Costco 2009 Annual Report Download - page 78

U.S. Attorney’s Office Investigation on Certain Stock Options
As previously disclosed, in March 2007, the Company was informed by the U.S. Attorney’s Office in the
Western District of Washington that the office was conducting an investigation of the Company’s past
stock option granting practices to determine whether there had been any violations of federal law. As
part of this investigation, the U.S. Attorney’s Office served a grand jury subpoena on the Company,
seeking documents and information relating to its historic stock option grants. On February 12, 2009,
the U.S. Attorney’s Office publicly announced that it had closed its investigation.
Employee Tax Consequences on Certain Stock Options
As previously disclosed, in 2006, a special committee of independent directors was formed to
determine whether the stated grant dates of stock options were supported by the Company’s books
and records. In connection with this review and guidance issued by the U.S. Internal Revenue Service
in 2006, the Compensation Committee of the Board of Directors approved a program intended to
protect approximately 1,000 Company employees who are United States taxpayers from certain
adverse tax consequences resulting from their options having been granted originally at prices lower
than the market value. The program involved increasing the exercise prices on certain stock options
granted from 2000 to 2003 and, in turn, the Company making payments to employees in an amount
approximately equal to the increase in the exercise price. In 2007, as a result of this program, the
Company made cash payments totaling $19 to approximately 1,000 employees, which resulted in a
pre-tax stock compensation charge of $8 (“incremental fair value”). The difference between the cash
payment and the incremental fair value of $11 was recognized as a reduction to additional paid-in
capital, as it represented a partial cash settlement of the original award because no future service was
required to earn the cash payment.
Also connected with this review, the Company is examining alternatives to mitigate the potential
adverse tax consequences associated with effected unexercised options held by Canadian employees
that were the subject of an accounting adjustment in fiscal 2006. During 2009 and 2008, the Company
made payments of approximately $7 and $38, respectively, to employees in Canada related to options
exercised in calendar years 2004 through the end of calendar year 2008. The related liability as of the
end of 2009 and 2008 was $2 and $9, respectively.
Summary of Restricted Stock Unit Activity
RSUs granted to employees and to non-employee directors generally vest over five years and three
years, respectively; however, the Company provides for accelerated vesting upon qualified retirement
for recipients that have attained certain years of service with the Company. Recipients are not entitled
to vote or receive dividends on unvested shares. At the end of 2009, 5,343,000 RSUs were available to
be granted to eligible employees and directors under the Fourth Restated 2002 Plan.
The following awards were outstanding at the end of 2009:
• 7,828,000 shares of time-based RSUs in which the restrictions lapse upon the achievement of
continued employment over a specified period of time; and
• 703,000 performance RSUs, of which 305,000 will be formally granted to certain executive
officers of the Company upon the official certification of the attainment of specified
performance targets for 2009. Once formally granted, the restrictions lapse upon achievement
of continued employment over a specified period of time.
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