Adobe 2004 Annual Report Download - page 71

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request from these companies. This information is not subject to the same disclosure regulations as U.S.
publicly traded companies and as such, the basis for these evaluations is subject to the timing and the
accuracy of the data received from these companies. If we believe the carrying value of a company is in
excess of fair value, it is our policy to write-down the investments to reduce its carrying value to fair value.
Impairment of Long-lived Assets
We evaluate our long-lived assets in accordance with the provisions of SFAS 144, which superseded
SFAS 121.
During fiscal 2002, we recognized a $6.3 million impairment charge for capitalized Adobe Design
Team hosted server development costs, under SFAS 121. The impairment charge was recorded on our
consolidated statement of income under cost of products revenue. The impairment charge was determined
based on discounted future cash flows. For segment reporting purposes, the charge was included in our
Creative Professional segment.
Stock-Based Incentive Compensation
We account for our fixed stock option plans and our employee stock purchase plan, under APB 25,
using the intrinsic value method. The following table sets forth the pro forma amounts of net income and
net income per share that would have resulted if we had accounted for our employee stock plans under the
fair value recognition provisions of SFAS 123.
For purposes of computing pro forma net income, we estimate the fair value of option grants and
employee stock purchase plan purchase rights using the Black-Scholes option pricing model. The Black-
Scholes option-pricing model was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable, characteristics not present in our employee stock options
and employee stock purchase plan shares. Additionally, option valuation models require the input of highly
subjective assumptions, including the expected volatility of the stock price. Because our employee stock
options and employee stock purchase plan shares have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can materially affect the fair value
estimates, in management’s opinion, the existing models may not provide a reliable single measure of the
fair value of its stock-based awards.
For purposes of the pro forma disclosures, the expected volatility assumptions we used prior to the
third quarter of fiscal 2003 were based solely on the historical volatility of our common stock over the most
recent period commensurate with the estimated expected life of our stock options. Beginning with the third
quarter of fiscal 2003, we modified our approach and expected volatility by considering other relevant
factors in accordance with SFAS 123. We considered implied volatility in market-traded options on our
common stock as well as third party volatility quotes. In addition, we considered historical volatility. We
Fiscal Years
2004 2003 2002
Net income:
As reported ................................................................................................... $ 450,398 $ 266,344 $ 191,399
Add: Stock-based employee compensation expense included in reported
net income, net of related tax effects .......................................................
221 1,837 4,411
Less: Total stock-based employee compensation expense determined
under fair value based method, net of related tax effects ........................
(105,883) (188,427) (189,164)
Pro forma...................................................................................................... $ 344,736 $ 79,754 $ 6,646
Basic net income per share:
As reported ................................................................................................... $ 1.89 $ 1.14 $ 0.81
Pro forma...................................................................................................... $ 1.44 $ 0.34 $ 0.03
Diluted net income per share:
As reported ................................................................................................... $ 1.82 $ 1.10 $ 0.79
Pro forma...................................................................................................... $ 1.39 $ 0.33 $ 0.03