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FI NA NCI A L S
37
The following table illustrates the effect on net income and earnings per share if we had applied the fair value
recognition provisions of SFAS 123R to stock-based employee compensation.
2004 2003
Net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,810.1 $2,560.8
Add: Compensation expense for stock-based performance
awards included in reported net income, net of related
tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.5 —
Deduct: Total stock-based employee compensation expense
determined under fair-value-based method for all awards,
net of related tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (300.9) (210.8)
Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,543.7 $2,350.0
Earnings per share: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic, as reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.67 $2.38
Basic, pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.42 $2.18
Diluted, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.66 $2.37
Diluted, pro forma. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.42 $2.17
Note 2: Implementation of New Financial Accounting Pronouncements
In 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) 46, Consolidation of
Variable Interest Entities. FIN 46 defines a variable interest entity (VIE) as a corporation, partnership, trust, or any
other legal structure that does not have equity investors with a controlling financial interest or has equity investors
that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires consoli-
dation of a VIE by the primary beneficiary of the assets, liabilities, and results of activities. FIN 46 also requires
certain disclosures by all holders of a significant variable interest in a VIE that are not the primary beneficiary. We
do not have any material investments in variable interest entities; therefore, the adoption of this interpretation in
the first quarter of 2004 had no material impact on our consolidated financial position or results of operations.
In 2005, the FASB issued FIN 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143. FIN 47 requires us to record the fair value of a liability for conditional asset retirement
obligations in the period in which it is incurred, which is adjusted to its present value each subsequent period. In
addition, we are required to capitalize a corresponding amount by increasing the carrying amount of the related
long-lived asset, which is depreciated over the useful life of the related long-lived asset. The adoption of FIN 47
on December 31, 2005 resulted in a cumulative effect of a change in accounting principle of $22.0 million, net of
income taxes of $11.8 million.
As discussed previously, we adopted SFAS 123R effective January 1, 2005. The adoption of this standard re-
quired recognition of the fair value of stock-based compensation in net income.
Note 3: Acquisitions
Applied Molecular Evolution, Inc. Acquisition
On February 12, 2004, we acquired all the outstanding common stock of Applied Molecular Evolution, Inc. (AME) in
a tax-free merger. Under the terms of the merger agreement, each outstanding share of AME common stock was
exchanged for our common stock or a combination of cash and our stock valued at $18. The aggregate purchase
price of approximately $442.8 million consisted of issuance of 4.2 million shares of our common stock valued at
$314.8 million, issuance of 0.7 million replacement options to purchase shares of our common stock in exchange
for the remaining outstanding AME options valued at $37.6 million, cash of $85.4 million for AME common stock
and options for certain AME employees, and transaction costs of $5.0 million. The fair value of our common stock
was derived using a per-share value of $74.14, which was our average closing stock price for February 11 and 12,
2004. The fair value for the options granted was derived using a Black-Scholes valuation method using assump-