<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1996.
REGISTRATION NO. 333-15781
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
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 95-4481766
(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 Singer, Esq.
J. Stephen Hufford, Esq. Morgan, Lewis & Bockius LLP
W. Tinley Anderson, III, Esq. 2000 One Logan Square
Hunton & Williams Philadelphia, Pennsylvania 19103
NationsBank Plaza, Suite 4100 (215) 963-5000
600 Peachtree Street, NE
Atlanta, Georgia 30308
(404) 888-4000
</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. / /
------------------------
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>
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 DECEMBER 11, 1996
2,000,000 SHARES
EARTHLINK NETWORK-REGISTERED TRADEMARK-
COMMON STOCK
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY EARTHLINK
NETWORK, INC. (THE "COMPANY"). PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC
MARKET FOR THE COMPANY'S COMMON STOCK. IT IS CURRENTLY ESTIMATED THAT THE
INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $14.00 AND $16.00 PER SHARE. FOR
FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE, SEE
"UNDERWRITING." THE COMMON STOCK HAS BEEN 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 UNDERWRITER, SEE
"UNDERWRITING."
(2) BEFORE DEDUCTING EXPENSES OF THE OFFERING PAYABLE BY THE COMPANY, ESTIMATED
AT $500,000.
(3) THE COMPANY HAS GRANTED THE UNDERWRITER AN OPTION, EXERCISABLE FOR 30 DAYS
FROM THE DATE OF THIS PROSPECTUS, TO PURCHASE UP TO ADDITIONAL SHARES
OF COMMON STOCK SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF THE OPTION IS
EXERCISED IN FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND
COMMISSIONS AND PROCEEDS TO COMPANY WILL BE $ , $ AND $ ,
RESPECTIVELY. SEE "UNDERWRITING."
------------------------
THE SHARES OF COMMON STOCK ARE OFFERED BY THE UNDERWRITER, SUBJECT TO
PRIOR SALE, WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY IT AND SUBJECT TO ITS
RIGHT TO REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF
THE SHARES WILL BE MADE IN NEW YORK, NEW YORK ON OR ABOUT , 1996.
INVEMED ASSOCIATES, INC.
THE DATE OF THIS PROSPECTUS IS , 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]
THE EARTHLINK INTERNET USER EXPERIENCE
EarthLink focuses on providing reliable access, useful information, assistance
and services to its customers to encourage their introduction to the Internet
and help them have a satisfying user experience.
GAINING ACCESS TO THE INTERNET THROUGH EARTHLINK NETWORK
The EarthLink Network-R- TotalAccess-TM- software package enables quick and easy
Internet access. A customer simply inserts the EarthLink Network-R-
TotalAccess-TM- disk into the computer and follows the step-by-step instructions
to register on-line for a new EarthLink account and gain access to the resources
of the Internet.
EarthLink Network-R- TotalAccess-TM- guides customers through a simple account
registration procedure. EarthLink provides a toll-free customer support number,
staffed 24 hours a day.
Once on the Internet, the customer can access a variety of EarthLink services,
such as the EarthLink Store, The Daily Blink-TM- on-line newsletter and The
Arena-TM-, EarthLinks' multi-player Internet game area.
[INSIDE BACK COVER PAGE]
EarthLink Network-R- has established relationships with a number of affinity
marketing partners through which the Company has expanded the reach of its
marketing efforts.
Trademarks are property of their respective owners. EarthLink Network-R-
TotalAccess-TM- is a trademark of EarthLink Network, Inc. Netscape Navigator-TM-
is a trademark of Netscape Communications Corporation. T@P Online is a trademark
of MarketSource Corporation. LAUNCH-TM- is a trademark of 2Way Media, Inc.
Activision-R- and Zork are registered trademarks. Spycraft-TM-: The Great Game
and Zork Nemesis are trademarks of Actvision, Inc. CNN-TM-, CNN Interactive-TM-,
CNN Learning-TM-, and each of their logos are trademarks of Cable News Network,
Inc. Smart Ventures-TM- is a trademark for American Institute for Financial
Research, Inc. DealerNet-TM- is a trademark of the Reynolds & Reynolds Company.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL EVENTS AND 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.
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO
THE AUTOMATIC CONVERSION, UPON CONSUMMATION OF THIS OFFERING, OF ALL OUTSTANDING
SHARES OF THE COMPANY'S SERIES A CONVERTIBLE PREFERRED STOCK INTO 1,363,624
SHARES OF COMMON STOCK AND ALSO ASSUMES THE UNDERWRITER'S OVER-ALLOTMENT OPTION
IS NOT EXERCISED. SEE "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING." THE
PROSPECTUS REFLECTS A ONE-FOR-TWO REVERSE STOCK SPLIT EFFECTIVE ON DECEMBER 4,
1996. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
EarthLink Network, Inc. ("EarthLink" or the "Company") is an Internet
service provider ("ISP") that was formed to help users derive meaningful
benefits from the extensive resources of the Internet. The Company focuses on
providing reliable access, useful information, assistance and services to its
customers to encourage their introduction to the Internet and to help them have
a satisfying user experience.
The Company believes that many users have not been able to enjoy the
benefits of the Internet. Particularly for non-technical users, access to the
Internet is often difficult. In addition, for some users the volume and lack of
organization of the information on the Internet makes accessing useful
information and entertainment an intimidating task. EarthLink's principal
strategy is to rapidly expand its customer base and retain those customers who
use its services principally by addressing these problems. The Company provides
its services through its EarthLink Network TotalAccess software ("TotalAccess"),
which is designed to simplify access to the Internet through an online
registration feature and a "point and click" graphical user interface. This
software permits users to browse the Internet through use of Netscape
Communications Corporation's ("Netscape") Navigator ("Netscape Navigator") or
Microsoft Corporation's ("Microsoft") Internet Explorer ("Microsoft Explorer")
(one or the other of which is included in each copy of TotalAccess), or any
other third-party browser that a customer may wish to use. The Company also
provides useful information to users through its extensive World Wide Web site.
