Adobe 2007 Annual Report Download - page 90

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90
The following table sets forth the pro forma effect on net income and net income per share for fiscal 2005 that would
have resulted if we had accounted for our employee stock plans under the fair value recognition provisions of SFAS 123:
2005
Net income:
As reported........................................................................................................................ $ 602,839
Add: Stock-based compensation expense for employees included in reported net
income, net of related tax effects ..................................................................................
255
Less: Total stock-based compensation expense for employees determined under the fair
value based method, net of related tax effects...............................................................
(88,603)
Pro forma .......................................................................................................................... $ 514,491
Basic net income per share:
As reported........................................................................................................................ $ 1.23
Pro forma .......................................................................................................................... $ 1.05
Diluted net income per share:
As reported........................................................................................................................ $ 1.19
Pro forma .......................................................................................................................... $ 1.01
Valuation of Stock Options and Employee Stock Purchase Shares
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 expected term of the awards, actual and
projected employee stock option exercise behaviors, a risk-free interest rate and any expected dividends.
We estimate the expected term of options granted by calculating the average term from our historical stock option
exercise experience. 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 zero-coupon yields implied by U.S. Treasury 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 assumptions used to value our option grants were as follows:
Fiscal Years
2007 2006 2005
Expected term (in years) ................. 3.54—4.82 3.7 3.0—3.9
Volatility ......................................... 29.6—39.2% 30.3—37.0% 30—37 %
Risk-free interest rate...................... 3.6—5.1% 4.3—5.2% 3.4—4.5 %