Western Digital 2006 Annual Report Download - page 37

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intend, and undertake no obligation, to publish revised forward-looking statements to reflect events or circumstances after the date of this
document or to reflect the occurrence of unanticipated events.
Adjustment to Previously Issued Financial Statements
We are filing this Annual Report on Form 10-K for the year ended June 30, 2006 with adjustments to our
consolidated financial statements for the years ended July 1, 2005 and July 2, 2004 and the related disclosures. This
Form 10-K also includes adjustments to selected financial data as of and for the years ended June 27, 2003 and June 28,
2002, which is included in Item 6.
We have adjusted our consolidated financial statements for the years ended July 1, 2005 and July 2, 2004, as well as
the selected financial data for the years ended June 27, 2003 and June 28, 2002, to record additional non-cash stock-based
compensation expense, and related tax accruals, resulting from stock options granted during fiscal years 1998 to 2003
that were incorrectly accounted for under U.S. generally accepted accounting principles (“GAAP”). Our decision to
adjust our financial statements was based on the facts obtained from an independent investigation into our stock option
accounting that was conducted under the direction of a special committee (“Special Committee”) of our Board of
Directors. The Board created the Special Committee, which was composed solely of independent directors, to conduct a
voluntary, company-initiated review of matters related to past stock option grants, including the timing of such grants
and associated documentation.
The Special Committee reviewed all option grants of the Company during the period from July 1, 1997 through
June 30, 2006 (the “Review Period”). The Special Committee reviewed corporate records and electronic documentation
and interviewed current and former employees and directors. The Special Committee presented its investigative findings
and recommendations to the Board of Directors and our independent auditors, KPMG LLP.
At the completion of its investigation, the Special Committee identified, and our management concurred, that the
appropriate measurement date for 28 option grants made on 27 separate grant dates during the period from fiscal 1998
through fiscal 2004 differed from the originally stated grant dates for such awards. Because the prices at the originally
stated grant dates were, in 19 of such instances, lower than the prices on the appropriate measurement dates for such
grants, our management determined we should have recognized stock-based compensation expense and additional tax
expense in our historical financial statements for these 19 grants. For the remaining 9 grants, since the prices at the
originally stated grant dates were at or above the prices on the appropriate measurement dates for such grants, we
determined that no accounting adjustment should be made for these grants.
Key findings from the Special Committee’s investigation include:
• Found no evidence that anyone manipulated the grant documentation or grant dates in order to avoid
compensation expense or other financial statement impacts.
• Found no misconduct by any member of our current management team.
• For 19 grants made during the period from fiscal 1998 through fiscal 2003, our stock price at the appropriate
measurement date was higher than the price on the originally stated grant dates. As a result, we should have
recognized stock-based compensation expense and additional tax expense in our historical financial statements for
these 19 grants. Based on these findings, we have determined we should have recognized approximately
$21 million of stock-based compensation and tax-related expenses.
• Approximately $13.2 million, before tax-related expenses, of these additional expenses were attributable to
annual employee stock option grants made by the Compensation Committee in November 1998 and 1999 and a
special employee grant made in March 2000 for which there was inadequate or no support for selection of the
grant dates, and the grant dates were at a low price in the relevant period. These grants were made by unanimous
written consent of the Compensation Committee of our Board.
• The Special Committee concluded that the annual employee stock option grant made in November 1999 was
intentionally dated with hindsight at a low price. While improper, no evidence was found that this action was
taken to avoid compensation expense or other financial statement impacts.
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