On this site, users can find technical assistance information, an on-line
newsletter, links to numerous popular categories of information and
entertainment and many other items and services designed to enhance users'
satisfaction with their Internet experience. In addition, the Company provides a
monthly printed newsletter, as well as 24 hour customer and technical support.
The Company markets its services through print advertisements, an affinity
marketing program, a customer referral program and other marketing activities.
Its affinity marketing program includes relationships with, among others,
prominent print publication, software and hardware companies. For example,
Macmillan Publishing USA bundles TotalAccess with several Internet-related book
titles. Customer referrals have also been an important source of new customers,
and the Company provides economic incentives to its customers to encourage these
referrals. The Company believes that these programs are a cost-effective means
of acquiring new customers.
The Company believes that its long-term success largely depends on
maintaining customer satisfaction with its services. Therefore, the Company will
continue to devote substantial resources to enhancing its service offerings,
expanding its technical support staff and expanding its World Wide Web site.
EarthLink also seeks to enhance its revenues by offering business services,
including business Web sites, high-speed ISDN communications capability and
frame relay connectivity. In addition, the Company offers consumer services such
as multiplayer Internet games and the EarthLink online store.
The Company has achieved a nationwide presence, without incurring
significant capital costs, by leasing access to dial-up points-of-presence
("POPs") from UUNET Technologies, Inc. ("UUNET") on a non-exclusive basis. The
Company also operates its own POPs in California. In addition, EarthLink has
agreed to lease POP access from PSINet, Inc. ("PSINet") on a non-exclusive basis
and the Company anticipates that its customers will have Internet access through
PSINet's POPs beginning in early 1997. The Company plans to expand its own POPs
in Northern California within the next year and will consider establishing its
own POPs in other areas if there is sufficient concentration of customers to
support the required capital investment.
The Company was incorporated as a California corporation in May 1994 and
reincorporated as a Delaware corporation in June 1996. The Company's principal
executive offices are located at 3100 New York Drive, Pasadena, California
91107, and its telephone number is (818) 296-2400.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered.......................... 2,000,000 shares
Common Stock Outstanding after this
Offering..................................... 9,386,348 shares (1)
Use of Proceeds............................... To finance sales and marketing activities,
leasehold improvements and investments in
network equipment, information systems and
office equipment, new service introductions
and for working capital and other general
corporate purposes, including the repayment
of indebtedness and possibly acquisitions.
Nasdaq National Market Symbol................. ELNK
Risk Factors.................................. The Common Stock offered hereby involves a
high degree of risk. See "Risk Factors."
</TABLE>
- ---------------
(1) Based on shares of Common Stock outstanding as of October 31, 1996, and
1,363,624 additional shares of Common Stock that will be outstanding upon
consummation of this Offering pursuant to the automatic conversion of all of
the Company's outstanding shares of Series A Convertible Preferred Stock.
This amount excludes (i) 1,005,750 shares of Common Stock subject to options
outstanding under the Company's 1995 Stock Option Plan having a weighted
average exercise price of $7.40 per share, (ii) 1,331,438 shares of Common
Stock subject to outstanding warrants and non-plan stock options having a
weighted average exercise price of $5.82 per share, (iii) 244,250 and 62,500
shares of Common Stock reserved for future grant of options under the
Company's 1995 Stock Option Plan and Directors Stock Option Plan,
respectively, (iv) up to approximately 382,500 shares of Common Stock into
which $5,000,000 of outstanding indebtedness is convertible and (v) 360,000
shares of Common Stock underlying warrants and options that the Company has
committed to issue if certain future events occur. See "Capitalization,"
"Management -- 1995 Stock Option Plan and Other Option and Warrant
Issuances," "Management -- Directors Stock Option Plan and Other Director
Option Issuances," "Description of Capital Stock" and Notes 7 and 8 of Notes
to Financial Statements.
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
INCEPTION NINE MONTHS ENDED
(MAY 26, 1994) YEAR ENDED ----------------------------
THROUGH DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
DEC. 31, 1994 1995 1995 1996
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues......................................... $ 111 $ 3,028 $ 1,447 $ 20,162
Loss from operations................................... (148) (6,018) (2,914) (21,240)
Net loss............................................... (148) (6,120) (2,972) (21,809)
Net loss per share (1)................................. $ (0.04) $ (1.15) $ (0.59) $ (3.15)
Weighted average shares
outstanding (1)....................................... 4,062 5,312 5,005 6,924
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------
ACTUAL PRO FORMA (2) AS ADJUSTED (3)
---------- -------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................................. $ (6,439) $ (6,439) $ 18,011
Total assets.......................................................... 26,033 31,033 50,483
Capital lease obligations, net of current portion..................... 5,388 5,388 5,388
Total liabilities..................................................... 23,941 28,941 48,391
Accumulated deficit................................................... (26,816) (26,816) (26,816)
Stockholders' equity (deficit)........................................ (11,921) (11,921) 29,492
</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.
(2) Adjusted to give effect to the issuance of a $5.0 million convertible
promissory note, as if such event occurred on September 30, 1996.
(3) Adjusted to reflect the automatic conversion upon consummation of this
Offering of the Series A Convertible Preferred Stock into 1,363,624 shares
of Common Stock, the sale of the 2,000,000 shares of Common Stock offered
hereby and application by the Company of a portion of the estimated net
proceeds therefrom (after deduction of estimated offering expenses and
underwriting discounts and commissions) to repay certain indebtedness. See
"Use of Proceeds" and "Capitalization."
