Stamps.com 2004 Annual Report Download - page 45

F-10
STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS (continued)
SFAS No. 123, and as amended by SFAS No. 148, permits companies to recognize, as expense over the
vesting period, the fair value of all stock-based awards on the date of grant. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and
are fully transferable. Because the Company’ s stock-based compensation plans have characteristics significantly
different from those of traded options and because changes in the subjective input assumptions can materially affect
the fair value estimate, management believes that the existing option valuation models do not necessarily provide a
reliable single measure of the fair value of awards from the plan. Therefore, as permitted, the Company applies the
existing accounting rules under APB No. 25 and provides pro forma net loss and pro forma loss per share
disclosures for stock-based awards made during the year as if the fair value method defined in SFAS No. 123, as
amended, had been applied. Net loss and net loss per share for each of the three years ended December 31, 2004
would have increased to the following pro forma amounts (in thousands, except per share data):
2004 2003 2002
Net loss-as reported ............................................................................... $ (4,733) $ (9,327) $ (6,847)
Add: Stock price based employee expense
included in net loss............................................................................. 3,076 9 305
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards...................................................................................... (7,884) (2,938) (3,948)
Net loss-pro forma................................................................................. $ (9,541) $ (12,256) $ (10,490)
Basic and diluted net loss per common share-as reported ..................... $ (0.21) $ (0.42) $ (0.28)
Basic and diluted net loss per common share-pro forma....................... $ (0.43) $ (0.56) $ (0.43)
Under SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-
Scholes option pricing model with the following weighted average assumptions:
2004 2003 2002
Expected dividend yield ........................................................................
—
—
—
Risk-free interest rate............................................................................. 3.43% 3.00% 2.61%
Expected volatility................................................................................. 48% 30% 30%
Expected life (in years).......................................................................... 5 5 5
For options granted during the years ended December 31, 2004, 2003 and 2002, the Company’ s assumption
of expected volatility for valuing options using the Black-Scholes model was based on the historical volatility of the
Company’ s stock price for the period January 1, 2002 through the date of option grant because management believes
the historical volatility since January 1, 2002 is more representative of prospective volatility.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price volatility. Because the Company’ s
employee stock options have characteristics significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect the fair value estimates, in management’ s opinion
the existing models do not necessarily provide a reliable single measure of the fair value of the Company’ s options.
Treasury Stock
In July 2004, the Company’ s Board of Directors authorized a stock repurchase program for a 12 month
period, superseding previous authorizations. During the previous repurchase programs, the Company repurchased
approximately 3.2 million shares (adjusted to give retroactive effect resulting from the Company’ s reverse stock
split), a reduction of over 12% of their shares outstanding from April 2002. The Company will consider
repurchasing shares of common stock throughout the current 12 month program by evaluating such factors as the
price of their stock, the daily trading volume and the availability of large blocks of stock and any additional
constraints because of material inside information the Company may possess.