Earthlink 2008 Annual Report Download - page 286

HELIO, INC. and HELIO LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
11. Stock Compensation (continued)
No income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from
exercised stock options for the periods ended December 31, 2007, 2006 or 2005. The implementation of FAS 123(R) did not have an impact on
cash flows from financing activities during the twelve months ended December 31, 2007 or 2006.
The Company estimated the fair value of employee time-based stock options using the Black-
Scholes valuation model. The fair value of
these time-based employee stock options is being amortized on a straight-
line basis over the requisite service period of the awards. The fair value
of employee stock options was estimated using the following weighted-average assumptions:
In 2006 and 2007, the Company’s expected term of stock options was based upon the “shortcut method” as prescribed under SAB 107
(an expected term based on the mid-point between the vesting date and the end of the contractual term) as the Company did not have sufficient
historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior of its
employees. The use of the shortcut method is permitted through December 31, 2007. The Company plans to convert to company-specific
experience on January 1, 2008. The expected stock price volatility for the Company’s stock options was determined by independent valuation
experts by examining and using an average of the historical volatilities of similar companies and industry peers as the Company did not have any
trading history for the Company’s common stock. The Company will continue to analyze the historical stock price volatility and expected term
assumptions as more historical data for the Company’s common stock becomes available. The risk-free interest rate assumption is based on the
U.S. Treasury instruments whose term was consistent with the expected term of the Company’s stock options. The expected dividend
assumption is based on the Company’s history and expectation of dividend payouts. In addition, FAS 123(R) requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated
based on historical experience and future expectations. Prior to the adoption of FAS 123(R), the Company accounted for forfeitures as
they occurred.
During the periods ended December 31, 2005, 2006 and 2007, the Company granted certain employee Performance Options of 2,725,000,
75,000 and 549,500, respectively. During 2005, 2006 and 2007, 0, 100,000 and 357,000, respectively of the Performance Options were
forfeited. As prescribed under FAS 123(R), the Company accounts for its Performance Options based upon the probability of achieving the
specific Performance Options milestones. For the periods ended December 31, 2007, 2006 and 2005, the certainty of achieving the Performance
Options milestones, which was performed by an independent financial valuation expert, was deemed less than probable (probable being defined
as the likelihood of achieving such Performance Options milestones under FAS 123(R)), and accordingly there was no related compensation
expense recorded for these Performance Options during these periods. The Company will continue to evaluate the probability of achieving these
Performance Options milestones and as a result, additional stock compensation expense pertaining to these Performance Options may be
recorded in future periods.
26
Period
inception to
December 31,
2005
Year ended
December 31,
2006
Year ended
December 31,
2007
Expected volatility
70
%
70
%
70
%
Risk
-
free interest rate
4 to 5
%
4 to 5
%
3 to 5
%
Dividend yield
0.0
%
0.0
%
0.0
%
Expected term (in years)
5.0
6.25
6.25