"EARTHLINK NETWORK-REGISTERED TRADEMARK-," "EARTHLINK NETWORK
TOTALACCESS-TM-," "BLINK-TM-," "THE ARENA-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. ACTUAL EVENTS AND 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. INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE
OF RISK. 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 had net losses of
approximately $6.3 million from inception through 1995 and of approximately
$21.8 million for the nine months ended September 30, 1996. As of September 30,
1996, the Company had an accumulated deficit of approximately $26.8 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
as it continues to expend substantial resources on sales, marketing and
administration, build its network systems, develop new service offerings and
improve its management information systems. 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 and UUNET; (ii) established online services such as America Online,
CompuServe, Prodigy and the Microsoft Network; (iii) computer software and
technology companies such as Microsoft; (iv) national telecommunications
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 ISPs.
The entry of new participants from these categories and the potential entry
of competitors from other categories (such as computer hardware manufacturers)
would 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 telecommunications industry may be
able to provide customers with reduced communications costs in connection with
their Internet access services, reducing the overall cost of Internet access and
significantly increasing pricing pressures on the Company. Among other
competitors who have recently introduced or enhanced their Internet offerings,
AT&T has recently expanded its Internet services offerings. The Company believes
that AT&T's expansion has substantially increased pricing pressure in the
industry. In addition, certain of the Company's online competitors, including
America Online, the Microsoft Network and Prodigy, have recently announced
unlimited access to the Internet and their proprietary content at flat rates
that are equal to the Company's monthly flat rate, and do not require a set-up
fee. Certain of the RBOCs have also announced competitive flat-rate pricing for
unlimited access (without a set-up fee for at least some period of time). As a
result, competition for active users of Internet services should intensify.
There can be no assurance that the
5
<PAGE>
Company will be able to offset the adverse effect on revenues of any necessary
price reductions resulting from competitive pricing pressures by increasing the
number of its customers, by generating higher revenue from enhanced services, by
reducing costs or otherwise.
Competition is also expected to focus increasingly on overseas markets, in
which Internet services are just beginning to be introduced. The Company is not
presently seeking to penetrate 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.
There can be no assurance that the Company will have the financial
resources, technical expertise or marketing and support capabilities to compete
successfully. See "-- Dependence on Third-Party Network Providers," "-- New and
Uncertain Market; Dependence on Continued Growth in Use of the Internet;
Uncertainty of Customer Retention," "-- Dependence on Network Infrastructure;
Capacity; Risk of System Failure; Security Risks," "-- Dependence on Affinity
Marketing and Distribution Relationships," "Business -- Competition" and "--
Government Regulation."
RISKS ASSOCIATED WITH MANAGEMENT OF POTENTIAL GROWTH
The Company's growth has placed, and is expected to continue to place, a
significant strain on its managerial, operational, financial and information
systems resources. To accommodate its current size and manage growth, the
Company must continue to implement and improve its operational, financial and
information systems, and expand, train and manage its employee base.
Additionally, expansion of the Company's information and network systems is
required to accommodate its growth. There can be no assurance that the Company
will be able to effectively manage the expansion of its operations, or that the
Company's facilities, systems, procedures or controls will be adequate to
support the Company's operations. The inability of the Company to manage
effectively its future growth would have a material adverse effect on the
Company.
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 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 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 or technical 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 and technical support largely will depend on its ability to attract,
identify, train, integrate and retain qualified personnel. Failure to provide
adequate customer and technical support services would adversely affect the
Company's ability to maintain and increase its customer base, and could
therefore have a material adverse effect on the Company. 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."
DEPENDENCE ON THIRD-PARTY NETWORK PROVIDERS
As of October 31, 1996, the Company maintained 20 Company-owned POPs and
provided Internet access through an additional 336 UUNET POPs to which it has
access on a non-exclusive basis. The Company is dependent on UUNET, a
third-party provider of Internet network infrastructure, to continue to provide
the Company's customers with access to the Internet through UUNET's systems of
POPs. The Company recently executed an agreement with PSINet to access PSINet's
nationwide system of POPs on a non-exclusive basis. The Company anticipates that
its customers will have Internet access through PSINet POPs in early 1997. The
Company's agreement with UUNET has a term expiring in March 1999 (subject to
earlier cancellation after
6
<PAGE>
March 1998 upon one year's prior notice, but provided that if this notice is
given, EarthLink is required to begin to reduce its usage of UUNET's POPs in
accordance with a schedule set forth in the agreement). Unless otherwise
terminated prior to or at the end of its current term, the agreement
automatically renews for consecutive one-year terms. The PSINet agreement has a
term expiring in July 1998 after which it is automatically renewed for
consecutive one-year terms unless prior notice of termination is given.
Both UUNET and PSINet provide POP access to ISPs other than the Company and
to entities offering online services. UUNET provides such access to, among
others, Microsoft for the Microsoft Network, a competitor of the Company. The
Microsoft Network has recently announced unlimited access to the Internet at a
flat rate, which, the Company believes, has substantially increased utilization
of UUNET POPs by subscribers to the Microsoft Network. Microsoft is a
stockholder of UUNET's parent corporation, MFS Communications Company, Inc.
("MFS"), and therefore could be granted preferred access to UUNET's system of
POPs. Accordingly, if customer usage of the Microsoft Network materially
increases, the Company's access to UUNET's system of POPs may be limited and the
Company's customers may experience increased difficulties in gaining access to
the Internet. As usage of UUNET's and PSINet's POPs by other ISPs' and online
service providers' customers increases, system performance experienced by
EarthLink's customers may degrade and POP access may become limited. UUNET and
PSINet also independently compete with the Company.
