Home Depot 2006 Annual Report Download - page 55

occurred for grants at all levels of the Company. Management personnel, who have since left the
Company, generally followed a practice of reviewing closing prices for a prior period and
selecting a date with a low stock price to increase the value of the options to employees on lists
of grantees subsequently approved by a committee of the Board of Directors.
• The annual option grants in 1994 through 2000, as well as many quarterly grants during this
period, were not finally allocated among the recipients until several weeks after the stated grant
date. Because of the absence of records prior to 1994, it is unclear whether allocations also
postdated the selected grant dates from 1981 through 1993. Moreover, for many of these annual
and quarterly grants from 1981 through December 2000, there is insufficient documentation to
determine with certainty when the grants were actually authorized by a committee of the Board
of Directors. Finally, the Company’s stock administration department also retroactively added
employees to lists of approved grantees, or changed the number of options granted to specific
employees, without authorization of the Board of Directors or a board committee, to correct
administrative errors.
• Numerous option grants to rank-and-file employees were made pursuant to delegations of
authority that may not have been effective under Delaware law.
• In numerous instances, and primarily prior to 2003, beneficiaries of grants who were required to
report them to the SEC failed to do so in a timely manner or at all.
• The subcommittee concluded that there was no intentional wrongdoing by any current member
of the Company’s management team or its Board of Directors.
The Company believes that because of these errors, it had unrecorded expense over the affected period
(1981 through 2005) of $227 million in the aggregate, including related tax items. In accordance with
the provisions of SAB 108, the Company decreased beginning Retained Earnings for fiscal 2006 by
$227 million within the accompanying Consolidated Financial Statements.
As previously disclosed, the staff of the SEC has begun an informal inquiry into the Company’s stock
option practices, and the U.S. Attorney for the Southern District of New York has also requested
information on the subject. The Company is continuing to cooperate with these agencies. While the
Company cannot predict the outcome of these matters, it does not believe that they will have a
material adverse impact on its consolidated financial condition or results of operations.
The Company does not believe that the effect of the stock option adjustment was material, either
quantitatively or qualitatively, in any of the years covered by the review of these items. In reaching that
determination, the following quantitative measures were considered (dollars in millions):
Net After-tax Percent of
Effect of Reported Net Reported Net
Fiscal Year Adjustment Earnings Earnings
2005 $ 11 $ 5,838 0.19%
2004 18 5,001 0.36
2003 18 4,304 0.42
2002 21 3,664 0.57
1981-2001 159 14,531 1.09
Total $227 $33,338 0.68%
Vendor Credits
The Company records credits against vendor invoices for various issues related to the receipt of goods.
The Company previously identified that it was not recording an allowance for subsequent reversals of
these credits based on historical experience. Beginning Retained Earnings for fiscal 2006 has been
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