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Stock-Based Compensation
12 Months Ended
Dec. 02, 2011
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION
 
We have the following stock-based compensation plans and programs:
Stock Option Plans
Our stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. Currently, we grant options from the 2003 Equity Incentive Plan, as amended (“2003 Plan”), and the 2005 Equity Incentive Assumption Plan (“2005 Assumption Plan”). These plans are collectively referred to in the following discussion as “the Plans.” Under the Plans, options can be granted to all employees, including executive officers, outside consultants and non-employee directors. The Plans will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued and restrictions on issued shares have lapsed. Option vesting periods are generally four years for all of the Plans. Options granted under the Plans generally expire seven years from the effective date of grant.
As of December 2, 2011, we had reserved 124.5 million and 5.2 million shares of common stock for issuance under our 2003 Plan and 2005 Assumption Plan, respectively. As of December 2, 2011, we had 33.8 million and 2.7 million shares available for grant under our 2003 Plan and 2005 Assumption Plan, respectively.
Employee Stock Purchase Plan
Our 1997 Employee Stock Purchase Plan (“ESPP”) allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions. The ESPP consists of a twenty-four month offering period with four six-month purchase periods in each offering period. Employees purchase shares in each purchase period at 85% of the market value of our common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower. The ESPP will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued.
As of December 2, 2011, we had reserved 93.0 million shares of our common stock for issuance under the ESPP and approximately 22.4 million shares remain available for future issuance.
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. Performance awards granted after fiscal year 2009 and restricted stock awards granted under these plans vest annually over three years. Performance awards granted prior to fiscal year 2009 and restricted stock units granted under these plans generally vest over four years, the majority of which vest 25% annually; certain restricted stock units vest 50% on the second anniversary and 25% on each of the third and fourth anniversaries.
In addition to the shares available under our 2003 Plan, as of December 2, 2011, we had reserved 16.0 million shares of our common stock for issuance under the Restricted Stock Plan and approximately 29.0 thousand shares were available for grant.
Performance Share Programs
Effective January 24, 2011, the Executive Compensation Committee adopted the 2011 Performance Share Program (the “2011 Program”). The purpose of the 2011 Program is to align key management and senior leadership with stockholders’ interests and to retain key employees. The measurement period for the 2011 Program is our fiscal 2011 year. All members of our executive management and other key senior management are participating in the 2011 Program. Awards granted under the 2011 Program are 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 one third vesting on the later of the date of certification of achievement or the first anniversary date of the grant, and the remaining two thirds vesting evenly on the following two annual anniversary dates of the grant, contingent upon the recipient’s continued service to Adobe. Participants in the 2011 Program have the ability to receive up to 150% 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 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
 
2011
 
2010
 
2009
Expected life (in years)
3.8 - 4.2
 
3.8 - 5.1
 
3.0- 4.1
Volatility
30 - 41%
 
29 - 36%
 
34 - 57%
Risk free interest rate
0.64 - 1.92%
 
1.04 - 2.66%
 
1.16 - 2.24%


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
 
2011
 
2010
 
2009
Expected life (in years)
0.5 - 2.0
 
0.5 - 2.0
 
0.5 - 2.0
Volatility
30 - 34%
 
32 - 40%
 
40 - 57%
Risk free interest rate
0.10 - 0.61%
 
0.18 - 1.09%
 
0.27 - 1.05%
 
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 awards are earned upon attainment of identified performance goals, some of which contain discretionary metrics. As such, these awards are re-valued based on our traded stock price at the end of each reporting period. If the discretion is removed, the award will be classified as a fixed equity award. The fair value of the awards will be based on the measurement date, which is the date the award becomes fixed. The awards will be subsequently amortized over the longer of the remaining performance or service period. 
Summary of Stock Options 
Option activity under our stock option program for fiscal years ended 2011, 2010 and 2009 was as follows (shares in thousands):
 
Outstanding Options
 
Number of
Shares
 
Weighted
Average
Exercise
Price
November 28, 2008
40,704

 
$
29.67

Granted
5,758

 
$
22.90

Exercised
(7,560
)
 
$
17.15

Cancelled
(3,160
)
 
$
33.57

Increase due to acquisition
5,509

 
$
20.15

November 27, 2009
41,251

 
$
29.45

Granted
3,198

 
$
34.03

Exercised
(5,196
)
 
$
20.48

Cancelled
(2,908
)
 
$
33.94

Increase due to acquisition
730

 
$
8.24

December 3, 2010
37,075

 
$
30.33

Granted
4,507

 
$
33.60

Exercised
(4,987
)
 
$
21.02

Cancelled
(2,268
)
 
$
33.85

Increase due to acquisition
475

 
$
2.25

December 2, 2011
34,802

 
$
31.47

 
The weighted average fair values of options granted during fiscal 2011, 2010 and 2009 were $8.82, $9.17 and $8.39, respectively.
The total intrinsic value of options exercised during fiscal 2011, 2010 and 2009 was $59.4 million, $72.7 million and $91.8 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares.
Information regarding stock options outstanding at December 2, 2011, December 3, 2010 and November 27, 2009 is summarized below:
 
