This excerpt taken from the BBBY 8-K filed Oct 10, 2006.
Independent Review of Stock Option Grants and Procedures
On June 19, 2006, following the issuance of two analyst reports that included the Company on lists of companies whose shares had shown comparatively high increases in trading prices subsequent to stock option grant dates, the Board of Directors appointed a special committee of two independent members of the Board of Directors, with authority, among other things, to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters as the committee deemed appropriate. On June 20, 2006, the special committee retained independent legal counsel, Weil, Gotshal & Manges LLP, and on June 25, 2006, Weil, Gotshal & Manges LLP engaged outside accounting advisors, Navigant Consulting, Inc. The Company promptly informed its regular independent accountants of the analyst reports, and has kept its accountants informed as the review has progressed.
The special committee commenced its review in late June 2006, and during the period through October 2006, carried out an extensive review covering stock option grants and restricted stock awards made by the Company during the period from its initial public offering in 1992 through May 15, 2006. During the course of this review, counsel to the special committee interviewed 31 officers, directors, employees, advisors and others involved in the award process, and undertook a broad document review.
On September 20, 2006, prior to the public announcement of the review, counsel to the special committee notified the Securities and Exchange Commission (the SEC) of the review. Following such self-reporting, the Staff indicated that it would commence an informal inquiry. The Company intends to cooperate fully with the SEC.
The special committees review has been completed, and on October 9, 2006, the special committee presented its report (the Report) to the Companys Board of Directors.
The review identified various deficiencies in the process of granting and documenting stock options and restricted shares described below. As a result of the deficiencies, the special committee recommended, among other things, that the Company revise the measurement dates under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, for 16 annual option grant dates, 26 monthly grant dates and 2 special grant dates (revisions of 2 annual, 4 monthly and 1 special grant dates have no accounting impact because prices on the revised dates were lower than on the measurement dates previously recorded by the Company). As a result of these new measurement dates and the correction of various other errors relating to the accounting for equity-based compensation, the Company has determined that from fiscal year 1993 through the second quarter of fiscal 2006, it had certain unrecorded non-cash equity-based compensation charges associated with its equity-based compensation plans. The Company believes, however, that these charges are not material to its financial statements in any of the periods to which such charges would have related and therefore, has not recorded such charges and will not revise its historic financial statements.
The Company will, however, in accordance with the transition provisions of Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements, (SAB 108), record a reclassification, within the equity section of the consolidated balance sheet to be included in its Form 10-K for the fiscal year ending March 3, 2007, of approximately $66 million, excluding any related tax effect. This reclassification represents the effect of the adjustment resulting from the non-cash charges discussed above that relate to fiscal 2005 and prior years. The Company also expects to record a year-to-date non-cash selling, general and administrative expense charge in its consolidated statement of earnings of approximately $8 million in fiscal third quarter. This approximately $8 million pre-tax charge represents the total of the first and second quarter charges related to the impact of the revised measurement dates (and the correction of various other immaterial errors referred to above), and the applicable charge for the third quarter. This approximately $8 million charge was not included in the Companys planning assumptions and earnings guidance for its fiscal third quarter and fiscal 2006, which were provided in its conference call on September 20, 2006. The Company is reviewing any potential tax implications relating to the Companys stock option grants and restricted share awards, but believes that such matters will not have a material impact on the Companys financial position.
The Report is summarized as follows: