Western Digital 2000 Annual Report Download - page 44

WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
technology, the gaps between critical components (principally the recording heads and disks) within the drive
became much smaller until they were almost in contact with one another. This made the thin-Ñlm drives
much more susceptible to environmental factors which typically manifest themselves over longer periods of
time, such as gases released from the surrounding environment that may permeate through or from other
components in the drive. In early 1999, the Company began to see consistent data indicating a higher
percentage of advanced thin-Ñlm drives coming back after the Ñrst six months. That, combined with the
signiÑcant amount of these drives that were in the Ñeld, led to a higher lifetime return rate being applied to a
larger base of products in the Ñeld and an incremental warranty provision was recorded.
Advertising Expense
Advertising costs are expensed as incurred. Selling, general and administrative expenses of the Company
include advertising costs of $17.4, $14.3, and $9.0 million in 1998, 1999 and 2000, respectively.
Income Taxes
The Company accounts for income taxes using the liability method under Statement of Financial
Accounting Standards No. 109, ""Accounting for Income Taxes'' (""SFAS 109''). This method generally
provides that deferred tax assets and liabilities be recognized for temporary diÅerences between the Ñnancial
reporting basis and the tax basis of the Company's assets and liabilities and expected beneÑts of utilizing net
operating loss (""NOL'') carryforwards. The Company records a valuation allowance for certain temporary
diÅerences for which it is more likely than not that it will not receive future tax beneÑts. The impact on
deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary
diÅerences are expected to be settled and reÖected in the consolidated Ñnancial statements in the period of
enactment.
Per Share Information
The Company computes basic loss per share using the net loss and the weighted average number of
common shares outstanding during the period. Dilutive loss per share is computed using the net loss and the
weighted average number of common shares and dilutive potential common shares outstanding during the
period. Dilutive common shares include outstanding employee stock options, employee stock purchase plan
shares and common shares issuable upon conversion of the convertible debentures. The eÅects of these items
were not included in the computation of diluted loss per share for each period presented as their eÅect would
have been anti-dilutive (See Note 9).
Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No. 123, ""Accounting for
Stock-Based Compensation'' (""SFAS 123''). SFAS 123 establishes the Ñnancial accounting and reporting
standards for stock-based compensation plans. The Company elected to continue accounting for stock-based
employee compensation plans in accordance with Accounting Principles Board Opinion No. 25, ""Accounting
for Stock Issued to Employees'' and related interpretations (""APB Opinion No. 25''), as SFAS 123 permits,
and to follow the pro forma net income (loss), pro forma earnings (loss) per share, and stock-based
compensation plan disclosure requirements set forth in SFAS 123. (See Note 6).
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximates fair value for all periods presented
because of the short-term maturity of these Ñnancial instruments. The fair value of the Company's convertible
debentures is estimated by reference to quoted information from market sources. At June 30, 2000, the market
value of the Company's convertible debentures was approximately $111.6 million, compared to the related
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