Square Enix 2004 Annual Report Download - page 59

SQUARE ENIX 2004 57
the assets, obligations, cash flows and net periodic benefit cost of defined
benefit pension plans and other postretirement benefit plans.
Stock-Based Compensation
The Company accounts for its incentive stock option plans using intrinsic
value method in accordance with Accounting Principles Board Opinion
No.25, "Accounting for Stock Issued to Employees" ("APB25"). Under
APB25, generally no compensation expenses are recorded when the terms
of the award are fixed and the exercise price of the stock option equals or
exceeds the fair value of the underlying stock on the date of grant.
In fiscal 2003, the Company adopted the disclosure provisions of SFAS
No.148 "Accounting for Stock-Based Compensation-Transaction and
Disclosure-an Amendment of FASB Statement No. 123", which provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation.
In June 2002, the stockholders of the Company approved the
Company’s Stock Option Plan, pursuant to which officers, directors,
employees of the Company may purchase up to an aggregate of 487,400
shares of common stock. In addition, the Company took over Square’s
stock option plan as a result of the merger, pursuant to which, the direc-
tors, officers and employees of former Square may purchase up to an
aggregate of 3,330,895 shares of common stock of the Company. As of
March 31, 2004 and 2003, the plans had outstanding stock options for an
aggregate of 3,262,645 and 487,400 shares of the Company’s common
stock, respectively.
The following table summarizes the activity in options under the plans:
Number of shares Weighted Average
(In thousands) Exercise Price
Options outstanding - April 1, 2002 357.7 ¥2,215.15
Granted - exercise price equal to fair value 312.5 2,313.00
Granted - exercise less than fair value — —
Exercised — —
Forfeited 182.8 2,543.48
Options outstanding - March 31,2003 487.4 ¥2,374.92
Increase in option as a result of the merger
with SQUARE on April 1, 2003 3,330.895 3,084.84
Granted - exercise price equal to fair value — —
Granted - exercise price equal to fair value — —
Exercise less than fair value 184.8 2,313.00
Forfeited 370.85 2,984.04
Options outstanding - March 31, 2004 3,262.645 ¥3,001.17
At March 31, 2004 and 2003, the number of options exercisable was
719,038 and 185,945, respectively, and their related weighted average exer-
cise prices were ¥3,001.17 and ¥2,374.92, respectively.
Had compensation cost for the Company’s stock option plan been
determined based on the fair value at the grant date for awards in 2004 and
2003, consistent with the provisions of SFAS No.123, the Company’s net
income and the net income per share would have been reduced to the pro
forma amounts indicated below.
Millions of Yen Thousands of
(Except share data) U.S. Dollars
Years Ended March 31, (Except share data)
2004 2003 2004
Net income :
As reported ¥4,355 ¥2,296 $41,205
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards — 45 —
Pro forma net income ¥4,355 ¥2,251 $41,205
Earnings per share:
As reported - Basic ¥39.58 ¥39.06 $0.37
Pro forma - Basic — 38.28 —
As reported - Diluted ¥37.99 ¥38.57 $0.36
Pro forma - Diluted — 37.80 —
The pro forma disclosures shown are not representative of the effects on
net income and the net income per share in future years.
The fair value of the Company’s stock options used to compute pro
forma net income and the net income per share disclosures is the estimated
present value at the grant date using the Black-Scholes option-pricing
model. The weighted average fair values of options granted were ¥146.27
for the year ended March 31, 2003. The following weighted average
assumptions for 2003 were used to value grants: expected volatility of 44.65
percent; risk-free interest rate of 0.029 percent; and expected holding peri-
od of 0.68 years.
Earnings Per Share
Basic earnings per share ("EPS") are computed by dividing the net income
(loss) applicable to common stockholders for the year by the weighted
average number of common shares outstanding during the year. Diluted
EPS is computed by dividing the net income (loss) applicable to common
stockholders for the year by the weighted average number of common and
common stock equivalents, which include common shares issuable upon
the exercise of stock options outstanding during the year. Common stock
equivalents are excluded from the computation if their effect is antidilutive.
Comprehensive Income (Loss)
Comprehensive income (loss) represents change in net assets of a business
enterprise during a period from transactions and other events and circum-
stances from non-owner sources. Comprehensive income (loss) of the
Company includes net income adjusted for the change in foreign currency
translation adjustments and the change in net unrealized gain (loss) from
investments.
Foreign Currency Translation and Transactions
The functional currency for the Company’s foreign operations is the
applicable local currency. Accounts of foreign operations are translated