Earthlink 2009 Annual Report Download - page 97

Table of Contents
EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Call Spread Transactions
In connection with the issuance of the Notes (see Note 9, "Convertible Senior Notes"), the Company entered into separate convertible note
hedge transactions and separate warrant transactions with respect to the Company's common stock to minimize the impact of the potential
dilution upon conversion of the Notes. The Company purchased call options in private transactions to cover approximately 28.4 million shares of
the Company's common stock at a strike price of $9.12 per share, subject to adjustment in certain circumstances, for $47.2 million. The
Company also sold warrants permitting the purchasers to acquire up to approximately 28.4 million shares of the Company's common stock at an
exercise price of $11.20 per share, subject to adjustments in certain circumstances, in private transactions for total proceeds of approximately
$32.1 million. In September 2008, the Company terminated its convertible note hedge and warrant agreements. The Company received an
aggregate payment from the counterparties to the agreements, which was recorded as additional paid-
in capital. Upon termination of the
agreements, the Company purchased approximately 2.5 million shares of common stock the counterparties held in hedge positions for
approximately $22.7 million, based on the closing price of the EarthLink common stock on the purchase date.
11. Stock-Based Compensation
Stock-
based compensation expense was $19.6 million, $20.1 million and $13.2 million during the years ended December 31, 2007, 2008
and 2009, respectively. The Company has classified stock-
based compensation expense within the same operating expense line items as cash
compensation paid to employees.
Included in stock-based compensation expense for the year ended December 31, 2007 was $4.9 million of stock-
based compensation
expense related to Charles G. Betty, EarthLink's former President and Chief Executive Officer. Mr. Betty passed away on January 2, 2007.
Pursuant to Mr. Betty's employment agreement, all unvested stock options and restricted stock units immediately vested and became fully
exercisable upon death. In addition, the Leadership and Compensation Committee of the Board of Directors extended the exercise period of
Mr. Betty's stock options until December 31, 2008. This date represents the exercise period if Mr. Betty had terminated employment after
serving the full term of his employment agreement, which was set to expire in July 2008. During the year ended December 31, 2007, EarthLink
recorded stock-
based compensation of $3.5 million related to the accelerated vesting of 1.1 million stock options and 120,000 restricted stock
units and recorded stock-
based compensation expense of $1.4 million related to the extension of the exercise period for Mr. Betty's stock
options.
Stock Incentive Plans
The Company has granted options to employees and non-
employee directors to purchase the Company's common stock under various stock
incentive plans. The Company has also granted restricted stock units to employees and non-
employee 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 Leadership and 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 EarthLink, Inc. common
stock on the date of grant, have a term of ten years or less, and vest over terms of four years from the date of grant. Restricted stock units are
granted with various vesting terms that range from one to six years from the date of grant. The Company's various stock incentive plans provide
for the issuance of a maximum of 31.0 million shares, of which approximately 13.8 million shares were still
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