Adobe 2006 Annual Report Download - page 98

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key executives. All members of Adobe’s executive management team and other key members of senior
management are participating in the Program which runs through the end of our fiscal 2007. Awards under
the Program were granted in the form of performance shares pursuant to the terms of our 2003 Plan or
Restricted Stock Plan. Performance shares granted entitle the recipient to receive fully-vested shares of
Adobe common stock upon completion of the performance period subject to attaining identified
performance goals, some of which contain discretionary metrics.
During fiscal 2006, we granted performance shares under the Program as shown in the table below.
Upon achievement of performance goals, the recipients may be eligible to receive up to 504,000 shares.
These shares will be issued out of our 2003 Plan and our Restricted Stock Plan.
Performance Shares
Shares
Granted
Maximum
Shares
Eligible to
Receive
December 2, 2005.............. ― ―
Awarded......................... 360 540
Forfeited......................... (24) (36)
December 1, 2006.............. 336 504
Stock-Based Compensation
Beginning with our first quarter of fiscal 2006, we adopted SFAS 123R. See Note 1 for a description of
our adoption of SFAS 123R. We currently use the Black-Scholes option pricing model to determine the fair
value of stock options and employee stock purchase plan shares. The determination of the fair value of
stock-based payment awards on the date of grant using an option-pricing model is affected by our stock
price as well as assumptions regarding a number of complex and subjective variables. These variables
include our expected stock price volatility over the term of the awards, actual and projected employee stock
option exercise behaviors, risk-free interest rate and expected dividends.
We estimate the expected term of options granted by calculating the average term from our historical
stock option exercise experience. As permitted by SAB 107, we estimate the volatility of our common
stock by using implied volatility in market traded options. Our decision to use implied volatility was based
upon the availability of actively traded options on our common stock and our assessment that implied
volatility is more representative of future stock price trends than historical volatility. We base the risk-free
interest rate that we use in the option valuation model on U.S. Treasury zero-coupon issues with remaining
terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the
foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. We
are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if
actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option
forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of
the awards, which are generally the vesting periods.
The expected term of employee stock purchase plan shares is the average of the remaining purchase
periods under each offering period.
Prior to the adoption of SFAS 123R, we recognized the estimated compensation cost of restricted
stock over the vesting term. The estimated compensation cost is based on the fair value of Adobe’s
common stock on the date of grant. We will continue to recognize the compensation cost, net of estimated
forfeitures, over the vesting term.
In accordance with SFAS 123R, we will recognize the estimated compensation cost of performance
shares, net of estimated forfeitures. The awards are earned upon attainment of identified performance goals,
some of which contain discretionary metrics, and are accounted for based upon the fair value of the award