Earthlink 2004 Annual Report Download - page 69

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EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
could occur if securities or other contracts to issue common stock, including convertible preferred stock, restricted stock units, and stock
options and warrants (commonly and hereinafter referred to as “Common Stock Equivalents”),
were exercised or converted into common stock.
The following table reconciles the denominator for the basic and diluted per share computations for the year ended December 31, 2004:
Common Stock Equivalents for the year ended December 31, 2004 included an average of 12.5 million options, warrants and restricted
stock units which had a dilutive effect based on application of the treasury stock method, but excluded 9.0 million average options, warrants
and restricted stock units outstanding which were deemed anti-dilutive because the exercise prices exceeded the Company’
s average stock price
during the year ended December 31, 2004, but these options, warrants and restricted stock units could be dilutive in future periods.
The Company has not included the effect of Common Stock Equivalents in the calculation of diluted EPS for the years ended
December 31, 2002 and 2003 because such inclusion would have an anti-dilutive effect due to the Company’s net losses. The Common Stock
Equivalents for the years ended December 31, 2002 and 2003 would have included outstanding options and warrants with exercise prices less
than the average closing price of the Company’s common stock during the respective period, outstanding shares of Series A and Series B
convertible preferred stock on an as converted basis and restricted stock units.
Stock-Based Compensation
As of December 31, 2004, EarthLink had various stock-based compensation plans, including the EarthLink, Inc. Employee Stock
Purchase Plan (“ESPP”), which are more fully described in Note 12, “Stock Compensation Plans and Warrants.” EarthLink accounts for those
plans under the intrinsic value method, which follows the recognition and measurement principles of Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees,” and Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”)
No. 44,
“Accounting for Certain Transactions Involving Stock Compensation.” Stock and other equity instruments issued to non-
employees are
accounted for in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” and EITF Issue No. 96-18, “Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” and are
valued using the Black-Scholes model.
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 had an exercise price equal to the market
66
Year Ended
December 31, 2004
(in thousands, except
per share data)
Net income attributable to common stockholders (A)
$
111,009
Basic weighted average common shares outstanding (B)
154,233
Dilutive effect of Common Stock Equivalents:
Stock options, warrants and restricted stock units
3,582
Diluted weighted average common shares outstanding (C)
157,815
Basic net income per share (A/B)
$
0.72
Diluted net income per share (A/C)
$
0.70