Research In Motion (RIMM), the Canadian company behind the popular BlackBerry, tried to get past the appearance of trouble with its stock options grants with a series of moves aimed at bolstering investor confidence.
The company disclosed a $250 million earnings restatement for previous periods starting in 2004, and announced that chairman and co-CEO James Balsillie would relinquish his duties as chairman. RIM (RIMM) said its option troubles were due to some key differences between accounting rules in the U.S. and Canada, where it trades on the NASDAQ and Toronto Stock Exchange. The company said that in 321 cases, stock option grants were not accounted for properly under rules in the U.S.
In an interview with BusinessWeek.com, Balsillie said the company did not know it was running afoul of U.S. rules. "When we did this plan, there was a clause that said that if you got options for say, 100 shares, that were worth $1,000, and they increased in value to $2,000, you wouldn't have to write a check for the full $2,000 to exercise the shares," he said. "Instead, the company would give you the shares net of the difference. That's O.K. under Canadian accounting rules, but in the U.S. they have to be accounted for differently, as either a loss to income or a profit as the case may be."
Although Balsillie was at first directly involved in approving stock grants to employees, the company said, he became less involved as the duties were delegated to other executives. The mistake was missed at all levels of RIM's accounting processes, even by RIM's auditors, Ernst & Young International. "It's our mistake. We ran it through auditors, but everyone missed it," Balsillie said.
The company said its internal investigation found no evidence of intentional misconduct.
While in some cases grants appeared to have been "spring-loaded"—granted in advance of runups in RIM's stock price—the company found no evidence of anyone at the company engaged in intentional spring-loading. The company didn't specify who benefited from the conveniently timed grants, and took pains to describe the events as having "created the impression" that some grants were spring-loaded.
Directors and C-level executives will return any profit from incorrectly priced options—the company didn't specify how much—and Balsillie and co-CEO Mike Lazaridis both pledged to contribute $10 million Canadian, or $8.5 million, to cover the costs of the investigation. "This happened on our watch, and we want to take responsibility for it," Balsillie said.
An informal inquiry has been under way at the Securities & Exchange Commission since the irregularities were first disclosed on Sept. 28, 2006. Additionally, the Ontario Securities Commission has been investigating and has issued a "management cease trade order," preventing senior executives from trading the company's stock. RIM had already issued its own order to this effect internally. The company says it continues to cooperate with regulators in both countries, but said it cannot predict what action if any those regulators may take as a result of the review.
The $250 million noncash restatement affects fiscal periods starting in 2004 through the first fiscal quarter of 2007, which ended on June 3, 2006. Additionally, RIM said it would require further time to complete regulatory filings for its fiscal fourth quarter and fiscal year just completed.
Balsillie will relinquish the title of Chairman voluntarily. "Separating the jobs of CEO and chairman has been something that has been No. 1 on the mind of Canadian regulators, and in just about everyone's mind it's overdue," he said. Balsillie will retain his seat on the board.
Additionally, two directors, Kendall Cork, managing director of Sentinel Associates, and Douglas Wright, a president emeritus of the University of Waterloo, will not stand for re-election to the board.
RIM named two new directors, Barbara Stymiest, chief operating officer of the Royal Bank of Canada, and John Wetmore, former CEO of IBM Canada (IBM), and said it would add two additional board seats. John Richardson, chairman of the Ontario Pension Board and a former insurance executive, was named Lead Director in the interim as a search for a chairman begins.
RIM stock finished down $1.45, or slightly more than 1%, on the news, but stocks were generally down on the day. Analyst James Faucette with Pacific Crest Securities in Portland, Ore., said that most stocks in the wireless device space were down, and RIM finished the day better than most.
Faucette said he doesn't think RIM is facing any significant trouble from regulators as a result of the probe. "The SEC and the [National Association of Securities Dealers] have not done a ton of investigating given the number of companies that have been caught up in the options problems, especially given the depth and breadth of response from companies," he said. "It seems like RIM is doing its best to give the appearance of making things right." Faucette has maintained an "outperform" rating on the stock with a price target of $160 per share.
The news takes place against the backdrop of a surging business environment for RIM, while competitors have sputtered. Balsillie said RIM added a million subscribers in the quarter just ended, the first time it has added that many in a single quarter, beating the prior guidance that called for 975,000 new subscribers. Previously, RIM had said that it expected to report sales of between $900 million and $940 million.
Meanwhile, rivals Palm (PALM), maker of the Treo line of smartphones that competes with RIM's BlackBerry, and Motorola (MOT), whose Q phone is also a BlackBerry-like rival, have been struggling. Palm, according to reports, is exploring its options, which may include shopping itself as a possible acquisition target. Motorola would be a likely candidate to acquire Palm, but the company has its own troubles, says Pacific Crest's Faucette. Motorola has struggled in recent months with declining sales and profit margins on its wireless phones, and is now engaged in what could be a battle with financier Carl Ichan for a board seat.