Number of
Shares
(thousands)
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2011
 
 
 
 
 
 
 
Options outstanding
34,802

 
$
31.47

 
3.24
 
$
68.0

Options vested and expected to vest
33,856

 
$
31.52

 
3.17
 
$
65.6

Options exercisable
26,622

 
$
32.31

 
2.56
 
$
42.1

2010
 

 
 

 
 
 
 

Options outstanding
37,075

 
$
30.33

 
3.62
 
$
116.3

Options vested and expected to vest
35,961

 
$
30.42

 
3.56
 
$
111.0

Options exercisable
27,763

 
$
31.17

 
3.06
 
$
72.7

2009
 
 
 
 
 
 
 
Options outstanding
41,251

 
$
29.45

 
4.33
 
$
295.8

Options vested and expected to vest
39,322

 
$
29.54

 
4.24
 
$
279.1

Options exercisable
26,677

 
$
29.85

 
3.54
 
$
181.7

_________________________________________ 
(*) 
The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of December 2, 2011, December 3, 2010 and November 27, 2009 were $27.11, $29.14 and $35.38, respectively.
All stock options granted to current executive officers are made after a review by and with the approval of the Executive Compensation Committee of the Board of Directors.

Summary of Employee Stock Purchase Plan Shares
The weighted average subscription date fair value of shares under the ESPP during fiscal 2011, 2010 and 2009 were $9.01, $7.43 and $5.43, respectively. Employees purchased 3.7 million shares at an average price of $23.48, 3.3 million shares at an average price of $20.19, and 3.2 million shares at an average price of $19.04, respectively, for fiscal 2011, 2010 and 2009. The intrinsic value of shares purchased during fiscal 2011, 2010 and 2009 was $28.9 million, $33.9 million and $21.7 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.
Summary of Restricted Stock Units
Restricted stock unit activity for fiscal years 2011, 2010 and 2009 was as follows (in thousands):
 
2011
 
2010
 
2009
Beginning outstanding balance
13,890

 
10,433

 
4,261

Awarded
8,180

 
7,340

 
6,176

Released
(3,819
)
 
(2,589
)
 
(1,162
)
Forfeited
(1,587
)
 
(1,294
)
 
(401
)
Increase due to acquisition
207

 

 
1,559

Ending outstanding balance
16,871

 
13,890

 
10,433

 
The weighted average grant date fair values of restricted stock units granted during fiscal 2011, 2010 and 2009 were $33.10, $33.47 and $27.74, respectively. The total fair value of restricted stock units vested during fiscal 2011, 2010 and 2009 was $123.3 million, $84.1 million and $27.1 million, respectively.

Information regarding restricted stock units outstanding at December 2, 2011, December 3, 2010 and November 27, 2009 is summarized below:
 
Number of
Shares
(thousands)
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2011
 
 
 
 
 
Restricted stock units outstanding
16,871

 
1.35
 
$
457.4

Restricted stock units vested and expected to vest
14,931

 
1.25
 
$
404.3

2010
 

 
 
 
 

Restricted stock units outstanding
13,890

 
1.54
 
$
404.8

Restricted stock units vested and expected to vest
11,185

 
1.38
 
$
325.7

2009
 
 
 
 
 
Restricted stock units outstanding
10,433

 
1.82
 
$
369.1

Restricted stock units vested and expected to vest
8,078

 
1.63
 
$
285.7

_________________________________________ 
(*) 
The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of December 2, 2011, December 3, 2010 and November 27, 2009 were $27.11, $29.14 and $35.38, respectively. 
Summary of Performance Shares 
The following table sets forth the summary of performance share activity under our 2011 Program for the fiscal year ended December 2, 2011 (in thousands): 
 
Shares
Granted
 
Maximum
Shares Eligible
to Receive
Beginning outstanding balance

 

Awarded
425

 
638

Forfeited
(47
)
 
(71
)
Ending outstanding balance
378

 
567


In the first quarter of fiscal 2012, the Executive Compensation Committee certified the actual performance achievement of participants in the 2011 Performance Share Program (the “2011 Program”). Based upon the achievement of goals outlined in the 2011 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 130% of target or approximately 0.5 million shares for the 2011 Program. One third of the shares under the 2011 Program vested in the first quarter of fiscal 2012 and the remaining two thirds vest evenly on the following two annual anniversary dates of the grant, contingent upon the recipient's continued service to Adobe.
In the first quarter of fiscal 2011, the Executive Compensation Committee certified the actual performance achievement of participants in the 2010 Performance Share Program (the “2010 Program”). Based upon the achievement of goals outlined in the 2010 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 135% of target or approximately 0.3 million shares for the 2010 Program. One third of the shares under the 2011 Program vested in the first quarter of fiscal 2012 and the remaining two thirds vest evenly on the following two annual anniversary dates of the grant, contingent upon the recipient's continued service to Adobe.
The performance metrics under the 2009 Performance Share Program were not achieved and therefore no shares were awarded.