UUNET was recently acquired by MFS, a supplier of local and long distance
telephone service. In August 1996, MFS and WorldCom, Inc. ("WorldCom") announced
that MFS and WorldCom had executed a definitive agreement for the merger of MFS
into WorldCom. The parties also announced that they expect to consummate this
merger late in 1996 or during the first quarter of 1997. There can be no
assurance that, following the expiration of the Company's current agreement with
UUNET, the Company will continue to have access to UUNET's POPs 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 current agreement with UUNET, the Company
pays UUNET a monthly fee equal to the greater of a specified minimum or an
amount that varies based primarily on peak customer usage. The Company also pays
UUNET an additional fee to the extent that hours of usage exceed a formula set
forth in the agreement. The Company has recently experienced increasing per
customer usage of its services. If the number of hours used by EarthLink
customers accessing the Internet through UUNET increases beyond the amount
provided for in the agreement or the usage becomes more concentrated during peak
times, the fees paid by the Company to UUNET would increase, which would
adversely affect the Company's operating margins. The UUNET agreement also
provides that in the event of regulatory or legislative changes having a
structural impact on the ISP marketplace which materially increase UUNET's
costs, EarthLink will renegotiate the agreement in good faith at UUNET's
request. There can be no assurance that EarthLink and UUNET will be able to
renegotiate the UUNET agreement with terms acceptable to UUNET and EarthLink or
that any renegotiation would not result in additional costs to the Company. Any
such renegotiated agreement or the failure to renegotiate the agreement could
have a material adverse affect on the Company.
As noted above, under the Company's current agreement with UUNET, the
Company pays UUNET a monthly fee equal to the greater of a specified minimum or
an amount that varies based primarily on peak customer usage. The specified
minimum amount increases over the term of the agreement. The Company's operating
margins could be adversely affected if the Company is unable to increase its
customer base so as to avoid paying the increasing minimum amount. 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 --
EarthLink's Services" and "-- Customers, POPs and Network Infrastructure."
The inability or unwillingness of one or both of UUNET and PSINet to provide
POP access to the Company's customers, or the Company's inability to secure
alternative POP arrangements if necessary, would
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limit the Company's ability to provide Internet access to its customers, and
would, in turn, have a material adverse effect on the Company. See "--
Dependence on Network Infrastructure; Capacity; Risk of System Failure; Security
Risks."
FACTORS AFFECTING OPERATING RESULTS; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results may 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, including upgrading the Company's
systems and infrastructure, the timing and market acceptance of new and upgraded
service introductions, changes in the pricing policies of the Company and its
competitors, changes in operating expenses (including telecommunications costs),
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 significant portion of the Company's
expenses are fixed; 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 agreed to produce and broadcast 15-second and 60-second commercials
for EarthLink's services. Under this agreement, in addition to certain fees
payable to NMC, the Company agreed to issue warrants to NMC to purchase 50,000
shares of Common Stock having an exercise price of $9.76 per share, upon the
completion by NMC, subject to the Company's approval, of the 15-second and
60-second commercials, and to issue warrants to NMC to purchase one share of
Common Stock for each two customers generated by this relationship, up to
300,000 shares of Common Stock. The exercise price of such additional warrants
earned through December 31, 1997 will be $9.76 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 such 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
issuance. 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 to which the Company has access through UUNET and PSINet. The Company
will be required to expand and improve this infrastructure as the number of
customers and the amount and type of information its customers communicate over
the Internet increases, and the means by which customers connect to the Internet
evolve. Such expansion and improvement may require substantial financial,
operational and managerial resources. There can be no assurance that the Company
will be able to expand or improve 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,
servers and other equipment used by the Company in providing its services. Any
severe shortage of new telephone lines, modems, 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
various network, email, Web and other servers quickly enough to keep pace with
demand from the Company's expanding customer base. If the capacity of such
servers is exceeded, customers
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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 of these events could cause customers to terminate use of the Company's
services. Accordingly, 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. See "-- Dependence on
Third-Party Network Providers" and "Business -- Customers, POPs and Network
Infrastructure."
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 and
network hub or at POPs through which customers connect to the Internet could
cause interruptions in the services provided by the Company. For example, in
October 1996, the Company experienced a power outage at its network hub in Los
Angeles, which caused a several hour system wide disruption of the Company's
Internet services. Services were restored when the Company installed a backup
power source. The Company's computer equipment, including critical equipment
dedicated to its Internet services, is located in Los Angeles and Pasadena,
California. The Company will relocate its data center from Los Angeles to a
facility adjacent to its Pasadena headquarters in the near future. The risks
associated with such a move include network and services down time, 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. In addition, failure of the Company's telecommunications 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, which could have a
material adverse effect on the Company.
The Company's network infrastructure, including the POP sites to which the
Company has access through UUNET and PSINet, 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 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. In addition, there can be
no assurance that customers or others will not assert claims of liability
against the Company as a result of these events.
The Company does not presently maintain redundant or backup Internet
services or backbone facilities or other redundant computing and
telecommunications 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. See "-- Risks Associated with Management of
Potential Growth," and "-- Dependence on Third-Party Network Providers."
