Earthlink 2006 Annual Report Download - page 76

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EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
accounting for forfeitures as they occurred, was not material. Prior to the adoption of SFAS No. 123(R), deferred compensation relating to
restricted stock units was presented as a separate component of stockholders’ equity. Upon adoption of SFAS No. 123(R) on January 1, 2006,
the deferred compensation balance of $4.9 million was reclassified to additional paid-in capital.
Stock-based compensation expense under SFAS No. 123(R) was $14.2 million during the year ended December 31, 2006, of which $12.2
million related to stock options and $2.0 million related to restricted stock units. Stock-based compensation expense during the year ended
December 31, 2005 was $1.5 million, of which $1.1 million related to restricted stock units and $0.4 million was stock-based compensation
expense arising from modifications to extend the exercise periods of certain vested stock options for EarthLink employees transferring to
HELIO. As a result of adopting SFAS No. 123(R) on January 1, 2006, the Company’s income from operations and net income for the year
ended December 31, 2006 were $12.3 million lower than if it had continued to account for share-based compensation using the intrinsic
method of accounting under APB Opinion No. 25. Basic and diluted net income per share for the year ended December 31, 2006 were $0.10
per share and $0.09 per share lower, respectively, than if the Company had continued to account for share-based compensation using the
intrinsic method of accounting under APB Opinion No. 25. The incremental impact of SFAS No. 123(R) during the year ended December 31,
2006 represents stock-based compensation expense related to stock options and the impact of estimating forfeitures related to nonvested shares
of restricted stock.
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 and basic and diluted net income per share for the years ended December 31, 2004 and 2005 would
have been changed to the pro forma amounts indicated below:
75
Year Ended December 31,
2004
2005
(in thousands, except
per share data)
Net income, as reported
$
111,009
$
142,780
Add: Stock-based compensation expense associated with stock options
included in reported net income
—
366
Deduct: Stock-based compensation expense determined using a fair value
based method for all stock options
(23,311
)
(15,900
)
Pro forma net income
$
87,698
$
127,246
Basic net income per share:
As reported
$
0.72
$
1.04
Pro forma
$
0.57
$
0.93
Diluted net income per share:
As reported
$
0.70
$
1.02
Pro forma
$
0.57
$
0.92