Apple Computer, Inc. (NDAQ:AAPL) released its 10-K annual report today after delaying it while the company investigated irregularities with the company's stock option grants. In the explanatory note in the beginning of the filing, Apple noted that while the company would face an $84 million charge related to the stock option grants, Steve Jobs and other senior executives would not involved in the scandal. Al Gore, chair of the special committee, said, "The board of directors is confident that the company has corrected the problems that led to the restatement, and it has complete confidence in Steve Jobs and the senior management team". The company found that while Jobs was aware of, or recommended the selection of, some favorable grant dates, he neither benefited financially from them nor "appreciated the accounting implications" of his actions. Consequently, Steve Jobs' and other executives appear to be safe, and the company's stock has rebounded 5% in today's trading.

Comstock Resources, Inc. (NYSE:CRK) CEO Jay M. Allison exercised 45,000 options yesterday in a transaction worth over $1.39 million. According to the form 4 filing with the SEC, Allison exercised the 45,000 options at $3.88 per share and then immediately sold them at $31.32. The filing also noted that he gave away 25,000 shares as a gift. Comstock's stock has been on a bull run since October, rising from $26 to $33 before retracing slightly over the past few sessions. Sometimes insider selling is seen as a lack of confidence in management; however, in many cases it is simply timely portfolio diversification for executives.

Comstock Resources, Inc. (Comstock) is engaged in the acquisition, development, production and exploration of oil and natural gas. The Company's oil and natural gas operations are concentrated in the east Texas/north Louisiana, southeast Texas, south Texas and Mississippi regions. In addition, the Company has properties in other regions in Arkansas, Kansas, Kentucky, New Mexico and Oklahoma. The Company owns 48% of Bois d'Arc Energy, Inc., which conducts exploration, development and production operations in state and federal waters of the Gulf of Mexico.

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The U.S. Securities and Exchange Commission caused some controversy yesterday after it reversed an earlier decision to force executives to disclose the face value of stock grants as they are given to executives. This rule is one of many that came as the result of an executive compensation overhaul earlier this year. Specifically, this new change, going into effect immediately, allows companies to disclose only the portions of the stock grants that are usable by executives. This allows companies to dispense stock grants to executives that will not be disclosed to investors until they are exercisable. While many people have criticized this move, SEC Chairman Christopher Cox insisted that this rule was actually what the commission intended when it first adopted its new executive compensation policies. The only two major problems seen with the new rule were policies dealing with retirement and resignations. When executives retire, their stock grants are immediately expensed at full value. This means that those retiring executives may appear overcompensated, when in fact they are on par with others. Meanwhile, if an executive leaves a company before the full value of their options vest, then the full amount would be reported when there was actually nothing received. While the SEC noted these problems, they argued that these new policies needed to be pushed out before early 2007, when many companies will be reporting under the new regulations.

Pfizer, Inc. (NYSE:PFE) revealed today in an 8-K filing with the SEC that its former CEO, Henry A. McKinnel, could receive more than $180 million in retirement benefits after he leaves the company in February. This news comes shortly after the ex-CEO was forced into early retirement in part due to investor concern over his excessive compensation benefits. These benefits include $13,278,518 in supplemental savings; $41,769,089 worth of deferred performance-contigent shares; $22,862,334 in deferred bonuses; and, a lump sum pension totaling $82,305,823. While the executive has served the company for 35-years, investors have been critical of executive compensation as the stock's price has suffered in recent months.

Home Depot (NYSE:HD) may find itself in more trouble soon after Relational Investors announced that it wants an independent committee appointed by the board to evaluate the company's management and direction. This move comes after the company has already faced widespread criticism for its executive compensation policies and subpar stock price. According to the letter to management:

"We believe the Company's board of directors is presented with enormous responsibility and opportunity to reverse the Company's chronic inferior stock price performance experienced since 2000. We attribute this performance to deficient strategy, operations, capital allocation, and governance.

We are planning an advocacy program designed to spur positive action to address these deficiencies. In that vain, under separate cover we have submitted the attached Notice of Shareholder Proposal. This notice was timed to satisfy the deadlines set forth in the Company's Bylaws.

