SiliconBeat

We found a new wrinkle in the stock-option mess after reading the long-delayed filing of Electronic for Imaging’s annual financial report Friday.

One-fifth of the $151.7 million worth of extra-value the company gave out in improperly handled stock option grants came from “modifications” of the terms made to certain executives’ existing stock option grants. The changes to the original option terms allowed for additional vesting and exercising of options beyond the plan’s standard three month period after termination.

The single largest charge — $30.6 million — was the result of a change made to option grants belonging to the company’s former chairman and chief executive — probably Dan Avida, who resigned on January 1, 2000.

Electronics for Imaging finished filing its delinquent financial reports with SEC on Monday when it officially reported results for the first two quarters of 2007. On Friday it finally filed results for its 2006 third quarter and fiscal year.

After a lengthy investigation into its past stock option grants, EFI decided it would need to restate results for fiscal years 2002 through 2005, along with the first two quarters of 2006.

We were busy watching the mini market meltdown Friday and didn’t get around to reading EFI’s explanation about its stock option dating mess detailed in its 10-K until today. It was worth the wait, if you are an aficionado of how complex and time-consuming a “special investigation” like this can be.

This is how the company set the scene in its section blandly titled “Restatement of Consolidated Financial Statements and Special Committee Investigation”:

“In May 2006, Citigroup published a number of reports, one of which identified us as having well-timed option grants among seven companies in our sector, and therefore, as being at risk for greater scrutiny of our option granting practices. The report identified certain stock options granted to executive officers of the Company on selected dates during the years 1996, 1998, 1999 and 2001.

“On August 16, 2006, the first of several shareholder derivative suits was filed, alleging that certain of our current and former officers and directors breached their fiduciary duty in connection with the administration and accounting associated with stock option grants to officers.

“On October 20, 2006, our management reviewed information compiled by our litigation counsel, Wilson Sonsini Goodrich and Rosati and discussed the matter with the Chairman of the Audit Committee of the Board of Directors.”

And that’s when the board finally set up a special committee to investigate the matter, some five months after the Citigroup report. It hired independent counsel and forensic accounting personnel, among other consultants, who spent a “collective 30,000 professional hours” looking into the matter. Their work included:

• Conducting 46 interviews of 27 current and former directors, officers, employees, and “advisors”
• Collecting approximately 9.5 million pages of hard copy and electronic documents from current and former directors, officers, and employees, and documents from outside legal counsel and other sources
• Reviewing approximately 4.5 million pages of hard copy and electronic documents.
• Analyzing each option grant from the company’s initial public offering on October 2, 1992 through 2006.

What did the special committee find?

That a “substantial number” of the grants were priced on dates “coinciding with our low stock price for the month, and, in some instances, the quarter.” The evidence “suggests” that prior to 2004, many option grants were priced with the benefit of a “look back” at historical stock prices, with such “look backs” ranging up to several weeks.

Grants to newly-hired employees, dated April 1994 through October 2003, were typically priced with an effective date coinciding with a low stock price for a given period.

The lion’s share of the offenses occurred from 1998 to 2000, but some date as early as 1992 with the last offenses happening in 2003.

The company has spent about $15 million so far on its internal investigation. We couldn’t resist making the gross calculation of dividing $15 million by 30,000 hours, which comes out to $500 per hour. We know that’s not entirely fair, but any way you cut it, it ain’t bad.