<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1996.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------
EARTHLINK NETWORK, INC.
(Exact Name of Issuer as specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 4825 95-4582245
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
3100 NEW YORK DRIVE, PASADENA, CALIFORNIA 91107
(818) 296-2400
(Address and Telephone Number of Principal Executive Offices)
--------------------------
BARRY W. HALL, CHIEF FINANCIAL OFFICER
EARTHLINK NETWORK, INC.
3100 NEW YORK DRIVE
PASADENA, CALIFORNIA 91107
(818) 296-2400
(Name, address and telephone number of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
Scott M. Hobby, Esq. Alan K. Austin, Esq.
J. Stephen Hufford, Esq. Brian C. Erb, Esq.
W. Tinley Anderson, III, Esq. Thomas I. Savage, Esq.
Hunton & Williams Wilson, Sonsini, Goodrich & Rosati
NationsBank Plaza, Suite 4100 A Professional Corporation
600 Peachtree Street, NE 650 Page Mill Road
Atlanta, Georgia 30308 Palo Alto, California 94304
(404) 888-4000 (415) 493-9300
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AMOUNT TO PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value...... 4,140,000 shares $12.00 $49,680,000 $17,131.03
<FN>
(1) Includes 540,000 shares that may be sold pursuant to an over-allotment
option granted to the Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
</TABLE>
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EARTHLINK NETWORK, INC.
CROSS REFERENCE SHEET PURSUANT TO
ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NO. FORM S-1 CAPTION CAPTION OR LOCATION IN PROSPECTUS
- -------- ------------------------------ --------------------------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus..... Facing Page; Cross Reference Sheet;
Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus.... Inside Front Cover Page; Outside Back
Cover Page
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges............. Prospectus Summary; Risk Factors
4. Use of Proceeds............... Use of Proceeds
5. Determination of Offering
Price........................ Underwriting
6. Dilution...................... Dilution
7. Selling Security Holders...... Not Applicable
8. Plan of Distribution.......... Underwriting
9. Description of Securities to
be Registered................ Description of Capital Stock
10. Interest of Named Experts and
Counsel...................... Not Applicable
11. Information with Respect to
the Registrant............... Prospectus Summary; Risk Factors;
Dividend Policy; Capitalization;
Selected Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain
Transactions; Principal Stockholders;
Financial Statements
12. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities.................. Not Applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION, DATED JUNE 3, 1996
3,600,000 SHARES
[LOGO]
COMMON STOCK
------------------
All of the 3,600,000 shares of Common Stock offered hereby are being
sold by EarthLink Network, Inc. ("EarthLink" or the "Company"). Prior to this
Offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be between
$10.00 and $12.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. Application
has been made to have the Common Stock approved for quotation on the Nasdaq
National Market under the symbol "ELNK."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 5.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share......................... $ $ $
Total (3)......................... $ $ $
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $ .
(3) The Company has granted the Underwriters an option, exercisable within 30
days from the date hereof, to purchase up to 540,000 additional shares of
Common Stock on the same terms as set forth above, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public will be $ , the Underwriting Discounts and Commissions will be
$ and the Proceeds to Company will be $ . See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1996.
------------------------
UBS SECURITIES
PIPER JAFFRAY INC.
CRUTTENDEN ROTH
INCORPORATED
, 1996
<PAGE>
[GATEFOLD PAGES SHOWING VARIOUS SCREEN IMAGES FROM THE EARTHLINK NETWORK
WORLD WIDE WEB SITE, SCREENS FROM THE EARTHLINK REGISTRATION SOFTWARE AND
PICTURES OF PRODUCTS WITH WHICH THE EARTHLINK NETWORK TOTALACCESS SOFTWARE
PRODUCT IS BUNDLED AND OFFERED BY VARIOUS OF THE COMPANY'S AFFINITY MARKETING
PARTNERS]
2
<PAGE>
PROSPECTUS SUMMARY
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS.
THE COMPANY
EarthLink Network, Inc. ("EarthLink" or the "Company") is a leading branded
provider of reliable, easy-to-use Internet services. The Company facilitates and
enhances the quality and productivity of its customers' Internet experience by
providing capabilities which enable its customers to navigate and exploit the
resources of the Internet. EarthLink has grown from approximately 30,000
customers at the end of 1995 to approximately 100,000 customers at the end of
May 1996.
International Data Corporation ("IDC") estimates that the number of Internet
users was approximately 56 million at the end of 1995 and that this number will
reach approximately 200 million by the end of 1999. This growth, combined with
the emergence of the World Wide Web, the graphical, multimedia environment of
the Internet, has resulted in the development of the Internet as a new mass
communications medium. However, current limitations of Internet service
providers ("ISPs") and traditional on-line service providers, combined with the
volume and lack of organization of the information contained on the Internet,
have precluded non-technical users from fully enjoying expanding Internet
resources. The Company believes that the next phase of growth in the Internet
services market will require providers to address the needs of non-technical
users and to shift from providing network infrastructure and undifferentiated
access to providing value-added, distinct services which build customer
satisfaction and loyalty.
EarthLink's services and products are designed to address these needs by (i)
focusing on the customer's need for speed, reliability and support in gaining
access to the Internet; (ii) transforming the resources of the Internet into
information, education, communication, entertainment and a sense of community;
and (iii) leveraging the infrastructure and software development investments of
third parties in order to focus the Company's efforts on providing the customer
with a useful and enjoyable Internet experience. The Company provides its
services through its EarthLink Network TotalAccess software package, a tool that
enables Internet access via an open, non-proprietary architecture. In addition,
the Company provides a variety of Internet services tailored to enhance its
customers' Internet experience, including the EarthLink Web site, with more than
800 pages of content and information, an EarthLink on-line store and on-line
multi-player gaming.
EarthLink has taken a strategic approach to network development. To increase
its national presence while minimizing capital costs, the Company leases
nationwide points-of-presence ("POPs") from UUNET Technologies, Inc. ("UUNET"),
while maintaining the flexibility to establish Company-owned POPs in those
geographical areas in which there is a sufficient concentration of customers to
support such investment. This approach permits the Company to focus on meeting
customer needs rather than on managing network infrastructure.
The Company markets its services through multiple distribution channels,
including affinity marketing partnerships, customer referrals and promotional
programs. The Company has established strategic relationships with approximately
90 affinity marketing partners through which the Company has expanded the reach
of its marketing efforts. The Company works with these leading media and
consumer products companies to promote and distribute EarthLink's services. The
Company believes that these relationships provide a cost-effective means by
which the Company can enhance the EarthLink brand. For example, Macmillan
Publishing USA bundles EarthLink Network TotalAccess software with several
Internet-related book titles. Other affinity marketing partners include
Activision, CNN Interative, Columbia TriStar and Graphix Zone.
The Company was incorporated as a California corporation in May 1994. The
Company anticipates that it will reincorporate as a Delaware corporation prior
to the closing of this Offering. The terms "EarthLink" and the "Company" as used
herein refer to EarthLink Network, Inc., a California corporation, and, where
applicable, its Delaware successor. The Company's principal executive offices
are located at 3100 New York Drive, Pasadena, California 91107. The Company's
telephone number is (818) 296-2400, and its World Wide Web address is
http://www.earthlink.net. Information contained on the Company's World Wide Web
site shall not be deemed to be a part of this Prospectus.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered.......................... 3,600,000 shares
Common Stock Outstanding after this
Offering...................................... 15,570,465 shares (1)
Use of Proceeds............................... To finance enhancements to the Company's
network infrastructure, to fund new service
and product introductions, to finance
potential acquisitions, and for working
capital and other general corporate pur-
poses.
Proposed Nasdaq National Market Symbol........ ELNK
Risk Factors.................................. The Common Stock offered hereby involves a
high degree of risk. See "Risk Factors."
</TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
INCEPTION THREE MONTHS ENDED
(MAY 26, 1994) YEAR ENDED ----------------------------------
THROUGH DECEMBER 31, MARCH 31, MARCH 29,
DEC. 31, 1994 1995 1995 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.............................. $ 111 $ 3,028 $ 183 $ 3,418
Loss from operations........................ (148) (6,018) (252) (4,788)
Net loss.................................... (148) (6,120) (271) (4,869)
Net loss per share (2)...................... $ (0.01) $ (0.47) $ (0.02) $ (0.35)
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares
outstanding (2)............................ 11,716 13,159 12,594 13,717
</TABLE>
<TABLE>
<CAPTION>
MARCH 29, 1996
------------------------------
AS ADJUSTED
ACTUAL (3)
-------------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................................................... $ (3,016) $ 33,190
Total assets...................................................................... 8,878 45,084
Total liabilities................................................................. 7,081 7,081
Accumulated deficit............................................................... (9,876) (9,876)
Stockholders' equity.............................................................. 1,797 38,003
</TABLE>
- -------------
(1) Based on shares of Common Stock outstanding as of May 31, 1996. This amount
excludes (i) 1,822,750 shares of Common Stock subject to options outstanding
under the Company's 1995 Stock Option Plan at a weighted average exercise
price of $3.51 per share, (ii) 1,880,654 shares of Common Stock subject to
outstanding warrants and non-plan stock options at a weighted average
exercise price of $1.75 per share, (iii) 677,250 and 125,000 shares of
Common Stock reserved for future grant of options under the Company's 1995
Stock Option Plan and Directors Stock Option Plan, respectively, and (iv)
920,000 shares of Common Stock reserved for future issuance pursuant to
warrants that the Company has made commitments to issue. See
"Capitalization," "Management -- 1995 Stock Option Plan," "Management --
Directors Stock Option Plan," "Description of Capital Stock" and Notes 7 and
11 of Notes to Financial Statements.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of weighted average shares outstanding used in
the net loss per share computation.
(3) Adjusted to reflect the sale of the 3,600,000 shares of Common Stock offered
hereby and receipt by the Company of the estimated net proceeds therefrom.
See "Use of Proceeds" and "Capitalization."
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES (I)
THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED, AND (II) THE COMPANY'S
REINCORPORATION IN THE STATE OF DELAWARE PRIOR TO THE CLOSING OF THIS OFFERING.
SEE "CAPITALIZATION" AND "DESCRIPTION OF CAPITAL STOCK." IN JANUARY 1996, THE
COMPANY CHANGED ITS FISCAL YEAR SUCH THAT IT ENDS ON THE LAST FRIDAY OF DECEMBER
OF EACH YEAR.
"EARTHLINK NETWORK-REGISTERED TRADEMARK-," "EARTHLINK NETWORK
TOTALACCESS-TM-" AND THE EARTHLINK LOGO ARE TRADEMARKS OF THE COMPANY. THIS
PROSPECTUS INCLUDES TRADEMARKS OF COMPANIES OTHER THAN THE COMPANY.
4
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS
PROSPECTUS. PROSPECTIVE INVESTORS IN THE SHARES OFFERED HEREBY SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND EXPECTATIONS OF FUTURE LOSSES
The Company was founded in May 1994 and began offering its services in July
1994. Accordingly, the Company has only a limited operating history upon which
an evaluation of its prospects can be made. Such prospects must be considered in
light of the substantial risks, expenses and difficulties encountered by new
entrants into the Internet services industry. The Company has experienced net
losses in each quarter since it commenced operations and had net losses of
approximately $6.3 million from inception through 1995 and of approximately $4.9
million for the three months ended March 29, 1996. As of March 29, 1996, the
Company had an accumulated deficit of approximately $9.9 million (exclusive of
$1.3 million of losses incurred while the Company was an S Corporation for tax
purposes, which, upon the Company's conversion to C Corporation status in June
1995, were charged to the Company's capital accounts). The Company expects that
it is likely to continue to incur net losses at least through the end of 1997 as
it continues to expend substantial resources to build its infrastructure,
develop new service and product offerings and build its sales and marketing and
administrative organizations. There can be no assurance that the Company will
achieve or sustain profitability or positive cash flow from its operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION
The Internet services market in which the Company operates is extremely
competitive, and the Company expects competition in this market to intensify in
the future. The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. The Company competes
(or in the future is expected to compete) directly or indirectly with the
following categories of companies: (i) national and regional ISPs such as Bolt
Beranek & Newman, Inc. ("BBN"), IDT Corporation ("IDT"), MindSpring Enterprises,
Inc. ("MindSpring"), Netcom On-line Communication Services, Inc. ("NETCOM"),
PSINet, Inc. ("PSINet") and UUNET; (ii) established online services companies
such as America Online, Inc. ("America Online"), CompuServe Incorporated
("CompuServe") and Prodigy Services Company ("Prodigy"); (iii) computer software
and technology companies such as Microsoft Corporation ("Microsoft"); (iv)
national telecommunication companies such as AT&T Corp. ("AT&T"), MCI
Communications Corporation ("MCI") and Sprint Corporation ("Sprint"); (v)
regional Bell operating companies ("RBOCs"); (vi) cable operators such as
Comcast Corporation ("Comcast"), Tele-Communications, Inc. ("TCI") and Time
Warner, Inc. ("Time Warner"); and (vii) nonprofit or educational Internet
service providers.
Many established online services companies and telecommunication companies
have recently announced plans to introduce or expand their Internet services.
The Company expects that a significant number of major telecommunication, cable,
media, software and hardware companies, as well as all of the major online
services companies, will eventually compete fully in the Internet services
market, and that their entry into this market will result in substantially
greater competition for the Company. The ability of these competitors or others
to bundle services and products with Internet connectivity services could place
the Company at a significant competitive disadvantage. In addition, competitors
in the telecommunication industry may be able to provide customers with reduced
communication costs in connection with their Internet access services, reducing
the overall cost of Internet access and significantly increasing pricing
pressures on the Company. There can be no assurance that the Company will be
able to offset the effects of any necessary price reductions resulting from such
pricing pressures with an increase in the number of its customers, higher
revenue from enhanced services, cost reductions or otherwise.
5
<PAGE>
Competition in the Company's market is also expected to focus increasingly
on overseas markets where Internet services are just beginning to be introduced.
There can be no assurance that the Company will be able to increase its presence
in overseas markets. To the extent that the ability to provide Internet services
overseas becomes a competitive advantage in the Internet services industry, the
failure of the Company to penetrate overseas markets may result in the Company
being at a competitive disadvantage relative to other Internet access providers.
The Company believes that its ability to compete successfully in the
Internet services market depends on a number of factors, including market
presence; the adequacy of the Company's customer support services; the capacity,
reliability and security of its network infrastructure; the ease of access to
and navigation of the Internet provided by the Company's services; the pricing
policies of the Company, its competitors and its suppliers; the timing of
introductions of new services and products by the Company and its competitors;
the Company's ability to support existing and emerging industry standards; and
industry and general economic trends. There can be no assurance that the Company
will have the financial resources, technical expertise or marketing and support
capabilities to compete successfully. See "-- New and Uncertain Market;
Dependence on Continued Growth in Use of the Internet," "-- Dependence on
Network Infrastructure; Capacity; Risk of System Failure; Security Risks," "--
Dependence on Affinity Marketing and Distribution Relationships" and "Business
- -- Competition."
MANAGEMENT OF POTENTIAL GROWTH; NEW MANAGEMENT TEAM
The Company's recent growth has placed, and is expected to continue to
place, a significant strain on its managerial, operational and financial
resources. To manage any future growth, the Company must continue to implement
and improve its operational and financial systems and to expand, train and
manage its employee base. As of December 31, 1995 and May 31, 1996, the Company
had 196 and 376 full-time employees, respectively. In addition, nearly all
members of the Company's senior management have only recently joined the
Company. These individuals have not previously worked together and are in the
process of being integrated into a management team. The Company anticipates that
its recent growth will require it to recruit and hire a substantial number of
new technical, sales, marketing, financial and executive personnel. There can be
no assurance that the Company will be able to effectively manage the expansion
of its operations, or that the Company's infrastructure, facilities, systems,
procedures or controls will be adequate to support the Company's operations. The
inability of the Company to effectively manage its future growth could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Demand on the Company's network infrastructure, technical staff and
resources has grown rapidly with the Company's expanding customer base, and the
Company has in the past experienced difficulties satisfying the demand for its
Internet services. There can be no assurance that the Company's infrastructure,
technical staff and resources will be adequate to facilitate the Company's
growth. In addition, delays have occurred in establishing Internet accounts for
the Company's customers, and customers in the past have experienced significant
delays in contacting, and in receiving responses from, the Company's customer
and technical support personnel. There can be no assurance that the Company will
be able to establish accounts or provide customer support on a timely basis, or
that any delays will not result in a loss of customers. The Company believes
that its ability to provide timely access for customers and adequate customer
support will largely depend on its ability to attract, identify, train,
integrate and retain qualified personnel. Failure to provide adequate customer
support services will adversely affect the Company's ability to increase its
customer base and reduce its customer cancellation rate, and could therefore
have a material adverse effect on the Company's business, financial condition
and results of operations. See "-- Dependence on Network Infrastructure;
Capacity; Risk of System Failure; Security Risks," "-- Dependence on Key
Personnel," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview" and "Business -- Employees."
6
<PAGE>
DEPENDENCE ON UUNET
As of May 31, 1996, the Company maintained 19 Company-owned POPs and
provided Internet access through an additional 284 UUNET POPs. The Company
relies on UUNET to continue to allow the Company's customers to access the
Internet through UUNET's system of POPs. The Company's current agreement with
UUNET expires in December 1996 and is renewable for additional one-year terms
unless 60 days' prior written notice of termination is given by either party.
UUNET's inability or unwillingness to provide POP access to the Company's
customers, or the Company's inability to secure alternative POP arrangements,
could limit the Company's ability to provide Internet access to its customers,
and could, in turn, have a material adverse effect on the Company's business,
financial condition and results of operations.
UUNET recently announced that it has agreed to be acquired by MFS
Communications Company, Inc. ("MFS"), a supplier of local and long distance
telephone service. There can be no assurance that, following the expiration of
the Company's current agreement with UUNET, MFS or UUNET will continue to
provide the Company with POP access or that such access, if provided, will be
available to the Company on acceptable terms.
The Company's customers generally pay a fixed monthly fee for the Company's
Internet services. Under the Company's agreement with UUNET, the Company pays to
UUNET a fixed monthly fee per customer plus a variable amount based on customer
usage in excess of a threshold number of hours per month. The Company has
recently experienced increasing average per-customer usage of its Internet
services by customers accessing the Internet through UUNET. If this trend
continues and the average per-customer monthly usage exceeds the threshold
number of hours, the Company's operating margins will be adversely affected,
which could, in turn, have a material adverse effect on the Company's business,
financial condition and results of operations. See "-- Dependence on Network
Infrastructure; Capacity; Risk of System Failure; Security Risks," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations -- Cost of Revenues," "Business -- Services and Products"
and "-- Customers, POPs and Network Infrastructure."
FACTORS AFFECTING OPERATING RESULTS; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results have fluctuated significantly in the past
and will likely continue to fluctuate significantly in the future as a result of
a variety of factors, many of which are beyond the Company's control. These
factors include the rates of and costs associated with new customer acquisition,
customer retention, capital expenditures and other costs relating to the
expansion of operations, the timing of new service and product announcements,
changes in the pricing policies of the Company and its competitors, market
acceptance of new and enhanced versions of the Company's services and products,
changes in operating expenses, including telecommunication costs, changes in the
Company's strategy, personnel changes, the introduction of alternative
technologies, the effect of potential acquisitions, increased competition in the
Company's markets and other general economic factors. In addition, a relatively
large portion of the Company's expenses are fixed, and therefore the Company's
operating margins are particularly sensitive to fluctuations in revenues. Due to
these factors, in some future quarter the Company's operating results may fall
below the expectations of securities analysts and investors. In such event, the
market price of the Company's Common Stock would likely be materially and
adversely affected.
In May 1996, the Company entered into an agreement with National Media
Corporation ("NMC"), a producer of infomercials and commercials, pursuant to
which NMC will produce and broadcast 15-second and 60-second commercials for
EarthLink's services and products. Under this agreement, in addition to certain
fees payable to NMC, the Company has agreed to issue NMC warrants to purchase up
to 700,000 shares of Common Stock, depending on the number of customers
generated by this relationship. The exercise price of any warrants earned
through December 31, 1997 will be $4.88 per share, and thereafter the exercise
price will be the fair market value of the Common Stock on the date of grant.
Upon issuance of the warrants, the Company will be required to record in the
quarter in which such warrant is issued a non-cash charge against earnings in an
amount equal to the fair value of the warrant on the date of grant. The Company
anticipates
7
<PAGE>
that, based on its obligation to NMC to issue a fixed number of warrants upon
completion of production and approval of the commercials, it will issue 100,000
of these warrants to NMC in the third quarter of 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Potential Fluctuations in Quarterly Results."
DEPENDENCE ON NETWORK INFRASTRUCTURE; CAPACITY; RISK OF SYSTEM FAILURE; SECURITY
RISKS
The future success of the Company's business will depend on the capacity,
reliability and security of the Company's network infrastructure, including the
POP sites leased by the Company from UUNET. The Company will be required to
expand and adapt this network infrastructure as the number of customers and the
amount and type of information its customers communicate over the Internet
increases. Such expansion and adaptation may require substantial financial,
operational and management resources. There can be no assurance that the Company
will be able to expand or adapt its network infrastructure to meet any
additional demand or changing customer requirements on a timely basis or at a
commercially reasonable cost, if at all.
Capacity constraints have occurred, and may occur in the future, both at the
level of particular POPs (affecting only customers attempting to use that
particular POP) and in connection with system-wide services (such as email and
news services, which can affect all customers). From time to time, the Company
has experienced delayed delivery from suppliers of new telephone lines, modems,
terminal servers and other equipment. Any severe shortage of new telephone
lines, modems, terminal servers or other equipment could result in incoming
access lines becoming full during peak times, causing busy signals for customers
who are trying to connect to the Internet. Similar problems may occur if the
Company is unable to expand the capacity of its information servers quickly
enough to keep pace with demand from the Company's expanding customer base. If
the capacity of such servers is exceeded, customers will experience delays when
trying to use a particular service. Further, if the Company does not maintain
sufficient capacity in its network connections, customers will experience a
general slow-down of all services on the Internet. Any failure of the Company to
expand or enhance its network infrastructure on a timely basis, or to adapt it
to an expanding customer base, changing customer requirements or evolving
industry standards could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's operations are dependent on its ability to protect its
computer equipment against damage from fire, earthquake, power loss,
telecommunication failure and similar events. The occurrence of a natural
disaster or another unanticipated problem at the Company's headquarters, network
hub or at a number of the POPs through which customers connect to the Internet
could cause interruptions in the services provided by the Company. The Company's
computer equipment, including critical equipment dedicated to its Internet
services, is located in Los Angeles and Pasadena, California. The Company
intends to relocate its facilities located in Los Angeles to its headquarters in
Pasadena, California in the near future. The risks associated with such a move
include loss of data, loss of system integrity and the risk of system failure.
The occurrence of any of these events could have a material adverse effect on
the Company's ability to provide Internet services to its customers, and, in
turn, on the Company's business, financial condition and results of operations.
In addition, failure of the Company's telecommunication providers to provide the
data communications capacity required by the Company as a result of a natural
disaster, operational disruption or for any other reason could cause
interruptions in the services provided by the Company. See "Business --
Facilities."
The Company's infrastructure is vulnerable to computer viruses and other
similar disruptive problems caused by its customers, other Internet users or
other third parties. Computer viruses and other problems could lead to
interruptions, delays in or cessation of service to the Company's customers, as
well as corruption of the Company's or its customers' computer systems.
Inappropriate use of the Internet by third parties could also potentially
jeopardize the security of confidential information stored in the computer
systems of the Company or those of its customers, which may cause losses to the
Company or its customers, or deter certain persons from using the Company's
services. The Company expects that its customers may increasingly use the
Internet for commercial transactions in the future. Any network malfunction or
security breach could cause these transactions to be delayed, not completed or
completed with compromised security. Alleviating problems
8
<PAGE>
caused by computer viruses or other inappropriate uses or security breaches may
cause interruptions, delays or cessation in service to the Company's customers,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that customers or
others will not assert claims of liability against the Company as a result of
any such failure.
The Company does not presently maintain redundant or backup Internet
services or backbone facilities or other redundant computing and
telecommunication facilities. Any accident, incident or system failure that
causes interruptions in the Company's operations could have a material adverse
effect on the Company's ability to provide Internet services to its customers,
and, in turn, on the Company's business, financial condition and results of
operations. See "-- Management of Potential Growth; New Management Team," and
"-- Dependence on UUNET."
FUTURE ADDITIONAL CAPITAL REQUIREMENTS
The Company believes that the net proceeds from this Offering, together with
other available cash, including any net cash flow from operations, will be
sufficient to meet the Company's operating expenses and capital requirements for
at least the next 12 months. The Company's capital requirements depend on
numerous factors, including the rate of market acceptance of the Company's
services, the Company's ability to maintain and expand its customer base, the
level of resources devoted to expanding the Company's marketing and sales
organization and the Company's research and development activities, the
availability of hardware and software provided by third-party vendors, the rate
of expansion of the Company's network infrastructure and other factors. The
timing and amount of such capital requirements cannot accurately be predicted.
If capital requirements vary materially from those currently planned, the
Company may require additional financing. The Company has no commitments for any
additional financing, and there can be no assurance that any such commitments
can be obtained on favorable terms, if at all. Any additional equity financing
may be dilutive to the Company's stockholders, and debt financing, if available,
may involve restrictive covenants with respect to dividends, raising future
capital and other financial and operational matters. If the Company is unable to
obtain additional financing as needed, the Company may be required to reduce the
scope of its operations or its anticipated expansion, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "-- Management of Potential Growth; New Management
Team," "-- Dependence or Network Infrastructure; Capacity; Risk of System
Failure; Security Risks," "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DEPENDENCE ON TELECOMMUNICATION CARRIERS AND OTHER SUPPLIERS
The Company relies on local telephone companies and other companies to
provide data communications capacity via local telecommunication lines and
leased long distance lines. The Company is subject to potential disruptions in
these telecommunication services and may have no means of replacing these
services, on a timely basis or at all, in the event of such disruption.
In addition, the Company is dependent on certain third-party suppliers of
hardware components. Certain components used by the Company in providing its
network services are currently acquired from limited sources. The Company also
depends on third-party software vendors to provide the Company with much of its
Internet software, including the Netscape Navigator software ("Netscape
Navigator"), the World Wide Web client software that the Company licenses from
Netscape Communications Corporation ("Netscape"). Failure of the Company's
suppliers to provide components and products in the quantities, at the quality
levels or at the times required by the Company, or an inability by the Company
to develop alternative sources of supply if required, could result in delays in
and/or increased costs of expansion of the Company's network infrastructure.
The Company's suppliers and telecommunication carriers also sell or lease
services and products to the Company's competitors and may be, or in the future
may become, competitors of the Company. There can be
9
<PAGE>
no assurance that the Company's suppliers and telecommunication carriers will
not enter into exclusive arrangements with the Company's competitors or stop
selling or leasing their services or products to the Company. See "--
Competition," "Business -- Services and Products" and "-- Marketing."
DEPENDENCE ON AFFINITY MARKETING AND DISTRIBUTION RELATIONSHIPS
A substantial number of the Company's new customers have been acquired
through its relationships with its affinity marketing partners. The Company
believes that its affinity marketing relationships will continue to account for
a significant number of new customers. The Company relies on these marketing
partners to assist it with distributing the EarthLink Network TotalAccess
software, which enables users to register as customers and to access the
Company's Internet services. There can be no assurance that the Company's
current affinity marketing partners will continue to distribute the Company's
software or will be successful in developing new customers for the Company's
services. The Company's inability to develop alternative methods of distributing
EarthLink Network TotalAccess software in the future, if required, could result
in delays and increased costs in expanding its customer base, which could, in
turn, have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Marketing -- Affinity
Marketing Partners Program."
NEW AND UNCERTAIN MARKET; DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET
EarthLink's future success is substantially dependent on continued growth in
the use of the Internet. Rapid growth in the use of and interest in the
Internet, and in particular the World Wide Web, is a recent phenomenon and there
can be no assurance that Internet usage will become widespread or that extensive
content will continue to be provided over the Internet. The Internet may not
prove to be viable for a number of reasons, including potentially inadequate
development of the necessary infrastructure, such as a reliable network
backbone, or timely development of performance improvements. To the extent that
the Internet continues to experience significant growth in the number of users
and level of use, there can be no assurance that the Internet infrastructure
will be able to support the demands placed on it by such potential growth. If
use of the Internet does not continue to grow, or if the Internet infrastructure
does not effectively support growth that may occur, the Company's business,
results of operations and financial condition would be materially and adversely
affected.
The sales and marketing and other costs to the Company of acquiring new
customers are substantial relative to the monthly fees derived from such
customers. Accordingly, the Company's ability to improve or sustain operating
margins depends in part on its ability to retain its existing customers, while
continuing to attract new customers. The novelty of the market for Internet
services may adversely affect the Company's ability to retain new customers. The
Company continues to invest significant resources in its infrastructure and
customer support capabilities. However, there can be no assurance that such
investment will improve customer retention. Because the Internet services market
is new and the variety of available services is not well understood by new and
potential customers, it is difficult, if not impossible, for the Company to
predict future customer retention rates. See "-- Management of Potential Growth;
New Management Team," "-- Dependence on Network Infrastructure; Capacity; Risk
of System Failure; Security Risks" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."
RAPID TECHNOLOGICAL CHANGE
The market for Internet services is characterized by rapidly changing
technology, evolving industry standards, changes in customer needs and frequent
new service and product introductions. The Company's future success will depend,
in part, on its ability to use leading technologies effectively, to continue to
develop its technical expertise, to enhance its existing services and to develop
new services that meet changing customer needs on a timely and cost-effective
basis. There can be no assurance that the Company will be successful in using
new technologies effectively, developing new services or enhancing existing
services on a timely basis, or that such new technologies or enhancements will
achieve market acceptance. Any failure on
10
<PAGE>
the part of the Company to use new technologies effectively, develop new
services or enhance existing services on a timely basis would have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the technical and managerial skills of
its key employees, including technical, sales, marketing, financial and
executive personnel, and on its ability to identify, hire and retain additional
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to retain existing personnel or to
identify or hire additional personnel. In addition, the Company is highly
dependent on the continued services of its senior management team, which
currently is composed of a small number of individuals, most of whom only
recently joined the Company. The inability to attract, hire or retain the
necessary technical, sales, marketing, financial and executive personnel, or the
loss of the services of any member of the Company's senior management team,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "-- Management of Potential Growth; New
Management Team," "Business -- Employees" and "Management."
GOVERNMENT REGULATION
The Company provides Internet services, in part, through data transmissions
over public telephone lines. These transmissions are governed by regulatory
policies establishing charges and terms for wire line communications. The
Company is not currently subject to direct regulation by the Federal
Communications Commission (the "FCC") or any other governmental agency, other
than regulations applicable to businesses generally. However, in the future the
Company could become subject to regulation by the FCC or another regulatory
agency as a provider of basic telecommunication services. For example, a number
of long distance telephone carriers recently filed a petition with the FCC
seeking a declaration that Internet telephone service is a "telecommunications
service" subject to common carrier regulation. Such a declaration, if enacted,
would create substantial barriers to the Company's entry into the Internet
telephone market. See "Business -- Government Regulation."
POTENTIAL LIABILITY
The case law relating to the liability of ISPs and online services companies
for information carried on or disseminated through their networks has not yet
been definitively established. Several private lawsuits seeking to impose such
liability upon ISPs and online services companies are currently pending.
Although no such claims have been asserted against the Company to date, there
can be no assurance that such claims will not be asserted in the future, or if
asserted, will not be successful. The recently enacted Telecommunications Act of
1996 (the "Telecommunications Act") imposes fines on any entity that knowingly
(i) uses any interactive computer service or telecommunications device to send
obscene or indecent material to minors; (ii) makes obscene or indecent material
available to minors via an interactive computer service; or (iii) permits any
telecommunications facility under such entity's control to be used for the
purposes detailed above. The standard for determining whether an entity acted
knowingly has not yet been established. As the law in this area develops, the
potential imposition of liability upon the Company for information carried on
and disseminated through its network could require the Company to implement
measures to reduce its exposure to such liability. The implementation of such
measures could require the expenditure of substantial resources or the
discontinuation of certain service or product offerings. Any costs that are
incurred as a result of contesting any such asserted claims or the consequent
imposition of liability could have a material adverse effect on the Company's
business, financial condition and results of operations.
Due to the increasing use of the Internet, it is possible that additional
laws and regulations may be adopted with respect to the Internet covering issues
such as content, user privacy, pricing and copyright and intellectual property
infringement. Changes in the regulatory environment relating to the Internet
services
11
<PAGE>
industry, including regulatory changes that directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
PROPRIETARY RIGHTS; INFRINGEMENT CLAIMS
The Company believes that its success is dependent in part on its technology
and its continuing right to use such technology. The Company relies on a
combination of copyright, trademark and trade secret laws and contractual
restrictions to establish and protect its technology. It is the Company's policy
to require employees and consultants and, when possible, suppliers to execute
confidentiality agreements upon the commencement of their relationships with the
Company. These agreements provide that confidential information developed or
made known during the course of the relationship with the Company must be kept
confidential and not disclosed to third parties except in specific instances.
There can be no assurance that the steps taken by the Company will be adequate
to prevent misappropriation of its technology and other proprietary property or
that the Company's competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology.
The Company has obtained authorization, typically in the form of a license,
to distribute third-party software incorporated in the EarthLink Network
TotalAccess software product for Windows 3.1, Windows 95 and Macintosh
platforms. Most of these licenses have one-year terms and automatically renew
for additional one-year terms in the absence of notice from the other party.
Applications licensed by the Company include Netscape Navigator, the Eudora
Light-TM- email program from QUALCOMM Incorporated ("Qualcomm") and MacTCP
software from Apple Computer, Inc. ("Apple"). There can be no assurance that the
Company will be able to successfully obtain all necessary license renewals in
the future. The failure to obtain such renewals or other licenses in the future
could have a material adverse affect on the Company's business, financial
condition and results of operations.
There can be no assurance that third parties will not assert that the
Company's services and products infringe their proprietary rights. Such claims
could result in substantial costs and diversion of resources even if ultimately
decided in favor of the Company. Such claims or judgments resulting from such
claims could have a material adverse effect on the Company's business, financial
condition and results of operations. In the event a claim is asserted alleging
that the Company has infringed the proprietary technology or information of a
third party, the Company may be required to seek licenses to continue to use
such intellectual property. There can be no assurance, however, that such
licenses would be offered or obtained on commercially reasonable terms, if at
all, or that the terms of any offered licenses will be acceptable to the
Company. The failure to obtain the necessary licenses or other rights could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Proprietary Rights."
INTEGRATION OF POTENTIAL ACQUISITIONS
As part of its business strategy, EarthLink may make acquisitions of, or
significant investments in, complementary companies, products or technologies,
although no such acquisitions or investments are currently pending. Any such
future transactions would be accompanied by the risks commonly encountered in
making acquisitions of companies, products and technologies. Such risks include,
among other things, the difficulty associated with assimilating the operations
and personnel of the acquired companies, the potential disruption of the
Company's ongoing business, the inability of management to maximize the
financial and strategic position of the Company through the successful
integration of acquired technology and rights, additional expenses associated
with the amortization of acquired intangible assets, the maintenance of uniform
standards, controls, procedures and policies and the impairment of relationships
with employees and customers as a result of the integration of new management
personnel. There can be no assurance that the Company will be successful in
overcoming these risks or any other problems encountered in connection with any
such acquisitions. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Potential
Fluctuations in Quarterly Results."
12
<PAGE>
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATED ENTITIES
The Company's directors, executive officers and entities affiliated with
them will, in the aggregate, beneficially own approximately 53.8% of the
Company's outstanding shares of Common Stock following this Offering (52.1% if
the Underwriters' over-allotment option is exercised in full). These
stockholders, if acting together, would be able to significantly influence all
matters requiring approval by the stockholders of the Company, including the
election of directors and the approval of mergers or other business combination
transactions. See "Principal and Selling Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Company's Common Stock in the
public market following this Offering could adversely affect the market price of
the Common Stock. The number of shares of Common Stock available for sale in the
public market is limited by restrictions under the Securities Act of 1933, as
amended (the "Securities Act"), and lock-up agreements under which all
directors, officers and other stockholders of the Company have agreed not to
sell or otherwise dispose of any of their shares within the 180-day period
following this Offering without the prior written consent of UBS Securities LLC.
However, UBS Securities LLC may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to such lock-up
agreements. See "Shares Eligible for Future Sale" and "Underwriting."
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that may discourage proposals or bids to acquire the Company. These
provisions could limit the price that investors might be willing to pay for
shares of the Company's Common Stock. Certain of such provisions allow the
Company to issue Preferred Stock, the rights and preferences of which may be
specified by the Board of Directors at any time prior to issuance, without
further stockholder approval, which could have the effect of delaying, deferring
or preventing a change in control of the Company. In addition, the Company's
Certificate of Incorporation contains a provision for the Board of Directors to
be divided into three classes, which may adversely affect the ability of a third
party to gain control of the Company's Board of Directors through a proxy
contest or otherwise. The Company also will be subject to Section 203 of the
Delaware General Corporation Law which, under certain circumstances, could
delay, defer or prevent a business combination with an "interested stockholder."
See "Description of Capital Stock."
NO PUBLIC MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that a regular trading market will develop
and continue after this Offering or that the market price of the Common Stock
will not decline below the initial public offering price. The initial public
offering price will be determined through negotiations between the Company and
the Representatives of the Underwriters and may not be indicative of the market
price of the Common Stock following this Offering. Among the factors to be
considered in such negotiations are prevailing market conditions, certain
financial information of the Company, market valuations of other companies that
the Company and the Representatives of the Underwriters believe to be comparable
to the Company, estimates of the business potential of the Company, the present
state of the Company's development and other factors deemed relevant. The stock
markets have experienced price and volume fluctuations that have particularly
affected the stocks of technology companies, resulting in changes in the market
prices of the stocks of many companies that may not have been directly related
to the operating performance of those companies. Such broad market fluctuations
may adversely affect the market price of the Common Stock following this
Offering. In addition, the market price of the Common Stock following this
Offering may be highly volatile. Factors such as variations in the Company's
financial results, comments by securities analysts, announcements of
technological innovations or new products by the
13
<PAGE>
Company or its competitors, changing government regulations, developments
concerning the Company's proprietary rights or litigation may have a material
adverse effect on the market price of the Common Stock. See "Underwriting."
DILUTION
Assuming an initial public offering price of $11.00 per share (the mid-point
of the range set forth on the cover page of this Prospectus), investors
purchasing shares of Common Stock in this Offering will incur immediate and
substantial dilution in net tangible book value of the Common Stock of $8.48 per
share. To the extent that currently outstanding options and warrants to purchase
shares of Common Stock are exercised, there will be further dilution. See
"Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,600,000 shares of
Common Stock offered hereby are estimated to be approximately $36,200,000
($41,700,000 if the Underwriters' over-allotment option is exercised in full) at
an assumed initial public offering price of $11.00 per share, after deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company.
EarthLink expects to use the net proceeds of this Offering to finance
enhancements to the Company's network infrastructure (including leasehold
improvements and investments in network equipment), to fund new service and
product introductions, and for working capital and other general corporate
purposes. The Company also anticipates that it may use a portion of the net
proceeds to acquire complementary product lines, technology, equipment, other
companies or interests in other companies. While the Company from time to time
has engaged in preliminary discussions concerning possible acquisitions,
investments or joint ventures, it has no present understandings, commitments,
agreements or active negotiations with respect to any such transaction.
Pending such uses, the net proceeds of this Offering will be invested in
short-term, investment grade, interest-bearing securities. The Company believes
that the net proceeds from this Offering, together with other available cash,
including any net cash flow from operations, will be sufficient to meet the
Company's operating expenses and capital requirements for at least the next 12
months. See "Risk Factors -- Future Additional Capital Requirements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has not paid any dividends since its inception and does not
intend to pay any dividends in the foreseeable future. Future cash dividends, if
any, will be determined by the Board of Directors.
14
<PAGE>
CAPITALIZATION
The following table sets forth as of March 29, 1996 (i) the capitalization
of the Company (after giving effect to the Company's proposed reincorporation as
a Delaware corporation) and (ii) the capitalization of the Company as adjusted
to reflect the reincorporation and the sale of the 3,600,000 shares of Common
Stock being offered hereby at an assumed initial public offering price of $11.00
per share and the application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 29, 1996
------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capitalized lease obligations, net of current portion.................................. $ 1,709 $ 1,709
----------- -----------
Stockholders' equity...................................................................
Preferred Stock, $0.01 par value, 10,000,000 shares authorized; none issued and
outstanding, actual and as adjusted................................................. -- --
Common Stock, $0.01 par value, 50,000,000 shares authorized; 10,255,300 issued and
outstanding, actual; 13,855,300 shares issued and outstanding, as adjusted (1)...... 102 138
Additional paid-in capital............................................................. 5,412 41,582
Common Stock pending issuance (2)...................................................... 5,931 5,931
Warrants to purchase Common Stock...................................................... 228 228
Accumulated deficit.................................................................... (9,876) (9,876)
----------- -----------
Total stockholders' equity..................................................... 1,797 38,003
----------- -----------
Total capitalization........................................................... $ 3,506 $ 39,712
----------- -----------
----------- -----------
</TABLE>
- -------------
(1) As of May 31, 1996, there were 11,970,465 shares of Common Stock
outstanding, an amount which excludes (i) 1,822,750 shares of Common Stock
subject to options outstanding under the Company's 1995 Stock Option Plan at
a weighted average exercise price of $3.51 per share, (ii) 1,880,654 shares
of Common Stock subject to outstanding warrants and non-plan stock options
at a weighted average exercise price of $1.75 per share, (iii) 677,250 and
125,000 shares of Common Stock reserved for future grant of options under
the Company's 1995 Stock Option Plan and Directors Stock Option Plan,
respectively, and (iv) 920,000 shares of Common Stock reserved for future
issuance pursuant to warrants that the Company has made commitments to
issue. See "Capitalization," "Management -- 1995 Stock Option Plan,"
"Management -- Directors Stock Option Plan," "Description of Capital Stock"
and Notes 7 and 11 of Notes to Financial Statements.
(2) Represents shares of Common Stock pending issuance as of March 29, 1996 in
connection with the Company's private placement of 1,704,920 shares of
Common Stock for aggregate proceeds to the Company of approximately
$8,661,000, which was consummated in May 1996. Upon consummation of the
private placement, the net proceeds were recorded as Common Stock and
additional paid-in capital. See Note 11 of Notes to Financial Statements.
15
<PAGE>
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
March 29, 1996 was $1,797,000, or approximately $0.16 per share, including
Common Stock pending issuance as if such shares had been issued at March 29,
1996. Pro forma net tangible book value per share represents the amount of the
Company's total tangible assets less total liabilities, divided by the pro forma
number of shares of Common Stock outstanding. Net tangible book value dilution
per share represents the difference between the amount per share paid by
purchasers of shares of Common Stock in the Offering made hereby and the net
tangible book value per share of Common Stock immediately after completion of
this Offering. After giving effect to the sale by the Company of the 3,600,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $11.00 per share and after deducting estimated underwriting discounts
and commissions and offering expenses payable by the Company, the pro forma net
tangible book value of the Company as of March 29, 1996 would have been
$38,003,000, or approximately $2.52 per share, including Common Stock pending
issuance as if such shares had been issued at March 29, 1996. This represents an
immediate increase in the net tangible book value of $2.36 per share to existing
stockholders and an immediate dilution in net tangible book value of $8.48 per
share to new investors purchasing shares of Common Stock in this Offering.
The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
Initial public offering price per share........................... $11.00
<S> <C> <C>
Pro forma net tangible book per share value as of March 29,
1996............................................................. $ 0.16
Increase per share attributable to the Offering................... 2.36
---------
Pro forma net tangible book value after this Offering............. 2.52
---------
Dilution per share to new investors............................... $ 8.48
---------
---------
</TABLE>
The following table sets forth, on an as adjusted basis as of March 29,
1996, the difference between the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share paid
by the existing holders of Common Stock and by the new investors, before
deducting estimated underwriting discounts and commissions and offering expenses
payable by the Company, at an assumed initial public offering price of $11.00
per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------------- --------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 10,255,300 74.0% $ 5,514,000 12.2% $ .54
New investors........................ 3,600,000 26.0 39,600,000 87.8 11.00
------------- ----- -------------- ----- -----------
Total.............................. 13,855,300 100.0% $ 45,114,000 100.0%
------------- ----- -------------- -----
------------- ----- -------------- -----
</TABLE>
The foregoing table (i) assumes no exercise of the Underwriters'
over-allotment option and (ii) excludes 3,703,404 shares of Common Stock
reserved for issuance pursuant to stock options and warrants outstanding as of
May 31, 1996, at a weighted average exercise price of $2.62 per share, 677,250
shares of Common Stock reserved for future grant under the Company's 1995 Stock
Option Plan and 125,000 shares of Common Stock reserved for future grant under
the Company's Directors Stock Option Plan. See Notes 7 and 11 of Notes to
Financial Statements.
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Prospectus. The statement of operations data for the period from inception
(May 24, 1994) through December 31, 1994, and for the year ended December 31,
1995, and the balance sheet data as of December 31, 1994 and 1995, have been
derived from financial statements audited by Price Waterhouse LLP, independent
accountants. The selected financial data for the three months ended March 31,
1995 and March 29, 1996 have been derived from the Company's unaudited financial
statements. In the opinion of management, the unaudited financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results for the periods presented.
<TABLE>
<CAPTION>
INCEPTION
(MAY 26,
1994) THREE MONTHS ENDED
THROUGH YEAR ENDED ----------------------------
DECEMBER 31, DECEMBER MARCH 31, MARCH 29,
1994 31, 1995 1995 1996
------------ ----------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Recurring revenues....................... $ 53 $ 2,422 $ 113 $ 2,628
Other revenues........................... 58 606 70 790
------------ ----------- ------------- -------------
Total revenues......................... 111 3,028 183 3,418
Operating costs and expenses:
Cost of recurring revenues............... 4 1,055 60 1,698
Cost of other revenues................... 12 349 6 569
Sales and marketing...................... 37 3,711 124 2,209
General and administrative............... 168 2,062 141 1,632
Operations and customer support.......... 38 1,869 104 2,098
------------ ----------- ------------- -------------
Total operating costs and expenses..... 259 9,046 435 8,206
------------ ----------- ------------- -------------
Loss from operations....................... (148) (6,018) (252) (4,788)
Interest expense........................... -- (136) (19) (100)
Interest income............................ -- 34 -- 19
------------ ----------- ------------- -------------
Net loss............................... $ (148) $ (6,120) $ (271) $ (4,869)
------------ ----------- ------------- -------------
------------ ----------- ------------- -------------
Net loss per share (1)..................... $ (0.01) $ (0.47) $ (0.02) $ (0.35)
------------ ----------- ------------- -------------
------------ ----------- ------------- -------------
Weighted average shares outstanding (1).... 11,716 13,159 12,594 13,717
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 29,
1994 1995 1996
------------ ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital deficit.......................... $ (62) $ (1,976) $ (3,016)
Total assets..................................... 186 4,874 8,878
Total liabilities................................ 89 4,584 7,081
Accumulated deficit.............................. (148) (5,007) (9,876)
Total stockholders' equity....................... 97 290 1,797
</TABLE>
- -------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of weighted average shares outstanding used in
the net loss per share computation.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS.
OVERVIEW
EarthLink, founded in 1994, is a leading branded provider of reliable,
easy-to-use Internet services. The Company began offering its services in July
1994. Since inception, the growth in the Company's customer base along with an
expansion of service offerings has resulted in a significant period-to-period
increase in revenues and related expenses.
The Company's standard EarthLink Network service provides unlimited Internet
access for a one-time registration fee of $25.00 and a flat monthly fee of
$19.95, which is generally collected from a pre-authorized credit card account.
In addition to its standard service, the Company offers a number of premium,
add-on and other services which can increase the speed of, or add features to,
the capabilities of the standard service. Prices and billing methods for
premium, add-on and other services vary. See "Business -- EarthLink's Services
and Products."
The Company has only a limited operating history upon which an evaluation of
its prospects can be made. Such prospects must be considered in light of the
substantial risks, expenses and difficulties encountered by new entrants into
the Internet services industry. The Company has experienced net losses in each
quarter since it commenced operations and had net losses of approximately $6.3
million from inception through 1995 and of approximately $4.9 million for the
three months ended March 29, 1996. As of March 29, 1996, the Company had an
accumulated deficit of approximately $9.9 million (exclusive of $1.3 million of
losses incurred while the Company was an S Corporation for tax purposes, which,
upon the Company's conversion to C Corporation status in June 1995, were charged
to the Company's capital accounts). The Company expects that it is likely to
continue to incur net losses at least through the end of 1997 as it continues to
expend substantial resources to build its infrastructure, develop new service
and product offerings and build its sales and marketing and administrative
organizations. There can be no assurance that the Company will achieve or
sustain profitability or positive cash flow from its operations.
The Company's strategy is to rapidly expand its customer base and increase
market share. In addition, the Company intends to increase its investment in
sales and marketing. Also, the Company plans to add administrative
infrastructure, increase customer support capability and build network
operations capacity to meet customer demand. The sales and marketing and other
costs to the Company of acquiring new customers are substantial relative to the
monthly fees derived from such customers. Accordingly, the Company's ability to
improve or sustain operating margins depends in part on its ability to retain
its existing customers, while continuing to attract new customers.
The market for the Company's services and products has only recently begun
to develop, is rapidly evolving and is characterized by an increasing number of
market entrants who have introduced new services for access to the Internet. The
Company and its prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in the new and rapidly evolving
market for Internet services and products. To address these risks, the Company
must, among other things, continue to attract, retain and motivate qualified
persons, and continue to upgrade its technologies and services. There can be no
assurance that the Company will be successful in addressing such risks.
18
<PAGE>
RESULTS OF OPERATIONS
ACCOUNTING PERIODS. The Inception Period reflects activity from May 26,
1994 through December 31, 1994. As of January 1, 1996, the Company changed its
fiscal year from a calendar year end to a 52 or 53 week year ending on the last
Friday in December. Accordingly, each three-month period consists of 13 weeks
ending on the last Friday of that quarter.
REVENUES. Recurring revenues consist of monthly fees charged to customers
for Internet access and other ongoing services. Other revenues generally
represent one-time setup fees. Recurring revenues are recognized pro rata over
the period for which the services are performed. Other revenues are recognized
as earned.
For the Inception Period and the year ended December 31, 1995, recurring
revenues were approximately $53,000 and $2.4 million, respectively. Other
revenues for the same periods were approximately $58,000 and $606,000,
respectively. Recurring revenues were approximately $113,000 and $2.6 million
for the three months ended March 31, 1995 and March 29, 1996, respectively.
Other revenues were approximately $70,000 and $790,000 for the three months
ended March 31, 1995 and March 31, 1996, respectively. The increase in recurring
revenues in 1995 as compared to the Inception Period is primarily attributable
to the Company being operational for the full year in 1995 and an increase in
the number of customers during that period. Revenues for the three months ended
March 29, 1996 increased over revenues for the three months ended March 31, 1995
as a result of an increase in the number of customers. The increase in other
revenues for 1995 as compared to the Inception Period is primarily attributable
to an increase in the number of customers added in 1995 and one-time set-up fees
collected from customers. Other revenues for the three months ended March 29,
1996 increased over other revenues in the three months ended March 31, 1995 as a
result of an increase in the number of new customers during that period. From
time to time, the Company has waived, and may in the future waive, the one-time
set-up fee it charges new customers. To the extent the Company continues or
increases this practice, the Company expects to derive a lesser portion of its
future other revenues from one-time set-up fees.
COST OF REVENUES. Cost of revenues consists of cost of recurring revenues
and cost of other revenues. Cost of recurring revenues principally includes
telecommunication expenses and depreciation expense on equipment used in network
operations for ongoing customer services. Included in telecommunication cost are
fees paid to UUNET for local access to UUNET's system of POPs. Cost of other
revenues principally includes expenses related to the registration of new
customers. These costs include licensing fees for software, software duplication
costs and commissions paid to third parties for referring new customers to the
Company.
For the year ended December 31, 1995, cost of recurring revenues increased
to approximately 44% of recurring revenues, up from 8% of recurring revenues for
the Inception Period. This increase was due to increased hourly customer usage
and the Company's expansion of its POP sites. Cost of recurring revenues for the
three months ended March 29, 1996 increased to approximately 65% of recurring
revenues, up from 53% of recurring revenues for the three months ended March 31,
1995 due to increased hourly customer usage and the Company's expansion to
nationwide service through its relationship with UUNET. As the Company continues
to expand, the Company anticipates that it will build and use Company-owned POPs
in those geographical areas where there is a sufficient concentration of
customers to support the cost of such investment.
The Company's customers generally pay a fixed monthly fee for the Company's
Internet services. Under the Company's agreement with UUNET, the Company pays to
UUNET a fixed monthly fee per customer plus a variable amount based on customer
usage in excess of a threshold number of hours per month. The Company has
recently experienced increasing average per-customer usage of its Internet
services by customers accessing the Internet through UUNET. If this trend
continues and the average per-customer monthly usage exceeds the threshold
number of hours, the Company's operating margins will be adversely affected
which could, in turn, have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Dependence
on UUNET" and "Business -- Customers, POPs and Network Infrastructure."
19
<PAGE>
SALES AND MARKETING. Sales and marketing expenses consist primarily of
sales commissions, salaries, cost of promotional material, advertising, travel
and third party sales commissions. Sales and marketing expenses were
approximately $37,000, or 33% of revenues, and $3.7 million, or 123% of
revenues, for the Inception Period and the year ended December 31, 1995,
respectively. Sales and marketing expenses were approximately $124,000, or 68%
of revenues, and $2.2 million, or 65% of revenues, for the three months ended
March 31, 1995 and March 29, 1996, respectively. These period-to-period
increases have primarily resulted from increased emphasis on marketing the
Company's services, expanding sales and marketing efforts nationwide, increased
sales commissions and increased marketing headcount. The Company intends to
aggressively promote the EarthLink brand and as a result expects further
significant increases in sales and marketing expenses in future periods. The
Company does not capitalize costs associated with the acquisition of customers.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of costs associated with finance and accounting, human
resources, legal expenses and expenses related to certain executive officers.
General and administration expenses were approximately $168,000 and $2.1 million
for the Inception Period and the year ended December 31, 1995, respectively.
General and administration expenses were approximately $141,000 and $1.6
million, for the three months ended March 31, 1995 and March 29, 1996,
respectively. Since inception, general and administrative expenses have
increased as a result of increased employee headcount, rent and other general
and administrative expenses as the Company focused on building an administrative
infrastructure in anticipation of an increase in the number of customers and
employees. During the three months ended March 29, 1996, the Company hired a
number of senior management personnel and moved into a new headquarters
building, which resulted in a significant increase in general and administrative
expenses as compared to the same period in 1995. Management intends to implement
a new management information system and continue to expand staff in order to
support customer growth. As a result, the Company expects general and
administrative expenses to increase in future periods.
OPERATIONS AND CUSTOMER SUPPORT. Operations and customer support expenses
consist primarily of expenses associated with technical and billing support to
register and maintain customer accounts with the Company. Operations and
customer support expenses were approximately $38,000, or 34% of revenues, and
$1.9 million, or 62% of revenues, for the Inception Period and the year ended
December 31, 1995, respectively. Operations and customer support expenses were
approximately $104,000, or 57% of revenues, and $2.1 million, or 61% of
revenues, for the three months ended March 31, 1995 and March 29, 1996,
respectively. These expenses have increased significantly since the Company's
inception. This trend reflects the costs associated with building a customer
service organization to support anticipated customer growth as well as the
Company's current customers. The Company intends to continue to increase
expenditures for operations and customer support.
INCOME TAXES. No provision for federal or state income taxes has been
recorded as the Company incurred net operating losses through December 31, 1995.
At December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $5.0 million, which begin to expire
in 2010, and for state income tax purposes of approximately $2.5 million, which
begin to expire in 2001. The Tax Reform Act of 1986 includes provisions which
limit the net operating loss carryforwards for use in a given year if
significant ownership changes have occurred. The Company expects that this
Offering will result in an ownership change limiting the Company's ability to
utilize net operating loss carryforwards to offset future income, if any. The
Company has provided a full valuation allowance on the deferred tax asset
because of the uncertainty regarding realizability. Prior to July 1995, the
Company was taxed as an S Corporation under the Internal Revenue Code. As such,
losses totaling approximately $1.3 million flowed directly to the stockholders
and are not included in the amount of net operating loss carryforwards.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results have fluctuated significantly in the past
and will likely continue to fluctuate significantly in the future as a result of
a variety of factors, many of which are beyond the Company's control. These
factors include the rates of and costs associated with new customer acquisition,
customer retention, capital expenditures and other costs relating to the
expansion of operations, the timing of new service and product announcements,
changes in the pricing policies of the Company and its competitors,
20
<PAGE>
market acceptance of new and enhanced versions of the Company's services and
products, changes in operating expenses, including telecommunication costs,
changes in the Company's strategy, personnel changes, the introduction of
alternative technologies, the effect of potential acquisitions, increased
competition in the Company's markets and other general economic factors. In
addition, a relatively large portion of the Company's expenses are fixed, and
therefore the Company's operating margins are particularly sensitive to
fluctuations in revenues. Due to these factors, in some future quarter the
Company's operating results may fall below the expectations of securities
analysts and investors. In such event, the market price of the Company's Common
Stock would likely be materially and adversely affected.
In May 1996, the Company entered into an agreement with National Media
Corporation ("NMC"), a producer of infomercials and commercials, pursuant to
which NMC will produce and broadcast 15-second and 60-second commercials for
EarthLink's services and products. Under this agreement, in addition to certain
fees payable to NMC, the Company has agreed to issue NMC warrants to purchase up
to 700,000 shares of Common Stock, depending on the number of customers
generated by this relationship. The exercise price of any warrants earned
through December 31, 1997 will be $4.88 per share, and thereafter the exercise
price will be the fair market value of the Common Stock on the date of grant.
Upon issuance of any of the warrants, the Company will be required to record in
the quarter in which such warrant is issued a non-cash charge against earnings
in an amount equal to the fair value of the warrant on the date of grant. The
Company anticipates that, based on its obligation to NMC to issue a fixed number
of warrants upon completion of production and approval of the commercials, it
will issue 100,000 of these warrants to NMC in the third quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through a combination of
cash flow from operations, private sales of equity securities and borrowings
from third parties. The Company's operating activities used net cash of
approximately $3.6 million and $2.8 million during 1995 and the three months
ended March 29, 1996, respectively. During 1995 and the three months ended March
29, 1996, net cash used in operations resulted primarily from net losses, offset
by increases in trade accounts payable.
Cash used by investing activities has consisted primarily of equipment
purchases for POP and network expansion. For the year ended December 31, 1995
and the three months ended March 29, 1996, capital expenditures amounted to
approximately $2.8 million and $4.2 million, respectively. Including the $4.2
million spent during the first three months of 1996, the Company anticipates
investing approximately $20.0 million during 1996 on network enhancements,
including leasehold improvements and investments in network equipment.
Cash from financing activities provided the Company with approximately $8.2
million and $6.7 million during 1995 and the three months ended March 29, 1996,
respectively. The Company's financing activities have consisted of the private
sale of Common Stock and capital lease transactions, primarily for equipment.
From inception through March 29, 1996, the Company raised $12.7 million and $2.7
million through the private sale of Common Stock and capital lease obligations,
respectively.
As of December 31, 1995 and March 29, 1996, the Company had cash and cash
equivalents of approximately $290,000 and $950,000, respectively, and negative
working capital of approximately $2.0 million and $3.0 million, respectively.
The Company also has $500,000 available under a bank line of credit agreement,
which is secured by a certificate of deposit of $500,000. The Company recently
received a commitment from certain entities and individuals, some of whom may be
directors, officers and principal stockholders of the Company, to provide a
short-term line of credit that permits the Company to borrow up to $3,000,000 at
an interest rate of 10% per annum. This commitment contemplates (i) the payment
of a commitment fee equal to 1.5% of the amount committed, (ii) final maturity
of any amounts borrowed at May 30, 1997 and (iii) the issuance to such entities
and individuals of 200,000 warrants to purchase Common Stock at an exercise
price of $10.00 per share.
EarthLink expects to use the net proceeds of this Offering to finance
enhancements to the Company's network infrastructure (including leasehold
improvements and investments in network equipment), to fund
21
<PAGE>
new service and product introductions, and for working capital and other general
corporate purposes. The Company also anticipates that it may use a portion of
the net proceeds to acquire complementary product lines, technology, equipment,
other companies or interests in other companies. While the Company from time to
time has engaged in preliminary discussions concerning possible acquisitions,
investments or joint ventures, it has no present understandings, commitments,
agreements or active negotiations with respect to any such transaction. See "Use
of Proceeds."
Pending such uses, the net proceeds of this Offering will be invested in
short-term, investment grade, interest-bearing securities. The Company believes
that the net proceeds from this Offering, together with other available cash,
including any net cash flow from operations, will be sufficient to meet the
Company's operating expenses and capital requirements for at least the next 12
months. The Company's capital requirements depend on numerous factors, including
the rate of market acceptance of the Company's services, the Company's ability
to maintain and expand its customer base, the level of resources devoted to
expanding the Company's marketing and sales organization and the Company's
research and development activities, the availability of hardware and software
provided by third-party vendors, the rate of expansion of the Company's network
infrastructure and other factors. The timing and amount of such capital
requirements cannot accurately be predicted. If capital requirements vary
materially from those currently planned, the Company may require additional
financing. The Company has no commitments for any additional financing, and
there can be no assurance that any such commitments can be obtained on favorable
terms, if at all. Any additional equity financing may be dilutive to the
Company's stockholders, and debt financing, if available, may involve
restrictive covenants with respect to dividends, raising future capital and
other financial and operational matters. If the Company is unable to obtain
additional financing as needed, the Company may be required to reduce the scope
of its operations or its anticipated expansion, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
EarthLink's future success is substantially dependent on continued growth in
the use of the Internet. Rapid growth in the use of and interest in the
Internet, and in particular the World Wide Web, is a recent phenomenon and there
can be no assurance that Internet usage will become widespread or that extensive
content will continue to be provided over the Internet. The Internet may not
prove to be viable for a number of reasons, including potentially inadequate
development of the necessary infrastructure, such as a reliable network
backbone, or timely development of performance improvements. To the extent that
the Internet continues to experience significant growth in the number of users
and level of use, there can be no assurance that the Internet infrastructure
will continue to be able to support the demands placed on it by such potential
growth. If use of the Internet does not continue to grow, or if the Internet
infrastructure does not effectively support growth that may occur, the Company's
business, results of operations and financial condition would be materially and
adversely affected.
22
<PAGE>
BUSINESS
OVERVIEW
EarthLink, founded in 1994, is a leading branded provider of reliable,
easy-to-use Internet services. Since its founding, the Company has focused on
providing non-technical users with a satisfying Internet experience and has
concentrated on specific opportunities in the fragmented Internet services
market where it can add value. The Company provides its services through the
EarthLink Network TotalAccess-TM- software package, a tool that enables Internet
access via an open, non-proprietary architecture. In addition, the Company
promotes the EarthLink brand and seeks to expand its customer base through
strategic partnerships and affinity marketing agreements with leading content,
publishing, entertainment and gaming companies, including Activision, CNN
Interactive, Columbia TriStar, Graphix Zone and Macmillan Publishing USA.
EarthLink has taken a strategic approach to network development. To increase its
national presence while minimizing capital costs, the Company leases nationwide
POPs from UUNET, while maintaining the flexibility to establish Company-owned
POPs in those geographical areas in which there is sufficient concentration of
customers to support such investment. Customers can access the EarthLink service
through a network of 19 Company-owned and 284 UUNET POPs across the United
States and in Canada. EarthLink provides unlimited Internet access for a flat
monthly fee and offers a number of other services which can increase the speed
of, or add features to, the capabilities of its standard service. EarthLink has
grown from approximately 30,000 customers at the end of 1995 to approximately
100,000 customers at the end of May 1996.
INDUSTRY BACKGROUND
The Internet is a collection of computer networks linking millions of public
and private computers around the world. Historically, the Internet was used by
government agencies and academic institutions to exchange information, publish
research and transfer electronic mail. A number of factors, including the
proliferation of communication-enabled personal computers, the availability of
intuitive graphical user interface software and the wide accessibility of an
increasingly robust network infrastructure, have combined to allow non-technical
users to easily access the Internet and, in turn, have produced rapid growth in
the number of Internet users. IDC estimates that the number of Internet users
was approximately 56 million at the end of 1995 and that this number will reach
200 million by the end of 1999.
This growth, combined with the emergence of the World Wide Web, the
graphical, multimedia environment of the Internet, has resulted in the
development of the Internet as a new mass communications medium. The ease and
speed of publishing, distributing and communicating text and graphics over the
Internet has lead to a proliferation of Internet-based content, including online
magazines, news feeds, interactive games and a wealth of educational and
entertainment information, as well as to the development of online communities.
In addition, the reduced cost of executing transactions over the Internet
provides individuals and organizations with a new means to conduct business.
These factors have created a rapidly growing market for Internet services.
To date, users have gained access to the Internet primarily through two types of
service providers. The first of these, online service providers, are primarily
focused on the presentation of proprietary content to subscribers by means of
closed networks, although these providers typically offer limited access to the
Internet from their networks. This access often tends to be slow and expensive
for the customer. The second of these, ISPs, offer direct access to the Internet
at a lower price, but often provide an uneven quality of service to their
customers. New Internet users have experienced busy dial-up lines, dropped
connections, ineffective technical support and software that can be difficult to
install and configure. These limitations, together with the volume and lack of
organization of the information available on the Internet, have precluded
non-technical users from fully enjoying the expanding resources available on the
Internet. The Company believes that the next phase of growth in the Internet
services market will require providers to address the needs of non-technical
users and to shift from providing network infrastructure and undifferentiated
access to providing value-added, distinct services which build customer
satisfaction and loyalty.
23
<PAGE>
THE EARTHLINK SOLUTION
EarthLink was founded in 1994 to become a leading branded provider of
Internet services. The Company facilitates and enhances the quality and
productivity of its customers' Internet experience by providing capabilities
which enable its customers to navigate and exploit the resources of the
Internet. The Company has grown from approximately 30,000 customers at the end
of 1995 to approximately 100,000 customers at the end of May 1996, and believes
it is well-positioned to capitalize on the continued growth of the Internet.
EarthLink attributes its rapid growth to the following key elements:
FOCUS ON CUSTOMER NEEDS. EarthLink has designed its service in an effort to
minimize a number of difficulties that non-technical users encounter in gaining
access to the Internet. These include software that is difficult to install,
busy signals, poor network performance and insufficient customer support.
EarthLink continues to invest in building its service capabilities to address
these needs. For example, the Company has developed the EarthLink Network
TotalAccess software package with simple point and click functionality, thereby
reducing many of the start-up problems faced by customers signing up for
Internet service.
PROVIDE A USEFUL AND ENJOYABLE INTERNET EXPERIENCE. As the level and scope
of resources available on the Internet increase and the quality of content
improves, the Company believes users will increasingly desire services and
products that enhance the quality and productivity of their Internet experience.
The Company also believes that EarthLink Network provides the capability for
customers to transform the resources of the Internet into information,
education, communication, entertainment and a sense of community. To meet these
customer needs, EarthLink has developed resources to help customers navigate the
Internet, such as the EarthLink home page; BLINK, the Company's newsletter; and
"Getting the Most Out of EarthLink," a book by Sky Dayton, EarthLink's founder
and Chairman. In addition, because customers increasingly desire access to
enhanced services on the Internet, the Company has recently begun to offer
online retailing and is currently offering an online multi-player gaming
capability.
CAPITALIZE ON MARKET SEGMENTATION. The Company believes that as the
Internet services market has matured, providers of Internet services have begun
to focus their efforts on specific segments of this market. For example, several
companies, such as UUNET, provide Internet infrastructure while other companies,
such as Netscape, focus on providing Internet software tools. In contrast, the
Company is focusing on the customer's experience with the Internet, and
leveraging the infrastructure and software development investments of others.
This approach gives the Company flexibility and speed in expanding its service
coverage, relieves the Company from the task of network management, reduces its
operating costs and allows it to focus on meeting customer needs.
STRATEGY
The Company's objective is to establish EarthLink as the leading branded
provider of Internet services. To achieve this objective, the Company seeks to:
RAPIDLY EXPAND ITS CUSTOMER BASE. The Company believes that the Internet
services market is in its early stages of development and is significantly
underpenetrated. The Company's goal is to rapidly capture an increasing share of
this untapped market. Thus, EarthLink is aggressively investing in sales and
marketing, particularly strategic and affinity marketing relationships, and the
promotion of its brand name, and is enhancing its operational infrastructure.
The Company believes that by attracting and retaining a large and growing
customer base, it will be well-positioned to achieve cost efficiencies and
generate new opportunities in the future.
LEVERAGE AFFINITY MARKETING RELATIONSHIPS. EarthLink has aggressively
established strategic relationships with affinity marketing partners to expand
the reach of its marketing efforts. Through these relationships, EarthLink
partners with leading media and consumer products companies to promote and
distribute EarthLink's services to the partner's customer base. For example,
Macmillan Publishing USA bundles EarthLink Network TotalAccess with several
Internet-related book titles. These relationships are cost-effective and enhance
the EarthLink brand through its association with leading media and consumer
products companies.
24
<PAGE>
PROMOTE THE EARTHLINK BRAND. The Company believes the EarthLink name has
significant brand potential and that cultivating a distinct brand image will be
critical to differentiating its service and building a sense of community. The
Company intends to maximize its brand potential, first, by providing consistent,
high-quality services and, second, by conducting marketing activities that
reinforce the Company's image.
ESTABLISH EARTHLINK AS ITS CUSTOMERS' PRINCIPAL GATEWAY FOR WEB
BROWSING. The Company believes that as the volume of information available on
the Web proliferates, EarthLink's customers will increasingly desire a resource
to organize and manage the abundance of available information. EarthLink's
in-house staff actively seeks out content from across the Internet and
categorizes it into subject areas of interest organized on the EarthLink home
page under topics such as "What's Hot," "Hollywood," "News," "Finance" and
"Games." This approach to providing content promotes the Company's strategy of
serving as its customers' principal resource for utilizing and experiencing the
Internet.
LEVERAGE THIRD-PARTY NETWORK INFRASTRUCTURE. EarthLink has taken a
strategic approach to network development. To increase its national presence
while minimizing capital costs, the Company leases nationwide POPs from UUNET,
while maintaining the flexibility to establish Company-owned POPs in those
geographical areas in which there is sufficient concentration of customers to
support such investment. In addition, the Company's network infrastructure uses
non-proprietary standards and an open architecture. These approaches have
reduced the Company's capital expenditures and allowed EarthLink to quickly
establish national network coverage. More importantly, these approaches permit
the Company to focus on meeting customer needs rather than managing the network
itself.
ENHANCE AND DEVELOP SERVICE OFFERINGS FOR BUSINESS CUSTOMERS. The Company
believes that the opportunity to provide Internet services to business customers
is underdeveloped and has been penetrated only to a limited extent. Earthlink
has targeted this segment for future growth. The Company also believes that key
features of its consumer-oriented service, in particular its ease-of-use, have
strong appeal to business customers. Therefore, EarthLink has begun to emphasize
a variety of services designed to appeal to them. In addition, the Company is
investing additional resources in sales and marketing and customer service
efforts directed at this growing market segment.
EARTHLINK'S SERVICES AND PRODUCTS
EarthLink provides a variety of competitively-priced Internet services to
individual and business customers. The Company makes its services available
through its EarthLink Network TotalAccess software package, a tool that enables
access to the Internet via an open, non-proprietary architecture. This software
incorporates a telephone dialer and email functionality with several leading
third-party Internet access tools, including Netscape Navigator, thereby
providing a functional, easy-to-use Internet access solution for Windows 3.1,
Windows 95 and Macintosh platforms. EarthLink Network TotalAccess installation
software automatically installs these and other software applications on the
customer's computer. The simple point-and-click functionality of EarthLink
Network TotalAccess, combined with its easy-to-use registration module, permits
online credit card registration, allowing new EarthLink customers to quickly
access the Internet.
The Company's Internet services and products include the following:
STANDARD EARTHLINK NETWORK INTERNET SERVICES
EarthLink provides its customers with a core set of functionalities through
its standard Internet service, which provides unlimited access to the Internet
as well as the other features and services for a flat monthly fee of $19.95 plus
a one-time setup fee of $25.00. The following functionalities are included in
the standard EarthLink service:
INTERNET ACCESS. EarthLink provides customers with direct high-speed access
to the Internet and the World Wide Web in a manner that is reliable and easy to
use.
EARTHLINK NETWORK WEB SITE. EarthLink has developed and maintains its own
Web site, containing more than 800 pages. EarthLink's in-house staff actively
seeks out content from across the Internet and categorizes
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it into subject areas of interest organized on the EarthLink home page under
topics such as "What's Hot," "Hollywood," "News," "Finance" and "Games." The
Company's home page provides customers with a road map to the volumes of
information on the Internet. A customer can browse the page and click on topics
of interest in order to be linked to the desired information. In addition,
through the embedded functionality of Netscape Navigator, a customer can conduct
customized searches for other topics.
ELECTRONIC MAIL. Each customer is provided a mailbox, or address, from
which to send and receive electronic mail. Email functionality allows customers
to exchange an unlimited number of multimedia text, graphics and audio messages
with other EarthLink customers as well as with other Internet users.
PERSONAL WEB SITES. Each EarthLink customer is provided two megabytes of
disk space on the Company's Web server to create his or her own home page. This
enables each customer to participate in the Internet community by personally
adding content to the Internet and the Web.
PREMIUM EARTHLINK NETWORK SERVICES
In addition to its standard service, the Company offers a variety of premium
services, including the following:
BUSINESS WEB SITES. The Company provides space on its Web server for
commercial customers to publish their own home pages directly on EarthLink's
Internet backbone. Business Web Site monthly fees range from $30 to $175, plus
one-time setup fees of $225 to $1,495, depending on the size of the home page,
the traffic volume through the site and whether the site is a shared or unique
address. Each option is also available with an audio feature for an additional
charge. Volume surcharges apply.
ISDN CAPABILITY. EarthLink offers high-speed ISDN Internet access
communication lines for its Southern California business customers. ISDN
provides a faster, more efficient method for communicating digital data over
telephone lines. ISDN speeds are up to four times faster than conventional modem
speeds (up to 128 Kbps versus up to 28.8 Kbps). ISDN service charges range from
$45 to $575 per month depending on access speeds, connect time and other data
transfer metrics. One-time setup fees range from $50 to $750 depending on the
modem speed.
FRAME RELAY CAPABILITY. Frame relay enables direct, high-speed continuous
connection of an organization's internal local area network to the Internet
using dedicated circuits at speeds ranging from 56 Kbps to 1,544 Kbps. This
service enables businesses to connect an entire local area network or high-end
workstation to the Internet and provides the fastest data transfer rate
generally available. Frame relay is currently available only to the Company's
Southern California customers. Frame relay service fees range from $395 to $995
per month depending on access speeds, data throughput and other data transfer
metrics. One-time setup fees range from $495 to $1,245 depending on modem speed.
