Stamps.com 2006 Annual Report Download - page 52

STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies – (continued)
Compensation expense recognized for all employee stock options awards granted is recognized using the straight-line single method over
their respective vesting periods of three or four years. As stock-based compensation expense recognized in the Statement of Operations for the
year ended December 31, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R
requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. In the Company’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for
forfeitures as they occurred.
SFAS 123R requires the cash flow resulting from tax benefits resulting from tax deduction in excess of the compensation cost recognized
for those options (excess tax benefits) to be classified as financing cash flows. Prior to fiscal 2005 the Company had a history of net operating
losses and because it is uncertain as to when and if it may realize its deferred tax assets, the Company has placed a valuation allowance against
its otherwise recognizable deferred tax assets. Therefore, there are no excess tax benefits recorded in the financing cash inflow that would have
been classified as an operating cash inflow if the Company had not adopted SFAS 123R. During the year ended December 31, 2006, the
Company received $7.6 million and $538,000, respectively, in cash from stock options exercised and from shares issued through the Employee
Stock Purchase Program.
Upon adoption of SFAS 123R the Company continued to use the Black-Scholes option valuation model, which requires management to
make certain assumptions for estimating the fair value of employee stock options granted at the date of the grant. 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 may not necessarily
provide a reliable single measure of the fair value of the Company’
s employee stock options. Although the fair value of employee stock options
is determined in accordance with SFAS 123R using an option valuation model, that value may not be indicative of the fair value observed in a
willing buyer/willing seller market transaction.
For options granted, 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 risk-free interest rate is based on U.S.
Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant.
The following are the weighted average assumptions used in the Black-Scholes valuation model for the periods indicated:
F-12
2006 2005 2004
Expected dividend yield
— — —
Risk-free interest rate
4.74
%
4.11
%
3.43
%
Expected volatility
49
%
48
%
48
%
Expected life (in years)
5
5
5
Expected forfeiture rate
15
% — —