SanDisk 1998 Annual Report Download - page 49

SanDisk Corporation
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Employee Stock Purchase Plan
In August 1995, the Company adopted the Employee Stock
Purchase Plan (the Purchase Plan). The Company has
reserved 883,333 shares of common stock for issuance there-
under. Under the Purchase Plan, qualified employees are enti-
tled to purchase shares through payroll deductions at 85%
of the fair market value at the beginning or end of the offer-
ing period, whichever is lower. As of December 31, 1998,
shares issued under the Purchase Plan totaled 347,889.
In April 1997, the stockholders (i) increased the shares avail-
able for future issuance under the 1995 Stock Benefit Plan by
2,500,000 shares, (ii) increased the shares available for
future issuance under the 1995 Non-Employee Directors
Stock Option Plan by 50,000 and (iii) increased the shares
available for future issuance under the Employee Stock
Purchase Plan by 450,000.
Accounting for Stock Based Compensation
The Company has elected to follow APB 25 and related
interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value
accounting provided for under SFAS 123 “Accounting for
Stock-Based Compensation,” requires use of option valua-
tion models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise
price of the Company’s stock options equals the market
price of the underlying stock on the date of grant, no com-
pensation expense is recognized.
Pro forma information regarding net income and earnings
per share is required by SFAS 123, which also requires that
the information be determined as if the Company has accounted
for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of this
Statement. For all grants subsequent to December 31, 1994
that were granted prior to the Company’s initial public offer-
ing in November 1995, the fair value of these options was
determined using the minimum value method with a weighted
average risk free interest rate of 6.32% and an expected life
of 5 years. The fair value for the options granted subsequent
to the Company’s initial public offering in November 1995
was estimated at the date of grant using a Black-Scholes single
option pricing model with the following weighted average
assumptions: risk-free interest rates of 4.84% , 6.24% , and
6.23% for 1998, 1997, and 1996, respectively; a dividend
yield of 0.0% , a volatility factor of the expected market
price of the Company’s common stock of 0.60, 0.655, and
0.588 for 1998, 1997, and 1996, respectively; and a weighted-
average expected life of the option of 5 years. The weighted
average fair value of those options granted were $6.65,
$12.45, and $6.98 for 1998, 1997, and 1996, respectively.
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition,
option models require the input of highly subjective assump-
tions including the expected stock price volatility. Because
the Company’s employee stock options have characteristics
significantly different from those of traded options, and
because changes in the subjective assumptions can materially
affect the fair value estimate, in management’s opinion, the
existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Under the 1995 Employee Stock Purchase Plan, the Company
is authorized to issue up to 883,333 shares of common stock
to participating employees. Under the terms of the Plan,
employees can choose to have up to 10% of their annual
base earnings withheld to purchase the Company’s common
stock. The purchase price of the stock is 85% of the lower of
the subscription date fair market value and the purchase date
fair market value. Approximately 65% of eligible employees
have participated in the plan in 1998 and 75% and 86% in
1997 and 1996, respectively. Under the Plan, the Company
sold 129,742; 125,797 and 92,350 shares to employees in
1998, 1997 and 1996, respectively. Pursuant to APB 25 and
related interpretations, the Company does not recognize
compensation cost related to employee purchase rights under
the Plan. To comply with the pro forma reporting requirements
of SFAS 123, compensation cost is estimated for the fair value
of the employees’ purchase rights using the Black-Scholes
model with the following assumptions for those rights granted
in 1998, 1997, and 1996: dividend yield of 0.0%; and
expected life of 6 months; expected volatility factor of .65
and 1.02 in 1998, 0.63 and 0.89 in 1997, and 0.588 in
1996; and a risk free interest rate ranging from 5.36% to
6.08% . The weighted average fair value of those purchase
rights granted in February 1996, August 1996, February
1997, August 1997, February 1998 and August 1998 were
$2.47, $2.52, $3.42, $4.69, $7.00 and $4.50 respectively.
Had compensation cost for the Company’s stock-based com-
pensation plans been determined based on the fair value at
the grant dates for awards under those plans consistent with
the method of SFAS 123, the Company’s net income and
earnings per share would have been reduced to the pro
forma amounts indicated below:
Years ended December 31,
(in thousands, except per share amounts) 1998 1997 1996
Pro forma net income $ 5,178 $17,156 $13,553
Pro forma net income per share
Basic $ 0.20 $ 0.75 $ 0.61
Diluted $ 0.19 $ 0.69 $ 0.56
Because SFAS 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will
not be fully reflected until 1999.
Shareholder Rights Plan
On April 21, 1997, the Company adopted a shareholder
rights plan (the Rights Agreement). Under the Rights
Agreement, rights were distributed as a dividend at the rate
of one right for each share of common stock of the
Company held by stockholders of record as of the close of