ADD-ON AND OTHER SERVICES
To augment its standard and premium services, the Company provides its
customers with the following add-on and other services:
ADDITIONAL MAILBOXES. The Company provides additional mailboxes for a per
mailbox setup fee of $9.95 and a monthly service fee of $4.95 for those
customers who require more than one mailbox for colleagues, employees or family
members.
DOMAIN NAME REGISTRATION. EarthLink provides unique domain names for those
customers who prefer an individualized address. Instead of
"[email protected]," the user Joe Smith may prefer the name "[email protected]."
Or a business user may find greater marketing presence by having a domain name
in the name of his business, such as "[email protected]." EarthLink charges $75 to
assist in establishing unique domain names for customers. Customers then pay an
annual renewal fee to an Internet domain registration agency.
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800 SERVICE. EarthLink provides 800 number dial-up service for customers
who do not have access to a local POP. EarthLink charges customers $24.95 per
month for five hours of 800 number service plus a one-time setup fee of $25.00.
Additional hours are $4.95 per hour.
PRODUCT DEVELOPMENT AND SERVICE ENHANCEMENT
EarthLink places significant emphasis on developing advanced features for
its service offerings, expanding and refining its services and further
developing its core enabling technologies. To this end, EarthLink's development
staff undertakes a number of product development and service enhancement
activities, including reviewing new third-party software products for potential
incorporation into the Company's EarthLink Network TotalAccess software package.
As an element of its ongoing efforts to enhance its customers' Internet user
experience, EarthLink also constantly updates and expands the online services
provided through the EarthLink Web site. These activities include organizing
Internet and Web content and the development of online guides, help screens and
other user services. The EarthLink Web site is updated daily.
EarthLink also actively develops additional high-quality services for its
customers' benefit. For example, the Company recently opened the EarthLink
online store, which offers EarthLink branded merchandise that online shoppers
may purchase by placing an order through the EarthLink Network via an online
credit card transaction. The Company intends to further develop its systems for
offering electronic retail services by establishing an online mall through which
it can "lease space" to businesses to advertise their products on and conduct
business over the Web through the EarthLink Network.
Additionally, the Company has introduced and plans to continue to develop an
online, multi-player computer gaming service that will allow users across the
Internet to play multimedia games through the EarthLink Network.
MARKETING
The Company markets and sells its services through an organization
consisting of 81 employees. The Company believes its marketing programs,
particularly its Affinity Marketing Partners Program, provide it with a
competitive advantage. EarthLink's sales and marketing effort consists of the
following programs:
AFFINITY MARKETING PARTNERS PROGRAM. EarthLink's Sales and Marketing
Department administers the Company's affinity marketing program. This program
promotes the Company through the distribution of the EarthLink Network
TotalAccess software package by its affinity marketing partners. These partners
typically bundle EarthLink Network TotalAccess disks with their own goods or
services. In certain instances the affinity partner may itself sell goods and
services over the Internet. In such a case, the partner's own customers require
access to the Internet, which can be provided by the bundled EarthLink Network
TotalAccess software. Through the affinity marketing program, EarthLink achieves
product distribution efficiencies and reductions in its customer acquisition
costs which are not available through other marketing strategies.
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EarthLink currently has approximately 90 affinity marketing relationships.
The following table identifies certain of EarthLink's affinity marketing
partners in a variety of industries.
<TABLE>
<S> <C>
PUBLISHING CATALOG/RETAIL
CMP Media, Inc./Windows Magazine Creative Computers
Imagine Publications MacMall/PCMall
Macmillan Publishing USA Manheim Auctions
NEWS/ENTERTAINMENT/MULTIMEDIA Micro Warehouse, Inc.
Activision Spiegel
CNN Interactive OTHER
Columbia TriStar Best Data Products
Graphix Zone American Heart Association
Index Stock Photo National Telephone and
Personal Training Systems Communications
Seattle Film Works
</TABLE>
CUSTOMER REFERRAL PROGRAM. The Company believes that one of its most
powerful marketing tools is its installed base of customers. In order to
encourage satisfied customers to refer other users, the Company provides an
incentive of one free month of standard EarthLink Internet service. The Company
estimates that in the first three months of 1996, approximately 13,000 new
customers were added through the referral program.
OTHER MARKETING ACTIVITIES. EarthLink exhibits at national trade shows such
as Comdex, MacWorld and OnLine Expo, as well as at numerous local and regional
trade shows. Additionally, the Company markets through trade publications and
bundles EarthLink Network TotalAccess with these publications, either as disks
which contain only the EarthLink Network TotalAccess software package or as
CD-ROMs which may include numerous other software applications. The Company has
also entered into an agreement with National Media Corporation ("NMC"), a
producer of infomercials and commercials, under which NMC will produce and
broadcast 15-second and 60-second commercials for EarthLink's services and
products. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Potential Fluctuations in Quarterly Results."
CUSTOMERS, POPS AND NETWORK INFRASTRUCTURE
The Company had approximately 100,000 customers at the end of May 1996.
EarthLink has taken a strategic approach to network development. To increase
its national presence while minimizing capital costs, the Company leases
nationwide POPs from UUNET, while maintaining the flexibility to establish
Company-owned POPs in those geographical areas in which there is a sufficient
concentration of customers to support such investment. This approach permits the
Company to focus on meeting customer needs rather than on managing network
infrastructure. Substantially all of the Company's customers access
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the EarthLink network and the Internet by dialing into local POPs. Of these, the
Company owns 19 POP sites in California and currently offers additional access
through 284 UUNET POPs. The Company's POP network, as of May 31, 1996, is set
forth below.
[INSERT USA AND CANADIAN MAP IDENTIFYING LOCATION
OF COMPANY OWNED AND UUNET OWNED POP SITES]
For customers located in a geographic area not presently serviced by a local
POP, the EarthLink Network can be accessed by a toll-free number for which the
Company bills customers on an hourly usage basis. The Company's POP sites are
connected to the Internet primarily through its network hub in Los Angeles. The
Company's network hub is in turn connected directly to the Internet via two
leased high-speed fiber optic data lines.
The Company relies on UUNET to continue to allow the Company's customers to
access the Internet through UUNET's system of POPs. UUNET's inability or
unwillingness to provide POP access to the Company's customers could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company believes that alternative sources for POPs
exist. However, there can be no assurance that such sources will be available on
terms acceptable to the Company, if at all, or that such sources will be capable
of replacing UUNET on a timely basis. The Company's current agreement with UUNET
expires in December 1996 and is renewable for additional one-year terms unless
60 days' prior written notice of termination is given by either party. UUNET
recently announced that it has agreed to be acquired by MFS. There can be no
assurance that, following the expiration of the Company's current agreement with
UUNET, MFS or UUNET will continue to provide the Company with POP access or that
such access, if provided, will be available to the Company on acceptable terms.
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CUSTOMER SUPPORT
The Company believes that high-quality customer support is critical to
retaining existing customers and attracting new ones. The Company currently
provides five avenues of customer support which are available seven days a week,
24 hours a day: (i) toll-free, live telephone assistance; (ii) email based
assistance; (iii) help sites and Internet guide files on the EarthLink Web site;
(iv) automated "fax back" and "fax on demand" assistance; and (v) printed
reference material. Additionally, the Company provides dedicated support for its
business customers. The Company also furnishes its newsletter, BLINK, to each of
its customers.
In order to continue to improve its support services and to deliver those
services in a more timely and cost-effective manner, the Company is currently
installing expanded computing facilities and new call management database
software at its headquarters in Pasadena, and is increasing its support staff on
an ongoing basis. The Company has expanded its support staff from 81 employees
as of December 31, 1995 to 157 employees as of May 31, 1996.
Demand on the Company's network infrastructure, technical staff and
resources has grown rapidly with the Company's expanding customer base, and the
Company has in the past experienced difficulties satisfying the demand for its
Internet services. There can be no assurance that the Company's infrastructure,
technical staff and resources will be adequate to facilitate the Company's
growth. In addition, delays have occurred in establishing Internet accounts for
the Company's customers and customers have in the past experienced significant
delays in contacting, and in receiving responses from, the Company's customer
and technical support personnel. There can be no assurance that the Company will
be able to provide its software, establish accounts or provide customer or
technical support to its customers on a timely basis or that any delays will not
result in the loss of customers. The Company believes that its ability to
provide timely access for customers and adequate customer support service will
largely depend upon the Company's ability to attract, identify, train, integrate
and retain qualified personnel. Failure to provide adequate customer support
services will adversely affect the Company's ability to increase its customer
base and to reduce its customer cancellation rate, and could therefore have a
material adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION
The Internet services market in which the Company operates is extremely
competitive, and the Company expects competition in this market to intensify in
the future. The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. The Company competes
(or in the future is expected to compete) directly or indirectly with the
following categories of companies: (i) national and regional ISPs, such as BBN,
IDT, MindSpring, NETCOM, PSINet, and UUNET; (ii) established online services
companies such as America Online, CompuServe and Prodigy; (iii) computer
software and technology companies such as Microsoft; (iv) national
telecommunication companies, such as AT&T, MCI and Sprint; (v) RBOCs; (vi) cable
operators, such as Comcast, TCI and Time Warner; and (vii) nonprofit or
educational Internet service providers.
Many established online services companies and telecommunication companies
have recently announced plans to introduce or expand their Internet services.
The Company expects that a significant number of major telecommunication, cable,
media, software and hardware companies, as well as all of the major online
services companies, will eventually compete fully in the Internet services
market, and that their entry into this market will result in substantially
greater competition for the Company. The ability of these competitors or others
to bundle services and products with Internet connectivity services could place
the Company at a significant competitive disadvantage. In addition, competitors
in the telecommunication industry may be able to provide customers with reduced
communication costs in connection with their Internet access services, reducing
the overall cost of Internet access and significantly increasing pricing
pressures on the Company. There can be no
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assurance that the Company will be able to offset the effects of any necessary
price reductions resulting from such pricing pressures with an increase in the
number of its customers, higher revenue from enhanced services, cost reductions
or otherwise.
Competition in the Company's markets is also expected to focus increasingly
on overseas markets, where Internet services are just beginning to be
introduced. There can be no assurance that the Company will be able to increase
its presence in overseas markets. To the extent the ability to provide Internet
services overseas becomes a competitive advantage in the Internet services
industry, the failure of the Company to penetrate overseas markets may result in
the Company being at a competitive disadvantage relative to other Internet
access providers.
The Company believes that its ability to compete successfully in the
Internet services market depends on a number of factors, including market
presence; the adequacy of the Company's customer support services; the capacity,
reliability and security of its network infrastructure; the ease of access to
and navigation of the Internet provided by the Company's services; the pricing
policies of the Company, its competitors and its suppliers; the timing of
introductions of new services and products by the Company and its competitors;
the Company's ability to support existing and emerging industry standards; and
industry and general economic trends. There can be no assurance that the Company
will have the financial resources, technical expertise or marketing and support
capabilities to compete successfully.
PROPRIETARY RIGHTS
GENERAL. The Company believes that its success is dependent in part on its
technology and its continuing right to use such technology. The Company relies
on a combination of copyright, trademark and trade secret laws and contractual
restrictions to establish and protect its technology. It is the Company's policy
to require employees and consultants and, when possible, suppliers to execute
confidentiality agreements upon the commencement of their relationships with the
Company. These agreements provide that confidential information developed or
made known during the course of a relationship with the Company must be kept
confidential and not disclosed to third parties except in specific instances.
Although the Company believes that it has taken adequate precautions to protect
its proprietary rights, there can be no assurance that the steps taken by the
Company will be sufficient to prevent misappropriation of its technology and
other proprietary property or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology.
Although the Company believes that it does not infringe upon the proprietary
rights of others, there can be no assurance that third parties will not assert
that the EarthLink's services and products infringe their proprietary rights.
Such claims could result in substantial costs and diversion of resources even if
ultimately decided in favor of the Company. Such claims or judgments resulting
from such claims could have a material adverse effect on the Company's business,
financial condition and results of operations. In the event a claim is asserted
alleging that the Company has infringed the proprietary technology or
information of a third party, the Company may be required to seek licenses to
continue to use such intellectual property. There can be no assurance, however,
that such licenses would be offered or obtained on commercially reasonable
terms, if at all, or that the terms of any offered licenses will be acceptable
to the Company. The failure to obtain the necessary licenses or other rights
could have a material adverse effect on the Company's business, financial
condition and results of operations.
LICENSES. EarthLink has obtained authorization, typically in the form of a
license, to distribute third-party software incorporated in the EarthLink
Network TotalAccess software product for Windows 3.1, Windows 95 and Macintosh
platforms. Applications licensed by the Company include Netscape Navigator (the
license for which expires on December 31, 1997 and is renewable for additional
one-year terms), the Eudora Light email program from Qualcomm (the license for
which expires on January 26, 1997 and is renewable for additional one-year
terms), and MacTCP software from Apple (the license for which automatically
renews itself each December 31 for additional one-year periods). The only
software in the EarthLink
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Network TotalAccess package that is developed by the Company is the front-end
program and the installation/ registration program. The Company currently
intends to maintain or negotiate renewals of existing software licenses and
authorizations. The Company may want or need to license other applications in
the future.
TRADEMARKS. "EarthLink Network-Registered Trademark-," "EarthLink Network
TotalAccess-TM-" and the EarthLink logo are trademarks of the Company. This
Prospectus includes trademarks of companies other than the Company.
GOVERNMENT REGULATION
The Company provides Internet services, in part, through data transmissions
over public telephone lines. These transmissions are governed by regulatory
policies establishing charges and terms for wire line communications. The
Company currently is not subject to direct regulation by the FCC or any other
governmental agency, other than regulations applicable to businesses generally.
However, in the future the Company could become subject to regulation by the FCC
or another regulatory agency as a provider of basic telecommunication services.
For example, a number of long distance telephone carriers recently filed a
petition with the FCC seeking a declaration that Internet telephone service is a
"telecommunications service" subject to common carrier regulation. Such a
declaration, if enacted, would create substantial barriers to the Company's
entry into the Internet telephone market.
The recently-enacted Telecommunications Act contains certain provisions that
lift, or establish procedures for lifting, restrictions on RBOCs and other
companies that may permit them to engage directly in the Internet access
business. The Telecommunications Act also makes it easier for national long
distance carriers such as AT&T to offer local telephone service. In addition,
the Act allows the RBOCs to provide electronic publishing of information and
databases. Competition from these companies could have an adverse effect on the
Company's business. Further, the Telecommunications Act imposes fines on any
entity that knowingly uses any interactive computer service to send obscene
material to minors or makes obscene material available to minors. The standard
for determining whether an entity acted knowingly has not yet been established.
Due to the increasing popularity and use of the Internet, it is possible
that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, user privacy, pricing and copyright
infringement. Changes in the regulatory environment relating to the Internet
access industry, including regulatory changes that directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition from
regional telephone companies or others, could have an adverse effect on the
Company's business. See "Risk Factors -- Potential Liability" and "--
Competition."
EMPLOYEES
As of May 31, 1996, the Company employed 376 people on a full-time basis,
which consists of 81 sales and marketing personnel, 16 Web Site and development
personnel, 62 MIS and information technologies personnel, 157 service and
support representatives and 60 administrative personnel. As of that date, the
Company also employed 29 people on a part-time basis, most of whom serve as
telephone service and support representatives. None of the Company's employees
are represented by a labor union and the Company is not a party to any
collective bargaining agreement.
The Company is highly dependent on the technical and managerial skills of
its key employees, including technical, sales, marketing, financial and
executive personnel, and on its ability to identify, hire and retain additional
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to retain existing personnel or to
identify or hire additional personnel. In addition, the Company is highly
dependent on the continued services of its senior management team, which
currently is composed of a small number of individuals, most of whom only
recently joined the Company. The inability to attract, hire or retain the
necessary technical, sales, marketing, financial and executive personnel, or the
loss of the services of any member of the Company's senior management team,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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FACILITIES
EarthLink's corporate headquarters are located in an 85,500-square foot
facility in Pasadena, California. The lease for this space expires June 30,
2001. The Company has an option to extend this lease for an additional five
years. In addition to the Company's corporate headquarters, the Company also
leases approximately 7,400 square feet of office space in Los Angeles that
presently houses the Company's central computer network.
The Company's operations are dependent on its ability to protect its
computer equipment against damage from fire, earthquake, power loss,
telecommunications failure and similar events. The occurrence of a natural
disaster or another unanticipated problem at the Company's headquarters, network
hub or at a number of the POPs through which customers connect to the Internet
could cause interruptions in the services provided by the Company. The Company's
computer equipment, including critical equipment dedicated to its Internet
services, is located in Los Angeles and Pasadena, California. The Company
intends to relocate its facilities located in Los Angeles to its headquarters in
Pasadena, California in the near future. The risks associated with such a move
include loss of data, loss of system integrity and the risk of system failure.
The occurrence of any of these events could have a material adverse effect on
the Company's ability to provide Internet services to its customers, and, in
turn, on the Company's business, financial condition and results of operations.
In addition, failure of the Company's telecommunication providers to provide the
data communications capacity required by the Company as a result of a natural
disaster, operational disruption or for any other reason could cause
interruptions in the services provided by the Company.
LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
executive officers and directors as of May 15, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Sky D. Dayton............................. 24 Founder and Chairman of the Board of Directors
Charles G. Betty.......................... 39 President, Chief Executive Officer and Director
Barry W. Hall............................. 48 Vice President, Finance and Administration and Chief Financial
Officer
Robert E. Johnson, Jr..................... 44 Vice President, Sales and Marketing
David R. Tommela.......................... 57 Vice President, Operations
Brinton O.C. Young........................ 44 Vice President, Strategic Planning
Sidney Azeez (1).......................... 63 Director
Robert M. Kavner (1)...................... 52 Director
Linwood A. Lacy, Jr. (2).................. 50 Director
Kevin M. O'Donnell (2).................... 45 Director
Reed E. Slatkin (1)(2).................... 47 Director
</TABLE>
- ------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
SKY D. DAYTON, the founder of the Company, has served as Chairman of the
Board of Directors since the Company's inception in May 1994 and served as its
Chief Executive Officer from May 1994 until May 1996. From 1992 to 1993, he
served as co-owner of a computer-based digital imaging firm, Dayton Walker
Design. From 1991 to 1992, he served as Director of Marketing for new products
at Executive Software, a VAX/VMS utility software maker. From 1990 to 1994, Mr.
Dayton operated Cafe Mocha, a coffee house in Los Angeles, which he co-founded,
and was a co-owner of Joe Cafe, a coffee house in Studio City, California. From
1988 to 1990, Mr. Dayton served as systems engineer and computer graphics
consultant at several entertainment industry advertising firms.
CHARLES G. BETTY has served as the President and as a director of the
Company since January 1996, and in May 1996, Mr. Betty was named the Company's
Chief Executive Officer. From February 1994 to January 1996, he was a strategic
planning consultant, advising Reply Corp., Perot Systems Corporation and
Microdyne, Inc., and was active in the formation of Physicians Data Corporation.
From September 1989 to February 1994, Mr. Betty served as President, Chief
Executive Officer and a director of Digital Communications Associates, Inc., a
publicly traded network connectivity provider. Mr. Betty holds a bachelor's
degree in chemical engineering from the Georgia Institute of Technology.
BARRY W. HALL has served as Vice President, Finance and Administration and
Chief Financial Officer of the Company since January 1996. From April 1994 to
December 1995, he was an independent management consultant. From March 1989 to
March 1994, Mr. Hall served as Chief Executive Officer and Chairman of
California Amplifier, Inc., a publicly traded manufacturer of microwave
amplifiers. Prior to joining California Amplifier, he served as Vice President
of Finance and Chief Financial Officer of Los Angeles Cellular Telephone
Company. Mr. Hall also worked for eight years as a certified public accountant
with Arthur Young & Company. He currently serves on the board of directors of
Luther Medical, Inc. Mr. Hall holds a bachelor's degree in mathematics and an
M.B.A. from San Diego State University.
ROBERT E. JOHNSON, JR. has served as Vice President, Sales and Marketing of
the Company since February 1995. From June 1992 through January 1995, he served
as Vice President of Sales for Competence Software. From 1982 to May 1992, he
was employed by Real World Software, Inc., and served as its Vice President of
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Sales from 1988 to May 1992. In December 1994, Mr. Johnson filed a voluntary
bankruptcy petition which was dismissed in January 1996 when Mr. Johnson and his
creditors agreed upon a currently operative repayment plan.
DAVID R. TOMMELA has served as Vice President, Operations of the Company
since December 1995. From 1973 to August 1995, he served in various capacities
for, and ultimately as the Chief Information Officer of, Southern California
Edison Company, an electric power utility.
BRINTON O.C. YOUNG has served as Vice President, Strategic Planning of the
Company since March 1996. From 1989 to 1996, Mr. Young was President of Young &
Associates, a consulting firm specializing in strategic planning for high growth
companies. Mr. Young holds a bachelor's degree in Physics from Yale University
and M.B.A. and J.D. degrees from Harvard University.
SIDNEY AZEEZ has been a director of the Company since June 1996. Mr. Azeez
founded Ultronic Systems Corp., which produced a stock and commodity quotation
system. He also founded American Cellular Network, Inc. and Universal Telecell,
Inc. ("Unitel"), cellular telephone companies, PCS, Inc., a wireless
communications company, and several banks in Colorado and New Jersey. Mr. Azeez
is a director of Unitel and Thermal Tech Development, Inc.
ROBERT M. KAVNER has been a director of the Company since June 1996. Since
August 1995, he has been Managing Director of Kavner Associates, a private
venture capital and consulting firm in the media and communications industry.
From 1994 through August 1995, he headed Creative Artist Agency's business
advisory group. From 1984 to 1994, Mr. Kavner held several senior management
positions at AT&T, including Senior Vice President and Chief Financial Officer,
Executive Vice President of the Communications Products Group, Chief Executive
Officer of the Multimedia Products and Services Group, President of the Computer
Division, Chairman of the UNIX Systems Laboratory, Chairman of AT&T Capital
Corporation, Chairman of AT&T Paradyne Corporation and Chairman of AT&T Venture
Capital Group. Mr. Kavner also served as a member of AT&T's Executive Committee.
Mr. Kavner serves as a director of Fleet Financial Group, Ascent Entertainment,
Inc. and Tandem Computers, Inc.
LINWOOD A. LACY, JR. has been a director of the Company since June 1996.
From 1989 to May 1996, he served as the Co-Chairman and Chief Executive Officer
of Ingram Micro, a microcomputer products distributor. From December 1993 to
June 1995, Mr. Lacy was also President of Ingram Industries. From June 1995
until April 1996, he was President and CEO of Ingram Industries, and
subsequently Vice Chairman and CEO of Ingram Industries.
KEVIN M. O'DONNELL, a co-founder of the Company, has been a director of the
Company since its inception. Mr. O'Donnell is President of O'Donnell &
Associates, a venture capital firm specializing in emerging high technology
companies. In 1982, Mr. O'Donnell founded Government Technology Services, Inc.,
a reseller of computer equipment to the federal government, and from 1982 to
1990 served as its Chairman, Chief Executive Officer and President.
REED E. SLATKIN, a co-founder of the Company, has been a director of the
Company since its inception. Mr. Slatkin is a private investor and money manager
who has invested in public and private companies for the last 15 years. Mr.
Slatkin is a director of Havenwood Ventures, Inc.
BOARD OF DIRECTORS
The Board of Directors maintains an Audit Committee and a Compensation
Committee. The Audit Committee consists of Messrs Azeez, Kavner and Slatkin. The
Audit Committee is responsible for making recommendations to the Board regarding
the selection of independent auditors, reviews the results and scope of audits
and other services provided by the Company's independent auditors and reviews
and evaluates the Company's internal audit and control functions. The
Compensation Committee consists of Messrs, Lacy, O'Donnell and Slatkin. The
Compensation Committee is responsible for making recommendations to the
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Board concerning cash and long-term incentive compensation for key employees of
the Company. The Compensation Committee also administers and makes
recommendations under the Company's 1995 Stock Option Plan.
Currently all directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
The Company's Certificate of Incorporation contains a provision for the Board of
Directors to be divided into three classes, with this provision to take effect
as of the record date for the first annual meeting after (i) the Company's
Common Stock is quoted on the Nasdaq National Market and (ii) the Company has
800 beneficial owners of its Common Stock. Each class of directors will consist
of two or three directors, who will initially serve for one-, two- or three-year
terms. Thereafter, directors will serve staggered three-year terms. It is
presently intended that Class I of the Board of Directors will consist of
Messrs. Dayton, O'Donnell and Slatkin, Class II will consist of Messrs. Kavner
and Lacy and Class III will consist of Messrs. Azeez and Betty.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No officer or employee of the Company currently serves, or has served during
the Company's last completed fiscal year, as a member of the Compensation
Committee. No member of the Compensation Committee has at any time been an
officer or employee of the Company. No interlocking relationship exists between
the Company's Board of Directors or Compensation Committee and the board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.
See "Certain Transactions" for a description of related party transactions
involving certain directors of the Company.
DIRECTOR COMPENSATION
Directors do not receive cash compensation for serving in that capacity, but
are reimbursed for the expenses they incur in attending meetings of the Board or
committees thereof. Non-employee directors are eligible to receive options to
purchase Common Stock awarded under the Company's Directors Stock Option Plan.
See "-- Directors Stock Option Plan."
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid during or with respect to 1995 to Sky D. Dayton, who served as the
Company's Chief Executive Officer during that year, and Robert E. Johnson, Jr.,
its Vice President, Sales and Marketing, the Company's only executive officers
who earned in excess of $100,000 of salary and bonus in 1995. Mr. Dayton's
current base salary is $165,000 and Mr. Johnson's is $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME SALARY BONUS OPTIONS (#) COMPENSATION
- ----------------------------------------------------- --------- --------- ------------------- -------------
<S> <C> <C> <C> <C>
Sky D. Dayton........................................ $ 97,726 $ 16,573 500,000(1) --
Robert E. Johnson, Jr................................ 87,578 21,646(2) 100,000(1) --
</TABLE>
- ------------
(1) These options vest in equal increments of 5% per quarter over the five-year
period beginning on the date of grant, June 19, 1995.
(2) Represents sales commissions.
36
<PAGE>
STOCK OPTION INFORMATION
The following table sets forth certain information regarding options granted
in 1995 to, and held at year end by, the executive officers named in the Summary
Compensation Table above. The Company does not have any stock appreciation
rights outstanding.
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERMS (2)
OPTIONS IN FISCAL PRICE EXPIRATION ------------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% 10%
- ------------------------------ ----------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sky D. Dayton................. 500,000(1) 38.0% $ 0.91 6/18/05 $ 286,147 $ 725,153
Robert E. Johnson, Jr......... 100,000(1) 7.6 0.91 6/18/05 57,229 145,031
</TABLE>
- ------------
(1) These options vest in equal increments of 5% per quarter over the five-year
period beginning on the date of grant, June 19, 1995.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. These assumptions are not intended to forecast future
appreciation of the Company's stock price. The potential realizable value
computation does not take into account federal or state income tax
consequences of option exercises or sales of appreciated stock. This table
does not take into account any appreciation in the price of the Common Stock
to date.
The following table summarizes the value of options held at December 31,
1995 by the executive officers named in the Summary Compensation Table above. No
such options were exercised by Mr. Dayton or Mr. Johnson during 1995.
OUTSTANDING GRANTS & OPTION VALUES AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF
SHARES SHARES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS (1)
ON VALUE -------------------------- --------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sky D. Dayton..................... -- -- 50,000 450,000 $ 75,500 $ 679,500
Robert E. Johnson, Jr............. -- -- 10,000 90,000 15,100 135,900
</TABLE>
- ------------
(1) The value of "in-the-money" options represents the difference between the
exercise price of stock options and the fair market value for the Company's
Common Stock, as determined by the Company's Board of Directors, of $2.42
per share as of December 31, 1995.
37
<PAGE>
EMPLOYMENT AGREEMENT
In January 1996, the Company entered into a two-year employment agreement
with Mr. Charles G. Betty. Under this agreement, the Company agreed to employ
Mr. Betty as its President and Chief Operating Officer at a salary of $225,000
per year plus such other benefits as are made available to other senior
executives of the Company. In May 1996, Mr. Betty was named the Company's Chief
Executive Officer. Mr. Betty is also guaranteed a bonus of at least $37,500 for
1996 and may earn up to an additional $37,500 for 1996 if the Company reaches a
specified number of customers by year-end. The agreement provides that (i) if
Mr. Betty is terminated by the Company other than for "cause" or "total
disability," as defined in the agreement, (ii) if the Company elects not to
extend the term of the employment agreement at the end of the first two-year
term or any yearly extension or (iii) if Mr. Betty terminates his employment
because of a breach of the employment agreement by the Company, he is entitled
to severance compensation equal to 100% of his then-current annual salary. The
agreement contains provisions that restrict Mr. Betty's ability to compete with
the Company or solicit its employees or customers for a specified period
following the termination of his employment. In connection with entering into
the employment agreement, Mr. Betty purchased 50,000 shares of the Common Stock
at $2.42 per share, and also was granted options to purchase an additional
350,000 shares of Common Stock at an exercise price of $2.42 per share. These
options vest in equal increments of 5% per quarter over the five-year period
beginning on the date of grant, January 15, 1996. In the event of a "change in
control," as defined in the agreement, the termination of Mr. Betty by the
Company other than for cause or if Mr. Betty terminates his employment because
of a breach of the agreement by the Company, all unvested options held by Mr.
Betty will vest immediately.
1995 STOCK OPTION PLAN
The Company's Board of Directors has adopted the Company's 1995 Stock Option
Plan (the "Plan") and reserved thereunder 2,500,000 shares of Common Stock for
grants of incentive and non-qualified stock options to key employees of the
Company. As of the date of this Prospectus, there were options to purchase
1,822,750 shares of Common Stock outstanding under the Plan at exercise prices
ranging from $2.42 to $4.88 per share. In addition to options outstanding under
the Plan, the Company has issued non-plan options and warrants to purchase an
aggregate of 1,880,654 shares of Common Stock at exercise prices ranging from
$0.30 to $4.88 per share.
DIRECTORS STOCK OPTION PLAN
The Board of Directors has adopted the Company's Directors Stock Option Plan
(the "Directors Plan") and reserved 125,000 shares of Common Stock thereunder
for grants of non-qualified stock options to directors who do not also serve as
employees of the Company. Under the Directors Plan, grants of options to
purchase 20,000 and 5,000 shares of Common Stock are automatically made to each
non-management director at the time such person first becomes a member of the
Board of Directors and at the beginning of each fiscal year of the Company,
respectively. All of these options are exercisable at the fair market value of
the Common Stock on the date of grant.
Prior to the adoption by the Board of Directors of the Directors Plan, the
Company issued to each of Messrs. Kavner and Lacy warrants to purchase 100,000
shares of Common Stock at an exercise price of $2.42 per share, the then fair
market value, in consideration of Messrs. Kavner's and Lacy's agreement to serve
on the Board of Directors.
38
<PAGE>
CERTAIN TRANSACTIONS
Kevin M. O'Donnell and Reed E. Slatkin are members of the Board of Directors
of the Company, and each owns more than five percent of the Company's
outstanding Common Stock. Messrs. O'Donnell and Slatkin have participated in the
Company's financing since inception, as described below.
In December 1994, Messrs. Slatkin and O'Donnell provided a $400,000 credit
line to the Company for which each of them received warrants to purchase 150,000
shares of Common Stock at an exercise price of $0.91 per share, the then fair
market value of the Common Stock. Indebtedness outstanding under this line bore
interest at 8.1% per annum. The maximum amount outstanding under this line was
$397,686, which was repaid in full in September 1995.
In August 1995 and January 1996, Mr. Slatkin agreed to act as lessee
together with the Company under equipment leases of $500,000 and $1.5 million,
respectively. As consideration for this agreement, the Company issued Mr.
Slatkin warrants to purchase 100,000 shares of Common Stock at an exercise price
of $0.91 per share and 200,000 shares of Common Stock at an exercise price of
$2.42 per share, the then fair market value as of August 1995 and January 1996,
respectively. The Company and Mr. O'Donnell subsequently agreed to indemnify Mr.
Slatkin against certain liability arising out of these leases. As consideration
for this agreement, Mr. Slatkin transferred one-half of these warrants to Mr.
O'Donnell.
In December 1995, Mr. Slatkin guaranteed a $250,000 letter of credit as
security for the Company's lease of its Pasadena facility. In return, he
received warrants to purchase 100,000 shares of Common Stock at an exercise
price of $2.42 per share, the then fair market value of the Common Stock. The
Company and Mr. O'Donnell subsequently agreed to indemnify Mr. Slatkin with
respect to certain liability arising out of the letter of credit. As
consideration for this agreement, Mr. Slatkin transferred to Mr. O'Donnell
one-half of these warrants.
In addition, the Company and Messrs. Dayton, O'Donnell and Slatkin are
parties to a Buy-Sell Agreement pursuant to which the Company has the first
right of refusal upon sale or transfer of shares of Common Stock by such
persons. The right will expire upon consummation of this Offering. See Note 7 to
Notes to Financial Statements.
From time to time since the Company's inception, the Company's officers,
directors and more than five percent stockholders (including certain of their
family members and affiliates) have purchased shares of the Company's Common
Stock at the weighted average per share purchase prices as follows: Gregory
Abbott, 677,250 shares, $2.04 per share; Charles G. Betty, 50,000 shares, $2.42
per share; Sky D. Dayton, 3,000,000 shares, $0.0003 per share; Sidney Azeez,
1,044,916 shares, $3.13 per share; Linwood A. Lacy, Jr., 49,620 shares, $2.42
per share; Robert M. Kavner, 41,350 shares, $2.42 per share; Robert London,
744,065 shares, $1.08 per share; Kevin M. O'Donnell, 1,884,305 shares, $0.42 per
share; Reed E. Slatkin, 1,884,315 shares, $0.42 per share; and Storie Partners,
831,197 shares, $3.13 per share.
The Company believes that the foregoing transactions were on terms no less
favorable to the Company than could be obtained from unaffiliated parties. It is
the Company's current policy that all transactions by the Company with officers,
directors, more than five percent stockholders and their affiliates will be
entered into only if such transactions are approved by a majority of
disinterested independent directors and are on terms no less favorable to the
Company than could be obtained from unaffiliated parties.
39
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of May 31, 1996 by (i)
each person or entity who is known by the Company to own beneficially more than
five percent of the Common Stock, (ii) each of the Company's directors and
executive officers, and (iii) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY SHARES BENEFICIALLY OWNED
OWNED PRIOR TO ------------------------------------
AND AFTER THE BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNERS (1) OFFERING OFFERING OFFERING
- ---------------------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Sky D. Dayton................................................... 3,100,000(2) 25.7% 19.8%
Kevin M. O'Donnell.............................................. 2,234,330(3) 18.1 14.0
Reed E. Slatkin................................................. 2,234,315(4) 18.1 14.0
Sidney Azeez.................................................... 1,044,916(5) 8.7 6.7
Charles G. Betty................................................ 89,098(6) * *
Linwood A. Lacy, Jr............................................. 59,620(7) * *
Robert M. Kavner................................................ 51,350(8) * *
Robert E. Johnson............................................... 20,000(9) * *
Brinton O.C. Young.............................................. 11,250 (10 * *
Barry W. Hall................................................... 12,500 (11 * *
David R. Tommela................................................ 8,750 (12 * *
Storie Partners................................................. 831,197 6.9 5.3
One Bush Street
San Francisco, CA 94104
Robert London................................................... 744,065 6.2 4.8
Cruttenden Roth Incorporated
809 Presidio Ave.
Santa Barbara, CA 93101
Gregory Abbott.................................................. 677,250 5.7 4.3
1285 S. Ocean Blvd.
Palm Beach, FL 33480
All directors and executive officers as a group (11 persons).... 8,866,129 (13 68.9% 53.8%
<FN>
- ------------
* Represents beneficial ownership of less than 1% of the Common Stock.
</TABLE>
(1) Except as otherwise indicated by footnote, the named person has sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned. Except as otherwise indicated in the table, the named
person's address is that of the Company.
(2) Includes options to purchase 100,000 shares of Common Stock that are
exercisable within 60 days of May 31, 1996.
(3) Includes (i) 13,259 shares of Common Stock held by Mr. O'Donnell's son,
(ii) warrants to purchase 350,000 shares of Common Stock, and (iii) options
to purchase 25 shares of Common Stock held by Mr. O'Donnell's son, that are
exercisable within 60 days of May 31, 1996. Mr. O'Donnell disclaims
beneficial ownership of the shares of Common Stock held by his son and the
shares of Common Stock issuable upon exercise of options held by his son.
(4) Includes (i) warrants to purchase 350,000 shares of Common Stock that are
exercisable within 60 days of May 31, 1996 and (ii) 11,220 shares of Common
Stock held in trust for Mr. Slatkin's minor children.
(5) Includes 632,403 shares of Common Stock held by Mr. Azeez's wife and
children.
(6) Includes (i) options to purchase 35,000 shares of Common Stock that are
exercisable within 60 days of May 31, 1996 and (ii) 4,098 shares of Common
Stock held by Mr. Betty's father-in-law and mother-in-law of which Mr. Betty
disclaims beneficial ownership.
(7) Includes warrants to purchase 10,000 shares of Common Stock that are
exercisable within 60 days of May 31, 1996.
(8) Includes options to purchase 10,000 shares of Common Stock that are
exercisable within 60 days of May 31, 1996.
(9) Includes options to purchase 20,000 shares of Common Stock that are
exercisable within 60 days of May 31, 1996.
(10) Includes options to purchase 11,250 shares of Common Stock that are
exercisable within 60 days of May 31, 1996.
(11) Includes options to purchase 12,500 shares of Common Stock that are
exercisable within 60 days of May 31, 1996.
(12) Includes options to purchase 8,750 shares of Common Stock that are
exercisable within 60 days of May 31, 1996.
(13) Includes (i) options and warrants to purchase 907,525 shares of Common
Stock that are exercisable within 60 days of May 31, 1996 and (ii) 647,721
shares of Common Stock owned by family members or affiliates of certain
members of the group.
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 50 million
shares of Common Stock, $0.01 par value per share, and (ii) 10 million shares of
Preferred Stock, $0.01 par value per share. As of May 31, 1996, there were
11,970,465 shares of Common Stock outstanding. The following summary is
qualified in its entirety by reference to the Company's Certificate of
Incorporation, which is filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
COMMON STOCK
Under the Delaware General Corporation Law and the Company's Certificate of
Incorporation, holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders, including the election of
directors, and holders of such shares exclusively possess all voting power. The
Company's Certificate of Incorporation does not provide for cumulative voting
rights, meaning that the holders of a majority of the shares voting for the
election of directors can elect all the directors if they choose to do so. The
Common Stock carries no preemptive rights and is not convertible, redeemable or
assessable. The holders of Common Stock are entitled to dividends in such
amounts and at such times as may be declared by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." Upon the liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive ratably the net assets of the Company available after
payment or provision for payment of all debts and other liabilities subject to
prior rights of holders of Preferred Stock then outstanding, if any.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of 10
million shares of Preferred Stock, all of which will be available for future
issuance upon consummation of this Offering. Preferred Stock may be issued from
time to time in one or more series, and the Board of Directors, without further
approval of the stockholders, is authorized to fix the dividend rights and
terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, sinking funds and any other rights, preferences,
privileges and restrictions applicable to each such series of Preferred Stock.
The issuance of Preferred Stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, among other things,
adversely affect the voting power of the holders of Common Stock and, under
certain circumstances, make it more difficult for a third party to gain control
of the Company, discourage bids for the Company's Common Stock at a premium, or
otherwise adversely affect the market price of the Common Stock.
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Certificate of Incorporation contains a provision for the
Board of Directors to be divided into three classes. The stockholders may not
amend or repeal this provision except upon the affirmative vote of holders of
not less than 75% of the outstanding shares of capital stock of the Company
entitled to vote thereon. Directors may be removed only for cause and with the
affirmative vote of the holders of 75% of all outstanding shares of capital
stock of the Company entitled to vote at any meeting of stockholders with
respect to which notice of such purpose has been given. The Certificate of
Incorporation further provides that any action required or permitted to be taken
at any annual or special meeting of stockholders may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing,
setting forth the actions so taken, is executed by the holders of the requisite
number of shares of capital stock entitled to vote thereon.
Following the consummation of this Offering, the Company will be subject to
the "business combination" statute of the Delaware General Corporation Law. This
statute prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the
41
<PAGE>
corporation's voting stock. The effect of this statute could, among other
things, make it more difficult for a third party to gain control of the Company,
discourage bids for the Company's Common Stock at a premium, or otherwise
adversely affect the market price of the Common Stock.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY; INDEMNIFICATION
The Company's Certificate of Incorporation and Bylaws provide that, to the
fullest extent permitted by Delaware law, the Company shall indemnify its
directors and officers against any damages arising from their actions as agents
of the Company. The Bylaws further provide that the Company may similarly
indemnify its other employees and agents. In addition, each director has entered
into an indemnification agreement with the Company pursuant to which the Company
has agreed to indemnify such director to the fullest extent permitted by
Delaware law. At present, there is no pending litigation or proceeding involving
a director or officer of the Company in which indemnification is required or
permitted, and the Company is not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
REGISTRATION RIGHTS
The holders of substantially all of the shares of Common Stock outstanding
prior to this Offering (including the Company's founder and Chairman of the
Board and its President and Chief Executive Officer) as well as certain holders
of warrants to purchase such stock, are parties to a Registration Rights
Agreement (the "Agreement") with the Company. Under this Agreement, at any time
after six months following consummation of this Offering, the holders (excluding
Sky D. Dayton, the Company's founder and Chairman) of 20% or more of the shares
eligible for registration under this Agreement (in an amount reasonably expected
to result in proceeds of at least $5.0 million) may demand that the Company
effect a registration of such shares. This Agreement also gives the holders of
these rights the ability to require the Company, if it is eligible to file a
registration statement on Form S-3, to file a shelf registration to permit sales
of their stock, and also provides incidental or "piggyback" registration rights
that allow such holders, under certain circumstances, to include shares of
Common Stock in registration statements initiated by the Company or other
stockholders. The Agreement does not permit holders of registration rights to
include their shares of Common Stock in this Offering, or to exercise their
registration rights within the 180-day period following this Offering. See
"Shares Eligible for Future Sale."
TRANSFER AGENT AND REGISTRAR
The Company's Transfer Agent and Registrar is American Stock Transfer &
Trust Company.
42
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time. Sales
of substantial amounts of Common Stock of the Company in the public market after
various restrictions lapse could adversely affect the prevailing market price
and the ability of the Company to raise equity capital in the future.
Upon the completion of this Offering, the Company will have 15,570,465
shares of Common Stock outstanding. Of these shares, the 3,600,000 shares of
Common Stock sold in this Offering will be freely tradable without restriction
under the Securities Act, except that shares purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act, may
generally be sold only in compliance with the limitations of Rule 144 described
below.
SALES OF RESTRICTED SHARES
The 11,970,465 shares of Common Stock held by existing stockholders prior to
this Offering were issued and sold by the Company in reliance on exemptions from
the registration requirements of the Securities Act and are deemed "Restricted
Shares" under Rule 144. These shares may be sold in the public market only if
registered, or pursuant to an exemption from registration such as Rules 144,
144(k) or 701 under the Securities Act. The Company's directors, officers and
holders of all of the shares of Common Stock outstanding prior to this Offering
have entered into lock-up agreements under which they have agreed not to offer,
sell or otherwise dispose of any shares of Common Stock, any options or warrants
to acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock owned by them for a period of 180 days after the
date of this Prospectus, without the prior written consent of UBS Securities
LLC. The Company has entered into a similar agreement, except that the Company
may grant additional options under its 1995 Stock Option Plan or issue shares of
Common Stock under outstanding options and warrants. Upon expiration of the
lock-up agreements, 5,882,360 shares will become eligible for immediate public
resale subject to Rule 144. The remaining 6,088,105 shares held by existing
stockholders will become eligible for public resale following expiration of the
lock-up agreements at various times over a period of less than two years
following the completion of this Offering, subject in some cases to volume
limitations. The holders of substantially all of the shares of the shares of
Common Stock outstanding prior to this Offering (including the Company's
founders and Chairman and its President and Chief Executive Officer) as well as
certain holders of warrants to purchase such stock are parties to Registration
Rights Agreement with the Company. The number of shares sold in the public
market could increase if such rights are exercised. See "Description of Capital
Stock -- Registration Rights."
OPTIONS
As of May 31, 1996, 3,703,404 shares were subject to outstanding options and
warrants. Of these shares, 3,110,678 are subject to the lock-up agreements
described above. Approximately 90 days after the date of this Prospectus, the
Company intends to file a Registration Statement on Form S-8 covering shares
issuable under the Company's 1995 Stock Option Plan (including shares subject to
then outstanding options under such plans), thus permitting the resale of such
shares in the public market without restriction under the Securities Act after
expiration of the applicable lock-up agreements.
Following the expiration of the 90-day period following the date of this
Prospectus, 160,622 shares of Common Stock subject to outstanding vested options
will become eligible for sale without restriction in the public market pursuant
to Rules 144 and 701; however, 139,749 of such shares will be subject to lock-up
agreements for an additional 90 days. In general, under Rule 144 as currently in
effect, a person (or persons whose shares are aggregated) who has beneficially
owned shares for at least two years (including the holding period of any prior
owner, except an affiliate) is entitled to sell in "broker's transactions" or to
market makers, within any three month period commencing 90 days after the date
of this Prospectus, a number of shares that does not exceed the greater of (i)
one percent of the number of shares of Common Stock then outstanding
43
<PAGE>
(approximately 155,700 shares immediately after this Offering) or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the required filing of a Form 144 with respect to such sale. Sales
under Rule 144 are generally subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years, is entitled to sell such shares without having to comply with the manner
of sale, public information, volume limitation or notice provisions of Rule 144.
Under Rule 701 of the Securities Act, persons who purchase shares upon exercise
of options granted prior to the effective date of this Offering are entitled to
sell such shares 90 days after the effective date of this Offering in reliance
on Rule 144 without having to comply with the holding period requirements of
Rule 144 and, in the case of persons who are not affiliates of the Company,
without having to comply with the public information, volume limitation or
notice provisions of Rule 144.
The Securities and Exchange Commission (the "Commission") has recently
proposed reducing the initial Rule 144 holding period to one year and the Rule
144(k) holding period to two years. There can be no assurance as to when or
whether such rule changes will be enacted. If enacted, such modifications will
have a material effect on the times when shares of the Company's Common Stock
become eligible for resale.
44
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom UBS Securities LLC,
Piper Jaffray Inc. and Cruttenden Roth Incorporated are acting as
representatives (the "Representatives"), have agreed to purchase from the
Company the following respective number of shares of Common Stock:
<TABLE>
<CAPTION>
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------- -----------
<S> <C>
UBS Securities LLC.............................................................
Piper Jaffray Inc..............................................................
Cruttenden Roth Incorporated...................................................
-----------
Total...................................................................... 3,600,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The nature
of the Underwriters' obligations is such that they are committed to purchase all
shares of Common Stock offered hereby if any of such shares are purchased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow and such dealers may reallow a concession not in excess of $ per
share to certain other dealers. After the public offering of the shares of
Common Stock, the offering price and other selling terms may be changed by the
Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 540,000
additional shares of Common Stock to cover over-allotments, if any, at the
public offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. To the extent that the Underwriters
exercise this option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof which the number of shares of
Common Stock to be purchased by it shown in the above table bears to the total
number of shares of Common Stock offered hereby. The Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
All officers, directors and stockholders of the Company have agreed that
they will not, without the prior written consent of UBS Securities LLC, offer,
sell or otherwise dispose of any shares of Common Stock, any options or warrants
to acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock owned by them for a period of 180 days after the
date of this Prospectus. The Company has agreed that it will not, without the
prior written consent of UBS Securities LLC, offer, sell or otherwise dispose of
any shares of Common Stock for a period of 180 days after the date of this
Prospectus, except that the Company may grant additional options under its 1995
Stock Option Plan or issue shares of Common Stock upon the exercise of
outstanding stock options and warrants.
45
<PAGE>
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined through negotiations
between the Company and the Representatives of the Underwriters and may not be
indicative of the market price of the Common Stock following this Offering.
Among the factors to be considered in such negotiations are prevailing market
conditions, certain financial information of the Company, market valuations of
other companies that the Company and the Representatives of the Underwriters
believe to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Hunton & Williams, Atlanta, Georgia.
Certain legal matters in connection with the Offering will be passed upon for
the Underwriters by Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation, Palo Alto, California.
EXPERTS
The financial statements as of December 31, 1995 and 1994 and for the period
from inception through December 31, 1994 and the year ended December 31, 1995
included in this Prospectus and Registration Statement have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed a registration statement on Form S-1 (the
"Registration Statement") with the Commission under the Securities Act in
respect of the Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement as permitted by the rules
and regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits thereto, and Financial Statements
and Notes thereto filed as a part thereof. Statements herein concerning the
contents of any contract or other document filed with the Commission as an
exhibit to the Registration Statement are not necessarily complete and are
qualified in all respects by such reference. Copies of the Registration
Statement, including all exhibits and schedules thereto, may be inspected
without charge at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material
can be obtained from the Public Reference Section of the Commission upon payment
of certain fees prescribed by the Commission.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by its independent accountants
and quarterly reports for the first three quarters of each fiscal year
containing unaudited financial information.
46
<PAGE>
EARTHLINK NETWORK, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants......................................... F-2
Balance Sheet as of December 31, 1994 and 1995 and March 29, 1996......... F-3
Statement of Operations for the period from inception (May 26, 1994)
through December 31, 1994, and the year ended December 31, 1995 and the
three months ended March 31, 1995 and March 29, 1996..................... F-4
Statement of Stockholders' Equity for the period from inception (May 26,
1994) through December 31, 1994, the year ended December 31, 1995 and the
three months ended March 29, 1996........................................ F-5
Statement of Cash Flows for the period from inception (May 26, 1994)
through December 31, 1994, the year ended December 31, 1995 and the three
months ended March 31, 1995 and March 29, 1996........................... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of EarthLink Network, Inc.
The reincorporation described in Note 11 to the financial statements has not
been consummated at May 31, 1996. When it has been consummated, we will be in a
position to furnish the following report:
"In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of EarthLink
Network, Inc. at December 31, 1994 and 1995, and the results of its
operations and its cash flows for the period from inception (May 26, 1994)
through December 31, 1994 and the year ended December 31, 1995 in conformity
with generally accepted accounting principles. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. "
PRICE WATERHOUSE LLP
Costa Mesa, California
May 21, 1996
F-2
<PAGE>
EARTHLINK NETWORK, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
------------- ------------
MARCH 29,
1996
------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 290 $ 950
Restricted short-term investment (Note 6)............................ 1,500 500
Accounts receivable.................................................. $ 27 218 281
Prepaid expenses and other assets (Note 4)........................... 245 625
----- ------------ ------------
Total current assets............................................. 27 2,253 2,356
Property and equipment, net (Notes 1 and 3)............................ 90 2,551 6,363
Intangibles, net (Notes 2, 5 and 7).................................... 69 70 159
----- ------------ ------------
$ 186 $ 4,874 $ 8,878
----- ------------ ------------
----- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable............................................... $ 18 $ 1,766 $ 1,640
Accrued payroll and related expenses................................. 4 193 436
Other accounts payable and accrued liabilities....................... 405 2,118
Lines of credit...................................................... 1,494
Current portion of capital lease obligations (Note 9)................ 159 763
Note payable to investor............................................. 67
Deferred revenues.................................................... 212 415
----- ------------ ------------
Total current liabilities........................................ 89 4,229 5,372
Capital lease obligations, net of current portion (Note 9)............. 355 1,709
----- ------------ ------------
Total liabilities................................................ 89 4,584 7,081
----- ------------ ------------
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred Stock, $0.01 par value, 10,000,000 shares authorized, none
issued and outstanding..............................................
Common Stock, $0.01 par value, 50,000,000 shares authorized,
5,882,360, 10,114,330 and 10,255,300 issued and outstanding (Note
7).................................................................. 59 101 102
Additional paid-in capital........................................... 117 5,072 5,412
Common Stock pending issuance........................................ 5,931
Warrants to purchase common stock (Note 7)........................... 69 124 228
Accumulated deficit.................................................. (148) (5,007) (9,876)
----- ------------ ------------
Total stockholders' equity............................................. 97 290 1,797
----- ------------ ------------
$ 186 $ 4,874 $ 8,878
----- ------------ ------------
----- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
EARTHLINK NETWORK, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(MAY 26, 1994) YEAR ENDED THREE MONTHS ENDED
THROUGH DECEMBER 31, ------------------------------
DEC. 31, 1994 1995 MARCH 31, 1995 MARCH 29, 1996
-------------- ------------- -------------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Recurring revenues............................. $ 53 $ 2,422 $ 113 $ 2,628
Other revenues................................. 58 606 70 790
-------------- ------------- -------------- --------------
Total revenues............................... 111 3,028 183 3,418
Operating costs and expenses:
Cost of recurring revenues..................... 4 1,055 60 1,698
Cost of other revenues......................... 12 349 6 569
Sales and marketing............................ 37 3,711 124 2,209
General and administrative expenses............ 168 2,062 141 1,632
Operations and customer support................ 38 1,869 104 2,098
-------------- ------------- -------------- --------------
Total operating costs and expenses........... 259 9,046 435 8,206
-------------- ------------- -------------- --------------
Loss from operations............................. (148) (6,018) (252) (4,788)
Interest expense................................. -- (136) (19) (100)
Interest income.................................. -- 34 -- 19
-------------- ------------- -------------- --------------
Net loss................................... $ (148) $ (6,120) $ (271) $ (4,869)
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
Net loss per share (Note 1)...................... $ (0.01) $ (0.47) $ (0.02) $ (0.35)
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
Weighted average shares outstanding (Note 1)..... 11,716 13,159 12,594 13,717
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
EARTHLINK NETWORK, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON
COMMON STOCK ADDITIONAL STOCK
---------------------- PAID-IN PENDING ACCUMULATED
SHARES AMOUNT CAPITAL ISSUANCE WARRANTS DEFICIT
--------- ----------- ----------- ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock......................... 5,882 $ 59 $ 117 $ -- $ -- $ --
Warrants issued in connection with line of credit
(Note 7)....................................... -- -- -- -- 69 --
Net loss......................................... -- -- -- -- -- (148)
--------- ----- ----------- ----------- ----- -------------
Balance at December 31, 1994..................... 5,882 59 117 -- 69 (148)
Issuance of Common Stock......................... 4,232 42 6,216 -- -- --
Reclassification of S Corporation accumulated
deficit (Note 8)............................... -- -- (1,261) -- -- 1,261
Warrants issued for lease guarantee (Note 7)..... -- -- -- -- 50 --
Warrants issued for non-competition agreement
(Notes 2 and 7)................................ -- -- -- -- 5 --
Net Loss......................................... -- -- -- -- -- (6,120)
--------- ----- ----------- ----------- ----- -------------
Balance at December 31, 1995..................... 10,114 101 5,072 -- 124 (5,007)
Issuance of Common Stock
(unaudited).................................... 141 1 340 -- -- --
Common Stock pending issuance.................... -- -- -- 5,931 -- --
Warrants issued in connection with equipment
leases......................................... -- -- -- -- 104 --
Net loss (unaudited)............................. -- -- -- -- -- (4,869)
--------- ----- ----------- ----------- ----- -------------
Balance at March 29, 1996
(unaudited).................................... 10,255 $ 102 $ 5,412 $ $5,931 $ 228 $ (9,876)
--------- ----- ----------- ----------- ----- -------------
--------- ----- ----------- ----------- ----- -------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Issuance of Common Stock......................... $ 176
Warrants issued in connection with line of credit
(Note 7)....................................... 69
Net loss......................................... (148)
-------------
Balance at December 31, 1994..................... 97
Issuance of Common Stock......................... 6,258
Reclassification of S Corporation accumulated
deficit (Note 8)............................... --
Warrants issued for lease guarantee (Note 7)..... 50
Warrants issued for non-competition agreement
(Notes 2 and 7)................................ 5
Net Loss......................................... (6,120)
-------------
Balance at December 31, 1995..................... 290
Issuance of Common Stock
(unaudited).................................... 341
Common Stock pending issuance.................... 5,931
Warrants issued in connection with equipment
leases......................................... 104
Net loss (unaudited)............................. (4,869)
-------------
Balance at March 29, 1996
(unaudited).................................... $ 1,797
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
EARTHLINK NETWORK, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
(MAY 26, 1994) THREE MONTHS ENDED
THROUGH YEAR ENDED ------------------------
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 29,
1994 1995 1995 1996
--------------- ------------- ----------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $ (148) $ (6,120) $ (271) $ (4,869)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................ 7 305 16 450
Increase in accounts receivable.......................... (27) (191) (9) (63)
Increase in prepaid expenses and other assets............ -- (141) (124) (380)
Increase in accounts payable and accrued liabilities..... 22 2,292 88 1,830
Increase in deferred revenue............................. -- 212 41 203
----- ------ ----- -----------
Net cash used in operating activities.................. (146) (3,643) (259) (2,829)
----- ------ ----- -----------
Cash flows from investing activities:
Purchases of property and equipment, net................... (97) (2,766) (176) (4,247)
(Purchase) liquidation of restricted short-term
investment................................................ -- (1,500) -- 1,000
----- ------ ----- -----------
Net cash used in investing activities.................. (97) (4,266) (176) (3,247)
----- ------ ----- -----------
Cash flows from financing activities:
Proceeds from (payment of) line of credit.................. -- 1,494 -- (1,494)
Increase (decrease) in note payable........................ 67 (67) 135 --
Proceeds from capital lease obligations.................... -- 556 -- 2,163
Principal payments under capital lease obligations......... -- (42) -- (205)
Proceeds from issuance of Common Stock..................... 176 6,258 158 341
Proceeds from Common Stock pending issuance................ -- -- 142 5,931
----- ------ ----- -----------
Net cash provided by financing activities.............. 243 8,199 435 6,736
----- ------ ----- -----------
Net increase in cash and cash equivalents.................... -- 290 -- 660
Cash and cash equivalents, beginning of year................. -- -- -- 290
----- ------ ----- -----------
Cash and cash equivalents, end of year....................... $ -- $ 290 $ -- $ 950
----- ------ ----- -----------
----- ------ ----- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
EarthLink Network, Inc. ("EarthLink" or the "Company") was organized on May
26, 1994 and is a leading branded provider of reliable, easy-to-use Internet
services.
The Company has experienced operating losses since its inception as a result
of efforts to build its network infrastructure and internal staffing, develop
its systems, and expand into new markets. The Company expects to continue to
focus on increasing its customer base and geographic coverage. Accordingly, the
Company expects its cost of revenues, selling, general, and administrative
expenses and capital expenditures will continue to increase significantly, all
of which will have a negative impact on short-term operating results. In
addition, the Company may change its pricing policies to respond to a changing
competitive environment. There can be no assurance that growth in the Company's
revenues or customer base will continue or that the Company will be able to
achieve or sustain profitability or cash flow.
FISCAL YEAR
Effective January 1, 1996 the Company changed its fiscal year from a
calendar year end to a 52, 53 week year ending on the last Friday of December.
Accordingly, the three months ended March 29, 1996 comprised 13 weeks.
REVENUES
Recurring revenues from monthly Internet service are recognized over the
period services are provided. Other revenues, consisting primarily of sign up
fees, are recognized as revenue when earned.
CASH AND CASH EQUIVALENTS
All highly liquid investments with an original maturity of three months or
less at the date of acquisition are classified as cash equivalents.
ACCOUNTS RECEIVABLE AND DEFERRED REVENUES
Commencing in 1995, the Company began to bill for Internet service generally
one month in advance. Accordingly, these non-cancelable advanced billings are
included in both accounts receivable and deferred revenue.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated or amortized using the straight-line
method over the estimated useful life of the assets, which is generally three
years. Leasehold improvements are amortized using the straight line method over
the shorter of their estimated lives or the term of the lease.
EQUIPMENT UNDER CAPITAL LEASE
The Company leases certain of its data communications and other equipment
under capital lease agreements. The assets and liabilities under capital lease
are recorded at the lesser of the present value of aggregate future minimum
lease payments, including estimated bargain purchase options, or the fair value
of the assets under lease. Assets under capital lease are depreciated over their
estimated useful lives of three years, which are generally equal to the terms of
the leases.
F-7
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLES
Intangible assets consist primarily of deferred financing costs, prepaid
lease guarantee costs, goodwill, rights to client lists and a covenant not to
compete. The costs assigned to intangible assets are being amortized on a
straight-line basis over the estimated useful lives of the assets ranging from 2
to 3 years. The Company regularly reviews the recoverability of intangibles
based on estimated undiscounted future cash flows from operating activities
compared with the carrying values of the intangibles.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS
123), effective for years beginning after December 15, 1995. For purposes of
recording expense associated with stock-based compensation, the Company intends
to continue to apply the provisions of APB Opinion No. 25 and related
interpretations. The effect of adoption of SFAS 123 in the year ending December
31, 1996 is not expected to be material.
ADVERTISING AND CUSTOMER ACQUISITION COSTS
Advertising and customer acquisition costs are included in sales and
marketing. Such costs are expensed as incurred.
INCOME TAXES
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under this method, deferred
tax assets and liabilities are determined based on differences between the
financial reporting basis and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding. In addition, pursuant to Securities and Exchange Commission
Staff Accounting Bulletin No. 83, Common Stock and Common Stock equivalent
shares issued by the Company at prices below the public offering price during
the twelve month period prior to the proposed offering date (using the treasury
stock method and an assumed initial public offering price of $11.00 per share)
including Common Stock pending issuance have been included in the calculation as
if they were outstanding for all periods regardless of whether they are
dilutive. Common Stock equivalent shares issued by the Company more than twelve
months prior to the proposed offering date have been excluded from the net loss
per share calculation because the impact is anti-dilutive.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consists principally of cash investments and trade receivables.
The Company's cash investment policies limit investments to short-term, low risk
instruments. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
F-8
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The interim financial data is unaudited. However, in the opinion of the
Company, the interim financial data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
the interim periods.
2. PURCHASE OF CERTAIN ASSETS FROM BECKEMEYER DEVELOPMENT TECHNOLOGIES
In order to recruit the principal shareholder of Beckemeyer Development
Technologies ("BDT") to serve as the Company's Vice President of Engineering, on
November 7, 1995, the Company agreed to purchase all fixtures, equipment, and
the client list of BDT for cash of $64,000. In addition to the above, the
principal shareholder was issued warrants to purchase 20,678 shares of the
Company's Common Stock at $2.42 per share as consideration for a provision not
to compete for a two-year period. The value assigned to the warrants was $5,000
based upon an appraisal obtained by the Company. The warrants expire October 10,
2005. This purchase price was allocated to the assets acquired with the
remainder reflected as an intangible asset. At the time of purchase, BDT was not
material to the results of operations, financial position or customer base of
EarthLink.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Data communications equipment......................................................... $ 71 $ 2,167
Office and other equipment............................................................ 26 661
Leasehold improvements................................................................ -- 35
--- ---------
97 2,863
Less accumulated depreciation and amortization........................................ (7) (312)
--- ---------
$ 90 $ 2,551
--- ---------
--- ---------
</TABLE>
Property under capital lease, primarily data communications equipment
included above, aggregated $556,000 at December 31, 1995. Included in
accumulated depreciation and amortization are amounts related to property under
capital lease of $56,000 at December 31, 1995. Depreciation and amortization
expense charged to operations was $7,000 and $305,000 in 1994 and 1995,
respectively, which included nil and $56,000, respectively, pertaining to
property under capital lease.
F-9
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
---------------
(IN THOUSANDS)
<S> <C>
Deposits............................................................................... $ 122
Prepaid expenses....................................................................... 123
-----
$ 245
-----
-----
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred financing costs.............................................................. $ 69 $ --
Lease guarantee....................................................................... -- 50
Rights to client lists................................................................ -- 10
Goodwill.............................................................................. -- 5
Covenant not to compete............................................................... -- 5
--- ---
$ 69 $ 70
--- ---
--- ---
</TABLE>
At December 31, 1995, deferred financing costs were fully amortized and
charged against operations as additional interest.
6. LINES OF CREDIT
The Company has three secured revolving credit agreements with its banks
under which the Company may borrow up to a maximum principal amount of
$1,000,000, $250,000 and $250,000, respectively. These revolving line of credit
agreements expire on October 31, 1996, June 14, 1996 and July 3, 1996
respectively. All lines of credit are secured by certificates of deposit.
Interest is payable monthly in arrears at 1.5% to 2% in excess of the annualized
percentage yield of the pledged certificates of deposits. The outstanding
principle balance under these lines of credit was $1,000,000, $248,000 and
$246,000 at December 31, 1995. The effective interest rates at December 31, 1995
were 6.48%, 7.62% and 7.65%, respectively.
7. STOCKHOLDERS' EQUITY
BUY-SELL AGREEMENT
The Company and certain stockholders entered into a Buy-Sell Agreement
pursuant to which the Company has the first right of refusal upon sale or
transfer of shares of Common Stock by these stockholders. The right will expire
by either written agreement of all parties, dissolution, bankruptcy, or
insolvency of the Company, registration of the Company's Common Stock under
Section 12(b) or 12(g) of the Securities Exchange Act of 1934, consummation of a
public offering, sale or merger, or at such time as only one stockholder
remains.
F-10
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS
The Company grants non-qualified stock options to certain employees,
officers and directors as directed by the Company's board of directors. Options
generally vest ratably over a five year period. A summary of the activity
related to these options is as follows:
<TABLE>
<CAPTION>
OPTION PRICE
PER SHARE OUTSTANDING EXERCISABLE
-------------- ----------- -----------
<S> <C> <C> <C>
Options granted.............................................. $0.30-$2.42 850,000
Became exercisable........................................... $0.30-$2.42 85,000
Forfeited.................................................... $0.30 (120,417)
-------------- ----------- -----------
Balance at December 31, 1995................................. $0.30-$2.42 729,583 85,000
-------------- ----------- -----------
-------------- ----------- -----------
</TABLE>
In September 1995, the Company established the EarthLink Network 1995 Stock
Option Plan (the "1995 Plan"). The 1995 Plan provides for the grant of incentive
stock options to employees of the Company and non-qualified stock options to
employees, officers, directors and consultants of the Company. The 1995 Plan is
administered by a committee appointed by the Board which determines the terms of
the options granted, including the exercise price, the number of shares subject
to option, and the option vesting period. The exercise price of all options
granted under the plan must be at least 85% of the fair market value (for
nonstatutory stock options) or 100% of the fair market value (for incentive
stock options) on the date of grant. Options generally vest in equal quarterly
increments over a five year period. Options to purchase 75,000 shares granted to
an officer accelerate to a four year vesting in the event of an initial public
offering of the Company's Common Stock. A summary of the activity related to
these options is as follows:
<TABLE>
<CAPTION>
OPTION PRICE AVAILABLE
PER SHARE OUTSTANDING EXERCISABLE FOR GRANT
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Plan creation (1995)............................. 1,500,000
Options granted.................................. $ 2.42 465,000 (465,000)
Became exercisable............................... $ 2.42 2,000
----- ----------- ----- -----------
Balance at December 31, 1995..................... $ 2.42 465,000 2,000 1,035,000
----- ----------- ----- -----------
----- ----------- ----- -----------
</TABLE>
WARRANTS
The Company has issued to certain Board members, consultants, lease
providers and creditors warrants to purchase shares of the Company's Common
Stock.
On December 15, 1994, certain stockholders provided the Company a revolving
line of credit of $400,000 bearing interest at a rate of 8.1%. As of December
31, 1994 the outstanding balance was $67,000. Interest expense for the year
ended December 31, 1995 was $15,000. The Company issued warrants to the
stockholders to purchase 300,000 shares of Common Stock at $0.91 per share
valued at $69,000, based upon an appraisal obtained by the Company, as
additional consideration for this line of credit. These warrants expire June 19,
2000.
On September 1, 1995, certain stockholders guaranteed a $500,000 lease for
networking equipment. The Company issued warrants to purchase 100,000 shares of
Common Stock at $0.91 per share valued at $25,000, based upon an appraisal
obtained by the Company, as consideration for this guarantee. These warrants
expire August 31, 2000.
F-11
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On December 13, 1995, certain stockholders provided the Company with a
$250,000 Irrevocable Standby Letter of Credit as a performance guarantee for a
real estate lease. In conjunction with this transaction the Company issued
warrants valued at $25,000, based upon an appraisal obtained by the Company, to
purchase 100,000 shares at $2.42 per share. These warrants expire December 1,
2000.
A summary of the activity related to these grants is as follows:
<TABLE>
<CAPTION>
WARRANT PRICE
PER SHARE SHARES
-------------- ---------
<S> <C> <C>
Warrants granted........................................................... $0.91 300,000
Balance at December 31, 1994............................................... $0.91 300,000
Warrants granted........................................................... $0.91-$2.42 220,678
-------------- ---------
Balance at December 31, 1995............................................... $0.91-$2.42 520,678
-------------- ---------
-------------- ---------
</TABLE>
The value of these warrants have been reflected as additional financing or
lease costs and reflected accordingly as charges against operations.
8. INCOME TAXES
The stockholders, upon incorporating the Company, elected to treat the
Company as an S Corporation under the Internal Revenue Code. On June 19, 1995,
this election was revoked as certain ineligible entities (i.e partnerships,
corporations) became stockholders. Losses of $1,261,000 incurred from inception
through June 19, 1995 have been reclassified from accumulated deficit to Common
Stock as a result of the change to C Corporation status. The Company is now
subject to income taxes on income earned after June 19, 1995. At December 31,
1995, the Company had net operating loss carryforwards for federal income tax
purposes totaling approximately $4,981,000 which begin to expire in 2010.
Operating loss carryforwards for state income tax purposes totaling
approximately $2,524,000 begin to expire in 2001. The Tax Reform Act of 1986
includes provisions which may limit the net operating loss carryforwards
available for use in any given year if certain events occur, including
significant changes in ownership. If the Company is successful in completing its
proposed initial public offering, utilization of the Company's net operating
loss carryforwards to offset future income may be limited.
Deferred tax assets at December 31, 1995 include the following (in
thousands):
<TABLE>
<S> <C>
Net operating loss carryforwards.......................................... $ 1,992
Vacation accrual.......................................................... 27
---------
Gross deferred tax assets................................................. 2,019
Deferred tax asset valuation allowance.................................... (2,019)
---------
$ --
---------
---------
</TABLE>
The Company recorded a full valuation allowance for net deferred tax assets
as the Company believes it is more likely than not that the deferred tax asset
will not be realized.
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities and certain equipment under non-cancelable
operating leases expiring in various years through 2000. Total rent expense for
the years ended December 31, 1994 and 1995 for all
F-12
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
operating leases amounted to $23,882 and $145,017, respectively. The Company
also leases equipment, primarily data communications equipment, under
non-cancelable capital leases. Generally, the Company's capital leases include
purchase options at the end of the lease term.
Minimum lease commitments under non-cancelable leases at December 31, 1995
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ---------------------------------------------------------------------------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C>
1996.............................................................................. $ 214 $ 107
1997.............................................................................. 214 52
1998.............................................................................. 178 4
1999.............................................................................. 8 --
----- -----
Total minimum lease payments...................................................... 614 $ 163
-----
-----
Less amount representing interest................................................. (100)
-----
Present value of future lease payments............................................ 514
Less current portion.............................................................. (159)
-----
$ 355
-----
-----
</TABLE>
SIGNIFICANT AGREEMENTS
Access to the EarthLink Network outside of the Company's Southern California
regional base is currently leased from UUNET Technologies, Inc. ("UUNET").
EarthLink is in effect a reseller of UUNET's services, buying in bulk at a
discount, and providing access to EarthLink's customer base at EarthLink's
normal rates. Payment to UUNET is generally concurrent with EarthLink's receipt
of funds from customers. The Company's current agreement with UUNET, upon
expiration, automatically renews each subsequent period unless 60 days prior
written notice is given by either party. UUNET recently announced that it has
agreed to be acquired by MFS Communications, Inc. ("MFS"), a supplier of local
and long distance telephone service. There can be no assurance that following
the acquisition, MFS or UUNET will continue to provide the same service and at
affordable rates. Although leased telecommunications lines are available from
several alternative suppliers, there can be no assurance that the Company could
obtain substitute services from other providers at reasonable prices or in a
timely fashion.
EarthLink has licensed Netscape Navigator software ("Netscape Navigator"),
the World Wide Web client software, from Netscape Communications Corporation.
This license permits the Company to distribute Netscape Navigator as part of its
EarthLink Network TotalAccess software package. Management believes that
contract renewal, under conditions acceptable to EarthLink, is probable.
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
-----------------
(IN THOUSANDS)
<S> <C>
Cash paid for:
Interest............................................................................. $ 60
Income taxes......................................................................... $ 1
</TABLE>
F-13
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
As discussed in Note 2, the Company obtained a covenant not to compete
agreement in exchange for warrants valued at $5,000.
As discussed in Note 7, certain stockholders guaranteed a $500,000 equipment
lease in exchange for warrants valued at $25,000 and provided the security
deposit for a real estate lease in exchange for warrants valued at $25,000
during the year ended December 31, 1995. The Company obtained a revolving line
of credit of $400,000 in exchange for warrants valued at $69,000 during 1994.
11. SUBSEQUENT EVENTS
REVOLVING LINE OF CREDIT
On May 31, 1996, the Company obtained a commitment from certain entities and
individuals, certain of whom may be directors, officers and principal
stockholders of the Company, to provide a short-term line of credit under which
the Company may borrow a maximum of $3,000,000 at an interest rate of 10%. The
line of credit will expire on May 30, 1997.
STOCK OPTIONS
In January 1996, stock options to purchase 550,000 shares of Common Stock at
$2.42 were granted. On March 4, 1996, options to purchase 5,000 shares of Common
Stock at $4.88 were granted of which 4,750 were subsequently forfeited. On May
7, 1996 the Company granted to employees under the 1995 Plan options to purchase
807,500 shares of Common Stock at $4.88 per share.
WARRANTS
On January 11, 1996, certain stockholders guaranteed a $1,500,000 lease for
networking equipment. The Company issued warrants to purchase 200,000 shares of
Common Stock at $2.42 per share valued at $60,000, based upon an appraisal
obtained by the Company, as consideration for this guarantee. These warrants
expire January 11, 2001.
On January 12, 1996, the Company issued warrants to purchase 200,000 shares
of Common Stock at $2.42 to Board members. The warrants vest quarterly over five
years and were valued at $76,000, based upon appraisal. Compensation will be
recognized quarterly over the vesting period.
On January 18, 1996, LINC Capital Partners, Inc. provided a $1,500,000 lease
line for equipment. The Company issued warrants to purchase 100,000 shares of
Common Stock at $2.42 per share valued at $40,000, based upon an appraisal
obtained by the Company. These warrants expire January 18, 2006.
