Western Digital 2006 Annual Report Download - page 70

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than on the date of grant, employee participation in that offering period is terminated and re-enrollment in the new
offering period occurs automatically. The Company’s ESPP operates in accordance with Section 423 of the Internal
Revenue Code. The 1993 Employee Stock Purchase Plan, which was previously suspended by the Board of Directors,
terminated upon stockholder approval of the 2005 ESPP.
Stock-Based Compensation Expense
Effective July 2, 2005, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised
2004), “Share-Based Payment” (“SFAS No. 123-R”) using the modified prospective method. SFAS No. 123-R establishes
the financial accounting and reporting standards for stock-based compensation plans. As required by SFAS No. 123-R,
the Company recognized the cost resulting from all share-based payment transactions including shares issued under the
Company’s stock option plans and employee stock purchase plans in the financial statements. During the fiscal year ended
June 30, 2006, the Company expensed $21.1 million related to stock-based compensation from stock options and ESPP
shares as a result of the adoption of SFAS No. 123-R. At June 30, 2006, total compensation cost related to unvested stock
options granted to employees and ESPP shares, but not yet recognized, was $31.1 million and will be amortized on a
straight-line basis over a weighted average period of approximately 1.9 years.
Pro forma Information for Periods Prior to the Adoption of SFAS No. 123-R
Prior to July 2, 2005, the Company accounted for stock-based employee compensation plans (including shares
issued under the Company’s stock option plans and ESPP) in accordance with APB No. 25 and followed the pro forma net
income, pro forma income per share, and stock-based compensation plan disclosure requirements set forth in the
Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”).
The following table sets forth the computation of basic and diluted income per share for the years ended July 1, 2005 and
July 2, 2004, and illustrates the effect on net income and income per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation (in millions, except per share data):
July 1,
2005
July 2,
2004
Year Ended
(as adjusted) (as adjusted)
Net income
As reported . . . ................................... $196.0 $149.8
Stock-based employee compensation included in reported
earnings ....................................... 4.8 2.6
Stock-based employee compensation expense determined under
fair-value based methods for all awards ................. (29.5) (29.3)
Pro forma net income ............................... $171.3 $123.1
Basic income per share:
As reported . . . ................................... $ 0.94 $ 0.73
Pro forma........................................ $ 0.83 $ 0.60
Diluted income per share:
As reported . . . ................................... $ 0.90 $ 0.69
Pro forma........................................ $ 0.79 $ 0.57
The pro forma income per share information for all stock options granted on or prior to December 31, 2004, as well
as all ESPP shares granted on or prior to July 1, 2005, is estimated using the Black-Scholes-Merton option-pricing
model. The Black-Scholes-Merton option-pricing model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. For stock options granted subsequent to December 31,
64
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)