FUTURE ADDITIONAL CAPITAL REQUIREMENTS
The Company believes that the net proceeds from this Offering, together with
other available cash, will be sufficient to meet the Company's operating
expenses and capital requirements for at least the next 12 months. However, 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 rate of expansion of the Company's network
infrastructure, the level of resources required to expand the
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Company's marketing and sales organization, information systems and research and
development activities, the availability of hardware and software provided by
third-party vendors 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 sooner than anticipated. 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, as well as the market price of the
Common Stock. See "-- Risks Associated with Management of Potential Growth," "--
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 TELECOMMUNICATIONS CARRIERS AND OTHER SUPPLIERS
The Company relies on local telephone companies and other companies to
provide data communications capacity via local telecommunications lines and
leased long distance lines. The Company is subject to potential disruptions in
these telecommunications services and may have no means of replacing these
services, on a timely basis or at all, in the event of such disruption. Any such
disruptions could have a material adverse effect on the Company.
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 Netscape Navigator and Microsoft Explorer, the
World Wide Web browser software that the Company licenses from Netscape and
Microsoft, respectively. 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 materially adversely affect the Company's
ability to effectively support the growth of its customer base in a timely
manner and increase its costs of expansion. Moreover, because Netscape Navigator
and Microsoft Explorer are the two most widely used Web browsers, the failure of
Netscape or Microsoft to continue to provide World Wide Web browser software to
the Company could have a material adverse effect on the Company.
The Company's suppliers and telecommunications carriers also sell or lease
services and products to the Company's competitors, and some of these carriers
are, and in the future others may become, competitors of the Company. There can
be no assurance that the Company's suppliers and telecommunications carriers
will not enter into exclusive arrangements with the Company's competitors or
otherwise stop selling or leasing their services or products to the Company,
which events could have a material adverse effect on the Company. See "--
Competition," "Business -- Supplier Relationships" and "-- Marketing."
DEPENDENCE ON AFFINITY MARKETING AND DISTRIBUTION RELATIONSHIPS
A significant number of the Company's customers have been generated through
its relationships with its affinity marketing partners. The Company relies on
these marketing relationships to assist it with distributing TotalAccess, 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 maintain its affinity marketing relationships or establish new
affinity marketing
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relationships could result in delays and increased costs in expanding its
customer base, which could, in turn, have a material adverse effect on the
Company. See "Business -- Marketing -- Affinity Marketing Partners Program."
NEW AND UNCERTAIN MARKET; DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET;
UNCERTAINTY OF CUSTOMER RETENTION
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 more widespread, that
extensive Internet content will continue to be developed or that extensive
Internet content will continue to be accessible at no or nominal cost. The
Internet may not prove to be viable for a number of reasons, including
potentially inadequate development of the necessary infrastructure or of
performance improvements. If use of the Internet does not continue to grow, the
Company would be materially and adversely affected. Conversely, 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. See "-- Risks Associated with Management of Potential Growth."
The sales, marketing and other costs to the Company of acquiring new
customers are substantial relative to the monthly fee derived from such
customers. Accordingly, the Company believes that its long-term success largely
depends on its ability to retain its existing customers, while continuing to
attract new customers. The Company continues to invest significant resources in
its infrastructure and customer and technical 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.
Moreover, intense competition from competitors, some of whom offer many free
hours of services for new customers, have most likely caused, and may continue
to cause, some of the Company's customers to switch to a competitor's service.
In addition, a certain number of new Internet users experience the Internet only
as a novelty and do not become consistent users of Internet services. These
factors adversely affect the Company's customer retention rates. See "-- Risks
Associated with Management of Potential Growth," "-- Dependence on Network
Infrastructure; Capacity; Risk of System Failure; Security Risks," "--
Competition" 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 and obtain market acceptance. There are currently under development a
number of alternative methods for users to connect to the Internet, including
cable modems and satellite and other wireless telecommunications technologies.
Any failure on the part of the Company to use new technologies effectively, to
develop its technical expertise and new services or to enhance existing services
on a timely basis, either internally or through arrangements with third parties,
could have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the technical and managerial skills of
its key employees, including technical, sales, marketing, information systems,
financial and executive personnel, and on its ability to identify, hire and
retain additional personnel. To accommodate its current size and manage its
anticipated growth, the Company must maintain and expand its employee base.
Competition for key personnel, particularly persons having technical expertise,
is intense, and there can be no assurance that the Company will be
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<PAGE>
able to retain existing personnel or to identify or hire additional personnel.
The need for such personnel is particularly important given the strains on the
Company's existing infrastructure and the need to anticipate the demands of
future growth. In particular, 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. Of the
members of its senior management team, only the Company's President and Chief
Executive Officer, Charles G. Betty is a party to an employment agreement with
the Company. The Company does not maintain key-man life insurance on the life of
any employee. The inability of the Company to attract, hire or retain the
necessary technical, sales, marketing, information systems, 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. See
"-- Risks Associated with Management of Potential Growth," "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 telecommunications 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 FCC has requested comments on this petition, but has not
set a deadline for issuing a final decision.
The recently enacted Telecommunications Act of 1996 (the "Telecommunications
Act") contains certain provisions that lift, or establish procedures for
lifting, certain restrictions relating to the RBOCs' ability 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 and allows RBOCs to provide electronic publishing of information and
databases. Competition from these companies could have a material adverse effect
on the Company. 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 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
although a federal district court panel recently issued a preliminary injunction
preventing enforcement of this part of the Telecommunications Act. This decision
may be appealed. 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 offerings. Any costs that are incurred as a result of such expenditure,
contesting any such asserted claims or the imposition of liability could have a
material adverse effect on the Company.
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
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intellectual property protection and infringement. Changes in the regulatory
environment relating to the Internet services 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.
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, consultants and, when possible, suppliers to execute
confidentiality agreements upon the commencement of their relationships with the
Company. 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 of termination from the
other party, but are generally terminable earlier upon the occurrence of certain
events (and, with respect to Microsoft, is terminable by Microsoft or the
Company at will). Applications licensed by the Company include Netscape
Navigator, Microsoft Explorer and MacTCP software from Apple Computer, Inc.