On February 15, 1996, Boston Financial & Equity Corporation provided a
$700,000 lease line. The Company issued warrants to purchase 10,000 shares of
Common Stock at $4.88 per share valued at $3,500, based upon an appraisal
obtained by the Company. These warrants expire February 15, 2006.
In May 1996, the Company issued warrants to purchase 120,393 shares of
Common Stock at $4.88 per share for lease lines and services to the Company.
F-14
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of warrants granted subsequent to December 31, 1995 is as follows:
<TABLE>
<CAPTION>
WARRANT PRICE
PER SHARE SHARES
---------------- ---------
<S> <C> <C>
Warrants granted through March 29, 1996........................ $2.42 - $4.88 510,000
Warrants granted subsequent to March 29, 1996.................. $4.88 120,393
---------------- ---------
$2.42 - $4.88 630,393
---------------- ---------
---------------- ---------
</TABLE>
On May 6, 1996, the Company agreed to issue warrants to purchase 100,000
shares of Common Stock at an exercise price of $4.88 per share as consideration
for production of commercials. In addition the Company agreed to issue
additional warrants to purchase a maximum of 600,000 shares of Common Stock
based upon the number of customers obtained through the commercials. Through
December 31, 1997, the exercise price will be $4.88 per share, thereafter, the
exercise price will be set at the then fair market value of the Company's Common
Stock.
In connection with the commitment to provide the line of credit described
above, the Company agreed to issue to the lenders warrants to purchase 200,000
shares of Common Stock at $10.00 per share.
On May 31, 1996, in connection with an amendment to the UUNET Agreement, the
Company agreed to issue warrants to purchase 20,000 shares of Common Stock at an
exercise price of $10.00 per share.
COMMON STOCK
The Company issued 90,970 shares of Common Stock at $2.42 and 50,000 shares
of Common Stock at $2.42 on January 18, 1996 and March 20, 1996, respectively.
On May 6, 1996, the Company issued 1,704,920 shares of common stock at $4.88 in
a private placement. As a result of these placements, EarthLink raised, in the
aggregate, $8,661,000 subsequent to December 31, 1995. In addition, on May 5,
1996, the Company issued 10,245 shares of Common Stock at $4.88 per share, to a
sub-contractor in lieu of cash for services provided to the Company.
LEASES
Subsequent to December 31, 1995, the Company entered into several long-term
operating and capital lease agreements. Following is a schedule of future
minimum lease payments for agreements entered into subsequent to December 31,
1995:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------- --------- -----------
(IN THOUSANDS)
<S> <C> <C>
1996............................................................................. $ 673 $ 492
1997............................................................................. 951 565
1998............................................................................. 943 592
1999............................................................................. 332 620
2000............................................................................. 230 650
Thereafter....................................................................... 63 332
--------- -----------
3,192 $ 3,251
-----------
-----------
Less amount representing interest................................................ (754)
---------
Present value of future lease payments........................................... $ 2,438
---------
---------
</TABLE>
New leases and related commitments are incremental to those disclosed in
Note 9.
F-15
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
REINCORPORATION
On June , 1996, the Company effected a reincorporation in Delaware. As a
result of the reincorporation the Company's authorized shares of Common Stock
was increased to 50,000,000 shares with a par value of $0.01 per share. In
addition the Company authorized 10,000,000 shares of preferred stock with a par
value of $0.01 per share. In March 1995 and January 1996 the Company executed
100-for-1 and 10-for-1 stock splits, respectively. The accompanying financial
statements have been retroactively adjusted to give effect to the
reincorporation and the stock splits.
F-16
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED HEREIN AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 5
The Company....................................
Use of Proceeds................................ 14
Dividend Policy................................ 14
Capitalization................................. 15
Dilution....................................... 16
Selected Financial Data........................ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business....................................... 23
Management..................................... 34
Certain Transactions........................... 39
Principal Stockholders......................... 40
Description of Capital Stock................... 41
Shares Eligible for Future Sale................ 43
Underwriting................................... 45
Legal Matters.................................. 46
Experts........................................ 46
Additional Information......................... 46
Financial Statements........................... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,600,000 Shares
[LOGO]
Common Stock
--------------
PROSPECTUS
, 1996
------------------------
UBS SECURITIES
PIPER JAFFRAY INC.
CRUTTENDEN ROTH
INCORPORATED
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses, other than underwriting discounts
and commissions, to be borne by the Company in connection with the issuance and
distribution of the Common Stock being registered:
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---------------------------------------------------------------------------- --------------
<S> <C>
Securities and Exchange Commission registration fee......................... $ 17,131.03
NASD filing fee............................................................. 5,468.00
Nasdaq National Market listing fee.......................................... *
Blue Sky fees and expenses.................................................. *
Printing and engraving expenses............................................. *
Legal fees and expenses..................................................... *
Accounting fees and expenses................................................ *
Transfer Agent and Registrar fee............................................ *
Miscellaneous............................................................... *
--------------
Total................................................................... $
--------------
--------------
</TABLE>
- ------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provide that directors of the
Company will not be personally liable for monetary damages to the Company or its
stockholders for breaches of their fiduciary duty of care or other duties as
directors to the extent provided by Delaware law. The Company's Bylaws and
Indemnification Agreements with each director provide that the Company will
indemnify (i) directors who succeed in the defense of any proceeding to which
the director was a party; or (ii) directors who are made a party to a proceeding
because of their service for or on behalf of the Company if the directors acted
in good faith in or not against the Company's best interest or if the directors
had no reasonable cause to believe their conduct was unlawful. Indemnification
is not available to directors who are adjudged liable to the Company, who
receive improper benefits, who make unlawful distributions, or who appropriate a
business opportunity of the Company. The Company's Board of Directors has the
discretion to apply these provisions to officers, employees and agents of the
Company.
In appropriate circumstances, the Company will advance or reimburse
reasonable expenses if authorized by the Board of Directors, legal counsel, or
the stockholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since its inception in May 1994, the Registrant has issued and sold
unregistered securities in the transitions described below. All of the following
share and per share amounts have been restated to give effect to all of the
Company's stock splits.
Shares of Common Stock
1. On May 27, 1994, the Company issued 3,000,000 shares of Common Stock to
Mr. Dayton as founder's stock for an aggregate price of $1,000.
2. On June 10, 1994, the Company sold 1,000,000 shares of Common Stock to
each of Messrs. Slatkin and O'Donnell, directors of the Company, at a purchase
price of $0.05 per share.
II-1
<PAGE>
3. On October 17, 1994, the Company sold 441,180 shares of Common Stock to
each of Messrs. Slatkin and O'Donnell, directors of the Company, at a purchase
price of $0.09 per share.
4. On March 30, 1995, the Company sold 122,340 shares of Common Stock, to
each of Messrs. Slatkin and O'Donnell, directors of the Company, and 489,630
shares of Common Stock to Robert London, at a purchase price of $0.41 per share.
5. On June 19, 1995, the Company sold 1,654,170 shares of Common Stock to
20 investors, including Messrs. Slatkin, O'Donnell, directors of the Company,
and to Mr. Sidney Azeez, a director of the Company, at a purchase price of $0.91
per share.
6. On October 31, 1995, the Company sold 1,843,490 shares of Common Stock
to 19 investors, including Messrs. Slatkin and O'Donnell, directors of the
Company, and to Mr. Azeez, a director of the Company, at a purchase price of
$2.42 per share.
7. On January 18, 1996, the Company sold 90,970 shares of Common Stock to
Messrs. Linwood Lacy, Jr. and Robert Kavner, directors of the Company, at a
purchase price of $2.42 per share.
8. On March 20, 1996, the Company sold 50,000 shares of Common Stock to Mr.
Charles G. Betty, a director of the Company and the Company's President and
Chief Operating Officer, at a purchase price of $2.42 per share.
9. On May 6, 1996, the Company sold 10,245 shares of Common Stock to a
sub-contractor at a purchase price of $4.88 per share, which purchase price was
paid by performance of certain services.
10. On May 6, 1996, the Company sold 1,704,920 shares of Common Stock to 34
investors (primarily existing stockholders of the Company), including Messrs.
Azeez, Slatkin and O'Donnell, directors of the Company, at a purchase price of
$4.88 per share.
Warrants to Purchase Common Stock
11. Effective December 1, 1994, the Company granted Warrants to purchase
150,000 shares of Common Stock at an exercise price of $0.91 per share to each
of Messrs. Slatkin and O'Donnell in connection with their provision of a
$400,000 credit line to the Company.
12. On August 31, 1995, the Company granted Warrants to purchase 100,000
shares of Common Stock at an exercise price of $0.91 per share to Mr. Slatkin in
connection with his acting as lessee, with the Company, under a $500,000
equipment lease. Mr. Slatkin subsequently transferred one-half of these warrants
to Mr. O'Donnell as consideration for his agreement to indemnify Mr. Slatkin for
certain liability arising in connection with the lease.
13. On October 31, 1995, the Company granted Warrants to purchase 20,678
shares of Common Stock at an exercise price of $2.42 per share to David
Beckemeyer as partial consideration for the sale of certain of the assets of
Beckemeyer Consulting.
14. Effective January 11, 1996, the Company granted Warrants to purchase
200,000 shares of Common Stock at an exercise price of $2.42 per share to Mr.
Slatkin in connection with his acting as lessee, with the Company, under a
$1,500,000 equipment lease. Mr. Slatkin subsequently transferred one-half of
these warrants to Mr. O'Donnell as consideration for his agreement to indemnify
Mr. Slatkin for certain liability arising in connection with the lease.
15. On December 1, 1995, the Company granted Warrants to purchase 100,000
shares of Common Stock at an exercise price of $2.42 per share to Mr. Slatkin in
connection with their provision of a $250,000 line of credit as security for the
lease of the Company's Pasadena, California facility. Mr. Slatkin subsequently
transferred one-half of these warrants to Mr. O'Donnell in consideration for his
agreement to indemnify Mr. Slatkin for certain liability arising in connection
with the line of credit.
II-2
<PAGE>
16. On January 12, 1996, the Company granted warrants to purchase 100,000
shares of Common Stock at an exercise price of $2.42 per share to each of
Messrs. Lacy and Kavner as consideration for their agreeing to serve on the
Company's Board of Directors.
17. On January 18, 1996, the Company granted warrants to purchase 100,000
shares of Common Stock at an exercise price of $2.42 per share to LINC Capital
Partners, Inc. ("LINC") in connection with LINC's provision of a $2,000,000
equipment lease credit line.
18. On February 15, 1996, the Company granted warrants to purchase 10,000
shares of Common Stock at an exercise price of $4.88 per share to Boston
Financial & Equity Corporation ("BFE") in connection with BFE's provision of a
$700,000 equipment lease credit line.
19. On May 6, 1996, the Company agreed to issue warrants to purchase 100,000
shares of Common Stock at an exercise price of $4.88 per share in connection
with the production of commercials on behalf of the Company. In addition, the
Company agreed to issue additional warrants to purchase up to a maximum of
600,000 shares of Common Stock based upon the number of subscribers obtained
through the commercials. Through December 31, 1997, the exercise price will be
$4.88 per share; thereafter, the price will be set at the fair market value of
the Common Stock of the Company.
20. On May 10, 1996, the Company issued warrants to purchase 120,393 shares
of Common Stock at an exercise price of $4.88 per share for lease lines and
services rendered to the Company.
21. On May 10, 1996, the Company obtained a commitment from a group of
lenders, which may include certain directors, officers and principal
stockholders of the Company, to provide a short-term revolving line of credit
under which the Company may borrow a maximum of $3,000,000 at an interest rate
of 10% per annum. The line of credit will expire one year from its execution. In
connection with this line of credit, the Company agreed to issue warrants to
purchase 200,000 shares of Common Stock at an exercise price of $10.00 per
share.
22. On May 31, 1996, in connection with the amendment of its agreement with
UUNET, the Company agreed to issue warrants to purchase 20,000 shares of Common
Stock at $10.00 per share.
Options to Purchase Common Stock
23. On March 18, 1995, the Company granted non-plan Options to purchase
150,000 shares of Common Stock at an exercise price of $0.30 per share to Mr.
Phil Gale in consideration for Mr. Gale's development efforts and as payment for
the development by Mr. Gale of certain software for the Company. Upon
termination by Mr. Gale of his employment on March 8, 1996, 29,583 of these
shares had vested and the balance expired.
24. On June 19, 1995, the Company granted non-plan Options to purchase
500,000 shares of Common Stock at an exercise price of $0.91 to Mr. Dayton in
consideration for his continuing efforts to develop the Company and its
business.
25. On June 19, 1995, the Company granted non-plan Options to purchase
100,000 shares of Common Stock at an exercise price of $0.91 per share to Mr.
Robert E. Johnson, Jr. in consideration for his accepting employment with the
Company.
26. On December 1, 1995, the Company granted non-plan Options to purchase
100,000 shares of Common Stock at an exercise price of $2.42 to Mr. Leland C.
Thoburn in consideration for his accepting employment with the Company.
27. In addition to the options described, between October 1, 1995 and May 7,
1996, the Registrant granted options to purchase an aggregate of 1,822,750
shares of Common Stock to employees of the Registrant at exercise prices ranging
from $2.42 to $4.88 per share as incentives under the Registrant's Stock Option
Plan.
All issuances of securities described above were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 or Rule 701 promulgated under the Securities Act of 1933. All of the
securities were acquired by the investors for investment and with no view toward
the resale or
II-3
<PAGE>
distribution thereof. In each instance, the investor was either an employee of
the Company or a sophisticated investor, the offers and sales were made without
any public solicitation and the stock certificates bear restrictive legends. No
underwriter was involved in the transactions and no commissions were paid.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
<C> <C> <S>
.1 1 -- Form of Underwriting Agreement*
3.1 -- Certificate of Incorporation
3.2 -- Bylaws
4.1 -- See exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and Bylaws
defining rights of holders of Common Stock
4.2 -- Specimen Stock Certificate*
4.3 -- Form of Warrant Agreement
4.4 -- Form of Registration Rights Agreement*
4.5 -- Buy-Sell Agreement dated June 10, 1995 among the Registrant, Sky Dayton, Reed Slatkin and
Kevin O'Donnell*
5.1 -- Opinion of Hunton & Williams*
9.1 -- Voting Trust Agreement dated June 10, 1995 among Sky Dayton, Reed Slatkin and Kevin
O'Donnell*
10.1 -- 1995 Stock Option Plan and forms of Stock Option Agreement and Stock Purchase Agreement
10.2 -- Stock Option Plan for Directors
10.3 -- Master Lease Agreement, dated February 8, 1996, between the Registrant and Boston Financial &
Equity Corporation
10.4 -- Lease Line Agreement, dated January 30, 1996, between the Registrant and Boston Financial &
Equity Corporation
10.5 -- Master Lease Agreement, dated September 1, 1995, between the Registrant and LINC Capital
Management
10.6+ -- Netscape Communications Corporation Internet Service Provider Navigator Distribution
Agreement dated May 31, 1996, between the Registrant and Netscape Communications
Corporation*
10.7+ -- Network Services Agreement between the Registrant and UUNET Technologies, Inc.*
10.8 -- Software Distribution Agreement (MacTCP) dated October 2, 1995, between the Registrant and
Apple Computer, Inc.*
10.9 -- Employment Agreement, dated January 15, 1996, between the Registrant and Mr. Charles G. Betty
10.10 -- Indemnification Agreement, dated August 31, 1995, among the Registrant and Kevin O'Donnell as
Indemnitors and Reed Slatkin as Indemnitee
10.11 -- Indemnification and Participation Agreement, dated December 1, 1995, among the Registrant and
Kevin O'Donnell as Indemnitors and Reed Slatkin as Indemnitee
10.12 -- Standard Industrial/Commercial Multi-Tenant Lease, dated December 1, 1995, between the
Registrant and Becton, Dickinson*
10.13 -- Business Loan Agreement, dated June 15, 1995, and Promissory Note in the original principal
amount of $250,000 between the Registrant and California United Bank*
10.14 -- Line of Credit Note in the original principal amount of $250,000, dated June 23, 1995 and
Security Agreement, dated June 23, 1995 between the Registrant and the Bank of California,
N.A.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
10.15 -- Line of Credit Note in the original principal amount of $1,000,000, dated November 2, 1995,
between the Registrant and the Bank of California, N.A.
<C> <C> <S>
10.16 -- Production and Distribution Agreement, dated May 6, 1996, between the Registrant and National
Media Corporation
11.1 -- Statement re computation of per share earnings
23.1 -- Consent of Price Waterhouse LLP, independent public accountants*
23.2 -- Consent of Hunton & Williams (contained in its opinion in exhibit 5.1)
27. -- Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment.
+ Confidential treatment requested.
(b) Financial Statement Schedules:
All of the financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are either not required
under the related instructions or are inapplicable and have therefore been
omitted, except for the Financial Data Schedule referenced above as Exhibit 27
and filed herewith; provided, however, that Exhibit 27 shall not be deemed filed
for purposes of Section 11 of the Securities Act, Section 18 of the Exchange Act
and Section 323 of the Trust Indenture Act, or otherwise be subject to the
liabilities of such sections, nor shall it be deemed a part of this Registration
Statement.
ITEM 17. UNDERTAKINGS
The Company hereby undertakes to provide the Underwriters at the closing
specified in the underwriting agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each Purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons to the Company,
the Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of a
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pasadena, State of
California, on the 3rd day of June, 1996.
EARTHLINK NETWORK, INC.
by: /s/ SKY D. DAYTON
-----------------------------------
Sky D. Dayton
Chairman of the Board of Directors
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Sky D. Dayton, Charles G. Betty and Barry W. Hall the true and lawful
attorneys-in-fact and agents of the undersigned, with full power of substitution
and resubstitution, for and in the name, place and stead of the undersigned, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Commission, and hereby grants to such attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully for all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on the 3rd day of June, 1996.
SIGNATURE TITLE
- ----------------------------------- -------------------------
/s/ Sky D. Dayton
- ----------------------------------- Chairman of the Board of
Sky D. Dayton Directors
President, Chief
/s/ CHARLES G. BETTY Executive Officer and
- ----------------------------------- Director (Principal
Charles G. Betty Executive Officer)
/s/ BARRY W. HALL Chief Financial Officer
- ----------------------------------- (Principal Financial and
Barry W. Hall Accounting Officer)
- ----------------------------------- Director
Sidney Azeez
/s/ ROBERT M. KAVNER
- ----------------------------------- Director
Robert M. Kavner
- ----------------------------------- Director
Linwood A. Lacy, Jr.
/s/ KEVIN M. O'DONNELL
- ----------------------------------- Director
Kevin M. O'Donnell
/s/ REED E. SLATKIN
- ----------------------------------- Director
Reed E. Slatkin
II-6
<PAGE>
CERTIFICATE OF INCORPORATION
OF
EARTHLINK NETWORK, INC.
The undersigned, for the purposes of forming a corporation pursuant to
Sections 101 and 102 of the General Corporation Law of the State of Delaware,
does hereby certify as follows:
I.
The name of the Corporation is EarthLink Network, Inc. (hereinafter the
"Corporation").
II.
The Corporation shall have perpetual duration.
III.
The purposes for which the Corporation is formed are to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware and to possess and exercise all of the
powers and privileges granted by such law.
IV.
The total number of shares of capital stock which the Corporation is
authorized to issue is sixty million (60,000,000) divided into two classes as
follows:
(1) fifty million (50,000,000) shares of common stock, $.01 par value
per share ("Common Stock"); and
(2) ten million (10,000,000) shares of preferred stock, $.01 par value
per share ("Preferred Stock").
The holders of Common Stock shall be entitled to one vote for each share on
all matters required or permitted to be voted on by stockholders of the
Corporation.
The Board of Directors is authorized, subject to limitations prescribed by
law and the provisions of this Certificate of Incorporation, to provide for the
issuance of shares of Preferred Stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such
<PAGE>
series, and to fix the designation, powers, preferences and rights of the shares
of each such series and the qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each series of
Preferred Stock shall include, but not be limited to, determination of the
following:
(1) The number of shares constituting that series and the distinctive
designation of that series; and
(2) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares
of that series; and
(3) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting
rights; and
(4) Whether that series shall have conversion privileges, and, if so, the
terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of
Directors shall determine; and
(5) Whether or not the shares of that series shall be redeemable, and, if
so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under
different conditions and at different redemption dates; and
(6) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series and, if so, the terms and amount of
such sinking fund; and
(7) The rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation,
and the relative rights of priority, if any, of payment of shares of
that series; and
(8) Any other relative rights, preferences and limitations of that series.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be paid
or declared and set apart for payment on the common shares with
respect to the same dividend period.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, the assets available for distribution to holders of shares
of Preferred Stock of all series shall be insufficient to pay such holders the
full preferential amount to which they are entitled, then such assets shall be
distributed ratably among the shares of all series of Preferred
-2-
<PAGE>
Stock in accordance with the respective preferential amounts (including unpaid
cumulative dividends, if any) payable with respect thereto.
-3-
<PAGE>
V.
The Board of Directors of the Corporation is hereby expressly authorized to
make, amend, repeal or otherwise alter the By-laws of the Corporation.
VI.
The directors of the Corporation shall not be required to be elected by
written ballots.
VII.
To the fullest extent permitted by the General Corporation Law of the State
of Delaware, as the same presently exists or may hereafter be amended, no
director of the Corporation shall be liable to the Corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director.
VIII.
(a) The business and affairs of the Corporation shall be managed by, or
under the direction of, a Board of Directors comprised as follows:
(1) The initial number of directors shall be such as may be
determined by the incorporator and thereafter the number of directors of
the Corporation shall be not less than five and not more than eleven, the
exact number within such minimum and maximum limits to be fixed and
determined from time to time by resolution of a majority of the Board of
Directors or by the affirmative vote of the holders of at least 75% of all
outstanding shares entitled to be voted in the election of directors,
voting together as a single class.
(2) At the first Annual Meeting of Stockholders, the Board of
Directors shall be divided into three classes consisting, as nearly as may
be possible, of one-third of the total number of directors constituting the
entire Board of Directors. At the first Annual Meeting of Stockholders,
the first class of directors shall be elected for a one-year term expiring
upon the next following Annual Meeting of Stockholders and upon the
election and qualification of their respective successors, the second class
of directors shall be elected for a term expiring upon the second next
Annual Meeting of Stockholders and upon the election and qualification of
their respective successors, and the third class of directors shall be
elected for a term expiring upon the third next Annual Meeting of
Stockholders and upon the election and qualification of their respective
successors. At each succeeding Annual Meeting of Stockholders, successors
to the class of directors whose term expires at that Annual Meeting of
Stockholders shall be elected for a three-year term. If the number of
directors has changed, any
-4-
<PAGE>
increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible,
and any additional director of any class elected to fill a vacancy
resulting from an increase in such a class shall hold office for a term
that shall coincide with the remaining term of that class, unless otherwise
required by law, but in no case shall a decrease in the number of directors
for a class shorten the term of an incumbent director.
A director shall hold office until the Annual Meeting of Stockholders
upon which his term expires and until his successor shall be elected and
qualified, subject, however, to prior death, resignation, retirement,
disqualification or removal from office.
(3) Nominations for the election of directors may be made by the
Board of Directors or a committee appointed by the Board of Directors, or
by any stockholder of record entitled to vote generally in the election of
directors; provided, however, that any stockholder of record entitled to
vote generally in the election or directors may nominate one or more
persons for election as directors at a meeting only if written notice of
such stockholder's intent to make such nomination or nominations has been
given, either by personal delivery or by the United States mail, postage
prepaid, to the Secretary of the Corporation not later than (i) with
respect to any election to be held at the Annual Meeting of Stockholders,
90 days in advance of such meeting, and (ii) with respect to any election
for directors to be held at a Special Meeting of Stockholders, the close of
business on the seventh day following the date on which notice of such
meeting is first given to stockholders. Each such notice shall set forth:
(A) the name and address of the stockholder of record who
intends to make the nomination and of the person or persons to be
nominated;
(B) a representation that the stockholder is a holder of record
of shares of the Corporation entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice;
(C) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder;
(D) such other information regarding each nominee proposed by
such stockholder as would be required to be included in a proxy
statement filed pursuant to the then-current proxy rules of the
Securities and Exchange Commission if the nominees were to be
nominated by the Board of Directors; and
-5-
<PAGE>
(E) the consent of each nominee to serve as a director of the
Corporation if so elected.
The chairman of the meeting may refuse to acknowledge the nomination of any
person not made in compliance with the foregoing procedure.
(4) Any vacancy on the Board of Directors that results from an
increase in the number of directors or from the prior death, resignation,
retirement, disqualification or removal from office of a director shall be
filled by a majority of the Board of Directors then in office, though less
than a quorum, or by the sole remaining director. Any director elected to
fill a vacancy resulting from the prior death, resignation, retirement,
disqualification or removal from office of a director shall have the same
remaining term as that of his or her predecessor.
(5) At any meeting of stockholders with respect to which notice of
such purpose has been given, the entire Board of Directors or any
individual director may be removed, with cause, by the affirmative vote of
the holders of 75% of all outstanding shares entitled to be voted at an
election of directors.
(6) Notwithstanding the foregoing, whenever the holders of any one or
more classes or series of Preferred Stock issued by the Corporation shall
have the right, voting separately by class or series, to elect directors at
an Annual or Special Meeting of Stockholders, the election, term of office,
filling of vacancies and other features of such directorships shall be
governed by the terms of this Certificate of Incorporation or the
resolutions of the Board of Directors creating such class or series, as the
case may be, applicable thereto, and such directors so elected shall not be
divided into Classes pursuant to Section (a) of this Article VIII unless
expressly provided by such terms.
(b) Notwithstanding any other provisions of this Certificate of
Incorporation or the By-laws of the Corporation (and notwithstanding the fact
that a lesser percentage for separate class vote for certain action may be
permitted by law, this Certificate of Incorporation or the By-laws of the
Corporation), the affirmative vote of the holders of not less than 75% of the
votes entitled to be cast by the holders of all the outstanding shares of
capital stock, voting together as a single class, shall be required to make,
alter, amend, change, add to or repeal any provision of this Certificate of
Incorporation or the By-laws of the Corporation which is or which is proposed to
be inconsistent with this Article VIII; provided, however, that this Section (b)
shall not apply to, and such 75% vote shall not be required to alter, amend,
change, add to or repeal any provisions of the By-laws relating to this Article
VIII recommended by the affirmative vote of more than 75% of the members of the
Board of Directors.
(c) The invalidity or unenforceability of this Article VIII or any portion
hereof, or of any action taken pursuant to this Article VIII, shall not affect
the validity or enforceability
-6-
<PAGE>
of any other provision of this Certificate of Incorporation, any action taken
pursuant to such other provision, or any action taken pursuant to this Article
VIII.
IX.
Action required to be taken or which may be taken at any Annual Meeting or
Special Meeting of the Stockholders of the Corporation may be taken without a
meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by all the holders
of outstanding stock entitled to vote on such action, and shall be delivered to
the Corporation by delivery to its registered office in Delaware, to its
principal place of business or to an officer or agent of the Corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested.
X.
Special meetings of stockholders may be called at any time for any purpose
or purposes by the Chairman, a majority of the Board of Directors or the holder
or holders of not less than 25% of all the shares of stock entitled to vote on
the issue proposed to be considered at the meeting if such holder or holders
sign, date and deliver to the Corporation's secretary one or more written
demands for the meeting describing the purpose or purposes for which it is to be
held.
XI.
The address of the Corporation's registered office in the State of Delaware
is to be located at ________________________________________________. The name
of the Corporation's registered agent at such address is
_____________________________.
XII.
The name and mailing address of the incorporator is:
NAME MAILING ADDRESS
Joseph B. Alexander, Jr., Esq. Hunton & Williams
600 Peachtree Street, N.E.
Suite 4100
Atlanta, Georgia 30308
-7-
<PAGE>
XIII.
The names and mailing address of each person who is to serve as a director
of the Corporation until the first Annual Meeting of Stockholders or until his
successor is elected and qualified is:
NAME MAILING ADDRESS
Sky Dayton EarthLink Network, Inc.
3100 New York Drive, Suite 201
Pasadena, CA 91107
Reed E. Slatkin EarthLink Network, Inc.
3100 New York Drive, Suite 201
Pasadena, CA 91107
Kevin M. O'Donnell EarthLink Network, Inc.
3100 New York Drive, Suite 201
Pasadena, CA 91107
Charles G. Betty EarthLink Network, Inc.
3100 New York Drive, Suite 201
Pasadena, CA 91107
Sidney Azeez EarthLink Network, Inc.
3100 New York Drive, Suite 201
Pasadena, CA 91107
Linwood A. Lacy, Jr. EarthLink Network, Inc.
3100 New York Drive, Suite 201
Pasadena, CA 91107
Robert M. Kavner EarthLink Network, Inc.
3100 New York Drive, Suite 201
Pasadena, CA 91107
-8-
<PAGE>
IN WITNESS WHEREOF, the undersigned, being the sole incorporator
hereinabove named, hereby further certifies that the facts stated herein are
true and, accordingly, has signed this Certificate of Incorporation on this
___ day of May, 1996.
--------------------------------------
Joseph B. Alexander, Jr.
-9-
<PAGE>
BY-LAWS
OF
EARTHLINK NETWORK, INC.
(A DELAWARE CORPORATION)
<PAGE>
INDEX
PAGE
ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II STOCKHOLDERS' MEETINGS. . . . . . . . . . . . . . . . . . . . 1
2.1 Places of Meetings. . . . . . . . . . . . . . . . . . . . . . 1
2.2 Annual Meetings . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 Special Meetings. . . . . . . . . . . . . . . . . . . . . . . 1
2.4 Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.5 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.6 List of Stockholders. . . . . . . . . . . . . . . . . . . . . 2
2.7 Action Without Meeting. . . . . . . . . . . . . . . . . . . . 2
ARTICLE III BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . 2
3.1 Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.2 Election of Directors . . . . . . . . . . . . . . . . . . . . 2
3.3 Compensation. . . . . . . . . . . . . . . . . . . . . . . . . 3
3.4 Meetings and Quorum . . . . . . . . . . . . . . . . . . . . . 3
3.5 Committees. . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.6 Conference Telephone Meetings . . . . . . . . . . . . . . . . 4
3.7 Action Without Meeting. . . . . . . . . . . . . . . . . . . . 4
ARTICLE IV OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.1 Titles and Election . . . . . . . . . . . . . . . . . . . . . 4
4.2 Duties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(a) Chairman of the Board of Directors . . . . . . . . . . . 5
(b) Chief Executive Officer. . . . . . . . . . . . . . . . . 5
(c) President. . . . . . . . . . . . . . . . . . . . . . . . 5
(d) Vice Presidents. . . . . . . . . . . . . . . . . . . . . 5
(e) Secretary. . . . . . . . . . . . . . . . . . . . . . . . 5
(f) Treasurer. . . . . . . . . . . . . . . . . . . . . . . . 6
(g) Assistant Secretaries and Treasurers . . . . . . . . . . 6
4.3 Delegation of Authority . . . . . . . . . . . . . . . . . . . 6
4.4 Compensation. . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE V RESIGNATIONS, VACANCIES AND REMOVALS . . . . . . . . . . 6
5.1 Resignations. . . . . . . . . . . . . . . . . . . . . . . . . 6
5.2 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(a) Directors. . . . . . . . . . . . . . . . . . . . . . . . 7
(b) Officers . . . . . . . . . . . . . . . . . . . . . . . . 7
(i)
<PAGE>
5.3 Removals. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(a) Directors. . . . . . . . . . . . . . . . . . . . . . . . 7
(b) Officers . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE VI CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . 7
6.1 Certificates of Stock . . . . . . . . . . . . . . . . . . . . 7
6.2 Transfer of Stock . . . . . . . . . . . . . . . . . . . . . . 7
6.3 Record Dates. . . . . . . . . . . . . . . . . . . . . . . . . 8
6.4 Lost Certificates . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE VII FISCAL YEAR, BANK DEPOSITS, CHECKS, ETC.. . . . . . . . . . . 8
7.1 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . 8
7.2 Bank Deposit, Checks, Etc.. . . . . . . . . . . . . . . . . . 8
ARTICLE VIII BOOKS AND RECORDS . . . . . . . . . . . . . . . . . . . . . . 9
8.1 Place of Keeping Books. . . . . . . . . . . . . . . . . . . . 9
8.2 Examination of Books. . . . . . . . . . . . . . . . . . . . . 9
ARTICLE IX NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
9.1 Requirements of Notice. . . . . . . . . . . . . . . . . . . . 9
9.2 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE X SEAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE XI POWERS OF ATTORNEY. . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE XII INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES. . . . . 10
12.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 10
12.2 Indemnification Granted . . . . . . . . . . . . . . . . . . . 10
12.3 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE XIII AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 11
13.1 Amendment or Repeal.. . . . . . . . . . . . . . . . . . . . . 11
13.2 Stockholder Proposals . . . . . . . . . . . . . . . . . . . . 11
(ii)
<PAGE>
EARTHLINK NETWORK, INC.
BY-LAWS
ARTICLE I
OFFICES
EarthLink Network, Inc. (the "Corporation") shall at all times
maintain a registered office in the State of Delaware and a registered agent at
that address but may have other offices located in or outside of the State of
Delaware as the Board of Directors may from time to time determine.
ARTICLE II
STOCKHOLDERS' MEETINGS
2.1 PLACES OF MEETINGS. All meetings of stockholders shall be held at
such place or places in or outside of the State of Delaware as the Board of
Directors may from time to time determine or as may be designated in the notice
of meeting or waiver of notice thereof, subject to any provisions of the laws of
the State of Delaware.
2.2 ANNUAL MEETINGS. The annual meeting of stockholders for the election
of directors and the transaction of such other business as may properly come
before the meeting shall be held on such date within five (5) months after the
end of each fiscal year of the Corporation and at such time as may be designated
from time to time by the Board of Directors. If the annual meeting is not held
on the date designated, it may be held as soon thereafter as convenient and
shall be called the annual meeting. Written notice of the time and place of the
annual meeting shall be given by mail to each stockholder entitled to vote
thereat at the address of such stockholder as it appears on the records of the
Corporation, not less than ten (10) nor more than sixty (60) days prior to the
scheduled date thereof, unless such notice is waived as provided by Article IX
of these By-Laws.
2.3 SPECIAL MEETINGS. Special meetings of stockholders may be called at
any time by the Board of Directors or the Chairman of the Board of Directors
stating the specific purpose or purposes thereof. Written notice of the time,
place and specific purposes of such meeting shall be given by mail to each
stockholder entitled to vote thereat at the address of such stockholder as it
appears on the records of the Corporation, not less than ten (10) nor more than
sixty (60) days prior to the scheduled date thereof, unless such notice is
waived as provided by Article IX of these By-Laws.
<PAGE>
2.4 VOTING. At all meetings of stockholders, each stockholder entitled to
vote on the record date, as determined under Article VI, Section 6.3 of these
By-Laws or, if not so determined, as prescribed under the General Corporation
Law of the State of Delaware, shall be entitled to one vote for each share of
stock standing of record in the name of such stockholder, subject to any
restrictions or qualifications set forth in the Certificate of Incorporation or
any amendment thereto.
2.5 QUORUM. At any meeting of stockholders, a majority of the number of
shares of stock outstanding and entitled to vote thereat, present in person or
by proxy, shall constitute a quorum, but a smaller interest may adjourn any
meeting from time to time, and the meeting may be held as adjourned without
further notice, subject to such limitations as may be imposed under the General
Corporation Law of the State of Delaware. When a quorum is present at any
meeting, a majority of the number of shares of stock entitled to vote present
thereat shall decide any question brought before such meeting unless the
question is one upon which a different vote is required by the General
Corporation Law of the State of Delaware, the Certificate of Incorporation or
these By-Laws, in which case such express provision shall govern.
2.6 LIST OF STOCKHOLDERS. At least ten (10) days before every meeting, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of and the number of shares
registered in the name of each stockholder, shall be prepared by the Secretary
or the transfer agent in charge of the stock ledger of the Corporation. Such
list shall be open for examination by any stockholder, for any purpose germane
to the meeting, during ordinary business hours, for a period of at least ten
(10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present. The stock ledger shall represent conclusive evidence as to who are the
stockholders entitled to examine such list or the books of the Corporation or to
vote in person or by proxy at such meeting.
2.7 ACTION WITHOUT MEETING. Action required to be taken or which may be
taken at any annual meeting or special meeting of stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by all
the holders of outstanding stock entitled to vote on such action, and shall be
delivered in the manner specified by law or by the Corporation's Certificate of
Incorporation.
ARTICLE III
BOARD OF DIRECTORS
3.1 POWERS. The business and affairs of the Corporation shall be carried
on by or under the direction of the Board of Directors, which shall have all the
powers authorized by the
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<PAGE>
General Corporation Law of the State of Delaware, subject to such limitations as
may be provided by the Certificate of Incorporation or these By-Laws.
3.2 ELECTION OF DIRECTORS. Directors shall be elected at each annual
meeting of stockholders as provided in the Certificate of Incorporation, each
director so elected to serve until the election and qualification of his or her
successor or until his or her earlier death, resignation, retirement,
disqualification or removal from office. Directors need not be stockholders,
nor need they be residents of the State of Delaware.
3.3 COMPENSATION. The Board of Directors, or a committee thereof, may
from time to time by resolution authorize the payment of fees or other
compensation to the directors for services as such to the Corporation,
including, but not limited to, fees for serving as members of the Board of
Directors or any committee thereof and for attendance at meetings of the Board
of Directors or any committee thereof, and may determine the amount of such fees
and compensation. Directors shall in any event be paid their reasonable travel
and other expenses for attendance at all meetings of the Board or committees
thereof. Nothing herein contained shall be construed to preclude any director
from serving the Corporation in any other capacity and receiving compensation
therefor in amounts authorized or otherwise approved from time to time by the
Board of Directors or any committee thereof.
3.4 MEETINGS AND QUORUM. Meetings of the Board of Directors may be held
either in or outside of the State of Delaware. A quorum shall be one-half (1/2)
of the then authorized number of directors, but not less than three directors.
The Board of Directors shall, at the close of each annual meeting of
stockholders and without further notice other than these By-Laws, if a quorum of
directors is then present or as soon thereafter as may be convenient, hold a
regular meeting for the election of officers and the transaction of any other
business. At such meeting they shall elect a President, a Secretary and a
Treasurer, and such other officers as they deem proper, none of whom except the
Chairman of the Board, if elected, need be members of the Board of Directors.
The Board of Directors may from time to time provide for the holding of
regular meetings with or without notice and may fix the times and places at
which such meetings are to be held. Meetings other than regular meetings may be
called at any time by the President or the Chairman of the Board of Directors
and must be called by the President or the Secretary or an Assistant Secretary
upon the request of any director.
Notice of each meeting, other than a regular meeting (unless required by
the Board of Directors), shall be given to each director by mailing the same to
each director at his or her residence or business address at least five business
days before the meeting or by delivering the same to him personally or by
telephone, telegraph or telecopier at least two business days before the meeting
unless, in case of exigency, the Chairman of the Board of Directors, the
President or the Secretary shall prescribe a shorter notice to be given
personally or by telephone, telegraph,
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telecopier, cable or wireless to all or any one or more of the directors at
their respective residences or places of business. Notice by mail shall be
deemed to be given at the earlier of (a) receipt thereof, or (b) five (5) days
after it is deposited in the United States mail with first-class postage affixed
thereon. Notice to directors may also be given by telecopier transmission to
the director's telecopier transmission number supplied for the purpose of
telecopier transmissions and, upon actual confirmation of such receipt by the
director, such notice shall be deemed to be given as of the date and time of
telephonic confirmation of receipt. Telephonic notice shall be deemed given at
such a time as such notice is actually provided to the director.
Notice of any meeting shall state the time and place of such meeting, but
need not state the purposes thereof unless otherwise required by the General
Corporation Law of the State of Delaware, the Certificate of Incorporation, the
By-Laws or by the order of the Board of Directors.
3.5 COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the entire Board of Directors, provide for committees of two or more
directors and shall elect the members thereof to serve at the pleasure of the
Board of Directors and may designate one of such members to act as chairman
thereof. The Board of Directors may at any time change the membership of any
committee, fill vacancies in it, designate alternate members to replace any
absent or disqualified members at any meeting of such committee, or dissolve
it. During the intervals between the meetings of the Board of Directors, the
Executive Committee (if one shall have been constituted) shall possess and may
exercise any or all of the powers of the Board of Directors in the management or
direction of the business and affairs of the Corporation and under the By-Laws
to the extent authorized by resolution adopted by a majority of the whole Board
of Directors and subject to such limitations as may be imposed by the General
Corporation Law of the State of Delaware.
Each committee may determine its rules of procedure and the notice to be
given of its meetings (although in the absence of any special notice procedure,
the notice provisions of Section 3.4 hereof shall govern), and it may appoint
such other committees and assistants as it shall from time to time deem
necessary. A majority of the members of the each committee shall constitute a
quorum.
3.6 CONFERENCE TELEPHONE MEETINGS. Any one or more members of the Board
of Directors or any committee thereof may participate in a meeting by means of a
conference telephone call or other similar communication equipment by means of
which all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at such meeting.
3.7 ACTION WITHOUT MEETING. Any action required or permitted to be taken
at any meeting of the Board of Directors or any committee thereof may be taken
without a meeting if all members of the Board of Directors or such committee, as
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board of Directors or such
committee.
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ARTICLE IV
OFFICERS
4.1 TITLES AND ELECTION. The officers of the Corporation shall be the
President, one or more Vice Presidents, the Secretary and the Treasurer, all of
whom shall initially be elected as soon as convenient by the Board of Directors
and thereafter, in the absence of earlier resignations or removals, shall be
elected at the first meeting of the Board of Directors following each annual
meeting of stockholders. Each officer shall hold office at the pleasure of the
Board of Directors except as may otherwise be approved by the Board of
Directors, or until his or her earlier resignation, removal under these By-Laws
or other termination of his or her employment. Any person may hold more than
one office if the duties can be adequately performed by the same person and to
the extent permitted by the General Corporation Law of the State of Delaware.
The Board of Directors, in its discretion, may also at any time elect or
appoint a Chairman of the Board of Directors, a Chief Executive Officer, one or
more Senior or Executive Vice Presidents, a Chief Operating Officer, a Chief
Financial Officer, a Treasurer and one or more Assistant Secretaries and
Assistant Treasurers and such other officers as it may deem advisable, each of
whom shall hold office at the pleasure of the Board of Directors, except as may
otherwise be approved by the Board of Directors, or until his or her earlier
death, resignation, retirement, removal or other termination of employment, and
shall have such authority and shall perform such duties as may be prescribed or
determined from time to time by the Board of Directors or in case of officers
other than the Chairman of the Board, if not prescribed or determined by the
Board of Directors, the President or the then senior executive officer may
prescribe or determine. The Board of Directors may require any officer or other
employee or agent to give bond for the faithful performance of his or her duties
in such form and with such sureties as the Board may require.
4.2 DUTIES. Subject to such extension, limitations and other provisions
as the Board of Directors may from time to time prescribe or determine, the
following officers shall have the following powers and duties:
(a) CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of
Directors, if one is elected, shall be a director and, when present, shall
preside at all meetings of the stockholders and of the Board of Directors.
(b) CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall be
charged with general supervision of the management and policy of the
Corporation and shall have such other powers and perform such other duties
as the Board of Directors may prescribe from time to time. The Chief
Executive Officer shall (subject to the presence of the Chairman of the
Board of Directors, if one exists) preside at all meetings of the
stockholders and, if he is a director, of the Board of Directors.
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(c) PRESIDENT. The President shall exercise the powers and authority
and perform all of the duties commonly incident to his or her office and
shall perform such other duties as the Board of Directors shall specify
from time to time.
(d) VICE PRESIDENTS. The Vice President or Vice Presidents shall
perform such duties as may be assigned to them from time to time by the
Board of Directors or by the President if the Board of Directors does not
do so. In the absence or disability of the President, the Executive Vice
Presidents in order of seniority, or if none, the Senior Vice Presidents in
order of seniority, or if none, the Vice Presidents in order of seniority,
may, unless otherwise determined by the Board of Directors, exercise the
powers and perform the duties pertaining to the office of President, except
that if one or more Vice Presidents has been elected or appointed, the
person holding such office in order of seniority shall exercise the powers
and perform the duties of the office of President.
(e) SECRETARY. The Secretary or in his or her absence an Assistant
Secretary shall keep the minutes of all meetings of stockholders and of the
Board of Directors and any committee thereof, give and serve all notices,
attend to such correspondence as may be assigned to him or her, keep in
safe custody the seal of the Corporation, and affix such seal to all such
instruments properly executed as may require it, shall perform all of the
duties commonly incident to his or her office and shall have such other
duties and powers as may be prescribed or determined from time to time by
the Board of Directors or by the President if the Board of Directors does
not do so.
(f) TREASURER. The Treasurer or in his or her absence an Assistant
Treasurer, subject to the order of the Board of Directors, shall have the
care and custody of the monies, funds, securities, valuable papers and
documents of the Corporation (other than his or her own bond, if any, which
shall be in the custody of the President), and shall have, under the
supervision of the Board of Directors, all the powers and duties commonly
incident to his or her office. He or she shall deposit all funds of the
Corporation in such bank or banks, trust company or trust companies, or
with such firm or firms doing a banking business as may be designated by
the Board of Directors or by the President if the Board of Directors does
not do so. He or she may endorse for deposit or collection all checks,
notes and similar instruments payable to the Corporation or to its order.
He or she shall keep accurate books of account of the Corporation's
transactions, which shall be the property of the Corporation, and together
with all of the property of the Corporation in his or her possession, shall
be subject at all times to the inspection and control of the Board of
Directors. The Treasurer shall be subject in every way to the order of the
Board of Directors, and shall render to the Board of Directors and/or the
President of the Corporation, whenever they may require it, an account of
all his or her transactions and of the financial condition of the
Corporation. In addition to the foregoing, the Treasurer shall have such
duties as may be prescribed or determined from time to time by the Board of
Directors or by the President if the Board of Directors does not do so.
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(g) ASSISTANT SECRETARIES AND TREASURERS. Assistants to the
Secretaries and Treasurers may be appointed by the President or elected by
the Board of Directors and shall perform such duties and have such powers
as shall be delegated to them by the President or the Board of Directors.
4.3 DELEGATION OF AUTHORITY. The Board of Directors may at any time
delegate the powers and duties of any officer for the time being to any other
officer, director or employee.
4.4 COMPENSATION. The compensation of the officers of the Corporation
shall be fixed by the Board of Directors or a committee thereof, and the fact
that any officer is a director shall not preclude such officer from receiving
compensation or from voting upon the resolution providing the same.
ARTICLE V
RESIGNATIONS, VACANCIES AND REMOVALS
5.1 RESIGNATIONS. Any director or officer may resign at any time by
giving written notice thereof to the Board of Directors, the Chairman of the
Board of Directors, the President or the Secretary. Any such resignation shall
take effect at the time specified therein or, if the time be not specified, upon
receipt thereof; and unless otherwise specified therein or in these By-Laws, the
acceptance of any resignation shall not be necessary to make it effective.
5.2 VACANCIES.
(a) DIRECTORS. Any vacancy in the Board of Directors caused by
reason of death, disqualification, incapacity, resignation, removal,
increase in the authorized number of directors or otherwise, shall be
filled in the manner provided in the Certificate of Incorporation.
(b) OFFICERS. The Board of Directors may at any time or from time to
time fill any vacancy among the officers of the Corporation.
5.3 REMOVALS.
(a) DIRECTORS. Except as may otherwise be provided by the General
Corporation Law of the State of Delaware or the Certificate of
Incorporation or any amendment thereto, any director or the entire Board of
Directors may be removed, with cause, by the affirmative vote of the
holders of 75% of all outstanding shares entitled to be voted at an
election of directors.
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(b) OFFICERS. Subject to the provisions of any validly existing
agreement, the Board of Directors may at any meeting remove from office any
officer, with or without cause, and may appoint a successor.
ARTICLE VI
CAPITAL STOCK
6.1 CERTIFICATES OF STOCK. Every stockholder shall be entitled to a
certificate or certificates for shares of the capital stock of the Corporation
in such form as may be prescribed or authorized by the Board of Directors, duly
numbered and setting forth the number and kind of shares represented thereby.
Such certificates shall be signed by the President or a Vice President, unless
some other person is thereunto specifically authorized as provided in Article
IV, Section 4.2(c) of these By-Laws, and by the Treasurer or an Assistant
Treasurer or by the Secretary or an Assistant Secretary. Any or all of such
signatures may be in facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate has ceased to be such
officer, transfer agent or registrar before the certificate has been issued,
such certificate may nevertheless be issued and delivered by the Corporation
with the same effect as if he were such officer, transfer agent or registrar at
the date of issue.
6.2 TRANSFER OF STOCK. Shares of the capital stock of the Corporation
shall be transferable only upon the books of the Corporation upon the surrender
of the certificate or certificates properly assigned and endorsed for transfer.
If the Corporation has a transfer agent or registrar acting on its behalf, the
signature of any officer or representative thereof may be in facsimile.
The Board of Directors may appoint a transfer agent and one or more
co-transfer agents and a registrar and one or more co-registrars and may make or
authorize such agents to make all such rules and regulations deemed expedient
concerning the issue, transfer and registration of shares of stock.
6.3 RECORD DATES. For the purpose of determining stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to receive payment of any dividend, or to express consent to
corporate action in writing without a meeting, or in order to make a
determination of stockholders for any other proper purposes, the Corporation's
stock transfer books shall not be closed, but a record date shall be set by the
Board of Directors and, upon that date, the Corporation or its transfer agent
shall take a record of the stockholders without actually closing the stock
transfer books. Such record date shall not be more than sixty (60) days, nor
less than ten (10) days, prior to the date on which the particular action
requiring such determination of stockholders is to be taken.
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If no such record date is fixed by the Board, the record date shall be that
prescribed by the General Corporation Law of the State of Delaware.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may, in their discretion, fix a
new record date for the adjourned meeting.
6.4 LOST CERTIFICATES. In case of loss or mutilation or destruction of a
stock certificate, a duplicate certificate may be issued upon such terms as may
be determined or authorized by the Board of Directors or the Executive Committee
(if one has been appointed), or by the President if the Board of Directors or
the Executive Committee does not do so.
ARTICLE VII
FISCAL YEAR, BANK DEPOSITS, CHECKS, ETC.
7.1 FISCAL YEAR. The fiscal year of the Corporation shall be the calendar
year, unless otherwise fixed by resolution of the Board of Directors.
7.2 BANK DEPOSIT, CHECKS, ETC. The funds of the Corporation shall be
deposited in the name of the Corporation or of any division thereof in such
banks or trust companies in the United States or elsewhere as may be designated
from time to time by the Board of Directors or by such officer or officers as
the Board of Directors may authorize to make such designations.
All checks, drafts or other orders for the withdrawal of funds from any
bank account shall be signed by such person or persons as may be designated from
time to time by the Board of Directors. The signatures on checks, drafts or
other orders for the withdrawal of funds may be in facsimile if authorized in
the designation.
ARTICLE VIII
BOOKS AND RECORDS
8.1 PLACE OF KEEPING BOOKS. The books and records of the Corporation may
be kept within or outside of the State of Delaware.
8.2 EXAMINATION OF BOOKS. Except as may otherwise be provided by the
General Corporation Law of the State of Delaware, the Certificate of
Incorporation or these By-Laws, the Board of Directors shall have the power to
determine from time to time whether and to what extent and at what times and
places and under what conditions any of the accounts, records and books of the
Corporation are to be open to the inspection of any stockholder. No stockholder
shall have any right to inspect any account or book or document of the
Corporation except as
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prescribed by law or authorized by express resolution of
the stockholders or of the Board of Directors.
ARTICLE IX
NOTICES
9.1 REQUIREMENTS OF NOTICE. Whenever notice is required to be given by
statute, the Certificate of Incorporation or these By-Laws, except as otherwise
provided in Section 3.4 hereof, it shall not mean personal notice unless so
specified, but such notice may be given in writing by depositing the same in a
post office, letter box or mail chute postage prepaid and addressed to the
person to whom such notice is directed at the address of such person on the
records of the Corporation, and such notice shall be deemed given at the time
when the same shall be thus mailed.
9.2 WAIVERS. Any stockholder, director or officer may, in writing or by
telegram or cable, at any time waive any notice or other formality required by
law, the Certificate of Incorporation or these By-Laws. Such waiver of notice,
whether given before or after any meeting or action, shall be deemed equivalent
to notice. Presence of a stockholder either in person or by proxy at any
meeting of stockholders and presence of any director at any meeting of the Board
of Directors shall constitute a waiver of such notice as may be required by law,
the Certificate of Incorporation or these By-Laws, unless such presence is
solely for the purpose of objecting to the lack of notice and such objection is
stated at the commencement of the meeting.
ARTICLE X
SEAL
The corporate seal of the Corporation shall be in such form as the Board of
Directors shall determine from time to time and may consist of a facsimile
thereof or the word "SEAL" enclosed in parentheses or brackets. The corporate
seal of the Corporation shall not be necessary to validate or authenticate any
instrument duly executed by the Corporation or to render any such instrument
enforceable against the Corporation.
ARTICLE XI
POWERS OF ATTORNEY
The Board of Directors may authorize one or more of the officers of the
Corporation to execute powers of attorney delegating to named representatives or
agents power to represent or act on behalf of the Corporation, with or without
the power of substitution.
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In the absence of any action by the Board of Directors, any officer of the
Corporation may execute, for and on behalf of the Corporation, waivers of notice
of meetings of stockholders and proxies, or may vote shares directly, for such
meetings of any company in which the Corporation may hold voting securities.
ARTICLE XII
INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
12.1 DEFINITIONS. As used in this article, the term "Person" means any
past, present or future director, officer or employee of the Corporation or any
subsidiary of the Corporation.
12.2 INDEMNIFICATION GRANTED. The Corporation shall indemnify, to the full
extent and under the circumstances permitted by the General Corporation Law of
the State of Delaware in effect from time to time, any Person, made or
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such Person is or was or with his or her consent is
named by the Corporation as being or about to become a director of the
Corporation or any subsidiary thereof, or is or was an officer or employee of
the Corporation or any subsidiary thereof, or is or was an employee or agent of
the Corporation or any subsidiary thereof, or is or was serving at the specific
request of the Corporation as a director, officer, employee or agent of another
company or other enterprise in which the Corporation owns or owned, directly or
indirectly, an equity interest or of which it may be a creditor.
The right of indemnification shall not be deemed exclusive of any other
rights to which a Person indemnified herein may be entitled by Bylaw, agreement,
vote of stockholders or disinterested directors or otherwise, and shall continue
as to a Person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors, administrators and other
legal representatives of such Person. It is not intended that the provisions of
this article be applicable to, and they are not to be construed as granting
indemnity with respect to, matters as to which indemnification would be in
contravention of the laws of Delaware or of the United States of America,
whether as a matter of public policy or pursuant to statutory provision.
12.3 MISCELLANEOUS. Subject to the limitations set forth in the General
Corporation Law of the State of Delaware, the Board of Directors may also on
behalf of the Corporation grant indemnification to any individual other than a
Person to such extent and in such matter as the Board of Directors in its sole
discretion may from time to time and at any time determine.
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ARTICLE XIII
AMENDMENTS
13.1 AMENDMENT OR REPEAL. Except as provided otherwise by the laws of the
State of Delaware or the Certificate of Incorporation, these By-Laws may be
amended or repealed either:
(a) At any meeting of stockholders at which a quorum is present by
vote of a majority of the number of shares of stock entitled to vote
present in person or by proxy at such meeting as provided in Article II of
these By-Laws; provided that the notice of such meeting of stockholders or
waiver of notice thereof contains a statement of the substance of the
proposed amendment or repeal; or
(b) At any meeting of the Board of Directors by a majority vote of
the directors then in office.
13.2 STOCKHOLDER PROPOSALS. Any stockholder who intends to propose that
any provision of these By-Laws be amended by action of the stockholders shall
notify the Secretary of the Corporation in writing of the amendment or
amendments which such stockholder intends to propose not later than one hundred
eighty (180) days prior to a request by such stockholder to call a special
meeting for such purpose or, if such proposal is intended to be made at an
annual meeting of stockholders, not later than the latest date permitted for
submission of stockholder proposals by Rule 14a-8 under the Securities Exchange
Act of 1934. Such notice to the Secretary shall include the text of the
proposed amendment or amendments and a brief statement of the reason or reasons
why such stockholder intends to make such proposal.
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND HAVE
BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE
SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE, TRANSFER OR DISTRIBUTION
MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
Warrants to Purchase
_______Shares of Common Stock
EARTHLINK NETWORK, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
Void after ______
The Warrants evidenced by this certificate (this "Certificate") have been
issued for good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged.
This Certificate evidences the right of ______________ (the "Holder") to
purchase ________ shares of the Common Stock (the "Shares") of EarthLink
Network, Inc., a California corporation (the "Company"), at a price of
_______________________ ($__.__) per Share; subject, however, to the terms and
conditions hereinafter set forth.
1. TERM OF WARRANTS. The Warrants may be exercised only during the
period commencing on _________ through the close of business on
_________ (the "Warrant Term"), and may be exercised only in
accordance with the terms and conditions hereinafter set forth.
2. EXERCISE OF WARRANTS. The Warrants shall be exercisable as follows:
a) RIGHT TO EXERCISE. The Warrants shall vest and become
exercisable immediately as to all of the Shares.
b) METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANTS; TRANSFER
AND EXCHANGE. The Warrants may be exercised by the Holder, in
whole or in part, by the surrender of this Certificate, properly
endorsed, at the principal office of the Company, and by the
payment to the Company by check of the then applicable Warrant
Price (as such term is hereinafter defined). In the event of any
exercise of the Warrants, certificates for the Shares so
purchased shall be delivered to the Holder within a reasonable
time after the Warrants shall have been so exercised, and unless
the Warrants have expired, a new certificate representing the
right to purchase the number of
<PAGE>
Shares, if any, with respect to which this Certificate shall not
then have been exercised shall also be issued to the Holder
within such time. All such new certificates shall be dated the
date hereof and shall be identical to this Certificate except as
to the number of Shares issuable pursuant thereto.
c) RESTRICTIONS ON EXERCISE. The Warrants may not be exercised if
the issuance of the Shares upon such exercise would constitute a
violation of any applicable federal or state securities laws or
other laws or regulations. As a condition to the exercise of the
Warrants, the Company may require the Holder to make such
representations and warranties to the Company as may be required
by applicable law or regulation.
3. STOCK FULLY PAID; RESERVATION OF SHARES. The Company covenants and
agrees that all Shares will, upon issuance and payment in accordance
herewith, be fully paid, validly issued and nonassessable. The
Company further covenants and agrees that during the Warrant Term the
Company will at all times have authorized and reserved for the purpose
of the issue upon exercise of the Warrants at least the maximum number
of Shares as are issuable upon the exercise of the Warrants.
4. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The number and
kind of securities purchasable upon the exercise of the Warrants and
the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
a) CONSOLIDATION, MERGER OR RECLASSIFICATION. If the Company at any
time while the Warrants remain outstanding and unexpired shall
consolidate with or merge into any other corporation, or sell all
or substantially all of its assets to another corporation, or
reclassify or in any manner change the securities then
purchasable upon the exercise of the Warrants (any of which shall
constitute a "Reorganization"), then lawful and adequate
provision shall be make whereby this Certificate shall thereafter
evidence the right to purchase such number and kind of securities
and other property as would have been issuable or distributable
on account of such Reorganization upon or with respect to the
securities which were purchasable or would have become
purchasable under the Warrants immediately prior to the
Reorganization. The company shall not effect any such
Reorganization unless prior to or simultaneously with the
consummation thereof the successor corporation (if other than the
Company) resulting from such Reorganization shall assume by
written instrument executed and mailed or delivered to the
Holder, at the last address of the Holder appearing on the books
of the Company, the obligation to deliver to the Holder such
shares of stock, securities or assets as, in accordance with the
foregoing provisions, the Holder may be entitled to purchase.
Notwithstanding anything in this Section 4(a) to the contrary,
the prior two sentences shall be inoperative and of no force and
effect if upon the completion of any such Reorganization the
shareholders of the Company immediately prior to such event do
not own at least 50% of the equity interest of the corporation
resulting from such
<PAGE>
Reorganization, and those Warrants which are unexercised shall
expire on the completion of such Reorganization, if the notice
required by Section 4(e) hereof has been duly given.
b) SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time
while the Warrants remain outstanding and unexpired shall
subdivide or combine its Common Stock, the Warrant Price shall be
adjusted to a price determined by multiplying the Warrant Price
in effect immediately prior to such subdivision or combination by
a fraction (i) the numerator of which shall be the total number
of shares of Common Stock outstanding immediately prior to such
subdivision or combination and (ii) the denominator of which
shall be the total number of shares of Common Stock outstanding
immediately after such subdivision or combination.
c) CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the Company at any time
while the Warrants are outstanding and unexpired shall take a
record of the holders of its Common Stock for the purpose of:
i) STOCK DIVIDENDS. Entitling them to receive a dividend
payable in, or other distribution without consideration of,
Common Stock, then the Warrant Price shall be adjusted to
that Price determined by multiplying the Warrant Price in
effect immediately prior to each dividend or distribution by
a fraction (A) the numerator of which shall be the total
number of shares of Common Stock outstanding immediately
prior to such dividend or distribution, and (B) the
denominator of which shall be the total number of shares of
Common Stock outstanding immediately after such dividend or
distribution; or
ii) DISTRIBUTION OF ASSETS, SECURITIES, ETC. Making any
distribution without consideration with respect to its
Common Stock (other than a cash dividend) payable otherwise
than in its Common Stock, the Holder shall, upon the
exercise thereof, be entitled to receive, in addition to the
number of Shares receivable thereupon, and without payment
of any additional consideration therefor, such assets or
securities as would have been payable to him as owner of
that number of Shares receivable by exercise of the Warrants
had he been the Holder of record of such Shares on the
record date for such distribution; and an appropriate
provision therefor shall be made a part of any such
distribution.
d) ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment in the
Warrant Price pursuant to Subsections (b) or (c) (i) of this
section 4, the number of Shares purchasable hereunder shall be
adjusted to that number determined by multiplying the number of
Shares purchasable upon the exercise of the Warrants immediately
prior to such adjustment by a fraction, the numerator of which
shall be the Warrant Price immediately prior to such adjustment
and the denominator of which shall be the Warrant Price
immediately following such adjustment.
<PAGE>
e) NOTICE. In case at any time:
i) The Company shall pay any dividend payable in stock upon its
Common Stock or make any distribution, excluding a cash
dividend, to the holders of its Common Stock;
ii) The Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock
of any class or other rights;
iii) There shall be any reclassification of the Common Stock of
the Company, or consolidation or merger of the Company with,
or sale of all or substantially all of its assets to,
another corporation; or
iv) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
v) then, in any one or more of such cases, the Company shall
give to the Holder at least 10 days' prior written notice
(or, in the event of notice pursuant to Section 4 (e) (iii),
at least 30 days' prior written notice) of the date on which
the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights
or for determining rights to vote in respect to any such
reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up. Such notice in accordance with
the foregoing clause shall also specify, in the case of any
such dividend, distribution or subscription rights, the date
on which the holders of Common Stock shall be entitled
thereto, and such notice in accordance with the foregoing
clause shall also specify the date on which the holders of
Common Stock shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such
reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be. Each such
written notice shall be given by first-class mail, postage
prepaid, addressed to the Holder hereof at the address of
the Holder as shown on the books of the Company.
f) NO CHANGE IN CERTIFICATE. The form of this Certificate need not
be changed because of any adjustment in the Warrant Price or in
the number of Shares purchasable on it exercise. The Warrant
Price or the number of Shares shall be considered to have been so
changed as of the close of business on the date of adjustment.
5. FRACTIONAL SHARES. No fractional Shares will be issued in connection
with any subscription hereunder but, in lieu of such fractional
Shares, the Company shall make a cash payment therefore upon the basis
of the fair market value of the Shares.
6. NONTRANSFERABLILITY OF WARRANTS. The Warrants may be exercised during
the lifetime of the Holder only by the Holder, and may not be sold,
pledged, assigned, hypothecated, gifted, transferred or disposed of in
any manner, in whole or in part, either voluntarily or involuntarily
by operation of law, other than by will or the
<PAGE>
laws of descent or distribution, without the prior written consent of
the Company, which consent may be granted or withheld by the Company
in its sole discretion.
7. NO RIGHTS AS SHAREHOLDER. The Holder of the Warrants, as such, shall
not be entitled to vote or receive dividends or be considered a
shareholder of the Company for any purpose, nor shall anything in this
Certificate be construed to confer on the Holder hereof, as such, any
rights of a shareholder of the Company or any right to vote, give or
withhold consent to any corporate action, to receive notice of
meetings of shareholders, to receive dividends or subscription rights
or otherwise.
8. DEFINITIONS. As used in this Certificate:
a) "Warrants" shall mean the rights evidenced by this Certificate.
b) "Warrant Price" shall mean _________________________ ($__.__), as
adjusted in accordance with Section 4 hereof.
Dated as of
--------------
EARTHLINK NETWORK, INC.
By:
-------------------------
Sky Dayton, President
Attest:
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<PAGE>
EARTHLINK NETWORK, INC.
SUBSCRIPTION FORM
(To be completed and signed only upon exercise of the Warrants)
TO: EarthLink Network, Inc.
3171 Los Feliz Blvd., Suite 203
Los Angeles, CA 90039
Attention: Secretary
The undersigned, the holder and registered owner of the attached Warrants,
hereby irrevocably and unconditionally elects to exercise such Warrants and to
purchase ____* shares of EarthLink Network, Inc. Common Stock pursuant to the
terms and conditions thereof, and herewith tenders a check in the amount of
$_________ in full payment of the purchase price for such shares, and requests
that the certificate(s) for such shares be issued in the name of and delivered
to:
(Please print name and address)
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- ------------------------------
- ------------------------------
Dated: Signature:
------------------------ ------------------------------
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* Insert here the number of shares called for on the face of the Warrants
(or in the case of partial exercise, that portion as to which the Warrants is
being exercised), without making any adjustment for additional Common Stock or
any other securities or property which, under the adjustment provisions of the
Warrants, may be deliverable upon exercise.
<PAGE>
EARTHLINK NETWORK, INC.
1995 STOCK OPTION PLAN
1. PURPOSES OF THE PLAN. The purposes of this 1995 Stock Option Plan are
to attract and retain the best available personnel, to provide additional
incentive to the Employees of the Company and its Subsidiaries, to promote the
success of the Company's business and to enable the Employees to share in the
growth and prosperity of the Company by providing them with an opportunity to
purchase stock in the Company.
Options granted hereunder may be either Incentive Stock Options or
Nonstatutory Stock Options, at the discretion of the Board and as reflected in
the terms of the written stock option agreement.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "AFFILIATE" shall mean any entity that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is under
common control with, the Company.
(b) "BOARD" shall mean the Board of Directors of the Company.
(c) "CODE" shall mean the Internal Revenue Code of 1986, as amended
from time to time. References in the Plan to any section of the Code shall be
deemed to include any amendment or successor provisions to such section and any
regulations issued under such section.
(d) "COMMON STOCK" shall mean the Common Stock of the Company.
(e) "COMPANY" shall mean EarthLink Network, Inc., a California
corporation.
(f) "COMMITTEE" shall mean the Committee appointed by the Board in
accordance with Section 4(a) of the Plan, if one is appointed.
(g) "CONTINUOUS EMPLOYMENT" OR "CONTINUOUS STATUS AS AN EMPLOYEE"
shall mean the absence of any interruption or termination of employment or
service as an Employee by or to the Company or any Parent or Subsidiary of the
Company which now exists or is hereafter organized or acquired by or acquires
the Company. Continuous Employment shall not be considered interrupted in the
case of sick leave, military leave or any other leave of absence approved by the
Board or in the case of transfers between locations of the Company or between
the Company, its Parent, or any of its Subsidiaries or its successors.
(h) "DISABILITY" shall mean the inability of the Optionee to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or has
lasted or can be expected to last for a continuous period of not less than 12
months. In determining the Disability of an Optionee, the Board may
<PAGE>
require the Optionee to furnish proof of the existence of Disability and may
select a physician to examine the Optionee. The final determination as to the
Disability of the Optionee shall be made by the Board.
(i) "DISINTERESTED PERSON" shall mean an administrator of the Plan
who, during the one year prior to service as an administrator of the Plan, has
not been granted or awarded and, during such service, is not granted or awarded
stock, stock options or stock appreciation rights pursuant to the Plan or any
other plan of the Company or any of its Affiliates entitling the participants
therein to acquire stock, stock options or stock appreciation rights of the
Company or any Affiliates, except for any plan under which the award of stock,
stock options or stock appreciation rights is not subject to the discretion of
any person or persons. The term "Disinterested Person" shall be interpreted in
a manner consistent with the meaning of such term under Rule 16b-3 promulgated
by the Securities and Exchange Commission under the Exchange Act.
(j) "EMPLOYEE" shall mean any person, including officers and
directors, employed by the Company, its Parent, any of its Subsidiaries or its
successors. A person shall not be deemed to be employed by the Company merely
because such person is a member of the Board of Directors of the Company or a
consultant to the Company.
(k) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
(l) "INCENTIVE STOCK OPTION" shall mean an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
(m) "NONSTATUTORY STOCK OPTION" shall mean an Option which is not an
Incentive Stock Option.
(n) "OPTION" shall mean a stock option granted pursuant to the Plan
evidencing the grant of a right to an Employee pursuant to the Plan to purchase
a specified number of Shares at a specified exercise price.
(o) "OPTION AGREEMENT" shall mean a written agreement substantially
in one of the forms attached hereto as Exhibit A, or such other form or forms as
the Board (subject to the terms and conditions of this Plan) may from time to
time approve, evidencing and reflecting the terms of an Option.
(p) "OPTIONED STOCK" shall mean the Common Stock subject to an
Option.
(q) "OPTIONEE" shall mean an Employee who is granted an Option.
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<PAGE>
(r) "PARENT" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Sections 424(e) and (g) of the Code.
(s) "PLAN" shall mean this 1995 Stock Option Plan.
(t) "SHARE" or "SHARES" shall mean shares of the Common Stock, as
adjusted in accordance with Section 10 of the Plan.
(u) "STOCK PURCHASE AGREEMENT" shall mean an agreement substantially
in the form attached hereto as Exhibit B, or such other form or forms as the
Board (subject to the terms and conditions of this Plan) may from time to time
approve, which is to be executed as a condition of purchasing Optioned Stock
upon exercise of an Option.
(v) "SUBSIDIARY" shall mean a subsidiary corporation, whether now or
hereafter existing, as defined in Sections 424(f) and (g) of the Code.
(w) "TERMINATION FOR CAUSE" shall mean termination of employment as a
result of (i) any act or acts by the Optionee constituting a felony under any
federal, state or local law; (ii) the Optionee's willful and continued failure
to perform the duties assigned to him or her as an Employee (iii) any material
breach by the Optionee of any agreement with the Company concerning his or her
employment or other understanding concerning the terms and conditions of
employment by the Company; (iv) dishonesty, gross negligence or malfeasance by
the Optionee in the performance of his or her duties as an Employee or any
conduct by the Optionee which involves a material conflict of interest with any
business of the Company or Affiliate; or (v) the Optionee's taking or knowingly
omitting to take any other action or actions in the performance of Optionee's
duties as an Employee without informing appropriate members of management to
whom such Optionee reports, which action or actions, in the determination of the
Board, have caused or substantially contributed to the material deterioration in
the business or financial condition of the Company or any Affiliate, taken as a
whole.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 10 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
pursuant to the exercise of Options under the Plan is 150,000 Shares. The
Shares may be authorized, but unissued or reacquired Shares.
If an Option should expire or become unexercisable for any reason
without having been exercised in full or if the Company repurchases Shares from
the Optionee pursuant to the terms of a Stock Purchase Agreement, the
unpurchased or repurchased Shares, respectively, which were subject thereto
shall, unless the Plan shall have been terminated, return to the Plan and become
available for other Options under the Plan.
4. ADMINISTRATION OF THE PLAN.
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<PAGE>
(a) PROCEDURE. The Plan shall be administered by the Board. Members
of the Board who are eligible for Options or have been granted Options may vote
on any matters affecting the administration of the Plan or the grant of any
Options pursuant to the Plan, except that no such member shall act upon the
granting of an Option to himself or herself, but any such member may be counted
in determining the existence of a quorum at any meeting of the Board or
Committee during which action is taken with respect to the granting of Options
to him or her.
The Board may at any time appoint a Committee consisting of not less
than two persons to administer the Plan on behalf of the Board, subject to such
terms and conditions as the Board may prescribe. Members of the Committee shall
serve for such period of time as the Board may determine. From time to time the
Board may increase the size of the Committee and appoint additional members
thereto, remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies however caused, or remove all members of
the Committee and thereafter directly administer the Plan. In the event the
Company has a class of equity securities registered under Section 12 of the
Exchange Act and unless the Board determines otherwise, from the effective date
of such registration until six months after the termination of such
registration, all grants of Options to persons subject to the provisions of
Section 16(b) of the Exchange Act during any and all periods of time when all
members of the Board do not qualify as Disinterested Persons shall be made by,
or only in accordance with the recommendations of, a Committee of two or more
persons having full authority to act in the matter and all of whom are
Disinterested Persons.
(b) POWERS OF THE BOARD. Subject to the provisions of the Plan, the
Board shall have the authority, in its discretion: (i) to grant Incentive Stock
Options and Nonstatutory Stock Options; (ii) to determine, upon review of
relevant information and in accordance with Section 7 of the Plan, the fair
market value per Share; (iii) to determine the terms and conditions of vesting
of Options, the exercise price of the Options and the consideration to be paid
for shares upon the exercise of Options (which exercise price and consideration
shall be determined in accordance with Section 7 of the Plan); (iv) to determine
the Employees to whom, and the time or times at which, Options shall be granted,
and the number of Shares to be subject to each Option; (v) to prescribe, amend
and rescind rules and regulations relating to the Plan; (vi) to determine the
terms and provisions of each Option Agreement and each Stock Purchase Agreement
(each of which need not be identical with the terms of other Options and Stock
Purchase Agreements) and, with the consent of the holder thereof, to modify or
amend each Option and Stock Purchase Agreement; (vii) to determine whether a
stock repurchase agreement or other agreement will be required to be executed by
any Employee as a condition to the exercise of an Option, and to determine the
terms and provisions of any such agreement (which need not be identical with the
terms of any other such agreement) and, with the consent of the Optionee, to
amend any such agreement; (viii) to interpret the Plan, the Option Agreements,
the Stock Purchase Agreements or any agreement entered into with respect to the
grant or exercise of Options; (ix) to authorize any person to execute on behalf
of the Company any instrument required to effectuate the grant of an Option
previously granted by the Board or to take such other actions as may be
necessary or appropriate with respect to the Company's rights pursuant to
Options or
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<PAGE>
agreements relating to the grant or exercise thereof; and (x) to make such other
determinations and establish such other procedures as it deems necessary or
advisable for the administration of the Plan.
