I guess it just wasn't in the stars for Meade Instruments
In May, the company began reviewing its option-granting practices following a story that had appeared in The Wall Street Journal (subscription required). Based on a review of Meade's option-granting practices, the story reported that company founder John Diebel had received six "suspicious" grants between 1998 and 2002, and that one of those preceded a tripling in the stock's price over three weeks. The Journal found that the odds of so fortuitous an options grant were roughly 1 in 800,000.
Meade says that its review, which included all stock options granted since the company went public back in 1998, found no evidence of "backdating," the practice by which companies change the dates on which an option was granted to coincide with a lower stock price, thereby giving the option grantee additional profit. Companies including UnitedHealth
A stock option is the right to purchase a stock at a set price in the future. If a company does well, its stock price should rise, making the option more valuable. This is supposedly a way to align management and shareholder interests in seeing the company prosper and advance. Backdating simply gives management a big payday at shareholders' expense. Moreover, because there are tax implications with stock options, the revelation of improper option grants leads to additional costs for the company.
While Meade says that there is no evidence of backdating in its option-granting practices, the telescope maker will still face additional expenses between $3.5 million and $4 million, most of which will fall before 2003. It will also have to pay additional taxes.
Many of the problems exposed by these option scandals seem to have occurred before 2003. Why's that? The Sarbanes-Oxley reforms were passed in 2002 , tightening up many company reporting requirements. Sarbanes-Oxley has proved to be a burden to many companies, particularly small ones, but it has also halted many of the abuses with option grants; corporations now have to notify the SEC within days of such grants, rather than weeks, as was the case previously.
Meade says its option problems stem from errors in the "accounting measurement dates" between 1998 and 2005. According to Accounting Principles Board Opinion 25 -- the rule that companies used to have to follow when reporting stock options -- if a stock option was granted that was equal to or more than the market price of the stock, the company did not have to record any compensation expense related to the option on the income statement. Most stock options fall into this category. However, some options, such as performance stock options granted to executives, end up costing companies money; when they are granted, the number of shares, their price, or the eventual cash settlement is unknown. The costs have to be recognized at a later date. While Meade does not specifically state what the problem is with its option-grant dates, it's possible that the problem falls into this category. Thus, the issues are not "backdating" for an executive's personal gain, but rather getting around the compensation costs associated with options.
When the company gets around to finally filing its revised financial statements, let's hope shareholders aren't knocked so badly that they're seeing stars.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