We would like to meet with you and representatives of the Company's board of directors at the earliest convenient time. At that meeting, we would like to discuss this proposal and other steps we are considering, which include nominating one or more directors for election to the Company's board of directors at the Company's 2007 Annual Meeting of Shareholders." (Read More)

The company immediately rejected the request, however, in it's response:

"The Home Depot(R), the world's largest home improvement retailer, announced that it has received notice from Relational Investors, LLC, an investment firm, that Relational intends to submit a proposal at the next annual meeting of shareholders of The Home Depot. The proposal will request that the board of directors of The Home Depot appoint a special committee of independent directors to evaluate the strategic direction of the Company, the performance of management and strategic alternatives for the
Company. Relational notified the Company that this proposal is part of an "advocacy program" planned by Relational with respect to the Company, that Relational plans to solicit proxies to have its proposal adopted, and that Relational may nominate one or more directors for election at the 2007 annual meeting. In addition, Relational has requested a meeting with The Home Depot's chief executive officer, Bob Nardelli, and members of the Company's board of directors.

The Company said that its board of directors recently completed a strategic review and that it will oppose the resolution and proxy solicitation that Relational intends to pursue.

The Company also said today that its board of directors unanimously supports the management team and its plan to continue enhancing value for all shareholders through the execution of its current strategy. During the past six years, the Company has delivered strong financial results. Sales at The Home
Depot have nearly doubled, from $45.7 billion in 2000 to $81.5 billion in 2005, and earnings per share have increased more than 140 percent in the same period. From 2001 to the present, the Company has invested more than $29 billion back into the business, through capital and acquisition spending, while also returning over $20 billion to shareholders in the form of share repurchases and dividends, including two dividend increases of 50 percent each this year. This includes, most recently, issuing $5 billion in debt and announcing a $3 billion accelerated share repurchase. Since 2002, when the Company's share repurchase program began, The Home Depot has repurchased approximately 450 million shares, or 19 percent of its outstanding shares. This demonstrates the Company's balanced approach to capital allocation through business investments and cash returned to its shareholders.

The Home Depot has advised Relational that it will arrange a meeting shortly after the first of the year to discuss its concerns, consistent with The Home Depot's policy of engaging in an open and direct dialogue with shareholders.

Relational indicated in its notice that it has recently become a shareholder of The Home Depot. Relational further indicated that its various affiliates own approximately 12,966,338 shares of The Home Depot's common stock, or roughly 0.6 percent of the common shares outstanding. The Home Depot's correspondence with Relational is attached." (Read More)

In an interview with the Associated Press, Relational Investors manager Whitworth, said: "There is no accountability to shareholders. Since Nardelli was made president in 2000, he’s taken hundreds of millions in compensation, but the company’s return to investors has been almost nothing. There needs to be someone making sure management is watching the store." And it's true, while the CEO has received $240 million in compensation this year, the company's stock rose merely 3%. Moreover, the company's main competitor, Lowe's, increased over 170% during the same time period! Clearly change is needed here and Relational Investors may be the best bet for investors.

Speedway Motors Inc. CEO Burton Smith has recently received some press coverage by the AP over his questionable bonuses, disclosed in a December 5th 8-K filing with the SEC. According to the filing, Mr. Smith is entitled to receive a $1.45 million bonus in part for his "reduction of debt" to the company. Even more troubling is the fact that this "performance" metric has been used for determining Mr. Smith's bonuses for the past several years!

But just how much debt are we talking? Well according to a recent 10-Q filing with the SEC:

"Notes and other receivables from affiliates at September 30, 2006 and December 31, 2005 include $939,000 and $1,906,000 due from the Company’s Chairman and Chief Executive Officer. The amount due represents premiums paid by the Company under a split-dollar life insurance trust arrangement on behalf of the Chairman, cash advances and expenses paid by the Company on behalf of the Chairman before July 30, 2002 and accrued interest. The Board of Directors, including SMI’s independent directors, have reviewed this compensatory arrangement and determined it an appropriate use of available Company funds based on interest rates at the time of transaction and creditworthiness of the Chairman. As of July 30, 2002, the Company indicated to the Chairman that it would no longer make payments under the split-dollar life insurance trust arrangements or advances for his benefit."

How are companies allowed to do this? Well, the practice is now actually illegal - the relatively new Sarbanes-Oxley law (that took effect in 2002) now prohibits public companies from extending new loans to their executives. Meanwhile, experts agree that this type of behavior goes against the notion of performance-based bonuses. Moreover, the company is essentially rewarding the executive twice - once by lending the money and again by rewarding him for repayment. Meanwhile, the company argued that under increased scrutiny, they simply wanted to encourage the executive to pay off his outstanding debts. In reality, it may have attracted even more scrutiny...

