Earthlink 2005 Annual Report Download - page 74

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EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Generally, no stock-based employee compensation cost related to stock options is reflected in net income (loss), as all options granted
under stock-based compensation plans have an exercise price equal to the market value of the underlying common stock on the grant date.
However, to the extent the Company modifies stock options subsequent to the grant date, the Company records compensation expense based on
the modification, as required by SFAS No. 123 and APB Opinion No. 25. Compensation cost related to restricted stock units granted to non-
employee directors and certain key employees is reflected in net income (loss) as services are rendered. During the year ended December 31,
2005, the Company recognized $0.4 million of stock-based compensation expense arising from modifications to extend the exercise periods of
certain vested stock options for EarthLink employees transferring to HELIO. During the years ended December 31, 2003 and 2004, the
Company recognized no amounts of compensation expense for stock options. If the Company had elected to adopt the optional recognition
provisions of SFAS No. 123, which uses the fair value based method for stock-based compensation, and amortized the grant date fair value of
stock options to compensation expense on a straight-line basis over the vesting period of the options, net income (loss) attributable to common
stockholders and basic and diluted net income (loss) per share would have been changed to the pro forma amounts indicated below:
The fair value of stock options used to compute pro forma net income (loss) attributable to common stockholders is the estimated fair
value as of the date of grant using the Black-Scholes option-pricing model with the following assumptions:
73
Year Ended December 31,
2003
2004
2005
(in thousands, except per share data)
Net income (loss) attributable to common
stockholders,
as reported
$
(66,780
)
$
111,009
$
142,780
Add: Stock-based compensation expense associated with stock
options included in reported net income (loss)
—
—
366
Deduct: Stock-based compensation expense determined using a
fair value based
method for all stock options
(40,681
)
(23,311
)
(15,900
)
Pro forma net income (loss) attributable to common
stcokholders
$
(107,461
)
$
87,698
$
127,246
Basic net income (loss) per share:
As reported
$
(0.42
)
$
0.72
$
1.04
Pro forma
$
(0.68
)
$
0.57
$
0.93
Diluted net income (loss) per share:
As reported
$
(0.42
)
$
0.70
$
1.02
Pro forma
$
(0.68
)
$
0.57
$
0.92
Year Ended December 31,
2003
2004
2005
Dividend yield
0%
0%
0%
Expected volatility
70%
58%
49%
Risk
-
free interest rate
3.35%
3.59%
4.03%
Expected life
5.6 years
4.3 years
4.7 years