SanDisk 2010 Annual Report Download - page 42

exercise date over (ii) the exercise price paid for such shares. If the Section 83(b) election is made, the optionee
will not recognize any additional income as and when the repurchase right lapses.
The Company will be entitled to an income tax deduction equal to the amount of ordinary income
recognized by the optionee with respect to the exercised non-statutory option. The deduction will in general be
allowed for the Company’s taxable year in which such ordinary income is recognized by the optionee.
Stock Appreciation Rights. No taxable income is recognized upon receipt of a stock appreciation right. The
holder will recognize ordinary income in the year in which the stock appreciation right is exercised, in an amount
equal to the excess of the fair market value of the underlying shares of Common Stock on the exercise date over
the base price in effect for the exercised right, and the Company will be required to collect the withholding taxes
applicable to such income from the holder.
The Company will be entitled to an income tax deduction equal to the amount of ordinary income
recognized by the holder in connection with the exercise of the stock appreciation right. The deduction will be
allowed for the taxable year in which such ordinary income is recognized.
Direct Stock Issuances. The tax principles applicable to direct stock issuances under the 2005 Plan will be
substantially the same as those summarized above for the exercise of non-statutory option grants.
Restricted Stock Units. No taxable income is recognized upon receipt of a restricted stock unit. The holder
will recognize ordinary income in the year in which the shares subject to that unit are actually issued to the
holder. The amount of that income will be equal to the fair market value of the shares on the date of issuance and
the Company will be required to collect the withholding taxes applicable to such income from the holder. The
Company will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the
holder at the time the shares are issued. The deduction will be allowed for the taxable year in which such
ordinary income is recognized.
Deductibility of Executive Compensation. The Company anticipates that any compensation deemed paid by
the Company in connection with the disqualifying disposition of incentive stock option shares or the exercise of
non-statutory options or stock appreciation rights will qualify as performance-based compensation for purposes
of Internal Revenue Code Section 162(m) and will not have to be taken into account for purposes of the
$1 million limitation per covered individual on the deductibility of the compensation paid to certain of the
Company’s executive officers. Accordingly, the compensation deemed paid with respect to options and stock
appreciation rights granted under the 2005 Plan will remain deductible by the Company without limitation under
Section 162(m). However, any compensation deemed paid by the Company in connection with shares issued
under the stock issuance program will be subject to the $1 million limitation, 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.”
Accounting Treatment. Pursuant to the accounting standards established by FAS No. 123(R)/ASC 718, 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 are valued at fair value as of the grant
date under an appropriate valuation formula, and that value will 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 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
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