Adobe 2009 Annual Report Download - page 106

ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
106
Restricted Stock Plan
We grant restricted stock awards and performance awards to officers and key employees under our Amended 1994
Performance and Restricted Stock Plan (“Restricted Stock Plan”). We can also grant restricted stock units to all eligible
employees under the Restricted Stock Plan and the 2003 Plan. Restricted stock awards issued under these plans vest annually
over three years. Performance awards and restricted stock units issued under these plans generally vest over four years, the
majority of which vest 25% annually; certain other restricted stock units vest 50% on the second anniversary and 25% on
each of the third and fourth anniversaries.
As of November 27, 2009, we had reserved 16.0 million shares of our common stock for issuance under the Restricted
Stock Plan and approximately 0.3 million shares were available for grant.
Performance Share Programs
Effective January 26, 2009, the Executive Compensation Committee adopted the 2009 Performance Share Program (the
“2009 Program”). The purpose of the 2009 Program is to align key management and senior leadership with stockholders’
interests and to retain key employees. The measurement period for the 2009 Program is our fiscal 2009 year. All members of
our executive management and other key senior leaders are participating in the 2009 Program. Awards granted under the
2009 Program were granted in the form of performance shares pursuant to the terms of our 2003 Equity Incentive Plan. If
pre-determined performance goals are met, shares of stock will be granted to the recipient, with 25% vesting on the later of
the date of certification of achievement or the first anniversary date of the grant, and the remaining 75% vesting evenly on the
following three annual anniversary dates of the grant, contingent upon the recipient’s continued service to Adobe.
Participants in the 2009 Program have the ability to receive up to 115% of the target number of shares originally granted.
Issuance of Shares
Upon exercise of stock options, vesting of restricted stock and performance shares, and purchases of shares under the
ESPP, we will issue treasury stock. If treasury stock is not available, common stock will be issued. In order to minimize the
impact of on-going dilution from exercises of stock options and vesting of restricted stock and performance shares, we
instituted a stock repurchase program. See Note 14 for information regarding our stock repurchase programs.
Valuation of Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award. We currently use the
Black-Scholes option pricing model to determine the fair value of stock options and ESPP 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.
The assumptions used to value our option grants were as follows:
Fiscal Years
2009
2008
2007
Expected term (in years) ......................
3.0 – 4.1
2.3 – 4.7
3.5 – 4.8
Volatility ...................................
34 – 57
%
32 – 60
%
30 – 39
%
Risk-free interest rate .........................
1.16 – 2.24
%
1.70 – 3.50
%
3.60 – 5.10
%