Classmates.com 2007 Annual Report Download - page 98

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UNITED ONLINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, ACCOUNTING POLICIES, AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
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
recognized under SFAS No. 123R for the years ended December 31, 2007 and 2006 was $19.5 million and $19.2 million, respectively, which
was primarily related to restricted stock, stock options and the discount on purchases related to the Company's employee stock purchase plan.
Stock-based compensation, recorded in accordance with APB Opinion No. 25, for the year ended December 31, 2005 was $10.0 million, 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, Accounting for Stock-Based Compensation , 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 share-
based payment awards. The value of the portion of the award that is ultimately expected to
vest is recognized as an 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 payment awards to employees and directors using the intrinsic value method in
accordance with APB No. 25 as allowed under SFAS No. 123. Under the intrinsic value method, no stock-based compensation 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.
SFAS No. 123R requires forfeitures to be estimated at the time of grant in order to calculate the amount of share-based payment awards
ultimately expected to vest. The forfeiture rate is based on historical rates. Stock-based compensation recognized in the Company's consolidated
statements of operations for the years ended December 31, 2007 and 2006 includes (i) compensation expense for share-based payment awards
granted prior to or on, 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 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 recognized in the
consolidated statements of operations for the years ended December 31, 2007 and 2006 is based on equity 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
pre-tax 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 share-based payment 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 for equity 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 SFAS No. 123R, the Company treats such awards as a single award and recognizes stock-
based compensation on a
straight-line basis (net of estimated forfeitures) over the employee service period.
F-16