Salesforce.com 2005 Annual Report Download - page 67

Table of Contents
salesforce.com, inc.
Notes to Consolidated Financial Statements—(Continued)
During the second quarter of fiscal 2006, the Company reevaluated the assumptions used to estimate the future volatility of its stock price. The
Company estimated its future stock price volatility based upon a blending of both observed option-implied volatilities and historical volatility calculations for
both the Company and a group of peer comparable companies. Management believes this is the best estimate of the expected volatility over the 4 year
weighted-average expected life of its option grants. During the Company's initial year as a public company, the volatility assumption was primarily based on
the historical volatility of comparable companies. As a result of its reevaluation and the general market decline in share price volatilities, the Company
reduced its volatility assumption from 75% to 50% and applied this estimate in valuing the options awarded during the remainder of fiscal 2006.
Had compensation cost for the Company's stock-based compensation plans been determined using the fair-value method at the grant date for awards
under those plans calculated using the Black-Scholes pricing model and recognized on a straight-line basis over the option vesting periods, the Company's net
income would have been decreased to the pro forma amounts indicated below (in thousands, except per share data):
Fiscal Year Ended January 31,
2006
2005 2004
Net income, as reported $ 28,474 $ 7,346 $ 3,514
Add: Total stock-based compensation expense included in the determination of net income 2,765 3,298 3,765
Deduct: Total stock-based compensation expense determined under the fair-value-based method for all awards. Such expense
amounts are not net of tax benefits. (22,649) (13,901) (7,884)
Net income (loss), pro forma $ 8,590 $ (3,257) $ (605)
Net income (loss), per share:
Basic
As reported $ 0.27 $ 0.10 $ 0.12
Pro forma 0.08 (0.04) (0.02)
Diluted:
As reported $ 0.24 $ 0.07 $ 0.04
Pro forma 0.07 (0.04) (0.02)
For the pro forma calculation, the per share weighted-average fair value of options granted are as follows:
Fiscal Year Ended January 31,
2006 2005 2004
Weighted-average fair value:
Options granted below fair value $ — $ 6.51 $ 2.69
Options equal to fair value 11.11 7.59 3.65
Weighted-average exercise price:
Options granted at or below fair value $ 24.51 $ 11.61 $ 3.74
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the fiscal period.
Diluted net income per share is computed giving effect to all potential dilutive common stock, including options, warrants and convertible preferred stock
prior to the completion of the Company's initial public offering in June 2004.
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