Google Inc. (NDAQ:GOOG) announced today plans to unveil a new options program that would enable employees to sell their vested options via an auction. Dubbed the "Transferable Stock Option" program, non-executive employees would have the ability to sell their shares on a new secondary market managed by Morgan Stanley, where pre-approved financial institutions can bid on their vested options. Google reportedly instituted the program in order to make things fair for newer employees, after Google's shares are beginning to slow after their steep post-IPO climb. Opinions regarding the new program are mixed at best. Many expect that financial institutions would be willing to pay a premium for these options, enabling these newer employees to cash in on some of their options. However, some have criticized the program, stating that it encourages employees to sell shares rather than hold a stake in the company. Moreover, while Google's accounting will not change, they said they would incur greater stock option expenses as a result of the new program. However, the criticism was only mild since executive vested options were not included in the program - a move which would have sparked much controversy. As it stands, the program is a test of sorts for Google, who continues to innovate, not just in technology, but now finance as well.

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ScanSource Inc. approved a new form of compensation for its executives today after shareholders sued the company amid an options backdating scandal. The new compensation plan calls for restricted stock to be used instead of options, which the ScanSource CEO Mike Bauer said is common among other public companies in their industry. In fact, restricted stock has become more and more popular ever since Microsoft switched over not long ago. What's the difference? Well, stock options give you the right to buy shares at a certain price, but if the stock falls below that level, they expire worthless. Recent problems surfaced in instances where backdating occurs - that is, when these options are granted at "certain prices" well below the current market price at the time, making the options instantly worth millions in some cases. Restricted stock, on the other hand, is actual stock that is given to executives with a provision saying that they are not allowed to sell it for a certain amount of time (typically six months). This prevents any opportunity for backdating and forces executives to invest on a more long-term basis.

However, restricted stock isn't as widely used as stock options because they are disadvantageous to executives in many ways. First, they are taxed in the same year they are issued. Unlike stock options, which are taxed when exercised, restricted stock is treated just as normal compensation. Secondly, since restricted stock is actual stock, companies tend to issue much fewer shares than they would options. Although restricted stock can never expire worthless, this often limits the upside and leaves them exposed on the downside. Despite these problems, restricted stock may be the answer for shareholders concerned that executive interests are misaligned with their own. Perhaps we will see more of these trends in the future.

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Bloomberg reported yesterday that stock sales by American executives exceeded stock purchases last month by the widest margin since 1987. Among the largest aggregate sellers were Microsoft's Bill Gates and Google's Eric Schmidt. We first profiled Google's massive insider selling back in September, when we noted that executives unloaded nearly $1.7 billion worth of Google shares during the six previous months. While many high-profile executives have indeed been selling a large amount of stock lately, there is debate as to whether this is due to a negative outlook on the economy or simply a move to diversify their holdings. Some argue that many executives, including Gates and Schmidt, sell shares on a fairly regular basis using a set program. In general, these programs tend to sell into rallies and buy into dips. Therefore, selling after this rally should come as no suprise to investors. Others, however, that economists are forecasting a slowdown in profits, and these sales are indicative of an upcoming slowdown or retracement in company performance. The answer may lie somewhere inbetween, however, such a large number of insider sales is not something that can be easily ignored.

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A federal court granted The California Public Employees Retirement System's (CalPERS for short) request last Thursday to block ex-UnitedHealth CEO William McGuire from accessing millions of dollars worth of unexercised stock options and his retirement plan pending a special review of shareholder lawsuits against McGuire and UnitedHealth Group. These lawsuits allege that the company backdated options granted to executives in order to inflate their value.

The first sign of major problems surfaced during the Spring board elections when several major shareholders witheld their votes. Although the encumbants were re-elected anyway, Mr. McGuire was eventually forced to resign due to these allegations - his last day as CEO was last Thursday. According to SEC filings, McGuire has over $1 billion worth of unexercised options, although UnitedHealth said the value of these options has declined significantly since last reported. The CEO's severance package also includes a pension of $5.1 million per year in addition to a $6 million lump sum payout. And finally, we can see from ExecutiveDisclosure.com that the company's executive compensation already surpasses that of its peers:

Clearly CalPERS and other shareholders have valid concerns. The stock has moved down over 20% this year, in part due to this options scandal. Perhaps when this cloud clears there will be hope for UnitedHealth Group to turn itself around and start generating value for its shareholders again. However until then, shareholder lawsuits and a SEC investigation are likely to keep shares depressed.

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UnitedHealth Group, Inc. (UNH)