It is no secret that high-tech companies have lately become quite sensitive to the rising criticism in the capital market against their generous allocations of options to managers. The criticism relates to both the accounting issue of recording of options as an expense and to the dilution caused by the allocation of options. A Check Point (Nasdaq: CHKP) director has now decided to comment on the subject in a document released by the company in advance of its shareholders meeting at the end of the month.
In the document, Check Point states that the board of directors has concluded, "is at the lower end of the scale in terms of net stock option grants (i.e. options granted annually less outstanding options expired, terminated or cancelled), when compared to companies that the company believes to be its industry peers." Check Point allocated a net 3.77 million options in 2003, amounting to only 1.5% of its share capital, and a net 5.23 million options in 2002, amounting to 2.1% of its share capital.
"The review concluded that the number of shares reserved for issuance under the company’s stock option plans exceeds the number of shares necessary for the expected net grants to employees, consultants and service providers in the foreseeable future." The board therefore reduced the number of shares reserved for future grants by 60 million ordinary shares to 45.2 million shares.
New options for Shwed and Nacht
The document also states that Check Point chairman and CEO Gil Shwed and senior VP Marius Nacht will receive new options. At the upcoming meeting, shareholders will be asked to approve the allocation of two million options to Shwed and one million to Nacht at a strike price equal to Check Point's closing price on the date of the meeting. Shwed's options will amount to 0.78% of Check Point's share capital and Nacht's to 0.39%, for an aggregate total of 1.17% of the company's share capital.
The new options allocation equals the allocation they received a year ago, when Shwed received two million options and Nacht one million, at a strike price equal to Check Point's closing price on the date of the allocation ($17-18). Since Check Point's share price has subsequently risen 20% to $24, the options reflect a theoretical profit of several million dollars to Shwed and Nacht.
The document also lists the updated holdings by parties at interest in the company, headed by Shwed and Nacht. Shwed currently owns 30 million shares amounting to 11.4% of Check Point's share capital, worth $733 million. Nacht owns 27.5 million shares, amounting to 10.5% of Check Point's share capital, worth $672 million. Check Point states that its cofounders' holdings include options exercisable within 60 days from April 30. Shwed has 5.05 million of these options and Nacht 4.01 million. Together, they hold 9.06 million options, not including the new allocation, amounting to 3.5% of Check Point's share capital, worth $214 million.
Check Point's other parties at interest are Franklin Resources (NYSE:BEN), which sold an estimated $50 million worth of Check Point shares in the past two months, reducing its stake from 11% to 9.7%. Janus Capital Management also sold an estimated $25 million worth of Check Point shares in the past two months, reducing its stake from 7% to 6.3%.
Over the past two months, Check Point co-founder Shlomo Kramer also sold 100,000 shares, with a current estimated market value of $2 million, and now owns 5.3% of Check Point's share capital, worth $333 million. Kramer is exempt from filing reports on his sales, because he is not a director in the company.
Improving the Board of Directors Option Grant Program
Although Check Point is reducing options for employees, it is increasing the number of options awarded to outside directors. At the upcoming meeting, Check Point's shareholders will be asked approve a proposal "to increase the option grant to each non-employee director who is first elected or appointed to the Board of Directors to an option to purchase up to 50,000 Ordinary Shares [up from the current 30,000], vested over a four-year period, and to increase the option grant to each continuing non-employee director to an option to purchase up to 25,000 Ordinary Shares [up from the current 18,000], vesting in equal monthly installments over a one-year period, all at an exercise price equal to 100% of the closing price of the Ordinary Shares on the Nasdaq ctock market on the date of grant."
Besides options, "each non-employee director receives annual compensation of $15,000 for service as a member of the board of directors and $5,000 for each membership on a committee of the Board of Directors. Furthermore, each non-employee director receives a $1,000 per-meeting fee for each meeting in which the non-employee director participates." Check Point's outside directors are US Venture Partners general partner Irwin Federman, Venrock Associates general partner Ray Rothrock, organizational consultant Dr. Tal Shavit, and Rubner Technology Ventures chairman and CEO David Rubner, a former chairman of ECI Telecom.
The document states, "The Board believes that the board of directors option Grant Program is an important factor in attracting and retaining highly-qualified individuals to serve on the company’s board of directors and in motivating such individuals to devote their maximum efforts toward the advancement of the company." Check Point argues "After comparing the board of directors stock option grants by the company with stock option grants to non-employee directors of companies that the company believes to be its industry peers, the board of directors determined that in order for the company to remain competitive in attracting and retaining such individuals to serve on the company’s board of directors, the option grants to non-employee directors should be increased."
Check Point is currently traded at a market cap of $6.09 billion, after a 45% rise in its share price since the beginning of the year.
Published by Globes [online] - www.globes.co.il - on June 7, 2004