Dell 2003 Annual Report Download - page 42

Table of Contents
The following table illustrates the effect on net income and earnings per share for each of the past three fiscal years as if Dell had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation:
Fiscal Year Ended
January 30, January 31, February 1,
2004 2003 2002
(in millions, except per share amounts)
Net income — as reported $ 2,645 $ 2,122 $ 1,246
Deduct: Total stock-based employee compensation determined under fair value method for all awards, net of related tax
effects (829) (723) (694)
Net income — pro forma $ 1,816 $ 1,399 $ 552
Earnings per common share:
Basic — as reported $ 1.03 $ 0.82 $ 0.48
Basic — pro forma $ 0.71 $ 0.54 $ 0.21
Diluted — as reported $ 1.01 $ 0.80 $ 0.46
Diluted — pro forma $ 0.68 $ 0.51 $ 0.19
Under the Black-Scholes option pricing model, the weighted average fair value of stock options at date of grant was $10.25, $11.41, and $13.04, per option
for options granted during fiscal 2004, 2003, and 2002, respectively. Additionally, the weighted average fair value of the purchase rights under the employee
stock purchase plan granted in fiscal 2004, 2003, and 2002 was $7.88, $7.39, and $6.74 per right, respectively. The weighted average fair value of options and
purchase rights under the employee stock purchase plan was determined based on the Black-Scholes model weighted for all grants during the period, utilizing
the following assumptions:
Fiscal Year Ended
January 30, January 31, February 1,
2004 2003 2002
Expected term:
Stock options 3.8 years 5 years 5 years
Employee stock purchase plan 6 months 6 months 6 months
Risk-free interest rate 2.99% 3.76% 4.63%
Volatility 43% 43% 61%
Dividends 0% 0% 0%
During fiscal 2004, Dell evaluated the historical stock option exercise behavior of its employees, among other relevant factors, and determined that the best
estimate of expected term of stock options granted in fiscal 2004 was 3.8 years, compared to the previous expected term of 5 years. Dell used expected
volatility, as well as other economic data, to estimate the volatility for fiscal 2004 and 2003 option grants, because management believes such volatility is
more representative of prospective trends. In fiscal 2002, Dell used historical trailing volatility.
Comprehensive Income — Dell's comprehensive income is comprised of net income, foreign currency translation adjustments, unrealized gains and losses on
derivative financial instruments related to foreign currency hedging, and unrealized gains and losses on marketable securities classified as available-for-sale.
Recently Issued Accounting Pronouncements — In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, which
supersedes SAB 101, Revenue Recognition in Financial Statements. The adoption of SAB 104 did not have a material impact on Dell's consolidated results of
operations or financial position. SAB 104 primarily rescinds the accounting guidance contained in SAB 101 related to multiple-element revenue arrangements
that was superseded as a result of the issuance of EITF 00-21. While the wording of SAB 104 has changed to
39