SanDisk 2005 Annual Report Download - page 135

Note 3: Compensation and Benefits
Stock Based Compensation. FAS 123R will require the Company to change its method of accounting for
share based compensation, by recognizing the fair value of share based compensation as an expense in its
consolidated financial statements, beginning in January 2006. Until such date, as permitted by FAS 148, the
Company is accounting for employee stock based compensation using the intrinsic value method and accordingly,
no expense has been recognized for options granted to employees or directors under the plans as the grant exercise
price is set at the fair market value of the stock on the day of grant. The Company accounts for its employee purchase
plan following the guidance provided by APB 25, which considers certain qualified stock purchase plan as non-
compensatory and accordingly, the Company has not recognized any expense for the discount on the fair market
value of the shares of stock sold under the Company’s employee stock purchase plan. The discount is applied to the
fair market value of the shares either at the beginning or the end of the purchase period, whichever is lower.
During the fourth quarter of 2005, the Company considered the guidance provided by the Securities and
Exchange Commission in SAB 107 and reviewed both the actual volatility in the trading market for its common
stock and the implied volatility of tradable forward call options to purchase shares of its common stock as part of its
efforts to make a thorough and accurate estimate of expected volatility utilized in the estimate of fair value of
valuing share based compensation. Based on such review, the Company determined the volatility factor it used to
estimate the fair value of stock based compensation awarded during the fourth quarter of the year ended January 1,
2006 to be based on implied forward volatilities. Prior to this change, the Company estimated future volatility based
on historical and implied stock volatility. Estimated volatility is one of the inputs used in the Black-Scholes-Merton
model currently used by the Company to make a reasonable estimate of the fair value of options granted under the
Company’s stock plans and the rights to purchase shares under the Company’s employee stock purchase plan.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option-
pricing model, with the following weighted-average assumptions for grants made in 2005, 2004 and 2003,
respectively:
January 1,
2006
January 2,
2005
December 28,
2003
Years Ended
Dividend yield ................................... None None None
Expected volatility . . .............................. 0.52 0.92 0.95
Risk free interest rate . ............................. 3.94% 3.07% 3.39%
Expected lives.................................... 4.5years 5 years 5 years
The weighted-average fair value of options granted during the year was $13.03, $22.64 and $8.71 for 2005,
2004 and 2003, respectively.
The fair value of issuance under the employee stock purchase plans is estimated on the date of issuance using
the Black-Scholes-Merton model, with the following weighted-average assumptions for issuances made in 2005,
2004 and 2003, respectively:
January 1,
2006
January 2,
2005
December 28,
2003
Years Ended
Dividend yield ................................... None None None
Expected volatility . . .............................. 0.47 0.57 0.57
Risk free interest rate . ............................. 2.69% 2.69% 2.94%
Expected lives.................................... 1⁄2year 1⁄2year 1⁄2year
The weighted-average fair value of employee stock purchases for the year was $7.60, $8.12 and $3.36 for
2005, 2004 and 2003, respectively.
F-16
Notes to Consolidated Financial Statements — (Continued)