(c) EFFECT OF THE BOARD'S DECISION. All decisions, determinations
and interpretations of the Board shall be final and binding on all Optionees and
any other holders of Options.
5. ELIGIBILITY. Options may be granted only to Employees (including
employees of the Company who are also directors of the Company). An Employee
who has been granted an Option may, if such Employee is otherwise eligible, be
granted additional Options.
6. TERM OF PLAN. Effectiveness of the Plan shall be subject to approval
by the shareholders of the Company within 12 months before or after the date the
Plan is adopted; provided, however, that Options may be granted pursuant to the
Plan prior to such shareholder approval subject to subsequent approval of the
Plan by such shareholders. Shareholder approval shall be obtained by the
affirmative votes of the holders of a majority of voting shares of the Company's
capital stock present and entitled to vote at a meeting of shareholders duly
held in accordance with the laws of the State of California or by such other
means authorized under law. The Plan shall continue in effect for a term of ten
years unless sooner terminated in accordance with the terms and provisions of
the Plan.
7. OPTION PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The exercise price per Share for the Shares to
be issued pursuant to the exercise of a Nonstatutory Stock Option shall be not
less than 85% of the "fair market value" per Share, as described below. The
exercise price per Share for the Shares to be issued pursuant to the exercise of
an Incentive Option shall be the fair market value per Share. However, with
respect to both Incentive Stock Options and Nonstatutory Stock Options, the
exercise price shall be 110% of the fair market value per Share on the date of
grant in the case of any Optionee who, at the time the Option is granted, owns
stock (as determined under Section 424(d) of the Code) possessing more than 10%
of the total combined voting power of all classes of stock of the Company or its
Parent or Subsidiaries.
(b) FAIR MARKET VALUE. The fair market value per Share on the date
of grant shall be determined by the Board in its sole discretion, exercised in
good faith; provided, however, that where there is a public market for the
Common Stock, the fair market value per Share shall be the average of the
closing bid and asked prices of the Common Stock on the date of grant, as
reported in THE WALL STREET JOURNAL (or, if not so reported, as otherwise
reported by the National Association of Securities Dealers Automated Quotations
("Nasdaq") System), or, in the event the Common Stock is listed on a stock
exchange or on the Nasdaq Stock Market, the fair market value per Share shall be
the closing price on the exchange or on the Nasdaq Stock Market as of the date
of grant of the Option, as reported in THE WALL STREET JOURNAL.
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<PAGE>
(c) PAYMENT OF CONSIDERATION. The consideration to be paid for the
Shares to be issued upon exercise of an Option, including the method of payment,
shall be determined by the Board in its discretion on the date of grant and may
consist of cash, check, promissory notes or other forms of legally permitted
consideration if authorized by the Board in connection with the grant of an
Option.
8. OPTIONS.
(a) TERMS AND PROVISIONS OF OPTIONS. As provided in Section 4 of
this Plan and subject to any limitations specified herein, the Board shall have
the authority to determine the terms and provisions of any Option granted under
the Plan or any agreement required to be executed in connection with the grant
or exercise of an Option. Each Option granted pursuant to this Plan shall be
evidenced by an Option Agreement. Options granted under the Plan are
conditioned upon the Company obtaining any required permit or order from
appropriate governmental agencies, authorizing the Company to issue such Options
and Shares issuable upon exercise thereof.
(b) NUMBER OF SHARES. Each Option Agreement shall state the number
of Shares to which it pertains and whether such Option is intended to constitute
an Incentive Stock Option or a Nonstatutory Stock Option. The maximum number of
Shares which may be awarded as Options under the Plan during any calendar year
to any Optionee is 50,000 Shares. If an Option held by an Employee is canceled,
the canceled Option shall continue to be counted against the maximum number of
Shares for which Options may be granted to such Employee and any replacement
Option granted to such Employee shall also count against such limit.
(c) TERM OF OPTION. The term of each Option may be up to ten years
from the date of grant thereof, as determined by the Board upon the grant of the
Option and specified in the Option Agreement, except that the term of an
Incentive Stock Option granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent of the
total combined voting power of all classes of stock of the Company or its Parent
or Subsidiaries, shall not exceed five years from the date of grant thereof.
(d) EXERCISE OF OPTION.
(i) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
shall vest and become exercisable at such times, in such installments and under
such conditions as may be determined by the Board, specified in the Option
Agreement and as shall be permissible under the terms of the Plan, including
performance criteria with respect to the Company and/or the Optionee, provided
that each Option shall vest and become exercisable at the rate of not less than
15 % per year over five years from the date such Option is granted.
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<PAGE>
An Option may be exercised in accordance with the provisions of
this Plan as to all or any portion of the Shares then exercisable under an
Option, from time to time during the term of the Option. An Option may not be
exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company at its principal business office in
accordance with the terms of the Option Agreement by the person entitled to
exercise the Option and full payment for the Shares with respect to which the
Option is exercised has been received by the Company, accompanied by an executed
Stock Purchase Agreement (including the attachments thereto) substantially in
the form of Exhibit B hereto and as may be modified by the Board from time to
time, and any other agreements required by the terms of the Plan and/or the
Option Agreement. Full payment may consist of such consideration and method of
payment allowable under Section 7 of the Plan. Until the Option is properly
exercised in accordance with the terms of this Section 8(d), no right to vote or
to receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock. No adjustment shall be made for a dividend or
other right for which the record date is prior to the date the Option is
exercised, except as provided in Section 10 of the Plan.
As soon as practicable after any proper exercise of an Option in
accordance with the provisions of the Plan, the Company shall, without transfer
or issue tax to the Optionee, deliver to the Optionee at the principal executive
office of the Company or such other place as shall be mutually agreed upon
between the Company and the Optionee, a certificate or certificates representing
the Shares for which the Option shall have been exercised. The time of issuance
and delivery of the certificate(s) representing the Shares for which the Option
shall have been exercised may be postponed by the Company for such period as may
be required by the Company, with reasonable diligence, to comply with any
applicable listing requirements of any national or regional securities exchange
or any law or regulation applicable to the issuance or delivery of such Shares.
No Option may be exercised unless the Plan has been duly approved by the
shareholders of the Company in accordance with applicable law. Notwithstanding
anything to the contrary herein, the terms of a Stock Purchase Agreement
required to be executed and delivered in connection with the exercise of an
Option may require the certificate or certificates representing the Shares
purchased upon the exercise of an Option to be delivered and deposited with the
Company as security for the Optionee's faithful performance of the terms and
conditions of his or her Stock Purchase Agreement.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(ii) TERMINATION OF STATUS AS AN EMPLOYEE. If an Optionee ceases to
serve as an Employee for any reason other than death, Disability or Termination
for Cause, and thereby terminates his or her Continuous Status As An Employee,
to the extent that such Optionee was entitled to exercise the Option at the date
of such termination, such Optionee shall have the right
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<PAGE>
to exercise the Option at any time within 30 days subsequent to the last day of
such Optionee's Continuous Status As An Employee (unless at the time of grant of
such Option the Board specified a longer period, not to exceed 90 days),
PROVIDED, however, that no Option shall be exercisable after the expiration of
the term set forth in the Option Agreement. To the extent that such Optionee
was not entitled to exercise the Option at the date of the terminating event, or
if such Optionee does not exercise such Option (which such Optionee was entitled
to exercise) within the time specified herein, the Option shall terminate. In
the event that an Optionee's Continuous Status As An Employee terminates due to
death or Disability, to the extent that such Optionee was entitled to exercise
the Option at the date of such termination, the Option may be exercised any time
within 180 days subsequent to the death or Disability of the Optionee (unless at
the time of grant of such Option the Board specified a longer period, not to
exceed one year), PROVIDED, however, that no Option shall be exercisable after
the expiration of the Option term set forth in the Option Agreement. To the
extent that such Optionee was not entitled to exercise such Option at the date
of his or her termination due to death or Disability or if such Option is not
exercised (to the extent it could be exercised) within the time specified
herein, the Option shall terminate. If an Optionee's Continuous Employment with
the Company terminates due to his or her Termination for Cause, his or her
Option shall terminate as of the date of such Termination for Cause to the
extent not exercised as of such date.
(e) LIMIT ON VALUE OF OPTIONED STOCK. To the extent that the
aggregate fair market value (determined at the time an Incentive Stock Option is
granted) of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by an Optionee during any calendar year under all
incentive stock option plans of the Company, its Parent or its Subsidiaries, if
any, exceeds $100,000, the Options in excess of such limit shall be treated as
Nonstatutory Stock Options.
(f) EXPIRATION OF OPTION. Notwithstanding any provision in the Plan,
including but not limited to the provisions set forth in this Section 8, an
Option may not be exercised, under any circumstances, after the expiration of
its term.
9. NONTRANSFERABILITY OF OPTIONS. Options granted under this Plan may
not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of
in any manner, either voluntarily or involuntarily by operation of law, other
than by will or by the laws of descent or distribution or as a transfer between
spouses incident to a "divorce" within the meaning of Section 1041(a) of the
Code, and any such attempt may result, at the discretion of the Board, in the
termination of such Options. During the lifetime of the Optionee, his or her
Option may be exercised only by such Optionee or his or her legal guardian.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(a) Subject to any required action by the shareholders of the
Company, the number of Shares covered by each outstanding Option, and the number
of Shares which have been authorized for issuance under the Plan but as to which
no Options have yet been granted or which
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<PAGE>
have been returned to the Plan upon cancellation or expiration of an Option or
repurchase of Shares from an Optionee upon termination of employment or service,
as well as the exercise price per Share covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, combination,
recapitalization or reclassification of the Common Stock, or the payment of a
stock dividend (but only on the Common Stock) or any other increase or decrease
in the number of issued shares of Common Stock effected without receipt of
consideration by the Company (other than stock bonuses to Employees or
directors); provided, however, that the conversion of any convertible securities
of the Company shall not be deemed to have been effected without the receipt of
consideration. Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to the Plan or an Option.
(b) In the event of a proposed dissolution or liquidation of the
Company or the sale of all or substantially all of the assets of the Company
(other than in the ordinary course of business), or the merger, consolidation or
reorganization of the Company with or into another corporation as a result of
which the Company is not the surviving corporation or as a result of which the
outstanding Shares are exchanged for or converted into cash or property or
securities not of the Company, the Board shall (i) make provision for the
assumption of all outstanding Options by the successor corporation or a Parent
or a Subsidiary thereof, or (ii) declare that outstanding Options shall
terminate as of a date fixed by the Board which is at least thirty (30) days
after the notice thereof to the Optionee (unless such thirty (30) day period is
waived by the Optionee) and shall give each Optionee the right to exercise his
or her Option as to all or any part of the shares underlying such Option to the
extent then exercisable, provided such exercise does not violate Section
8(d)(ii) of the Plan.
(c) No fractional shares of Common Stock shall be issuable on account
of any action described in this Section, and the aggregate number of shares into
which Shares then covered by the Option, when changed as the result of such
action, shall be reduced to the largest number of whole shares resulting from
such action, unless the Board, in its sole discretion, shall determine to issue
scrip certificates in respect to any fractional shares, which scrip
certificates, in such event, shall be in a form and have such terms and
conditions as the Board in its discretion shall prescribe.
11. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date on which the Board makes the determination granting
such Option, PROVIDED, however, that if the Board determines that such grant
shall be as of some future date, the date of grant shall be such future date.
Notice of the determination shall be given to each Employee to whom an Option is
so granted within a reasonable time after the date of such grant.
12. AMENDMENT AND TERMINATION OF THE PLAN.
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(a) AMENDMENT AND TERMINATION. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable and
shall make any amendments which may be required so that Options intended to be
Incentive Stock Options shall at all times continue to be Incentive Stock
Options for the purpose of the Code, except that, without approval of the
holders of a majority of the shares of the Company's capital stock represented
or present and entitled to vote at a valid meeting of the Company's shareholders
at which action is taken on an amendment or revision, no such amendment or
revision shall:
(i) Increase the number of Shares subject to the Plan, other
than in connection with an adjustment under Section 10 of
the Plan;
(ii) Materially change the designation of the class of
Employees eligible to be granted Options;
(iii) Remove the administration of the Plan from the Board
except to a Committee;
(iv) Materially increase the benefits accruing to participants
under the Plan; or
(v) Extend the term of the Plan.
(b) EFFECT OF AMENDMENT OR TERMINATION. Except as otherwise provided
in Section 10, any amendment or termination of the Plan shall not affect Options
already granted and such Options shall remain in full force and effect as if
this Plan had not been amended or terminated, unless mutually agreed otherwise
between the Optionee and the Company, which agreement must be in writing and
signed by the Optionee and the Company.
13. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Shares shall not be issued pursuant to the exercise of an Option
unless the exercise of such Option and the issuance and delivery of such Shares
pursuant thereto shall comply with all relevant provisions of law, including,
without limitation, the Securities Act of 1933, as amended, the Securities
Exchange Act of 1934, as amended, applicable state securities laws, the rules
and regulations promulgated thereunder, and the requirements of any stock
exchange upon which the Shares may then be listed, and shall be further subject
to the approval of counsel for the Company with respect to such compliance.
(b) As a condition to the exercise of an Option, the Board may
require the person exercising such Option to execute an agreement with, and/or
may require the person exercising such Option to make any representation and
warranty to, the Company as may in the judgment of counsel to the Company be
required under applicable law or regulation, including but not limited to a
representation and warranty that the Shares are being purchased only for
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<PAGE>
investment and without any present intention to sell or to distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
appropriate under any of the aforementioned relevant provisions of law.
14. RESERVATION OF SHARES. The Company, during the term of this Plan,
shall at all times reserve and keep available, such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The Company, during the term of this Plan, shall use its best efforts
to seek to obtain from appropriate regulatory agencies any requisite
authorization in order to issue and to sell such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain from any such regulatory agency having jurisdiction the
requisite authorization(s) deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any Shares hereunder, or the inability of the
Company to confirm to its satisfaction that any issuance and sale of any Shares
hereunder will meet applicable legal requirements, shall relieve the Company of
any liability in respect to the failure to issue or to sell such Shares as to
which such requisite authority shall not have been obtained.
15. STOCK OPTION AND STOCK PURCHASE AGREEMENTS. Options shall be
evidenced by written Option Agreements in such form or forms as the Board shall
approve from time to time. Upon the exercise of an Option, the Optionee shall
sign and deliver to the Company a Stock Purchase Agreement in such form or forms
as the Board shall approve from time to time.
16. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective upon
shareholder approval as provided in Section 17 of the Plan. The Plan shall
continue in effect for a term of ten years unless sooner terminated under
Section 12 of the Plan.
17. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within 12 months before or after the
date the Plan is adopted by the Board. If such shareholder approval is obtained
at a duly held shareholders' meeting, it may be obtained by the affirmative vote
of the holders of a majority of the shares of the Company represented or present
and entitled to vote thereon. All Options granted prior to shareholder approval
of the Plan are subject to such approval, and if such approval is not obtained
within 12 months before or after the date the Plan is adopted by the Board all
such Options shall expire and shall be of no further force or effect.
18. TAXES, FEES, EXPENSES AND WITHHOLDING OF TAXES.
(a) The Company shall pay all original issue and transfer taxes (but
not income taxes, if any) with respect to the grant of Options and/or the issue
and transfer of Shares pursuant to the exercise thereof, and all other fees and
expenses necessarily incurred by the Company in connection therewith, and will
from time to time use its best efforts to comply with all laws and regulations
which, in the opinion of counsel for the Company, shall be applicable thereto.
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<PAGE>
(b) The grant of Options hereunder and the issuance of Shares
pursuant to the exercise thereof is conditioned upon the Company's reservation
of the right to withhold, in accordance with any applicable law, from any
compensation or other amounts payable to the Optionee, any taxes required to be
withheld under federal, state or local law as a result of the grant or exercise
of such Option or the sale of the Shares issued upon exercise thereof. To the
extent that compensation or other amounts, if any, payable to the Optionee are
insufficient to pay any taxes required to be so withheld, the Company may, in
its sole discretion, require the Optionee, as a condition of the exercise of an
Option, to pay in cash to the Company an amount sufficient to cover such tax
liability or otherwise to make adequate provision for the Company's satisfaction
of its withholding obligations under federal, state and local law.
19. LIABILITY OF COMPANY. The Company, its Parent or any Subsidiary which
is in existence or hereafter comes into existence shall not be liable to an
Optionee or other person if it is determined for any reason by the Internal
Revenue Service or any court having jurisdiction that any Options intended to be
Incentive Stock Options granted hereunder do not qualify as incentive stock
options within the meaning of Section 422 of the Code.
20. INFORMATION TO OPTIONEE. The Company shall provide without charge at
least annually to each Optionee during the period his or her Option is
outstanding a balance sheet and income statement of the Company. In the event
that the Company provides annual reports or periodic reports to its shareholders
during the period in which an Optionee's Option is outstanding, the Company
shall provide to each Optionee a copy of each such report.
21. INDEMNIFICATION. No member of the Committee or of the Board shall be
liable for any act or action taken, whether of commission or omission, except in
circumstances involving actual bad faith, or for any act or action taken,
whether of commission or omission, by any other member or by any officer, agent,
or Employee. In addition to such other rights of indemnification they may have
as members of the Board, or as members of the Committee, the Committee shall be
indemnified by the Company against reasonable expenses, including attorneys'
fees actually and necessarily incurred in connection with the defense of any
action, suit or proceeding, or in connection with any appeal therein, to which
they or any of them may be a party by reason of any action taken, by commission
or omission, in connection with the Plan or any Option taken thereunder, and
against all amounts paid by them in settlement thereof (provided such settlement
is approved by independent legal counsel selected by the Company) or paid by
them in satisfaction of a judgment in any action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such Committee or Board member is liable for actual bad faith in
the performance of his or her duties; provided that within 60 days after
institution of any such action, suit or proceeding, a Committee or Board member
shall in writing offer the Company the opportunity, at its own expense, to
handle and defend the same.
22. NOTICES. Any notice to be given to the Company pursuant to the
provisions of this Plan shall be given in writing, addressed to the Company in
care of its Secretary at its principal office, and any notice to be given to an
Employee to whom an Option is granted hereunder shall
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<PAGE>
be delivered personally or addressed to him or her at the address given beneath
his or her signature on his Option Agreement or Stock Purchase Agreement or at
such other address as such Optionee or his or her transferee (upon the transfer
of the Optioned Stock) may hereafter designate in writing to the Company. Any
such notice shall be deemed duly given when enclosed in a properly sealed
envelope or wrapper addressed as aforesaid, registered or certified, and
deposited, postage and registry or certification fee prepaid, in a post office
or branch post office regularly maintained by the United States Postal Service.
It shall be the obligation of each Optionee and each transferee holding Shares
purchased upon exercise of an Option to provide the Secretary of the Company, by
letter mailed as provided hereinabove, with written notice of his or her direct
mailing address.
23. NO ENLARGEMENT OF EMPLOYEE RIGHTS. This Plan is purely voluntary on
the part of the Company, and the continuance of the Plan shall not be deemed to
constitute a contract between the Company and any Employee, or to be
consideration for or a condition of the employment or service of any Employee.
Nothing contained in this Plan shall be deemed to give any Employee the right to
be retained in the employ or service of the Company, its Parent, Subsidiary or a
successor corporation, or to interfere with the right of the Company or any such
corporations to discharge or to retire any Employee at any time with or without
cause and with or without notice. No Employee shall have any right to or
interest in Options authorized hereunder prior to the grant thereof to such
Employee, and upon such grant he or she shall have only such rights and
interests as are expressly provided herein, subject, however, to all applicable
provisions of the Company's Articles of Incorporation, as the same may be
amended from time to time.
24. LEGENDS ON CERTIFICATES.
(a) FEDERAL LAW. Unless an appropriate registration statement is
filed pursuant to the Federal Securities Act of 1933, as amended, with respect
to the Options and Shares issuable under this Plan, each document or certificate
representing such Options or Shares shall be endorsed thereon with a legend
substantially as follows:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND HAVE BEEN ACQUIRED
FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE, TRANSFER
OR DISTRIBUTION THEREOF. NO SUCH SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) ADDITIONAL LEGENDS. Each document or certificate representing
the Options or Shares issuable under the Plan shall also contain legends as may
be required under applicable blue sky laws or by any Stock Purchase Agreement or
other agreement the execution of which is a condition to the exercise of an
Option under this Plan.
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<PAGE>
25. AVAILABILITY OF PLAN. A copy of this Plan shall be delivered to the
Secretary of the Company and shall be shown by him or her to any eligible person
making reasonable inquiry concerning it.
26. INVALID PROVISIONS. In the event that any provision of this Plan is
found to be invalid or otherwise unenforceable under any applicable law, such
invalidity or unenforceability shall not be construed as rendering any other
provisions contained herein as invalid or unenforceable, and all such other
provisions shall be given full force and effect to the same extent as though the
invalid or unenforceable provision was not contained herein.
27. SEVERABILITY. In the event that any provision of the Plan is found to
be invalid or otherwise unenforceable under any applicable law, such invalidity
or unenforceability shall not be construed as rendering any other provisions
contained herein as invalid or unenforceable, and all such other provisions
shall be given full force and effect to the same extent as though the invalid or
unenforceable provision was not contained herein.
28. APPLICABLE LAW. To the extent that federal laws do not otherwise
control, this Plan shall be governed by and construed in accordance with the
laws of the State of California without regard to the conflict of laws
principles thereof.
[END OF PLAN]
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<PAGE>
CERTIFICATE OF SECRETARY
The undersigned Secretary of EarthLink Network, Inc. (the "Company") hereby
certifies that the Board of Directors of the Company by resolution adopted on
____________, 1996, and the shareholders of the Company by resolution adopted on
____________, 1996, approved and adopted the foregoing 1995 Stock Option Plan.
IN WITNESS WHEREOF, the undersigned has executed this document effective as
of the ____ day of __________, 1996.
--------------------------------------------
--------------------------------------------
Secretary
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AMENDMENT NO. 1
TO THE
EARTHLINK NETWORK, INC.
1995 STOCK OPTION PLAN
On March 20, 1996, at a meeting of the Board of Directors of EarthLink Network,
Inc., the Board of Directors resolved to increase the shares reserved for
issuance under the EarthLink Network, Inc. 1995 Stock Option Plan by one (1)
million shares.
<PAGE>
AMENDMENT NO. 2
TO THE
EARTHLINK NETWORK, INC.
1995 STOCK OPTION PLAN
As of May 3, 1996, the Board of Directors of EarthLink Network, Inc., by
unanimous written consent, consented to, approved and adopted the following
amendments to and in connection with the EarthLink Network, Inc. 1995 Stock
Option Plan (the "Plan"):
I. The first paragraph of Section 8(d)(i) of the Plan was amended to read as
follows:
"(I) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option shall
vest and become exercisable at such times, in such installments and under such
conditions as may be determined by the Board, specified in the Option Agreement
and as shall be permissible under the terms of the Plan, including performance
criteria with respect to the Company and/or the Optionee, provided that each
Option shall vest and become exercisable at the rate of not less than 20% per
year over five years from the date such Option is granted."
II. Section 8(d)(ii) of the Plan was amended in full to read as follows:
"(II) TERMINATION OF STATUS AS AN EMPLOYEE. If an Optionee ceases to
serve as an Employee for any reason other than death or Disability, and thereby
terminates his or her Continuous Status As An Employee, to the extent that such
Optionee was entitled to exercise the Option at the date of such termination,
such Optionee shall have the right to exercise the Option at any time within 30
days subsequent to the last day of such Optionee's Continuous Status As An
Employee (unless at the time of grant of such Option the Board specified a
longer period, not to exceed 90 days), PROVIDED, however, that no Option shall
be exercisable after the expiration of the term set forth in the Option
Agreement. To the extent that such Optionee was not entitled to exercise the
Option at the date of the terminating event, or if such Optionee does not
exercise such Option (which such Optionee was entitled to exercise) within the
time specified herein, the Option shall terminate. In the event that an
Optionee's Continuous Status As An Employee terminates due to death or
Disability, to the extent that such Optionee was entitled to exercise the Option
at the date of such termination, the Option may be exercised any time within 180
days subsequent to the death or Disability of the Optionee (unless at the time
of grant of such Option the Board specified a longer period, not to exceed one
year), PROVIDED, however, that no Option shall be exercisable after the
expiration of the Option term set forth in the Option Agreement. To the extent
that such Optionee was not entitled to exercise such Option at the date of his
or her termination due to death or Disability or if such Option is not exercised
(to the extent it could be exercised) within the time specified herein, the
Option shall terminate."
III. In connection with the above amendments to the Plan, Section 2(b) of the
form of Stock Purchase Agreement was amended in full to read as follows:
<PAGE>
"(b) The repurchase price shall be an amount equal to the higher of the
exercise price of the Option or 100% of the fair market value of the shares
underlying the option on the date of termination of employment, times the number
of shares to be repurchased. The repurchase price may be paid by the Company by
check, evidence of cancellation of indebtedness of Optionee to Company, or some
combination thereof, as the Company acting in its sole discretion determines."
IV. The Board of Directors also authorized the officers of the Company to make
any amendments, if necessary, to the forms of Incentive Stock Option Agreement
and Nonstatutory Stock Option Agreement to reflect the above amendments to the
Plan.
V. The Board of Directors also authorized the officers of the Company to make
any further amendments, if necessary, to the form of Stock Purchase Plan to
reflect the above amendments made to the Plan and form of Stock Purchase Plan.
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<PAGE>
EXHIBIT A-1
EARTHLINK NETWORK, INC.
INCENTIVE STOCK OPTION AGREEMENT
EarthLink Network, Inc., a California corporation (the "Company"), hereby
grants to ________________________ (the "Optionee") an option to purchase a
total of _____________ shares of Common Stock (the "Shares") of the Company, at
the price set forth herein, and in all respects subject to the terms and
provisions of the Company's 1995 Stock Option Plan (the "Plan") applicable to
incentive stock options which terms and provisions are hereby incorporated by
reference herein. Unless otherwise defined or the context herein otherwise
requires, the capitalized terms used herein shall have the same meanings
ascribed to them in the Plan.
1. NATURE OF THE OPTION. This Option is intended to be an incentive
stock option within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
2. DATE OF GRANT; TERM OF OPTION. This Option is granted as of
_____________, and it may not be exercised later than ________________.
3. OPTION EXERCISE PRICE. The Option exercise price is $___________ per
Share, which price is not less than the fair market value thereof on the date
this Option was granted.
4. EXERCISE OF OPTION. This Option shall be exercisable during its term
only in accordance with the terms and provisions of the Plan and this Option as
follows:
(a) RIGHT TO EXERCISE. This Option shall vest and be exercisable,
cumulatively [Specify vesting schedule, e.g., in five annual installments
commencing on the first anniversary of the date of grant and continuing to vest
as to one additional installment on every annual anniversary thereafter as long
as the Optionee remains an Employee.]
(b) METHOD OF EXERCISE. This Option shall be exercisable by written
notice which shall state the election to exercise this Option, the number of
Shares in respect to which this Option is being exercised, such other
representations and agreements as to the Optionee's investment intent with
respect to such Shares as may be required by the Company hereunder or pursuant
to the provisions of the Plan. Such written notice shall be signed by the
Optionee and shall be delivered in person or by certified mail to the Secretary
of the Company or such other person as may be designated by the Company. The
written notice shall be accompanied by payment of the exercise price and by an
executed Stock Purchase Agreement if required by the Company. Payment of the
exercise price shall be by cash or by check or by such other method of payment
as is authorized by the Board in accordance with the Plan. The certificate or
certificates for the Shares as to which the Option shall be exercised shall be
registered in the name of the Optionee and, shall be legended as set forth in
the Plan, the Stock Purchase Agreement
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<PAGE>
and/or as required under applicable law. This Option may not be exercised for a
fraction of a Share.
(c) RESTRICTIONS ON EXERCISE. This Option may not be exercised if
the issuance of the Shares upon such exercise would constitute a violation of
any applicable federal or state securities laws or other laws or regulations.
As a condition to the exercise of this Option, the Company may require the
Optionee to make such representations and warranties to the Company as may be
required by any applicable law or regulation.
(d) NO SHAREHOLDER RIGHTS BEFORE EXERCISE AND ISSUANCE. No rights as
a shareholder shall exist with respect to the Shares subject to the Option as a
result of the grant of the Option. Such rights shall exist only after issuance
of a stock certificate in accordance with Section 8(d)(i) of the Plan following
the exercise of the Option as provided in this Agreement and the Plan.
5. INVESTMENT REPRESENTATIONS. In connection with the acquisition of
this Option, the Optionee represents and warrants as follows:
(a) The Optionee is acquiring this Option, and upon exercise of this
Option, he will be acquiring the Shares for investment for his own account, not
as a nominee or agent, and not with a view to, or for resale in connection with,
any distribution thereof.
(b) The Optionee has a preexisting business or personal relationship
with the Company or one of its directors, officers or controlling persons and by
reason of his business or financial experience, has, and could be reasonably
assumed to have, the capacity to evaluate the merits and risks of purchasing
Common Stock of the Company and to make an informed investment decision with
respect thereto and to protect Optionee's interests in connection with the
acquisition of this Option and the Shares.
6. TERMINATION OF STATUS AS AN EMPLOYEE.
(a) If the Optionee's Continuous Employment terminates for any reason
other than death or Disability, the Optionee shall have the right to exercise
the Option at any time within 30 days after the date of such termination to the
extent that the Optionee was entitled to exercise the Option at the date of such
termination (subject to any earlier termination of the Option as provided by its
terms).
(b) If the Optionee's Continuous Employment terminates due to the
death or Disability of the Optionee, the Option may be exercised at any time
within 180 days after the date of such termination, in the case of death, by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, or, in the case of Disability, by the Optionee
(subject to any earlier termination of the Option as provided by its terms).
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<PAGE>
(c) Notwithstanding the foregoing regarding the exercise of the
Option after the termination of Continuous Employment, the Option shall not be
exercisable after the expiration of its term, as set forth in Section 2 herein,
and the Option may be exercised only to the extent the Optionee was entitled to
exercise it on the date Optionee's Continuous Employment with the Company
terminated. To the extent that the Optionee was not entitled to exercise the
Option at the date of termination, or to the extent the Option is not exercised
within the time specified herein, the Option shall terminate.
7. WITHHOLDING. The Company reserves the right to withhold, in
accordance with any applicable laws, from any compensation or other
consideration payable to the Optionee, any taxes required to be withheld by
federal, state or local law as a result of the grant or exercise of this Option
or the sale or other disposition of the Shares issued upon exercise of this
Option; and, if such compensation or consideration is insufficient, the Company
may require Optionee to pay to the Company an amount sufficient to cover such
withholding tax liability.
8. NONTRANSFERABILITY OF OPTION. This Option may not be sold, pledged,
assigned, hypothecated, gifted, transferred or disposed of in any manner, either
voluntarily or involuntarily by operation of law or otherwise, other than by
will or by the laws of descent or distribution or a transfer between spouses
incident to a "divorce" within the meaning of Section 1041(a) of the Code, and
may be exercised during the lifetime of the Optionee only by such Optionee or
his or her legal guardian. Subject to the foregoing and the terms of the Plan,
the terms of this Option shall be binding upon the executors, administrators,
heirs, successors and assigns of the Optionee.
9. CONTINUATION OF EMPLOYMENT. Neither the Plan, this Option, nor any
Option granted thereunder shall (a) confer upon the Optionee any right
whatsoever to continue in the employment of the Company or any of its
Subsidiaries or (b) limit or restrict in any respect the rights of the Company,
which rights are hereby expressly reserved, to terminate the Optionee's
employment and compensation at any time for any reason whatsoever, with or
without cause, in the Company's sole discretion and with or without notice.
10. THE PLAN. This Option is subject to, and the Company and the Optionee
agree to be bound by, all of the terms and conditions of the Company's Plan as
such Plan may be amended from time to time in accordance with the terms thereof,
provided that no such amendment shall deprive the Optionee, without his consent,
of this Option or any rights hereunder. Pursuant to the Plan, the Board is
authorized to adopt rules and regulations not inconsistent with the Plan as it
shall deem appropriate and proper. A copy of the Plan in its present form is
available for inspection at the Company's principal office during business hours
by the Optionee or the persons entitled to exercise this Option.
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<PAGE>
11. ENTIRE AGREEMENT. The terms of this Agreement and the Plan constitute
the entire agreement between the Company and the Optionee with respect to the
subject matter hereof and supersede any and all previous agreements between the
Company and the Optionee.
EarthLink Network, Inc.,
a California corporation
Date: ___________________ By: ________________________________________
Title: _____________________________________
The Optionee hereby acknowledges receipt of a copy of the Plan, a copy of which
is attached hereto, and represents that he has read and is familiar with the
terms and provisions thereof and of this Agreement, and hereby accepts this
Option subject to all of the terms and provisions thereof and of this Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Board upon any questions arising under the Plan.
Date: ____________________ _____________________________________________
Signature of Optionee
____________________________________________
Address
____________________________________________
City State Zip Code
THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXECUTION OF
THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE, TRANSFER OR
DISTRIBUTION THEREOF. NO SUCH SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS OPTION ARE SUBJECT
TO A RIGHT OF FIRST REFUSAL AND MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE
TERMS OF A STOCK PURCHASE AGREEMENT TO BE ENTERED INTO BETWEEN THE HOLDER OF
THIS
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<PAGE>
OPTION AND THE COMPANY UPON EXERCISE OF THIS OPTION, A COPY OF WHICH AGREEMENT
IS ON FILE WITH THE SECRETARY OF THE COMPANY.
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<PAGE>
EXHIBIT A-2
EARTHLINK NETWORK, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
EarthLink Network, Inc., a California corporation (the "Company"), hereby
grants to ______________ (the "Optionee") an option to purchase a total of
__________ shares of Common Stock (the "Shares") of the Company, at the price
set forth herein, and in all respects subject to the terms and provisions of the
Company's 1995 Stock Option Plan (the "Plan") applicable to nonstatutory stock
options which terms and provisions are hereby incorporated by reference herein.
Unless otherwise defined or the context herein otherwise requires, capitalized
terms used herein shall have the same meanings ascribed to them in the Plan.
1. NATURE OF THE OPTION. This Option is intended to be a nonstatutory
stock option and is NOT intended to be an incentive stock option within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or to otherwise qualify for any special tax benefits to the Optionee.
2. DATE OF GRANT; TERM OF OPTION. This Option is granted as of
____________, and it may not be exercised later than ________________.
3. OPTION EXERCISE PRICE. The Option exercise price is $__________ per
Share, which price is not less than 85 % of the fair market value thereof on the
date this Option was granted.
4. EXERCISE OF OPTION. This Option shall be exercisable during its term
only in accordance with the terms and provisions of the Plan and this Option as
follows:
(a) RIGHT TO EXERCISE. This Option shall vest and be exercisable,
cumulatively [Specify vesting schedule, e.g., in five annual installments
commencing on the first anniversary of the date of grant and continuing to vest
as to one additional installment on every annual anniversary thereafter as long
as the Optionee remains an Employee.]
(b) METHOD OF EXERCISE. This Option shall be exercisable by written
notice which shall state the election to exercise this Option, the number of
Shares in respect to which this Option is being exercised, such other
representations and agreements as to the Optionee's investment intent with
respect to such Shares as may be required by the Company hereunder or pursuant
to the provisions of the Plan. Such written notice shall be signed by the
Optionee and shall be delivered in person or by certified mail to the Secretary
of the Company or such other person as may be designated by the Company. The
written notice shall be accompanied by payment of the exercise price and by an
executed Stock Purchase Agreement if required by the Company. Payment of the
exercise price shall be by cash or by check or by such other method of payment
as is authorized by the Board in accordance with the Plan. The certificate or
certificates for the Shares as to which the Option shall be exercised shall be
registered in the name
<PAGE>
of the Optionee and, shall be legended as set forth in the Plan, the Stock
Purchase Agreement and/or as required under applicable law. This Option may not
be exercised for a fraction of a Share.
(c) RESTRICTIONS ON EXERCISE. This Option may not be exercised if
the issuance of the Shares upon such exercise would constitute a violation of
any applicable federal or state securities laws or other laws or regulations.
As a condition to the exercise of this Option, the Company may require the
Optionee to make such representations and warranties to the Company as may be
required by any applicable law or regulation.
(d) NO SHAREHOLDER RIGHTS BEFORE EXERCISE AND ISSUANCE. No rights as
a shareholder shall exist with respect to the Shares subject to the Option as a
result of the grant of the Option. Such rights shall exist only after issuance
of a stock certificate in accordance with Section 8(d)(i) of the Plan following
the exercise of the Option as provided in this Agreement and the Plan.
INVESTMENT REPRESENTATIONS. In connection with the acquisition of
this Option, the Optionee represents and warrants as follows:
(a) The Optionee is acquiring this Option, and upon exercise of this
Option, he will be acquiring the Shares for investment for his own account, not
as a nominee or agent, and not with a view to, or for resale in connection with,
any distribution thereof.
(b) The Optionee has a preexisting business or personal relationship
with the Company or one of its directors, officers or controlling persons and by
reason of his business or financial experience, has, and could be reasonably
assumed to have, the capacity to evaluate the merits and risks of purchasing
Common stock of the Company and to make an informed investment decision with
respect thereto and to protect Optionee's interests in connection with the
acquisition of this Option and the Shares.
6. TERMINATION OF STATUS AS AN EMPLOYEE.
(a) If the Optionee's Continuous Employment terminates for any reason
other than death or Disability, the Optionee shall have the right to exercise
the Option at any time within 30 days after the date of such termination to the
extent that the Optionee was entitled to exercise the Option at the date of such
termination (subject to any earlier termination of the Option as provided by its
terms).
(b) If the Optionee's Continuous Employment terminates due to the
death or Disability of the Optionee, the Option may be exercised at any time
within 180 days after the date of such termination, in the case of death, by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, or, in the case of Disability, by the Optionee
(subject to any earlier termination of the Option as provided by its terms).
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<PAGE>
(c) Notwithstanding the foregoing regarding the exercise of the
Option after the termination of Continuous Employment, the Option shall not be
exercisable after the expiration of its term, as set forth in Section 2 herein,
and the Option may be exercised only to the extent the Optionee was entitled to
exercise it on the date Optionee's Continuous Employment with the Company
terminated. To the extent that the Optionee was not entitled to exercise the
Option at the date of termination, or to the extent the Option is not exercised
within the time specified herein, the Option shall terminate.
7. NONTRANSFERABILITY OF OPTION. This Option may not be sold, pledged,
assigned, hypothecated, gifted, transferred or disposed of in any manner, either
voluntarily or involuntarily by operation of law or otherwise, other than by
will or by the laws of descent or distribution or a transfer between spouses
incident to a "divorce" within the meaning of Section 1041(a) of the Code, and
may be exercised during the lifetime of the Optionee only by such Optionee or
his or her legal guardian. Subject to the foregoing and the terms of the Plan,
the terms of this Option shall be binding upon the executors, administrators,
heirs, successors and assigns of the Optionee.
8. CONTINUATION OF EMPLOYMENT. Neither this Option, the Plan nor any
Option granted thereunder shall (a) confer upon the Optionee any right
whatsoever to continue in the employment of the Company or any of its
Subsidiaries or (b) limit or restrict in any respect the rights of the Company,
which rights are hereby expressly reserved, to terminate the Optionee's
employment and compensation at any time for any reason whatsoever, with or
without cause, in the Company's sole discretion and with or without notice.
9. WITHHOLDING. The Company reserves the right to withhold, in
accordance with any applicable laws, from any consideration or other amounts
payable to the Optionee any taxes required to be withheld by federal, state or
local law as a result of the grant or exercise of this Option or the sale or
other disposition of the Shares issued upon exercise of this Option.
10. THE PLAN. This Option is subject to, and the Company and the Optionee
agree to be bound by, all of the terms and conditions of the Company's Plan as
such Plan may be amended from time to time in accordance with the terms thereof,
provided that no such amendment shall deprive the Optionee, without his consent,
of this Option or any rights hereunder. Pursuant to the Plan, the Board is
authorized to adopt rules and regulations not inconsistent with the Plan as it
shall deem appropriate and proper. A copy of the Plan in its present form is
available for inspection at the Company's principal office during business hours
by the Optionee or the persons entitled to exercise this Option.
11. ENTIRE AGREEMENT. The terms of this Agreement and the Plan constitute
the entire agreement between the Company and the Optionee with respect to the
subject matter hereof and supersede any and all previous agreements between the
Company and the Optionee.
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<PAGE>
EarthLink Network, Inc.,
a California corporation
Date: _______________ By: ________________________________________
Title: _____________________________________
The Optionee hereby acknowledges receipt of a copy of the Plan, a copy of which
is attached hereto, and represents that he has read and is familiar with the
terms and provisions thereof and of this Agreement, and hereby accepts this
Option subject to all of the terms and provisions thereof and of this Agreement.
The Optionee hereby agrees to accept as binding, conclusive and final all
decisions or interpretations of the Board upon any questions arising under the
Plan.
Date: ____________________ _____________________________________________
Signature of Optionee
_____________________________________________
Address
_____________________________________________
City State Zip Code
THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXECUTION OF
THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE, TRANSFER OR
DISTRIBUTION THEREOF. NO SUCH SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS OPTION ARE SUBJECT
TO A RIGHT OF FIRST REFUSAL AND MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE
TERMS OF A STOCK PURCHASE AGREEMENT TO BE ENTERED INTO BETWEEN THE HOLDER OF
THIS OPTION AND THE COMPANY UPON EXERCISE OF THIS OPTION, A COPY OF WHICH
AGREEMENT IS ON FILE WITH THE SECRETARY OF THE COMPANY.
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<PAGE>
EXHIBIT B For Use Upon Exercise of Options
EARTHLINK NETWORK, INC.
STOCK PURCHASE AGREEMENT
This Agreement is made as of the ______ day of ______________, 19__, by
and between EarthLink Network, Inc., a California corporation (the "Company"),
and __________________________________ ("Optionee"). Unless the context herein
otherwise requires, capitalized terms used herein shall have the same meaning as
such capitalized terms have under the Plan.
R E C I T A L S
A. Optionee was granted a Stock Option (the "Option") on _____________,
pursuant to the Company's 1995 Stock Option Plan (the "Plan"), the terms and
conditions of which are incorporated herein by reference.
B. Pursuant to said Option, Optionee was granted the right to purchase
____ shares of the Company's common stock, as adjusted in accordance with the
Plan (the "Optioned Shares").
C. Optionee has elected to exercise the Option to purchase ____ of such
Optioned Shares (herein referred to as the "Shares") under the Stock Option
Agreement evidencing said Option (the "Option Agreement").
D. As required by the Option Agreement, as a condition to Optionee's
exercise of his or her Option, Optionee must execute this Agreement which gives
the Company the right of first refusal upon transfer.
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. EXERCISE OF OPTION. Subject to the terms and conditions hereof,
Optionee hereby agrees to exercise his or her Option or a portion thereof to
purchase ____ Shares at $_________ per Share, payable in accordance with the
terms and provisions of the Option Agreement.
2. COMPANY'S RIGHT TO REPURCHASE SHARES.
(a) If an Optionee ceases to serve as an Employee for any reason,
including death, Disability or Termination for Cause, and thereby terminates his
or her Continuous Status As An Employee, the Company shall have the right to
repurchase all of the Shares purchased by Optionee hereunder, at a price to be
determined as set forth below. Such right on the part of the Company shall
commence upon the last day of such Optionee's Continuous Status As An Employee
(the "Termination Date") and shall expire on the 90th day after the Termination
Date.
<PAGE>
(b) The repurchase price shall be an amount equal to the higher of
the exercise price of the Option or 100% of the fair market value of the shares
underlying the option on the date of termination of employment, times the number
of shares to be repurchased. The repurchase price may be paid by the Company by
check, evidence of cancellation of indebtedness of Optionee to Company, or some
combination thereof, as the Company acting in its sole discretion determines.
3. RIGHT OF FIRST REFUSAL. Before any Shares registered in the name
of Optionee may be sold or transferred (including transfer by operation of law),
such Shares shall first be offered to the Company at the same price, and upon
the same terms (or terms as similar as reasonably possible), in the following
manner:
(a) Optionee shall deliver a notice ("Notice") to the Company
stating a. his or her bona fide intention to sell or transfer such Shares, b.
the number of such Shares to be sold or transferred, c. the price for which he
or she proposes to sell or transfer such Shares, and d. the name of the proposed
purchaser or transferee.
(b) Within 30 days after receipt of the Notice, the Company or
its assignee may elect to purchase any or all Shares to which the Notice refers,
at the price per share and on the same terms (or terms as similar as reasonably
possible) specified in the Notice.
(c) If all or a portion of the Shares to which the Notice refers
are not elected to be purchased pursuant to paragraph 3(b) hereof, Optionee may
sell the Shares not purchased by the Company to any person named in the Notice
at the price and terms specified in the Notice or at a higher price, provided
that such sale or transfer is consummated within 60 days of the date of said
Notice to the Company, and provided, further, that any such sale is in
accordance with all the terms and conditions hereof.
In the event of any transfer by operation of law or other involuntary transfer
(including, but not limited to, by will or by the laws of descent or
distribution) where there is no price established as a matter law, the Company
shall have the right to repurchase all of the Shares purchased by Optionee
hereunder, at a price to be determined as set forth in Section 2(b) above. In
such event, Optionee or Optionee's estate shall notify the Company promptly
after the happening of the event giving rise to the involuntary transfer.
Within 30 days after receipt of such Notice, the Company or its assignee may
elect to purchase any or all Shares to which the Notice refers.
4. TERMINATION OF REPURCHASE RIGHT AND RIGHT OF FIRST REFUSAL.
Optionee's obligations and the Company's rights under paragraphs 2 and 3 above
shall terminate upon the earlier of e. the first sale of Common Stock by the
Company to the public which raises an aggregate of not less than $5,000,000.00
and which is effected pursuant to a registration statement filed with, and
declared effective by, the Securities and Exchange Commission (the "SEC") under
the Securities Act of 1933, as amended (the "Act"), or f. the merger or
consolidation of the Company into, or the sale of all or substantially all of
the Company's assets to, another
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<PAGE>
corporation, if immediately after such merger, consolidation or sale of assets,
at least 50% of the capital stock of the Company or such other corporation is
owned by persons who are not holders of capital stock of the Company immediately
prior to such merger, consolidation or sale.
5. ASSIGNMENT. The Company may assign its rights under paragraphs 2
and 3 hereof to one or more persons, who shall have the right to so exercise
such rights in his or her own name and for his or her own account. If the
exercise of any such right requires the consent of the California Securities
Commissioner or the consent of the Securities Commissioner, or the equivalent,
of another state, the parties agree to cooperate in requesting such consent.
6. ADJUSTMENT. If, from time to time during the term of the right
of first refusal available pursuant to paragraph 3 hereof:
(a) There is any stock dividend or liquidating dividend of cash
and/or property, stock split or other change in the character or amount of any
of the outstanding securities of the Company; or
(b) There is any consolidation, merger or sale of all or
substantially all of the assets of the Company;
then, in such event, any and all new, substituted or additional securities or
other property to which Optionee is entitled by reason of his or her ownership
of Shares shall be immediately subject to the right of first refusal set forth
in paragraph 3 hereof, and be included in the word "Shares" for all purposes
with the same force and effect as the Shares presently subject to such right of
first refusal (provided, however, if such consolidation, merger or sale of all,
or substantially all, of the assets of the Company causes a termination of the
right of first refusal set forth in paragraph 3 hereof, then such new,
substituted or additional securities or other property shall not be included in
the word "Shares" for the purposes of this paragraph).
7. LEGENDS. All certificates representing any Shares of the Company
subject to the provisions of this Agreement shall have endorsed thereon legends
in substantially the following form unless in the opinion of the Company's
counsel such legends are no longer necessary:
(a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A STOCK PURCHASE AGREEMENT
BETWEEN THE COMPANY AND THE REGISTERED HOLDER, OR ITS PREDECESSOR IN INTEREST, A
COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY."
(b) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES
LAWS OF ANY STATE, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO,
OR IN CONNECTION WITH, THE SALE,
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<PAGE>
TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE, TRANSFER OR DISTRIBUTION MAY BE
EFFECTED WITHOUT AN EFFECTIVE REGISTRATION OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
8. INVESTMENT REPRESENTATIONS. Unless the Shares have been
registered under the Act, in which event the Company will so advise Optionee in
writing, Optionee agrees, represents and warrants, in connection with the
proposed purchase of the Shares, as follows:
(a) Optionee represents and warrants that he or she is
purchasing the Shares solely for Optionee's own account for investment and not
with a view to, or for resale in connection with any distribution thereof within
the meaning of the Act. Optionee further represents that he or she does not
have any present intention of selling, offering to sell or otherwise disposing
of or distributing the Shares or any portion thereof, and that the entire legal
and beneficial interest of the Shares Optionee is purchasing is being purchased
for, and will be held for the account of, Optionee only and neither in whole nor
in part for any other person.
(b) Optionee represents and warrants that he or she is aware of
the Company's business affairs and financial condition and has acquired
sufficient information about the Company to reach an informed and knowledgeable
decision to acquire the Shares. Optionee further represents that he or she has
a preexisting personal or business relationship with the officers and directors
of the Company and that Optionee has such knowledge and experience in business
and financial matters to enable him to evaluate the risks of the prospective
investment and to make an informed investment decision with respect thereto and
that he or she has the capacity to protect his or her own interests in
connection with the purchase of the Shares. Optionee further represents and
warrants that Optionee has discussed the Company and its plans, operations and
financial condition with its officers, has received all such information as he
or she deems necessary and appropriate to enable Optionee to evaluate the
financial risk inherent in making an investment in the Shares and has received
satisfactory and complete information concerning the business and financial
condition of the Company in response to all inquiries in respect thereof.
(c) Optionee represents and warrants that he or she realizes
that Optionee's purchase of the Shares will be a speculative investment and that
he or she is able, without impairing Optionee's financial condition, to hold the
Shares for an indefinite period of time and to suffer a complete loss on his or
her investment.
(d) Optionee represents and warrants that the Company has
disclosed to him or her in writing: (i) the sale of the Shares has not been
registered under the Act, and the Shares must be held indefinitely unless a
transfer of them is subsequently registered under the Act or an exemption from
such registration is available, and that the Company is under no obligation to
register the Shares; and (ii) the Company shall make a notation in its records
of the aforementioned restrictions on transfer and legends.
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<PAGE>
(e) Optionee represents and warrants that he or she is aware of
the provisions of Rule 144, promulgated under the Act, which, in substance,
permits limited public resale of "restricted securities" acquired, directly or
indirectly, from the issuer thereof (or an affiliate of such issuer) in a non-
public offering subject to the satisfaction of certain conditions, including
among other things: the resale occurring not less than two (2) years from the
date Optionee has purchased and paid for the Shares; the availability of certain
public information concerning the Company; the sale being through a broker in an
unsolicited "brokers' transaction" or in a transaction directly with a market
maker (as said term is defined under the Securities Exchange Act of 1934); and
that any sale of the Shares may be made by Optionee, if he or she is an
affiliate of the Company, only in limited amounts during any three-month period
not exceeding specified limitations. Optionee further represents that Optionee
understands that at the time he or she wishes to sell the Shares there may be no
public market upon which to make such a sale, and that, even if such a public
market then exists, the Company may not be satisfying the current public
information requirements of Rule 144, and that, in such event, he or she may be
precluded from selling the Shares under Rule 144 even if the two-year minimum
holding period had been satisfied. Optionee represents that he or she
understands that in the event the applicable requirements of Rule 144 are not
satisfied, registration under the Act, compliance with Regulation A, or some
other registration exemption will be required; and that, notwithstanding the
fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its
opinion that persons proposing to sell private placement securities other than
in a registered offering and otherwise than pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales, and that such persons and their
respective brokers who participate in such transactions do so at their own risk.
(f) Without in any way limiting Optionee's representations and
warranties set forth herein, Optionee further agrees that he or she shall in no
event make any disposition of all or any portion of the Shares which Optionee
is purchasing unless and until:
(i) There is then in effect a Registration Statement under
the Act covering such proposed disposition and such disposition
is made in accordance with said Registration Statement; or
(ii) Optionee shall have (x) notified the Company of the
proposed disposition and furnished the Company with a detailed
statement of the circumstances surrounding the proposed
disposition, and (y) furnished the Company with an opinion of his
or her own counsel to the effect that such disposition will not
require registration of such shares under the Act, and such
opinion of his or her counsel shall have been concurred in by
counsel for the Company and the Company shall have advised
Optionee of such concurrence.
9. ESCROW. As security for his or her faithful performance of the
terms of this Agreement and to insure the availability for delivery of
Optionee's Shares upon exercise of the Company's right to repurchase and right
of first refusal herein provided for, Optionee agrees to
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<PAGE>
deliver to and deposit with the Secretary of the Company or the Secretary's
nominee (in either case, the "Escrow Agent"), as Escrow Agent in this
transaction, two Assignment Separate From Certificates duly endorsed (with date
and number of shares blank) in the form attached hereto as Attachment A,
together with the certificate or certificates evidencing the Shares; said
documents are to be held by the Escrow Agent and delivered to said Escrow Agent
pursuant to the Joint Escrow Instructions of the Company and Optionee set forth
in Attachment B attached hereto and incorporated herein by this reference, which
instructions shall also be delivered to the Escrow Agent at the closing
hereunder.
10. RESTRICTION ON ALIENATION. Optionee agrees that he or she will
not sell, transfer, gift, pledge, hypothecate, assign or otherwise dispose of
any of the Shares or any right or interest therein, whether voluntary, by
operation of law or otherwise, without the prior written consent of the Company,
except a transfer which meets the requirements of this Agreement. Any sale,
transfer, gift, pledge, hypothecation, assignment or disposition or purported
sale, transfer or other disposition of such Shares by Optionee shall be null and
void unless the terms, conditions and provisions of this Agreement are strictly
observed.
11. LOCKUP AGREEMENT. Optionee, if requested by the Company and an
underwriter of Common Stock or other securities of the Company, agrees not to
sell or otherwise transfer or dispose of any Common Stock (or other securities)
of the Company held by the Optionee during the period not to exceed 180 days as
requested by the managing underwriter following the effective date of a
registration statement of the Company filed under the Securities Act of 1933, as
amended, provided that all officers and directors of the Company are required or
agreed to enter into similar agreements. Such agreement shall be in writing in
a form satisfactory to the Company and such underwriter. The Company may impose
stop-transfer instructions with respect to the shares or other securities
subject to the foregoing restriction until the end of such period.
12. MISCELLANEOUS.
(a) The Company shall not be required g. to transfer on its
books any Shares which shall have been sold or transferred in violation of any
of the provisions set forth in this Agreement, or h. to treat as owner of such
Shares or to accord the right to vote as such owner or to pay dividends to any
transferee to whom such Shares shall have been so transferred.
(b) Subject to the provisions of this Agreement, Optionee shall,
during the term of this Agreement, exercise all rights and privileges of a
stockholder of the Company with respect to the purchased Shares.
(c) The parties agree to execute such further instruments and to
take such further action as may reasonably be necessary to carry out the intent
of this Agreement.
(d) Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post
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<PAGE>
Office, by registered or certified mail with postage and fees prepaid, addressed
to the other party hereto at his or her address hereinafter shown below his or
her signature or at such other address as such party may designate by ten days'
advance written notice to the other party hereto.
(e) This Agreement shall inure to the benefit of the successors
and assigns of the Company and, subject to all compliance with the restrictions
on transfer herein set forth, be binding upon Optionee, his or her heirs,
executors, administrators, and permitted successors and assigns.
(f) This Agreement shall be construed under the laws of the
State of California and constitutes the entire Agreement of the parties with
respect to the subject matter hereof superseding all prior written or oral
agreements, and no amendment or addition hereto shall be deemed effective unless
agreed to in writing by the parties hereto.
(g) Optionee agrees that, until a public market for the Shares
exists, the Shares cannot be readily purchased, sold, or evaluated in the open
market, that they have a unique and special value, and that the Company and its
stockholders would be irreparably damaged if the terms of this Agreement were
not capable of being specifically enforced, and for this reason, among others,
Optionee agrees that the Company shall be entitled to a decree of specific
performance of the terms hereof or an injunction restraining violation of this
Agreement, said right to be in addition to any other remedies of the Company.
(h) If any provision of this Agreement is held by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall nevertheless continue in full force and effect without being
impaired or invalidated in any way and shall be construed in accordance with the
purposes and tenor and effect of this Agreement.
(i) Nothing in this Agreement shall be deemed to create any term
of employment or affect in any manner whatsoever the right or power of the
Company to terminate Optionee's employment, for any reason, with or without
cause.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
EarthLink Network, Inc., a California
corporation
By:__________________________________________
Title:_______________________________________
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<PAGE>
OPTIONEE
_____________________________________________
Address:_____________________________________
_____________________________________________
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<PAGE>
CONSENT
The undersigned spouse of Optionee acknowledges that he/she has read
the foregoing Agreement and agrees that his or her interest, if any, in the
Shares subject to the foregoing Agreement shall be irrevocably bound by this
Agreement and further understands and agrees that any community property
interest, if any, shall be similarly bound by this Agreement.
Date:_________________ ________________________________________
Spouse of Optionee
Spouse's Name:__________________________
<PAGE>
ATTACHMENT A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED ________________________________ hereby sells,
assigns and transfers unto ________________________________ (____) shares of the
Common Stock (the "Shares") of EarthLink Network, Inc., a California corporation
(the "Company"), standing in the undersigned's name on the books of the Company
represented by Certificate No. _______ herewith, and does hereby irrevocably
constitute and appoint _______________________________________ attorney to
transfer the Shares on the books of the Company with full power of substitution
in the premises.
Dated:_____________________________________________
Signature:_________________________________________
<PAGE>
ATTACHMENT B For Use With Stock Options
JOINT ESCROW INSTRUCTIONS
__________________, 199__
__________________________________
Secretary
EarthLink Network, Inc.
3171 Los Feliz Blvd., Suite 203
Los Angeles, CA 90039
Dear ________________:
As Escrow Agent for both EarthLink Network, Inc., a California
corporation (the "Company"), and the undersigned grantee of an option to
purchase stock of the Company ("Optionee"), you are hereby authorized and
directed to hold the documents delivered to you pursuant to the terms of that
certain Stock Purchase Agreement (the "Agreement"), dated as of _________,
199__, to which a copy of these Joint Escrow Instructions is attached as
Attachment B, in accordance with the following instructions:
1. In the event the Company and/or any assignee of the Company
(referred to collectively for convenience herein as the "Company") shall elect
to exercise the repurchase right set forth in Section 2 of the Agreement or the
right of first refusal set forth in Section 3 of the Agreement (collectively,
"Repurchase Rights"), the Company shall give to Optionee and you a written
notice specifying the number of shares of stock to be purchased, the exercise
price, and the time for a closing hereunder at the principal office of the
Company. Optionee and the Company hereby irrevocably authorize and direct you
to close the transaction contemplated by such notice in accordance with the
terms of said notice.
2. At the closing, you are directed (a) to date the stock
assignments necessary for the transfer in question, (b) to fill in the number of
shares being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company against the
simultaneous delivery to you of the exercise price (by check, evidence of
cancellation of indebtedness of Optionee to the Company or a promissory note, or
some combination thereof) for the number of shares of stock being purchased
pursuant to the exercise of the Repurchase Rights.
3. Optionee irrevocably authorizes the Company to deposit with you
any certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said stock as defined in the Agreement. Optionee
does hereby irrevocably constitute and appoint you
<PAGE>
as his attorney-in-fact and agent for the term of this escrow to execute with
respect to such securities all stock certificates, stock assignments, or other
documents necessary or appropriate to make such securities negotiable and
complete any transaction herein contemplated.
4. This escrow shall terminate at such time as there are no longer
any shares of stock subject to the Repurchase Rights under the Agreement.
5. If at the time of termination of this escrow you should have in
your possession any documents, securities, or other property belonging to
Optionee, you shall deliver all of same to Optionee and shall be discharged of
all further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or
revoked only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as
are specifically set forth herein and may rely and shall be protected in relying
or refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Optionee while acting in
good faith and in the exercise of your own good judgment, and any act done or
omitted by you pursuant to the advice of your own attorneys shall be conclusive
evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law, and are hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree of
any court, you shall not be liable to any of the parties hereto or to any other
person, firm or corporation by reason of such compliance, notwithstanding any
such order, judgment or decree being subsequently reversed, modified, annulled,
set aside, vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the
identity, authorities or rights of the parties executing or delivering or
purporting to execute or deliver the Agreement or any documents or papers
deposited or called for hereunder.
10. You shall not be liable for the outlawing of any rights under any
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other
experts as you may deem necessary or proper to advise you in connection with
your obligations hereunder and may rely upon the advice of such counsel, and the
Company shall pay such counsel reasonable compensation therefor.
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<PAGE>
12. Your responsibilities as Escrow Agent hereunder shall terminate
if you shall cease to be Secretary of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint any officer or employee of the Company as successor Escrow Agent.
13. If you reasonably require other or further instruments in
connection with these Joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities held by you hereunder, you are authorized and directed to retain in
your possession without liability to anyone all or any part of said securities
until such dispute shall have been settled either by mutual written agreement of
the parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post office, by registered or certified mail with
postage and fees prepaid, addressed to each of the other parties thereunto
entitled at the following addresses, or at such other address as a party may
designate by ten (10) days advance written notice to each of the other parties
hereto.
COMPANY: EarthLink Network, Inc.
3171 Los Feliz Blvd., Suite 203
Los Angeles, CA 90039
Attention: Secretary
OPTIONEE: _____________________________________________
_____________________________________________
_____________________________________________
ESCROW AGENT: EarthLink Network, Inc.
3171 Los Feliz Blvd., Suite 203
Los Angeles, CA 90039
Attention: Secretary
16. By signing these Joint Escrow Instructions, you become a party
hereto only for the purpose of said Joint Escrow Instructions; you do not become
a party to the Agreement.
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<PAGE>
17. This instrument shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and permitted assigns.
Very truly yours,
EarthLink Network, Inc., a California
corporation
By:__________________________________________
Title:_______________________________________
OPTIONEE
_____________________________________________
Address:_____________________________________
_____________________________________________
Agreed to and accepted as of the date set
forth above.
ESCROW AGENT
_____________________________________________
Secretary
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<PAGE>
EARTHLINK NETWORK, INC.
STOCK OPTION PLAN FOR DIRECTORS
1. PURPOSE. The purpose of this Stock Option Plan for Directors ("Plan")
of EarthLink Network, Inc. (the "Company"), a Delaware corporation, is to
encourage stock ownership by nonemployee directors ("Directors" or a "Director")
by providing them a means to acquire a proprietary interest in the Company,
thereby advancing the interests of the Company by encouraging and enabling the
acquisition of its stock by Directors whose judgment and ability are relied upon
by the Company for the attainment of its long term growth and development.
Accordingly, the Plan is intended to promote a close identity of interests among
the Company, the Directors and its stockholders, as well as to provide a means
to attract and retain well-qualified Directors.
2. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective as
of the effective date of the Company's initial public offering, subject,
however, to the approval of the Plan by the Company's stockholders, which may
occur prior to such effective date. The Plan shall remain in effect for ten
years from such date (___________ __, 1996), or until earlier termination by the
Board of Directors of the Company (the "Board"), whichever occurs first.
3. STOCK SUBJECT TO THE PLAN. There are authorized for issuance or
delivery upon the exercise of options to be granted from time to time under the
Plan an aggregate of 125,000 shares of the Company's common stock, $.01 par
value ("Common Stock"), subject to adjustment as provided hereinafter in Section
8. Such shares may be, as a whole or in part, authorized but unissued shares,
whether now or hereafter authorized, or issued shares which have been reacquired
by the Company. If any option issued under this Plan shall expire, terminate or
be cancelled for any reason without having been exercised in full, the shares of
Common Stock which have not been purchased thereunder shall again become
available for the purposes of this Plan.
4. PLAN ADMINISTRATION:
(a) The Plan shall be administered by the Compensation Committee (the
"Committee"), which shall consist of at least two Directors appointed by
the Board.
(b) The Committee shall have full and final authority to interpret
the Plan, adopt, amend and rescind rules and regulations relating to the
Plan, and make all other determinations and take all other actions
necessary and advisable for the administration of the Plan.
(c) Decisions and determinations of the Committee on all matters
relating to the Plan shall be in its sole discretion and shall be
conclusive. No member of the Committee shall be liable for any action
taken or decision made in good faith relating to this Plan or any grant
hereunder.
(d) An administrator of the Plan (the "Administrator") may from time
to time be appointed by the Committee. If appointed, the Administrator
shall be responsible for the general administration of the Plan under the
policy guidance of the Committee. The Administrator shall be in the employ
of the Company, and shall be compensated for services and expenses by the
Company according to its normal employment policies without special or
additional compensation, other than reimbursement of expenses, if any, for
his or her services as the Administrator.
5. TERMS AND CONDITIONS OF "FORMULA" STOCK OPTION AWARDS. Each Director
shall receive a non-qualified stock option in accordance with the terms and
conditions of this Section 5 and Section 6.
(a) INITIAL GRANTS UPON APPOINTMENT TO THE BOARD OF DIRECTORS. Each
person who is first elected or appointed to serve as a Director following
the effective date of this Plan shall be granted a non-qualified stock
option as of the first business day following the Director's election or
appointment to purchase 20,000 shares of Common Stock at an exercise price
equal to the then Fair Market Value (as defined in Section 5(d)) per share
of Common Stock.
<PAGE>
(b) SUBSEQUENT GRANTS DURING TENURE AS A DIRECTOR. Each Director
shall be granted, as of the first business day of each fiscal year of the
Company beginning after the effective date of this Plan, a non-qualified
stock option to purchase 5,000 shares of Common Stock at an exercise price
equal to the then Fair Market Value (as defined in Section 5(d)) per share
of Common Stock.
(c) CONDITIONS TO GRANTS. Options awarded pursuant to this Section 5
shall be subject to such additional terms as set forth in a non-qualified
stock option agreement as approved by the Committee and incorporated herein
by reference.
(d) FAIR MARKET VALUE. "Fair Market Value" with regard to any date
means the closing price at which a share of Common Stock shall have been
sold on that date as reported by the NASDAQ Stock Market (or, if
applicable, as reported by a national securities exchange selected by the
Committee on which the shares of Common Stock are then actively traded) and
published in The Wall Street Journal. If at the time of the determination
of Fair Market Value shares of Common Stock are not actively traded on any
market described above, Fair Market Value means the fair market value of a
share of Common Stock as determined by the Committee taking into account
such facts and circumstances deemed to be material by the Committee to the
value of the Common Stock in the hands of the Director.
6. GENERAL TERMS AND CONDITIONS OF OPTIONS. Options awarded under
Section 5 shall be subject to the following additional terms and conditions.
(a) TERM AND EXERCISE OF OPTION. Options may be exercised only by
written notice to the Company. Payment for all shares of Common Stock
purchased pursuant to exercise of an option shall be made (i) in cash; (ii)
by delivery to the Company of a number of shares of Common Stock which have
been beneficially owned by the Director for at least six (6) months prior
to the date of exercise having an aggregate Fair Market Value of not less
than the product of the exercise price multiplied by the number of shares
the participant intends to purchase upon exercise of the option on the date
of delivery; or (iii) in a cashless exercise through a broker. Payment
shall be made at the time that the option or any part thereof is exercised,
and no shares shall be issued or delivered upon exercise of an option until
full payment has been made by the participant. No option granted under the
Plan may be exercised before the expiration of the fiscal year for which it
was granted; provided, however, that any option granted under the Plan
shall become immediately exercisable upon the retirement of the Director
because of age, death or disability. No option granted under the Plan
shall be exercisable after the expiration of ten (10) years from the date
upon which it is granted. Each option shall be subject to termination
before its date of expiration as provided in Section 6(b).
(b) DEATH OF DIRECTOR. Any option granted to a Director and
outstanding on the date of his or her death may be exercised by the
administrator of such Director's estate, the executor under his or her
will, or the person or persons to whom the option shall have been validly
transferred by such executor or administrator pursuant to the will or laws
of intestate succession, but not beyond the first to occur of (i) the first
anniversary of the Director's death, or (ii) the specified expiration date
of the option; provided, however, that an option that is not exercised
prior to the first anniversary of the Director's death shall be deemed
exercised on the first anniversary of the date of death to the extent the
then aggregate Fair Market Value of the shares subject to the option
exceeds the aggregate Option Exercise Price and payment of such exercise
price shall be effected by withholding a number of shares of Common Stock
otherwise issuable pursuant to the option the Fair Market Value of which on
such anniversary is equal to the exercise price. If the Fair Market Value
of the Stock on the first anniversary of the Director's death equals or is
less than the option exercise price, then the option shall be deemed to
have expired unexercised.
7. CHANGES IN CAPITALIZATION. If the outstanding shares of Common Stock
are increased, decreased or exchanged for a different number or kind of shares
or other securities, or if additional shares of other property (other than
ordinary cash dividends) are distributed with respect to such shares of Common
Stock or other securities, through
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<PAGE>
merger, consolidation, sale of all or substantially all of the assets of the
Company, reorganization, recapitalization, reclassification, dividend, stock
split, reverse stock split, spin-off, split-off or other distribution with
respect to such shares of Common Stock, or other securities, an appropriate and
proportionate adjustment shall be made in (i) the maximum number and kind of
shares reserved for issuance under the Plan, (ii) the number and kind of shares
or other securities subject to then outstanding options under the Plan, and
(iii) the price for each share subject to any then outstanding options under the
Plan. No fractional shares will be issued under the Plan on account of any such
adjustments. Any adjustment pursuant to this Section 7 shall provide for the
elimination without payment therefor of any fractional shares. No such
adjustment shall be made with respect to the Company's reincorporation as a
Delaware corporation in connection with its initial public offering.
8. LIMITATION OF RIGHTS:
(a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan, nor the
granting of an option, nor any other action taken pursuant to the Plan,
shall constitute evidence of any agreement or understanding, express or
implied, that the Company will retain a Director as a director for any
period of time, or at any particular rate of compensation.
(b) NO STOCKHOLDERS' RIGHTS FOR OPTIONS. The holder of an option
granted under the Plan shall have no rights as a stockholder with respect
to the shares covered by his or her options until the date of the issuance
to such holder of a stock certificate therefor, and no adjustment will be
made for dividends or other rights for which the record date is prior to
the date such certificate is issued.
(c) NO RIGHT TO PARTICIPATE AS AN EMPLOYEE DIRECTOR. A Director's
right to participate in the Plan shall automatically terminate if and when
a Director becomes an employee of the Company.
9. TRANSFERABILITY:
(a) Options are not transferable other than by will or the laws of
intestate succession. No transfer by will or by the laws of intestate
succession shall be effective to bind the Company unless the Committee
shall have been furnished with a copy of the deceased participant's will or
such other evidence as the Committee may deem necessary to establish the
validity of the transfer.
(b) Only a Director, or in the event of disability, his or her
guardian, or in the event of death, his or her legal representative or
beneficiary, may exercise options and receive deliveries of shares.
(c) A Director or his transferee upon his death may not transfer any
Option or any of the Common Stock acquired pursuant to the exercise of an
Option until six months from the date of grant of the Option.
10. AMENDMENT, MODIFICATION AND TERMINATION. The Board at any time may
terminate and in any respect amend or modify the Plan; provided, however, that
no such action by the Board, without approval of the Company's stockholders, may
(i) increase the total number of shares of Common Stock available under the Plan
in the aggregate (except as otherwise provided in Section 7 above), (ii) extend
the period during which any option may be exercised, (iii) extend the term of
the Plan, (iv) change any option exercise price or (v) alter the class of
persons eligible to receive options. No amendment, modification or termination
of the Plan shall in any manner adversely affect the rights of any Director with
respect to an option previously granted. Notwithstanding any other provision of
this Plan, the provisions of Section 5 may not be amended more than once every
six months, other than to conform it with changes in the Internal Revenue Code
of 1986, as amended, the Employee Retirement Income Security Act of 1974, or any
rules under either of the foregoing.
11. NOTICE. Any written notice to the Company required by any of the
provisions of the Plan shall be addressed to the Corporate Secretary of the
Company and shall become effective when it is received.
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<PAGE>
12. RESTRICTIONS ON DELIVERY AND SALE OF SHARES; LEGENDS. Each option is
subject to the condition that if at any time the Committee, in its discretion,
shall determine that the listing, registration or qualification of the shares
covered by such option upon any securities exchange or under any state or
federal law is necessary or desirable as a condition of or in connection with
the granting of such option or the purchase or delivery of shares thereunder,
the delivery of any or all shares pursuant to such option may be withheld unless
and until such listing, registration or qualification shall have been effected.
If a registration statement is not in effect under the Securities Act of 1933 or
any applicable state securities laws with respect to the shares of Common Stock
purchasable or otherwise deliverable under options then outstanding, the
Committee may require, as a condition of exercise of any option or as a
condition to any other delivery of Common Stock pursuant to an option, that the
Director represent, in writing, that the shares received pursuant to the option
are being acquired for investment and not with a view to distribution and agree
that the shares will not be disposed of except pursuant to an effective
registration statement, unless the Company shall have received an opinion of
counsel that such disposition is exempt from such requirement under the
Securities Act of 1933 and any applicable state securities laws. The Company
may include on certificates representing shares issued pursuant to an option
such legends referring to the foregoing representations or restrictions or any
other applicable restrictions on resale as the Company, in its discretion, shall
deem appropriate.
EARTHLINK NETWORK, INC.
By:__________________________________________
Barry W. Hall
Chief Financial Officer
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ATCS:T:\EarthLin\Plan\sopdir.2
<PAGE>
MASTER EQUIPMENT LEASE
THIS LEASE, made this _______ day of _________________ 1996 between BOSTON
FINANCIAL & EQUITY CORPORATION (herein called "Lessor"), a Massachusetts
corporation with its principal place of business at 20 Overland St., Boston
Massachusetts, and EARTHLINK NETWORK, INC. (herein called "Lessee"), a
CALIFORNIA corporation, with its principal place of business at 3171 LOS
FELIZ BOULEVARD, SUITE 203, LOS ANGELES, CALIFORNIA 90039.
WITNESSETH
In consideration of the premises, the parties covenant and agree as follows:
1. Definitions. As herein used:
1.1 "Equipment" means the equipment manufactured or sold by the
Manufacturers or Distributors described in the Schedule of Leased
Equipment ("Schedule") annexed hereto and made a part hereof, together
with any replacements or substitution of parts, improvements or
additions thereto, and such other equipment which, by agreement, may
from time to time be hereafter described on any supplemental schedule
of leased equipment ("Schedule") which may be annexed hereto and made a
part hereof (the equipment on all such schedules being collectively
herein referred to as "Equipment"). The term "Equipment" also includes
all software and other intellectual property described on the Schedule
as well as operating software and application software used or usable
in connection with any item set forth on any Schedule whether or not
such software or other intellectual property is specifically identified
on the Schedule, and also includes all tangible representations of all
such software.
1.2 "Commencement Date" means the first day of the month next
following the delivery of all the Equipment.