("Apple"). There can be no assurance that the Company will be able to maintain
its existing licenses or successfully obtain necessary license renewals in the
future. The failure to maintain or renew its licenses in the future could have a
material adverse effect on the Company.
There can be no assurance that third parties will not assert that the
Company's services and products infringe their proprietary rights. From time to
time, the Company has received communications from third parties alleging that
certain of the names or marks for the Company's services infringe the trademarks
of such parties. To date, no such claims have had an adverse effect on the
Company's ability to market and sell its services. However, there can be no
assurance that those claims will not have an adverse effect in the future or
that other parties will not assert infringement claims against the Company in
the future with respect to current or future services. Such claims could result
in substantial costs and diversion of resources, even if ultimately decided in
favor of the Company, and could have a material adverse effect on the Company,
particularly if judgments on such claims are adverse to the Company. 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.
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, services 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, services 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 network facilities, technology, rights and other assets,
additional expenses associated with the amortization of acquired intangible
assets, the inability to maintain 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
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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."
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS, FIVE PERCENT STOCKHOLDERS AND
AFFILIATED ENTITIES
The Company's executive officers, directors and holders of more than 5% of
the outstanding Common Stock and their affiliates will beneficially own an
aggregate of approximately 59.3% of the Company's outstanding shares of Common
Stock after this Offering (approximately 57.4% if the Underwriter's over-
allotment option is exercised in full). If outstanding warrants and options
outstanding and exercisable within 60 days of November 30, 1996 were exercised,
these percentages would decrease to 61.0% and 59.2%, respectively. As a result,
these stockholders, acting together, would effectively be able to control most
matters requiring approval by the Company's stockholders, including the election
of a majority of the Company's directors. See "Principal Stockholders."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS
After consummation of this offering, current stockholders, including members
of management, will benefit from the creation of a public market for the
Company's Common Stock and the increase in the market value of the shares held
by such persons. Based upon the assumed public offering price of $15.00 per
share, the excess of market value over amounts paid for Common Stock (including
Common Stock issuable upon conversion of the Series A Convertible Preferred
Stock) by executive officers and directors of the Company is approximately $54.6
million. In addition, the excess of the assumed offering price over the
aggregate exercise price of options and warrants held by executive officers and
directors is approximately $13.0 million.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the 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 and lock-up
agreements under which the holders of 5,673,178 shares of Common Stock,
2,693,273 shares of Series A Convertible Preferred Stock (that will be converted
into 1,346,625 shares of Common Stock upon completion of this Offering) and
warrants, options and convertible debt securities exercisable or convertible
into an aggregate of 1,608,583 shares of Common Stock (including all of the
Company's officers and directors) have agreed not to sell or otherwise dispose
of any of their shares of Common Stock, any options or warrants to acquire
shares of Common Stock or securities exchangeable or convertible into shares of
Common Stock for a period of one year after the date of this Prospectus without
the prior written consent of the Underwriter. However, the Underwriter 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. Further, the holders of
substantially all of the shares of Common Stock outstanding prior to this
Offering as well as holders of certain warrants and convertible debt are parties
to registration rights agreements. The exercise of these registration rights and
subsequent sale of a substantial number of shares of the Common Stock in the
public market could adversely affect the market price of the Common Stock. See
"Description of Capital Stock -- Registration Rights," "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 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, and could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company also will be subject
to Section 203 of the
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Delaware General Corporation Law which, under certain circumstances, could
delay, defer or prevent a business combination with an "interested stockholder."
Following the first meeting of its stockholders subsequent to this Offering, and
provided that there are 800 or more beneficial owners of the Common Stock, the
Company anticipates that it will seek stockholder approval to divide its Board
into three classes, each serving a staggered three-year term. 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 Underwriter 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 an estimate of the business potential of the Company, the
present state of the Company's development, an assessment of the Company's
management, prevailing market conditions, the demand for similar securities of
comparable companies 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 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.
IMMEDIATE AND SUBSTANTIAL DILUTION
Assuming an initial public offering price of $15.00 per share, 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 $11.94
per share. To the extent that currently outstanding options, warrants and
convertible debt are exercised or converted, there will be further dilution. See
"Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $27,400,000 ($31,600,000 if the
Underwriter's over-allotment option is exercised in full) at an assumed initial
public offering price of $15.00 per share (the mid-point of the range set forth
on the cover page of this Prospectus), 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 sales
and marketing activities, leasehold improvements, investments in network
equipment, information systems and office equipment. In addition, the Company
expects to use the net proceeds for new service introductions and for working
capital and other general corporate purposes. The Company intends to use a
portion of the net proceeds of this Offering to repay approximately $2.95
million of short-term indebtedness (which bears interest at 10% per annum and
matures in June 1997). The Company also intends to repay $5.0 million of
outstanding convertible debt to UUNET (which bears interest at a floating rate
of prime plus 2% per annum (10.25% for November 1996) and matures in October
1997), unless UUNET decides to convert such debt to Common Stock prior to
repayment. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Certain
Transactions."
