Overstock.com 2006 Annual Report Download - page 106

18. STOCK OPTION PLANS
Periods prior to the adoption of SFAS 123(R)
Prior to January 1, 2006, the Company accounted for stock-based awards under the intrinsic value method, which followed the
recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employee , and related
interpretations. The intrinsic value method of accounting resulted in compensation expense for stock options to the extent option
exercise prices were set below market prices on the date of grant. Also, to the extent stock awards were forfeited prior to vesting, any
previously recognized expense was reversed as an offset to operating expenses in the period of forfeiture.
The following table illustrates the effects on net loss and net loss per share as if the Company had applied the fair value
recognition provisions of SFAS 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148, Accounting for Stock-
Based Compensation—Transition and Disclosure to options granted under the Company's stock-based compensation plans prior to the
adoption. For purposes of this pro forma disclosure, the value of the options was estimated using the Black-Scholes-Merton ("BSM")
option-pricing formula and amortized on a straight-line basis over the respective vesting periods of the awards. Disclosure for the year
ended December 31, 2006 is not presented because stock-based payments were accounted for under SFAS 123 (R)'s fair value method
during this period.
Year ended
December 31,
2004 2005
Net loss, as reported $ (4,540) $ (24,918)
Add: Stock-based employee compensation, as reported 360 72
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards (3,747)(3,996)
Pro forma net loss—SFAS 123 fair value adjusted $ (7,927) $ (28,842)
Net loss per common share
Basic and diluted—as reported $ (0.26) $ (1.29)
Basic and diluted—pro forma $ (.044) $ (1.48)
Adoption of SFAS 123(R)
As of January 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective method, which requires
measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the
service period for awards expected to vest. The fair value of stock options is determined using the BSM valuation model, which is
consistent with our valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123 . Such
value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method under SFAS 123(R).
The adoption of SFAS 123(R) did not result in a cumulative benefit from accounting change, which reflects the net cumulative
impact of estimating future forfeitures in the determination of period expense, rather than recording forfeitures when they occur as
previously permitted, as we did not have unvested employee stock awards for which compensation expense was recognized prior to
adoption of SFAS No. 123(R).
Prior to the adoption of SFAS 123(R), cash retained as a result of tax deductions relating to stock-based compensation was
presented in operating cash flows, along with other tax cash flows, in accordance with the provisions of the Emerging Issues Task
Force ("EITF") Issue No. 00-15, Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company
upon Exercise of a Nonqualified Employee Stock Option. SFAS 123(R) supersedes EITF 00-15, amends SFAS 95, Statement of Cash
Flows, and requires tax benefits relating to excess stock-based compensation deductions to be prospectively
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