1.3 "Monthly Rent" means the amount of rent payable by Lessee each
month pursuant to Paragraph 3 of the Schedule as well as all
maintenance charges payable, if any, if, according to the Schedule,
Lessor is furnishing maintenance as indicated on the Schedule.
1.4 "Net Proceeds of Sale" means the net amount received by Lessor
after deducting from the gross proceeds of sale of the Equipment or in
the event of a subsequent lease by the Lessor, the net present value of
rent due under such subsequent lease, all expenses incurred in the
termination of this lease and any amounts for which, if not paid,
Lessor would be liable or which, if not paid, would constitute a lien on
the Equipment.
1.5 "Lessor's Depreciated Book Value" means the original cost of the
equipment less the straight line depreciation for five year property,
all as reflected on Lessor's books of account.
1.6 "Lease Term" means the period specified in Section 2 of the
applicable Schedule thereof.
1.7 "Addendum" means any amendment to this Master Equipment Lease
which is specifically identified as such, and when so identified shall
be a part hereof.
2. Lessor does hereby lease to the Lessee, and Lessee hereby leases and hires
from the Lessor the Equipment subject to the terms, provisions, conditions
and agreements in this lease set forth.
3. Delivery. Lessee hereby acknowledges: (a) the Equipment is of the
manufacture, design and capacity selected by Lessee; (b) the Equipment is
suitable for Lessee's purposes, and (c) Lessor has made no representation
or warranty, expressed or implied, with respect to the Equipment or any of
the foregoing matters. Lessor will assign or otherwise make available to
Lessee all of Lessor's rights (if any and if assignable) under the
manufacturer's warranty on the Equipment and maintenance agreement
relating thereto, all costs and charges thereof and therefore to be borne
by Lessee. At the termination of the applicable Schedule, Lessee shall, at
its expense, return the Equipment subject thereto to Lessor at the
location designated by Lessor within the continental United States by
surface transportation, only if not shipped directly to a successor
Lessee. The Equipment returned to Lessor shall, at the time it is
disconnected from its then location in Lessee's premises, be in the same
condition and working order as when delivered to Lessee, reasonable wear
and tear and casualty loss excepted, and shall be at the then current
engineering change level recommended by the Equipment Manufacturer (if
required in the Schedule).
4. In addition to the Monthly Rent, Lessee shall pay, promptly when due,
all costs, expenses, fees, charges and taxes incurred in connection with
the use and operation of the Equipment. Such items shall include, but not
be limited to:
4.1.1 all costs of operating the Equipment.
4.1.2 all federal, state, county, municipal or other taxes whatsoever,
without proration, and any penalties and interest thereon ("Taxes")
(including any Taxes with an assessment date which occurred during the
Lease Term or any extension thereof). If the payment due date or
reimbursement date for a Tax should occur after the expiration or
termination of the Lease Term or any extension thereof, Lessee's
liability for such Tax shall survive such expiration or termination.
4.1.3 all shipping, installation, and transportation charges from the
manufacturer or vendor to the installation site.
4.1.4 all de-installation, shipping and transportation charges from the
installation site to a location designated by the Lessor at the
conclusion of the Lease or any extension thereof.
4.2 If Lessee should fail to pay any of the costs, expenses, fees,
charges and taxes (including attorney's fees) for which Lessee is liable
hereunder, Lessor may, but shall not be required to, pay the same for
the account of Lessee. Lessee shall reimburse Lessor, upon demand, for
the full amount of any such costs,
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<PAGE>
expenses, fees, charges and taxes paid by Lessor.
4.3 If, at the termination of the applicable Schedule, Lessee fails
to return to Lessor the Equipment subject thereto in accordance with the
provisions of the second paragraph of Section 3, Lessee shall, until
such Equipment is so returned: pay to Lessor on account of damages a
monthly amount equal to the amount shown in Section 5 of such Schedule,
and perform or observe all other of its agreements and covenants under
this Lease; but such payment, performance, and observance shall not
limit or impair Lessor's right to recover the Equipment or any other of
Lessor's rights under this Lease, nor shall it represent an extension of
the term provided in the applicable schedule, nor shall it represent a
consent by the Lessor to such failure by Lessee to return, and, in all
events notwithstanding such payment, performance and observance,
Lessee's obligation so to return shall remain in full force and effect.
5. Use of Equipment. Lessee shall use the Equipment only for lawful
purposes in the regular course of its business or the business of any
subsidiary or affiliate of Lessee within the United States or its
possessions. Lessee shall, concurrently with the execution of this
Lease, notify Lessor in writing where all Equipment is principally
located, and upon any change in such principal location of any
Equipment, notify Lessor in writing within ten (10) days thereafter of
the new principal location of such Equipment. Lessee shall use every
reasonable precaution to prevent loss or damage to Equipment from fire
and other hazards. Lessee's servants and agents shall cooperate fully
with Lessor in the investigation of any claims and suits relating to the
Equipment. Lessee shall keep the Equipment free from all liens and
encumbrances. This Lease and the interest of Lessee hereunder shall not
be assigned, alienated, pledged or hypothecated voluntarily by Lessee or
by operation of law, nor shall Lessee permit the Equipment to come into
the possession of any third person except a subsidiary or affiliate of
Lessee, provided, however, that Lessee shall remain obligated to Lessor
hereunder with respect to any such Equipment.
6. Lessee will enter into a Master Maintenance Agreement with Lessor.
Except to the extent of the Lessor's obligation to provide maintenance
(as provided in the aforesaid Master Maintenance Agreement) Lessee
shall, at its own expense, keep the Equipment in first-class condition
and repair and in good and efficient working order (including the
replacement or substitution of parts, improvements or additions to the
Equipment). Lessee shall not, without Lessor's prior written consent,
make any substitution of any part(s) of the Equipment, whether or not
such part(s) are specifically identified by manufacturer or serial
number. Without the prior written consent of Lessor, Lessee will not,
through the installation of accessory devices or any other method,
impair the originally intended function of any Equipment. Any
replacement or substitution of parts, improvements or additions to the
Equipment made by Lessee shall] become and remain the property of Lessor.
7. Insurance. Lessee shall, at its expense, procure and maintain, at all
times, in a responsible insurance company acceptable to Lessor,
insurance in an amount not less than the estimated market value of all of
the Equipment protecting Lessor and Lessee, as their interests may
appear, against loss and/or damage to the Equipment arising out of any
risk covered by fire and extended coverage and by employee theft and
dishonesty. All such insurance shall cover the period from delivery of
the Equipment to Lessee to the date of termination of the Lease with
respect thereto, and shall provide for ten (10) days' prior written
notice to Lessor of any cancellation or reduction in coverage. Lessee
shall deliver to Lessor within ten (10) days after the Commencement Date,
the insurance policy, and a Certificate of Insurance satisfactory to
Lessor. Lessor shall have no duty to examine such policies or
certificates, or to advise Lessee of any noncompliance of such insurance
with this Lease. If Lessee fails to provide the aforesaid insurance,
Lessor may, at its own option, provide such insurance and add the amount
of the premiums to the next rental installment together with interest
thereon at the rate of Twenty Four Per Cent (24%) per annum, or the rate
permitted by law (whichever is less), from the date of payment thereof
until paid in full. The proceeds of such insurance whether resulting from
loss, damage, return premium or otherwise, shall be payable to Lessor and
Lessee, as their interests may appear. If Lessee should be in default under
Section 10 hereof, Lessee hereby appoints Lessor as Lessee's
attorney-in-fact to make claim for, receipt payment of and execute or
endorse all documents, checks or drafts for loss, damage, return premium
or otherwise under any insurance policy issued on Equipment,
8. Indemnity. Lessee shall indemnify and hold Lessor harmless against any
and all claims, demands, liabilities, losses, damages and injuries of
whatsoever kind and nature, direct or consequential, and all fees, costs
and expenses relating to or in any way arising out of the possession.
maintenance, use, operation, control, loss damage, destruction, return,
surrender, sale or other disposition of the Equipment. The foregoing
indemnity shall not be affected by any termination of the Lease.
9. Termination of Lease of Equipment Through Loss or Destruction. Lessee
shall bear all risks of loss, damage or destruction of the Equipment during
the Lease Term. In the event the Equipment is damaged beyond repair the
Lessee shall be liable to the Lessor for an amount equal to the cost of
purchasing similar Equipment less the amount of any insurance or other
recoveries received by the Lessor in connection therewith.
10. Events of Default. The following events of default by Lessee shall give
rise to rights on the part of Lessor described in Section 11:
10.1 (a) Default in the payment of Monthly Rent hereunder, and such
default not having been remedied in three (3) days from due date. (b)
Default in the payment or performance of any other liability, obligation
or covenant of Lessee under this Lease
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<PAGE>
and the continuance of such default for fifteen (15) days after written
notice thereof to Lessee sent by certified mail; or
10.2 Breach of any representation or warranty. or default in the
performance of any agreement, of Lessee contained in this Lease; or
10.3 The Making of a general assignment for the benefit of
creditors by Lessee, the suspension of business or the commission by
Lessee of any act amounting to a business failure, any change in, or
termination of, Lessee's corporate existence (except a merger,
consolidation or reorganization in which the obligations of Lessee are
assumed by the surviving corporation), or the levy of an attachment or
filing of a tax lien (other than a Federal tax lien) against Lessee
affecting Equipment, and the failure of Lessee to cause such
attachment or tax lien to be discharged within thirty (30) days
thereafter, or the filing of a Federal Tax lien against Lessee, the
Equipment or any of Lessee's property; or
10.4 The institution of bankruptcy, reorganization, liquidation or
receivership proceedings by or against Lessee and, if instituted
against Lessee, its consent thereto or the failure to cause such
proceedings to be discharged within thirty (30) days thereafter,
11. Rights of Lessor Upon Default of Lessee. Upon occurrence of any
of the Events of Default described in Section 10, Lessor may, at its
discretion, do one or more of the following:
11.1 Terminate this Lease upon five (5) days' written notice to Lessee sent
by certified mail:
11.2 Whether or not this Lease be terminated, take immediate possession of
any or all of the Equipment, including substituted parts, accessories
or equipment, wherever situated, and for such purpose, enter upon any
premises without liability for so doing. Lessor shall hold the Equipment
so repossessed free and clear of this Lease and of any of the rights of
Lessee hereunder
11.3 Whether or not any action has been taken under Section 11.1 or 11.2
above, sell, dispose of, hold, use or lease any Equipment as Lessor at
its sole discretion, may decide, without any duty to account to Lessee
with respect to such action or any proceeds thereof, and free of any
interest of Lessee therein.
If, after default, Lessee should deliver the Equipment to Lessor, or if
Lessor should repossess the Equipment or if Lessor should terminate this
Lease, and in addition to all rights of Lessor set forth above, Lessee shall
be liable for, and Lessor may recover from Lessee, as liquidated damages for
the breach of this Lease: (i) all unpaid rent to the date of such delivery,
repossession or termination, (ii) all rent due to Lessor between the date of
such delivery, repossession or termination and the end of the present Lease
Term, (iii) in the event of a sale pursuant to Section 11.3, the amount of
any deficiency existing between the Net Proceeds of Sale of the Equipment and
the Lessor's Depreciated Book Value of the Equipment at the time of such
repossession, (iv) all such sums payable by Lessee pursuant to the provisions
hereof, (v) all other losses and damages sustained by reason of the default,
and (vi) all costs and expenses, including but not limited to costs
associated with repossession, deinstallation. transportation charges and
necessary repair expenses, incurred by Lessor by reason of the default. If,
for any reason, Lessor should be unable to effect repossession of the
Equipment, Lessor may recover, as liquidated damages, the amounts aforesaid,
except that instead of item (iii), Lessee shall be liable to Lessor in an
amount equal to the replacement cost of the Equipment as determined by the
Lessor.
12. In addition to all other sums payable by Lessee hereunder. Lessee shall
pay to Lessor all expenses incurred by Lessor, including, without
limitation, reasonable attorneys' fees and court expenses of enforcing any
rights of Lessor hereunder, whether against Lessee or any other party
primarily or secondarily liable with respect to the Lessee's obligations or
against the Equipment.
13. Equipment to Be and Remain Personal Property. It is the intention and
understanding of both Lessor and Lessee that all Equipment shall be and
at all times remain personal property.
14. Rentals to be Paid Directly to Lessor. Lessee shall make payment of all
rent and other payments due hereunder directly to Lessor at the following
mailing address BOSTON FINANCIAL & EQUITY CORPORATION. Post Office Box 71,
Kenmore Station, Boston, Massachusetts 02215, or to such other address as
Lessor shall instruct.
15. Miscellaneous
15.1 Time is of the essence hereof.
15.2 This agreement is and is intended to be a True Lease. Lessee does
not acquire hereby any right, title or interest in or to the Equipment,
except the right to use the same under the terms hereof. Lessor and
Lessee agree that for tax purposes this lease will be treated as a
finance lease by the Lessee.
15.3 The relationship between Lessor and Lessee shall always and only be
that of Lessor and Lessee. Lessee shall never at any time during the
term of this Lease for any purpose whatsoever be or become the agent of
the Lessor, and Lessor shall not be responsible for the acts or
omissions of Lessee, or its agents.
15.4 Lessor shall have the right to inspect any Equipment at any
reasonable time; provided however, that such right shall be limited to
the extent required by any applicable United States Government
security regulations.
15.5 Should the Lessee not pay the monthly rental payment when due and
owing under the provisions of this Lease, the Lessee agrees to pay to
the Lessor five per cent (5%) of the monthly payment as a delinquency
charge, or the maximum permitted by law, (whichever is less).
15.6 Lessor's rights and remedies with respect to any of the terms and
conditions of this Lease shall be cumulative and not exclusive, and
shall be in addition to all other rights and remedies in its favor.
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<PAGE>
15.7 No party hereto shall, by act, delay, omission or otherwise, be deemed
to have waived any of its rights or remedies hereunder, or under any
other instrument executed in connection herewith, unless such waiver is
in writing. A waiver on any one occasion shall not be construed as a
waiver on any future occasion.
15.8 The invalidity of any portion of this Lease shall not affect the force
and effect of the remaining valid portions thereof.
15.9 All notices shall be binding upon the parties hereto if sent to the
address set forth herein (unless a subsequent address has been
furnished) by certified mail, by one party to the other.
15.10 Lessee will provide Lessor with copies of Annual Financial Reports
prepared by Lessee's independent accounting firm within fourteen (14)
days of the issuance of said Report. In addition, Lessee will provide
Lessor with copies of interim, year-to-date or monthly financial
reports which reports shall be prepared at least every three (3) months.
Lessee will make every effort to prepare and deliver to Lessor all
financial reports in a timely fashion upon request by the Lessor.
Lessee also agrees to make available financial books and records for
review by Lessor during regular business hours, as well as other
contracts, agreements, or materials the Lessor may deem appropriate.
15.11 No representations, warranties. promises, guaranties or agreements,
oral or written, expressed or implied, have been made by either party
hereto with respect to this Lease or the Equipment, except as expressly
provided herein.
15.12 This Lease shall be construed in accordance with the laws of the
Commonwealth of Massachusetts without regard to the choice of law rules
thereof. Lessee hereby irrevocably submits to the jurisdiction of the
courts of said Commonwealth or any federal court sitting within said
Commonwealth, over any suit, action, or proceeding arising out of or
relating to this Lease or the Equipment and agrees that any suit,
action, or proceeding brought by the Lessee against or involving the
Lessor shall be brought only in said courts. Lessee further consents to
process being served in the manner described for notices under Section
15.9 above.
This Lease constitutes the entire agreement between the parties hereto
with respect to the leasing of the Equipment. Any change or
modification of this Lease must he in writing and signed by the parties
hereto.
15.13 Lessor and Lessee, each having had opportunity of review by
counsel, each irrevocably waive all right to trial by jury in any
proceeding hereinafter instituted by or against either of them in
respect of this Lease or arising out of any document executed in
connection herewith or in connection with the Equipment.
16. Lessor may assign its rights under this Lease and (1) if Lessor does assign
this Lease, the assignee shall be entitled, upon notifying the Lessee, to
performance of all of Lessee's obligations and agreements under this Lease
and to all of the rights and remedies of the Lessor, and (2) Lessee will
assert no claim or defenses it may have against the Lessor against the
assignee.
17. Lease is conditional upon approval of Lessor, and is neither consummated
nor binding on Lessor until accepted by an authorized officer of Lessor.
Such acceptance will be rendered only after submission of all necessary
information to the Lessor and an evaluation by the Lessor of the
acceptability of the Lessee for the Equipment Lease herein described.
Signature of this Lease by the Lessor shall constitute acceptance and all
aforementioned terms and conditions shall be effective upon endorsement
by the Lessor.
18. Supplemental Equipment Schedules may from time to time be included under
this Master Equipment Lease. The addition of supplemental Schedules is
conditional upon approval by Lessor and is neither consummated nor binding
on Lessor until accepted by an authorized officer of Lessor. Such
acceptance will be rendered only after submission of all necessary
information to the Lessor and an evaluation by the Lessor.
19. The terms and conditions of the Master Equipment Lease and any other
documents associated herewith are confidential and proprietary. Lessee
agrees not to disclose the same to any other party without prior
written consent of Lessor.
IN WITNESS WHEREOF, Lessor and Lessee have duly executed this Lease as of the
day and year first above written.
LESSOR: BOSTON FINANCIAL &
LESSEE: EARTHLINK NETWORK, INC. EQUITY CORPORATION
------------------------------- -------------------------------
Signature: /s/ LELAND THOBURN Signature:
---------------------------- ----------------------------
Name: LELAND THOBURN Name:
--------------------------------- ---------------------------------
Title: Treasurer Title:
-------------------------------- --------------------------------
Date: February 8, 1996 Date:
--------------------------------- ---------------------------------
ATTEST: ATTEST:
------------------------------- -------------------------------
-4-
<PAGE>
LEASE SCHEDULE NO. 1
to Master Equipment Lease between BOSTON FINANCIAL & EQUITY
CORPORATION, Lessor, and EARTHLINK NETWORK, INC., Lessee (Lease No. 1270)
dated as of February 23, 1996.
1. Description of Equipment:
(25) GATEWAY 2000 P5-100 SYSTEMS (to include)
QTY DESCRIPTION
---- -----------
(25) Intel 100MHz Pentium Processor
(25) 8MB EDO Performance DRAM expandable to 128MB
(25) 256KB Pipeline Burst SRAM cache
(25) 850MB Western Digital IDE (13ms) 17MB DTR
(25) PCI Enhanced IDE interface
(25) PCI local-bus graphics accelerator with 1MB DRAM
(25) 3.5" 1.44MB diskette drive
(25) Vivitron 15 color monitor (13.9" viewable)
(25) Slots: two 16-bit ISA, three 32-bit PCI, one PCI/ISA slots
(25) Desktop case with 145-watt power supply
(25) 104+ Keyboard
(25) 3COM ISA Ethernet Combo
(25) Microsoft mouse and Gateway mouse pad
(25) Microsoft Windows 95
(25) MS Office 95, Professional Edition
2. Lease Term. This Lease Schedule shall be effective as of the date hereof,
and unless terminated as provided herein, shall continue in full force and
effect for a period of thirty-six (36) months from Commencement Date.
3. Payment of Rent. Lessee shall pay to Lessor as Monthly Rent for the above
Equipment the sum of One Thousand Six Hundred Sixty-One Dollars ($1,661.00)
each month for the first Twenty-Four (24) months; and One Thousand Five
Hundred Sixty-Six Dollars ($1,566.00) each month for the final Twelve (12)
months. Payment will be made in advance on or before the first day of each
month of Lease Term, or any extensions thereof. Rental payments for Months
One (1) and Thirty-Six (36) are due upon signing of this agreement with the
Rental payment for the first month being applied to the month beginning with
the Commencement Date.
If delivery of the Equipment takes place on other than the first day of a
month, the rent for such partial first month shall be the amount obtained by
multiplying the following: Fraction of Monthly Rent as set forth above times
the number of days remaining in such partial first month: provided, however,
that if less than all of the Equipment is delivered prior to the Commencement
Date then Lessee shall pay rent to the Lessor for the period between such
date of delivery and Commencement Date, which rent for each full month of
such period shall be determined by multiplying by a fraction whose numerator
shall be the cost of the Equipment so delivered and whose denominator shall
be the total cost of all of the Equipment.
-1-
<PAGE>
LEASE SCHEDULE NO. 2
to Master Equipment Lease between BOSTON FINANCIAL & EQUITY
CORPORATION, Lessor, and EARTHLINK NETWORK, INC., Lessee (Lease No. 1270) dated
as of February 23, 1996.
1. Description of Equipment:
(See Exhibit A to Lease Schedule No. 2)
2. Lease Term. This Lease Schedule shall be effective as of the date
hereof, and unless terminated as provided herein, shall continue in full
force and effect for a period of thirty-six (36) months from Commencement
Date.
3. Payment of Rent. Lessee shall pay to Lessor as Monthly Rent for the above
Equipment the sum of Thirteen Thousand Six Hundred Fifty-Six Dollars
($13,656.00) each month for the first Twenty-Four (24) months; and Twelve
Thousand Eight Hundred Seventy-Five Dollars ($12,875.00) each month for the
final twelve (12) months. Payment will he made in advance on or before the
first day of each month of Lease Term, or any extensions thereof. Rental
payments for Months One (1) and Thirty-Six (36) are due upon signing of this
agreement with the Rental payment for the first month being applied to the month
beginning with the Commencement Date.
If delivery of the Equipment takes place on other than the first day of a
month, the rent for such partial first month shall be the amount obtained by
multiplying the following: Fraction of Monthly Rent as set forth above times
the number of days remaining in such partial first month: provided, however,
that if less than all of the Equipment is delivered prior to the Commencement
Date then Lessee shall pay rent to the Lessor for the period between such
date of delivery and Commencement Date, which rent for each full month of
such period shall be determined by multiplying by a fraction whose numerator
shall be the cost of the Equipment so delivered and whose denominator shall
be the total cost of all of the Equipment.
4. Extension of Lease. Lessee shall have the option to extend this Lease
Schedule at the end of the present term for a Twenty-Four (24) month period
at a monthly rental charge of Three Thousand Seven Hundred Seven Dollars
($3,707.00) each month, and a subsequent option to extend this Lease Schedule
for Sixty (60) months at a monthly rental charge of Two Thousand One Hundred
Seven Dollars ($2,107.00) each month.
5. Should Lessee wish to exercise the extension option under Section 4,
Lessor must be notified in writing by Lessee, via certified mail, of Lessee's
intention to exercise this option. Said notification must be received at least
ninety (90) days prior to termination of this Lease Schedule. Should said
notice not be delivered to Lessor, Lessee shall forfeit the option contained in
Section 4 and all Equipment shall be delivered to the Lessor at the
conclusion of the Lease Term. Should Lessee forfeit the option contained in
Section 4 and all Equipment is not received by the Lessor at the
conclusion of the Lease Term, Lessee shall, until such Equipment is so
returned, pay to Lessor on account of damages a monthly amount equal to Twelve
Thousand Eight Hundred Seventy-Five Dollars ($12,875.00).
-1-
<PAGE>
6. Termination of Lease. Should Lessee not wish to exercise the extension
option under Section 4, Lessor must be notified in writing, via certified
mail, of Lessee's intention to terminate this Lease Schedule. Said
notification must be received at least ninety (90) days prior to the end of
the term of this Lease Schedule. All Equipment shall be delivered to Lessor
at the conclusion of the Lease Term, pursuant to Section 3 of the Master
Equipment Lease. Should said notice not be delivered to Lessor and all
Equipment is not received at the conclusion of the Lease Term, Lessee shall,
until such Equipment is so returned, pay to Lessor on account of damages a
monthly amount equal to Twelve Thousand Eight Hundred Seventy-Five Dollars
($12,875.00).
7. Equipment Location (complete address):
EARTHLINK NETWORK, INC.
3100 NEW YORK AVENUE
PASADENA, CA 91109
8. Lessee's Billing Address:
EARTHLINK NETWORK, INC.
3171 LOS FELIZ BOULEVARD
LOS ANGELES, CA 90039
9. All of the provisions of the above-mentioned Master Equipment Lease are
incorporated by reference herein as if set forth fully herein.
10. This Lease Schedule is conditional upon approval of Lessor, and is
neither consummated nor binding on Lessor until accepted by an authorized
officer of Lessor. Such acceptance will be rendered only after submission of
all necessary information to the Lessor and an evaluation by the Lessor of
the acceptability of the Lessee for the Lease Schedule herein described.
Signature of this Lease Schedule by the Lessor shall constitute acceptance
and all aforementioned terms and conditions and shall be effective upon
endorsement by the Lessor.
LESSEE LESSOR
EARTHLINK NETWORK, INC. BOSTON FINANCIAL & EQUITY CORPORATION
/s/ Sky Dayton
- -------------------------------------- --------------------------------------
(Signature) (Signature)
- -------------------------------------- --------------------------------------
(Name) (Name)
- -------------------------------------- --------------------------------------
(Title) (Title)
- -------------------------------------- --------------------------------------
(Date) (Date)
-2-
<PAGE>
E X H I B I T A
TO
LEASE SCHEDULE NO. 2
BETWEEN
EARTHLINK NETWORK, INC.
AND
BOSTON FINANCIAL & EQUITY CORPORATION
Page 1 of 10
QTY DESCRIPTION
------- --------------------------------------------------------------
(107) PANEL-TACK ACOUST, LOW TOP CAP,
24-5/16x4O-5/8
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(9) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP,
24-5/16x4O-5/8
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(2) PANEL-TACK ACOUST, LOW TOP CAP,
30-5/16x4O-5/8
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(2) PANEL-TACK ACOUST, LOW TOP CAP,
48-5/16x4O-5/8
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(5) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP,
42-5/16x4O-5/8
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(6) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP,
48-5/16x4O-5/8
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(13) PANEL-TACK ACOUST, LOW TOP CAP,
60-5/16x4O-5/8
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
This filing is for information only as this transaction is a true lease.
<PAGE>
E X H I B I T A
TO
LEASE SCHEDULE NO. 2
BETWEEN
EARTHLINK NETWORK, INC.
AND
BOSTON FINANCIAL & EQUITY CORPORATION
Page 2 of 10
QTY DESCRIPTION
------- --------------------------------------------------------------
(58) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP,
60-11/16x4O-5/8
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(185) PANEL-TACK ACOUST, LOW TOP CAP,
24-5/16x51-3/4
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(39) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP,
24-5/16x51-3/4
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(34) PANEL-TACK ACOUST, LOW TOP CAP,
30-5/16x51-3/4
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(28) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP,
30-5/16x51-3/4
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(32) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP,
42-5/16x51-3/4
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
This filing is for information only as this transaction is a true lease.
<PAGE>
E X H I B I T A
TO
LEASE SCHEDULE NO. 2
BETWEEN
EARTHLINK NETWORK, INC.
AND
BOSTON FINANCIAL & EQUITY CORPORATION
Page 3 of 10
QTY DESCRIPTION
------- --------------------------------------------------------------
(87) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP,
48-5/16x51-3/4
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(119) PANEL-TACK ACOUST, LOW TOP CAP,
60-11/16x51-3/4
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(27) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP
60-11/16x51-3/4
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(13) PANEL-TACK ACOUST, LOW TOP CAP,
24-5/16x64-1/16
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(11) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP,
24-5/16x64-1/16
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(11) PANEL-TACK ACOUST, LOW TOP CAP,
30-5/16x64-1/16
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
This filing is for information only as this transaction is a true lease.
<PAGE>
E X H I B I T A
TO
LEASE SCHEDULE NO. 2
BETWEEN
EARTHLINK NETWORK, INC.
AND
BOSTON FINANCIAL & EQUITY CORPORATION
Page 4 of 10
QTY DESCRIPTION
------- --------------------------------------------------------------
(1) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP,
18-5/16x64-1/16
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(15) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP,
30-5/16x64-1/16
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(6) PANEL-TACK ACOUST, LOW TOP CAP,
42-5/16x64-1/16
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(1) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP,
42-5/16x64-1/16
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(18) PANEL-TACK ACOUST, LOW TOP CAP,
48-5/16x64-1/16
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(20) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP,
48-5/16x64-1/16
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
This filing is for information only as this transaction is a true lease.
<PAGE>
E X H I B I T A
TO
LEASE SCHEDULE NO. 2
BETWEEN
EARTHLINK NETWORK, INC.
AND
BOSTON FINANCIAL & EQUITY CORPORATION
Page 5 of 10
QTY DESCRIPTION
------- --------------------------------------------------------------
(7) PANEL-TACK ACOUST, LOW TOP CAP,
60-11/16x64-1/16
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(15) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP,
60-11/16x64-1/16
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(5) PANEL-3 CIRCT, TACK ACOUST, LOW TOP CAP,
18-5/16x4O-5/8
BASIC : 4692 GREY V5
SURF-1 : Z022 GRANITE
SURF-2 : Z022 GRANITE
(2) PANEL-NON TACK, CURVED, LOW TOP CAP,
24-5/16x64-1/16
BASIC : 4692 GREY V5
INNER : Z022 GRANITE
OUTER : Z022 GRANITE
(35) FILLER PACKAGE-"L" CONFIG, LOW TOP CAP, 41H
BASIC : 4692 GREY V5
UPRIGHT : Z022 GRANITE
(119) FILLER PACKAGE-"L" CONFIG, LOW TOP CAP, 53H
BASIC : 4692 GREY V5
UPRIGHT : Z022 GRANITE
This filing is for information only as this transaction is a true lease.
<PAGE>
E X H I B I T A
TO
LEASE SCHEDULE NO. 2
BETWEEN
EARTHLINK NETWORK, INC.
AND
BOSTON FINANCIAL & EQUITY CORPORATION
Page 6 of 10
QTY DESCRIPTION
------- --------------------------------------------------------------
(24) FILLER PACKAGE-"L" CONFIG, LOW TOP CAP, 65H
BASIC : 4692 GREY V5
UPRIGHT : Z022 GRANITE
(52) TOP CAP-FILLER, "X" CONFIG, LOW HGT
TOP-CAP : 4692 GREY V5
(100) FILLER PACKAGE-"T" CONFIG, LOW TOP CAP, 53H
BASIC : 4692 GREY V5
UPRIGHT : Z022 GRANITE
(19) FILLER PACKAGE-"T" CONFIG, LOW TOP CAP, 41H
BASIC : 4692 GREY V5
UPRIGHT : Z022 GRANITE
(1) FILLER PACKAGE-"X" CONFIG, LOW TOP CAP,
41/53H PNL APPL
TOP-CAP : 4692 GREY V5
UPRIGHT : Z022 GRANITE
(17) FILLER PACKAGE-"T" CONFIG, LOW TOP CAP, 65H
BASIC : 4692 GREY V5
UPRIGHT : Z022 GRANITE
(5) FILLER PKG-"T" CONFIG, BK FLR, LOW TOP CAP,
53/65H PNL APPL
BASIC : 4692 GREY V5
UPRIGHT : Z022 GRANITE
(50) BASE POWER IN-3 CIRCT, DUPLEX OR TRIPLEX,
1/2" CONDUIT/6' LEAD
(28) RECEPTACLE-DUPLEX, LINE 1, CTN/6
PLASTIC : 6615 GREY V5
This filing is for information only as this transaction is a true lease.
<PAGE>
E X H I B I T A
TO
LEASE SCHEDULE NO. 2
BETWEEN
EARTHLINK NETWORK, INC.
AND
BOSTON FINANCIAL & EQUITY CORPORATION
Page 7 of 10
QTY DESCRIPTION
------- --------------------------------------------------------------
(24) RECEPTACLE-DUPLEX, LINE 2, CTN/6
PLASTIC : 6615 GREY V5
(17) RECEPTACLE-DUPLEX, LINE 3, CTN/6
PLASTIC : 6615 GREY V5
(18) WORKSURFACE-CORNER, RADIUS EDGE,
24x42x25-1/2FRONT
TOP-SURF
(16) WORKSURFACE-CORNER, RADIUS EDGE,
24x42x25-1/2FRONT
TOP-SURF : 2716 DAWN (RET)
SPECIAL TO BE 24(A) 24(B) 60(C) 42(D)
AVENIR TOPS PROGRAM
EDGE : 6615 GV5
(50) WORKSURFACE-CORNER, RADIUS EDGE,
24x42x25-1/2FRONT
TOP-SURF : 2716 DAWN (RET)
SPECIAL TO BE 24(A) 24(B) 48(C) 6O(D)
AVENIR TOPS PROGRAM
EDGE : 6615 GREY V5
(54) WORKSURFACE-CORNER, RADIUS EDGE,
24x42x25-1/2FRONT
TOP-SURF : 2716 DAWN (RET)
SPECIAL TO BE 24(A) 24(B) 60(C) 48(D)
AVENIR TOPS PROGRAM
EDGE : 6615 GV5
This filing is for information only as this transaction is a true lease.
-7-
<PAGE>
E X H I B I T A
TO
LEASE SCHEDULE NO. 2
BETWEEN
EARTHLINK NETWORK, INC.
AND
BOSTON FINANCIAL & EQUITY CORPORATION
Page 8 of 10
QTY DESCRIPTION
------- --------------------------------------------------------------
(47) WORKSURFACE PACKAGE-RADIUS EDGE,
NO SPRT/NO SPRT, 24X30
TOP-SURF : 2716 DAWN (RET)
SPECIAL TO BE 24" WIDE
AVENIR TOPS PROGRAM
EDGE : 6615 GV5
(88) WORKSURFACE PACKAGE-RADIUS EDGE,
NO SPRT/NO SPRT, 24X30
TOP-SURF : 2716 DAWN (RET)
SPECIAL TO BE 30" WIDE
AVENIR TOPS PROGRAM
EDGE : 6615 GREY V5
(26) CANTILEVER-LH, 24D
BASIC : 4692 GREY V5
(23) CANTILEVER-RH, 24D
BASIC : 4692 GREY V5
(184) CANTILEVER-SHARED, 24D WKSF
APPL, 18D
BASIC : 4692 GREY V5
(315) BRACKET-SIDE SUPPORT
(204) PEDESTAL-2 BOX, 1 FILE DWR, LK,
24x15x27
BASIC : 4692 GREY V5
LOCK : 9201 POLISHED CHROME
PULL : 4692 GREY V5
KEYS : SK RAND
This filing is for information only as this transaction is a true lease.
<PAGE>
E X H I B I T A
TO
LEASE SCHEDULE NO. 2
BETWEEN
EARTHLINK NETWORK, INC.
AND
BOSTON FINANCIAL & EQUITY CORPORATION
Page 9 of 10
QTY DESCRIPTION
------- --------------------------------------------------------------
(6) PANEL-TRANSPT, STRAIGHT, MED TOP CAP,
24-5/16x64-11/16
BASIC : 4692 GREY V5
GLASS : 6502 SOLAR BRONZE GLASS
(6) PANEL-TRANSPT, STRAIGHT, MED TOP CAP,
48-5/16x64-11/16
BASIC : 4692 GREY V5
GLASS : 6502 SOLAR BRONZE GLASS
(3) WORKSURFACE-CORNER, RADIUS EDGE,
24x42x25-1/2FRONT
TOP-SURF : 2716 DAWN (RET)
24(A) 24(B) 44(C) 60(D)
AVENIR TOPS PROGRAM
EDGE : 6615 GV5
(1) WORKSURFACE-CORNER, RADIUS EDGE,
24x42x25-1/2FRONT
TOP-SURF : 2716 DAWN (RET)
24(A) 24(B) 60(C) 44(D)
AVENIR TOPS PROGRAM
EDGE : 6615 GV5
(56) WORKSURFACE-CORNER, RADIUS EDGE,
24x42x25-1/2FRONT
TOP-SURF : 2716 DAWN (RET)
SPECIAL TO BE 24(A) 24(B) 60(C) 60(D)
AVENIR TOPS PROGRAM
EDGE : 6615 GV5
This filing is for information only as this transaction is a true lease.
<PAGE>
E X H I B I T A
TO
LEASE SCHEDULE NO. 2
BETWEEN
EARTHLINK NETWORK, INC.
AND
BOSTON FINANCIAL & EQUITY CORPORATION
Page 10 of 10
QTY DESCRIPTION
------- --------------------------------------------------------------
(6) WORKSURFACE PACKAGE-RADIUS EDGE,
NO SPRT/NO SPRT, 24x42
TOP-SURF : 2716 DAWN (RET)
AVENIR TOPS PROGRAM
EDGE : 6615 GV5
(1) WORKSURFACE PACKAGE-RADIUS EDGE,
NO SPRT/NO SPRT, 24x42
TOP-SURF : 2716 DAWN (RET)
SPECIAL TO BE 44" WIDE
AVENIR TOPS PROGRAM
EDGE : 6615 GV5
(6) WORKSURFACE PACKAGE-RADIUS EDGE,
NO SPRT/NO SPRT, 24x48
TOP-SURF : 2716 DAWN (RET)
AVENIR TOPS PROGRAM
EDGE : 6615 GV5
(14) WORKSURFACE PACKAGE-RADIUS EDGE,
NO SPRT/NO SPRT, 24x6O
TOP-SURF : 2716 DAWN (RET)
AVENIR TOPS PROGRAM
EDGE : 6615 GV5
This filing is for information only as this transaction is a true lease.
<PAGE>
LEASE SCHEDULE NO. 3
to Master Equipment Lease between BOSTON FINANCIAL & EQUITY
CORPORATION, Lessor, and EARTHLINK NETWORK, INC., Lessee (Lease No. 1270)
dated as of February 23, 1996.
1. Description of Equipment:
QTY. DESCRIPTION SERIAL NO.
---- ----------- ----------
(3) GDBPENT133PIA 4370222-
P5-133 Professional 4370224
(3) MONO15006ACWW
15-inch Sony Vivitron Monitor
(3) SWRKIT125AAUS
Office 95 Pro CD
(1) GDBPENT133PIA 4370226
P5-133 Professional
(1) MON017003ABWW
MON WW SON 17VIV, 15.9" VIEW
(1) SWRKIT125AAUS
Office 95 Pro CD
(1) GDBPENT133PIA 4370498
P5-133 Professional
(1) MONO17003ABWW
MON WW SON 17VIV, 15.9" VIEW
(1) SWRKIT125AAUS
Office 95 Pro CD
(1) GDBPENT133PIA 4380899
P5-133 Professional
(1) MONO15006ACWW
15-inch Sony Vivitron Monitor
(1) SWRKIT125AAUS
Office 95 Pro CD
(1) GDBPENT133PIA 4380904
P5-133 Professional
(1) MONO17003ABWW
MON WW SON 17VIV, 15.9" VIEW
(1) SWRKIT125AAUS
Office 95 Pro CD
(1) GDAPENT166PIA 4369105
GA-P5-166 XL PC
(1) MONO17004AAWW
MON WW MAG 17VIV, 15.9" VIEW
(1) SWRKIT127ABUS
K SWR US OFF 95 & GENER II
-1-
<PAGE>
QTY. DESCRIPTION SERIAL NO.
---- ----------- ----------
(2) GSA4DX4100LBC 4371268-
GA LBT DX4-100 BASE PC 4371269
(2) SWRKIT086AAUS
MS Works 95 Disk
2. Lease Term. This Lease Schedule shall be effective as of the date
hereof, and unless terminated as provided herein, shall continue in full
force and effect for a period of thirty-six (36) months from Commencement
Date.
3. Payment of Rent. Lessee shall pay to Lessor as Monthly Rent for the
above Equipment the sum of One Thousand Fourteen Dollars ($1,014.00) each
month for the first twenty-four (24) months; and Nine Hundred Fifty-Six
Dollars ($956.00) each month for the final twelve (12) months. Payment will
be made in advance on or before the first day of each month of Lease Term, or
any extensions thereof. Rental payment for Months One (1) and Thirty-Six (36)
are due upon signing of this agreement with the Rental payment for the first
month being applied to the month beginning with the Commencement Date.
If delivery of the Equipment takes place on other than the first day of a
month, the rent for such partial first month shall be the amount obtained by
multiplying the following: Fraction of Monthly Rent as set forth above times
the number of days remaining in such partial first month: provided, however,
that if less than all of the Equipment is delivered prior to the Commencement
Date then Lessee shall pay rent to the Lessor for the period between such
date of delivery and Commencement Date, which rent for each full month of
such period shall be determined by multiplying by a fraction whose numerator
shall be the cost of the Equipment so delivered and whose denominator shall
be the total cost of all of the Equipment.
4. Extension of Lease. Lessee shall have the option to extend this Lease
Schedule at the end of the present term for a twenty-four (24) month period
at a monthly rental charge of Two Hundred Seventy-Five Dollars ($275.00)
each month, and a subsequent option to extend this Lease Schedule
for sixty (6O) months at a monthly rental charge of One Hundred Fifty-Six
Dollars ($156.00) each month.
-2-
<PAGE>
5. Should Lessee wish to exercise the extension option under Section 4, Lessor
must be notified in writing by Lessee, via certified mail, of Lessee's intention
to exercise this option. Said notification must be received at least ninety
(90) days prior to termination of this Lease Schedule. Should said notice not
be delivered to Lessor, Lessee shall forfeit the option contained in Section 4
and all Equipment shall be delivered to the Lessor at the conclusion of the
Lease Term. Should Lessee forfeit the option contained in Section 4 and all
Equipment is not received by the Lessor at the conclusion of the Lease Term,
Lessee shall, until such Equipment is so returned, pay to Lessor on account of
damages a monthly amount equal to Nine Hundred Fifty-Six Dollars ($956.00).
6. Termination of Lease. Should Lessee not wish to exercise the extension
option under Section 4, Lessor must be notified in writing, via certified
mail, of Lessee's intention to terminate this Lease Schedule. Said
notification must be received at least ninety (90) days prior to the end of
the term of this Lease Schedule. All Equipment shall be delivered to Lessor
at the conclusion of the Lease Term pursuant to Section 3 of the Master
Equipment Lease. Should said notice not be delivered to Lessor and all
Equipment is not received at the conclusion of the Lease Term, Lessee shall,
until such Equipment is so returned, pay to Lessor on account of damages a
monthly amount equal to Nine Hundred Fifty-Six Dollars ($956.00).
7. Equipment Location (complete address):
Earthlink Network, Inc.
3100 New York Drive, Suite 201
Pasadena, CA 91107
8. Lessee's Billing Address:
Earthlink Network, Inc.
3100 New York Drive, Suite 201
Pasadena, CA 91107
9. All of the provisions cf the above-mentioned Master Equipment Lease are
incorporated by reference herein as if set forth fully herein.
10. This Amendment is conditional upon approval of Lessor, and is neither
consummated nor binding on Lessor until accepted by an authorized officer of
Lessor. Such acceptance will be rendered only after submission of all
necessary information to the Lessor and an evaluation by the Lessor of the
acceptability of the Lessee for the Amendment herein described.
-3-
<PAGE>
Signature of this Amendment by the Lessor shall constitute acceptance and all
aforementioned terms and conditions and shall be effective upon endorsement
by the Lessor.
LESSEE LESSOR
EARTHLINK NETWORK, INC. BOSTON FINANCIAL & EQUITY CORPORATION
/s/ Sky Dayton
- -------------------------------------- --------------------------------------
(Signature) (Signature)
- -------------------------------------- --------------------------------------
(Name) (Name)
- -------------------------------------- --------------------------------------
(Title) (Title)
- -------------------------------------- --------------------------------------
(Date) (Date)
-4-
<PAGE>
BOSTON FINANCIAL & EQUITY CORPORATION
Mailing Address:
P.O. Box 71, Kenmore Station
Boston, Massachusetts 02215-0002
Tel: (617) 267-2900 New FAX No.: 617-437-7601
Adolf F. "Sonny" Monosson, President Established 1968
VIA: FAX NO. (213) 644-9510
AND
FEDERAL EXPRESS
January 30, 1996
Mr. Leland Thoburn
Treasurer
EARTHLINK NETWORK, INC.
3171 Los Feliz Boulevard, Suite 203
Los Angeles, CA 90039
LEASE LINE AGREEMENT
Dear Lee:
Boston Financial & Equity Corporation ("BF&EC") is pleased to make the
following Lease Line Agreement ("Agreement") with EarthLink Network, Inc.
("EarthLink") to provide equipment leasing to EarthLink in the amount
hereinafter specified and for the period ("Availability Period") and on the
terms and conditions hereinafter specified:
1. During the Availability Period we propose to lease equipment to
EarthLink, which equipment, in the aggregate, would have a cost of not
more than $700,000. All costs relating to the installation, freight,
training, insurance and any other cost related to the acquisition,
installation or operation of the leased equipment would be paid
directly by EarthLink and would not be included as part of the
Agreement.
2. The Availability Period commences on January 29, 1996 and expires on
January 29, 1997. To the extent leases have not been executed and the
purchase orders submitted by BF&EC to the supplier of the proposed
leased equipment, and accepted by the supplier during the Availability
Period, this Agreement will be of no further effect.
3. For each item of equipment leased during the Availability Period the
lease will have an initial term of thirty-six (36) months with a
monthly rental factor of .0350 for months one (1) through twenty-four
(24), and .0330 for the final twelve (12) months. The actual monthly
rental will be determined by multiplying the cost of the equipment by
the applicable monthly rental factor, plus any monthly maintenance
charges. Advance rental payments for month thirty-six (36) are due
upon execution of each lease schedule.
Continued.....
20 Overland Street, Boston, Massachusetts 02215-3309
<PAGE>
BOSTON FINANCIAL & EQUITY CORPORATION
Mailing Address:
P.O. Box 71, Kenmore Station
Boston, Massachusetts 02215-0002
Tel:(617) 267-2900 New FAX No.: 617-437-7601
Adolf F. "Sonny" Monosson, President Established 1968
Page Two
4. The proposed lease transaction is intended to be a true lease and
EarthLink will have no option of any kind to acquire title to the
leased equipment. However, at the end of the initial term EarthLink
will have the right, assuming no default and upon no less than ninety
(90) days written notice, to extend the lease term for an additional
twenty-four (24) months at a monthly rental factor of .0095 per month,
plus any monthly maintenance charges, and a subsequent right, assuming
no default and upon no less than ninety (90) days written notice, to
extend the lease term for an additional sixty (60) months at a monthly
rental FACTOR of .0055 per month, plus any monthly maintenance
charges.
5. Both parties intend that the type of equipment to be leased shall be
new STEELCASE office furniture, computers, and peripherals.
6. For value received EarthLink will issue a Warrant to purchase Ten
Thousand (10,000) shares of EarthLink common stock. The exercise price
of the shares shall be equal to Four Dollars ($4.00) per share unless
EarthLink demonstrates to BF&EC proceeds of at least One Million
Dollars ($1,000,000) from a round of common stock financing on or
before March 15, 1996. If EarthLink demonstrates to BF&EC's
satisfaction the proceeds described above, BF&EC's exercise price for
this Agreement shall be the average price paid by investors in that
round. The full details of the Warrant shall be agreed to in a
separate Warrant Agreement.
7. The documentation to be utilized in connection with each lease
transaction pursuant to this Agreement will be BF&EC's standard Master
Equipment Lease, with appropriate lease schedules, as well as a filing
of appropriate financing statements to give public notice of the
lease transaction, and the delivery by EarthLink of such other
instruments, documents and certificates as BF&EC or its counsel may
require.
8. EarthLink must furnish to BF&EC, on a regular basis, pursuant to the
terms of the Master Equipment Lease, financial statements and at any
time as EarthLink's financial condition shall not be satisfactory to
BF&EC, BF&EC may forthwith terminate this Agreement.
9. In all events BF&EC reserves the right to reject EarthLink's request
to lease any particular item of equipment. BF&EC's obligation to
lease the same to EarthLink, assuming that BF&EC does not reject
EarthLink's request, is based upon the availability of the equipment
at a price satisfactory to BF&EC.
Continued.....
20 Overland Street, Boston, Massachusetts 02215-3309
<PAGE>
BOSTON FINANCIAL & EQUITY CORPORATION
Mailing Address:
P.O. BOX 71, Kenmore Station
Boston, Massachusetts 0-2215-0002
Tel: (617) 267-2900 New FAX No.: 617-437-7601
Adolf F. "Sonny" Monosson, President Established 1968
Page Three
10. This Agreement and the terms' and conditions contained herein is
confidential and proprietary. EarthLink agrees not to disclose the
same to any other party without the prior written consent of BF&EC.
11. This Agreement and the respective obligations herein shall be governed
by and construed in accordance with the laws of the Commonwealth of
Massachusetts.
If this Agreement is satisfactory to EarthLink, please accept the same by
signing and returning the enclosed counterpart with a non-refundable lease
line commitment fee of Fourteen Thousand Dollars ($14,000). Unless such
counterpart is accepted by EarthLink and received by BF&EC with such
nonrefundable fee on or before Friday, February 9, 1996, this Agreement shall
be of no further force and effect.
Sincerely,
BOSTON FINANCIAL & EQUITY CORPORATION
/s/ H. Thomas Carter
H. Thomas Carter
Assistant Vice President
AGREED AND ACCEPTED:
EARTHLINK NETWORK, INC.
/s/ Leland Thoburn
- ---------------------------------
(Signature)
LELAND THOBURN
- ---------------------------------
(Name)
Treasurer
- ---------------------------------
(Title)
HTC:Isj
4976M
20 Overland Street, Boston, Massachusetts 02215-3309
<PAGE>
NAME OF CONTRACT: Master Lease Agreement
OTHER CONTRACTING PARTY: LINC Capital Management, a Division of Scientific
Leasing, Inc.
ADDRESS: 303 East Wacker Drive
Chicago, Illinois 60601
(312) 946 1000
CONTACT PERSON NAME AND TITLE: Lisa Abraham, Contract Administrator
DATE OF CONTRACT: September 1, 1995
TERM: 3 years (from October 1, 1995)
REVIEWED BY: Leland Thoburn
PURPOSE: Lease of network equipment.
KEY PROVISIONS:
Lease schedule for $516,923.14 worth of network equipment.
Payments are due in advance, on the first of each month. Late payments are
subject to a 2% late payment charge per month. (paragraph 1, Term and Rental,
Master Lease Agreement). However, there is a five day grace period for this
(Paragraph 26, Grace period, Addendum # 1.)
Additions or modifications to the equipment become the possession of LINC. We
have to affix labels to the equipment identifying it as LINC equipment if so
requested. (Paragraph 2, Title, Master Lease Agreement).
EarthLink is required to maintain a maintenance contract for the leased
equipment. (Paragraph 5, Care, Transfer and Use of Equipment, Master Lease
Agreement.)
We must notify LINC if we intend to move the leased equipment. (Paragraph 5,
Care, Transfer and Use of Equipment, Master Lease Agreement.)
We must insure the equipment against all risks of loss or damage from every and
any cause whatsoever, with deductibles and exclusions approved by LINC, and in a
form that is satisfactory to LINC. The amount of the insurance must be at least
the amount of the leased equipment. (Paragraph 8, Insurance, Master Lease
Agreement.)
We cannot encumber the leased equipment, sell it, or do anything that affects
the title to the equipment. (Paragraph 11, Representations and Warranties,
Master Lease Agreement).
The lease payment factor is 3.2541% per month. (Paragraph c, Minimum Lease Term
and
<PAGE>
Monthly Lease Rate, Addendum #1.) However, this lease rate will adjust according
to the U.S. Treasury Notes index for notes maturing closest to the 3 year
maturity of each equipment schedule, but only on the commencement of a new lease
schedule (e.g. once a schedule is in place, the rate is fixed for that
schedule). (Paragraph d, Rate Adjustment, Addendum #1.)
First and last was paid at the start of the lease. (Paragraph g, Last Month's
Rent, Addendum #1.)
At the end of the lease term, we have three options:
1. Continue to lease the equipment, at the same lease rate but applied to the
fair market value at the date of the termination of the lease, or
2. Purchase the equipment, for fair market value which shall not be less than
10% and not more than 20% of the purchase price.
3. Return the equipment.
In order to take advantage of one of these options, we have to notify LINC in
writing not more than 180 days and not less than 90 days prior to the expiration
of the lease term.
If we do nothing, the lease extends at its current payment amount, on a month
to month basis (Paragraph h, End of Term Options, Addendum #1.)
A $5,000 earnest money deposit was made to LINC. (Paragraph j, Earnest money
Deposit, Addendum #1.) This money is supposed to be returned minus expenses.
We are to provide LINC with financial information as provided to the Board of
Directors, and prompt notice of any material change in our financial status.
We are permitted to use our own personnel to perform routine maintenance and
attach other equipment. (Paragraph 27, Maintenance by Lessee, Addendum #1.)
<PAGE>
LINC CAPITAL MANAGEMENT, A DIVISION OF LINC Capital Management, a division of
SCIENTIFIC LEASING INC. Scientific Leasing Inc.
MASTER LEASE AGREEMENT 303 East Wacker Drive
Chicago, Illinois 60601
(312) 946-1000
Lessee: EarthLink Network, Inc. and Reed E. Slatkin (collectively "Lessee")
Address: 3171 Los Feliz Boulevard, 890 North Kellog Avenue
Suite 203 Santa Barbara, CA 93111
Date:
Los Angeles, CA 90039
Master Lease Agreement No. 6029
Date: September 1, 1995
----------------------
LINC Capital Management, a division of Scientific Leasing Inc. ("Lessor') hereby
leases to Lessee and Lessee leases from Lessor, in accordance with the terms
and conditions hereinafter set forth, the equipment and property together with
all replacement parts, additions, accessories, alterations and repairs
incorporated therein or now or hereafter affixed thereto (herein collectively
referred to as the "Equipment") described in each Equipment Schedule which may
be executed by Lessor and Co-Lessees from time to time (individually a
"Schedule" and collectively, the "Schedules"), each of which is made a part
hereof. For all purposes of this Master Lease Agreement ("Lease"), each
Schedule relating to one or more items of Equipment shall be deemed a separate
lease incorporating all of the terms and provisions of this Lease. In the event
of a conflict between the terms of this Lease and the terms and conditions of a
Schedule, the terms and conditions of the Schedule shall govern and control that
Schedule.
- --------------------------------------------------------------------------------
1. TERM AND RENTAL. The term of this Lease (the "Minimum Lease Term") for any
item of Equipment shall be set forth in the Schedule relating to such item of
Equipment and shall commence (the "Commencement Date") on the acceptance Date
("Acceptance Date"), which shall be the applicable of: (1) the date of delivery
of the Equipment to Lessee; (2) in the case of Equipment which is the subject of
a sale and leaseback between Lessor and Lessee, the date upon which Lessor
purchases such Equipment from Lessee; or (3) in the case of Equipment requiring
installation, the date of installation of the Equipment. If the Acceptance Date
is other than the first day of a calendar quarter, then the Commencement Date of
the Minimum Lease Term set forth in any Schedule shall be the first day of the
calendar quarter following the month which includes the Acceptance Date and
Lessee shall pay to Lessor, in addition to all other sums due hereunder, an
amount equal to one-thirtieth of the amount of the average monthly rental
payment due or to become due hereunder multiplied by the number of days from
and including the Acceptance Date to the Commencement Date of the Minimum Lease
Term set forth in the Schedule. Lessee agrees to pay the total rental for the
entire term hereof, which shall be the total amount of all rental payments set
forth in the Schedule, plus such additional amounts as may become due hereunder
or pursuant to any written modification hereof or additional written agreement
hereto. Except as otherwise specified in the Schedule, rental payments
hereunder shall be monthly and shall be payable in advance on the first day of
each month during the term of this Lease beginning with the Commencement Date of
the Minimum Lease Term and shall be sent to the address of the Lessor specified
in this Lease or in the Schedule or as otherwise directed by the Lessor in
writing. Rental payments or any other payments due hereunder not made on or
before the due date shall be overdue and shall be subject to a service charge in
an amount equal to two percent (2%) per month of the overdue payments or the
maximum rate permitted by law whichever is less (the "Service Charge Rate"). If
Lessor shall at any time accept a rental payment after it shall become due, such
acceptance shall not constitute or be construed as a waiver of any or all of
Lessor's rights hereunder, including without limitation those rights of Lessor
set forth in Sections 12 and 13 hereof.
2. TITLE. This is an agreement of lease only. Lessee shall have no right,
title or interest in or to the Equipment leased hereunder, except as to the use
thereof subject to the terms and conditions of this Lease. All of the
Equipment shall remain personal property (whether or not the Equipment may at
any time become attached or affixed to real property). The Equipment is and
shall remain the sole and exclusive property of Lessor or its assignees. All
replacement parts, modifications, repairs, alterations, additions and
accessories incorporated in or affixed to the Equipment (herein collectively
called "additions" and included in the definition of "Equipment"), whether
before or after the Commencement Date, shall become the property of Lessor upon
being so incorporated or affixed and shall be returned to Lessor as provided in
Section 3. Upon the request of Lessor, Lessee will affix to the Equipment labels
or other markings supplied by Lessor indicating its ownership of the Equipment
and shall keep the same affixed for the entire term of this Lease. Lessee
agrees to promptly execute and deliver or cause to be executed and delivered to
Lessor and Lessor is hereby authorized to record or file, any statement and/or
instrument requested by Lessor for the purpose of showing Lessor's interest in
the Equipment, including without limitation, financing statements, security
agreements, and waivers with respect to rights in the Equipment from any owners
or mortgagees of any real estate where the Equipment may be located. In the
event that Lessee fails or refuses to execute and/or file Uniform Commercial
Code financing statements or other instruments or recordings which Lessor or its
assignee reasonably deems necessary to perfect or maintain perfection of
Lessor's or its assignee's interests hereunder, Lessee hereby appoints Lessor as
Lessee's limited attorney-in-fact to execute and record all documents necessary
to perfect or maintain the perfection of Lessor's interests hereunder. Lessee
shall pay Lessor for any costs and fees relating to any filings hereunder
including, but not limited to, costs, fees, searches, document preparation,
documentary stamps, privilege taxes and reasonable attorneys' fees. If any item
of Equipment includes computer software, Lessee shall execute and deliver and
shall cause Seller (as hereinafter defined) to deliver all such documents as are
necessary to effectuate assignment of all applicable software licenses to
Lessor. Lessee shall at its expense: (i) indemnify, protect and defend Lessor's
title to the Equipment from and against all persons claiming against or through
Lessee; (ii) at all times keep the Equipment free from any and all liens,
encumbrances, attachments, levies, executions, burdens, charges or legal process
of any and every type whatsoever, except this lease; (iii) give Lessor immediate
1
<PAGE>
written notice of any breach of this Lease described in clause (ii); and (iv)
indemnify, protect and save Lessor harmless from any loss, cost or expense
(including reasonable attorneys' fees) caused by the Lessee's breach of any of
the provisions of this Lease.
3. ACCEPTANCE AND RETURN OF EQUIPMENT. Lessor shall, at any time prior to
unconditional acceptance of all Equipment by Lessee, have the right to cancel
this Lease with respect to such Equipment (and if the Equipment or any portion
thereof has not previously been delivered, Lessor may refuse to pay for the
Equipment or any portion thereof or refuse to cause the same to be delivered)
if: (a) the Acceptance Date with respect to any item of Equipment to be leased
pursuant to any Schedule, has not occurred within sixty (60) days of the
estimated Acceptance Date set forth in such Schedule or (b) there shall be, in
the reasonable judgment of Lessor, a material adverse change in the financial
condition or credit standing of Lessee or of any guarantor of Lessee's
performance under this Lease since the date of the most recent financial
statements of Lessee or of such guarantor submitted to Lessor. Upon any
cancellation by Lessor pursuant to this Section or the provisions of any
Schedule, Lessee shall forthwith reimburse to Lessor all sums paid by Lessor
with respect to such Equipment plus all costs and expenses of Lessor incurred
in connection with such Equipment and any interest or rentals due hereunder in
connection with such Equipment and shall pay to Lessor all other sums then due
hereunder, whereupon if Lessee is not in then in default and has fully performed
all of its obligations hereunder, Lessor will, upon request of Lessee, transfer
to Lessee without warranty or recourse any rights that Lessor may then have with
respect to such Equipment Lessee agrees to promptly execute and deliver to
Lessor (in no event later than 15 days after the Acceptance Date) a
confirmation by Lessee of unconditional acceptance of the Equipment in the form
supplied by Lessor (the "Equipment Acceptance"). Lessee agrees, before
execution of the aforesaid Equipment Acceptance, to inform Lessor in writing of
any defects in the Equipment, or in the installation thereof, which have come
to the attention of Lessee or its agents and which might give rise to a claim by
Lessee against the Seller or any other person. If Lessee fails to give notice
to Lessor of any such defects or fails to deliver to Lessor the Equipment
Acceptance as provided herein, it shall be deemed an acknowledgment by Lessee
(for purposes of this Lease only) that no such defects in the Equipment or its
installation exist and it shall be conclusively presumed, solely as between
Lessor and its assignees and Lessee, that such Equipment has been
unconditionally accepted by Lessee for lease hereunder. Except as otherwise
provided in any Schedule, Lessee shall provide Lessor ninety (90) days prior
written notice of its intention to return the Equipment upon expiration of the
Minimum Lease Term. Upon expiration or the cancellation or termination of the
Lease with respect to any Equipment, Lessee shall, at its own expense, assemble,
crate, insure and deliver all of the Equipment and all of the service records
and all software and software documentation subject to this Lease and any
Schedules hereto to Lessor in the same good condition and repair as when
received, reasonable wear and tear resulting only from proper use thereof
excepted, to such reasonable destination within the continental United States
as Lessor shall designate. Lessee shall, immediately prior to such return of
each item of Equipment, provide to Lessor a letter from the manufacturer of the
equipment or another service organization reasonably acceptable to Lessor
certifying that said item is in good working order, reasonable wear and tear
resulting only from proper use thereof excepted, that such item is eligible for
a maintenance agreement by such manufacturer and all software is included
thereon. If any computer software requires relicensing when removed from
Lessee's premises, Lessee shall bear all costs of such relicensing. If Lessee
fails for any reason to provide the notice set forth above or to re-deliver the
Equipment back to Lessor in accordance with the terms set forth above, Lessee
shall pay to Lessor, at Lessor's election, an amount equal to the highest
monthly payment set forth in the Schedule for a period of not less than three
(3) months and at the end of such period of time ("Holdover Period"), Lessee
shall return the Equipment to Lessor as provided herein. If Lessee fails or
refuses to return the Equipment as provided herein at the end of any Holdover
Period, Lessee shall pay to Lessor, at Lessor's option, an amount equal to one
hundred percent (100%) of the highest monthly payment set forth in the Schedule
or the highest rate permitted by law, whichever is less, for each month or
portion thereof, until Lessee so returns the Equipment to Lessor.
4. DISCLAIMER OF WARRANTIES. Lessee HAS EXCLUSIVELY SELECTED AND CHOSEN THE
TYPE, DESIGN, CONFIGURATION, SPECIFICATION AND QUALITY OF THE EQUIPMENT HEREIN
LEASED AND THE VENDOR, DEALER, SELLER, MANUFACTURER OR SUPPLIER THEREOF (HEREIN
COLLECTIVELY CALLED "SELLER"), AS SET FORTH IN THE SCHEDULES. LESSOR MAKES NO
REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO ANY MATTER
WHATSOEVER, INCLUDING WITHOUT LIMITATION, THE CONDITION OF THE EQUIPMENT, ITS
MERCHANTABILITY OR ITS FITNESS, ADAPTABILITY, ANY IMPLIED WARRANTY OF QUIET
ENJOYMENT OR NONINTERFERENCE OR SUITABILITY FOR ANY PARTICULAR PURPOSE, AND,
Lessee LEASES, HIRES AND RENTS THE EQUIPMENT "WHERE IS, AS IS." Lessee
understands and agrees that neither Seller, nor any agent of Seller, is an
agent of Lessor or is in any manner authorized to waive or alter any term or
condition of this Lease. Lessor shall not be liable for any loss or damage
suffered by Lessee or by any other person or entity, direct or indirect or
consequential, including, but not limited to, business interruption and injury
to persons or property, resulting from non-delivery or late delivery,
installation, failure or faulty operation, condition, suitability or use of the
Equipment leased by Lessee hereunder, or for any failure of any representations,
warranties or covenants made by the Seller. Any claims of Lessee shall not be
made against Lessor but shall be made, if at all, solely and exclusively against
Seller, or any persons other than the Lessor. Lessor hereby authorizes Lessee
to enforce during the term of this Lease, in its name, but at Lessee's sole
effort and expense, all warranties, agreements or representations, if any, which
may have been made by Seller to Lessor or to Lessee, and Lessor hereby assigns
to Lessee solely for the limited purpose of making and prosecuting any such
claim, all rights which Lessor may have against Seller for breach of warranty
or other representation respecting the Equipment.
5. CARE, TRANSFER AND USE OF EQUIPMENT. Lessee, at its own expense, shall
maintain the Equipment in good operating condition, repair and appearance in
accordance with Seller's specifications and in compliance with all applicable
laws and regulations and shall protect the Equipment from deterioration except
for reasonable wear and tear resulting only from proper use thereof. When
generally offered, Lessee shall, at its expense, keep a maintenance contract in
full force and effect, throughout the term of this Lease and any Schedule
hereto. The disrepair or inoperability of the Equipment regardless of the
cause thereof shall not relieve Lessee of the obligation to pay rental
hereunder. Lessee shall not make any modification, alteration or addition to
the Equipment (other than normal operating accessories or controls).
2
<PAGE>
Lessee will not, and will not permit anyone other than the authorized field
engineering representatives of Seller or other maintenance organization
reasonably acceptable to Lessor to effect any inspection, adjustment,
preventative or remedial maintenance or repair to the Equipment. Lessee may not
(a) relocated or operate the Equipment at locations other than the premises of
Lessee specified in the applicable Schedule (the "Premises"), except with
Lessor's prior written consent, which shall not be unreasonably withheld if such
other location within the continental United States, or (b) SELL,
CONVEY, TRANSFER, ENCUMBER, PART WITH POSSESSION OF, OR ASSIGN ANY ITEM OF
EQUIPMENT OR ANY OF ITS RIGHTS HEREUNDER AND ANY SUCH PURPORTED TRANSACTION
SHALL BE NULL AND VOID AND OF NO FORCE OR EFFECT. In the event of a relocation
of the Equipment or any item thereof to which Lessor consents, all costs
(including any additional property taxes or other taxes and any additional
expense of insurance coverage) resulting from any such relocation, shall be
promptly paid by Lessee upon presentation to Lessee of evidence supporting such
cost. Lessor shall have the right during normal hours upon reasonable notice to
Lessee, subject to applicable laws and regulations, to enter Lessee's Premises
in order to inspect, observe, affix labels or other markings, or to exhibit the
Equipment to prospective purchasers or future Lessees thereof, or to otherwise
protect Lessor's interest therein.
6. NET LEASE. THIS LEASE AND ANY SCHEDULE HERETO IS A NET LEASE, AND ALL
PAYMENTS HEREUNDER ARE NET TO LESSOR. All taxes, assessments, licenses, and
other charges including, without limitation personal property taxes and sales,
use and leasing taxes and penalties and interest on such taxes) imposed, levied
or assessed on the ownership, possession, rental or use of the Equipment during
the term of this Lease and any Schedule hereto (except for Lessor's federal or
state net income taxes) shall be paid by Lessee when due and before the same
shall become delinquent, whether such taxes are assessed or would ordinarily be
assessed against Lessor or Lessee. To the extent possible under applicable law,
for personal property or advalorem tax return purposes only, Lessee shall
include the Equipment on such returns as may be required, which returns shall be
timely filed by it. In any event, Lessee shall file all tax returns required
for itself or Lessor and Lessor hereby appoints Lessee as its attorney-in-fact
for such purpose. In case of failure by Lessee to so pay said taxes,
assessments, licenses or other charges, Lessor may pay all or any part of such
items, in which event the amount so paid by Lessor including any interest or
penalties thereon and reasonable attorneys' fees incurred by Lessor shall be
immediately paid by Lessee to Lessor as additional rental hereunder. Lessee
shall promptly pay all costs, expenses and obligations of every kind and nature
incurred in connection with the use or operation of the Equipment which may
arise or become due during the term of this Lease and any Schedule hereto,
whether or not specifically mentioned herein. In case of failure by Lessee to
comply with any provision of this Lease and any Schedule hereto, Lessor shall
have the right, but no the obligation, to effect such compliance on behalf of
Lessee. In such event, all costs and expenses incurred by Lessor in effecting
such compliance shall be immediately paid by Lessee to Lessor as additional
rental hereunder.
7. INDEMNITY. Lessee shall and does hereby agree to indemnify, defend and
hold Lessor and its assigns harmless from and against any and all lability,
loss, costs, injury, damage, penalties, suits, judgements, demands, claims,
expenses and disbursements (including without limitation, reasonable attorneys'
fees) of any kind whatsoever arising out of, on account of, or in connection
with this Lease and the Equipment leased hereunder, including, without
limitation, its manufacture, selection, purchase, delivery, rejection,
installation, ownership, possession, leasing, renting, operation, control, use,
maintenance and the return thereof. This indemnity shall survive the Minimum
Lease Term or earlier cancellation or termination of this Lease and any Schedule
hereto.
8. INSURANCE. Commencing on the date that risk of loss or damage passes to
Lessor from the Seller and continuing until Lessee has re-delivered possession
of the Equipment to Lessor, Lessee shall, at its own expense, keep the Equipment
(including all additions thereto) insured against all risks of loss or damage
from every and any cause whatsoever in such amounts (but in no event less than
the greater of the replacement value thereof or the amount set forth in the
applicable Casualty Schedule, whichever is higher) with such deductibles and
exclusions as approved by Lessor and in such form as is satisfactory to
Lessor. All such insurance policies shall protect Lessor and Lessor's
assignee(s) as loss payees as their interests may appear. Lessee shall also, at
its own expense, carry public liability insurance, with Lessor and Lessor's
assignee(s) as an additional insured, in such amounts with such companies and in
such form as is satisfactory to Lessor, with respect to injury to person or
property resulting from or based in any way upon or in any way connected with or
relating to the installation, use or alleged use, or operation of any or all of
the Equipment, or its location or condition. Not less than ten days prior to
the Acceptance Date, Lessee shall deliver to Lessor satisfactory evidence of
such insurance and shall further deliver evidence of renewal of each such policy
not less than thirty (30) days prior to expiration thereof. Each such policy
shall contain an endorsement providing that the insurer will give Lessor not
less than thirty (30) days prior written notice of the effective date of any
alteration, change, cancellation, or modification of such policy or the failure
by Lessee to timely pay all required premiums, costs or charges with respect
thereto. Upon Lessor's request, Lessee shall cause its insurance agent(s) to
execute and deliver to Lessor Loss Payable Clause Endorsement and Additional
Insured Endorsement (bodily injury and property damage liability insurance)
forms provided to Lessee by Lessor. In case of the failure to procure or
maintain such insurance, Lessor shall have the right, but not the obligation, to
obtain such insurance and any premium paid by Lessor shall be immediately due
and payable by Lessee to Lessor as additional rent hereunder. The maintenance
of any policy or policies of insurance pursuant to this Section shall not limit
any obligation or liability of Lessee pursuant to Sections 7 or 9 or any other
provision of this Lease and any Schedule hereto.
9. RISK OF LOSS. Until such time as the Equipment is returned and delivered
to and accepted by Lessor, pursuant to the terms of this Lease and any Schedule
hereto, Lessee hereby assumes and shall bear the entire risk of loss, damage,
theft and destruction of the Equipment, or any portion thereof, from any cause
whatsoever ("Equipment Loss"). Without limitation of the foregoing, no
Equipment Loss shall relieve Lessee in any way from its obligations hereunder.
Lessee shall promptly notify Lessor in writing of any Equipment Loss. In the
event of any such Equipment Loss, Lessee shall: (a) in the event Lessor
determines such Equipment to be repairable, promptly place, at Lessee's expense,
the Equipment in good repair, condition and working order in accordance with
Seller's specifications and to the satisfaction of Lessor; or (b) in the event
of an actual or constructive total loss of any item of
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Equipment, at Lessor's option: (i) promptly replace, at Lessee's expense, the
Equipment with like equipment of the same or a later model with the same
additions as the Equipment, and in good repair, condition and working order in
accordance with the Seller's specifications and to the satisfaction of Lessor;
or (ii) immediately pay to Lessor the amount obtained by multiplying the Actual
Equipment Cost as specified in the applicable Schedule by the percentage
contained in the applicable Casualty Schedule for the date of such Equipment
Loss plus, any unpaid rentals or any amounts due hereunder or, if no Casualty
Schedule has been made a part of any applicable Schedule, an amount equal to the
present value of the total amount of unpaid rentals and all other amounts due
and to become due under any applicable Schedule during the term thereof as of
the date of any payment, discounted at a rate equal to discount rate of the
Federal Reserve Bank of Chicago as of the Commencement Date of the Lease with
respect to each applicable Schedule, plus an additional amount equal to the fair
market value of the Equipment immediately prior to the loss, theft, damage, or
destruction, but in no event shall the amount of such fair market value be less
than twenty percent (20%) of the actual cost of the Equipment. In the event
Lessee is required to repair or replace any such item of Equipment pursuant to
Subsections (a) or (b)(i) of the preceding sentence, the insurance proceeds
received by Lessor, if any, pursuant to Section 8, after the use of such funds
to pay any unpaid amounts then due hereunder, shall be paid to Lessee or, if
applicable, to a third party repairing or replacing the Equipment upon Lessee's
furnishing proof satisfactory to Lessor that such repair or replacement has been
completed in a satisfactory manner. In the event Lessor elects option (b)(ii),
Lessee shall be entitled to a credit against the payment required by said
Subsection in an amount equal to such insurance proceeds actually received by
Lessor pursuant to Section 8 on account of such Equipment, and, upon payment by
Lessee to Lessor of all of the sums required pursuant to Subsection (b)(ii), the
applicable Schedule shall terminate with respect to such item of Equipment and
Lessee shall be entitled to whatever interest Lessor may have in such item "as
is, where is" and "with all faults" in its then condition and location without
warranties of any type whatsoever, express or implied.
10. COVENANTS OF LESSEE. Lessee agrees that its obligations under this Lease
and any Schedule hereto, including without limitation, the obligation to pay
rental, are irrevocable and absolute, shall not abate for any reason whatsoever
(including any claims against Lessor), and shall continue in full force and
effect regardless of any inability of Lessee to use the Equipment or any part
thereof for any reason whatsoever including, without limitation, war, act of
God, storms, governmental regulations, strike or other labor troubles, loss,
damage, destruction, disrepair, obsolescence, failure of or delay in delivery of
the Equipment, or failure of the Equipment to properly operate for any cause.
In the event of any alleged claim (including a claim which would otherwise be
in the nature of a set-off) against Lessor, Lessee shall fully perform and pay
its obligations hereunder (including all rents, without set-off or defense of
any kind) and its only exclusive recourse against Lessor shall be by a separate
action. Lessee agrees to furnish promptly to Lessor the annual financial
statements of Lessee (and of any guarantors of Lessee's performance under this
Lease and any Schedule hereto), prepared in accordance with generally accepted
accounting principles and certified by independent certified public accountants,
and such interim financial statements of Lessee as Lessor may require during the
entire term of this Lease and any Schedule hereto. Lessee, if requested, shall
provide at Lessee's expense an opinion of its counsel acceptable to Lessor
affirming the covenants, representations and warranties of Lessee under this
Lease and any Schedule hereto.
