Family Dollar 2006 Annual Report Download - page 52

10. Special Committee Review of Historical Stock Option Granting Procedures
On September 25, 2006, the Company filed a Form 8−K with the SEC in which the Company advised that it was named as a nominal
defendant in a lawsuit filed in the Superior Court of North Carolina, Mecklenburg County, alleging that certain of the Company’s
stock option grants were “backdated.” In connection with the lawsuit, the Company’s Board of Directors (the “Board”) formed a
Special Committee (the “Special Committee”), consisting solely of independent directors who were not named as defendants in the
lawsuit, to conduct an independent investigation of the Company’s stock option granting practices, evaluate the lawsuit, and take such
actions with respect to the lawsuit and related matters as the Special Committee deemed appropriate. The Special Committee was
advised in its review by independent legal counsel, Richards, Layton & Finger, P.A., and by independent accounting experts. The
Special Committee’s five month review included 35 interviews of 21 current or former officers, directors and employees of the
Company, as well as the review of documents and electronically−stored information amounting to hundreds of thousands of pages of
documents and data.
On March 7, 2007, the Company filed a Form 8−K announcing that, based on its review of the principal factual findings of the Special
Committee, the Company determined it did not properly account for certain stock options granted during the period from fiscal 1995
to fiscal 2006. As a result, the Company determined that a total charge of $10.5 million on a cumulative pretax basis was required,
with $9.1 million being to record non−cash equity based compensation charges (the “Stock Option Charge”) and the balance relating
to certain income tax related adjustments. The income tax effect of the cumulative charge was a tax benefit of $3.9 million.
Utilizing the materiality guidelines set forth in SEC Staff Accounting Bulletin No. 99, “Materiality,” and the factual findings of the
Special Committee, the Company has determined that the impact of the resulting accounting adjustments attributable to any prior
reporting periods is not material to any such periods and that the cumulative impact of recording the Stock Option Charge is not
material to the current year. Therefore, the Company has not restated its previously issued financial statements, but rather recorded
the Stock Option Charge and tax related adjustments in the fourth quarter of fiscal 2006.
Company’s Historical Process for Granting Options
Several key findings of the Special Committee relating to the Company’s historical stock option granting practices are summarized
below.
• Based upon the terms of the Company’s Non−Qualified Stock Option Plan (as amended from time to time, the “1989 Plan”) the
Company’s Stock Option Committee or in later years, the Compensation Committee (in each case, the “Option Committee”) was
vested with the authority to administer the 1989 Plan and to grant stock options under the 1989 Plan. During the reporting periods
to which the Stock Option Charge is attributed, stock option grants were approved by the Option Committee, acting in virtually
all cases by unanimous written consents. In approving the issuance of stock options, the Option Committee relied heavily upon
recommendations of management with respect to matters such as recipients of options, the effective date and exercise price, and
the number of shares underlying the options to be awarded. However, the Option Committee did not delegate to any member of
management the authority to make or approve stock option grants. Although management followed a relatively consistent
process in proposing the terms of the option grants, there were no specific guidelines approved by the Option Committee by
reference to which the Option Committee could have ascertained whether any recipient had received the appropriate number of
option shares or whether the guidelines had been followed.
• Annual grants of stock options were made to employees, including officers, in conjunction with the Company’s annual merit
review process, which generally occurred over a few weeks following the Company’s fiscal year end (“annual grants”). From
fiscal 1995 through fiscal 2004, the stated effective date of the annual grant was selected by a senior officer of the Company, in
consultation with, and with the agreement of, either the Company’s chief executive officer or president.
• Stock option grants were also made throughout the year to newly hired and promoted employees (“non−annual grants”). New
hire grants were made in accordance with a consistently applied practice providing that grants made to new employees would be
priced using the lowest average daily stock price within the ten−day window following an employee’s hire date. The use of the
ten−day window was generally well known among members of management involved in the stock option grant process and was
not concealed. The practice of using the ten−day window was applied in rare instances to grants made to newly promoted
employees.
• All stock option grants made by the Company between fiscal 1995 and fiscal 2006 (options to acquire a total of almost 16 million
shares) were either annual grants or non−annual grants except for a single instance in which options to acquire 20,000 shares were
granted to two officers in fiscal 1997.
41
Source: FAMILY DOLLAR STORES, 10−K, March 28, 2007