Earthlink 2005 Annual Report Download - page 88

EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
10. Deductions for Accretion Dividends
Prior to June 30, 2003, the Company had Series A and Series B convertible preferred stock outstanding. Each share of Series A and
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. Dividends on Series A and Series B
convertible preferred stock were payable 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. All issued and outstanding shares of Series A and Series B convertible preferred stock were held by Sprint, and Sprint
converted all shares of Series A and Series B convertible preferred stock into common stock at less than a one-to-one ratio prior to June 30,
2003.
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 included approximately $3.0 million for the year ended December 31, 2003 related to increases in the
liquidation value per share pursuant to the provisions of the convertible preferred stock. Deductions for accretion dividends also included
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 became 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 included
approximately $1.6 million for the year ended December 31, 2003 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 prior to December 31, 2003, the Company did not
have any dividend obligations during the years ended December 31, 2004 and 2005.
11. Stock Compensation Plans and Warrants
Stock Incentive 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, phantom share units and performance awards, among others. 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.
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