11. REPRESENTATIONS AND WARRANTIES. In order to induce Lessor in enter into this
Lease and any Schedule hereto and to lease the Equipment to Lessee hereunder,
Lessee represents and warrants that: (a) FINANCIAL STATEMENTS. (i) applications,
financial statements, and reports which have been submitted by Lessee and any
Obligors (as hereinafter defined) to Lessor are, and all information hereafter
furnished by Lessee and Obligors to Lessor will be, true and correct in all
material respects as of the date submitted; (ii) as of the date hereof, the date
of any Schedule and any Acceptance Date, there has been no material adverse
change in any matter stated in such applications, financial statements and
reports; and, (iii) none of the foregoing omit or omitted to state any
material fact. (b) ORGANIZATION. Lessee is an organizational entity described
on the signature page hereof and is duly organized, validly existing and is duly
qualified to do business and is in good standing in each State in which the
Equipment will be located. (c) AUTHORITY. Lessee has full power, authority and
right to execute, deliver and perform this Lease and any Schedule hereto, and
the execution, delivery and performance hereof has been authorized by all
necessary action of Lessee. (d) ENFORCEABILITY. This Lease and any Schedule or
other document executed in connection therewith has been duly executed and
delivered by Lessee and any Obligor and constitutes a legal, valid and binding
obligation of Lessee and any Obligor enforceable in accordance with its terms.
(e) CONSENTS. The execution, delivery and performance of this Lease and any
Schedule hereto does not require any approval or consent of any stockholders,
partners or proprietors or of any trustee or holders of any indebtedness or
obligations of Lessee, and will not contravene any law, regulation, judgment or
decree applicable to Lessee, or the certificate of incorporation, partnership
agreement, by-laws or other governing documents of Lessee, or contravene the
provisions of, or constitute a default under, or result in the creation of any
lien upon any property of Lessee under any mortgage, instrument or other
agreement to which Lessee is a party or by which Lessee or its assets may be
bound or affected. Except as disclosed, no authorization, approval, license,
filing or registration with any court or governmental agency or instrumentality
is necessary in connection with the execution, delivery, performance, validity
and enforceability of this Lease and any Schedule, hereto. (f) TITLE. On each
Commencement Date, Lessor shall have good and marketable title to the items of
Equipment which is subject to this Lease and any Schedule hereto on such date,
free and clear of all liens, except the lien of Seller which will be released
upon receipt of payment. Lessee warrants that no party has a security interest
in the Equipment which will not be released on or before payment by Lessor to
Seller of the Equipment and that the Equipment is and shall at all times remain
personal property regardless of how it may be affixed to any real property. (g)
LITIGATION. There is no action, suit, investigation or proceeding by or before
any court, arbitrator, agency or governmental authority pending or threatened
against or affecting Lessee: (i) which involves the Equipment or the
transactions contemplated by this Lease and any Schedule hereto; or (ii) which,
if adversely determined, could have a material adverse effect on the financial
condition, business or operation of Lessee.
12. EVENTS OF DEFAULT. An event of default ("Event of Default") shall occur
hereunder if Lessee or any Obligor ("Obligor" shall include any guarantor or
surety of any obligations of Lessee to Lessor under this Lease and any Schedule
hereto): (i) fails to pay any installment of rent or other payment required
hereunder when due; or (ii) attempts to or
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does remove from the Premises (except a relocation with Lessor's consent as
provided in Section 5), sell, transfer, encumber, part with possession of, or
sublet any item of the Equipment; or (iii) shall suffer or have suffered, in
the reasonable judgment of Lessor, a material adverse change in its financial
condition since the date of the last financial statements submitted to Lessor,
and as a result thereof Lessor deems itself to be insecure, or any of the
statements or other documents or information submitted at any time heretofore or
hereafter by Lessee or Obligor to Lessor has misstated or shall misstate or has
failed or shall fail to state a material fact; or (iv) breaches or shall have
breached any representation or warranty made or given by Lessee or Obligor in
this Lease or in any other document furnished to Lessor in connection herewith,
or any such representation or warranty shall be untrue or, by reason of failure
to state a material fact or otherwise, shall be misleading; or (v) fails to
perform or observe any other covenant, condition or agreement to be performed or
observed by it hereunder, and such failure or breach shall continue unremedied
for a period of ten days after the earlier of (a) the date on which Lessee
obtains, or should have obtained knowledge of such failure or breach, or (b) the
date on which notice thereof shall be given by Lessor to Lessee; or (vi) shall
become insolvent or bankrupt or make an assignment for the benefit of creditors
or consent to the appointment of a trustee or receiver, or a trustee or receiver
shall be appointed for a substantial part of its property without its consent,
or bankruptcy or reorganization or insolvency proceeding shall be instituted by
or against Lessee or Obligor; or (vii) conveys, sells, transfers or assigns
substantially all of Lessee's or Obligor's assets or ceases doing business as a
going concern, or, if a corporation, ceases to be in good standing or files a
statement of intent to dissolve, or abandons any or all of the Equipment; or
(viii) shall be in breach of or default under any lease or other agreement at
any time executed with Lessor or any other lessor or with any lender to Lessee
or Obligor.
13. REMEDIES. Upon the occurrence of an Event of Default (the "Default Date")
set forth in Section 12 and at any time thereafter, Lessor may, in its sole and
absolute discretion, do any one or more of the following: (a) upon notice to
Lessee cancel all or any portion of this Lease and some or all Schedules
executed pursuant thereto; (b) upon notice, enter Lessee's Premises and without
removal of the Equipment, render the Equipment unusable or, require Lessee to
assemble the Equipment and make it available to Lessor at a place designated by
Lessor, and/or dispose of the Equipment by sale or otherwise (all of which
determinations may be made by Lessor in its sole and absolute discretion)
without any duty to account for such action or inaction or for any proceeds or
profits with respect thereto; (c) declare immediately due and payable all sums
due and to become due hereunder for the full term of the Lease (including any
renewal or purchase obligations which Lessee has contracted to pay); (d) with or
without canceling this Lease, recover from Lessee damages, in an amount equal to
the sum of: (i) all unpaid rent and other amounts that became due and payable
on, or prior to, the Default Date, (ii) the present value of all future rentals
and other amounts described in the Lease and not included in (i) above
discounted to the Default Date at a rate equal to the discount rate of the
Federal Reserve Bank of Chicago as of the Commencement Date of the Lease with
respect to each Schedule (which discount rate, Lessee agrees is a commercially
reasonable rate which takes into account the facts and circumstances at the time
such Schedule commenced), (iii) all commercially reasonable costs and expenses
incurred by Lessor in enforcing Lessor's rights under this Lease, including but
not limited to, costs of repossession, recovery, storage, repair, sale, re-lease
and reasonable attorneys' fees, (iv) the estimated residual value of the
Equipment as of the expiration of the Lease, (v) any indemnity amount payable to
Lessor; and (vi) interest on all of the foregoing from the Default Date until
the date payment is received by Lessor at 2 1/2% in excess of the Prime Rate (or
its equivalent) per annum in effect on the date of such payment at the First
National Bank of Chicago) or the highest rate permitted by law, whichever is
less; (e) exercise any other right or remedy which may be available to it under
the Uniform Commercial Code or any other applicable law. Lessor reserves the
right, in its sole and absolute discretion, to release or sell any or all of the
Equipment at a public auction or in a private sale, at such time, on such terms
and with such notice as Lessor shall in its sole and absolute discretion deem
reasonable. In such event, without any duty on Lessor's part to effect any such
re-lease or sale of the Equipment, Lessor will credit the present value of any
proceeds from such sale or re-lease actually received and retainable by it (net
of any and all costs or expenses) discounted from the date of Lessor's receipt
thereof to the Default Date at 2 1/2% in excess of the Prime Rate (or its
equivalent) per annum in effect on the date of such payment at the First
National Bank of Chicago, or the highest rate permitted by law, whichever is
less to the amounts due to Lessor from Lessee under the provisions of (c), (d)
and/or (e) above. A cancellation of this Lease shall occur only upon notice by
Lessor and only as to such items of Equipment as Lessor specifically elects to
cancel and this Lease shall continue in full force and effect as to the
remaining items of Equipment, if any. If this Lease and/or any Schedule is
deemed at any time to be one intended as security, Lessee agrees that the
Equipment shall secure, in addition to the indebtedness set forth herein, any
other indebtedness at any time owing by Lessee to Lessor. No remedy referred
to in this Section is intended to be exclusive, but shall be cumulative and in
addition to any other remedy referred to above or otherwise available to Lessor
at law or in equity. No express or implied waiver by Lessor of any default
shall constitute a waiver of any other default by Lessee or a waiver of any of
Lessor's rights.
14. ASSIGNMENT BY LESSOR. LESSOR MAY (WITH OR WITHOUT NOTICE TO Lessee) SELL,
TRANSFER, ASSIGN OR GRANT A SECURITY INTEREST IN ALL OR ANY PART OF ITS INTEREST
IN THIS LEASE, ANY SCHEDULE, ANY ITEMS OF EQUIPMENT OR ANY AMOUNT PAYABLE
HEREUNDER. In such an event Lessee shall, upon receipt of notice, acknowledge
any such sale, transfer, assignment or grant of a security interest and shall
pay its obligations hereunder or amounts equal thereto to the respective
transferee, assignee or secured party in the manner specified in any
instructions received from Lessor. Notwithstanding any such sale, transfer,
assignment or grant of a security interest by Lessor and so long as no event of
default shall have occurred hereunder, neither Lessor nor any transferee,
assignee or secured party shall interfere with Lessee's right of use or quiet
enjoyment of the Equipment. In the event of such sale, transfer, assignment or
grant of a security interest in all or any part of this Lease and any Schedule
hereto, or in the Equipment or in sums payable hereunder, as aforesaid, Lessee
agrees to execute such documents as may be reasonably necessary to evidence,
secure and complete such sale, transfer, assignment or grant of a security
interest and to perfect the transferee's, assignee's or secured party's interest
therein and Lessee further agrees that the rights of any transferee, assignee or
secured party shall not be subject to any defense, set-off or counterclaim that
Lessee may have against Lessor or any other party, including the Seller, which
defenses, set-offs and counterclaims shall be asserted only against such party,
and that any such transferee, assignee
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or secured party shall have all of Lessor's rights hereunder, but shall assume
none of Lessor's obligations hereunder. Lessee acknowledges that any assignment
or transfer by Lessor shall not materially change Lessee's duties or obligations
under this Lease nor materially increase the burdens and risks imposed on
Lessee. Lessee agrees that Lessor may assign or transfer this Lease or Lessor's
interest in the Equipment even if said assignment or transfer could be deemed to
materially affect the interests of Lessee. Nothing in the preceding sentence
shall affect or impair the provisions of Section 4, Section 10 or any other
provision of this Lease.
15. AMENDMENTS. This Lease and any Schedule hereto contain the entire agreement
between the parties with respect to the Equipment, this Lease and any Schedule
hereto and there is no agreement or understanding, oral or written, which is not
set forth herein. This Lease and any Schedule hereto may not be altered,
modified, terminated or discharged except by a writing signed by the party
against whom such alteration, modification, termination or discharge is sought.
Lessee' Initials /s/
------
16. LAW. This Lease and any Schedule hereto shall be binding only when accepted
by Lessor at its corporate headquarters in Illinois and shall in all respects be
governed and construed, and the rights and the liabilities of the parties hereto
determined, except for local filing requirements, in accordance with the laws of
the State of Illinois. Lessee WAIVES TRIAL BY JURY AND SUBMITS TO THE
JURISDICTION OF THE FEDERAL DISTRICT COURTS OF COMPETENT JURISDICTION OR ANY
STATE COURT WITHIN THE STATE OF ILLINOIS AND WAIVES ANY RIGHT TO ASSERT THAT ANY
ACTION INSTITUTED BY LESSOR IN ANY SUCH COURT IS IN THE IMPROPER VENUE OR SHOULD
BE TRANSFERRED TO A MORE CONVENIENT FORUM.
Lessee' Initials /s/
------
17. INVALIDITY. In the event that any provision of this Lease and any Schedule
hereto shall be unenforceable in whole or in part, such provision shall be
limited to the extent necessary to render the same valid, or shall be excised
from this Lease or any Schedule hereto, as circumstances may require, and this
Lease and the applicable Schedule shall be construed as if said provision had
been incorporated herein as so limited, or as if said provision had not been
included herein, as the case may be without invalidating any of the remaining
provisions hereof.
18. MISCELLANEOUS. All notices and demands relating hereto shall be in writing
and mailed by certified mail, return receipt requested, to Lessor or Lessee at
their respective addresses above or shown in the Schedule, or at any other
address designated by notice served in accordance herewith. Notice shall become
effective when deposited in the United States mail, with proper postage prepaid,
addressed to the party intended to be served at the address designated herein.
All obligations of Lessee shall survive the termination or expiration of this
Lease and any Schedule hereto. Should Lessor permit use by Lessee of any
Equipment beyond the Minimum Lease Term, or, if applicable, any exercised
extension or renewal term, the lease obligations of Lessee shall continue and
such permissive use shall not be construed as a renewal of the term thereof, or
as a waiver of any right or continuation of any obligation of Lessor hereunder,
and Lessor may take possession of any such Equipment at any time upon demand.
If more than one Lessee is named in this Lease, the liability of each shall be
joint and several. Lessee shall, upon request of Lessor from time to time,
perform all acts and execute and deliver to Lessor all documents which Lessor
deems reasonably necessary to implement this Lease and any Schedule hereto,
including, without limitation, certificates addressed to such persons as Lessor
may direct stating that this Lease and the Schedule hereto is in full force and
effect, that there are no amendments or modifications thereto, that Lessor is
not in default hereof or breach hereunder, setting forth the date to which
rentals due hereunder have been paid, and stating such other matters as Lessor
may request. This Lease and any Schedule hereto shall be binding upon the
parties and their successors, legal representatives and assigns. Lessee's
successors and assigns shall include, without limitation, a receiver,
debtor-in-possession, or trustee of or for Lessee. If any person, firm,
corporation or other entity shall guarantee this Lease and the performance by
Lessee of its obligations hereunder, all of the terms and provisions hereof
shall be duly applicable to such Obligor.
19. LESSEE' WAIVERS. To the extent permitted by applicable law, Lessee hereby
waives any and all rights and remedies conferred upon a Lessee by Article 2A of
the Uniform Commercial Code as adopted in any jurisdiction, including but not
limited to Lessee's rights to: (i) cancel this Lease; (ii) repudiate this Lease;
(iii) reject the Equipment; (iv) revoke acceptance of the Equipment; (v) recover
damages from Lessor for any breaches of warranty or for any other reason; (vi)
claim a security interest in the Equipment in Lessee's possession or control for
any reason (vii) deduct all or any part of any claimed damages resulting from
Lessor's default, if any, under this Lease; (viii) accept partial delivery of
the Equipment (ix) "cover" by making any purchase or lease of or contract to
purchase or lease Equipment in substitution for those due from Lessor; (x)
recover any general, special, incidental, or consequential damages for any
reason whatsoever; and (xi) specific performance, replevin, detinue,
sequestration, claim, and delivery of the like for any Equipment identified to
this Lease. To the extent permitted by applicable law, Lessee also hereby
waives any rights now or hereafter conferred by statute or otherwise which may
require Lessor to sell, lease or otherwise use any Equipment in mitigation of
Lessor's damages as set forth in Paragraph 13 or which may otherwise limit or
modify any of Lessor's rights or remedies under Paragraph 13.
20. COUNTERPARTS. This Lease may be executed in any number of counterparts,
each of which shall be deemed an original. Each Schedule shall be executed in
three (3) serially numbered counterparts each of which shall be deemed an
original but only counterpart number 1 shall constitute "chattel paper" or
"collateral" within the meaning of the Uniform Commercial Code in any
jurisdiction.
21. ADDENDUM. ("X" if applicable) [X] See Addendum(s) attached hereto and made
a part hereof.
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The person executing this Lease for and on behalf of Lessee warrants and
represents, which warranty and representation shall survive the expiration or
termination of this Lease, that this Lease and the execution hereof has been
duly and validly authorized by Lessee, constitutes a valid and binding
obligation of Lessee and that he has authority to make such execution for and on
behalf of Lessee.
IN WITNESS WHEREOF, this Lease has been executed by Lessee this 1st day of
September, 1995.
ACCEPTED AT CHICAGO, ILLINOIS
LINC CAPITAL MANAGEMENT, A DIVISION OF
SCIENTIFIC LEASING INC.
Lessor
By: /s/ [illegible signature]
------------------------------------
Title: Vice President of Operations
---------------------------------
Date: 1/5/96
----------------------------------
EARTHLINK NETWORK, INC. REED E. SLATKIN
(Lessee) (Lessee)
By: /s/ [illegible signature] By: /s/ Reed E. Slatkin
------------------------------------ -------------------------------
Title Pres & Ceo Title
--------------------------------- ----------------------------
Date 8/28/95 Date 8/30/95
----------------------------------- -----------------------------
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ADDENDUM NO. 1 TO
MASTER LEASE AGREEMENT NO. 6029
DATED AS OF 9/1/95
BETWEEN
LINC CAPITAL MANAGEMENT,
A DIVISION OF SCIENTIFIC LEASING INC., AS LESSOR
AND
EARTHLINK NETWORK, INC. AND
REED E. SLATKIN, AS LESSEE
This Addendum is attached to and forms part of that certain Master Lease
Agreement No. 6029 dated as of September 1, 1995, between LINC CAPITAL
MANAGEMENT, A DIVISION OF SCIENTIFIC LEASING INC. ("Lessor" or "LINC") and
EARTHLINK NETWORK, INC. and REED E. SLATKIN, (collectively "Lessee"), (the
"Lease") agreeing as follows:
A. Terms defined in the Lease shall have the same meanings herein unless
otherwise expressly set forth herein or other wise required by context
hereof.
B. The following shall be added to the terms of the Lease and are hereby
incorporated therein by reference.
C. To the extent any terms or conditions contained in this Addendum may be
inconsistent or conflict with any terms or conditions contained in the
Lease, the terms and conditions contained in this Addendum shall govern and
control.
22. LEASING OF EQUIPMENT
a. LEASE LINE. Subject to the terms and conditions herein set forth and
in the applicable Equipment Schedule, and provided no event of default under the
Lease shall have occurred and be then continuing, Lessor agrees to purchase and
lease to Lessee, from time to time, the "Equipment" (as defined below). The
aggregate "Cost" (as defined below) of Equipment purchased by Lessor pursuant to
this Section 22.a shall in no event exceed $500,000.00 (the "Lease Line
Amount"). All "Takedowns" (as defined below) shall be completed on or before
February 1, 1996 (the "Last Takedown Date").
b. EQUIPMENT.
(1) Lessor will purchase new ISDN ports, new dial-up modems, terminal
servers and other new network and ancillary equipment related thereto (the
"Equipment") from Lessee or from vendors designated by Lessee. All Equipment
shall be located in Lessee's locations in Los Angeles County, California. The
amount paid for the Equipment (hereinafter "Cost") will be equal to the lesser
of (i) 100% of the manufacturers' net invoice price (excluding applicable sales
or use taxes, freight, installation, and similar charges), (ii) the then fair
market value for each piece of Equipment or (iii) the net book value for each
piece of Equipment (determined in accordance with generally accepted accounting
principles).
(2) All Equipment shall be tangible personal property eligible for
MACRS depreciation under the Internal Revenue Code of 1986, as amended. The
depreciation benefits arising from the Equipment will be for the account of
Lessor.
(3) Each piece of Equipment, its vendor and all purchase orders,
invoices and related documents will be subject to review and approval by Lessor
prior to funding any Takedown. The amount advanced shall be equal to 100% of
Equipment Cost. No unit of Equipment with an aggregate Cost less thin $1,000.00
shall be included in the Equipment subject to this Master Lease.
c. MINIMUM LEASE TERM AND MONTHLY LEASE RATE. The Minimum Lease Term
shall be 36 months. The applicable Monthly Lease Rate factor shall be 3.2541%
of Cost per month, subject to Rate Adjustments described below. All Monthly
Lease Rate payments shall be payable monthly, in advance.
d. RATE ADJUSTMENT. The Monthly Lease Rate Factor will be indexed to the
yield for U.S. Treasury Notes maturing closest to the date three (3) years from
the commencement date of each Equipment Schedule (the "Index Instrument")
currently 6.10% for the 9.25% Treasury Notes maturing August, 1998 as reported
in the WALL STREET JOURNAL dated July 31, 1995. The Monthly Lease Rate Factor
shall be adjusted to provide for any increase in the yield of the Index
Instrument on the commencement date of each Equipment Schedule. Upon
commencement of each Equipment Schedule, the Monthly Lease Rate Factor shall be
fixed for the Minimum Lease Term of such Equipment Schedule.
f. TAKEDOWNS. "Takedown" means the payment of the Cost of the Equipment
for any Equipment Schedule by LINC. All Schedules shall commence on the first
day of the calendar quarter following Lessee's acceptance of all Equipment on
each Equipment
<PAGE>
Schedule. The initial Takedown for Equipment Schedule 001 shall be for at
least $250,000 and shall include any Equipment Lessor accepts and purchases
from Lessee. The initial Takedown shall occur on or before to October 1,
1995. Any Equipment purchased after the initial Takedown shall be funded on
subsequent Takedowns through additional Equipment Schedules of at least
$100,000.00 each up to the amount of the Cost of such Equipment. Each
Equipment Schedule will include all purchases of Equipment made for Equipment
on a progress payment basis in the previous calendar quarter not previously
included in an Equipment Schedule.
g. LAST MONTH'S RENT. An amount equal to $16,270.50, representing
Lessor's estimate of the last Monthly Lease Rate payment based upon the Monthly
Lease Rate Factor and based upon Equipment Cost equal to the aggregate Lease
Line Amount, will be invoiced and due at the time of the commencement of
Equipment Schedule 001 and this rent will be applied to the last Monthly Lease
Payment due under each Equipment Schedule on a pro rata basis. If the entire
Lease Line Amount is not fully funded by February 1, 1996, then the unused
amount of the last Monthly Lease Rate payment under this paragraph shall be
retained by Lessor.
h. END OF TERM OPTIONS. Provided that this Master Lease has not been
terminated and that no Event of Default or event which, with notice or lapse of
time or both, would become an Event of Default shall have occurred and be
continuing, Lessee shall elect one of the following options in clauses (i),
(ii), or (iii) below:
(i) Lessee's Option to Renew: At the expiration of the Minimum Lease
Term of Schedule No. 001, Lessee may elect to renew the Master Lease
with respect to all, and not less than all, of the Equipment under all
Schedules to the Master Lease at their respective expiration dates for
not less than twelve (12) months at the Equipment's Fair Rental Value
(as defined below), but not less than 1% or more than 2% of Equipment
Cost per month, which rent shall be paid monthly in advance plus any
applicable taxes.
(ii) Lessee's Option to Purchase: At the expiration of the Minimum
Lease Term of Schedule No. 1, Lessee may elect to purchase all, but not
less than all, of the Equipment under all Schedules to the Master Lease
at their respective expiration dates for a purchase price equal to the
then "Fair Market Value" (as defined below), but not less than 10% or
more than 20% of Equipment Cost thereof as of the end of the Minimum
Lease Term applicable to each Equipment Schedule, plus any applicable
sales or other transfer taxes payable as a result of such sale plus any
amounts that remain unpaid to Lessor under the Lease.
(iii) Lessee's Option to Return: At the expiration date of Minimum Lease
Term of Schedule No. 001, Lessee may elect to return all, but not less
than all, of the Equipment under all Schedules to the Master Lease at
their respective expiration dates in accordance with the return
provisions of Section 3 of the Lease.
The foregoing options in clauses (i), (ii), or (iii) shall be exercised by
written notice delivered to Lessor not more than 180 days and not less than
ninety (90) days prior to the expiration of the Minimum Lease Term of the
Equipment which are subject to Schedule No. 001.
If none of the foregoing options in clauses (i), (ii), or (iii) of this section
is duly exercised by Lessee, this Lease shall be automatically extended at the
highest rental rate in effect immediately prior to the expiration date of the
Minimum Lease Term applicable to Schedule No. 001 with respect to all Equipment
covered by any Equipment Schedule from the expiration date of the Minimum Lease
Term of each Schedule on a month-to-month basis. Lessee may terminate any such
extended term on ninety (90) days' prior written notice to Lessor and so long as
with such notice Lessee elect one of the options described in clauses (i), (ii),
or (iii) above.
Fair Market Value or Fair Rental Value, as the case may be, shall be determined
on the basis of and shall be equal in amount to the value which would be
obtained in an arm's-length transaction between an informed and willing buyer-
user or lessee-user (other than a used equipment dealer) and an informed and
willing seller or lessor under no compulsion to sell or lease, on the
assumptions that: all such Equipment (a) is being sold "in place and in use";
(b) is free and clear of all liens and encumbrances; (c) is in the condition
required upon the return of the Equipment under Sections 3 and 5 of this Lease;
(d) and does not include any additions which Lessee may have incorporated into
the Equipment as may be permitted under paragraph 2 of the Lease. In such
determination, costs of removal from the location of current use by Lessee shall
be in addition to such value(s). Notwithstanding anything contained herein to
the contrary, Fair Rental Value shall not exceed the Monthly Lease Rate Factor
applicable to the Minimum Lease Term of each Equipment Schedule.
The purchase of the Equipment by Lessee pursuant to any options herein granted
shall be "AS IS, WHERE IS," without recourse to or any warranty by Lessor, other
than a warranty that the Equipment is free and clear of liens and encumbrances
resulting by or through acts of Lessor.
j. EARNEST MONEY DEPOSIT. Lessor acknowledges receipt of $5,000.00 (the
"Earnest Money Deposit") from Lessee. The Earnest Money Deposit will be first
applied to legal expenses, due diligence expenses, and on-site document
preparation costs (if such service is requested by Lessee) (legal and due
diligence expenses not to exceed $5,000.00 provided Lessor's standard lease
documents
- 2 -
<PAGE>
are used). Any remainder shall then be applied to the initial Monthly Lease Rate
payment which is due Lessor upon commencement of the Equipment Schedule 001. If
Lessee do not execute and deliver all documents required by Lessor, the Earnest
Money Deposit or any unapplied portion thereof will be retained by Lessor.
k. CONDITIONS PRECEDENT TO LEASING. In addition to any other document or item
requested by Lessor, Lessee shall deliver the items set forth below in form and
substance acceptable to Lessor. With respect to the Initial Takedown the
following items:
(1) Execution and delivery by Lessee to Lessor the following documents
prior to the Initial Takedown:
(a) Master Lease Agreement;
(b) Addendum No. 1 to Master Lease Agreement;
(c) Equipment Schedule(s), as required by Lessor;
(d) Secretary's certificate as to board of directors' resolutions and
incumbency;
(e) UCC-1 financing statements and protective fixture filings signed
by Lessee (to be filed prior to the earlier of funding or, for
Equipment delivered after the date of the Lease, delivery of
Equipment to Lessee) along with any UCC Amendments relating
thereto for any prior, present or subsequent Equipment Schedule;
(f) Progress Payment Authorization (if applicable);
(g) Bill(s) of sale for Equipment sold by Lessee to Lessor (if
applicable);
(h) Purchase Agreement Assignment of agreements between Lessee and its
Equipment vendors for new Equipment (if applicable); and
(i) The Warrant described in Section 24. below.
(2) Delivery to Lessor of executed copies of the following Documents prior
to the Initial Takedown:
(a) Legal opinion of Lessee's Counsel, in form and substance
acceptable to Lessor;
(b) Certificate of insurance;
(c) Release or subordination of all security interests in favor of any
other party granted by Lessee or the owners of Equipment to be
sold to Lessor which cover either the Equipment to be sold or
include "after acquired" Equipment clauses in favor of such other
party ("Equipment Liens"), (if applicable); and
(d) Release, disclaimer or subordination agreements (if required by
Lessor) by each owner of any premises in which Equipment will be
located of any landlord's lien or other right which a real
property owner might claim in the Equipment to be leased
hereunder.
(3) With respect to Subsequent Takedowns occurring prior to February 1,
1996 the following items will be required to be delivered and executed, if
applicable, prior to each Subsequent Takedown:
(a) Equipment Schedule(s), as needed by Lessor;
(b) Secretary's certificate as to board of directors' resolutions and
incumbency (if requested by Lessor);
(c) UCC-1 financing statements and protective fixture filings signed
by Lessee (to be filed prior to the earlier of funding or delivery
of Equipment to Lessee) along with any UCC Amendments relating
thereto for any prior, present, or subsequent Equipment Schedule;
(d) Progress Payment Authorization, (if applicable);
(e) Bill(s) of sale for Equipment sold by Lessee to Lessor (if
applicable);
(f) Purchase Agreement Assignment of agreements between Lessee and its
Equipment vendors for new Equipment (if applicable);
(g) Updated legal opinion (if requested by Lessor);
(h) Certificate of insurance (if requested by Lessor);
(i) Release of "Equipment Liens" (if applicable);
(j) Landlord subordination agreements or Equipment Waiver agreements
acceptable to Lessor; (if applicable);
(k) Original invoices issued to Lessor (or copies of invoices to
Lessee and canceled checks of Lessee);
(l) Amendments to Articles of Incorporation and By-Laws (if
applicable);
(4) The following other documents shall also be required to be delivered
by Lessee prior to or within 30 days after any Takedown:
(a) Copies of invoices to Lessee and canceled checks of Lessee or
original invoices billed to Lessor for all items of Equipment
proposed for the initial Takedown(s)
(b) Certified copies of the Lessee's Articles of Incorporation
- 3 -
<PAGE>
(c) Current Financial Statements prepared by Lessee or its independent
auditor not previously furnished to Lessor, if any
23. PROGRESS PAYMENTS
As requested, progress payments will be made for any unit of equipment with an
aggregate cost over $1,000 per invoices to vendors in accordance with Lessor's
standard procedures. Interim rent on progress payments on Equipment shall be
payable from the date progress payments are made to the commencement date of the
corresponding Equipment Schedule.
Lessee shall deliver to Lessor Lessee's authorization, not less than 30 days
prior to the due date thereof and in a form acceptable to Lessor, to make a
progress payment and, provided on such due date no Events of Default have
occurred and be continuing hereunder or under the Lease, Lessor shall make the
progress payment set forth to the manufacturer(s) or supplier(s) as set forth in
such authorization. In respect of such progress payments so made by Lessor,
Lessee agrees as follows:
(i) to pay the Lessor or Lessor's Assignee a daily rental amount equal to
the product of the aggregate amount of progress payments actually made by
Lessor multiplied by the Lease Rate Factor as set forth in each applicable
Equipment Schedule divided by thirty (30) from the date such progress
payments are in fact made. Such payment shall be made by Lessee to Lessor
immediately upon Lessee's receipt of a written request therefor (but not
more than one such payment shall be made within any given period of thirty
(30) days) accompanied by evidence reasonably satisfactory to Lessee
indicating the amount and date of payment by Lessor of the progress
payments in respect of which such payment is so requested;
(ii) in the event Lessee shall not deliver Lessee's Equipment Acceptance
Form in respect of the Equipment to Lessor on or before three (3) months
from the date of the first progress payment made hereunder (unless such
period is extended by mutual written agreement of Lessor and Lessee), to
pay to Lessor or Lessor's Assignee, upon demand, an amount equal to the sum
of all progress payments theretofore made by Lessor pursuant to this
provision, together with unpaid daily rental amounts thereon;
(iii) Lessee acknowledge and understand that Lessor may elect to borrow
all or a portion of the progress payments required of Lessor under this
provision and that as security therefor, Lessor may assign the applicable
Equipment Schedule, including but not limited to Lessor's rights hereunder,
to the lender of such amounts so borrowed. Lessee agree, without notice to
Lessee, Lessor may make such assignment in connection with any such
borrowing and for the protection and benefit of Lessor and any such
assignee, the rights of Lessor or its assignee in and to such payments
shall be absolute and unconditional under all circumstances,
notwithstanding: (I) any set-off, abatement, reduction, counterclaim,
recoupment, defense or other right which Lessee may have against Lessor,
the manufacturer(s) or seller(s) of the Equipment, or any other person for
any reason whatsoever; or (ii) any defect in condition, operation, fitness
or use, damage or destruction of the Equipment, or failure of the
manufacturer(s) or supplier(s) to deliver the Equipment for any reason
whatsoever; or (iii) or any insolvency, bankruptcy, reorganization or
similar proceedings instituted by or against the Lessor or Lessee.
24. REPORTS
Lessee shall furnish to Lessor the following: (1) financial and operating
performance data as is provided to members of Earthlink Network Inc.'s Board of
Directors, investors and, if applicable, the S.E.C. and (2) prompt written
notice of any material adverse change in Lessee's financial condition or
business prospects. LINC shall not disseminate or otherwise disclose any of the
information furnished under this paragraph 24 to any other party except to the
extent necessary to service, monitor, protect, establish or enforce its rights
under the Lease. The information furnished shall not be deemed confidential and
subject to this covenant to the extent (a) the information was in the public
domain at the time it was communicated to the recipient by the other party; (b)
it entered the public domain subsequent to the time it was communicated to the
recipient by the other party through no fault of the recipient; (c) it was in
the recipient's possession free of any obligation of confidence at the time it
was communicated to the recipient by the other party; (d) it was rightfully
obtained by the recipient from a third party under no obligation of
confidentiality to the other party; or (e) the communication was in response to
a valid order by a court or other governmental body or was otherwise required by
law.
25. JOINT AND SEVERAL LIABILITY
Earthlink Network, Inc. and Reed E. Slatkin shall each be deemed a Lessee and
shall be required jointly and severally liable as Lessee to LINC. Earthlink
Network, Inc. and Reed E. Slatkin shall be jointly and severally bound by the
terms of the Lease.
26. GRACE PERIOD
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<PAGE>
26. GRACE PERIOD
Notwithstanding paragraphs 1 (Term and Rental) and 12 (Events of Default), no
payment shall be subject to imposition of the Service Charge Rate nor shall an
Event of Default be deemed to have occurred if the payment required to be made
shall be made within five (5) days of the due date.
27. MAINTENANCE BY LESSEE
Notwithstanding paragraph 5 of the Lease, Lessee may perform routine maintenance
and make necessary non-material modifications to the Equipment using its own
personnel provided that such service is performed in a good and workmanlike
manner, shall not adversely affect the value of the Equipment and does not
invalidate any warranty or service contract which may be in effect.
28. OPINION OF COUNSEL
Lessee shall provide at Lessee's expense, an opinion of its counsel to LINC in
form and substance substantially in conformance with the Form of Legal Opinion
of Counsel attached hereto as Exhibit A and made an integral part hereof.
IN WITNESS WHEREOF, this Addendum has been executed by a duly authorized
officer of Lessee as of the 1st day of September, 1995.
EARTHLINK NETWORK, INC. REED E. SLATKIN
(Lessee) (Lessee)
By: /s/ Sky Dayton By:/s/ Reed E. Slatkin
---------------------- ----------------------
Name: Sky Dayton Name:
------------------- -------------------
Title: Pres & CEO Title: 8/30/95
------------------- -------------------
LINC CAPITAL MANAGEMENT, A DIVISION OF SCIENTIFIC LEASING INC.
(Lessor)
By: /s/ Mark K. Zimmerman
----------------------
Name: Vice President of Operations
-------------------
Title: 1/5/96
-------------------
- 5 -
<PAGE>
ADDENDUM NO. 2 TO
MASTER LEASE AGREEMENT NO. 6029
DATED AS OF SEPTEMBER 1, 1995
BETWEEN
LINC CAPITAL MANAGEMENT,
A DIVISION OF SCIENTIFIC LEASING INC., AS LESSOR
AND
EARTHLINK NETWORK, INC. AND
REED E. SLATKIN, AS LESSEE
This Addendum is attached to and forms part of that certain Master Lease
Agreement No. 6029 dated as of September 1, 1995, between LINC CAPITAL
MANAGEMENT, A DIVISION OF SCIENTIFIC LEASING INC. ("Lessor" or "LINC") and
EARTHLINK NETWORK, INC. and REED E. SLATKIN, (collectively "Lessee"), (the
"Lease") agreeing as follows:
A. Terms defined in the Lease shall have the same meanings herein unless
otherwise expressly set forth herein or otherwise required by context
hereof.
B. The following shall be added to the terms of the Lease and are hereby
incorporated therein by reference.
C. To the extent any terms or conditions contained in this Addendum may be
inconsistent or conflict with any terms or conditions contained in the
Lease, the terms and conditions contained in this Addendum shall govern and
control.
29. LEASING OF EQUIPMENT
a. LEASE LINE. Subject to the terms and conditions herein set forth and
in the applicable Equipment Schedule(s), and provided no event of default under
the Lease shall have occurred and be then continuing, Lessor agrees to purchase
and lease to Lessee, from time to time, the "Equipment" (as defined below). The
aggregate "Cost" (as defined below) of Equipment purchased by Lessor pursuant to
this Section 29.a shall in no event exceed $1,500,000.00 (the "Lease Line
Amount"). All "Takedowns" (as defined below) shall be completed on or before
September 1, 1996 (the "Last Takedown Date").
b. EQUIPMENT.
(1) Lessor will purchase new ISDN ports, new dial-up modems, terminal
servers and other new network and ancillary equipment related thereto (the
"Equipment") from Lessee or from vendors designated by Lessee. All Equipment
shall be located in Lessee's locations in Los Angeles County, California. The
amount paid for the Equipment (hereinafter "Cost") will be equal to the lesser
of (i) 100% of the manufacturers' net invoice price (excluding applicable
sales or use taxes, freight, installation, and similar charges), (ii) the then
fair market value for each piece of Equipment or (iii) the net book value for
each piece of Equipment (determined in accordance with generally accepted
accounting principles).
(2) All Equipment shall be tangible personal property eligible for
MACRS depreciation under the Internal Revenue Code of 1986, as amended. The
depreciation benefits arising from the Equipment will be for the account of
Lessor.
(3) Each piece of Equipment, its vendor and all purchase orders,
invoices and related documents will be subject to review and approval by Lessor
prior to funding any Takedown. The amount advanced shall be equal to 100% of
Equipment Cost. No unit of Equipment with an aggregate Cost less than $1,000.00
shall be included in the Equipment subject to this Master Lease, unless
such a unit of Equipment, upon attachment to another unit of Equipment, forms
one functional piece of Equipment having an aggregate Cost in excess of
$1,000.00.
c. MINIMUM LEASE TERM AND MONTHLY LEASE RATE. The Minimum Lease Term
shall be 36 months. The applicable Monthly Lease Rate factor shall be
3.2541% of Cost per month, subject to Rate Adjustments described below. All
Monthly Lease Rate payments shall be payable monthly, in advance.
d. RATE ADJUSTMENT. The Monthly Lease Rate Factor will be indexed to
the yield for U.S. Treasury Notes maturing closest to the date three (3) years
from the commencement date of each Equipment Schedule (the "Index Instrument")
currently 6.00% for the 4.75% Treasury Notes maturing September, 1998 as
reported in the WALL STREET JOURNAL dated September 9, 1995. The Monthly Lease
Rate Factor shall be adjusted to provide for any increase in the yield of the
Index Instrument on the commencement date of each Equipment Schedule. Upon
commencement of each Equipment Schedule, the Monthly Lease Rate Factor shall be
fixed for the Minimum Lease Term of such Equipment Schedule.
e. TAKEDOWNS. "Takedown" means the payment of the Cost of the Equipment
for any Equipment Schedule by LINC. All Schedules shall commence on the first
day of the calendar quarter following Lessee's acceptance of all Equipment on
each Equipment Schedule. Any Equipment purchased shall be funded on Takedowns
through Equipment Schedules of at least $100,000.00 each, up to the
<PAGE>
amount of the Cost of such Equipment. The Aggregate Takedowns for Equipment
Schedules prior to April 1, 1996 shall total at least $750,000 and shall
include any Equipment Lessor accepts and purchases from Lessee. All Takedowns
shall occur on or before September 1, 1996. Each Equipment Schedule will
include all purchases of Equipment made for Equipment on a progress payment
basis in the previous calendar quarter not previously included in an Equipment
Schedule.
f. LAST MONTH'S RENT. An amount equal to $48,811.50, representing
Lessor's estimate of the last Monthly Lease Rate payment based upon the Monthly
Lease Rate Factor and based upon Equipment Cost equal to the aggregate Lease
Line Amount, will be invoiced and due at the time of the commencement of
Equipment Schedule 002 and this rent will be applied to the last Monthly Lease
Payment due under each Equipment Schedule on a pro rata basis. If the entire
Lease Line Amount is not fully funded by September 1, 1996, then the unused
amount of the last Monthly Lease Rate payment under this paragraph shall be
retained by Lessor.
g. END OF TERM OPTIONS. Provided that this Master Lease has not been
terminated and that no Event of Default or event which, with notice or lapse of
time or both, would become an Event of Default shall have occurred and be
continuing, Lessee shall elect one of the following options in clauses (i), or
(ii) below:
(i) Lessee's Option to Renew: Lessee may elect to renew the
Master Lease with respect to all, and not less than all, of the
Equipment under all Schedules to the Master Lease at their
respective expiration dates, effective upon the expiration of the
Minimum Lease Term of Schedule Number 002, for not less than
twelve (12) months at the Equipment's Fair Rental Value (as
defined below), but not less than 1% or more than 2% of Equipment
Cost per month, which rent shall be paid monthly in advance plus
any applicable taxes.
(ii) Lessee's Option to Purchase: Lessee may elect to purchase
all, but not less than all, of the Equipment under all Schedules
to the Master Lease at their respective expiration dates,
effective upon the expiration of the Minimum Lease Term of
Schedule Number 002, for a purchase price equal to the then "Fair
Market Value" (as defined below), but not less than 10% or more
than 20% of Equipment Cost thereof as of the end of the Minimum
Lease Term applicable to each Equipment Schedule, plus any
applicable sales or other transfer taxes payable as a result of
such sale plus any amounts that remain unpaid to Lessor under the
Lease.
The foregoing options in clauses (i), or (ii) shall be exercised by written
notice delivered to Lessor not more than 180 days and not less than ninety (90)
days prior to the expiration of the Minimum Lease Term of the Equipment which
are subject to Schedule No. 001.
If one of the foregoing options in clauses (i) or (ii) of this section is duly
exercised by Lessee, this Lease shall be automatically extended at the highest
rental rate in effect immediately prior to the expiration date of the Minimum
Lease Term applicable to Schedule No. 002 with respect to all Equipment covered
by any Equipment Schedule from the expiration date of the Minimum Lease Term of
each Schedule on a month-to-month basis. Lessee may terminate any such extended
term on ninety (90) days' prior written notice to Lessor and so long as with
such notice Lessee elect one of the options described in clauses (i) or (ii)
above.
Fair Market Value or Fair Rental Value, as the case may be, shall be determined
on the basis of and shall be equal in amount to the value which would be
obtained in an arm's-length transaction between an informed and willing buyer-
user or lessee-user (other than a used equipment dealer) and an informed and
willing seller or lessor under no compulsion to sell or lease, on the
assumptions that: all such Equipment (a) is being sold "in place and in use";
(b) is free and clear of all liens and encumbrances; (c) is in the condition
required upon the return of the Equipment under Sections 3 and 5 of this Lease;
(d) and does not include any additions which Lessee may have incorporated into
the Equipment as may be permitted under paragraph 2 of the Lease. In such
determination, costs of removal from the location of current use by Lessee shall
be in addition to such value(s). Notwithstanding anything contained herein to
the contrary, Fair Rental Value shall not exceed the Monthly Lease Rate Factor
applicable to the Minimum Lease Term of each Equipment Schedule.
The purchase of the Equipment by Lessee pursuant to any options herein granted
shall be "AS IS, WHERE IS," without recourse to or any warranty by Lessor, other
than a warranty that the Equipment is free and clear of liens and encumbrances
resulting by or through acts of Lessor.
h. EARNEST MONEY DEPOSIT. Lessor acknowledges receipt of $15,000.00 (the
"Earnest Money Deposit") from Lessee. The Earnest Money Deposit will be first
applied to legal expenses, due diligence expenses, and on-site document
preparation costs (if such service is requested by Lessee) (legal and due
diligence expenses not to exceed $5,000.00 provided Lessor's standard lease
documents are used). Any remainder shall then be applied to the initial Monthly
Lease Rate payment which is due Lessor upon commencement of the Equipment
Schedule 002. If Lessee does not execute and deliver all documents required by
Lessor, the Earnest Money Deposit or any unapplied portion thereof will be
retained by Lessor.
i. CONDITIONS PRECEDENT TO LEASING. In addition to any other document or
item requested by Lessor, Lessee shall deliver the items set forth below in form
and substance acceptable to Lessor. With respect to the Initial Takedown
the following items:
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<PAGE>
(1) Execution and delivery by Lessee to Lessor the following documents
prior to the Initial Takedown:
(a) Addendum No. 2 to Master Lease Agreement;
(b) Equipment Schedule(s), as required by Lessor;
(c) Secretary's certificate as to board of directors' resolutions
and incumbency;
(d) UCC-1 financing statements and protective fixture filings
signed by Lessee (to be filed prior to the earlier of funding
or, for Equipment delivered after the date of the Lease,
delivery of Equipment to Lessee) along with any UCC
Amendments relating thereto for any prior, present or
subsequent Equipment Schedule;
(e) Progress Payment Authorization (if applicable)
(f) Bill(s) of sale for Equipment sold by Lessee to Lessor (if
applicable);
(g) Purchase Agreement Assignment of agreements between Lessee
and its Equipment vendors for new Equipment (if applicable);
and
(h) The Warrant described in Section 33. below.
(2) Delivery to Lessor of executed copies of the following Documents prior
to the Initial Takedown:
(a) Legal opinion of Lessee's Counsel, in form and substance
acceptable to Lessor;
(b) Certificate of insurance;
(c) Release or subordination of all security interests in favor
of any other party granted by Lessee or the owners of
Equipment to be sold to Lessor which cover either the
Equipment to be sold or include "after acquired" Equipment
clauses in favor of such other party ("Equipment Liens"),
(if applicable); and
(d) Release, disclaimer or subordination agreements (if required
by Lessor) by each owner of any premises in which Equipment
will be located of any landlord's lien or other right which
a real property owner might claim in the Equipment to be
leased hereunder.
(3) With respect to Subsequent Takedowns occurring prior to September 1,
1996 the following items will be required to be delivered and executed, if
applicable, prior to each Subsequent Takedown:
(a) Equipment Schedule(s), as needed by Lessor;
(b) Secretary's certificate as to board of directors' resolutions
and incumbency (if requested by Lessor);
(c) UCC-1 financing statements and protective fixture filings
signed by Lessee (to be filed prior to the earlier of funding
or delivery of Equipment to Lessee) along with any UCC
Amendments relating thereto for any prior, present, or
subsequent Equipment Schedule;
(d) Progress Payment Authorization, (if applicable);
(e) Bill(s) of sale for Equipment sold by Lessee to Lessor (if
applicable);
(f) Purchase Agreement Assignment of agreements between Lessee
and its Equipment vendors for new Equipment (if applicable);
(g) Updated legal opinion (if requested by Lessor);
(h) Certificate of insurance (if requested by Lessor);
(i) Release of "Equipment Liens" (if applicable);
(j) Landlord subordination agreements or Equipment Waiver
agreements acceptable to Lessor; (if applicable);
(k) Original invoices issued to Lessor (or copies of invoices to
Lessee and canceled checks of Lessee);
(l) Amendments to Articles of Incorporation and By-Laws
(if applicable);
(4) The following other documents shall also be required to be delivered
by Lessee prior to or within 30 days after any Takedown:
(a) Copies of invoices to Lessee and canceled checks of Lessee or
original invoices billed to Lessor for all items of Equipment
proposed for the initial Takedown(s)
(b) Certified copies of the Lessee's Articles of Incorporation
(c) Current Financial Statements prepared by Lessee or its
independent auditor not previously furnished to Lessor, if
any
30. PROGRESS PAYMENTS
If requested, progress payments will be made for any unit of equipment with
an aggregate cost over $1,000 per invoices to vendors in accordance with
Lessor's standard procedures. Interim rent on progress payments on Equipment
shall be payable from the date progress payments are made to the commencement
date of the corresponding Equipment Schedule.
- 3 -
<PAGE>
Lessee shall deliver to Lessor Lessee's authorization, not less than 30 days
prior to the due date thereof and in a form acceptable to Lessor, to make a
progress payment and, provided on such due date no Events of Default have
occurred and be continuing hereunder or under the Lease, Lessor shall make the
progress payment set forth to the manufacturer(s) or supplier(s) as set forth
in such authorization. In respect of such progress payments so made by Lessor,
Lessee agrees as follows:
(i) to pay the Lessor or Lessor's Assignee a daily rental amount equal to
the product of the aggregate amount of progress payments actually made by
Lessor multiplied by the Lease Rate Factor as set forth in each applicable
Equipment Schedule divided by thirty (30) from the date such progress
payments are in fact made. Such payment shall be made by Lessee to Lessor
immediately upon Lessee's receipt of a written request therefor (but not
more than one such payment shall be made within any given period of thirty
(30) days) accompanied by evidence reasonably satisfactory to Lessee
indicating the amount and date of payment by Lessor of the progress
payments in respect of which such payment is so requested;
(ii) in the event Lessee shall not deliver Lessee's Equipment Acceptance
Form in respect of the Equipment to Lessor on or before three (3) months
from the date of the first progress payment made hereunder (unless such
period is extended by mutual written agreement of Lessor and Lessee), to
pay to Lessor or Lessor's Assignee, upon demand, an amount equal to the
sum of all progress payments theretofore made by Lessor pursuant to this
provision, together with unpaid daily rental amounts thereon;
(iii) Lessee acknowledge and understand that Lessor may elect to borrow
all or a portion of the progress payments required of Lessor under this
provision and that as security therefor, Lessor may assign the applicable
Equipment Schedule, including but not limited to Lessor's rights
hereunder, to the lender of such amounts so borrowed. Lessee agree,
without notice to Lessee, Lessor may make such assignment in connection
with any such borrowing and for the protection and benefit of Lessor and
any such assignee, the rights of Lessor or its assignee in and to such
payments shall be absolute and unconditional under all circumstances,
notwithstanding: (I) any set-off, abatement, reduction, counterclaim,
recoupment, defense or other right which Lessee may have against Lessor,
the manufacturer(s) or seller(s) of the Equipment, or any other person for
any reason whatsoever; or (ii) any defect in condition, operation, fitness
or use, damage or destruction of the Equipment, or failure of the
manufacturer(s) or supplier(s) to deliver the Equipment for any reason
whatsoever; or (iii) or any insolvency, bankruptcy, reorganization or
similar proceedings instituted by or against the Lessor or Lessee.
31. REPORTS
Lessee shall furnish to Lessor the following: (1) financial and operating
performance data as is provided to members of Earthlink Network Inc.'s Board of
Directors, investors and, if applicable, the S.E.C. and (2) prompt written
notice of any material adverse change in Lessee's financial condition or
business prospects. LINC shall not disseminate or otherwise disclose any of
the information furnished under this paragraph 24 to any other party except to
the extent necessary to service, monitor, protect, establish or enforce its
Rights under the Lease. The information furnished shall not be deemed
confidential and subject to this covenant to the extent (a) the information was
in the public domain at the time it was communicated to the recipient by the
other party; (b) it entered the public domain subsequent to the time it was
communicated to the recipient by the other party through no fault of the
recipient; (c) it was in the recipient's possession free of any obligation of
confidence at the time it was communicated to the recipient by the other party;
(d) it was rightfully obtained by the recipient from a third party under no
obligation of confidentiality to the other party; or (e) the communication was
in response to a valid order by a court or other governmental body or was
otherwise required by law.
32. LIABILITY OF LESSEE
EarthLink Network, Inc. and Reed E. Slatkin shall each be deemed a Lessee and
shall be jointly and severally liable as Lessee to Lessor. EarthLink Network,
Inc. and Reed E. Slatkin shall be jointly and severally bound by the terms of
the Lease. However, Lessor will release Reed E. Slatkin from his obligations
as Lessee upon the occurrence of any of the following events: (i) EarthLink
Network, Inc. experiences a positive cash flow for three (3) consecutive
months, as determined in accordance with generally accepted accounting
principals; (ii) upon the completion of a public offering of EarthLink Network,
Inc.'s stock, if such stock offering establishes the creditworthiness of
EarthLink on a standalone basis, in Lessor's sole opinion; or (iii) by mutual
consent of Lessor and Lessee.
Any release by Lessor of Reed E. Slatkin as Lessee shall not affect EarthLink
Network, Inc.'s obligations to Lessor.
33. WARRANTS
Lessee shall issue to Lessor warrants to purchased 10,000 shares of EarthLink
Network, Inc.'s stock. Such stock shall be issued of the same class and for
the same price as last sold to unaffiliated investors pursuant to any equity
financing in excess of $500,000.00 (hereinafter the "Warrants"). Currently,
EarthLink Network, Inc.'s common stock price is approximately $24.18 per share.
The Warrants will be issued to Lessor by Lessee upon the execution of the
lease documents set forth in 29.i(1) of this Addendum and shall be
exercisable for ten (10) years, beginning from the commencement date of
Schedule No. 002. The terms of the Warrants shall include
-4-
<PAGE>
piggyback registration rights on a pro rata basis with shares of other
shareholders, acceptable anti dilution rights, and shall provide for a
cashless exercise of the Warrants by Lessor.
34. GRACE PERIOD
Notwithstanding paragraphs 1 (Term and Rental) and 12 (Events of Default), no
payment shall be subject to imposition of the Service Charge Rate nor shall an
Event of Default be deemed to have occurred if the payment required to be made
shall be made within five (5) days of the due date.
35. MAINTENANCE BY LESSEE
Notwithstanding paragraph 5 of the Lease, Lessee may perform routine
maintenance and make necessary non-material modifications to the Equipment using
its own personnel, provided that such service is performed in a good and
workmanlike manner, shall not adversely affect the value of the Equipment, and
does not invalidate any warranty or service contract which may be in effect.
36. OPINION OF COUNSEL
Lessee shall provide at Lessee's expense, an opinion of its counsel to LINC in
form and substance substantially in conformance with the Form of Legal Opinion
of Counsel attached hereto as Exhibit A and made an integral part hereof.
IN WITNESS WHEREOF, this Addendum has been executed by a duly authorized
officer of Lessee as of the 16th day of January, 1996.
EARTHLINK NETWORK, INC. REED E. SLATKIN
(Lessee) (Lessee)
By: /s/ Sky Dayton By: /s/ Reed E. Slatkin
--------------------------------- -----------------------------
Name: Sky Dayton Name:
------------------------------- ---------------------------
Its Founder, Chairman & CEO Title:
------------------------------- ---------------------------
LINC CAPITAL MANAGEMENT, A DIVISION OF SCIENTIFIC LEASING INC.
(Lessor)
By: /s/ Mark K. Zimmerman
--------------------------------
Name: MARK K. ZIMMERMAN
--------------------------------
Title: VICE PRESIDENT
--------------------------------
- 5 -
<PAGE>
LINC CAPITAL MANAGEMENT, A DIVISION OF LINC Capital Management, a division of
SCIENTIFIC LEASING INC. Scientific Leasing Inc.
EQUIPMENT SCHEDULE 303 E. Wacker Drive.
Chicago, Illinois 60601
Equipment Location:
Master Lease Agreement No. 6029
3171 Los Feliz Blvd., Suite 203 Schedule No. 001
Los Angeles, CA 90039 Acceptance Date: September 30, 1995
--------------------
- --------------------------------------------------------------------------------
Equipment Description Equipment Cost: $516,934.14
The "Equipment" will consist of new ISDN ports, new dial-up modems, terminal
servers and other new network and ancillary equipment related thereto as more
fully described on Schedule "A" attached hereto and made a part hereof.
- --------------------------------------------------------------------------------
TERM AND RENTAL: Lease Term: 36 months
Lease Commencement Date: November 1, 1995
----------------
The term of this Schedule shall commence on the Acceptance Date and shall
terminate on the Lease Expiration Date set forth below.
Periodic Lease Payments to be made: X monthly quarterly
--- ---
Lease Expiration Date:
-----------
Periodic Lease Payments:
$ 16,821.55 per rental payment for the first thirty-six rental payments
Followed by:
$ ________ per rental payment for the next _____________ rental payments
Followed by:
$ ________ per rental payment for the next _____________ rental payments
END OF TERM OPTIONS: Refer to Addendum No. 1 to the Master Lease Agreement for
End of Term Options
- --------------------------------------------------------------------------------
LlNC Capital Management, a division of Scientific Leasing Inc. (Lessor) hereby
agrees to lease to the Lessee named below, and Lessee hereby agrees to lease and
rent from Lessor the Equipment listed above, for the term and at the rental
payments specified herein, all subject to the terms and conditions set forth
herein and on the reverse side hereof and in the referenced Master Lease
Agreement except as the same may be varied by the terms of this Schedule.
EARTHLINK NETWORK, INC. REED E. SLATKIN
(Lessee) (Lessee)
By: /s/ Sky Dayton By: /s/ Reed E. Slatkin
------------------------------------ ---------------------------------
Title: Its President Title: Director
--------------------------------- ------------------------------
Date: September 29,1995 Date: September 29, 1995
------------------------------------ --------------------------------
ACCEPTED AT CHICAGO, ILLINOIS
LINC CAPITAL MANAGEMENT,
A DIVISION OF SCIENTIFIC LEASING INC.
(Lessor)
By: /s/ Mark K. Zimmerman
-------------------------------------
Title: Vice President of Operations
-----------------------------------
Date: 1/5/96
-----------------------------------
<PAGE>
EarthLink, Network
LINC Lease - Schedule 1
Amortization Schedule
<TABLE>
<CAPTION>
TOTAL 12.19% REMAINING
- ---------------------------------------------------------------
Payment Interest Principal Balance 5.60
<S> <C> <C> <C> <C> <C>
10/1/95 516,934.14
10/31/95 17,069.19 5,249.04 11,820.15 505,113.99
11/1/95 16,821.55 5,129.01 11,692.54 493,421.45 1
12/1/95 16,821.55 5,010.28 11,811.27 481,610.18 2
1/1/96 16,821.55 4,890.35 11,931.20 469,678.98 3
2/1/96 16,821.55 4,769.20 12,052.35 457,626.63 4
3/1/96 16,821.55 4,646.82 12,174.73 445,451.90 5
4/1/96 16,821.55 4,523.19 12,298.36 433,153.54 6
5/1/96 16,821.55 4,398.31 12,423.24 420,730.30 7
6/1/96 16,821.55 4,272.17 12,549.38 408,180.92 8
7/1/96 16,821.55 4,144.74 12,676.81 395,504.11 9
8/1/96 16,821.55 4,016.01 12,805.54 382,698.57 10
9/1/96 16,821.55 3,885.99 12,935.56 369,763.01 11
10/1/96 16,821.55 3,754.64 13,066.91 356,696.10 12
11/1/96 16,821.55 3,621.95 13,199.60 343,496.50 13
12/1/96 16,821.55 3,487.92 13,333.63 330,162.87 14
1/1/97 16,821.55 3,352.53 13,469.02 316,693.85 15
2/1/97 16,821.55 3,215.76 13,605.79 303,088.06 16
3/1/97 16,821.55 3,077.61 13,743.94 289,344.12 17
4/1/97 16,821.55 2,938.05 13,883.50 275,460.62 18
5/1/97 16,821.55 2,797.07 14,024.48 261,436.14 19
6/1/97 16,821.55 2,654.67 14,166.88 247,269.26 20
7/1/97 16,821.55 2,510.81 14,310.74 232,958.52 21
8/1/97 16,821.55 2,365.50 14,456.05 218,502.47 22
9/1/97 16,821.55 2,218.71 14,602.84 203,899.63 23
10/1/97 16,821.55 2,070.43 14,751.12 189,148.51 24
11/1/97 16,821.55 1,920.65 14,900.90 174,247.61 25
12/1/97 16,821.55 1,769.34 15,052.21 159,195.40 26
1/1/98 16,821.55 1,616.50 15,205.05 143,990.35 27
2/1/98 16,821.55 1,462.10 15,359.45 128,630.90 28
3/1/98 16,821.55 1,306.14 15,515.41 113,115.49 29
4/1/98 16,821.55 1,148.59 15,672.96 97,442.53 30
5/1/98 16,821.55 989.45 15,832.10 81,610.43 31
6/1/98 16,821.55 828.69 15,992.86 65,617.57 32
7/1/98 16,821.55 666.29 16,155.26 49,462.31 33
8/1/98 16,821.55 502.25 16,319.30 33,143.01 34
9/1/98 16,821.55 336.54 16,485.01 16,658.00 35
10/1/98 16,821.55 169.15 16,652.40 5.60 36
</TABLE>
- --------------------------------------------------------------------------------
Page 1
<PAGE>
<TABLE>
<CAPTION>
VENDOR AMOUNT INV DATE INVOICE # SERIAL # # DESCRIPTION
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
1 Eagle Electronics $ 321.24 7/11/95 116056 None Phone Parts
2 Eagle Electronics $ 270.06 7/11/95 115959 None 6 Computer Rack
3 Network Appliances $ 87,889.64 7/19/95 1 D98570 1 50 GB Disk Subsystem
4 Eagle Electronics $ 120.00 7/19/95 116204 None 3 Adaptor
5 Eagle Electronics $ 743.68 7/19/95 116224 None 3 Motorola Radio
6 Solunet $ 27,550.10 7/20/95 11176 1A21448 4 Communications Device
1A22559 Communications Device
1A21779 Communications Device
1A20315 Communications Device
F451B1154 1 Channel Bank
N/A 4 High Speed Internal Modem
F449A324 1 Communications Device
7 Phase X Systems $ 10,820.00 7/21/95 12076 None 4 Computer Memory
8 Eagle Electronics $ 140.67 7/21/95 11621 None 1 Convertor
9 Solunet $ 38,777.50 7/24/95 11191 9390011925711 6 Access Device
9390012286975 Access Device
9390011915918 Access Device
9390011815826 Access Device
20009390003550 Access Device
N/A Access Device
10 Virtual Networks $ 4,272.92 7/24/95 879 25024853 1 Router
11 Eagle Electronics $ 159.99 7/25/95 116291 None 4 Adaptor
12 Eagle Electronics $ 66.78 7/25/95 116308 None 2 Grounding Panel
13 Solunet $ 347.50 7/11/95 11219 None 1 Network Software
14 Eagle Electronics $ 30.30 7/26/95 116344 None 1 Printer Cable
15 Datatech $ 3,987.36 7/26/95 18801 55555002583 1 Router
16 Eagle Electronics $ 120.00 8/4/95 116550 None 3 Adapter
17 Eagle Electronics $ 6.44 8/1/95 116475 None 1 Patch Panel
18 Eagle Electronics $ 286.86 8/1/95 116474 None 100 Adapter Kit
19 Eagle Electronics $ 274.24 8/4/95 116541 None 1 Access Device
20 Eagle Electronics $ 84.10 8/2/95 116483 None 1 Patch Panel
21 Com-Net Industries $ 1,215.00 8/10/95 17091CN H5225A0254 1 Access Device
Page 1
<PAGE>
22 Eagle Electronics $ 346.13 8/7/95 116589 None 3 Access Device
23 Eagle Electronics $ 32.42 8/7/95 116588 None 1 Adapter
24 Eagle Electronics $ 344.67 8/8/95 116616 None 80 Patch Cords
25 Solunet $ 13,180.50 8/8/95 11349 F451B1297 3 Communications Device
M519B1316 Communications Device
F451B1167 Communications Device
26 Eagle Electronics $ 113.38 8/12/95 103866 None Cables
27 Eagle Electronics $ 268.68 8/11/95 103861 None Access Device
28 Eagle Electronics $ 289.84 8/18/95 16852 None 1 Phone Test Set
29 WP Elec & Comm $ 291.20 8/14/95 7082 None 1 Elec Installation & Parts
30 Eagle Electronics $ 42.09 8/16/95 116806 None 8 Cables
31 Solunet $ 13,963.55 8/15/95 11402 1A21074 2 Communications Device
1A22741 Communications Device
M519B1355 2 Channel Bank
LG512A3524 Channel Bank
32 Solunet $ 12,920.00 8/17/95 11409 N/A -SEC 2 Access Device
N/A -SEC Access Device
33 U.S. Robotics, Inc $ 3,381.26 4/6/95 294750 None 15 Communications Device
34 Solunet, Inc. $ 15,226.55 5/5/95 10685 N/A -SEC 2 Channel Banks
N/A -SEC Channel Banks
1A7106S 1 Communications Device
1A21146 1 Communications Device
5185120 1 Interface
35 Solunet, Inc. $ 940.50 4/19/95 10561 H525A0254 1 Signalling Device
36 Solunet, Inc. $ 51,608.00 6/27/95 11041 93901195363 8 Access Device
N/A Access Device
9390011915931 Access Device
9390011925374 Access Device
9390011915894 Access Device
9390040127295 Access Device
9390011925374 Access Device
N/A Access Device
37 Solunet, Inc. $ 21,048.35 6/28/95 11062 1A47712 3 Communications Device
1A56132 Communications Device
Page 2
<PAGE>
1A71133 Communications Device
F449A324 3 Channel Bank
N/A Channel Bank
N/A Channel Bank
38 Solunet, Inc. $ 13,208.00 6/1/95 10836 51981091 3 Channel Bank
GL512A3638 Channel Bank
M519B1207 Channel Bank
39 Solunet, Inc. $ 12,330.10 6/2/95 10844 RMA 2 Access Device
RMA Access Device
40 Solunet, Inc. $ 47,042.50 6/9/95 10907 S200540 1 Communications Device
N/A 1 Communications Controller
20009380000031862 6 Access Device
20009380000067777 Access Device
20009380000037261 Access Device
2000938000006775 Access Device
20009380015995522 Access Device
20009380000037253 Access Device
None 1 Signalling Device
None 1 Communications Software
41 Solunet, Inc. $ 7,741.95 5/26/95 10810 1A77442 3 Communications Device
1A65672 Communications Device
1A34321 Communications Device
42 Solunet, Inc. 5,997.50 6/12/95 10926 None 15 Communications Device
43 Solunet, Inc. $ 24,721.70 6/2/95 10850 9380000031862 4 Access Device
9380000006775 Access Device
9390011925358 Access Device
20009390048127297 Access Device
44 Solunet, Inc. $ 21,485.70 6/19/95 10987 N/A -SEC 3 High Speed Internal Modem
None 1 Communications Controller
1A23382 3 Communications Device
1A23633 Communications Device
1A23403 Communications Device
45 George Haney & Sons $ 7,290.00 9/1/95 42715 None Air Conditioning Installation
46 Creative Computers $ 4,295.79 6/13/95 268140 FLS188Q4511 1 MAC Computer System
Page 3
<PAGE>
47 Vision Communication $ 841.64 5/31/95 13821 15304455 6 Phones
15201786 Phones
15101704 Phones
12603563 Phones
15304484 Phones
13102900 Phones
48 Vision Communication $ 225.08 5/31/95 13819 14502793i 1 Console Phone
49 Vision Communication $ 105.00 4/10/95 12015 None 1 Consulting
50 Vision Communication $ 10,048.85 4/10/95 12016 15400010A 1 Phone System
51 Vision Communication $ 1,875.35 6/16/95 14330 15310747i 6 Phones
13103321 Phones
15310756i Phones
13109491 Phones
13102814 Phones
13102904 Phones
52 Vision Communication $ 795.91 6/30/95 14886 25400840 1 Phone Controller
53 Vision Communication $ 1,103.68 6/30/95 14834 15204838 8 Phones
15412868i Phones
15412865i Phones
15312350i Phones
15304487i Phones
13102679 Phones
15312531i Phones
15312364i Phones
54 Vision Communication $ 1,707.10 6/5/95 13902 15412857i 9 Phones
15304579 Phones
15304530i Phones
15304546 Phones
15312562i Phones
15304574 Phones
13110315 Phones
15110254 Phones
15412872i Phones
55 Vision Communication $ 140.00 5/30/95 13717 None 1 Consulting/Installation
Page 4
<PAGE>
56 Amex/Mac Warehouse $ 2,126.95 4/21/95 42769920 XB5113UW41X 1 MAC Computer System
57 Amex/Mac Warehouse $ 172.95 5/12/95 82705555 None 1 MAC Software
58 Amex/Mac Warehouse $ 1,256.00 5/18/95 04065215 None 2 MAC Memory
59 Amex/Mac Warehouse $ 292.00 5/24/95 04065215 None 1 MAC Peripheral Hardware
60 RM Consulting $ 2,922.75 8/1/95 RMC01909 None 2 Computer System
None Computer System
61 RM Consulting $ 768.58 7/28/95 RMC01900 None 1 Computer System
62 GBH Distributing, Inc. $ 483.88 6/22/95 108403 None 3 Phone Headset
63 Eagle Electronics $ 207.56 6/1/95 115407 None Networking Parts
64 Eagle Electronics $ 311.76 5/23/95 115017 None 48 Cables
65 Eagle Electronics $ 609.61 4/9/95 113990 None 6 Powerstrips/Cables
66 Eagle Electronics $ 142.53 5/11/95 114970 None 1 Equipment Rack
67 Eagle Electronics $ 379.05 5/12/95 115032 None 24 Cords/Cables
68 Eagle Electronics $ 429.80 5/24/95 115275 None Cables/Wire
69 Eagle Electronics $ 179.57 5/17/95 114726 None 1 Patch Panel & Wire
70 Eagle Electronics $ 282.99 4/26/95 114537 None 3 Patch Panel & Parts
71 Eagle Electronics $ 355.25 4/27/95 114688 None 1 Patch Panel & Cables
72 Eagle Electronics $ 969.44 5/23/95 115212 None 24 Rack Mount Tray
73 Eagle Electronics $ 88.08 6/19/95 115734 None Parts/Blocks/Cords
74 Eagle Electronics $ 400.98 6/14/95 115376 None 48 Cables
75 Eagle Electronics $ 128.60 6/14/95 115659 None 24 Surge Suppressor
76 Phase X Systems $ 9,497.00 5/18/95 11893 2P04332 1 Axil 320 Computer System
77 Phase X Systems $ 1,415.00 6/7/95 11957 None 1 Computer Software
78 Phase X Systems $ 18,394.00 4/18/95 11807 N/A 2 AXIL Computer System
N/A AXIL Computer System
79 Phase X Systems $ 953.00 5/4/95 11854 None 2 AXIL Graphics Card
$515,204.68
29 WP Elec & Comm (291.20) Installation and Labor not financed
45 George Haney & Sons (7,290.00) Installation of air conditioning not financed
80 RM Consulting 9,310.66 RM Consulting invoice number RMC02019 for a File Server System
-----------
$516,934.14
Lesee's Initials Lessor's Initials
-------------- ---------------
Page 5
<PAGE>
3-OCT-95
Column F (Serial #'s) abbreviations:
N/A= Not Available: Would require shutting our Network down - or is buried inside an active box.
N/A -Sec = Not Available: Equipment in locked security cabinet.
RMA = Not Available: Device at Vendor for Repair - May come back with different SN.
None = No Serial number on device or component - or is either software or labor.
</TABLE>
Equipment Location
3171 Los Feliz Blvd., Suite 203
Los Angeles, CA 90039
Page 6
<PAGE>
LINC CAPITAL MANAGEMENT, A DIVISION OF LINC Capital Management, a division of
SCIENTIFIC LEASING INC. Scientific Leasing Inc.
EQUIPMENT SCHEDULE 303 E. Wacker Drive.
Chicago, Illinois 60601
Equipment Location:
Master Lease Agreement No. 6029
3171 Los Feliz Blvd., Suite 203 Schedule No. 003
Los Angeles, CA 90039 Acceptance Date: February 6, 1996
-----------------
- --------------------------------------------------------------------------------
Equipment Description Equipment Cost: $369,081.99
The "Equipment" will consist of new Axil Computers, Ascend Communications System
and other new network and ancillary equipment related thereto as more fully
described on Schedule "A" attached hereto and made a part hereof.
- --------------------------------------------------------------------------------
TERM AND RENTAL: Lease Term: 36 months
Lease Commencement Date: April 1, 1996
-------------
The term of this Schedule shall commence on the Acceptance Date and shall
terminate on the Lease Expiration Date set forth below.
Periodic Lease Payments to be made: X monthly quarterly
-- ---
Lease Expiration Date:
----------------
Periodic Lease Payments:
$ 12,010.30 per rental payment for the first thirty-six rental payments
Followed by:
$ ________ per rental payment for the next _____________ rental payments
Followed by:
$ ________ per rental payment for the next _____________ rental payments
END OF TERM OPTIONS: Refer to Addendum No. 2 to the Master Lease Agreement for
End of Term Options
- --------------------------------------------------------------------------------
LlNC Capital Management, a division of Scientific Leasing Inc. (Lessor) hereby
agrees to lease to the Lessee named below, and Lessee hereby agrees to lease and
rent from Lessor the Equipment listed above, for the term and at the rental
payments specified herein, all subject to the terms and conditions set forth
herein and on the reverse side hereof and in the referenced Master Lease
Agreement except as the same may be varied by the terms of this Schedule.
EARTHLINK NETWORK, INC. REED E. SLATKIN
(Lessee) (Lessee)
By: /s/ Sky Dayton By: /s/ Reed E. Slatkin
------------------------------------ ---------------------------------
Title: ITS PRESIDENT Title: DIRECTOR
--------------------------------- -----------------------------
Date: 1/31/96 Date: 1/31/96
--- ------------------------------ ------------------------------
ACCEPTED AT CHICAGO, ILLINOIS
LINC CAPITAL MANAGEMENT,
A DIVISION OF SCIENTIFIC LEASING INC.
(Lessor)
By: /s/ Mark K. Zimmerman
----------------------------------
Title:
-------------------------------
Date:
-------------------------------
<PAGE>
ADDITIONAL TERMS AND CONDITIONS TO EQUIPMENT SCHEDULE
1. ERRORS IN ESTIMATED COST AND ADJUSTMENTS IN RENTAL. As used herein,
"actual cost" means the total cost to Lessor of purchasing and delivering the
Equipment to Lessee including, subject to Lessor's consent, taxes,
transportation charges and other charges which may be applicable. The amount
of each payment set forth in the Schedule are based on an estimate of actual
cost, which estimate may, but need not, be set forth in the Schedule, and such
amounts shall be adjusted proportionately (increased or decreased) if the
actual cost of the Equipment differs from said estimate. Lessee hereby
authorizes Lessor to adjust, if necessary, the amounts set forth in the
Schedule to reflect actual cost when the actual cost is known and to add to the
amount of each rental payment any sales, use or leasing tax that may be imposed
on or measured by the rental payments. Lessor will inform Lessee of the
adjustments in rent and/or security deposit necessary to reflect actual cost.
If the actual cost of the Equipment exceeds the estimated cost by more than
10%, such increase, for purposes of lease hereunder, shall be subject to
approval by Lessor. The rental payment set forth in this Schedule is 3.2541%
of estimated equipment cost per month. If there shall be an increase in
the yield on the 9.25%, three (3) year Treasury Notes maturing August, 1998 and
yielding 6.10% per annum (the "Treasury Rate") as reported in the Wall Street
Journal as of July 31, 1995 at the Acceptance Date, this Schedule and the
Lease shall be amended to provide for an increase in rental which takes account
of said increase in the Treasury Rate.