The amounts actually expended for each purpose, other than repayment of the
indebtedness described above, will be determined at the discretion of the
Company's management. The Company's future capital
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<PAGE>
requirements and the allocation of the net proceeds of this Offering will depend
on many factors, including the rate of market acceptance of the Company's
services, the Company's ability to expand and maintain its customer base, the
rate of expansion of the Company's network infrastructure, the level of
resources required to expand the Company's marketing and sales organization,
information systems and research and development activities, the availability of
hardware and software provided by third-party vendors and other factors. The
Company also anticipates that it may use a portion of the net proceeds to
acquire complementary product and service 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
government securities or short-term, investment grade, interest-bearing
securities. The Company believes that the net proceeds from this Offering,
together with other available cash, 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. The payment of future
cash dividends, if any, will be at the sole discretion of the Board of
Directors.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1996 (i) the
capitalization of the Company, (ii) the pro forma capitalization of the Company
giving effect to the issuance by the Company of a convertible note payable in
the principal amount of $5,000,000 and (iii) the capitalization of the Company
as adjusted to reflect the automatic conversion upon consummation of this
Offering of the Series A Convertible Preferred Stock into 1,363,624 shares of
Common Stock, the sale of the shares of Common Stock being offered hereby at an
assumed initial public offering price of $15.00 per share and the application of
the estimated net proceeds therefrom after deduction of estimated offering
expenses and underwriting discounts and commissions.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------
AS
ACTUAL PRO FORMA ADJUSTED
----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Capitalized lease obligations, net of current portion........................ $ 5,388 $ 5,388 $ 5,388
Convertible debt............................................................. -- 5,000 5,000
----------- --------- ---------
Total debt........................................................... 5,388 10,388 10,388
Redeemable preferred stock................................................... 14,013 14,013 --
Stockholders' equity.........................................................
Common Stock, $0.01 par value, 50,000,000 shares authorized; 6,022,732
issued and outstanding, actual and pro forma; 7,386,348 shares issued and
outstanding, as adjusted (1).............................................. 60 60 94
Additional paid-in capital................................................... 14,236 14,236 55,615
Warrants to purchase Common Stock............................................ 599 599 599
Accumulated deficit.......................................................... (26,816) (26,816) (26,816)
----------- --------- ---------
Total stockholders' equity (deficit)................................. (11,921) (11,921) 29,492
----------- --------- ---------
Total capitalization................................................. $ 7,480 $ 12,480 39,880
----------- --------- ---------
----------- --------- ---------
</TABLE>
- ---------------
(1) This amount excludes the following securities outstanding or reserved for
future grant as of October 31, 1996: (i) 1,005,750 shares of Common Stock
subject to options outstanding under the Company's 1995 Stock Option Plan
having a weighted average exercise price of $7.40 per share, (ii) 1,331,438
shares of Common Stock subject to outstanding warrants and non-plan stock
options having a weighted average exercise price of $5.82 per share, (iii)
244,250 and 62,500 shares of Common Stock reserved for future grant of
options under the Company's 1995 Stock Option Plan and Directors Stock
Option Plan, respectively, (iv) up to approximately 382,500 shares of Common
Stock into which $5,000,000 of outstanding indebtedness is convertible and
(v) 360,000 shares of Common Stock underlying warrants and options that the
Company has committed to issue if certain future events occur. See
"Capitalization," "Management -- 1995 Stock Option Plan and Other Option and
Warrant Issuances," "Management -- Directors Stock Option Plan and Other
Director Option Issuances," "Description of Capital Stock" and Notes 7 and 8
of Notes to Financial Statements.
17
<PAGE>
DILUTION
The pro forma net tangible book value of the Common Stock as of September
30, 1996, assuming the conversion of the Series A Convertible Preferred Stock,
was $1,349,000, or approximately $0.18 per share. 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 (assuming the issuance, on September 30, 1996, of the
Company's Series A Convertible Preferred Stock and the conversion of such stock
into shares of Common Stock). After giving effect to the sale by the Company of
the 2,000,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $15.00 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 September 30, 1996 would have
been $28,749,000, or approximately $3.06 per share. This represents an immediate
increase in the net tangible book value of $2.88 per share to existing
stockholders and an immediate dilution of $11.94 per share to new investors
purchasing shares of Common Stock in this Offering. 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.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................... $ 15.00
Pro forma net tangible book per share value as of September 30,
1996........................................................... $ 0.18
Increase per share attributable to the Offering................. 2.88
---------
Pro forma net tangible book value after this Offering............. 3.06
---------
Dilution per share to new investors............................... $ 11.94
---------
---------
</TABLE>
The following table sets forth, on an as adjusted basis as of September 30,
1996, the difference between the number of shares of Common Stock purchased from
the Company (assuming the conversion, on September 30, 1996, of the Company's
Series A Convertible Preferred Stock into 1,363,624 shares of Common Stock), the
total cash 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 $15.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION (1) AVERAGE
-------------------------- --------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 7,386,348 78.7% $ 30,096,000 50.1% $ 4.07
New investors........................ 2,000,000 21.3 30,000,000 49.9 15.00
------------- ----- -------------- -----
Total.............................. 9,386,348 100.0% $ 60,096,000 100.0%
------------- ----- -------------- -----
------------- ----- -------------- -----
</TABLE>
- ------------
(1) Excludes non-cash consideration.
The foregoing table excludes all outstanding options, warrants and
convertible debt. See Notes 7 and 8 of Notes to Financial Statements. The
exercise or conversion of outstanding options, warrants and convertible debt
having an exercise or conversion price less than the initial public offering
price would increase the dilutive effect to new investors illustrated by the
foregoing tables.
18
<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 26, 1994) through December 31, 1994, for the year ended December 31, 1995
and the nine months ended September 30, 1996, and the balance sheet data as of
December 31, 1994 and 1995 and September 30, 1996, have been derived from
financial statements audited by Price Waterhouse LLP, independent accountants.
The selected financial data for the nine months ended September 30, 1995 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 period presented.
