Western Digital 2006 Annual Report Download - page 62

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 and the Company’s independent auditors, KPMG LLP.
At the completion of its investigation, the Special Committee identified, and the Company’s 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, management determined the Company should have recognized stock-based
compensation expense and additional tax expense in its 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, the Company determined that no accounting adjustment should be made for these
grants.
For 19 grants made during the period from fiscal 1998 through fiscal 2003, the Company’s stock price at the
appropriate measurement date was higher than the price on the originally stated grant dates. As a result, stock-based
compensation expense should have been recognized, as well as additional tax expense in historical financial statements for
these 19 grants. Based on these findings, management has determined that the Company should have recognized
approximately $21 million of stock based 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 the Board.
Approximately $4.2 million, before tax-related expenses, of these additional expenses were attributable to annual
employee stock option grants made in September 2001 and 2002. For these grants, acting at a meeting, the
Compensation Committee approved specific grants for Section 16(b) Officers and an overall budgeted number of
shares for grants to employees that were not Section 16(b) Officers to be allocated by later management action. The
allocation of awards to employees that were not Section 16(b) Officers was not completed with finality by the grant date.
Approximately $1.0 million, before tax-related expenses, additional expenses were attributable to grants involving
a variety of administrative errors, including errors in administration of grants to new hires and in connection with
promotions, and errors in supporting documentation.
The Company determined that the cumulative pre-tax non-cash stock-based compensation expense resulting from
revised measurement dates was approximately $18.4 million for fiscal years 1998 to 2006. This additional compensation
expense relates to stock options covering approximately 12.6 million shares. Additionally, the Company recorded
$2.5 million in tax-related expenses resulting from the recharacterization of incentive stock options to non-qualified
stock options for fiscal years 1998 to 2006. The following table summarizes the impact of the related adjustments (in
millions):
June 30,
2006
July 1,
2005
July 2,
2004
Fiscal Years
1998 to 2003 Total
Years Ended
Stock-based compensation expense ............. $0.7 $1.0 $1.3 $15.4 $18.4
Tax-related expenses ....................... 0.6 1.4 0.2 0.3 2.5
Total ................................ $1.3 $2.4 $1.5 $15.7 $20.9
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)