2. INITIAL PAYMENT AND/OR SECURITY DEPOSIT. Lessee shall make a security
deposit and/or initial payment as indicated in this Schedule upon execution of
this Schedule. Any security deposit and/or initial payment paid by Lessee
shall not be refundable to Lessee in the event that the term of this Lease
does not commence unless on account of Lessee's rightful refusal to accept
delivery of the Equipment. At Lessor's option any security deposit and/or
initial payment made hereunder may be applied by Lessor to cure any default of
Lessee, in which event Lessee shall promptly restore the security deposit
and/or initial payment to their full amounts as set forth in this Schedule.
If all the terms and conditions herein to be performed by Lessee are fully
performed and all of Lessee's obligations hereunder are fully complied with,
that portion of any security deposit not so applied shall be refunded to Lessee
at the termination or expiration of this Lease.
3. PURCHASE OPTION AND/OR RENEWAL OF LEASE TERM. If an event of default has
not occurred under the Lease, Lessee, by giving Lessor not less than ninety
(90) days' written notice by registered or certified mail prior to the
expiration date of this Schedule, may, elect to (1) if applicable, purchase not
less than all of the Equipment then leased hereunder, at the times and in the
manner hereinafter specified, for an amount equal to that stated on the face of
this Schedule, plus any applicable sales tax with respect thereto or (2) if
applicable, renew the lease term of not less than all of the Equipment then
leased hereunder for the period(s) and for the renewal rental(s) (payable in
advance) stated on the face of this Schedule. If Lessee elects to exercise
said purchase option, same shall be exercised on the day immediately following
the date of expiration of the minimum lease term, and by the delivery at such
time by Lessee to Lessor of payment, in cash or by certified check, of the
amount of the purchase price for the Equipment as hereinbefore set forth. Upon
payment of said purchase price for the Equipment, Lessor shall, upon request
of Lessee, execute and deliver to Lessee a Bill of Sale for the equipment, on
an "AS IS," "WHERE IS," "WITH ALL FAULTS" basis, without representations or
warranties of any kind whatsoever. If Lessee exercises its purchase option and
fails to make such payment, Lessee shall pay as additional rent for each month
or fraction thereof after the end of the minimum lease term, an amount equal
to the highest monthly payment set forth herein. If Lessee does not elect to
exercise either of said options, Lessee shall return each item of equipment to
Lessor, pursuant to and under the terms and conditions of Section 3 of the
Lease. If Lessee fails to notify Lessor as provided herein or if Lessor and
Lessee cannot agree on the purchase or renewal terms, then the term of this
Lease shall be automatically extended at the highest rental provided in this
Schedule, for successive three month periods unless and until terminated by
either party giving to the other not less than three months' prior written
notice by registered or certified mail of its intention to terminate at the
end of the next succeeding extension period, and, upon termination of this
Schedule, Lessee shall return all of the Equipment as provided in the Lease.
<PAGE>
SCHEDULE A
EARTHLINK NETWORK, INC.
LEASE NO. 6029-003
<TABLE>
<CAPTION>
VENDOR AMOUNT INVOICE DATE INVOICE # SERIAL # PRODUCT NO. CHECK # DATE PAID
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 Ascend Communications $44,400.00 11/06/95 14273-2 5441030 MAX-HPT1/PRI Base 4 1062 01/18/96
5441031
5441032
5441033
$7,200.00 11/06/95 14273-2 n/a Installed H/W opt. CCCC 4 1062 01/18/96
$2,400.00 11/06/95 14273-2 n/a Installed soft opt. ISDN 4 1062 01/18/96
$86,400.00 11/06/95 14273-2 n/a Slotcard 8 Channel V34 Modem 24 1062 01/18/96
$2,400.00 11/06/95 14273-2 n/a Installed S/W opt. FR 4 1062 01/18/96
$55,500.00 11/06/95 14273-2 5441034 MAX-HPT1/PRI Base 5 1062 01/18/96
5441035
5441037
5441038
5450063
$9,000.00 11/06/95 14273-2 n/a Installed H/W opt. CCCC 5 1062 01/18/96
$3,000.00 11/06/95 14273-2 n/a Installed soft opt. ISDN 5 1062 01/18/96
$108,000.00 11/06/95 14273-2 n/a Slotcard 8 Channel V34 Modem 30 1062 01/18/96
$3,000.00 11/06/95 14273-2 n/a Installed S/W opt. FR 5 1062 01/18/96
2 Ascend Communications $2,034.00 11/20/95 17114 n/a P50-IUBRI, Pipe 50/BRI-U 2 1062 01/18/96
Interface
3 Ascend Communications $2,148.00 12/04/95 16819 n/a P25-IUBRI, Pipeline 25 BRI(U) 4 1062 01/18/96
Syste
4 Axil Computer, Inc. $43,599.99 12/06/95 804363 n/a Axil 320 Base Unit w/out MB 3 1063 01/18/96
TOTAL: $369,081.99
Lessee's Initials Lessors Initials
EQUIPMENT LOCATION: ----------------- ----------------
3171 Los Feliz Blvd
Los Angeles, CA 90039
</TABLE>
<PAGE>
EARTHLINK NETWORK, INC.
LEASE NO. 6029-003
AS OF 02/06/96
<TABLE>
<S> <C>
FUNDING:
Total Equipment Cost: $369,081.99
Less: First Lease Pmt due 4/11/96 (12,010.30)
Less: Daily rent due for February 6-29 & March: (22,018.88)
-----------
Total Amount Disbursed $335,052.81
SECURITY DEPOSIT:
Total Security Deposit: $48,811.50
Less: Last Lease Pmt due upfront for Sch 002 (31,738.03)
Less: Last Lease Pmt due upfront for Sch 003 (12,010.30)
-----------
Amount Remaining in Security Deposit: $5,063.17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
LINC CAPITAL MANAGEMENT, A DIVISION OF LINC Capital Management, a division of
SCIENTIFIC LEASING INC. Scientific Leasing Inc.
EQUIPMENT SCHEDULE 303 E. Wacker Drive.
Chicago, Illinois 60601
Equipment Location:
Master Lease Agreement No. 6029
3171 Los Feliz Blvd., Suite 203 Schedule No. 002
Los Angeles, CA 90039 Acceptance Date:
----------------------
- --------------------------------------------------------------------------------------------------
Equipment Description Equipment Cost: $975,324.45
The "Equipment" will consist of new ISDN ports, new dial-up modems, terminal
servers and other new network and ancillary equipment related thereto as more
fully described on Schedule "A" attached hereto and made a part hereof. All
Equipment shall be located in Los Angeles County, CA.
- --------------------------------------------------------------------------------------------------
TERM AND RENTAL: Lease Term: 36 months
--
Lease Commencement Date: February 1, 1996
----------------
The term of this Schedule shall commence on the Acceptance Date and shall
terminate on the Lease Expiration Date set forth below.
Periodic Lease Payments to be made: X monthly quarterly Lease Expiration Date:
--- --- ----------------
Periodic Lease Payments:
$31,738.03 per rental payment for the first thirty-six rental payments
- ------------- --------------
Followed by:
$ - - - - per rental payment for the next - - - - rental payments
- ------------- --------------
Followed by:
$ - - - - per rental payment for the next - - - - rental payments
- ------------- --------------
END OF TERM OPTIONS: Refer to Addendum No. 2 to the Master Lease Agreement for
End of Term Options
- --------------------------------------------------------------------------------------------------
LINC Capital Management, a division of Scientific Leasing Inc. (Lessor) hereby
agrees to lease to the Lessee named below, and Lessee hereby agrees to lease and
rent from Lessor the Equipment listed above, for the term and at the rental
payments specified herein, all subject to the terms and conditions set forth
herein and on the reverse side hereof and in the referenced Master Lease
Agreement except as the same may be varied by the terms of this Schedule.
EARTHLINK NETWORK, INC. REED E. SLATKIN
(Lessee) (Lessee)
By: /s/ Sky Dayton By:
-------------------------------- --------------------------------
Title: Title:
----------------------------- -----------------------------
Date: Date:
------------------------------ ------------------------------
ACCEPTED AT CHICAGO, ILLINOIS
LINC CAPITAL MANAGEMENT,
A DIVISION OF SCIENTIFIC LEASING INC.
(Lessor)
By:
--------------------------------
Title:
-----------------------------
Date:
------------------------------
</TABLE>
<PAGE>
ADDITIONAL TERMS AND CONDITIONS TO EQUIPMENT SCHEDULE
ERRORS IN ESTIMATED COST AND ADJUSTMENTS IN RENTAL. As used herein, "actual
cost" means the total cost to Lessor of purchasing and delivering the Equipment
to Lessee including, subject to Lessor's consent, taxes, transportation charges
and other charges which may be applicable. The amount of each payment set forth
in the Schedule are based on an estimate of actual cost, which estimate may, but
need not, be set forth in the Schedule, and such amounts shall be adjusted
proportionately (increased or decreased) if the actual cost of the Equipment
differs from said estimate. Lessee hereby authorizes Lessor to adjust, if
necessary, the amounts set forth in the Schedule to reflect actual cost when the
actual cost is known and to add to the amount of each rental payment any sales,
use or leasing tax that may be imposed on or measured by the rental payments.
Lessor will inform Lessee of the adjustments in rent and/or security deposit
necessary to reflect actual cost. If the actual cost of the Equipment exceeds
the estimated cost by more than 10%, such increase, for purposes of lease
hereunder, shall be subject to approval by Lessor. The rental payment set forth
in this Schedule is 3.2541% of estimated equipment cost per month. If there
shall be an increase in the yield on the 9.75%, three, (3) year Treasury Notes
maturing September, 1998 and yielding 6.00% per annum (the "Treasury Rate") as
reported in the Wall Street Journal as of September 29, 1995 at the Acceptance
Date, this Schedule and the Lease shall be amended to provide for an increase in
rental which takes account of said increase in the Treasury Rate.
<PAGE>
Earthlink Sheet
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Vendor Amount Inv Date Invoice # Serial #
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Anixter $4,280.00 09/15/95 34957 P950789266
Anixter $4,550.00 09/06/95 154599 3095050055
Ascend $35,700.00 09/19/95 14273 5380244
Ascend $178,500.00 09/27/95 14272 5390683
5390684
5390685
5390686
5390687
Ascend $1,017.00 10/19/95 15045
Cisco $12,000.00 12/07/95 1157103 2454133
Cisco $69,520.00 09/12/95 1112048 73000079
1862544
01958563,02133563
1930190
Cisco $12,800.00 09/14/95 1113394 1937275
Cisco $7,996.00 09/05/95 1108044
Cisco $22,000.00 10/22/95 1144987 2168741
Datatech $3,223.00 09/26/95 20187
Micro Elec. $5,035.00 10/19/95 249530 B. Wenger
Phase X $4,905.00 08/29/95 12169
Phase X $38,151.00 08/29/95 12170
Progressive Network $4,245.00 08/09/95 128 SKU:S100SG00435
Solunet $40,950.00 09/18/95 11745
Solunet $30,892.00 09/20/95 11774
Solunet $2,670.00 10/02/95 11908
Solunet $5,061.00 10/18/95 12071
Solunet $11,820.00 10/12/95 12030
Solunet $24,378.80 09/26/95 11815
Solunet $24,378.00 09/26/95 11822
Solunet $163,800.00 09/21/95 11789
Solunet $17,444.00 10/25/95 12145
Axil/Phase X $5,692.00 11/03/95 12326
Axil/Phase X $48,783.00 11/03/95 12325
Axil/Phase X $22,700.00 11/03/95 12323
Corporate Source $12,250.00 10/30/95 42780
Corporate Source $2,925.00 10/23/95 4278
Network Appliances $100,892.65 10/24/95 1341 2157
Network General $49,220.00 10/25/95 A128538 208,844
208,691
208,859
Hal Computers $3,466.00 11/30/95
Hal Computers $4,080.00 11/30/95 EL2010
Total $975,324.45
- ------------------------------------------------------------------------------
No. Description Location Date Paid Check #
- ------------------------------------------------------------------------------
1 VA Line Interactive UPS 3171 Los Feliz 11/08/95 1030
1 DSU/CSU 3171 Los Feliz 11/08/95 1030
1 Max-HPT1/PIRI Base 3171 Los Feliz 10/27/95 1016
1 Max-HPT1/PRI Base 3171 Los Feliz 10/27/95 1016
1 Max-HPT1/PRI Base 3171 Los Feliz
1 Max-HPT1/PRI Base 3171 Los Feliz
1 Max-HPT1/PRI Base 3171 Los Feliz
1 Max-HPT1/PRI Base Santa Clarita POP
1 P50-IUBRI 3171 Los Feliz 11/08/95 1032
1 RSP2 Route Switch 3171 Los Feliz 11/21/95 1043
1 CISCO7513 13-slot 3171 Los Feliz 11/21/95 1043
1 FDDI Multi-Mode I/f Proc
2 HSSI I/F Proc
1 8 Port Serial I/F Proc
1 Spare 6 Port Ethernet 3171 Los Feliz 11/21/95 1043
Ciscoworks/Sun v2.1 3171 Los Feliz 11/21/95 1043
1 Memory, Serial Board 3171 Los Feliz 11/21/95 1043
1 UPS 3171 Los Feliz 11/08/95 1034
1 Micron Computer 3171 Los Feliz 11/08/95 1010
1 85MHz 64MB 3171 Los Feliz 10/19/95 1010
3 9OMHz 64MB 3171 Los Feliz 10/19/95 1011
1 Real Audio Server 40 10/19/95 1025
1 MAX 11/02/95 1026
6 MP/8 & 2 TSU 600 3171 Los Feliz 11/03/95 1026
3 LattisHub 3171 Los Feliz 11/03/95 1026
2 LattisHub & 3 TSU 3171 Los Feliz 11/03/95 1026
4 LattisHub & 10 Hawks 3171 Los Feliz 11/03/95 1026
3 MP/16 & 2 PM 11/03/95 1026
3 MP/16 & 2 PM 11/03/95 1026
4 MAX 11/03/95 1026
4 TSU 600 x24 voice Port 3171 Los Feliz 11/08/95 1038
1 Dual Processor 3171 Los Feliz 12/11/95 1050
3 320 SPARC 3171 Los Feliz 10/31/95 1017
5 245 SPARC 3171 Los Feliz 10/31/95 1017
5 16 MB & 64MB SIMM 3171 Los Feliz 12/11/95 1049
5 16MB Kit 3171 Los Feliz 11/08/95 1288
1 49 GB RAID 3171 Los Feliz 11/08/95 1036
1 Sniffer 3171 Los Feliz 11/08/95 1037
1 Cashier's Check
1
1 BBS Server 3171 Los Feliz 12/07/95 9954
2 486 PC: 100MHz 3171 Los Feliz 12/07/95 9954
</TABLE>
Lessee's Initials: Lessor's Initials:
<PAGE>
EARTHLINK NETWORK, INC.
SCHEDULE A
EQUIPMENT SCHEDULE 6029-004
<TABLE>
<CAPTION>
INVOICE INVOICE INVOICE
QUANTITY EQUIPMENT DESCRIPTION LOCATION VENDOR NUMBER SERIAL NO. AMOUNT BREAKDOWN
<S> <C> <C> <C> <C> <C> <C> <C>
2 PRI Base Pasadena, CA Ascend Communications 19093-1 6060933 22,200.00
6060935
2 H/W Opt. 3,600.00
12 Slotcard 8 Channel V34 Modem 43,200.00
2 Installed S/W Opt. FR 1,200.00
2 Installed Soft Opt ISDN 1,200.00
2 PRI Base 6060930 22,200.00
6060934
2 Installed H/W Opt. 3,600.00
12 Slotcard 8 Channel V34 Modem 43,200.00
2 Installed S/W Opt. FR 1,200.00
2 Installed Soft Opt ISDN 1,200.00
2 PRI Base 6060931 22,200.00
6060932
2 Installed H/W Opt. 3,600.00
12 Slotcard 8 Channel V34 Modem 43,200.00
2 Installed S/W Opt. FR 1,200.00
2 Installed Soft Opt ISDN 1,200.00
Freight 287.04
-----------
$214,487.04
2 PRI Base Pasadena, CA Ascend Communications 19093 6020070 22,200.00
6020071
2 Installed H/W Opt. 3,600.00
12 Slotcard 8 Channel V34 Modem 43,200.00
2 Installed S/W Opt. FR 1,200.00
2 Installed Soft Opt ISDN 1,200.00
Freight 89.24
-----------
$71,489.24
Total Equipment Cost: $285,976.28 $285,976.28
Lessee's Initials Lessor's Initials
---------- ----------
</TABLE>
<PAGE>
[EARTHLINK NETWORK, INC. - CHECK]
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made this 15th day of January, 1996,
between EARTHLINK NETWORK, INC., a California corporation (the "Company") and
CHARLES G. BETTY (the Employee, referred to herein as "You").
RECITALS
WHEREAS, the Company is engaged in the business of developing,
manufacturing, marketing and distributing Internet connectivity products and
services; and
WHEREAS, the Company has determined that in view of Your knowledge,
expertise and experience in the computer and information services industries,
Your services as an executive and an operating officer of the Company will be
of great value to the Company, and accordingly, the Company desires to enter
into this Agreement with You as set forth herein in order to secure such
services; and
WHEREAS, You desire to serve as an executive and an operating officer of
the Company on the terms set forth herein.
NOW, THEREFORE, for and in consideration of Your employment by the
Company, the above premises and the mutual agreements hereinafter set forth,
You and the Company agree as follows:
1. DEFINITIONS.
(a) "Cause" shall mean (i) Your commission of any act of fraud or
dishonesty relating to and adversely affecting the business affairs
of the Company; (ii) Your conviction of any felony in connection with
Your employment by the Company; or (iii) Your habitual failure after
written notice specifying such failure and a reasonable opportunity to
cure such failure to perform Your duties hereunder responsibly.
(b) "Change in Control Event" shall mean any of the following
events: the sale of all or substantially all of the assets of the Company;
the failure of the current members of the Company's Board of Directors
(the "Board") to constitute a majority of the Board; the sale of the
majority of the voting stock of the Company to any one entity/individual
or to a group of affiliated entities/individuals.
(c) "Total Disability" shall mean Your inability, through physical
or mental illness or accident, to perform the majority of Your usual
duties and responsibilities hereunder (as such duties are constituted on
the date of the commencement of such disability) in the manner and to the
extent required under this Agreement for a period of at least three
hundred sixty-five (365) consecutive days. Total Disability shall be
deemed to have occurred on the first day following the expiration of
such three hundred sixty-five (365) day period.
2. EMPLOYMENT; DUTIES.
(a) The Company agrees to employ You as President and Chief
Operating Officer of the Company with the duties and responsibilities
generally associated with such positions and such other reasonable
additional responsibilities and positions as may be added to Your duties
from time to time by the Chief Executive Officer or the Board consistent
with Your positions.
(b) During Your employment hereunder, You shall (i) diligently
follow and implement all management policies and decisions communicated
to You by the Board of Directors or the Chief Executive officer; and
(ii) timely prepare and forward to the Chief Executive Officer or the
Board all reports and accountings as may be requested of You.
<PAGE>
(c) Your duties and responsibilities hereunder shall be modified
and/or excused during reasonable periods of absence due to Your
health or disability or vacation, as provided herein.
3. TERM. The term hereof shall commence on the date of this Agreement
and shall continue for a period of two (2) years and shall be automatically
extended from year-to-year thereafter unless terminated in accordance with
Section 6 hereof (the "Term").
4. COMPENSATION.
(a) (1) You shall be paid a base salary of not less than Two
Hundred Twenty-Five Thousand Dollars ($225,000) per year (the "Base
Salary"). The Base Salary shall accrue and be due and payable in
equal, or as nearly equal as practicable, semi-monthly installments
and the Company may deduct from each such installment all amounts
required to be deducted and withheld in accordance with applicable
federal and state income, FICA and other withholding tax
requirements.
(2) The Base Salary may be increased from time to time and at
any time by the Chief Executive Officer or the Board, but shall in
no event be reduced or decreased below the highest level attained
any time by You.
(3) If the Term shall begin on other than the first business
day of a calendar month and if the Term hereof shall terminate on
other than the last day of a calendar month, Your compensation for
such month shall be prorated according to the number of days during
such month that occur within the Term.
(b) You shall be entitled to receive an annual bonus in the
amount of Seventy-Five Thousand Dollars ($75,000) per year (the "Bonus
Payment") upon the Company attaining certain performance goals; provided,
however, that You are guaranteed to receive a Bonus Payment of no less than
Thirty-Seven Thousand Five Hundred Dollars ($37,500) during the initial
year of the Term, with the remaining Thirty-Seven Thousand Five Hundred
Dollars ($37,500) to be paid to You on the Company's achievement of having
250,000 subscribers by the end of calendar year 1996. Bonus Payment
criteria for years subsequent to 1996 shall be based upon good faith
negotiations between You and the Chief Executive Officer and/or Board.
All Bonus Payments shall be paid to You on or before the 15th day of
January following the year for which such Bonus Payment was computed.
(c) While You are performing the services described in herein, the
Company shall, upon Your request, reimburse You for all reasonable and
necessary expenses incurred by You in connection with the performance of
Your duties of employment hereunder.
(d) If the Company now maintains or, while You are rendering
services to the Company, establishes an incentive or other compensation
plan (however described or denominated) for the corporate, operating or
executive officers or other management of the Company, or if the Company
now maintains or, while You are rendering services to the Company,
establishes any other benefit program(s) (however described or denominated)
for corporate, operating or executive officers or other management
employees of the Company, You shall be eligible to fully participate in
each such plan or benefit program.
(e) During the Term and any Severance Period the Company shall
provide health, medical, disability and term life insurance to You in
accordance with any group plan which it now maintains or which may
hereafter be established by the Company. If the Company does not maintain
any group plan for which You are eligible, the Company shall reimburse You,
upon request, for Your existing insurance policy payments. Further, the
Company shall reimburse You, upon request, for Your existing disability
2
<PAGE>
and term life insurance policy payments (and the policy payments under any
replacement policies) until the Company shall provide to You policies with
coverages and benefits that are the same as or substantially similar to the
coverages and benefits under Your existing disability and term life
insurance policies.
(f) You shall receive not less than four (4) weeks paid vacation
during each twelve (12) month period of Your employment. Such vacation
period may be increased from time to time and at any time by the Chief
Executive Officer or the Board but shall in no event be shortened to less
than the longest period attained by You at any time during Your employment.
(g) During each year of Your employment, the Company will pay the
full amount of Your and Your family's personal travel costs and expenses
incurred by You and Your family in traveling to and from Atlanta, Georgia,
up to a maximum amount of Twenty-Four Thousand Dollars ($24,000) per year,
such amount to be paid to You immediately upon Your request.
(h) During Your employment, should You elect to move Your
residence to California, the Company shall reimburse You for reasonable
moving expenses and associated costs plus an amount equal to all taxes
which will be incurred by You in connection with such payment, such amounts
to be paid to You immediately upon Your request.
5. STOCK AND STOCK OPTIONS; APPOINTMENT TO BOARD.
(a) Upon execution of this Agreement, the Company agrees to sell to
You up to Fifty Thousand (50,000) shares of its voting common stock for
a price of $2.42 per share (the "Signing Shares"). The Company agrees
that the purchase price for the Signing Shares may be in the form of
check or promissory note or any combination thereof. Any such promissory
note shall have a maximum term of twelve (12) months. Upon delivery to
the Company of the purchase price, whether by check or by promissory
note, the Signing Shares shall be registered in Your name and shall be
fully paid and non-assessable shares of the Company's voting common
stock. You may purchase the Signing Shares over a period which will
expire the earlier to occur of (i) six (6) months from the date hereof
or (ii) the effective date of the Company's initial public offering
under the Securities Act of 1933, and in such amounts (up to the
maximum amount) as You, in Your sole discretion, determine.
(b) Upon executive of this Agreement, the Company shall grant to You
stock options to purchase up to Three Hundred Fifty Thousand (350,000)
shares of the Company's voting common stock (the "Option Shares") at an
exercise price equal to $2.42 per share, the fair market value of a share
of the Company's voting common stock on the date of this Agreement. The
Option Shares shall vest quarterly over a five (5) year period beginning
on the date of this Agreement. Your options to purchase voting common
stock of the Company granted in Sections 5(a) and (b) of this Agreement
and as granted by the Company to You from time to time hereafter are
hereinafter collectively called the "Stock Options." In the event a
Change in Control Event occurs or the Company terminates Your employment
for other than "Cause" or You terminate Your employment for reasons of a
breach by the Company of this Agreement, all unvested Stock Options
(including the Option Shares) shall immediately vest and be fully
exercisable. You shall be given the maximum period permitted under the
Company's stock option plans to exercise Your Stock Options after
termination of Your employment with the Company.
(c) You hereby acknowledge that the Signing Shares, the Stock
Options and the Option Shares acquired under this Agreement are and
will be acquired by You for investment purposes with no view to the sale
or public distribution thereof. You further represent and warrant to the
Company that You are aware that the Company is relying upon Your
investment intent expressed hereinabove, and is issuing the Signing
Shares, the Stock Options and the Option Shares pursuant to an exemption
from the registration requirements of the Securities Act of 1933, as
amended ("1933 Act") under Section 4(2) thereof as transactions "not
involving any public offering." You agree that the transfer of the
Signing Shares, the
3
<PAGE>
Stock Options and the Option Shares to be issued may be restricted,
that a legend in form satisfactory to the Company may be placed on any
certificate representing any of the Signing Shares, the Stock Options
and the Option Shares, that stop-transfer orders may be placed against
the transfer of any of the Signing Shares, the Stock Options nor the
Option Shares and that neither the Signing Shares, the Stock Options
nor the Option Shares will be and may not be sold or transferred by You
unless You shall satisfy the Company with such documentation as the
Company in its absolute discretion may request (which may include an
opinion of Your counsel acceptable to the Company) that such transfer is
in full compliance with the provisions of the 1933 Act, and the Rules and
Regulations promulgated thereunder, and that such transfer will not
constitute or imply any violation of the 1933 Act, or any of the Rules
and Regulations promulgated thereunder by either the Company or You.
(d) If at any time or times after the date hereof, the Company
shall determine or be required to register any shares of its capital
stock or securities convertible into capital stock under the Securities
Act of 1933 whether in connection with a public offering of securities
by the Company (a "primary offering"), a public offering of securities by
shareholders of the Company (a "secondary offering") or both, the Company
will promptly give You written notice thereof. If within 30 days after
Your receipt of such notice You request the inclusion of some or all of
Your Signing Shares, Option Shares or other shares acquired by You
pursuant to the Stock Options (the "Registrable Securities"), the Company
will use its best efforts to effect the registration under the Securities
Act of all Registrable Securities which You have requested be registered.
The Company shall pay all costs and expenses associated with the
registration of Your Registrable Securities including reasonable fees of
legal counsel. In connection with any registration statement in which You
are participating, You agree to furnish the Company with the personal
information, opinion letter, indemnifications and other items and
materials necessary and/or proper (and that are customarily and generally
requested of parties with similar registration rights) in connection with
a registration of securities under the Securities Act of 1933. The manner
and content of any such registration statement and of any underwriting or
other agreements related thereto, shall be entirely in the control and
discretion of the Company. You agree to cooperate with the Company in the
preparation and filing of any registration statement prepared and filed
and shall make the customary agreements, representations, warranties and
indemnifications to the underwriters and/or the Company with respect to
any Registerable Shares included therein.
(e) The Company shall use its best efforts to cause You to be
elected as a member of the Company's Board. The Company agrees that if
within thirty (30) days of the date of this Agreement You have not been
elected as a member of the Board, You shall have the right, at Your
option, to terminate Your employment hereunder, and, in such event, the
Company shall be obligated to pay You all Base Salary payments and Bonus
Payments and all other amounts arising hereunder for the initial two year
Term as if You were still employed by the Company and such payment
obligations shall survive such termination.
6. TERMINATION.
(a) Your employment may be terminated only as follows:
(1) For Cause immediately by the Company; or
(2) At Your option, because of a breach of this Agreement
by the Company which is not cured within ten (10) days after written
notice of such breach is delivered to the Company; or
(3) At Your option upon thirty (30) days prior written notice
of termination delivered by You to the Company; or
(4) For any reason by the Company upon three (3) months prior
written notice of termination delivered to You, except during a
period of Your disability that may qualify as the
4
<PAGE>
period for qualification for Your termination due to Your Total
Disability as set forth in Section 6(a)(6); or
(5) By the Company upon Your death; or
(6) By the Company because of Your Total Disability upon thirty
(30) days prior written notice of termination delivered to You; or
(7) By You pursuant to Section 5(e).
(b) If the Company terminates Your employment for other than
"Cause" or Your "Total Disability" or the Company shall elect not to
extend the Term at the end of the first two (2) years or any yearly
extension of the Term or You terminate Your employment for reasons of
a breach by the Company of this Agreement:
(1) You shall continue to be paid the Base Salary in accordance
with the payment terms of Section 4(a):(A) for a period of one (1)
year from the effective date of such termination, if terminated at any
time following the initial year of the Term, or (B) for the remainder
of the Term if terminated during the initial year of the Term, (the
"Severance Period");
(2) You shall receive all Bonus Payments based on the year in
which You were terminated which You would have otherwise received
but for occasion of Your termination; and
(3) the health, medical, life and disability coverages afforded
to You by the Company (or payments in lieu thereof) as set forth in
Section 4(e) shall be continued for the Severance Period.
(c) In the event that Your employment is terminated by You at Your
option for reasons others than a breach of this Agreement by the Company
or is terminated by the Company due to Your death or Total Disability,
the Company will be obligated to pay to You the full amount of Base
Salary earned by You through the effective date of Your termination or
death, as the case may be.
(d) In the event that Your employment is terminated by the Company
for Cause, the Company will have no obligations to pay You any amount
beyond the effective date of such termination whether as Base Salary,
Bonus Payment or otherwise to provide You with any benefits arising
hereunder or otherwise except as required by law.
7. CONFIDENTIAL INFORMATION. You acknowledge that the nature of Your
engagement by the Company is such that You shall have access to information
of a confidential and/or trade secret nature which has great value to the
Company is based. Such information includes financial, manufacturing and
marketing data, plans and methods, computer software program technology,
i.e., process, formulas, research or development and test results, functional
or technical specifications for creating or writing code or for enhancing
debugging or otherwise writing or modifying code relating to software
developed by the Company, techniques, processes, formulas, developmental or
experimental work, work in process, methods, trade secrets (including,
without limitation, customer lists and lists of customer sources), and any
other information relating to the products, services, customers, sales or
business affairs of the Company, which has value and is treated as secret
and/or confidential by the Company (the "Confidential Information"). The
Company has and will also have access to Confidential Information of its
clients ("Clients" means any persons for whom the Company performs services
or form whom the Company or You obtains information). Confidential
Information includes not only information disclosed by the Company or its
clients to You
5
<PAGE>
in the course of Your employment, but also information developed or learned
by You during the course of Your employment with the Company. Confidential
Information is to be broadly defined. Confidential Information includes all
information that has or could have commercial value or other utility in the
business in which the Company or Clients are engaged or in which they
contemplate engaging. Confidential Information also includes all information
of which the unauthorized disclosure could be detrimental to the interests of
the Company or clients, whether or not such information is identified as
Confidential Information by the Company or Clients. You agree to keep all
such Confidential Information in confidence during the term of this Agreement
and at any time thereafter and shall not use, disclose, publish or otherwise
disseminate any of such Confidential Information to any other person, except
to the extent such disclosure is (i) necessary to the performance of this
Agreement and in furtherance of the Company's best interests, (ii) required by
applicable law, (iii) lawfully obtainable from other sources, (iv) authorized
in writing by the Company, (v) no longer qualifies as a trade secret or
confidential information under applicable law, or (vi) necessary to enforce
this Agreement. Upon termination of Your employment with the Company, You
shall deliver to the Company all documents, records, notebooks, work papers,
and all similar material containing Confidential Information, whether
prepared by You, the Company or anyone else.
8. INVENTIONS AND PATENTS. Except as may be limited by Section 2870 of
the California Labor Code, all inventions, designs, improvements, patents,
copyrights and discoveries conceived by You during the term of this Agreement
which are useful in or directly or indirectly relate to the business of the
Company or to any experimental work carried on by the Company, shall be the
property of the Company. You agree to promptly and fully disclose to the
Company all such inventions, designs, improvements, patents, copyrights and
discoveries (whether developed individually or with other persons) and at the
Company's expense, to take all steps necessary and reasonably required to
assure the Company's ownership thereof and to assist the Company in
protecting or defending the Company's proprietary rights therein.
You acknowledge hereby receipt of written notice from the Company that
this Agreement (to the extent it requires an assignment or offer to assign
rights to any invention of Yours) does not apply fully to an invention which
qualifies fully under California Labor Code Section 2870.
9. NON-COMPETITION. In order to protect the Confidential Information,
You agree that during the term of Your employment, and for a period of
one (1) year thereafter, You will not, directly or indirectly, whether as an
owner, partner, shareholder, agent, employee, creditor, or otherwise,
promote, participate or engage in any activity or other business competitive
with the Company's business in California if such activity or other business
involves any use by You of any of the Confidential Information.
10. NON-SOLICITATION OF CUSTOMERS. You agree that for a period of
one (1) year after the termination of Your employment with the Company, You
will not, on Your own behalf or on behalf of an other individual, association
or entity, call on any of the customers of the Company for the purpose of
soliciting or inducing any of such customers to acquire (or providing to any
of such customers) any product or service provided by the Company, nor will
you in any way, directly or indirectly, as agent or otherwise, in any other
manner solicit, influence or encourage such customers to take away or to
divert or direct their business away from the Company to You or to any other
person or entity by how with which You are employed, associated, affiliated or
otherwise related.
11. NONINTERFERENCE WITH EMPLOYEES. In order to protect the Confidential
Information, You agree that during the term hereof and for a period of
one (1) year thereafter, You will not, directly or indirectly, induce or
entice any employee of the Company with access to or possession of
Confidential Information, to leave such employment or cause anyone else to
leave such employment.
12. REMEDIES. The parties hereto agree that the services to be rendered
by You pursuant to this Agreement, and the rights and privileges granted to
the Company pursuant to this Agreement, are of a special, unique,
extraordinary and intellectual character, which gives them a peculiar value,
the loss of which cannot be reasonably or adequately compensated in damages
in any action at law, and that a breach by You of any of the terms
6
<PAGE>
of this Agreement will cause the Company great and irreparable injury and
damage. You hereby expressly agree that the Company shall be entitled to the
remedies of injunction, specific performance and other equitable relief to
prevent a breach of this Agreement by You. This Section 12 shall not be
construed as a waiver of any other rights or remedies which the Company may
have for damages or otherwise.
13. SEVERABILITY. In case any one or more of the provisions of this
Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect, the same shall not affect any other provision
of this Agreement, but this Agreement shall be construed as if such invalid or
illegal or unenforceable provision had never been contained herein.
14. ASSIGNMENT. This Agreement and the rights and obligations of the
hereunder may not be assigned by either party hereto without the prior
written consent of the other party hereto.
15. NOTICES. Except as otherwise specifically provided herein, any
notice required or permitted to be given to You pursuant to this Agreement
shall be given in writing, and personally delivered or mailed to You by
certified mail, return receipt requested, at the address set forth below Your
signature on this Agreement or at such other address as You shall designate
by written notice to the Company given in accordance with this Section 15,
and any notice required or permitted to be given to the Company shall be
given in writing, and personally delivered or mailed to the Company by
certified mail, return receipt requested, addressed to the Company at the
address set forth under the signature of the Chief Executive Officer of the
Company or his designee on this Agreement or at such other address as the
Company shall designate by written notice to You given in accordance with
this Section 15. Any notice complying with this Section 15 shall be deemed
received upon actual receipt by the addressee.
16. WAIVER. The waiver by either party hereto of any breach of this
Agreement by the other party hereto shall not be effective unless in writing,
and no such waiver shall operate or be construed as the waiver of the same or
another breach on a subsequent occasion.
17. GOVERNING LAW. This Agreement and the rights of the parties
hereunder shall be governed by and construed in accordance with the laws of
the State of California.
18. BENEFICIARY. All of the terms and provisions of this Agreement shall
be binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, heirs, executors, administrators and
permitted assigns.
19. ENTIRE AGREEMENT. This Agreement embodies the entire agreement of
the parties hereto relating to Your employment by the Company in the capacity
herein stated and, except as specifically provided herein, no provisions of
any employee manual, personnel policies, Company directives or other
agreement or document shall be deemed to modify the terms of this Agreement.
No amendment or modification of this Agreement shall be valid or binding upon
You or the Company unless made in writing and signed by the parties hereto.
All prior understandings and agreements relating to You employment by the
Company, in whatever capacity, are hereby expressly terminated.
20. CONFIDENTIALITY. The terms, conditions and existence of this
Agreement shall be confidential.
7
<PAGE>
IN WITNESS WHEREOF, You and the Company have executed and delivered this
Agreement as of the date first shown above.
YOU, THE EMPLOYEE: THE COMPANY:
CHARLES G. BETTY EARTHLINK NETWORK, INC.
/s/ Charles G. Betty By: /s/ Sky Dayton
- ----------------------------- ------------------------------------
Address: Printed Name: Sky Dayton
--------------------- --------------------------
Title: CEO
--------------------- ---------------------------------
--------------------- Address: 3100 New York Drive, Suite 201
Pasadena, California 91107
8
<PAGE>
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made and entered into
this 31 day of August, 1995 by and between EARTHLINK NETWORK, INC., a California
corporation ("EarthLink") and KEVIN O'DONNELL ("O'Donnell"), collectively
hereinafter referred to as "Indemnitors", on the one hand, and REED E. SLATKIN
("Indemnitee"), on the other hand.
WHEREAS, EarthLink and Indemnitee, as "Lessee", have entered into that
certain Master Lease Agreement No. 6029 dated August 31, 1995 with LINC Capital
Management, a division of Scientific Leasing, Inc. as "Lessor" ("Master Lease"),
pursuant to which Lessor has agreed to lease certain equipment and property to
Lessee; and,
WHEREAS, at some time in the future, EarthLink expects to enter into
addenda to the Master lease ("Addenda") pursuant to which LINC and/or an
affiliate thereof may agree to lease additional equipment and property to
EarthLink but may not agree to do so without Indemnitee also agreeing to act as
a Lessee under such Addendum;
WHEREAS, Indemnitee agreed to act as a Lessee under the Master Lease
at the request of Indemnitors and Lessor would not have entered into the Master
Lease unless Indemnitee had agreed to act as a Lessee thereunder; and,
WHEREAS, Indemnitee may agree to act as a Lessee under Addenda at some
time in the future; and,
WHEREAS, O'Donnell is a controlling person of EarthLink, and
Indemnitors acknowledge the benefit conferred upon them as a result of
Indemnitee agreeing to act as a Lessee under the Master Lease (and which may
in the future be conferred upon them in the event Indemnitee agrees to act as
a Lessee under the Addenda) and as an inducement to Indemnitee to act as a
Lessee under the Master Lease (and under the Addenda) and in consideration
therefore have agreed to indemnify and hold harmless Indemnitee from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses and disbursements of any
kind or nature whatsoever that may be imposed on, incurred by, or asserted
against Indemnitee, in any manner relating to or arising out of the Master
Lease and/or the Addenda and any amendments and waivers hereto and thereto;
NOW THEREFOR, the parties hereto agree as follows:
1. EXPENSES
Indemnitors, jointly and severally, agree to promptly pay sixty-six
and two-thirds percent (66 2/3%) of (i) all the actual and reasonable costs
and expenses of Indemnitee in connection with the preparation of the Master
Lease, the Addenda, this Agreement and any amendments and waivers hereto and
thereto, and of Indemnitee's performance of and compliance with all
agreements and conditions contained therein on his part to be performed or
complied with, (ii) the reasonable fees, expenses and disbursements of
counsel to Indemnitee in connection with the negotiation, preparation,
execution and administration of this Agreement, the Master Lease, the Addenda,
-1-
<PAGE>
and any amendments and waivers hereto and thereto, (iii) all other actual and
reasonable out-of-pocket expenses incurred by Indemnitee in connection
therewith; and (iv) after the occurrence of any Event of Default (as defined
in the Master Lease, the Addenda and any amendments and waivers hereto and
thereto), all costs and expenses (including reasonable attorneys' fees, and
costs of settlement) incurred by Indemnitee in enforcing any obligations of
or in collecting any payments due from Indemnitors hereunder or thereunder,
by reason of such Event of Default or in connection with any refinancing or
restructuring of the Master Lease, the Addenda, this Agreement and any
amendments and waivers hereto and thereto in the nature of a "work-out" or of
any insolvency or bankruptcy proceeding.
1.1 ADVANCEMENT OF EXPENSES
On written request to the Indemnitors by Indemnitee, Indemnitors
shall, jointly and severally, be responsible for advancing to Indemnitee
amounts of money sufficient to cover sixty-six and two-thirds percent (66
2/3%) of expenses in advance of the final disposition of them, on receipt of
(1) an undertaking by or on behalf of Indemnitee to repay such amount(s), if
it shall ultimately be determined by final judgment of a court of competent
jurisdiction that he is not entitled to be indemnified under this Agreement,
and (2) satisfactory evidence as to the amount of such expenses. The
Indemnitee's written certification, together with a copy of the statement
paid or to be paid by him, shall constitute satisfactory evidence, absent
manifest error.
2. INDEMNITY
In addition to the payment of expenses pursuant to Section 1,
Indemnitors, jointly and severally, agree to indemnify, pay and hold
Indemnitee harmless from and against, sixty-six and two-thirds percent (66
2/3%) of any and all other liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, expenses and
disbursements of any kind or nature whatsoever (including, without
limitation, the reasonable fees and disbursements of counsel for Indemnitee
in connection with any investigative, administrative, arbitral or judicial
proceeding, whether or not such Indemnitee shall be designated as party
thereto), that may be imposed on, incurred by, or asserted against
Indemnitee, in any manner relating to or arising out of the Master Lease, the
Addenda, this Agreement and any amendments and waivers hereto and thereto;
PROVIDED that no Indemnitor shall have any obligation to Indemnitee with
respect to indemnified liabilities arising from the gross negligence or
willful misconduct of Indemnitee and PROVIDED FURTHER that EarthLink shall
have no obligation to Indemnitee with respect to any monetary liability for
breach of his fiduciary duty as a director of EarthLink relating to or
arising out of (i) his acts or omissions involving intentional misconduct or
a knowing and culpable violation of law, (ii) acts or omissions he believes
to be contrary to the best interests of EarthLink or its shareholders or that
involve the absence of good faith on his part, (iii) any transaction from
which he derives an improper personal benefit, (iv) acts or omissions showing
reckless disregard for his duty to Earthlink or its shareholders in
circumstances in which he was aware or should have been aware, in the
ordinary course of performing his duties as a director of EarthLink, of a
risk of serious injury to EarthLink or its shareholders as a director of
EarthLink, (V) acts or omissions constituting an unexcused
-2-
<PAGE>
pattern of inattention that amounts to an abdication of his duty to EarthLink
or its shareholders, and (vi) transactions between him and EarthLink which
have not been approved or ratified in good faith by disinterested directors
or shareholders or which are not proved to be just and reasonable to
EarthLink.
In case a claim should be brought or an action filed or a
proceeding commenced with respect to the subject of indemnity herein,
Indemnitors agree that Indemnitee may employ an attorney of Indemnitee's own
selection to appear and defend the action on behalf of Indemnitee, at the
expense of Indemnitors. Indemnitee, at his option, shall have the sole
authority for the direction of the defense, and shall be the sole judge of
the acceptability of any compromise or settlement of any such claims, actions
or proceedings against Indemnitee.
To the extent that the undertaking to indemnify, pay and hold
harmless set forth herein may be unenforceable because it is violative of any
law or public policy, Indemnitors shall each contribute the maximum portion
that it or he is permitted to pay and satisfy under applicable law to the
payment and satisfaction of all indemnified liabilities incurred by
Indemnitee.
3. CONTINUATION OF INDEMNITY
All agreements and obligations of Indemnitors contained in this
Agreement shall continue during the period the Indemnitee remains as a Lessee
under the Master Lease, the Addenda and any amendments and waivers hereto and
thereto, and shall continue so long as Indemnitee shall be subject to any
possible action by reason of the fact that he was a Lessee under the Master
Lease, the Addenda and any amendments and waivers hereto and thereto.
4. RELEASE OF INDEMNITEE AS LESSEE
Notwithstanding anything to the contrary contained herein, the
parties hereto acknowledge that EarthLink intends to use its best efforts as
soon as practicable, to obtain a line of credit from a recognized commercial
financial institution which will allow it to provide a letter of credit to
Lessor. EarthLink agrees that at such time as it obtains said credit line it
will take all such steps as may be necessary, including, but not limited to,
providing Lessor with such letter of credit in Lessor's favor, to obtain
Indemnitee's release as Lessee under the Master Lease, the Addenda and any
amendments and waivers thereto. In the event Lessor will not release
Indemnitee as a Lessee under the Master Lease and/or under the Addenda and
any amendments and waivers thereto, EarthLink agrees that it will provide
Indemnitee with a letter of credit in his favor, in an amount sufficient to
pay all monetary obligations of Indemnitee under the Master Lease and/or the
Addenda and any amendments and waivers thereto, as security for EarthLink's
obligation to indemnify Indemnitee under this Agreement which letter of
credit shall remain in effect during the term of this Agreement.
5. NOTICE TO INDEMNITORS
Indemnitors shall perform their obligations under this Agreement on
receipt of written demand for such performance from the Indemnitee and, if
any of them fails to perform their obligations under this
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<PAGE>
Agreement on demand, the Indemnitee may then at any time bring legal action
against all or any of them to obtain full and complete performance of their
obligations under this Agreement. In any action brought to enforce this
Agreement, on a showing by the Indemnitee that a claim has been asserted
against him relating to or arising out of the Lease or this Agreement, there
shall be a presumption that Indemnitee is entitled to indemnification and
advancement of costs and expenses from Indemnitors with respect to
indemnification.
6. MISCELLANEOUS
6.1 NON-EXCLUSIVITY
The indemnification rights granted to the Indemnitee under this
Agreement shall not be deemed exclusive of, or in limitation of, any rights
to which he may be entitled under EarthLink's certificate of incorporation or
bylaws, a vote of shareholders of EarthLink, determination by EarthLink's
board of directors or otherwise.
6.2 SUCCESSORS AND ASSIGNS
The rights granted to the Indemnitee under this Agreement shall
inure to the benefit of Indemnitee and his personal representatives, heirs,
executors, administrators and beneficiaries, and this Agreement shall be
binding on Indemnitors and their respective personal representatives, heirs,
executors, administrators, beneficiaries, successors and assigns.
6.3 SEVERABILITY
To the extent permitted by applicable law, the parties, by this
Agreement, waive any provision of law that renders any provision in this
Agreement unenforceable in any respect. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision shall be held to be
prohibited by or invalid under applicable law, such provisions shall be
deemed amended to accomplish the objectives of the provision as originally
written to the fullest extent permitted by law, and all other provisions
shall remain in full force and effect.
6.4 CALIFORNIA LAW GOVERNS
This Agreement shall be governed by the laws of the State of
California.
6.5 NOTICE
Any notice, demand or other communication to the Indemnitors under
this Agreement may be addressed as follows:
EarthLink Network, Inc.
3171 Los Feliz Blvd., Suite 203
Los Angeles, California 90039
Attn: President
Kevin O'Donnell
1896 Rising Glen Road
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<PAGE>
Los Angeles, California 90069
In witness whereof, each party to this Agreement has caused it to
be executed at Los Angeles, California on the date indicated below.
"INDEMNITEE"
Dated: August 31, 1995 /s/ Reed E. Slatkin
-------------------------- --------------------------
Reed E. Slatkin
"INDEMNITORS":
Dated: August 31, 1995
-------------------------- --------------------------
Kevin O'Donnell
EARTHLINK NETWORK, INC.
Dated: August 31, 1995 /s/ Sky Dylan Dayton
-------------------------- --------------------------
Sky Dylan Dayton, President
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<PAGE>
INDEMNIFICATION AND PARTICIPATION AGREEMENT
This Indemnification and Participation Agreement ("Agreement") is
made and entered into this 1 day of December, 1996 by and between KEVIN
O'DONNELL ("Indemnitor"), and REED E. SLATKIN ("Indemnitee").
WHEREAS, Indemnitor and Indemnitee are shareholders and controlling
persons of EarthLink Network, Inc. ("EarthLink); and,
WHEREAS, EarthLink and Indemnitee, as "Lessee", have entered into
that certain Master Lease Agreement No. 6029 dated August 31, 1995 with LINC
Capital Management, a division of Scientific Leasing, Inc. as "Lessor"
("Master Lease"), pursuant to which LINC Capital Management ("LINC") agreed
to lease certain equipment and property to EarthLink; and,
WHEREAS, Indemnitee agreed to act as a Lessee under the Master
Lease at the request of EarthLink and Indemnitor and LINC would not have
entered into the Lease unless Indemnitee had agreed to act as a Lessee
thereunder; and,
WHEREAS, EarthLink entered into a lease with Becton Dickinson and
Company ("BD") of improved real property located at 3100 New York Drive,
Pasadena, California to be used as EarthLink's corporate offices and computer
data center and as a condition thereto BD required EarthLink to deliver a
Letter of Credit in favor of BD in the amount of $250,000 ("Letter of
Credit") as additional security for EarthLink's performance of its obligation
under the lease; and,
WHEREAS, EarthLink was able to obtain the Letter of Credit from The
Bank of California ("Bank") only upon Indemnitee's agreement to guarantee the
Letter of Credit ("Guarantee"); and,
WHEREAS, EarthLink and Indemnitee, as "Lessee" have entered into
Addendum No. 2 to the Master Lease ("Addendum No. 2") pursuant to which LINC
Capital Partners, Inc. ("LINC Capital") agreed to lease certain additional
equipment and property to EarthLink; and,
WHEREAS, Indemnitee agreed to act as a Lessee under Addendum No. 2
at the request of EarthLink and Indemnitor and LINC Capital would not have
entered into Addendum No. 2 unless Indemnitee had agreed to act as a Leasee
thereunder; and,
WHEREAS, Indemnitee has received certain consideration in the form
of Common Stock Purchase Warrants ("Warrants") from EarthLink and has agreed
to share with and allow Indemnitor to participate in such consideration as
further consideration for Indemnitor's agreements herein; and,
WHEREAS, Indemnitor acknowledges the benefit conferred upon him as
a result of Indemnitee agreeing to act as a Lessee under the Master Lease and
Addendum No. 2 and, as a result of Indemnitee's Guarantee of the Letter of
Credit with respect to the lease transaction with BD, and as an inducement to
Indemnitee to act as a Lessee under the Master Lease and Addendum No. 2 and
as a Guarantor of the Letter of Credit, and in consideration therefore and as
set forth above, has agreed to indemnify and hold harmless Indemnitee from
and against one-half (1/2) of any and all liabilities, obligations, losses,
damages, penalties,
<PAGE>
actions, judgments, suits, claims, costs, expenses and disbursements of any
kind or nature whatsoever that may be imposed on, incurred by, or asserted
against Indemnitee, in any manner relating to or arising out of the Master
Lease, the Addendum or said Guarantee;
NOW THEREFOR, the parties hereto agree as follows:
1. EXPENSES
Indemnitor agrees to promptly pay one-half (1/2) of (i) all the
actual and reasonable costs and expenses of Indemnitee in connection with the
preparation of the Master Lease, Addendum No. 2 and the Guarantee, and of
Indemnitee's performance of and compliance with all agreements and conditions
contained therein on his part to be performed or complied with, (ii) the
reasonable fees, expenses and disbursements of counsel to Indemnitee in
connection with the negotiation, preparation, execution and administration of
this Agreement, the Master Lease, Addendum No. 2 and the Guarantee, and any
amendments and waivers hereto and thereto, (iii) all other actual and
reasonable out-of-pocket expenses incurred by Indemnitee in connection with
the negotiation, preparation and execution of this Agreement, and the Master
Lease, Addendum No. 2 and the Guarantee, and (iv) after the occurrence of
any Event of Default (as defined in the Master Lease, Addendum No. 2 or the
Guarantee), all costs and expenses (including reasonable attorneys' fees, and
costs of settlement) incurred by Indemnitee in enforcing any obligations of
or in collecting any payments due from Indemnitor hereunder or under the
Master Lease, Addendum No. 2 or the Guarantee by reason of such Event of
Default or in connection with any refinancing or restructuring of the Master
Lease, Addendum No. 2 or the Guarantee in the nature of a "work-out" or of
any insolvency or bankruptcy proceeding.
1.1 ADVANCEMENT OF EXPENSES
On written request to the Indemnitor by Indemnitee, Indemnitor
shall be responsible for advancing to Indemnitee amounts of money sufficient
to cover one-half (1/2) of expenses in advance of the final disposition of
them, on receipt of (1) an undertaking by or on behalf of Indemnitee to repay
such amount(s), if it shall ultimately be determined by final judgment of a
court of competent jurisdiction that he is not entitled to be indemnified
under this Agreement, and (2) satisfactory evidence as to the amount of such
expenses. The Indemnitee's written certification, together with a copy of
the statement paid or to be paid by him, shall constitute satisfactory
evidence, absent manifest error.
2. INDEMNITY
In addition to the payment of expenses pursuant to Section 1,
Indemnitor agrees to indemnify, pay and hold Indemnitee harmless from and
against, one-half (1/2) of any and all other liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, claims, costs, expenses and
disbursements of any kind or nature whatsoever (including, without
limitation, the reasonable fees and disbursements of counsel for Indemnitee
in connection with any investigative, administrative, arbitral or judicial
proceeding, whether or not such Indemnitee shall be designated as party
thereto), that may be imposed on, incurred by, or asserted against
Indemnitee, in any manner relating to or arising out of the Master Lease,
Addendum
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<PAGE>
No. 2, or the Guarantee or this Agreement; PROVIDED that Indemnitor shall not
have any obligation to Indemnitee with respect to indemnified liabilities
arising from the gross negligence or willful misconduct of Indemnitee.
In case a claim should be brought or an action filed or a
proceeding commenced with respect to the subject of indemnity herein,
Indemnitor agrees that Indemnitee may employ an attorney of Indemnitee's own
selection to appear and defend the action on behalf of Indemnitee, at the
expense of Indemnitor. Indemnitee, at his option, shall have the sole
authority for the direction of the defense, and shall be the sole judge of
the acceptability of any compromise or settlement of any such claims, actions
or proceedings against Indemnitee.
To the extent that the undertaking to indemnify, pay and hold
harmless set forth herein may be unenforceable because it is violative of any
law or public policy, Indemnitor shall contribute the maximum portion that he
is permitted to pay and satisfy under applicable law to the payment and
satisfaction of all indemnified liabilities incurred by Indemnitee.
3. CONTINUATION OF INDEMNITY
All agreements and obligations of Indemnitor contained in this
Agreement shall continue during the period the Indemnitee remains as a
Lessee under the Master Lease, Addendum No. 2, or the Guarantee, and shall
continue so long as Indemnitee shall be subject to any possible action by
reason of the fact that he was a Lessee under the Master Lease or under
Addendum No. 2 or a guarantor under the Guarantee. No continuation,
extension, alteration, or renewal of the Master Lease, Addendum No. 2 or the
Guarantee or any of Indemnitee's bonds or obligations thereunder and no
waiver of defense nor any change of whatsoever kind or nature, whether or not
consented to by Indemnitor, nor the death of Indemnitor, whether or not
Indemnitee has notice thereof, shall in any way relieve Indemnitor or
Indemnitor's successors and assigns, from any liability assumed hereunder,
and Indemnitor hereby waives notice thereof.
4. FURTHER CONSIDERATION
Indemnitee acknowledges that he has received a Warrant to purchase
One Hundred Thousand (100,000) shares of Common Stock, (as adjusted) of
EarthLink as an exercise price of $.91 per share in partial consideration for
his having agreed to act as a Lessee under the Master Lease, that he has
received a Warrant to purchase an additional One Hundred Thousand (100,000)
shares of Common Stock (as adjusted) of EarthLink at an exercise price of
$2.42 per shares in consideration for his having acted as a Guarantor of the
Letter of Credit referred to above and that he has received a Warrant to
purchase an additional Two Hundred Thousand (200,000) shares of Common Stock
of EarthLink at an exercise price of $2.42 per share in consideration for his
having agreed to act as a Lessee under Addendum No. 2. As further
consideration for Indemnitor's entering into this Agreement, Indemnitee
agrees that he will transfer and assign one-half (1/2) of all Warrants issued
to him described herein to Indemnitor.
-3-
<PAGE>
5. NOTICE TO INDEMNITOR
Indemnitor shall perform his obligations under this Agreement on
receipt of written demand for such performance from the Indemnitee and, if he
fails to perform his obligations under this Agreement on demand, the
Indemnitee may then at any time bring legal action against him to obtain
full and complete performance of his obligations under this Agreement. In
any action brought to enforce this Agreement, on a showing by the Indemnitee
that a claim has been asserted against him relating to or arising out of the
Master Lease, Addendum No. 2, the Guarantee or this Agreement, there shall
be a presumption that Indemnitee is entitled to indemnification and
advancement of costs and expenses from Indemnitor with respect to
indemnification.
6. NON-EXCLUSIVITY; LIMITATION OF LIABILITY
The indemnification rights granted to the Indemnitee under this
Agreement shall not be deemed exclusive of, or in limitation of, any rights
to which he may be entitled under EarthLink's certificate of incorporation or
bylaws, a vote of shareholders of EarthLink, determination by EarthLink's
Board of Directors or under an Indemnification Agreement entered into by and
between EarthLink and O'Donnell (as "Indemnitors") and Indemnitee (as
"Indemnitee") with respect to the Master lease and Addendum No. 2, or
otherwise; PROVIDED, HOWEVER, that any payments made by Indemnitor thereunder
shall be credited against any liability which Indemnitor shall be obligated
to pay under this Agreement, but only with respect to indemnification due to
Indemnitee relating to the Master Lease and Addendum No. 2.
7. MISCELLANEOUS
7.1 SUCCESSORS AND ASSIGNS
The rights granted to the Indemnitee under this Agreement shall
inure to the benefit of Indemnitee and his personal representatives, heirs,
executors, administrators and beneficiaries, and this Agreement shall be
binding on Indemnitor and his personal representatives, heirs, executors,
administrators and beneficiaries.
7.2 SEVERABILITY
To the extent permitted by applicable law, the parties, by this
Agreement, waive any provision of law that renders any provision in this
Agreement unenforceable in any respect. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision shall be held to be
prohibited by or invalid under applicable law, such provisions shall be
deemed amended to accomplish the objectives of the provision as originally
written to the fullest extent permitted by law, and all other provisions
shall remain in full force and effect.
7.3 CALIFORNIA LAW GOVERNS
This Agreement shall be governed by the laws of the State of
California.
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<PAGE>
7.4 NOTICE
Any notice, demand or other communication to the Indemnitor under
this Agreement may be addressed as follows:
Kevin O'Donnell
1896 Rising Glen Road
Los Angeles, California 90069
In witness whereof, each party to this Agreement has caused it to
be executed at Los Angeles, California on the date indicated below.
"INDEMNITEE"
Dated: December 1, 1995 /s/ Reed E. Slatkin
----------------------- ------------------------------
Reed E. Slatkin
"INDEMNITOR":
Dated: December 1, 1995 /s/ Kevin O'Donnell
----------------------- ------------------------------
Kevin O'Donnell
Pursuant to the Buy-Sell Agreement effective as of June 10, 1994,
between Sky Dayton, Reed E. Slatkin, Kevin O'Donnell, and EarthLink Network,
Inc., the undersigned hereby consents to the transfer and assignment of the
warrants referred to in the Indemnification and Participation Agreement to
which this statement is appended from Reed E. Slatkin to Kevin O'Donnell.
EARTHLINK NETWORK, INC.
By: /s/ Sky Dayton /s/ Kevin O'Donnell
-------------------------- ------------------------------
Sky Dayton, Chairman Kevin O'Donnell
/s/ Sky Dayton
-------------------------
Sky Dayton
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<PAGE>
THE BANK OF CALIFORNIA
LINE OF CREDIT NOTE
-C/D COLLATERAL-RELATED INTEREST RATE-
$250,000.00 dated effective as of June 23, 1995
Each signer of this Note ("Borrower") promises to pay to the order of The Bank
of California, N.A. ("Bank") at its office at 1401 Dove Street, Newport Beach,
CA 92660 or at such other place as Bank may designate in writing, in lawful
money of the United States of America, the principal sum of TWO HUNDRED FIFTY
THOUSAND AND NO/100 DOLLARS ($250,000.00), or so much thereof as may be advanced
and outstanding, with interest on each advance under this Note from the date it
is disbursed until maturity, whether scheduled or accelerated, at a fluctuating
rate per annum as set forth below.
The obligations evidenced by this Note are secured by the pledge of a
certificate of deposit number 96709 in the principal amount of $250,000.00,
issued and held by Bank, and all renewals of and substitutions for such
certificate of deposit ("CD").
Borrower shall pay interest on the unpaid principal balance of this Note at
2.00% in excess of the annualized percentage yield of the CD as that yield may
change from time to time during the term of the Note ("Note Rate"). In the
event the Note Rate cannot be established for any reason, the unpaid principal
balance of this Note shall bear interest at the Prime Rate (the "Prime Rate")
plus 5.0%, as the term "Prime Rate" is defined below. Absent obvious error,
Bank's determination of the interest rate from time to time in effect hereunder
shall be conclusive.
During the term of this Note, Borrower may borrow, repay and reborrow as
Borrower may elect, in minimum amounts of ONE THOUSAND AND NO/100 DOLLARS
($1,000.00) and subject to all limitations, terms and conditions contained
herein and in any other agreements or documents executed in connection with this
Note; provided, however, that the outstanding principal balance of this Note
shall at no time exceed the maximum principal amount stated above.
Interest shall be payable on the 14th day of each consecutive month beginning
the first such date after the first advance under this Note, and continuing
through June 14, 1996, on which date all accrued interest and principal
remaining unpaid shall be due and payable in full. Principal, interest, and all
other sums owed Bank under any Loan Document (as defined below) shall be
evidenced by entries in records maintained by Bank for such purpose. Each
payment on and any other credits with respect to principal, interest and all
other sums outstanding under any Loan Document shall be evidenced by entries in
such records. Bank's records shall be conclusive evidence thereof.
Notwithstanding the rights given to Borrower pursuant to California Civil Code
sections 1479 and 2822 or equivalent provisions in the laws of the state
specified in the governing law clause of this document (and any amendments or
successors thereto), to designate how payments will be applied, Borrower hereby
waives such rights and Bank shall have the right in its sole discretion to
determine the order and method of the application of payments to this and/or any
other credit facilities that may be provided by Bank to Borrower and to revise
such application prospectively or retroactively at its discretion.
Borrower hereby expressly authorizes Bank to debit Borrower's account
No 069-047820 for the amount of each payment of principal and interest and
all other sums owed Bank under any Loan Document. Borrower shall have
sufficient collected balances in said account in order that each such payment
shall be available when due.
Each advance shall be made by a deposit to Borrower's account no. 069-047820 at
Bank's Newport Beach Office, unless Borrower shall otherwise direct Bank in
writing.
Advances may be requested in writing, by telephone, telex or otherwise on behalf
of Borrower. Borrower recognizes and agrees that Bank cannot effectively
determine whether a specific request purportedly made by or on behalf of
Borrower is actually authorized or authentic. As it is in Borrower's best
interest that Bank advance funds in response to these forms of request, Borrower
assumes all risks regarding the validity, authenticity and due authorization of
any request purporting to be made by or on behalf of Borrower. Borrower
promises to repay any sums, with interest, that are advanced by Bank pursuant to
any request which Bank in good faith believes to be authorized, or when the
proceeds of any advance are deposited to the account of Borrower with Bank,
regardless of whether any individual or entity, including without limitation
Bank where the context so permits and in Bank's sole discretion ("Person"),
other than Borrower may have authority to draw against such account.
The obligation of Bank to make any advance to Borrower, the proceeds of which
are, at Borrower's request, to be wire-transferred to Borrower or any other
Person, shall be subject to all applicable laws and regulations, and the policy
of the Board of Governors of the Federal Reserve System on Reduction of Payments
System Risk in effect from time to time ("Applicable Law and Policy"). Borrower
acknowledges that, as a result of Applicable Law and Policy, the transmission of
the proceeds of any advance which Borrower has requested to be wire-transferred
may be significantly delayed.
Page 1
<PAGE>
Any unpaid payments of principal or interest on this Note shall bear interest
from their respective maturities whether scheduled or accelerated, at a
fluctuating rate per annum at all times equal to the Prime Rate plus 5%, until
paid in full, whether before or after judgment. The Prime Rate is a rate set by
Bank based upon various factors including general economic and market
conditions, and is used as a reference point for pricing certain loans. Bank
may price its loans at, or above, below the Prime Rate.
Interest and fees shall be calculated for actual days elapsed on the basis of a
360-day year, which results in higher interest payments than if a 365-day year
were used. Each change in the rate of interest shall become effective on the
date each Prime Rate change is announced within the Bank. In no event shall
Borrower be obligated to pay interest at a rate in excess of the highest rate
permitted by applicable law from time to time in effect.
The occurrence of any of the following shall (1) terminate any obligation of
Bank to make or continue the line of credit evidenced by this Note, and shall,
at Bank's option, (2) make all sums of interest, principal and any other amounts
owing under any Loan Documents immediately due and payable without notice of
default, presentment or demand for payment, protest or notice of nonpayment or
dishonor or any other notices or demands; and (3) give Bank the right to
exercise any other right or remedy provided by contract or applicable law:
(a) Borrower shall fail to make any payment of principal or interest when
due under this Note or to pay any fees or other charges when due, or
Borrower or any other Person shall fail to provide Bank with, or to perform
any obligation under this Note or any contract, instrument, addenda or
document executed in connection with this Note, including without
limitation any rate option agreement, guaranty, pledge agreement, security
agreement or deed of trust (including this Note, each a "Loan Document").
(b) Any representation or warranty made, or financial statement,
certificate or other document provided, by Borrower or any guarantor
("Guarantor") of the obligations evidenced by this Note ("Obligations")
shall prove to have been false or misleading.
(c) Borrower or any Guarantor shall fail to pay its debts generally as
they become due or shall file any petition or action for relief under any
bankruptcy, insolvency, reorganization, moratorium, creditor composition
law, or any other law for the relief of or relating to debtors; an
involuntary petition shall be filed under any bankruptcy law against
Borrower or any Guarantor, or a custodian, receiver, trustee, assignee for
the benefit of creditors, or other similar official, shall be appointed to
take possession, custody or control of the properties of Borrower or any
Guarantor; or the death, incapacity, dissolution or termination of the
business of Borrower or any Guarantor.
(d) Borrower or any Guarantor shall fail to perform under any other
agreement involving the borrowing of money, the purchase of property, the
advance of credit or any other monetary liability of any kind to any
Person; or any guaranty of the Obligations shall be revoked or terminated.
(e) Any governmental or regulatory authority shall take any action, any
defined benefit pension plan maintained by Borrower or any Guarantor
shall have any unfunded liabilities, or any other event shall occur,
any of which, in the judgment of Bank, might have a material adverse
effect on the financial condition or business of Borrower or any
Guarantor.
(f) Any sale, transfer or other disposition of all or a substantial or
material part of the assets of Borrower or any Guarantor, including
without limitation to any trust or similar entity, shall occur.
(g) Any Person shall fail to perform its obligations under the terms of
any promissory note, contract or other obligation that is held by Bank as
collateral for the Obligations; or Bank shall not have a perfected security
interest in, or shall deem itself insecure with respect to the value of,
any collateral (including, without limitation, the CD) being held for the
Obligations.
(h) Any judgment(s) shall be entered against Borrower or any Guarantor, or
any involuntary lien(s) of any kind or character shall attach to any assets
or property of Borrower or any Guarantor, any of which, in the judgment of
Bank, might have a material adverse effect on the financial condition or
business of Borrower or any Guarantor.
(i) Without Bank's prior written consent: if Borrower is a corporation,
Borrower's shareholders of record as of the date of this Note shall cease
to own a majority of the voting interest in Borrower; or any change shall
occur in the executive management or managing partner(s) of Borrower; or
any change shall occur in the corporate or legal structure of Borrower.
(j) Borrower shall fail to perform any of its duties or obligations under
any Loan Document not specifically referenced hereinabove.
No failure or delay on the part of Bank in exercising any power, right or
privilege under any Loan Document shall operate as a waiver thereof, and no
single or partial exercise of any such power, right or privilege shall preclude
any further exercise thereof or the exercise of any other power, right or
privilege.
Bank has the right at its sole option to continue to accept interest and/or
principal payments due under the Loan Documents after default, and such
acceptance shall not constitute a waiver of said default or an extension of the
maturity date unless Bank agrees otherwise in writing.
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<PAGE>
DISPUTE RESOLUTION
(a) MANDATORY MEDIATION/ARBITRATION. Any controversy or claim between or
among the parties, their agents, employees and affiliates, including but
not limited to those arising out of or relating to this Note or any related
agreements or instruments ("Subject Documents"), including without
limitation any claim based on or arising from an alleged tort, shall, at
the option of any party, and at that party's expense, be submitted to
mediation, using either the American Arbitration Association ("AAA") or
Judicial Arbitration and Mediation Services, Inc. ("JAMS"). If mediation
is not used, or if it is used and it fails to resolve the dispute within 30
days from the date AAA or JAMS is engaged, then the dispute shall be
determined by arbitration in accordance with the rules of either JAMS or
AAA (at the option of the party initiating the arbitration) and Title 9 of
the U.S. Code, notwithstanding any other choice of law provision in the
Subject Documents. All statutes of limitations or any waivers contained
herein which would otherwise be applicable shall apply to any arbitration
proceeding under this subparagraph (a). The parties agree that related
arbitration proceedings may be consolidated. The arbitrator shall prepare
written reasons for the award. Judgment upon the award rendered may be
entered in any court having jurisdiction. This subparagraph (a) shall
apply only if, at the time of the proposed submission to AAA or JAMS, none
of the obligations to Bank described in or covered by any of the Subject
Documents are secured by real property collateral or, if so secured, all
parties consent to such submission.
(b) JURY WAIVER/JUDICIAL REFERENCE. If the controversy or claim is not
submitted to arbitration as provided and limited in subparagraph (a), but
becomes the subject of a judicial action, each party hereby waives its
respective right to trial by jury of the controversy or claim. In
addition, any party may elect to have all decisions of fact and law
determined by a referee appointed by the court in accordance with
applicable statereference procedures. The party requesting the reference
procedure shall ask AAA or JAMS to provide a panel of retired judges and
the court shallselect the referee from the designated panel. The referee
shall preparewritten findings of fact and conclusions of law. Judgment
upon the awardrendered shall be entered in the court in which such
proceeding was commenced.
(c) PROVISIONAL REMEDIES, SELF HELP, AND FORECLOSURE. No provision of, or
the exercise of any rights under, subparagraph (a), shall limit the right
of any party to exercise self help remedies such as setoff, to foreclose
against any real or personal property collateral, or to obtain provisional
or ancillary remedies such as injunctive relief or the appointment of a
receiver from a court having jurisdiction before, during or after the
pendency of any mediation or arbitration. At Bank's option, foreclosure
under a deed of trust or mortgage may be accomplished either by exercise
of power of sale under the deed of trust or mortgage, or by judicial
foreclosure. The institution and maintenance of an action for judicial
relief or pursuit of provisional or ancillary remedies or exercise of self
help remedies shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to mediation or
arbitration.
To the extent any provision of the dispute resolution clause is different than
the terms of this Note, the terms of this dispute resolution clause shall
prevail.
Bank reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in, Bank's rights and
obligations under the Loan Document. In that connection, Bank may disclose all
documents and information which Bank now or hereafter may have relating to this
credit facility, Borrower, or any Guarantor or their business.
Borrower shall pay and protect, defend and indemnify Bank and Bank's employees,
officers, directors, shareholders, affiliates, correspondents, agents and
representatives (other than Bank, collectively "Agents") against, and hold Bank
and each such Agent harmless from, all claims, actions, proceedings,
liabilities, damages, losses, expenses (including, without limitation,
attorneys' fees and costs) and other amounts incurred by Bank and each such
Agent, arising from (i) the matters contemplated by this Note or any Loan
Document or (ii) any contention that Borrower has failed to comply with any law,
rule, regulation, order or directive applicable to Borrower's sales, leases or
performance of services to Borrower's customers, including without limitation
those sales, leases and services requiring consumer or other disclosures
PROVIDED, HOWEVER, that this indemnification shall not apply to any of the
foregoing incurred solely as the result of Bank's or any Agent's gross
negligence or willful misconduct. This indemnification shall survive the
payment and satisfaction of all of Borrower's obligations and liabilities to
Bank.
Borrower shall reimburse Bank for all costs and expenses, including without
limitation reasonable attorneys' fees and disbursements (and fees and
disbursements of Bank's in-house counsel) expended or incurred by Bank in any
arbitration, mediation, judicial reference, legal action or otherwise in
connection with (a) the negotiation, preparation, amendment, interpretation and
enforcement of the Loan Documents, including without limitation during any
workout, attempted workout, and/or in connection with the rendering of legal
advice as to Bank's rights, remedies and obligations under the Loan Documents,
(b) collecting any sum which becomes due Bank under any Loan Document, (c) any
proceeding for declaratory relief, any counterclaim to any proceeding, or any
appeal, or (d) the protection, preservation or enforcement of any rights of
Bank. For the purposes of this section, attorneys' fees shall include, without
limitation, fees incurred in connection with the following: (1) contempt
proceedings; (2) discovery; (3) any motion, proceeding or other activity of any
kind in connection with a bankruptcy proceeding or case arising out of or
relating to any petition under Title 11 of the United States Code, as the same
shall be in effect from time to time, or any similar law; (4) garnishment, levy,
and debtor and third party examinations; and (5) postjudgment motions and
proceedings of any kind, including without limitation any activity taken to
collect or enforce any judgment.
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<PAGE>
Each Borrower is jointly and severally liable for the obligations evidenced
by this Note, and all references to "Borrower" shall be to "each" or "any"
Borrower as the context requires.
This Note shall be governed by, and construed in accordance with, the laws of
the State of California.
EARTHLINK NETWORK, INC.,
a California corporation
/s/ Sky Dayton
- -------------------------
Sky Dayton
Title: President
Page 4
<PAGE>
THE BANK OF CALIFORNIA
SECURITY AGREEMENT: BANK IN POSSESSION
(GENERAL PLEDGE)
This Agreement is dated effective as of June 23, 1995 by EARTHLINK NETWORK,
INC., a California corporation ("Debtor") in favor of THE BANK OF CALIFORNIA,
N.A. ("Bank").
