Earthlink 2007 Annual Report Download - page 195

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HELIO, INC. and HELIO LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
12. Warrants (Continued)
• The remaining one-third (
1
/
3
) of the Performance Warrant Shares may be purchased upon the attainment by the Operating
Company of two million five hundred thousand (2,500,000) members and at least two (2) consecutive quarters of positive cash
flows.
In October 2006 and in conjunction with the SKTI Service Agreement, the Company issued a ten-year warrant to SKTI to purchase 65,000
shares of the Company's Class A Common Stock at $1.82 per share (the "October 2006 Warrant"). The October 2006 Warrant vests over four
years at the rate of 25% each year beginning in October 2006.
In January 2007 and in conjunction with certain services to be provided to the Company over a four year period beginning in January 2007,
the Company issued ten-year warrants to SKTI to purchase 105,000 shares of the Company's Class A Common Stock (the "2007 Performance
Warrant") at an exercise price of $1.82 per share. The 2007 Performance Warrant is exercisable under the same terms as the Performance
Warrant.
In January 2007, the Company amended its wireless network services agreement (the "Amended Wireless Network Services Agreement").
In exchange for the Amended Wireless Network Services Agreement, the Company issued a ten-year warrant to an outside service provider to
purchase 2,348,883 fully vested shares of the Company's Class A Common Stock at an exercise price of $10.00 per share.
In December 2007 and in conjunction with the SKTI Service Agreement, the Company issued a ten-year warrant to SKTI to purchase
407,250 shares of the Company's Class A Common Stock at $1.82 per share (the "December 2007 Warrant"). The December 2007 Warrant vests
over four years at the rate of 25% each year beginning in December 2007.
The Company accounts for its warrants under EITF 96-18 using the fair value provisions of FAS 123(R). Under EITF 96-18, the warrants
were valued using the Black-Scholes valuation model and as applicable, the measurement of expense was subject to periodic mark-to-market
adjustments in each reporting period. The deemed fair value of its warrants was calculated with the following assumptions:
During the periods ended December 31, 2005, 2006 and 2007, the Company recognized expense of approximately $0.0 million,
$0.6 million and $0.6 million, respectively related to warrants issued. During the periods ended December 31, 2005, 2006 and 2007, no expense
was recognized for the Performance Warrants as the likelihood of reaching performance criteria was deemed to be less than probable. The
weighted average deemed fair value of warrants granted for the periods ended December 31, 2005, 2006 and 2007 was $1.04, $1.25 and $0.36
per share, respectively.
31
Risk
-
free interest rate
3%
-
5
%
Expected life in years
5.00
-
6.25
Dividend yield
0
%
Expected volatility
70
%