Dish Network 2004 Annual Report Download - page 98

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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
compensation expense on the grant of options under our Stock Incentive Plan because typically the option terms are
fixed and the exercise price equals or exceeds the market price of the underlying stock on the date of grant. We apply
the disclosure only provisions of Statement of Financial Accounting Standards No. 123, “Accounting and Disclosure of
Stock-Based Compensation,” (“SFAS 123”).
Pro forma information regarding net income and earnings per share is required by SFAS 123 and has been determined
as if we had accounted for our stock-based compensation plans using the fair value method prescribed by that
statement. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over
the options’ vesting period on a straight-line basis. All options are initially assumed to vest. Compensation previously
recognized is reversed to the extent applicable to forfeitures of unvested options. The following table illustrates the
effect on net income (loss) per share if we had accounted for our stock-based compensation plans using the fair value
method:
For the Years Ended December 31,
2004 2003 2002
(In thousands, except per share amounts)
Net income (loss) to common shareholders, as reported ........................................... $ 214,769 $ 224,506 $ (414,601)
Add: Stock-based employee compensation expense included
in reported net income (loss), net of related tax effects ................................. 1,139 3,420 10,884
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects ....... (20,515) (26,138) (24,427)
Pro forma net income (loss) to common shareholders...............................................
$
195,393
$
201,788
$
(428,144)
Basic income (loss) per share, as reported ................................................................ $ 0.46 $ 0.46 $
(
0.86
)
Diluted income (loss) per share, as reported ............................................................. $ 0.46 $ 0.46 $
(
0.86
)
Pro forma basic income (loss) per share ................................................................... $ 0.42 $ 0.42 $
(
0.89
)
Pro forma diluted income (loss) per share ................................................................ $ 0.42 $ 0.41 $
(
0.89
)
For purposes of this pro forma presentation, the fair value of each option grant was estimated at the date of the grant
using a Black-Scholes option pricing model with the following weighted-average assumptions:
For the Years Ended December 31,
2004 2003 2002
Risk-free interest rate ......................................................... 3.69% 3.32% 4.14%
Volatility factor .................................................................. 33.26% 71.08% 71.96%
Expected term of options in years....................................... 5.4 6.7 6.7
Weighted-average fair value of options granted ................ $ 11.66 $ 20.38 $ 15.08
During December 2004, we paid a one-time dividend of $1 per outstanding share of our Class A and Class B common
stock (Note 6) for the first time in our company’s history. We do not intend to pay additional dividends on our
common stock and accordingly, the dividend yield percentage is zero for all periods. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions
and are fully transferable and so, our estimate of fair value may differ from other valuation models. Further, the Black-
Scholes model requires the input of highly subjective assumptions and because changes in the subjective input
assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single
measure of the fair value of stock-based compensation awards.
During 2004, in accordance with the guidance under SFAS 123 for selecting assumptions to use in an option pricing
model, we reduced our estimate of expected volatility based upon a re-evaluation of the variability in the market
price of our publicly traded stock. Historically, we have relied on the variability in our daily stock price since
inception to derive our estimate of expected volatility. Upon review of this variability in our stock price over more
recent periods, we believe unadjusted historical experience is a relatively poor predictor of our future expectation of
F–18