SanDisk 1999 Annual Report Download - page 43

40 Annual Report 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE STOCK PURCHASE PLAN
In August 1995, the Company adopted the Employee Stock
Purchase Plan (the Purchase Plan). In May 1999, the stockholders
increased the shares available for future issuance under the
Employee Stock Purchase Plan by 600,000 and approved an auto-
matic share increase feature pursuant to which the number of
shares available for issuance under the plan will automatically
increase on the first trading day in January each calendar year,
beginning with calendar year 2002 and continuing over the remain-
ing term of the plan, by an amount equal to forty-three hundredths
of one percent (0.43%) of the total number of shares outstanding
on the last trading day in December in the immediately preceding
calendar year, but in no event will any such annual increase exceed
400,000 shares. Under the Purchase Plan, qualified employees are
entitled to purchase shares through payroll deductions at 85% of
the fair market value at the beginning or end of the offering period,
whichever is lower. As of December 31, 1999, the Company had
reserved 2,366,666 shares of common stock for issuance under the
Directors’ Plan and a total of 964,870 shares had been issued.
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 valuation 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 compensation 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 offering 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 esti-
mated at the date of grant using a Black-Scholes single option
pricing model with the following weighted average assumptions:
risk-free interest rates of 5.52%, 4.84% and 6.24% for 1999,
1998 and 1997, respectively; a dividend yield of 0.0%, a volatility
factor of the expected market price of the Company’s common stock
of 0.888, 0.60 and 0.655 for 1999, 1998 and 1997 respectively;
and a weighted-average expected life of the option of 5 years. The
weighted average fair value of those options granted were $22.38,
$3.325 and $6.225 for 1999, 1998 and 1997, 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 assumptions 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 assump-
tions 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 participating
employees can choose to have up to 10% of their annual base earn-
ings 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 79% of eligible employees have participated in the
plan in 1999 and 65% and 75% in 1998 and 1997, respectively.
Under the Plan, the Company sold 269,092, 259,484 and
251,591 shares to employees in 1999, 1998 and 1997, respec-
tively. 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
1999, 1998 and 1997: dividend yield of 0.0%; and expected life
of 6 months; expected volatility factor of .98 and 1.16 in 1999, .65
and 1.02 in 1998 and 0.63 and 0.89 in 1997; and a risk free inter-
est rate ranging from 5.35% to 6.08%. The weighted average fair
value of those purchase rights granted in February 1997, August
1997, February 1998, August 1998, February 1999 and August 1999
were $1.71, $2.345, $3.5, $2.25, $6.01 and $17.72, respectively.