SanDisk 2006 Annual Report Download - page 119

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the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period
of each of these awards, net of estimated forfeitures.
The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing
formula and a single-option award approach. The Company’s expected term represents the period that the
Company’s share-based awards are expected to be outstanding and was determined based on historical experience
regarding similar awards, giving consideration to the contractual terms of the share-based awards. The Company’s
expected volatility is based on the implied volatility of its traded options in accordance with the guidance provided
by the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin 107 to place exclusive reliance on
implied volatilities to estimate our stock volatility over the expected term of its awards. The Company has
historically not paid dividends and has no foreseeable plans to issue dividends. The risk-free interest rate is based on
the yield from U.S. Treasury zero-coupon bonds with an equivalent term.
As a result of adopting SFAS 123(R), the impact to the Consolidated Financial Statements for the year ended
December 31, 2006 to income before income taxes and net income was $100.6 million lower than if the Company
had continued to account for share-based compensation under APB 25. The basic and diluted earnings per share for
the year ended December 31, 2006 was $0.41 and $0.39 lower, respectively, than if the Company had continued to
account for share-based compensation under APB 25. In addition, prior to the adoption of SFAS 123(R), the
Company presented the tax benefit of stock option exercises as operating cash flows. Upon the adoption of
SFAS 123(R), tax benefits resulting from tax deductions in excess of the compensation cost recognized for those
options are classified as financing cash flows and a corresponding deduction from operating cash flows.
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, Transition Election Related
to Accounting for Tax Effects of Share-Based Payment Awards. The Company has elected to adopt the alternative
transition method provided in the FASB Staff Position for calculating the effects of share-based compensation
pursuant to FAS 123(R). The alternative transition method includes a simplified method to establish the beginning
balance of the additional paid in capital pool (APIC pool) related to the tax effects of employee share-based
compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123(R).
Stock Options and Stock Appreciation Rights (SARs). The fair value of the Company’s stock options granted
to employees for the years ended December 31, 2006, January 1, 2006 and January 2, 2005 was estimated using the
following weighted average assumptions:
December 31,
2006
January 1,
2006
January 2,
2005
Dividend yield ................................... None None None
Expected volatility ................................ 0.52 0.52 0.92
Risk-free interest rate .............................. 4.63% 3.94% 3.07%
Expected lives ................................... 3.7Years 4.5 Years 5.0 Years
Weightedaveragefairvalueatgrantdate ............... $25.44 $13.03 $22.64
F-20
Notes to Consolidated Financial Statements — (Continued)