Earthlink 2004 Annual Report Download - page 70

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EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
value of the underlying common stock on the grant date. Further, the ESPP qualifies as a noncompensatory plan under APB Opinion No. 25,
and, as such, no compensation cost was recognized for ESPP awards. Compensation cost related to restricted stock units granted to non-
employee directors and certain key employees in the years ended December 31, 2003 and 2004 is reflected in net income (loss) as services are
rendered. 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) is the estimated fair value at the date of grant using the Black-
Scholes option-pricing model with the following assumptions:
For options granted during the years ended December 31, 2002 and 2003, the Company’s estimate of expected volatility for valuing
options using the Black-Scholes model was based on the historical volatility of the Company’s stock price for the period January 1, 2001
through the date of grant. For options granted during the year ended December 31, 2004, the Company’s estimate of expected volatility for
valuing options using the Black-Scholes model was based on the historical volatility of the Company’s stock price for three years prior to the
grant date of the option. Management believes these historical volatilities are representative of prospective volatility.
Management regularly evaluates the historical turnover of its options outstanding to estimate the expected life for valuing options using
the Black-Scholes model.
67
Year Ended December 31,
2002
2003
2004
(in thousands, except per share data)
Net income (loss) attributable to common stockholders,
as reported
$
(168,020
)
$
(66,780
)
$
111,009
Stock-based compensation expense determined using a fair
value based method for all awards
(58,098
)
(40,681
)
(23,311
)
Pro forma net income (loss) attributable to common
stockholders
$
(226,118
)
$
(107,461
)
$
87,698
Basic net income (loss) per share:
As reported
$
(1.11
)
$
(0.42
)
$
0.72
Pro forma
$
(1.49
)
$
(0.68
)
$
0.57
Diluted net income (loss) per share:
As reported
$
(1.11
)
$
(0.42
)
$
0.70
Pro forma
$
(1.49
)
$
(0.68
)
$
0.57
Year Ended December 31,
2002
2003
2004
Annual dividends
zero
zero
zero
Expected volatility
76
%
70
%
58
%
Risk
-
free interest rate
3.69
%
3.35
%
3.59
%
Expected life
6.6 years
5.6 years
4.3 years