SanDisk 2005 Annual Report Download - page 128

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Share Based Compensation. The Company accounts for employee stock based compensation using the
intrinsic value method under Statement of Financial Accounting Standards No. 123 (FAS 123), Accounting for
Stock Based Compensation, as amended by Statement of Financial Accounting Standards No. 148 (FAS 148),
Accounting for Stock Based Compensation — Transition and Disclosure, and accordingly no expense has been
recognized in the consolidated income statements for options granted with an exercise price equal to the market
value of the Company’s stock on the date of grant to employees or directors under the Company’s stock option
plans. The Company has also accounted for its employee stock purchase plan following the guidance provided in
Accounting Principles Board Opinion No. 25, or APB 25, Accounting for Stock Issued to Employees, and
accordingly, the Company has not recognized any expense for the discount provided on the fair market value
of the stock sold under our qualified non-compensatory employee stock purchase plan. The Company accounts for
restricted stock awards by recognizing compensation expense equal to the fair market value of the restricted stock
awards on the date of the grant. This compensation expense is recognized ratably over the applicable vesting period.
Had compensation expense been determined based on the fair value at the grant dates, with amortization of the
deferred stock based compensation using the straight-line method over the vesting periods of the applicable options,
the Company’s pro forma net income and net income per share would have been as follows (in thousands, except per
share amounts):
January 1,
2006
January 2,
2005
December 28,
2003
Years Ended
Net income as reported ............................. $386,384 $266,616 $168,859
Fair value method expense, net of related tax ............ (52,629) (39,550) (29,793)
Pro forma net income .............................. $333,755 $227,066 $139,066
Pro forma basic income per share ..................... $ 1.82 $ 1.38 $ 0.96
Basic income per share, as reported.................... $ 2.11 $ 1.63 $ 1.17
Pro forma diluted income per share .................... $ 1.73 $ 1.23 $ 0.84
Diluted income per share, as reported .................. $ 2.00 $ 1.44 $ 1.02
Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable include amounts owed by
geographically dispersed distributors, retailers, and OEM customers. No collateral is required. Provisions are
provided for sales returns and credit losses.
The Company estimates the collectibility of its accounts receivable based on a combination of factors. In
circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations to the
Company (e.g., bankruptcy filings or substantial down-grading of credit ratings), the Company provides a specific
allowance for bad debts against amounts due to reduce the net recognized receivable to the amount it reasonably
believes will be collected. For all other customers, the Company provides allowances for bad debts based on the
length of time the receivables are past due based on the Company’s historical experience. Accounts receivable are
aged based on the applicable contractual due date. All accounts or portions thereof that are deemed to be
uncollectible are written-off through a charge to the allowance and a credit to accounts receivable. If circumstances
change (e.g., higher than expected defaults or an unexpected material adverse change in a major customer’s ability
to meet its financial obligations to the Company), the Company could experience higher write-offs.
Income Taxes. The Company accounts for income taxes using an asset and liability approach, which requires
recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been
recognized in the Company’s consolidated financial statements, but have not been reflected in the Company’s
taxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizable
value. Therefore, the Company provides a valuation allowance to the extent that the Company does not believe it is
more likely than not that it will generate sufficient taxable income in future periods to realize the benefit of its
deferred tax assets.
F-9
Notes to Consolidated Financial Statements — (Continued)
Annual Report