SanDisk 2005 Annual Report Download - page 32

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Proxy Statement
unless the vesting of the shares is tied solely to one or more of the performance milestones described above
under the section entitled ""Stock Issuance and Cash Bonus Program.'' As also described above, if
stockholders approve the 2005 Plan proposal, the Company intends to grant cash bonus opportunities under
the 2005 Plan designed to satisfy the requirements for deductibility under Section 162(m).
Accounting Treatment. Pursuant to the accounting standards established by Statement of Financial
Accounting Standards No. 123R, Share-Based Payment, or SFAS 123R, the Company is required to expense
all share-based payments, including grants of stock options, stock appreciation rights, restricted stock units
and all other awards under the 2005 Plan, commencing with the Company's 2006 fiscal year which began on
January 2, 2006. Accordingly, stock options and stock appreciation rights which are granted to the Company's
employees and non-employee Board members will have to be valued at fair value as of the grant date under an
appropriate valuation formula, and that value will then have to be charged as a direct compensation expense
against the Company's reported earnings over the designated vesting period of the award. Similar option
expensing will be required for any unvested options outstanding on the January 2, 2006 effective date, with the
fair value as of the grant date of those unvested options to be expensed against the Company's reported
earnings over the remaining vesting period. For shares issuable upon the vesting of restricted stock units
awarded under the 2005 Plan, the Company will be required to amortize over the vesting period a
compensation cost equal to the fair market value of the underlying shares on the date of the award. If any
other shares are unvested at the time of their direct issuance, then the fair market value of those shares at that
time will be charged to the Company's reported earnings ratably over the vesting period. Such accounting
treatment for restricted stock units and direct stock issuances will be applicable whether vesting is tied to
service periods or performance goals. The issuance of a fully-vested stock bonus will result in an immediate
charge to the Company's earnings equal to the fair market value of the bonus shares on the issuance date.
Option grants and other awards made under the 2005 Plan to non-employee consultants will result in a
direct charge to the Company's reported earnings based on the fair value of each such award as measured on
each vesting date for that award. Accordingly, such charge will include the appreciation in the fair value of the
award over the period between the grant date and each applicable vesting date.
Required Vote
The affirmative vote of the holders of a majority of the shares present in person or represented by proxy at
the meeting and entitled to vote on Proposal No. 2 is required for approval of the amendments to the 2005
Plan described above. Should such approval not be obtained, then the 2005 Plan will continue in full force and
effect, and (i) stock options and other stock or stock-based awards will continue to be made under the 2005
Plan until the share reserve under that plan as last approved by the Company's stockholders is exhausted and
(ii) the Company will not have the flexibility to grant performance-based awards that would be payable in
cash and satisfy the requirements for deductibility of compensation under Section 162(m) of the U.S. Internal
Revenue Code.
Recommendation of the Board of Directors
The Board believes that Proposal No. 2 is in the Company's best interests and in the best interests of its
stockholders and recommends a vote FOR the approval of the amendments to the 2005 Plan.
PROPOSAL NO. 3
INCREASE IN NUMBER OF SHARES OF AUTHORIZED COMMON STOCK
The Company is asking the stockholders to approve an amendment to the Company's Certificate of
Incorporation to increase the authorized shares of the Company's Common Stock from 400,000,000 shares to
800,000,000 shares. The Board of Directors of the Company believes the increase in the authorized shares is
necessary to provide the Company with the flexibility to act in the future with respect to financings,
acquisitions, stock splits and other corporate purposes, without the delay and expense of obtaining stockholder
approval each time an opportunity requiring the issuance of shares may arise.
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