Stamps.com 2006 Annual Report Download - page 51

STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies – (continued)
Stock
-Based Compensation
Effective January 1, 2006, the Company adopted the Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment” (SFAS 123R), and related SEC rules included in Staff Accounting Bulletin No. 107 (SAB 107), which require the measurement and
recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options
and employee stock purchases related to the Employee Stock Purchase Plan (employee stock purchases) based on estimated fair values.
The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting
standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. The Company’s financial statements as of and for the year
ended December 31, 2006 reflect the impact of SFAS 123R. In accordance with the modified prospective transition method, the Company’s
financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. Stock-based
compensation expense recognized under SFAS 123R was $2.6 million for the year ended December 31, 2006. Stock-based compensation
expense related to employee and director stock options was $1.8 million for the year ended December 31, 2006. Stock-based compensation
expense related to employee stock purchases was $810,000 for the year ended December 31, 2006.
SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing
model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in
the Company’s Statement of Operations. Prior to the adoption of SFAS 123R, the Company accounted for stock-based awards to employees
and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No.
123, “Accounting for Stock-Based Compensation” (SFAS 123). Under the intrinsic value method, no stock-based compensation expense had
been recognized in the Company’s Statement of Operations prior to January 1, 2006 because the exercise price of the Company’s stock options
granted to employees and directors was equal to or greater than the fair market value of the underlying stock at the date of grant.
The following table illustrates the reported and pro forma effect on net income (loss) and earnings (loss) per share if the Company had
elected to apply the fair value recognition provisions of SFAS 123 for the years ended December 31, 2005 and 2004 (in thousands, except per
share data):
Stock-based compensation expense recognized during the period is based on the value of the portion of share-
based payment awards that is
ultimately expected to vest during the period. Stock-based compensation expense recognized in the Company’s Statement of Income for the
year ended December 31, 2006 included 1) compensation expense for share
-based payment awards granted prior to, but not yet vested as of
January 1, 2006 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and 2) compensation
expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in
accordance with the provisions of SFAS 123R.
F-11
2005 2004
Net income (loss) as reported
$
10,429
$
(4,733
)
Add: Stock price based employee expense included in net income
—
3,076
Deduct: Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects
(1,332
)
(7,884
)
Net income (loss) pro forma
$
9,097
$
(9,541
)
Basic net income (loss) per common share-as reported
$
0.46
$
(0.21
)
Diluted net income (loss) per common share-as reported
$
0.44
$
(0.21
)
Basic net income (loss) per common share-pro forma
$
0.40
$
(0.43
)
Diluted net income (loss) per common share-pro forma
$
0.38
$
(0.43
)