Classmates.com 2006 Annual Report Download - page 77

Stock-Based Compensation— On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment , which
requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors
including employee stock options, restricted stock awards and employee stock purchases related to the Employee Stock Purchase Plan
(“employee stock purchases”) based on the grant-date fair values of the awards. SFAS No. 123R supersedes the Company’s previous accounting
under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees . In March 2005, the SEC issued Staff
Accounting Bulletin (“SAB”) No. 107 relating to SFAS No. 123R. The Company has applied the provisions of SAB No. 107 in its adoption of
SFAS No. 123R (see Note 5 for additional information).
The Company adopted SFAS No. 123R using the modified prospective transition method, and the Company’s consolidated financial
statements at and for the year ended December 31, 2006 reflect the impact of SFAS No. 123R. In accordance with the modified prospective
transition method, the Company’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the
impact of SFAS No. 123R. Stock-based compensation expense recognized under SFAS No. 123R for the year ended December 31, 2006 was
$19.2 million, which was primarily related to stock options, restricted stock and the discount on employee stock purchases. Stock-based
compensation expense, recorded in accordance with APB Opinion No. 25, for the years ended December 31, 2005 and 2004 was $10.0 million
and $2.4 million, respectively, which was primarily related to restricted stock.
SFAS No. 123R requires companies to estimate the fair value of share-based payment awards on the grant date using an option-pricing
model. Under SFAS No. 123, the Company used the Black-Scholes option-pricing model for valuation of share-based awards for its pro forma
information. Upon adoption of SFAS No. 123R, the Company elected to continue to use the Black-Scholes option-pricing model for valuing
awards. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the
Company’s consolidated statements of operations. Prior to the adoption of SFAS No. 123R, the Company accounted for share-based awards to
employees and directors using the intrinsic value method in accordance with APB No. 25 as allowed under SFAS No. 123, Accounting for Stock-
Based Compensation
. Under the intrinsic value method, no stock-based compensation expense related to stock options had been recognized in
the Company’s consolidated statements of operations, other than as related to acquisitions, because the exercise price of the Company’s stock
options granted to employees and directors equaled the fair market value of the underlying stock at the grant date.
Stock-based compensation expense recognized during the current period is based on the value of the portion of share-
based payment awards
that is ultimately expected to vest. SFAS No. 123R requires forfeitures to be estimated at the time of grant in order to calculate the amount of
share-based awards that will ultimately vest. The forfeiture rate is based on historical rates. Stock-
based compensation expense recognized in the
Company’s consolidated statement of operations for the year ended December 31, 2006 includes (i) compensation expense for share-based
payment awards granted prior to, but not yet vested at, December 31, 2005 based on the grant-date fair value estimated in accordance with the
pro forma provisions of SFAS No. 123 and (ii) compensation expense for the share-based payment awards granted subsequent to December 31,
2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. As stock-based compensation expense
recognized in the consolidated statement of operations for the year ended December 31, 2006 is based on awards ultimately expected to vest, it
has been reduced for estimated forfeitures. For the periods prior to 2006, the Company accounted for forfeitures as they occurred. Accordingly, a
pretax cumulative effect of accounting change adjustment totaling $1.1 million ($1.0 million, net of tax) was recorded in the March 2006 quarter
to adjust for awards granted prior to January 1, 2006 that are not ultimately expected to vest.
Prior to the adoption of SFAS No. 123R, the Company recognized stock-based compensation expense for awards with graded vesting by
treating each vesting tranche as a separate award and recognizing compensation expense ratably for each tranche. For equity awards granted
subsequent to the adoption of
F- 15