1. GRANT OF SECURITY INTEREST. Debtor hereby grants to Bank a security
interest in the following described property, and all proceeds thereof
("Collateral"):
All money and property herewith delivered to or deposited with Bank and
all money and property heretofore so delivered or deposited or which
shall hereafter be delivered to or deposited with Bank or come into the
possession, custody or control of Bank, whether constructively or
otherwise, in any manner or for any purpose whatever during the existence
of this Agreement, and whether held in a general or special account or
deposit or for safe-keeping or otherwise, and with respect to deposit
accounts or instruments, all extensions and renewals thereof,
substitutions or replacements therefor, and interest thereon; and, in the
event Debtor receives any of the above forms of property, Debtor will
immediately deliver it to Bank to be held by Bank hereunder in the same
manner as the property originally delivered hereunder.
2. INDEBTEDNESS. Debtor agrees that the Collateral is and shall be security
for the timely payment and performance of all obligations under all
Indebtedness to Bank. "Indebtedness" means all debts, obligations and
liabilities of Debtor or any one or more of them to Bank currently existing
or now or hereafter made, incurred or created, whether voluntary or
involuntary and however arising or evidenced, whether direct or acquired by
Bank by assignment or succession, whether due or not due, absolute or
contingent, liquidated or unliquidated, determined or undetermined, whether
under this Agreement or otherwise and whether Debtor or any one or more of
them may be liable individually or jointly, or whether recovery upon such
debt may be or become barred by any statute of limitations or otherwise
unenforceable; and all renewals, extensions and modifications thereof; and
all attorneys' fees and costs incurred by Bank in connection with the
collection and enforcement thereof; PROVIDED, HOWEVER, that this Agreement
shall not secure, unless Debtor shall otherwise agree in writing, such
liabilities which are or may hereafter be "consumer credit" subject to the
disclosure requirements of the federal Truth-in-Lending Law or any similar
state law in effect from time to time; and provided further that any deed of
trust or mortgage which secures any Collateral shall not be security for any
Indebtedness but is and shall be security solely for the Collateral, unless
otherwise agreed in writing by the applicable trustor or mortgagor and Bank.
The Collateral granted under this Agreement shall for all purposes be deemed
to be personal property and not real property security. Any writing which
evidences or is an agreement in respect to all or any portion of the
Indebtedness is a "Loan Document".
3. DEBTOR'S COVENANTS. Debtor hereby represents, warrants and agrees that:
(a) Debtor or any or more of them has acquired, or forthwith will
acquire and maintain, all portions of the marketable title to the
Collateral described herein and will at all times keep the Collateral
free of all liens, encumbrances and claims of any kind or nature other
than the security interest of Bank therein;
(b) Debtor will not sell, transfer, lease or otherwise dispose of any of
the Collateral or any interest therein to any individual or entity,
including without limitation Bank where the context so permits and in
Bank's sole discretion ("Person");
(c) The Collateral complies with all applicable laws, regulations,
interpretations and orders concerning form, content and manner of
preparation and execution;
(d) Debtor will pay when due and prior to delinquency all taxes, levies,
assessments or other claims which are or may become liens against the
Collateral;
(e) Debtor will neither make nor permit any material change in the
Collateral without the prior written consent of the Bank;
(f) Debtor will deliver to Bank promptly (i) all Collateral, (ii) except
as otherwise provided herein, all proceeds of the Collateral, (iii) such
specific acknowledgments, assignments, or other agreements or writings as
Bank may request relating to the Collateral, and (iv) such records and
other reports in such form and detail and at such times as Bank may
require relating to the Collateral;
(g) Debtor will give prompt notice to Bank of any threatened or asserted
dispute or claim with respect to the Collateral, any decrease in the
value of any Collateral and the amount of such decrease (other than as
reflected on any securities exchange or other market publication), any
litigation or administrative or regulatory proceeding which may have a
material adverse effect on Debtor or its business, and the occurrence of
any Event of Default or of any other development, financial or otherwise,
which might materially adversely affect the Collateral or Debtor's
ability to perform its obligations to Bank;
Page 1 of 5
<PAGE>
(h) Debtor will execute and deliver to Bank, and file or record at
Debtor's expense, all notices and other document from time to time
requested by Bank to maintain a first perfected security interest in the
Collateral in favor of Bank, all in form and substance satisfactory to
Bank, and perform such other acts, and execute and deliver to Bank such
additional assignments, agreements and instruments, as Bank may at any
time request in connection with the administration and enforcement of
this Agreement or Bank's rights, powers and remedies hereunder;
(i) If the Collateral shall at any time become unsatisfactory to Bank,
Debtor shall, upon demand, pledge, assign, transfer and deposit with Bank
and grant to Bank a continuing security interest in and to such
additional property, satisfactory to Bank, as Bank may request;
(j) Debtor will not change its name, mailing address, the nature of its
business, or its legal structure.
4. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an Event of Default under this Agreement:
(a) Debtor shall fail to pay any fees or other charges when due under
this Agreement, or Debtor or any other Person shall fail to provide Bank
with, or to perform any obligation under, this Agreement or any Loan
Document;
(b) Any representation or warranty made, or financial statement,
certificate or other document provided by, Debtor or any guarantor of the
Indebtedness ("Guarantor") to Bank shall prove to have been false or
misleading;
(c) Debtor or any Guarantor shall fail to pay its debts generally as
they become due or shall file any petition or action for relief under any
bankruptcy, insolvency, reorganization, moratorium, creditor composition
law, or any other law for the relief of or relating to debtors; an
involuntary petition shall be filed under any bankruptcy law against
Debtor or any Guarantor, or a custodian, receiver, trustee, assignee for
the benefit of creditors, or other similar official, shall be appointed
to take possession, custody or control of the properties of Debtor or any
Guarantor, or the death, incapacity, dissolution or termination of the
business of Debtor or any Guarantor;
(d) Debtor or any Guarantor shall fail to perform under any other
agreement involving the borrowing of money, the purchase of property, the
advance of credit or any other monetary liability of any kind to any
Person; or any guaranty of the Indebtedness shall be revoked or
terminated;
(e) Any governmental or regulatory authority shall take any action, any
defined benefit pension plan maintained by Debtor or any Guarantor shall
have any unfunded liabilities, or any other event shall occur, any of
which, in the judgment of Bank, might have a material adverse effect on
the financial condition or business of Debtor or any Guarantor;
(f) Any sale, transfer or other disposition of all or a material part of
the assets of Debtor or any Guarantor, including without limitation to
any trust or similar entity, shall occur;
(g) Any person shall fail to perform its obligations under the terms of
any contract or other obligation that is held by Bank as Collateral; or
Bank shall not have a first perfected security interest in any Collateral;
(h) Any judgment(s) shall be entered against Debtor or any Guarantor, or
any involuntary lien(s) of any kind or character shall attach to any
assets or property of Debtor or any Guarantor, any of which, in the
judgment of Bank, will have a material adverse effect on the financial
condition or business of Debtor or any Guarantor;
(i) Without Bank's prior written consent: if Debtor is a corporation,
Debtor's shareholders of record as of the Closing Date shall cease to own
a majority of the voting interest in Debtor, any change shall occur in
the executive management or managing partner(s) of Debtor; or any change
shall occur in the corporate or legal structure of Debtor;
(j) Any deterioration or impairment of any of the Collateral or any
decline or depreciation in the value or market price thereof (whether
actual or reasonably anticipated), which causes the Collateral, in Bank's
judgment, to become unsatisfactory as to character or value;
(k) Bank reasonably determines, in good faith, that its security
interest in the Collateral or the prospect of payment or performance
under this Agreement or any Loan Document secured hereby is materially
impaired;
(l) Bank, in good faith, believes any or all of the Collateral to be in
danger of misuse, dissipation, commingling, loss, theft, damage or
destruction, or otherwise in jeopardy;
(m) Debtor shall fail to perform any of its duties or obligations under
this Agreement not specifically referred to in this Section 4.
5. RIGHTS ON DEFAULT.
(a) Upon the occurrence of an Event of Default, all Indebtedness shall,
at the option of Bank, without demand or notice, become immediately due
and payable. Bank shall have all other rights and remedies available
under contract or applicable law, which include those of a secured party
under the Uniform Commercial Code, at law, or in equity, and the right to
take possession of the Collateral (if not then in Bank's possession), and
sell and dispose of the same, or any part thereof, at public or private
sale.
Page 2 of 5
<PAGE>
(b) The proceeds of any sale or disposition shall be applied
first to the reasonable expenses of retaking, holding, preparing for
sale, discharging all liens, selling and the like, then to the
attorneys' fees and legal expenses incurred by Bank, and then to the
Indebtedness in such order as Bank may determine. Notwithstanding the
rights given to Debtor pursuant to California Civil Code sections 1479
and 2822 or equivalent provisions in the laws of the state specified in
the governing law clause of this document (and any amendments or
successors thereto), to designate how payments will be applied, Debtor
hereby waives such rights and Bank shall have the right in its sole
discretion to determine the order and method of the application of
payments received from Debtor or from the sale or disposition of the
Collateral and to revise such application prospectively or retroactively
at its discretion.
(c) Person(s) liable for all or any portion of Indebtedness
shall remain liable for the unsatisfied portion of such Indebtedness,
and shall promptly pay the same to Bank immediately and without demand,
with interest thereon at the rate provided in the Loan Document
applicable thereto, or, if no rate is otherwise provided, at the rate of
interest applicable to the unsatisfied amount of a money judgment of a
court of the state whose laws govern this Agreement. Should the net
proceeds resulting from any such sale or disposition exceed the amount
owing to Bank, Bank shall pay such surplus to the Person(s) legally
entitled thereto.
(d) The obligations of Debtor under this Agreement shall continue
to be effective or be reinstated, as the case may be, if at any time any
payment of any Indebtedness is rescinded or must otherwise be returned
by Bank upon, on account of, or in connection with, the insolvency,
bankruptcy or reorganization of Borrower, Debtor or otherwise, all as
though such payment had not been made.
6. COSTS AND EXPENSES. Debtor promises, to the extent permitted by
applicable law, to reimburse Bank promptly for all costs and expenses
incurred by Bank in performing any agreement of Debtor which Debtor shall
fail to perform, or in taking any other action which Bank deems necessary for
the maintenance or preservation of any Collateral or its interest therein,
which costs and expenses shall constitute Indebtedness under this Agreement.
7. POWER OF ATTORNEY.
(a) Debtor hereby irrevocably appoints Bank, or any officer
thereof, as Debtor's true and lawful attorney-in-fact coupled with an
interest, with full power of substitution, to sign or endorse any
instrument, document, or other writing necessary or desirable to
transfer title or other rights to or in any of the Collateral; and to
do all acts necessary or incidental to assert, protect and enforce
Bank's rights in the Collateral and under this Agreement Debtor agrees
that Debtor will reimburse Bank promptly upon demand for any expenses
Bank may incur while acting as Debtor's attorney-in-fact, which expenses
shall constitute Indebtedness under this Agreement.
(b) At any time, without notice, and at the expense of Debtor,
Bank in its name or in the name of Debtor may, but shall not be
obligated to (i) collect by legal proceedings or otherwise, endorse,
receive and receipt for all dividends, interest, principal payments and
other sums now or hereafter payable upon or on account of the
Collateral; (ii) make any compromise or settlement it deems desirable or
proper with reference to the Collateral; (iii) insure, process and
preserve the Collateral; (iv) participate in any recapitalization,
reclassification, reorganization, consolidation, redemption, stock
split, merger or liquidation of any issuer of securities which
constitute Collateral, and in connection therewith may deposit or
surrender control of the Collateral, accept money or other property in
exchange for the Collateral, and take such action as it deems proper in
connection therewith, and any other money or property received in
exchange for the Collateral shall be applied to the Indebtedness or held
by Bank thereafter as Collateral pursuant to the provisions hereof; (v)
cause Collateral to be transferred to its name or to the name of its
nominee; (vi) exercise as to the Collateral all the rights, powers and
remedies of an owner necessary to exercise its rights, subject to
Section 5(c).
8. WAIVERS OF DEBTOR. Debtor waives any right to require Bank to proceed
against any Person, or to exhaust any Collateral or to pursue any remedy in
Bank's power whatsoever. Bank shall not be required to make presentment,
demand or protest, or give any notices thereof, or take any action to preserve
rights against prior parties with respect to any of the Collateral. Debtor
waives the right to plead any statute of limitations or any defense to the
personal liability of Debtor as a defense to Bank's exercise of any right or
remedy hereunder.
9. NON-WAIVER. Bank may, in the exercise of its sole discretion, waive
an Event of Default, or cure an Event of Default at Debtor's expense. Any
such waiver shall be subject to Section 11(c) below.
10. BANK'S DUTIES.
(a) Bank's sole duty with respect to the Collateral in its possession
shall be to use reasonable care in the custody and preservation thereof.
Bank shall be deemed to have exercised reasonable care in the custody
and preservation of such Collateral if such Collateral is accorded
treatment substantially equal to that which Bank accords its own
property, it being understood that Bank shall not have any
responsibility for ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, declining value, tenders or other
matters relative to any Collateral, regardless of whether Bank has or is
deemed to have knowledge of such matters; or taking any necessary steps
to preserve any rights against any Person with respect to any
Collateral. Under no circumstances shall Bank be responsible for any
injury or loss to the Collateral, or any part thereof, arising from any
cause beyond the reasonable control of Bank.
(b) Bank may at any time deliver the Collateral or any part thereof to
Debtor and the receipt of Debtor shall be a complete and full
acquittance for the Collateral so delivered, and Bank shall thereafter
be discharged from any liability or responsibility therefor.
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<PAGE>
11. GENERAL PROVISIONS.
(a) NOTICES. Any notices given by any party under this Agreement
or any Loan Document shall be in writing and personally delivered,
deposited in the United States mail, postage prepaid, or sent by telex
or other authenticated message, charges prepaid, and addressed as
follows:
To Debtor: To Bank:
EARTHLINK NETWORK, INC.,
a California corporation The Bank of California, N.A.
3171 Los Feliz Blvd., Suite 203 1401 Dove Street
Los Angeles, CA 90039 Newport Beach, CA 92660
Attn: Sky Dayton, President Attn: Stephen Stogsdill
Vice President
FAX or Telex No._______________ FAX or Telex No. (714) 752-1854
Each party may change the address to which notices, requests and other
communications are to be sent by giving written notice of such change
to each other party.
(b) BINDING EFFECT. This Agreement shall be binding upon Debtor,
its permitted successors, representatives and assigns, and shall inure
to the benefit of Bank and its successors, representatives and assigns;
provided however that Debtor may not assign or transfer's Debtor's
obligations under this Agreement without Bank's prior written consent.
Bank reserves the right to sell, assign, or transfer its rights and
powers under this Agreement, in whole or in part without notice to
Debtor. In that connection, Bank may disclose all documents and
information which Bank now or hereafter may have relating to this
Agreement, Debtor or Debtor's business.
(c) NO WAIVER. Any waiver, consent or approval by Bank of any
Event of Default or breach of any provision, condition or covenant of
this Agreement or any Loan Document must be in writing and shall be
effective only to the extent set forth in writing. No waiver of any
breach or default shall be deemed a waiver of any later breach or
default of the same or any other provision of this Agreement or any of
the Loan Documents. No failure or delay on the part of Bank in
exercising any power, right or privilege under this Agreement or any
Loan Document shall operate as a waiver thereof, and no single or
partial exercise of any such power, right or privilege shall preclude
any further exercise thereof, or the exercise of any further power,
right or privilege.
(d) RIGHTS CUMULATIVE. All rights and remedies existing under this
Agreement are cumulative to, and not exclusive of, any other rights or
remedies available under contract or applicable law.
(e) UNENFORCEABLE PROVISIONS. Any provision of this Agreement
which is prohibited or unenforceable in any jurisdiction shall be so
only as to such jurisdiction and only to the extent of such prohibition
or unenforceability, but all the remaining provisions of this Agreement
shall remain valid and enforceable.
(f) GOVERNING LAW/WAIVER OF NOTICE. Except as may be otherwise
provided by the Uniform Commercial Code or in any addendum hereto, this
Agreement shall be governed by and construed in accordance with the
laws of the State of California. To the fullest extent permitted by
law, Debtor hereby waives presentment, demand, protest, notice of
dishonor and all other notices and demands, as well as any applicable
statute of limitations.
(g) INDEMNIFICATION. Debtor shall pay and protect, defend and
indemnify Bank and Bank's employees, officers, directors, shareholders,
affiliates, correspondents, agents and representatives (other than
Bank, collectively "Agents") against, and hold Bank and each such Agent
harmless from, all claims, actions, proceedings, liabilities, damages,
losses, expenses (including, without limitation, attorneys' fees and
costs) and other amounts incurred by Bank and each such Agent, arising
from the matters contemplated by this Agreement; provided, however,
that this indemnification shall not apply to any of the foregoing
incurred solely as the result of Bank's or any Agent's gross negligence
or willful misconduct. This indemnification shall survive the payment
and satisfaction of all of Debtor's obligations and liabilities to
Bank.
(h) REIMBURSEMENT. Debtor shall reimburse Bank for all costs and
expenses, including without limitation reasonable attorneys' fees and
disbursements (and fees and disbursements of Bank's in-house counsel)
expended or incurred by Bank in any arbitration, mediation, judicial
reference, legal action or otherwise in connection with (a) the
negotiation, preparation, amendment, interpretation and enforcement of
this Agreement, including without limitation during any workout,
attempted workout, and/or in connection with the rendering of legal
advice as to Bank's rights, remedies and obligations under this
Agreement, (b) collecting any sum which becomes due Bank under this
Agreement, (c) any proceeding for declaratory relief, any counterclaim
to any proceeding, or any appeal, or (d) the protection, preservation
or enforcement of any rights of Bank. For the purposes of this section,
attorneys' fees shall include, without limitation, fees incurred in
connection with the following: (1) contempt proceedings; (2) discovery;
(3) any motion, proceeding or other activity of any kind in connection
with a bankruptcy proceeding or case arising out of or relating to any
petition under Title 11 of the United States Code, as the same shall
be in effect from time to time, or any similar law; (4) garnishment,
levy, and debtor and third party examinations; and (5) postjudgment
motions and proceedings of any kind, including without limitation any
activity taken to collect or enforce any judgment.
Page 4 of 5
<PAGE>
(i) MULTIPLE DEBTORS. In all cases where there is more than one
Debtor, or when this Agreement is executed by more than one Debtor, the
term "Debtor" shall include each or any Debtor, and all terms appearing
in the singular shall be deemed to have been used in the plural where
the context and construction so require.
(j) JOINT AND SEVERAL. Should more than one Person sign this
Agreement as Debtor, the obligations of each signer shall be joint and
several.
(k) ENTIRE AGREEMENT. This Agreement is intended by Debtor and
Bank as the final expression of Debtor's obligations to Bank in
connection with the Collateral and supersedes all prior understandings
or agreements concerning the subject matter hereof. This Agreement may
be amended only by a writing signed by Debtor and accepted by Bank in
writing.
IN WITNESS WHEREOF, Debtor has executed this Agreement as of the date of the
preamble.
DEBTOR
EARTHLINK NETWORK, INC.,
a California corporation
/s/ SKY DAYTON
_______________________________________
Sky Dayton
President
_______________________________________
Page 5 of 5
<PAGE>
THE BANK OF CALIFORNIA
LINE OF CREDIT NOTE
- C/D COLLATERAL-RELATED INTEREST RATE
$1,000,000.00 dated effective as of November 2, 1995
Each signer of this Note ("Borrower") promises to pay to the order of The
Bank of California, N.A. ("Bank") at its office at 1401 Dove Street,
Newport Beach, CA 92660 or at such other place as Bank may designate in
writing, in lawful money of the United States of America, the principal sum
of One Million and No/100 Dollars ($1,000,000.00), or so much thereof as may
be advanced and outstanding, with interest on each advance under this Note
from the date it is disbursed until maturity, whether scheduled or
accelerated, at a fluctuating rate per annum as set forth below.
The obligations evidenced by this Note are secured by the pledge of a
certificate of deposit number 96732 the principal amount of $1,000,000.00,
issued and held by Bank, and all renewals of and substitutions for such
certificate of deposit ("CD").
Borrower shall pay interest on the unpaid principal balance of this Note at
1.50% in excess of the annualized percentage yield of the CD as that yield
may change from time to time during the term of the Note ("Note Rate"). In
the event the Note Rate cannot be established for any reason, the unpaid
principal balance of this Note shall bear interest at the Prime Rate (the
"Prime Rate") plus 5%, as the term "Prime Rate" is defined below. Absent
obvious error, Bank's determination of the interest rate from time to time in
effect hereunder shall be conclusive.
During the term of this Note, Borrower may borrow, repay and reborrow as
Borrower may elect, in minimum amounts of One Thousand and No/100 Dollars
($1,000.00) and subject to all limitations, terms and conditions contained
herein and in any other agreements or documents executed in connection with
this Note; provided, however, that the outstanding principal balance of this
Note shall at no time exceed the maximum principal amount stated above.
Interest shall be payable on the last day of each consecutive month beginning
the first such date after the first advance under this Note, and continuing
through October 31, 1996, on which date all accrued interest and principal
remaining unpaid shall be due and payable in full. Principal, interest, and
all other sums owed Bank under any Loan Document (as defined below) shall be
evidenced by entries in records maintained by Bank for such purpose. Each
payment on and any other credits with respect to principal, interest and all
other sums outstanding under any Loan Document shall be evidenced by entries
in such records. Bank's records shall be conclusive evidence thereof.
Notwithstanding the rights given to Borrower pursuant to California Civil
Code sections 1479 and 2822 or equivalent provisions in the laws of the state
specified in the governing law clause of this document (and any amendments or
successors thereto), to designate how payments will be applied, Borrower
hereby waives such rights and Bank shall have the right in its sole
discretion to determine the order and method of the application of payments
to this and/or any other credit facilities that may be provided by Bank to
Borrower and to revise such application prospectively or retroactively at its
discretion.
Borrower hereby expressly authorizes Bank to debit Borrower's account no.
069-047820 for the amount of each payment of principal and interest and all
other sums owed Bank under any Loan Document. Borrower shall have sufficient
collected balances in said account in order that each such payment shall be
available when due.
Each advance shall be made by a deposit to Borrower's account no. 069-047820
at Bank's Newport Beach Office, unless Borrower shall otherwise direct Bank
in writing.
Advances may be requested in writing, by telephone, telex or otherwise on
behalf of Borrower. Borrower recognizes and agrees that Bank cannot
effectively determine whether a specific request purportedly made by or on
behalf of Borrower is actually authorized or authentic. As it is in
Borrower's best interest that Bank advance funds in response to these forms
of request, Borrower assumes all risks regarding the validity, authenticity
and due authorization of any request purporting to be made by or on behalf of
Borrower. Borrower promises to repay any sums, with interest, that are
advanced by Bank pursuant to any request which Bank in good faith believes to
be authorized, or when the proceeds of any advance are deposited to the
account of Borrower with Bank, regardless of whether any individual or
entity, including without limitation Bank where the context so permits and in
Bank's sole discretion ("Person"), other than Borrower may have authority to
draw against such account.
The obligation of Bank to make any advance to Borrower, the proceeds of which
are, at Borrower's request, to be wire-transferred to Borrower or any other
Person, shall be subject to all applicable laws and regulations, and the
policy of the Board of Governors of the Federal Reserve System on Reduction
of Payments System Risk in effect from time to time ("Applicable Law and
Policy"). Borrower acknowledges that, as a result of Applicable Law and
Policy, the transmission of the proceeds of any advance which Borrower has
requested to be wire-transferred may be significantly delayed.
Any unpaid payments of principal or interest on this Note shall bear interest
from their respective maturities, whether scheduled or accelerated, at a
fluctuating rate per annum at all times equal to the Prime Rate plus 5%,
until paid in full, whether before or after judgment. The Prime Rate is a
rate set by Bank based upon various
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<PAGE>
factors including general economic and market conditions, and is used as a
reference point for pricing certain loans. Bank may price its loans at,
above, or below the Prime Rate.
Interest and fees shall be calculated for actual days elapsed on the basis of
a 360-day year, which results in higher interest payments than if a 365-day
year were used. Each change in the rate of interest shall become effective on
the date each Prime Rate change is announced within the Bank. In no event
shall Borrower be obligated to pay interest at a rate in excess of the
highest rate permitted by applicable law from time to time in effect.
The occurrence of any of the following shall (1) terminate any obligation of
Bank to make or continue the line of credit evidenced by this Note, and
shall, at Bank's option, (2) make all sums of interest, principal and any
other amounts owing under any Loan Documents immediately due and payable
without notice of default, presentment or demand for payment, protest or
notice of nonpayment or dishonor or any other notices or demands; and (3)
give Bank the right to exercise any other right or remedy provided by
contract or applicable law:
(a) Borrower shall fail to make any payment of principal or interest
when due under this Note or to pay any fees or other charges when due, or
Borrower or any other Person shall fail to provide Bank with, or to
perform any obligation under this Note or any contract, instrument,
addenda or document executed in connection with this Note, including
without limitation any rate option agreement, guaranty, pledge agreement,
security agreement or deed of trust (including this Note, each a "Loan
Document").
(b) Any representation or warranty made, or financial statement,
certificate or other document provided, by Borrower or any guarantor
("Guarantor") of the obligations evidenced by this Note ("Obligations")
shall prove to have been false or misleading.
(c) Borrower or any Guarantor shall fail to pay its debts generally as
they become due or shall file any petition or action for relief under any
bankruptcy, insolvency, reorganization, moratorium, creditor composition
law, or any other law for the relief of or relating to debtors; an
involuntary petition shall be filed under any bankruptcy law
against Borrower or any Guarantor, or a custodian, receiver, trustee,
assignee for the benefit of creditors, or other similar official, shall
be appointed to take possession, custody or control of the properties of
Borrower or any Guarantor; or the death, incapacity, dissolution or
termination of the business of Borrower or any Guarantor.
(d) Borrower or any Guarantor shall fail to perform under any other
agreement involving the borrowing of money, the purchase of property, the
advance of credit or any other monetary liability of any kind to any
Person; or any guaranty of the Obligations shall be revoked or
terminated.
(e) Any governmental or regulatory authority shall take any action,
any defined benefit pension plan maintained by Borrower or any Guarantor
shall have any unfunded liabilities, or any other event shall occur, any
of which, in the judgment of Bank, might have a material adverse effect
on the financial condition or business of Borrower or any Guarantor.
(f) Any sale, transfer or other disposition of all or a substantial or
material part of the assets of Borrower or any Guarantor, including
without limitation to any trust or similar entity, shall occur.
(g) Any Person shall fail to perform its obligations under the terms
of any promissory note, contract or other obligation that is held by Bank
as collateral for the Obligations; or Bank shall not have a perfected
security interest in, or shall deem itself insecure with respect to the
value of, any collateral (including, without limitation, the CD) being
held for the Obligations.
(h) Any judgment(s) shall be entered against Borrower or any
Guarantor, or any involuntary lien(s) of any kind or character shall
attach to any assets or property of Borrower or any Guarantor, any of
which, in the judgment of Bank, might have a material adverse effect on
the financial condition or business of Borrower or any Guarantor.
(i) Without Bank's prior written consent: if Borrower is a
corporation, Borrower's shareholders of record as of the date of this
Note shall cease to own a majority of the voting interest in Borrower; or
any change shall occur in the executive management or managing partner(s)
of Borrower; or any change shall occur in the corporate or legal
structure of Borrower.
(j) Borrower shall fail to perform any of its duties or obligations
under any Loan Document not specifically referenced hereinabove.
No failure or delay on the part of Bank in exercising any power, right or
privilege under any Loan Document shall operate as a waiver thereof, and no
single or partial exercise of any such power, right or privilege shall
preclude any further exercise thereof or the exercise of any other power,
right or privilege.
Bank has the right at its sole option to continue to accept interest and/or
principal payments due under the Loan Documents after default, and such
acceptance shall not constitute a waiver of said default or an extension of
the maturity date unless Bank agrees otherwise in writing.
DISPUTE RESOLUTION
(a) MANDATORY MEDIATION/ARBITRATION. Any controversy or claim between
or among the parties, their
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<PAGE>
agents, employees and affiliates, including but not limited to those
arising out of or relating to this Note or any related agreements or
instruments ("Subject Documents"), including without limitation any
claim based on or arising from an alleged tort, shall, at the option
of any party, and at that party's expense, be submitted to mediation,
using either the American Arbitration Association ("AAA") or Judicial
Arbitration and Mediation Services, Inc. ("JAMS"). If mediation is
not used, or if it is used and it fails to resolve the dispute within
30 days from the date AAA or JAMS is engaged, then the dispute shall
be determined by arbitration in accordance with the rules of either
JAMS or AAA (at the option of the party initiating arbitration) and
Title 9 of the U.S. Code, notwithstanding any other choice of law
provision in the Subject Documents. All statutes of limitations or
any waivers contained herein which would otherwise be applicable shall
apply to any arbitration proceeding under this subparagraph (a). The
parties agree that related arbitration proceedings may be consolidated.
The arbitrator shall prepare written reasons for the award. Judgment
upon the award rendered may be entered in any court having jurisdiction.
This subparagraph (a) shall apply only if, at the time of the
proposed submission to AAA or JAMS, none of the obligations to Bank
described in or covered by any of the Subject Documents are secured
by real property collateral or, if so secured, all parties consent to
such submission.
(b) JURY WAIVER/JUDICIAL REFERENCE. If the controversy or claim is not
submitted to arbitration as provided and limited in subparagraph (a),
but becomes the subject of a judicial action, each party hereby
waives its respective right to trial by jury of the controversy or
claim. In addition, any party may elect to have all decisions of fact
and law determined by a referee appointed by the court in accordance
with applicable state reference procedures. The party requesting the
reference procedure shall ask AAA or JAMS to provide a panel of
retired judges and the court shall select the referee from the
designated panel. The referee shall prepare written findings of fact
and conclusions of law. Judgment upon the award rendered shall be
entered in the court in which such proceeding was commenced.
(c) PROVISIONAL REMEDIES, SELF HELP, AND FORECLOSURE. No provision of,
or the exercise of any rights under, subparagraph (a), shall limit the
right of any party to exercise self help remedies such as setoff, to
foreclose against any real or personal property collateral, or to
obtain provisional or ancillary remedies such as injunctive relief or
the appointment of a receiver from a court having jurisdiction
before, during or after the pendency of any mediation or arbitration.
At Bank's option, foreclosure under a deed of trust or mortgage may
be accomplished either by exercise of power of sale under the deed of
trust or mortgage, or by judicial foreclosure. The institution and
maintenance of an action for judicial relief or pursuit of
provisional or ancillary remedies or exercise of self help remedies
shall not constitute a waiver of the right of any party, including
the plaintiff, to submit the controversy or claim to mediation or
arbitration.
To the extent any provision of the dispute resolution clause is different
than the terms of this Note, the terms of this dispute resolution clause
shall prevail.
Bank reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in, Bank's rights and
obligations under the Loan Documents. In that connection, Bank may disclose
all documents and information which Bank now or hereafter may have relating
to this credit facility, Borrower, or any Guarantor or their business.
Borrower shall pay and protect, defend and indemnify Bank and Bank's
employees, officers, directors, shareholders, affiliates, correspondents,
agents and representatives (other than Bank, collectively "Agents") against,
and hold Bank and each such Agent harmless from, all claims, actions,
proceedings, liabilities, damages, losses, expenses (including, without
limitation, attorneys' fees and costs) and other amounts incurred by Bank and
each such Agent, arising from (i) the matters contemplated by this Note or any
Loan Document or (ii) any contention that Borrower has failed to comply with any
law, rule, regulation, order or directive applicable to Borrower's sales, leases
or performance of services to Borrower's customers, including without limitation
those sales, leases and services requiring consumer or other disclosures;
PROVIDED, HOWEVER, that this indemnification shall not apply to any of the
foregoing incurred solely as the result of Bank's or any Agent's gross
negligence or willful misconduct. This indemnification shall survive the payment
and satisfaction of all of Borrower's obligations and liabilities to Bank.
Borrower shall reimburse Bank for all costs and expenses, including without
limitation reasonable attorneys' fees and disbursements (and fees and
disbursements of Bank's in-house counsel) expended or incurred by Bank in any
arbitration, mediation, judicial reference, legal action or otherwise in
connection with (a) the negotiation, preparation, amendment, interpretation
and enforcement of the Loan Documents, including without limitation during
any workout, attempted workout, and/or in connection with the rendering of
legal advice as to Bank's rights, remedies and obligations under the Loan
Documents, (b) collecting any sum which becomes due Bank under any Loan
Document, (c) any proceeding for declaratory relief, any counterclaim to any
proceeding, or any appeal, or (d) the protection, preservation or enforcement
of any rights of Bank. For the purposes of this section, attorneys' fees
shall include, without limitation, fees incurred in connection with the
following: (1) contempt proceedings; (2) discovery; (3) any motion,
proceeding or other activity of any kind in connection with a bankruptcy
proceeding or case arising out of or relating to any petition under Title 11
of the United States Code, as the same shall be in effect from time to time,
or any similar law; (4) garnishment, levy, and debtor and third party
examinations; and (5) postjudgment motions and proceedings of any kind,
including without limitation any activity taken to collect or enforce any
judgment.
Each Borrower is jointly and severally liable for the obligations evidenced
by this Note, and all references to "Borrower" shall be to "each" or "any"
Borrower as the context requires.
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<PAGE>
This Note shall be governed by, and construed in accordance with, the laws of
the State of California.
Earthlink Network, Inc.,
a California corporation
/s/ SKY DAYTON
________________________________________
By: Sky Dayton
Title: President/Secretary
THE BANK OF CALIFORNIA
National Association
400 CALIFORNIA ST.
SAN FRANCISCO, CA 94104
Page 4
<PAGE>
NMC.516/96
PRODUCTION AND DISTRIBUTION AGREEMENT
THIS PRODUCTION AND DISTRIBUTION AGREEMENT ("Agreement") is dated May 6,
1996 and is between EARTHLINK NETWORK, INC., a California corporation
("EarthLink"), and NATIONAL MEDIA CORPORATION, a Delaware corporation
("National").
The parties wish to set forth in this Agreement the terms upon which
EarthLink will grant to National certain rights to market and distribute
EarthLink's proprietary EarthLink Network-Registered Trademark-
TotalAccess-Trademark- Internet Access software for the Macintosh, Windows 95
and Windows 3.1 platforms (such software, as it presently exists and as it
may hereafter be modified, collectively referred to as the "Software") and
EarthLink's Internet Access Service (the "ELN Service"), all as more
specifically set forth herein.
In consideration of the mutual promises and undertakings set forth
herein, and intending to be legally bound hereby, the parties agree as follows:
1. LICENSE RIGHTS.
1.1 GRANT OF RIGHTS. Subject to all of the terms and conditions
of this Agreement, EarthLink hereby grants to National the following rights
(collectively, the "License Rights"), which National may exercise itself or
through any one or more of its existing and future subsidiaries under its
control:
(a) EXCLUSIVE MARKETING RIGHTS. The exclusive right to
advertise, promote, market, sell and otherwise distribute the Software and
the ELN Service throughout the United States, Canada and such other countries
as the parties may from time to time agree (collectively, the "Territory")
via airings, on broadcast, cable, satellite and all other forms of
television transmission now existing or hereafter developed, of short-form
(i.e. two minutes running time or less) direct response television
programming; and
(b) USE OF INTELLECTUAL PROPERTY AND PROMOTIONAL MATERIALS.
In connection with the exercise of its rights hereunder, and subject to the
prior approval of EarthLink (which will not be unreasonably withheld or
delayed), the nonexclusive right to: (a) use any and all trademarks, trade
names, copyrights, trade secrets and other intellectual property rights which
EarthLink may own or control with respect to the Software and the ELN Service
(including, without limitation those specifically identified on Schedule I
attached hereto), and (b) reproduce, copy and otherwise use any and all artwork,
graphics and other promotional materials which EarthLink owns or controls with
respect to the Software and the ELN Service ("EarthLink's Promotional
Materials"), copies of all of which EarthLink shall provide to National as soon
as practicable after the execution of this Agreement.
1.2 EXCEPTIONS TO EXCLUSIVITY.
(a) AMERICAN INTERACTIVE MEDIA. The parties acknowledge
that, pursuant to preexisting contractual arrangements between EarthLink and
American Interactive Media ("AIM"), EarthLink granted nonexclusive rights to
AIM to market the Software and the ELN Service in the United States and
Canada via short-form direct response television programming. EarthLink
believes that AIM has
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concluded and discontinued all such marketing efforts. Nonetheless, the License
Rights shall in all events be subject to the valid exercise of such rights by
AIM so long as AIM shall retain such rights.
(b) GUTHY RENKER CORPORATION. The parties acknowledge that
EarthLink has previously granted certain nonexclusive rights to Guthy Renker
Corporation ("GRC") to market the Software and the ELN Service when bundled
with other products and services marketed by GRC, such rights to be formally
acknowledged in writing pursuant to a Distribution Agreement dated on or about
April 18, 1996 (the "GRC Distribution Agreement"). Accordingly, the License
Rights shall in all events be subject to the valid exercise of the rights
granted to GRC under the GRC Distribution Agreement for so long as GRC shall
retain such rights.
1.3 LOSS OF EXCLUSIVITY. In the event that National fails, for a
period of four consecutive weeks, to air the EarthLink Spots as contemplated by
Sections 2.2(a) and (b) of this Agreement in any country within the Territory,
then National's -rights -pursuant to Section 1.l of this Agreement shall cease
being exclusive in such country, and EarthLink, by itself or through any
licensee, may exercise such rights in such country concurrently with National's
exercise of such rights.
2. PRODUCTION AND AIRING OF EARTHLINK SPOTS.
2.1 PRODUCTION OF EARTHLINK SPOTS. National, through its
employees, agents and/or independent contractors, shall write, produce and edit
two television direct response advertisements (collectively, the "EarthLink
Spots"), one of approximately 15 seconds in length (the "Short Spot") and one of
approximately 60 seconds in length (the "Long Spot"). National shall bear all
costs incurred from and after the date of this Agreement in connection with the
production, editing and airing of the EarthLink Spots. National shall consult
with EarthLink with respect to the production of the EarthLink Spots, each of
which shall be subject to EarthLink's approval, which shall neither be
unreasonably withheld nor delayed. To that end, National shall provide
EarthLink with a review copy of each preliminary version of each of the
EarthLink Spots as promptly as practicable.
2.2 AIRING OF EARTHLINK SPOTS.
(a) SHORT SPOT. During the six-month period immediately
following EarthLink's approval of the Short Spot, National shall take such
steps as are necessary to add such Spot to the beginning or end of each 30-
minute infomercial which National airs on television in the Territory.
Following the conclusion of such six-month period, National shall air the Short
Spot in conjunction with each 30-minute infomercial which National airs in the
Territory for the balance of the term of this Agreement.
(b) LONG SPOT. As soon as practicable (but in any event not
longer than 90 days) following EarthLink's approval of the Long Spot, National
shall cause such Spot to be aired within the Territory not less than 50 times
per week for the balance of the term of this Agreement.
(c) NATIONAL'S EXCLUSIVE (CONTROL). Except to the extent
expressly set forth in Sections 2.2 hereof, National shall have exclusive
control over and shall be responsible for the broadcast, performance and
transmission of the EarthLink Spots within the Territory via broadcast, cable
and satellite television, at such times, with such frequency, in such markets
and on such networks and stations as National, in its sole judgment, shall
determine. National shall have no liability whatsoever to EarthLink arising
from or in connection with any action or determination made by National in the
good faith exercise
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of its business judgment regarding the foregoing matters. Notwithstanding
anything to the contrary contained in this Section 2.2(d), National shall, as
promptly as practicable upon the request of EarthLink, discontinue airing the
EarthLink Spots in conjunction with any 30-minute infomercial which EarthLink,
in its reasonable business judgment, concludes reflects unfavorably on EarthLink
or its products and services.
2.3 SUBSTANTIATION AND DOCUMENTATION OF PRODUCT ATTRIBUTES. The
EarthLink Spots shall be based upon such attributes of and claims made about the
Software and the ELN Service as have been documented or substantiated to
National's satisfaction. EarthLink shall be under a continuing obligation to
provide (or cause to be provided), at As sole expense, all such documentation
and substantiation as National shall determine may be necessary to facilitate
compliance with all applicable laws governing the advertising and marketing of
the Software and the ELN Service.
2.8. LICENSE OF FOOTAGE. EarthLink may, without fee, incorporate
footage and still images created by or for National in the course of producing
the EarthLink Spots into promotional materials to be exhibited at trade shows
and other promotional events. EarthLink may further edit and modify such
materials as it deems necessary for such purposes, subject to National's prior
approval (which shall not be unreasonably withheld or delayed). National shall
cooperate with EarthLink in making available all such materials as EarthLink
shall reasonably request. National shall retain all right, title and interest
in all such materials (and all modifications thereof) in accordance with the
provisions of Section 5.2 hereof.
3. CERTAIN OBLIGATIONS OF EARTHLINK.
3.1 FULFILLMENT. EarthLink shall, at its sole expense, be
responsible for all order processing, credit card processing, telemarketing,
warehousing, fulfillment, customer service, and returns processing in connection
with all orders for the Software and the ELN Service placed by customers who
order in response to the EarthLink Spots (collectively, "National Customers").
EarthLink shall encode all copies of the Software which are distributed to
National Customers with a special code identifying National as the source of the
order therefor.
3.2 TECHNICAL SUPPORT. EarthLink shall, at its sole expense,
provide technical support to all end users of the Software distributed to
National Customers. Such technical support shall be consistent with the support
provided to existing customers of EarthLink as of the date of this Agreement.
4. COMPENSATION.
4.1 FEE. EarthLink shall pay a fee to National with respect to
each National Customer. Such fee shall be determined in accordance with either
of the following methods, at the election of National, which shall be
communicated to EarthLink in writing prior to the first airing of an EarthLink
Spot:
(a) ONE-TIME PAYMENT. A one-time fee of $45.00 for each
National Customer who subscribes to and pays in full for the ELN Service for at
least 60 days from the date of registration; or
(b) PERIODIC PAYMENTS. A fee equal to 7% of EarthLink's
gross receipts received from each National Customer, such fee to be payable to
National for a period of five years from the date on which each such National
Customer registers for the ELN Service.
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4.2 WARRANTS.
(a) WARRANTS FOR EARTHLINK SP. EarthLink shall provide
National with warrants to purchase 50,000 shares of EarthLink's common stock
upon EarthLink's approval of the Short Spot and warrants to purchase an
additional 50,0OO shares of EarthLink's common stock upon EarthLink's approval
of the Long Spot. The exercise price for all such warrants shall be $4.88 per
share.
(b) WARRANTS FOR NATIONAL CUSTOMERS. EarthLink shall
provide National with warrants to purchase one share of EarthLink common stock
for each National Customer who subscribes to and pays in full for the ELN
Service for at least 60 days from the date of registration, up to a maximum of
warrants for 600,000 shares of EarthLink common stock. The exercise price for
all such warrants shall be $4.88 per share with respect to all warrants so
earned on or before December 31, 1997 and the fair market value of EarthLink's
common stock, as determined by EarthLink's Board of Directors, (or, if
EarthLink's common stock is publicly traded, the then-applicable 30-day average
closing price thereof) with respect to all warrants so earned from and after
January 1, 1998.
(c) OTHER TERMS OF WARRANTS. All warrants provided to
National hereunder shall be in form substantially similar to warrants provided
to EarthLink's Board of Directors as of the date of this Agreement; PROVIDED,
however, that all such warrants shall contain antidilution provisions reasonably
acceptable to National.
4.3 RECORD KEEPING. REPORTING AND REMITTANCE. EarthLink shall
maintain and retain complete and accurate records of all orders which are
subject to the payment of fees and the issuance of warrants hereunder. So long
as orders shall continue to be placed, and whether or not any payment of fees or
issuance of warrants on such orders shall be due hereunder, EarthLink shall
render to National on or before the thirtieth day following each month a true
and correct accounting setting forth the following information for the preceding
month: (i) total National Customers, (ii) gross receipts from National
Customers, (iii) EarthLink's calculations determining the fees payable and
warrants issuable on orders placed by National Customers (if any). Each such
accounting shall be accompanied by the fees payable and the warrants issuable on
orders so reported.
4.4 INSPECTION AND AUDIT RIGHTS. All records required to be kept
pursuant to Section 4.3 hereof shall be made available for inspection by
National (or its designee) at its expense during normal business hours upon
reasonable prior notice (which in any event shall not be less than five business
days). National may cause such records to be audited at its expense not more
than once in any twelve-month period upon five business days prior notice to
EarthLink; PROVIDED, however, that if any such audit shall show underpayment of
fees or underissuance of war-rants due hereunder and such underpayment exceeds
by more than 5% of the total amount actually due, then EarthLink shall bear the
cost -of such audit and shall promptly pay all fees and issue all warrants
determined by such audit to be due.
5. PROPRIETARY RIGHTS.
5.1 EARTHLINK'S INTELLECTUAL PROPERTY.
(a) GENERALLY. Subject to the rights granted to National
hereunder, all right, title and interest (including, without limitation, all
rights arising under the United States Trademark Act, 15 U.S.C. Section 1501 et
seq. (the "Trademark Act"), the United States Copyright Act, 17 U.S.C. Section
101
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et seq. (the "Copyright Act"), and all other applicable laws, rules and
regulations) in and to the Software, the ELN Service, EarthLink's Promotional
Materials and all patents, trademarks, trade names, copyrights and trade
secrets licensed to National hereunder (collectively, EarthLink's Intellectual
Property), is and shall remain the sole property of EarthLink. Neither National
nor any third-party shall acquire any right, title or interest in EarthLink's
Intellectual Property by virtue of this Agreement or otherwise, except to the
extent expressly provided herein. Any unauthorized use of EarthLink's
Intellectual Property by National or any third party shall be deemed an
infringement of the rights of EarthLink therein. National shall not in any way
or at any time dispute or attack the validity or harm or contest the rights of
EarthLink in or to any of EarthLink's Intellectual Property. National shall
display such notices as may be necessary or, in EarthLink's reasonable judgment,
desirable in order to preserve and protect EarthLink's proprietary rights in
EarthLink's Intellectual Property.
(b) USE OF TRADEMARKS. National acknowledges that some of
the trademarks listed on Schedule I hereto are not owned by EarthLink and
therefore are being sublicensed to National hereby. The trademarks licensed or
sublicensed to National pursuant to this Agreement may be used by National only
in connection with advertising EarthLink, the Software and the ELN Service and
as a means of identifying EarthLink and its licensors as the sources of such
products and services. Such trademarks may be used only in the form and manner
specified in Schedule I hereto (as such schedule may from time to time be
amended), and they may not be removed or altered in any way, whether by change
of color, typeface, design or otherwise. Moreover, in order to insure the
proper use of all such trademarks by National under this Agreement, all
proposed usages of such trademarks by National shall be submitted to EarthLink
for its prior review and approval.
5.2 NATIONAL'S INTELLECTUAL PROPERTY. All right, title and
interest (including, without limitation, all rights arising under the Copyright
Act, the Trademark Act and all other applicable laws, rules and regulations) in
and to the entire editorial, visual, audio, and graphic content of all
advertisements and promotional materials developed by National in connection
with its activities under this Agreement, including, without limitation, (i) the
EarthLink Spots and the performances recorded therein, (ii) all raw footage shot
in the course of producing the EarthLink Spots, (iii) all trademarks developed
or controlled by National, and (iv) all musical compositions included in the
EarthLink Spots (collectively, "National's Intellectual Property") shall be and
remain the sole property of National. Neither EarthLink nor any third party
shall acquire any right, title or interest in National's Intellectual Property
- -by virtue of this Agreement or otherwise. Any unauthorized use of any of
National's Intellectual Property by EarthLink or any third party shall be deemed
an infringement of the rights of National therein.
6. SPECIAL REPRESENTATIONS, WARRANTIES AND COVENANTS OF EARTHLINK.
6.1 REGULATORY REQUIREMENTS. EarthLink represents, warrants and
covenants to National that (i) it has (or, prior to the initial airing of any
EarthLink Spot, will obtain) all required governmental and regulatory approvals,
licenses, permits and consents which are required to market and distribute the
Software and the ELN Service within the Territory and (ii) the Software and the
ELN Service are not prohibited or otherwise restricted from being marketed and
used in commerce within the Territory. In the event that any modification to
the Software or its labeling, packaging or instructions is or becomes necessary
in order for it lawfully to be sold anywhere within the Territory, EarthLink
shall cause such modification to be made at no cost to National. The foregoing
shall be a continuing representation, warranty and covenant and shall remain in
full force and effect and shall bind EarthLink, and its successors and assigns,
throughout the term of this Agreement.
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6.2 PROPRIETARY RIGHTS. EarthLink represents, warrants and
covenants to National that:
(a) EARTHLINK'S INTELLECTUAL PROPERTY. EarthLink owns or
otherwise controls all right, title and interest in and to EarthLink's
Intellectual Property and has all necessary licenses, clearances and other
authorizations to permit the marketing and distribution of the Software and the
ELN Service as contemplated herein;
(b) POWER AND AUTHORITY. EarthLink has all necessary power
and authority to grant to National all of the rights and privileges granted
pursuant to this Agreement;
(c) NO INFRINGEMENT. Neither the granting of the rights and
privileges granted hereunder nor the exercise thereof by National in accordance
with the terms of this Agreement will infringe or otherwise violate the
proprietary rights of any person or entity under any patent, trademark,
copyright, trade secret or otherwise; and
(d) NO ADVERSE CLAIMS. EarthLink (i) has not been and is
not, as of the date of this Agreement, a party to any litigation enforcing or
defending its rights in, to or with respect to the Software, the ELN Service
or any of EarthLink's Intellectual Property, (ii) is not aware of any claims or
demands made or threatened by any person or entity involving the validity of its
rights in, to or with respect to the Software, the ELN Service or any of
EarthLink's Intellectual Property, and (iii) is not aware of any patents,
trademarks, copyrights, devices, processes, methods or other intellectual
property rights owned or controlled by any third party which may infringe or be
infringed by the Software, the ELN Service or any of EarthLink's Intellectual
Property.
7. SPECIAL REPRESENTATIONS, WARRANTIES AND COVENANTS OF NATIONAL.
National represents, warrants and covenants to EarthLink that:
7.1 NATIONAL'S INTELLECTUAL PROPERTY. National owns or otherwise
controls (or, in the case of intellectual property not yet conceived, shall,
prior to the initial airing of each EarthLink Spot, obtain) all right, title and
interest in and to National's Intellectual Property and has or shall have all
necessary licenses, clearances and other authorizations to use, in the manner
contemplated herein, National's Intellectual Property; and
7.2 NO INFRINGEMENT. The use by National of National's
Intellectual Property as contemplated by this Agreement will not knowingly
infringe or otherwise violate the proprietary rights of any person or entity
under any patent trademark, copyright, trade secret or otherwise.
8. GENERAL REPRESENTATIONS AND WARRANTIES. Each party represents and
warrants to the other as follows:
8.1 POWER AND AUTHORIZATION. It has all requisite power and
authority (corporate and otherwise) to enter into this Agreement, and has duly
authorized by all necessary action the execution and delivery hereof by the
officer or individual whose name is signed on its behalf below.
8.2 NO CONFLICT. Its execution and delivery of this Agreement
and the performance of its obligations hereunder, do not and will not conflict
with or result in a breach of or a default under its
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organizational instruments or any other agreement, instrument order, law-or
regulation applicable to it or by which it may be bound.
8.3 ENFORCEABILITY. This Agreement has been duly and validly
executed and delivered by it and constitutes its valid and legally binding
obligation, enforceable in accordance with its terms, except as enforcement may
be limited by bankruptcy, insolvency or other laws of general application
relating to or affecting the enforcement of creditors' rights and except as
enforcement is subject to general equitable principles
9. INDEMNIFICATION.
9.1 BY NATIONAL. National shall defend, indemnify and hold
harmless EarthLink, its affiliated companies and their respective officers,
directors, shareholders, employees, licensees, agents, successors and assigns
from and against any and all liabilities and expenses whatsoever, including,
without limitation, claims, damages, judgments, awards, settlements,
investigations, costs, and attorneys fees and disbursements (collectively
"Claims") which any of them may incur or become obligated to pay arising out of
or resulting from (i) the noncompliance of the EarthLink Spots with any
applicable law, regulation or order relating to the advertisement and sale of
the Software and the ELN Service, (ii) the infringement of the proprietary
rights of any third party with respect to National's Intellectual Property or
any television programming aired by National in connection with either of the
EarthLink Spots, or (iii) the breach by National of any of its
representations, warranties, covenants, obligations, agreements or duties under
this Agreement.
9.2 BY EARTHLINK. EarthLink shall defend, indemnify and hold
harmless National, its affiliated companies and their respective officers,
directors, shareholders, employees, licensees, agents, successors and assigns
from and against any and all Claims which any of them may incur or become
obligated to pay arising out of or resulting from (i) the use of the Software or
the ELN Service, (ii) the infringement of the proprietary rights of any third
party with respect to the Software, the ELN Service or any of EarthLink's
Intellectual Property in the course of the exercise by National of -the rights
granted to it under this Agreement, or (iii) the breach by EarthLink of any of
its representations, warranties, covenants, obligations, agreements or duties
under this Agreement.
9.3 PROCEDURE. Promptly after learning of the occurrence of any
event which may give rise to its rights under the provisions of this section,
any person seeking to enforce such rights (a "Claiming Person") shall give
written notice of such matter to the party against whom enforcement of such
rights is sought (the "Indemnifying Party"). The Claiming Person shall
cooperate with the Indemnifying Party in the negotiation, compromise and defense
of any such matter. The Indemnifying Party shall be in charge of and control
such negotiations, compromise and defense and shall have the right to select
counsel with respect thereto, provided that the Indemnifying Party shall
promptly notify the Claiming Person of all developments in the matter. In no
event shall the Claiming Person compromise or settle any such matter without the
prior consent of the Indemnifying Party, which shall not be bound by any such
compromise or settlement absent its prior consent, which shall not be
unreasonably withheld or delayed.
10. TERM. Unless sooner terminated in accordance with the provisions
of Section 1 1 hereof, this Agreement shall remain in Full force and effect for
an initial term of three years, commencing as of the date hereof. Upon the
expiration of such initial term (or any extension thereof), this Agreement shall
automatically be extended for an additional period of one year unless, within
not less than 30 and not
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more than 60 days before the expiration of such initial term (or any
extension thereof) either party shall give the other written notice of
nonextension.
11. TERMINATION.
11.1 TERMINATION EVENTS.
(a) TERMINATION UPON BREACH. Either party may terminate
this Agreement upon 30 days written notice thereof to the other party upon
the breach by the other party of any of its representations, warranties,
covenants or agreements contained in this Agreement. Upon the expiration of
such notice period, this Agreement shall terminate without the need for
further action by either party; PROVIDED, however, that if the breach upon
which such notice of termination is based shall have been fully cured to the
reasonable satisfaction of the nonbreaching party within such 30-day period,
then such notice of termination shall be deemed rescinded, and this
Agreement shall be deemed reinstated and in full force and effect. Such
right of termination shall be in addition to such other rights and remedies
as the terminating party may have under applicable law.
(b) TERMINATION BY EARTHLINK UPON IMPROPER USE OF
TRADEMARKS, ETC. EarthLink may terminate this Agreement upon written notice to
National of the breach by National of its obligations with respect to the use
and depiction of the trademarks licensed (or sublicensed) to National pursuant
to this Agreement or the breach of any of the representations, warranties or
covenants of National to EarthLink set forth min Section 7 hereof.
(c) TERMINATION BY NATIONAL UPON BREACH OF PROPRIETARY
WARRANTIES, ETC. National may terminate this Agreement upon written notice to
EarthLink of the breach of any of the representations, warranties or covenants
of EarthLink to National set forth in Section thereof.
(d) TERMINATION BY NATIONAL UPON MATERIAL ADVERSE CHANGES.
National may terminate this Agreement upon written notice to Earthlink upon
learning of the occurrence or existence, at any time during the term hereof, of
any event or circumstance which, in National's reasonable judgment, materially
adversely affects National's ability to market and distribute the Software and
the ELN Service. In such case, neither party shall have any claim as against
the other arising from such termination (including, without limitation, any
claim based on delay, lost profits, or loss of opportunity), all such claims
having been deemed waived, and each party shall be free thereafter to pursue its
respective business interests without regard to any of the obligations set forth
in this Agreement. Notwithstanding the foregoing, if National terminates this
Agreement pursuant to this Section 11.1 (d) at any time Within 180 days of the
commencement of airings of the EarthLink Spots hereunder, then the warrants
granted to National pursuant to Section 4.2(a) hereof shall be subject to pro
rata reduction by the amount by which such period of airing is less than 180
days.
11.2 RIGHTS AND DUTIES UPON TERMINATION.
(a) GENERALLY. Except as otherwise provided in Section
11.2(b) hereof, for a period of six months following the expiration or
termination of this Agreement, National shall retain the rights to (i) advertise
and promote the Software and the ELN Service by means of any media purchased
prior to the effective date of termination and (ii) use EarthLink's
Intellectual Property in connection therewith. Notwithstanding any termination
of this Agreement, National and EarthLink shall perform as
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though this Agreement were still in effect with respect to all existing and
pending orders for the Software and the ELN Service arising from the airing
of the EarthLink Spots until all such orders are filled and all requests for
refunds and replacements received in connection therewith have been
satisfactorily honored. Without limitation of the preceding sentence,
EarthLink shall remain liable for all fees and warrants which become due
pursuant to the terms of this Agreement with respect to all orders placed by
National Customers following the termination of this Agreement.
(b) TERMINATION BASED ON NATIONAL'S MATERIAL OR INTENTIONAL
BREACH. In the event that EarthLink terminates this Agreement upon a material
or intentional breach hereof by National, National shall discontinue further
airings of the EarthLink Spots as promptly as possible (but in no event longer
than three months from the effective date of such termination).
12. Confidentiality.
12.1 GENERALLY. The terms of this Agreement and all customer
lists, price lists, marketing plans, techniques, methods and data, sales and
transaction data, media purchase and placement data, and all other nonpublic
information designated by any party as being confidential or a trade secret,
written (whether in machine readable form or otherwise) or unwritten, shall
constitute confidential information of the disclosing party ("Confidential
Information"). Each party shall hold all Confidential Information in the
strictest confidence and shall protect all Confidential Information with the
same degree of care that it exercises with respect to its own proprietary
information. Without the prior written consent of the disclosing party, the
receiving party may not use, disclose, divulge or otherwise disseminate any
Confidential Information to any person or entity, except for the receiving
party's attorney and such other professionals as the receiving party may retain
in order for it to enforce the provisions of this Agreement.
12.2 EXCEPTIONS. Notwithstanding Section 12.1 hereof, neither
party shall have any obligations with respect to any Confidential Information
which (i) is or becomes within the public domain through no act of such party in
breach of this Agreement, (ii) was lawfully in the possession of such party
without any restriction on use or disclosure prior to its disclosure hereunder,
(iii) is lawfully received from another source subsequent to the date of this
Agreement without any restriction on use or disclosure, (iv) is disclosed by
order of any court of competent jurisdiction or other governmental authority
(PROVIDED in such latter case, however, that the receiving party shall timely
inform the disclosing party of all such legal or governmental proceedings so
that the disclosing party may attempt by appropriate legal means to limit such
disclosure, and the receiving party shall further use its best efforts to limit
the disclosure and maintain confidentiality to the maximum extent possible).
13. INDEPENDENT CONTRACTOR. No party nor any of its officers,
employees, agents or representatives is an employee or agent of any other party
for any purpose whatsoever. Rather, each party is and shall at all times remain
an independent contractor.
14. FORCE MAJEURE. Neither EarthLink nor National shall be
responsible for any delay or failure to perform any part of this Agreement to
the extent that such delay or failure is caused by fire, flood, explosion, war,
strike, labor unrest, riot, embargo, act of governmental, civil or military
authority, accident, inability to obtain raw materials or supplies, acts or
omissions of carriers, act of God, or other such contingencies beyond its
control. Notice with full details of any such event shall be given to the other
party as promptly as practicable after its occurrence. The affected party shall
use due diligence, where
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practicable, to minimize the effects of or end any such event so as to
facilitate the resumption of full performance hereunder.
15. FURTHER ACTIONS. The parties agree to execute such additional
documents and to perform all such other and further acts as may be necessary or
desirable to carry out the purposes and intents of this Agreement.
16. LICENSE OF INTELLECTUAL PROPERTY. This Agreement shall be deemed to
constitute an executory contract under which EarthLink is a licensor of
intellectual property, as to which National may make an election under Section
365(n) of the United States Bankruptcy Code, 11 U.S.C. Sec. 365(n).
17. MISCELLANEOUS.
17.1 NOTICES. All notices, requests, instructions, consents and other
communications to be given pursuant to this Agreement shall be in writing and
shall be deemed received (i) on the same day if delivered in person, by same-day
courier or by telegraph, telex or facsimile transmission, (ii) on the next day
if delivered by overnight mail or courier, or (iii) on the date indicated on the
return receipt, or if there is no such receipt, on the third calendar day
(excluding Sundays) if delivered by certified or registered mail, postage
prepaid, to the party for whom intended to the following addresses:
If to EarthLink:
EarthLink Network, Inc.
3100 New York Drive
Pasadena, CA 91107
Attention: Garry Betty
FAX: 818/296-4161
If to National:
National Media Corporation
1700 Walnut Street
Philadelphia, PA 19103-6013
Attention: Marshall A. Fleisher, Esq.
FAX: 215/772-5173
Each party may by written notice given to the other in accordance with this
Agreement change the address to which notices to such party are to be delivered.
17.2 ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings, whether written or oral,
between them with respect to the subject matter hereof.
17.3 AMENDMENT. No amendment of this Agreement shall be effective
unless embodied in a written instrument executed by all of the parties.
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17.4 WAIVER OF BREACH. The failure of any party hereto at any time to
enforce any of the provisions of this Agreement shall not be deemed or construed
to be a waiver of any such provision, nor in any way to affect the validity of
this Agreement or any provisions hereof or the right of any party hereto to
thereafter enforce each and every provision of this Agreement. No waiver of any
breach of any of the provisions of this Agreement shall be effective unless set
forth in a written instrument executed by the party against whom or which
enforcement of such waiver is sought; and no waiver of any such breach shall be
construed or deemed to be a waiver of any other or subsequent breach.
17.5 ASSIGNABILITY. This Agreement shall be binding on and inure to
the benefit of the parties hereto and their respective heirs, representatives,
successors and assigns; PROVIDED, however, except as otherwise expressly
permitted hereunder, no party hereto may assign this Agreement or any rights
hereunder to any person or entity without the prior written consent of the other
party, and any attempted assignment without such consent shall be void.
Notwithstanding the foregoing, it is understood and agreed that National may
exercise its rights and perform its obligations hereunder through any existing
or future subsidiary under its control.
17.6 GOVERNING LAW: JURISDICTION. This Agreement shall be governed
by and construed in accordance with the integral substantive and procedural laws
of the Commonwealth of Pennsylvania without regard to conflict of laws
principles. The parties consent to the personal jurisdiction and venue of the
Court of Common Pleas of Philadelphia County (Pennsylvania) and the United
States District Court for the Eastern District of Pennsylvania and further
consent that any process, notice of motion or other application to either such
court or a judge thereof may be served outside the Commonwealth of Pennsylvania
by registered or certified mail or by personal service, provided that a
reasonable time for appearance is allowed.
17.7 SEVERABILITY. All the provisions of this Agreement are intended
to be distinct and severable. If any provision of this Agreement is or is
declared to be invalid or unenforceable in any jurisdiction, it shall be
ineffective in such jurisdiction only to the extent of such invalidity or
unenforceability. Such invalidity or unenforceability shall not affect either
the balance of such provision, to the extent it is not invalid or unenforceable,
or the remaining provisions hereof, nor render invalid or unenforceable such
provision in any other jurisdiction.
17.8 SURVIVAL. The provisions of Sections 4 (compensation) 6 (special
representations, warranties and covenants of EarthLink), 7 (special
representations, warranties and covenants of National), 9 (indemnification),
11.2 (rights upon termination), 12 (confidentiality) and 17.6 (governing law;
jurisdiction) shall survive the termination of this Agreement.
17.9 HEADINGS AND COUNTERPARTS. The headings of sections and
subsections have been included for convenience only and shall not be considered
in interpreting this Agreement. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, and all of which
together shall constitute one and the same Agreement. This Agreement may be
executed and delivered via electronic facsimile transmission with the same force
and effect as if it were executed and delivered by the parties simultaneously in
the presence of one another.
-11-
<PAGE>
NMC.5/6/96
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the date first written above.
Attest: EARTHLINK NETWORK, INC
By: By: /s/ Charles G. Betty
----------------------------- --------------------------------
Title: Title: President
-------------------------- ----------------------------
Attest: NATIONAL MEDIA CORPORATION
By: /s/ Marshall A. Fleisher By: /s/ Constantinos I. Costalas,
----------------------------- --------------------------------
Marshall A. Fleisher, Constantinos I. Costalas,
Secretary Vice Chairman
-12-
<PAGE>
NMC.5/6/96
SCHEDULE I
TRADEMARKS, TRADE NAMES AND OTHER PRODUCT AND PROPRIETARY IDENTIFIERS
Marks
- -----
1. EarthLink Network-Registered Trademark-
2. TotalAccess-Trademark-
3. Netscape-Registered Trademark-
4. Netscape Navigator-Trademark-
5. Qualcomm's Eudora-Light-Registered Trademark-
Attributions
- ------------
- - EarthLink Network-Registered Trademark- and TotalAccess-Trademark- are
trademarks of EarthLink Network, Inc.
- - Navigator-Trademark- is a trademark of Netscape-Registered Trademark-
Communications Corporation.
- - Netscape-Registered Trademark- is a registered trademark of
Netscape-Registered Trademark- Communications Corporation.
- - Eudora-Light-Registered Trademark- is a registered trademark of the
University of Illinois Board of Trustees, licensed to Qualcomm Incorporated.
- - [See attached for Logo-and Trademark Usage Guidelines for Netscape
Navigator-Registered Trademark-]
-13-
<PAGE>
[NETSCAPE-LOGO]
NETSCAPE NAVIGATOR-TM- INCLUDED
LOGO AND TRADEMARK USAGE GUIDELINES
- -------------------------------------------------------------------------------
[NETSCAPE NAVIGATOR-LOGO]
1. QUALIFICATION
THE NETSCAPE NAVIGATOR INCLUDED LOGO MAY ONLY BE USED BY LICENSED
THIRD PARTIES (OEM'S) TO INDICATE THAT NETSCAPE NAVIGATOR-TM- SOFTWARE
IS INCLUDED IN AN OEM'S BRANDED PRODUCT. THE USAGE OF THE LOGO MUST
COMPLY WITH ALL OF THESE GUIDELINES. NO USE OF THE LOGO SHOULD IMPLY
THAT NETSCAPE COMMUNICATIONS EITHER WARRANTS OR SUPPORTS THE OEM
BRANDED PRODUCT.
2. REQUIRED USAGE OF THE "NETSCAPE NAVIGATOR-TM- INCLUDED" LOGO
A. IN PRODUCT PACKAGING
PLACEMENT: The logo must appear on the front of the product package.
The logo may appear on the spine and/or back of the product package.
The logo must be placed on a high contrast background and must stand-
alone in making a commercial impression. The logo must not touch or
overlap any other logo on the packaging.
SIZE: The N-graphic portion of Netscape Navigator Included logo must
be at least 3/4" on each side. Always size the logo proportionally
based on the size of the N-graphic.
For CD-ROMs and CD-ROM jewel case size packaging, the minimum size of
the N-graphic portion of Netscape Navigator Included logo must be at
least 1/2" on each side.
The logo may be no larger than the OEM brand or product name or logo
on the package. The N-graphic portion of the logo may never exceed
1 1/2" on each side.
B. IN PRINT, ONLINE, AND BROADCAST ADVERTISING AND DIRECT MAIL:
PLACEMENT: The logo must be on a high contrast background and stand-
alone in making a commercial impression. The logo must not touch or
overlap any other logo on the advertisement. In print advertising and
direct mail, the logo must appear in every viewing plane (i.e. page,
spread or gatefold) of the ad. In broadcast advertising, the logo
must be on screen for at least 5 seconds and totally within the title-
safe screen area.
SIZE: For all print applications, the N-graphic portion of Netscape
Navigator Included logo must be at least 3/4". The logo may be no
larger than the OEM brand or product name or logo in the printed
material. In addition, the graphic portion of the logo may never
exceed 1 1/2" on each side.
For all broadcast applications, the logo must be a minimum of 15% of
the title safe area. The logo may be no larger than the OEM brand or
product name or logo in the broadcast advertisement.
For all online advertising, the N-graphic portion of Netscape
Navigator Included logo must be at least 30 pixels on each side and
must link to the Netscape site at this URL: "www.netscape.com"
3. OPTIONAL USAGE: IN PRODUCT BROCHURES AND OTHER COLLATERAL:
PLACEMENT: The logo must be displayed on the first page of all
brochures and on the cover of all manuals and bound collateral. The
logo must be on a high contrast background and stand-alone in making a
commercial impression.
SIZE: The N-graphic portion of Netscape Navigator Included logo must
be at least 3/4". The logo may be no larger than the OEM brand or
product name or logo. In addition, the N-graphic portion of the logo
may never exceed 1 1/2" on each side. The logo may be no larger than
the OEM brand or product name or logo in the collateral.
<PAGE>
4. ALTERING OF THE LOGO
The logo may only be reproduced directly from the diskette, provided
by Netscape in this kit. It may not be altered in color, shape, font,
proportion or in any other manner. The logo may be increased in size,
but only in whole and in proportion to the original.
5. TRADEMARK CREDIT:
In all usage the Netscape Navigator Included logo should always be
identified as a trademark of Netscape Communications Corporation with
the following credit line: NETSCAPE NAVIGATOR AND THE NETSCAPE
NAVIGATOR INCLUDED LOGO ARE TRADEMARKS OF NETSCAPE COMMUNICATIONS.
6. STANDARDS AND QUALITY: The Netscape Navigator Included logo must be
displayed in a positive manner. The logo may not depict Netscape in
any negative way.
- --------------------------------------------------------------------------------
NETSCAPE NAVIGATOR-TM- NAME USAGE GUIDELINES
THESE GUIDELINES APPLY TO PRINTED COLLATERAL, ADVERTISING, POINT OF SALE
MATERIAL, RETAIL PACKAGING, ALL ON-LINE COMMUNICATIONS, ICONS AND ALL OTHER
MEDIA.
The OEM must always represent the product as "Including", "containing"
or "with" Netscape Navigator software.
The OEM must brand the product as their own. The words "Netscape" or
"Netscape Navigator" may NOT appear in the product or brand name.
EXAMPLES OF CORRECT USAGE:
XYZ Online Kit containing Netscape Navigator-TM- Internet
client.
ABC internet Suite with Netscape Navigator-TM- software,
Smallmail e-mail and MyStack software.
123 Company's Family Internet Fun-pak. Netscape Navigator
Internet client included.
EXAMPLES OF INCORRECT USAGE:
XYZ Netscape Browser
The Netscape Navigator from ABC Company
123 Internet Navigator
ABC Netscape Navigator
The words "Netscape Navigator" should always be used together to
represent the Internet client product supplied by Netscape. Never use
the term, Netscape, Mozilla or Mosaic to refer to the Netscape
Navigator product.
The Netscape Navigator name should always be used as a adjective
followed by an appropriate noun. Appropriate nouns are: Internet
client and software. Browser is NOT an appropriate noun. Never use
Netscape or Netscape Navigator as a verb or noun.
EXAMPLES OF CORRECT USAGE:
"...includes the Netscape Navigator-TM- Internet client."
"...with Netscape Navigator-TM- software, you can view..."
EXAMPLES OF INCORRECT USAGE:
"Includes the Netscape browser..."
"with Navigator, you can view..."
"Includes Netscape's Mosaic-like Navigator..."
"Just use Netscape to view this..."
"You can Netscape from your home PC..."
FONT SIZE: In all media, the size of the font of the words Netscape
Navigator should be no larger than the font of the brand or product
name of the OEM product.
SUPPORT: The OEM may NOT indicate in any way that the product is
supported or warranted directly by Netscape Communications
Corporation.
TRADEMARK CREDIT: Netscape Navigator software should always be
identified as a trademark of Netscape Communications Corporation with
the following credit line: NETSCAPE NAVIGATOR IS A TRADEMARK OF
NETSCAPE COMMUNICATIONS.
STANDARDS AND QUALITY: The Netscape Navigator name must be used in a
positive manner. The name may not depict Netscape in any negative
way.
<PAGE>
EXHIBIT 11.1
EARTHLINK NETWORK, INC.
STATEMENT RE COMPUTATION OF
PER SHARE EARNINGS*
<TABLE>
<CAPTION>
Inception
(May 26,
1994)
through Year ended Three months ended
December 31, December 31, ------------------------------
1994 1995 March 31, 1995 March 31, 1996
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss . . . . . . . . . . . . . . . . . . . . . $ 148 $ 6,120 $ 271 $ 4,869
-------- -------- -------- --------
-------- -------- -------- --------
Average shares outstanding . . . . . . . . . . . . 5,176 7,674 6,054 10,243
Common equivalent shares:
Common Stock issued below the expected
IPO price during fiscal 1995(1) . . . . . . . . 2,956 1,901 2,956
Common Stock issued below the expected
IPO price during fiscal 1996(1) . . . . . . . . 1,064 1,064 1,064 954
Effect of warrants for
Common Stock (2). . . . . . . . . . . . . . . . 648 648 648 648
Effect of options for
Common Stock (2). . . . . . . . . . . . . . . . 1,872 1,872 1,872 1,872
-------- -------- -------- --------
Weighted average
shares outstanding . . . . . . . . . . . . . . . . 11,716 13,159 12,594 13,717
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share . . . . . . . . . . . . . . . . $ (0.01) $ (0.47) $ (0.02) $ (0.35)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
* All shares in these tables are weighted on the basis of the number of days
the shares were outstanding or assumed to be outstanding during each
period.
(1) Represents shares issued in the twelve months prior to the assumed initial
public offering date.
(2) Represents options and warrants issued or granted below the expected IPO
price during the twelve months prior to the proposed initial public
offering date.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-29-1996
<CASH> 1,790 1,450
<SECURITIES> 0 0
<RECEIVABLES> 218 281
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,253 2,356
<PP&E> 2,863 7,110
<DEPRECIATION> 312 747
<TOTAL-ASSETS> 4,874 8,878
<CURRENT-LIABILITIES> 4,229 5,372
<BONDS> 0 0
0 0
0 0
<COMMON> 101 102
<OTHER-SE> 189 1,695
<TOTAL-LIABILITY-AND-EQUITY> 4,874 8,878
<SALES> 0 0
<TOTAL-REVENUES> 3,028 2,628
<CGS> 0 0
<TOTAL-COSTS> 1,404 2,267
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 136 100
<INCOME-PRETAX> (6,120) (4,869)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,120) (4,869)
<EPS-PRIMARY> (.47) (0.35)
<EPS-DILUTED> 0 0
</TABLE>
