This excerpt taken from the BBBY 8-K filed Dec 22, 2006.
Internal Revenue Code Section 409A Adverse Tax Consequences
UNION, New Jersey, December 20, 2006 Bed Bath & Beyond Inc. today reported net earnings of $.50 per diluted share ($142.4 million) in the fiscal third quarter ended November 25, 2006. In the fiscal third quarter of 2005, the Company reported net earnings of $.45 per diluted share ($134.6 million). Net sales for the fiscal third quarter of 2006 were approximately $1.619 billion, an increase of approximately 11.8% from net sales of approximately $1.449 billion reported in the fiscal third quarter of 2005. Comparable store sales for the fiscal third quarter of 2006 grew by approximately 4.6%, compared with an increase of approximately 3.1% in last years fiscal third quarter.
For the fiscal nine months ended November 25, 2006, the Company reported net earnings of $1.36 per diluted share ($388.4 million). In the comparable nine months a year ago, the Company reported net earnings of $1.25 per diluted share ($374.9 million). Net sales for the fiscal nine months of 2006 were approximately $4.622 billion, an increase of approximately 12.1% from net sales of approximately $4.124 billion reported in the corresponding period of the prior year. Comparable store sales for the fiscal nine months increased by approximately 4.8% compared with an increase of approximately 4.0% in last years fiscal nine months.
The Company adopted Statement of Financial Accounting Standards 123(R) at the beginning of the fiscal third quarter of 2005. Results for the nine months of 2006 include non-comparable stock-based compensation expenses for the first half of fiscal 2006.
In addition, the Companys Board of Directors is reviewing a program intended to protect over 1,600 employees from certain potential adverse tax consequences. These adverse tax consequences arise pursuant to Internal Revenue Code Section 409A as a result of historical issues associated with some of the Companys stock option grants that were disclosed through the Companys stock option review. Although no final determination has been reached by the Board of Directors, the Company anticipates it will incur a non-recurring charge in the fourth quarter of fiscal 2006 related to this program. The Company anticipates the potential cash payments pursuant to the program to be approximately $40 million. While the Company is currently reviewing the accounting treatment related to the potential program, the Company anticipates the pre-tax income statement impact in the fourth quarter to be slightly more than the cash payments, with any difference between the cash payments and the associated pre-tax expense to be recorded as an adjustment to Additional Paid-In Capital in the Shareholders Equity section of the Companys Balance Sheet. The potential cash outlay primarily represents payments to employees in connection with increasing the exercise prices on certain stock option grants so as to protect them from certain potential adverse tax consequences. The Company believes it is likely the Company would recoup a substantial portion of any such cash outlay over the next several years through higher proceeds from future stock option exercises, although this recovery would not flow through the income statement. The Companys two Co-Chairmen and CEO have informed the Board that they decline to be considered for payments.