Earthlink 2006 Annual Report Download - page 74

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EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Income Taxes
The Company recognizes deferred tax assets and liabilities for operating loss carryforwards, tax credit carryforwards and the estimated
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary
differences are expected to be recovered or settled. A valuation allowance is recorded to reduce the carrying amounts of net deferred tax assets
if there is uncertainty regarding their realization. EarthLink considers many factors when assessing the likelihood of future realization including
the Company’s recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods
available to the Company for tax reporting purposes and other relevant factors.
Net Income per Share
Net income per share has been computed according to SFAS No. 128, “Earnings per Share,” which requires a dual presentation of basic
and diluted earnings per share (“EPS”). Basic EPS represents net income divided by the weighted average number of common shares
outstanding during a reported period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue
common stock, including stock options, warrants, restricted stock units, phantom share units and contingently issuable shares (collectively
“Common Stock Equivalents”), were exercised or converted into common stock. The dilutive effect of outstanding stock options, warrants and
restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. Phantom share units and
contingently issuable shares are reflected on an if-converted basis. EarthLink’
s convertible debt instruments were excluded from the calculation
of diluted earnings per share as their effect was antidilutive. In applying the treasury stock method for stock-based compensation arrangements
during the year ended December 31, 2006, the assumed proceeds were computed as the sum of the amount the employee must pay upon
exercise and the amounts of compensation cost attributed to future services and not yet recognized.
The following table sets forth the computation for basic and diluted net income per share for the years ended December 31, 2004, 2005
and 2006:
During the years ended December 31, 2004, 2005 and 2006, approximately 8.7 million, 9.9 million and 21.2 million, respectively, options
and warrants were excluded from the calculation of diluted EPS because the exercise prices exceeded the Company’s average stock price
during the respective years. These options and warrants could be dilutive in future periods. In addition, approximately 28.4 million shares
underlie the Company’s convertible debt instruments, which could be dilutive in future periods.
73
Year Ended December 31,
2004
2005
2006
(in thousands, except per share data)
Net income (A)
$
111,009
$
142,780
$
4,987
Basic weighted average common shares outstanding (B)
154,233
137,080
128,790
Dilutive effect of Common Stock Equivalents
3,582
2,870
1,793
Diluted weighted average common shares outstanding (C)
157,815
139,950
130,583
Basic net income per share (A/B)
$
0.72
$
1.04
$
0.04
Diluted net income per share (A/C)
$
0.70
$
1.02
$
0.04