Michaels Finds Possible Options Discrepancies

Michaels Stores (MIK Quote) filed its delayed quarterly report late Tuesday and confirmed that there may be accounting discrepancies in its financials related to stock options granted before 2001.

The arts-and-crafts retailer became associated with the so-called options-backdating scandal on Wall Street last week when it delayed filing its 10-Q because its audit committee was reviewing past options-granting practices. In the Tuesday filing, the company said "certain non-routine" options grants may have used a measurement date to determine the exercise price of the options that differed from the measurement date recorded under its accounting policy before 2001.

The company said that non-cash-compensation cost related to that time period could potentially be recorded in an amount up to $60 million. Michaels said any restatements made to its financials as a result wouldn't affect total stockholders' equity. The company noted, though, that the audit committee hasn't reached any conclusions, and its review is ongoing.

Michaels also reported that two shareholders have filed suits against the company and directors in recent days alleging breach of fiduciary duty, among other claims, related to the stock-options issues.

Last week, Michaels said that before 2001 it had granted stock options by using a process in which a board committee would approve stock-option grants under "unanimous consent resolutions" with effective dates "that generally preceded the date" on which the consents occurred. Such language suggested Michaels was involved in a practice that has drawn regulatory fire elsewhere in corporate America. The company said it's pursuing the probe voluntarily based on news reports about stock-options practices at other publicly traded companies.

Stock-options practices are currently being investigated by the Securities & Exchange Commission or federal prosecutors at over 30 companies, and a number of senior executives and directors have been fired or forced to resign as a result.

Stock options are designed to allow recipients to profit if a company's stock advances after the date they are granted. Typically, an option is supposed to be granted with an exercise price, or strike price, set at the market value of the stock on the date the company's board approves it. That way, options provide a performance incentive for employees and executives at a company because if its stock price declines below the strike price, the option is worthless.