Western Digital 2006 Annual Report Download - page 38

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• Approximately $4.2 million, before tax-related expenses, of these additional expenses were attributable to annual
employee stock option grants made in September 2001 and 2002. For these grants, acting at a meeting, the
Compensation Committee approved specific grants for Section 16(b) Officers and an overall budgeted number of
shares for grants to employees that were not Section 16(b) Officers to be allocated by later management action.
The allocation of awards to employees that were not Section 16(b) Officers was not completed with finality by the
grant date.
• Approximately $1.0 million, before tax-related expenses, additional expenses were attributable to grants
involving a variety of administrative errors, including errors in administration of grants to new hires and in
connection with promotions, and errors in supporting documentation.
We determined that the cumulative pre-tax non-cash stock-based compensation expense resulting from revised
measurement dates was approximately $18.4 million for fiscal years 1998 to 2006. This additional compensation expense
relates to stock options covering approximately 12.6 million shares. Additionally, we have recorded $2.5 million in tax-
related expenses resulting from the recharacterization of incentive stock options to non-qualified stock options for fiscal
years 1998 to 2006. The following table summarizes the impact of the related adjustments (in millions):
June 30,
2006
July 1,
2005
July 2,
2004
Fiscal Years
1998 to 2003 Total
Years Ended
Stock-based compensation expense ..................... $0.7 $1.0 $1.3 $15.4 $18.4
Tax-related expenses ............................... 0.6 1.4 0.2 0.3 2.5
Total ........................................ $1.3 $2.4 $1.5 $15.7 $20.9
The following table reflects the consolidated income statement classification of the additional stock-based
compensation and tax-related expenses related to the adjustment for fiscal years 1998 to 2006:
Cost of revenue ................................................... $ 2.0
Research and development expense ...................................... 12.2
Selling, general and administrative expense ................................ 6.1
Provision for income taxes ............................................ 0.6
Total ......................................................... $20.9
The adjustments reduce previously reported diluted earnings per share (“diluted EPS”) by $0.01 each for both of the
years ended July 1, 2005 and July 2, 2004. Given that we have concluded that the foregoing adjustments were not
material to our historical consolidated financial statements, we have not amended, and do not intend to amend, any of our
previously filed annual reports on Form 10-K or quarterly reports on Form 10-Q for the periods affected by the
adjustments. For additional information on the adjustments, see Part II, Item 8 — Note 2 of the Notes to Consolidated
Financial Statements.
Our Company
We design, develop, manufacture and sell hard drives. A hard drive is a device that uses one or more rotating
magnetic disks and allows fast access to data. Hard drives are key components of computers, data storage subsystems and
many consumer electronics (“CE”) devices.
We sell our products worldwide to original equipment manufacturers (“OEM”) for use in computer systems,
subsystems or CE devices, and to distributors, resellers and retailers. Our hard drives are used in desktop computers,
notebook computers, and enterprise applications such as servers, workstations, network attached storage and storage area
networks. Additionally, our hard drives are used in CE applications such as digital video recorders (“DVR”), satellite and
cable set-top boxes (“STB”), MP3 players, and universal serial bus (“USB”) thumb drives. We also sell our hard drives as
stand-alone storage products and integrate them into our own WD-branded external storage products for uses such as
personal data backup and portable or expanded storage of digital music, photography, video, and other data.
Hard drives provide non-volatile data storage, which means that the data remains present when power is no longer
applied to the device. Our hard drives currently include 3.5-inch, 2.5-inch and 1.0-inch form factor drives. The 3.5-inch
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