Western Digital 2006 Annual Report Download - page 74

The pro forma income per share information for all stock options granted on or prior to December 31, 2004 as well
as all ESPP shares granted on or prior to June 30, 2006 was estimated using the Black-Scholes-Merton option-pricing
model. The Black-Scholes-Merton option-pricing model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. The Black-Scholes-Merton option pricing model
requires the input of highly subjective assumptions such as the expected stock price volatility and the expected period
until options are exercised. The pro forma impact of applying SFAS No. 123 at June 30, 2006 is not necessarily
representative of future periods.
The fair values of all stock options granted on or prior to December 31, 2004 and all ESPP shares granted on or prior
to June 30, 2006 have been estimated at the date of grant using a Black-Scholes-Merton option-pricing model with the
following weighted average assumptions:
2005 2004 2006 2005 2004
Stock Option
Plans ESPP
Option life (in years) ................................... 4.51 3.94 1.21 1.25 1.25
Risk-free interest rate .................................. 3.23% 1.65% 4.45% 2.25% 1.09%
Stock price volatility ................................... 0.74 0.75 0.42 0.55 0.77
Dividend yield . ...................................... — — — — —
Fair value ........................................... $5.33 $6.56 $3.85 $3.00 $4.73
Stock Repurchase Program
The Company’s Board of Directors has authorized the repurchase of up to $250 million of the Company’s common
stock in open market transactions. Stock repurchases are expected to be funded principally from operating cash flows.
During 2006, the Company repurchased 3.5 million shares of common stock at a total cost of $53.5 million (including
commissions). Between July 1, 2006 and November 10, 2006 the Company has not repurchased any additional common
stock. Since the inception of the program, and through November 10, 2006, the Company has repurchased 10.2 million
shares for a total cost of $115 million (including commissions). The Company may continue to repurchase its stock as it
deems appropriate and market conditions allow.
Stock Purchase Rights
In 1989, the Company implemented a plan to protect shareholders’ rights in the event of a proposed takeover of the
Company. Under the plan, each share of the Company’s outstanding common stock carried one Right to Purchase Series A
Junior Participating Preferred Stock (the “Right”). The Right enabled the holder, under certain circumstances, to
purchase common stock of Western Digital or of an acquiring company at a substantially discounted price ten days after a
person or group publicly announces it has acquired or has tendered an offer for 15% or more of the Company’s
outstanding common stock. On September 10, 1998, the Company’s Board of Directors approved the adoption of a new
Rights plan to replace the previous plan, which expired in September 1998. The Rights under the 1998 plan were similar
to the rights under the 1989 plan except they were redeemable by the Company at $.01 per Right and expired in 2008. In
connection with the establishment of a holding company structure on April 6, 2001, the Company terminated the Rights
under the 1998 plan and adopted a new Rights plan. The 2001 plan is similar to the terminated 1998 plan, except that
the exercise price was reduced from $150.00 to $50.00 per share and the expiration date for the 2001 Rights plan was
extended to April 2011.
Note 9. Western Digital Corporation 401(k) Plan
Effective July 1, 1991, the Company adopted the Western Digital Corporation 401(k) Plan (the “Plan”) formerly
known as the Western Digital Corporation Retirement Savings and Profit Sharing Plan. The Plan covers substantially all
domestic employees, subject to certain eligibility requirements. The Company may make annual contributions to the
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)