Earthlink 2010 Annual Report Download - page 119

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Table of Contents
EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with the issuance of the EarthLink Notes, the Company entered into separate convertible note hedge transactions and separate
warrant transactions with respect to the Company's common stock to reduce the potential dilution upon conversion of the EarthLink Notes
(collectively referred to as the "Call Spread Transactions"). During 2008, the Company terminated the convertible note hedge and warrant
agreements. See Note 11, "Shareholders' Equity," for more information on the Call Spread Transactions.
As of December 31, 2009 and 2010, the fair value of the EarthLink Notes was approximately $279.8 million and $300.3 million,
respectively, based on quoted market prices.
Under the terms of the indenture governing the EarthLink Notes, the Company's payment of cash dividends requires an adjustment to the
conversion rate for the EarthLink Notes. In addition, as a result of the adjustment, the EarthLink Notes may be surrendered for conversion for a
period of time between the declaration date and the record date, as defined in the indenture, for the consideration provided for in the indenture.
During the year ended December 31, 2010, $3.0 million principal amount of EarthLink Notes were surrendered for conversion for cash payment
of $2.8 million, resulting in a gain on conversion of debt of $0.2 million. Such gain is included in interest expense and other, net, in the
Consolidated Statement of Operations.
The Company accounts for the liability and equity components of the EarthLink Notes separately. The Company is accreting the debt
discount related to the equity component to non-cash interest expense over the estimated five-
year life of the EarthLink Notes, which represents
the first redemption date of November 2011. As of December 31, 2010, the remaining amortization period for the discount was 10 months.
The principal amount, unamortized discount and net carrying amount of the debt and equity components as of December 31, 2009 and 2010
are presented below:
The following table presents the associated interest cost related to the EarthLink Notes during the years ended December 31, 2008, 2009
and 2010, which consists of both the contractual interest coupon and amortization of the discount on the liability component:
112
As of December 31,
2009
2010
(in thousands)
Principal amount
$
258,750
$
255,791
Unamortized discount
(26,502
)
(12,722
)
Net carrying amount
$
232,248
$
243,069
Carrying amount of the equity component
$
62,095
$
61,847
Year Ended December 31,
2008 2009 2010
(in thousands)
Contractual interest recognized
$
8,895
$
8,895
$
8,868
Discount amortization
11,386
12,516
13,477
Effective interest rate
9.5
%
9.5
%
9.5
%