Yahoo 2004 Annual Report Download - page 87

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 options have characteristics
significantly different from those of traded options, and because changes in the subjective input assumptions can materi-
ally affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable
single measure of the fair value of its options.
Because additional stock options are expected to be granted each year, the pro forma disclosures are not representative of
pro forma effects on reported financial results for future years. The fair value of option grants is determined using the
Black-Scholes option pricing model with the following weighted average assumptions:
Years Ended December 31,
2002 2003 2004
Expected dividend 0.0% 0.0% 0.0%
Risk-free interest rate ranges 2.2% - 4.1% 1.5% - 2.5% 2.2% - 3.1%
Expected volatility(1) 77% 62% 50%
Expected life (in years)(2) 3 3 3.5
(1) For the year ended December 31, 2002, the Company used its three-year trailing volatility to estimate expected stock price volatility in the
computation of stock-based compensation under the fair value method. For the year ended December 31, 2003, the Company used an equally
weighted average of three-year trailing volatility and market-based implied volatility for the computation. For the year ended December 31, 2004,
the Company used an equally weighted average of three-and-one half-year trailing volatility and market-based implied volatility for the
computation.
(2) For the years ended December 31, 2002 and 2003, the stock compensation expense amounts have been adjusted to reflect lower calculated fair
values for employee stock options which resulted in a decrease of $99 million ($0.08 per share) in the pro forma net loss for the year ended
December 31, 2002 and an increase of $33 million ($0.02 per share) in the pro forma net income for the year ended December 31, 2003. These
adjustments were required as the Company’s estimate of the fair value of employee stock options was incorrectly based on a five-and-one-half year
expected life rather than the three year expected life intended by management.
Note 13 COMMITMENTS AND CONTINGENCIES
Operating Leases. During 1999, the Company entered into agreements for the development of an office complex in
Sunnyvale, California to serve as its headquarters. Upon substantial completion of the construction in 2001, approxi-
mately $259 million was funded for the complex in connection with the lease financing arrangement, and at Decem-
ber 31, 2001 such amount had been classified as restricted long-term investments. During July 2002, the Company
exercised its right, pursuant to the master lease agreement to acquire the complex for approximately $259 million, which
was funded by the restricted long-term investments. The Company has also entered into various non-cancelable operating
lease agreements for other offices throughout the United States, and for international subsidiaries, for original lease
periods up to 23 years and expiring between 2005 and 2027.
Net lease commitments as of December 31, 2004 can be summarized as follows (in millions):
Gross lease Sublease Net lease
Years Ending December 31, commitments income Commitments
2005 $ 44 $(10) $ 34
2006 38 (5) 33
2007 37 (1) 36
2008 35 (1) 34
2009 32 (1) 31
Due after 5 years 223 (1) 222
Total net lease commitments $409 $(19) $390
Rent expense under operating leases totaled approximately $15 million, $21 million, and $34 million for the years ended
December 31, 2002, 2003 and 2004, respectively.
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