Adobe 2013 Annual Report Download - page 87

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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 13 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 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
2013 2012 2011
Expected life (in years) 3.2 3.9 - 4.2 3.8 - 4.2
Volatility 27% 31 - 34% 30 - 41%
Risk free interest rate 0.36% 0.54 - .71% 0.64 - 1.92%
The expected term of ESPP shares is the average of the remaining purchase periods under each offering period. The
assumptions used to value employee stock purchase rights were as follows:
Fiscal Years
2013 2012 2011
Expected life (in years) 0.5 - 2.0 0.5 - 2.0 0.5 - 2.0
Volatility 26 - 30% 30 - 36% 30 - 34%
Risk free interest rate 0.09 - 0.34% 0.06 - 0.30% 0.10 - 0.61%
We recognize the estimated compensation cost of restricted stock awards and restricted stock units, net of estimated
forfeitures, over the vesting term. The estimated compensation cost is based on the fair value of our common stock on the date of
grant.
We recognize the estimated compensation cost of performance shares, net of estimated forfeitures. The fiscal 2013 awards
are earned upon achievement of an objective total stockholder return measure at the end of the three-year performance period, as
described above. The fair value of the awards was fixed at grant date and will be amortized over the longer of the remaining
performance or service period. In previous years, the awards were earned upon attainment of identified performance goals, some
of which contained discretionary metrics. As such, these awards were measured based on our traded stock price at the end of each
Table of Contents
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)