The following table sets forth the summary of performance share activity under our 2007, 2008 and 2010 programs, based upon share awards actually achieved, for the fiscal years ended December 2, 2011 and December 3, 2010 (in thousands):
 
2011
 
2010
Beginning outstanding balance
557

 
950

Achieved
337

 

Released
(436
)
 
(350
)
Forfeited
(53
)
 
(43
)
Ending outstanding balance
405

 
557

 
The total fair value of performance awards vested during fiscal 2011, 2010 and 2009 was $14.8 million, $12.0 million and $7.7 million, respectively.

Information regarding performance shares outstanding at December 2, 2011, December 3, 2010 and November 27, 2009 is summarized below: 
 
Number of
Shares
(thousands)
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2011
 
 
 
 
 
Performance shares outstanding
405

 
0.41
 
$
11.0

Performance shares vested and expected to vest
390

 
0.39
 
$
10.4

2010
 

 
 
 
 

Performance shares units outstanding
557

 
0.58
 
$
16.2

Performance shares vested and expected to vest
514

 
0.53
 
$
14.8

2009
 
 
 
 
 
Performance shares units outstanding
950

 
1.05
 
$
33.6

Performance shares vested and expected to vest
818

 
0.97
 
$
28.8

_________________________________________ 
(*) 
The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of December 2, 2011, December 3, 2010 and November 27, 2009 were $27.11, $29.14 and $35.38, respectively.     
 
Grants to Non-Employee Directors
 
The Directors Plan (and starting in fiscal 2008, the 2003 Plan) provides for the granting of nonqualified stock options to non-employee directors. Options granted before November 29, 2008 vest over four years: 25% on the day preceding each of our next four annual meetings and have a ten-year term. Starting in fiscal 2009, the initial equity grant to a new non-employee director is a restricted stock unit award having an aggregate value of $0.5 million based on the average stock price over the 30 calendar days ending on the day before the date of grant. The initial equity award vests over 2 years, 50% on the day preceding each of our next 2 annual meetings. For the annual equity grant, a non-employee director can elect to receive 100% options, 100% restricted stock units or 50% of each and shall have an aggregate value of $0.2 million as based on the average stock price over the 30 calendar days ending on the day before the date of grant. The target grant value converted to stock options is based on a 1:3 conversion of restricted stock units to stock options. Annual equity awards granted on or after November 29, 2008 vest 100% on the day preceding the next annual meeting. Options granted on or after November 29, 2008 have a seven-year term. The exercise price of the options that are issued is equal to the fair market value of our common stock on the date of grant.
 
Options granted to directors for fiscal 2011, 2010 and 2009 were as follows (shares in thousands):
 
2011
 
2010
 
2009
Options granted to existing directors
85

 
18

 
175

Exercise price
$
33.23

 
$
33.82

 
$
23.28

 
Restricted stock units granted to directors for fiscal 2011 and 2010 were as follows (in thousands):
 
2011
 
2010
 
2009
Restricted stock units granted to existing directors
28

 
48

 
27

Restricted stock units granted to new directors

 

 
20

 
Compensation Costs
With the exception of performance shares, stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the entire award, which is generally the vesting period. For performance shares, expense is recognized on a straight-line basis over the requisite service period for each vesting tranche of the award.

As of December 2, 2011, there was $442.5 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 2.4 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
 
Total stock-based compensation costs that have been included in our Consolidated Statements of Income for the fiscal years ended December 2, 2011, December 3, 2010 and November 27, 2009 were as follows (in thousands):
 
  Income Statement Classifications
 
Cost of
Revenue–
Subscription
 
Cost of
Revenue–
Services and Support
 
Research and Development
 
Sales and
Marketing
 
General and Administrative
 
 
Total(1)
Option Grants and Stock
Purchase Rights(2)
 
 
 
 
 
 
 
 
 
 
 
2011
$
936

 
$
4,716

 
$
28,132

 
$
31,754

 
$
20,605

 
$
86,143

2010
$
1,265

 
$
1,251

 
$
37,221

 
$
40,983

 
$
21,111

 
$
101,831

2009
$

 
$
1,906

 
$
45,535

 
$
38,790

 
$
24,595

 
$
110,826

Restricted Stock and Performance
Share Awards(2)
 

 
 

 
 

 
 

 
 

 
 

2011
$
1,521

 
$
8,607

 
$
79,427

 
$
68,485

 
$
41,920

 
$
199,960

2010
$
1,422

 
$
1,065

 
$
51,387

 
$
52,253

 
$
23,128

 
$
129,255

2009
$

 
$
639

 
$
27,931

 
$
19,818

 
$
9,274

 
$
57,662

_________________________________________ 
(1) 
During fiscal 2011, 2010 and 2009, we recorded tax benefits of $62.8 million, $50.3 million and $33.0 million, respectively.
(2) 
During fiscal 2009, we recorded $0.9 million associated with cash recoveries of fringe benefit tax from employees in India.