Blizzard 2005 Annual Report Download - page 66

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account฀for฀those฀plans฀under฀the฀recognition฀and฀measurement฀principles฀of฀APB฀Opinion฀No.฀25฀and฀related฀Interpretations.฀The฀following฀table฀illustrates฀the฀effect฀on฀
net฀income฀and฀earnings฀per฀share฀if฀we฀had฀applied฀the฀fair฀value฀recognition฀provisions฀of฀SFAS฀No.฀123฀to฀stock-based฀employee฀compensation:
Year ended March 31, 2005 2004 2003
Net฀income,฀as฀reported $ 138,335 $ 77,715 $ 66,180
Add:฀Stock-based฀employee฀compensation฀expense฀included฀in฀reported฀net฀income,฀฀
net฀of฀related฀tax฀effects 64 192 —
Deduct:฀Total฀stock-based฀employee฀compensation฀expense฀determined฀under฀฀
fair฀value฀based฀method฀for฀all฀awards,฀net฀of฀related฀tax฀effects (15,435) (18,303) (21,004)
Pro฀forma฀net฀income $ 122,964 $ 59,604 $ 45,176
Earnings฀per฀share
Basic—as฀reported $ 0.74 $ 0.44 $ 0.34
Basic—pro฀forma $ 0.66 $ 0.34 $ 0.23
Diluted—as฀reported $ 0.66 $ 0.40 $ 0.32
Diluted—pro฀forma $ 0.59 $ 0.31 $ 0.22
The฀fair฀value฀of฀options฀granted฀in฀the฀years฀ended฀March฀31,฀2005,฀2004฀and฀2003฀has฀been฀estimated฀at฀the฀date฀of฀grant฀using฀a฀Black-Scholes฀option฀pricing฀model฀
with฀the฀following฀weighted฀average฀assumptions:
Employee and Director
Options and Warrants
Employee Stock
Purchase Plan
2005 2004 2003 2005 2004 2003
Expected฀life฀(in฀years) 34 3 0.5 0.5 0.5
Risk฀free฀interest฀rate 3.25% 2.01% 1.51% 2.66% 1.75% 1.13%
Volatility 48% 49% 69% 46% 51% 69%
Dividend฀yield —— — —— —
The฀Black-Scholes฀option฀pricing฀model฀requires฀the฀input฀of฀highly฀subjective฀assumptions,฀including฀the฀expected฀stock฀price฀volatility.฀We฀use฀the฀historical฀stock฀price฀
volatility฀of฀our฀common฀stock฀over฀the฀most฀recent฀period฀that฀is฀generally฀commensurate฀with฀the฀expected฀option฀life฀as฀the฀basis฀for฀estimating฀expected฀stock฀฀
price฀volatility.฀In฀fiscal฀2003,฀the฀historical฀stock฀price฀volatility฀used฀was฀based฀on฀the฀daily,฀low฀stock฀price฀of฀our฀common฀stock,฀which,฀in฀recent฀years,฀resulted฀in฀an฀
expected฀volatility฀ranging฀from฀approximately฀65%฀to฀70%.฀For฀options฀granted฀during฀each฀of฀the฀quarters฀in฀the฀years฀ended฀March฀31,฀2005฀and฀2004,฀the฀historical฀
stock฀price฀volatility฀used฀was฀based฀on฀a฀weekly฀stock฀price฀observation,฀using฀an฀average฀of฀the฀high฀and฀low฀stock฀prices฀of฀our฀common฀stock,฀which฀resulted฀in฀an฀
expected฀stock฀price฀volatility฀ranging฀from฀45%฀to฀48%.฀Management฀believes฀such฀amounts฀are฀more฀representative฀of฀prospective฀trends.฀For฀purposes฀of฀the฀above฀
pro฀forma฀disclosure,฀the฀fair฀value฀of฀options฀granted฀is฀amortized฀to฀stock-based฀employee฀compensation฀cost฀over฀the฀period(s)฀in฀which฀the฀related฀employee฀services฀
are฀rendered.฀Accordingly,฀the฀pro฀forma฀stock-based฀compensation฀cost฀for฀any฀period฀will฀typically฀relate฀to฀options฀granted฀in฀both฀the฀current฀period฀and฀prior฀periods.
page 65
Activision, Inc. — 2005 Annual Report