Earthlink 2003 Annual Report Download - page 58

Series B convertible preferred stock was convertible into such number of shares of common stock as was determined by dividing the
liquidation value per share in effect at such time by the conversion value per share in effect at such time. Sprint received dividends on Series A
and Series B convertible preferred stock at an annual rate of 3% of the stated liquidation value per share, compounded quarterly. Through
June 2003, such dividends were payable "in kind" by way of an increase in the liquidation value per share. The increase in the liquidation value
per share resulted in an increase in the conversion ratio of the preferred stock, such that in June 2003, the liquidation value per share would
have been equal to the conversion value per share and each share of outstanding preferred stock would have been convertible into one share of
common stock. Prior to June 30, 2003, the shares of Series A and Series B convertible preferred stock were converted into common stock at
less than a one to one ratio.
During the year ended December 31, 2002, Sprint converted approximately 9.0 million shares of Series A convertible preferred stock into
8.8 million shares of the Company's common stock. During the year ended December 31, 2003, Sprint converted approximately 1.1 million and
16.8 million shares of Series A and Series B convertible preferred stock, respectively, into an approximately equivalent number of shares of
common stock. The conversions represented all of the outstanding shares of Series A and Series B convertible preferred stock. Consequently,
there are currently no shares of Series A or Series B convertible preferred stock outstanding and, accordingly, no associated dividend
obligations.
11. Deductions for Accretion Dividends
Increases in the liquidation value per share resulting from the payment "in kind" of dividends on the Series A and Series B convertible
preferred stock are included in deductions for accretion dividends and reduce the amount of earnings attributable to common stockholders.
Deductions for accretion dividends includes approximately $20.4 million, $13.0 million and $3.0 million for the years ended December 31,
2001, 2002 and 2003, respectively, related to increases in the liquidation value per share pursuant to the provisions of the convertible preferred
stock.
Deductions for accretion dividends also includes amounts related to the beneficial conversion features of the Series A and Series B
convertible preferred stock recognized in accordance with EITF Issue No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios," based upon the rate at which the preferred stock becomes convertible. In
effect, the Series A and Series B convertible preferred stock were issued at a discount to fair value, and the discounts were being accreted
through deductions for accretion dividends over the period from the date of issuance to the date the conversion ratio was equal to one to one in
June 2003. Deductions for accretion dividends includes approximately $9.5 million, $7.0 million and $1.6 million for the years ended
December 31, 2001, 2002 and 2003, respectively, related to amounts recognized pursuant to EITF Issue No. 98-5.
Because Sprint converted all of its Series A and Series B convertible preferred stock during the year ended December 31, 2003, the
Company will not record any dividends associated with the Series A and Series B convertible preferred stock in future periods. See Note 10,
"Convertible Preferred Stock."
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12. Stock Compensation Plans and Warrants
Option Plans
The Company has granted options to purchase the Company's common stock to employees and directors under various stock incentive
plans. Under the plans, employees and non-employee directors are eligible to receive awards of various forms of equity-based incentive
compensation, including stock options, restricted stock, restricted stock units and performance awards. The plans are administered by the Board
of Directors or the Compensation Committee of the Board of Directors, which determine the terms of the awards granted. Stock options are
generally granted with an exercise price equal to the market value of a share of common stock on the date of grant, have a term of ten years or
less, and vest over terms of four to six years from the date of grant.
The Company has reserved 32.8 million shares of common stock for the issuance of equity-based incentive compensation under its
various stock incentive plans, and 10.6 million were available for grant as of December 31, 2003.
Warrants
The Company has historically issued to certain members of its Board of Directors, customers, consultants, lessors, creditors and others
warrants to purchase shares of the Company's common stock. The Company did not issue warrants during the years ended December 31, 2001,
2002 and 2003. As of December 31, 2003, warrants to purchase a total of 241,750 shares of common stock were outstanding.
Options and Warrants Outstanding
The following table summarizes information concerning stock option and warrant activity during the years ended December 31, 2001,