<TABLE>
<CAPTION>
INCEPTION
(MAY 26, 1994) NINE MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ----------------------
1994 1995 1995 1996
-------------- ------------ --------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Recurring revenues.................................... $ 53 $ 2,422 $ 1,057 $ 15,914
Other revenues........................................ 58 606 390 4,248
-------------- ------------ --------- -----------
Total revenues...................................... 111 3,028 1,447 20,162
Operating costs and expenses:
Cost of recurring revenues............................ 4 1,055 448 11,736
Cost of other revenues................................ 12 349 105 2,020
Sales and marketing................................... 37 3,711 1,775 9,867
General and administrative............................ 168 2,062 990 7,838
Operations and customer support....................... 38 1,869 1,043 9,941
-------------- ------------ --------- -----------
Total operating costs and expenses.................. 259 9,046 4,361 41,402
-------------- ------------ --------- -----------
Loss from operations.................................... (148) (6,018) (2,914) (21,240)
Interest expense........................................ -- (136) (70) (683)
Interest income......................................... -- 34 12 114
-------------- ------------ --------- -----------
Net loss............................................ $ (148) $ (6,120) $ (2,972) $ (21,809)
-------------- ------------ --------- -----------
-------------- ------------ --------- -----------
Net loss per share (1).................................. $ (0.04) $ (1.15) $ (0.59) $ (3.15)
-------------- ------------ --------- -----------
-------------- ------------ --------- -----------
Weighted average shares outstanding (1)................. 4,062 5,312 5,005 6,924
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------
1994 1995 1995 1996
-------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................... $ (62) $ (1,976) $ 1,365 $ (6,439)
Total assets............................................ 186 4,874 4,554 26,033
Capital lease obligations, net of current portion....... -- 355 211 5,388
Total liabilities....................................... 89 4,584 2,239 23,941
Accumulated deficit..................................... (148) (5,007) (1,859) (26,816)
Total stockholders' equity (deficit).................... 97 290 2,316 (11,921)
</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.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
EarthLink is an ISP that was formed to help users derive meaningful benefits
from the extensive resources of the Internet. 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 significant
increases in revenues and related expenses. As a result, period-to period
comparisons of the Company's results of operations may not be as meaningful as
these comparisons would be for mature companies.
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."
The Company has experienced net losses since it commenced operations and had
net losses of approximately $6.3 million from inception through 1995 and of
approximately $21.8 million for the nine months ended September 30, 1996. As of
September 30, 1996, the Company had an accumulated deficit of approximately
$26.8 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 will continue to incur net losses as it
continues to expend substantial resources on sales, marketing and
administration, build its infrastructure, develop new service offerings and
improve its management information systems. There can be no assurance that the
Company will achieve or sustain profitability or positive cash flow from its
operations.
The Company's principal strategy is to expand rapidly and retain its
customer base. To realize this strategy, the Company intends to increase its
investment in sales and marketing. Also, the Company plans to add administrative
infrastructure, increase customer and technical support capability and build
network infrastructure to meet customer demand. The sales and marketing and
other costs to the Company of acquiring new customers are substantial relative
to the monthly fee derived from such customers. Accordingly, the Company's
long-term success depends largely upon its ability to retain its existing
customers, while continuing to attract new customers.
The market for the Company's services 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 infrastructure, including its information systems,
technologies and services. There can be no assurance that the Company will be
successful in addressing such risks. See "Risk Factors."
RESULTS OF OPERATIONS
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 over the period
for which the services are performed.
For the period from inception, May 26, 1994, through December 31, 1994 (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 $1.1 million and $15.9 million for the
nine months ended September 30, 1995 and September 30, 1996, respectively. Other
revenues were approximately $390,000 and
20
<PAGE>
$4.2 million for the nine months ended September 30, 1995 and September 30,
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 nine months ended September 30, 1996 increased over
revenues for the nine months ended September 30, 1995 as a result of an increase
in the number of customers. The increase in revenues was partially offset by
credits given to customers under the Company's customer referral program. Under
this program, the Company waives one month of service fee in consideration for
each new customer referred by an existing customer. This waived service fee
results in a reduction to revenue. 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 nine months ended September 30, 1996 increased
over other revenues in the nine months ended September 30, 1995 as a result of
an increase in the number of new customers during that period and one-time
set-up fees collected from customers. From time to time, the Company waives the
one-time set-up fee it charges new customers. As competition in the ISP market
intensifies, the Company may find it necessary to waive the one-time set-up fee
to remain competitive. Therefore, revenues from the one-time set-up fee are
expected to decrease in future periods.
COST OF REVENUES. Cost of revenues consists of cost of recurring revenues
and cost of other revenues. Cost of recurring revenues principally includes
telecommunications expenses and depreciation expense on equipment used in
network operations for ongoing customer services. Included in telecommunications
cost are fees paid to UUNET for local access to its nationwide 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
nine months ended September 30, 1996 increased to approximately 74% of recurring
revenues, up from 42% of recurring revenues for the nine months ended September
30, 1995 due to increased hourly customer usage and the Company's expansion to
nationwide service through its relationship with UUNET. During these periods,
the Company paid 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's agreement with UUNET was amended as of October 1996 such that the key
variable component is peak usage rather than hourly usage. As the Company
continues to expand, the Company anticipates that it may build and use
additional 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 current agreement with UUNET, the Company
pays UUNET a monthly fee equal to the greater of a specified minimum or an
amount that varies based primarily on peak customer usage. The Company also pays
UUNET an additional fee to the extent that hours of usage exceed a formula set
forth in the agreement. The Company has recently experienced increasing per
customer usage of its services. If the number of hours used by EarthLink
customers accessing the Internet through UUNET increases beyond the amount
provided for in the agreement or the usage becomes more concentrated during peak
times, the fees paid by the Company to UUNET would increase, which would
adversely affect the Company's operating margins. The UUNET agreement also
provides that in the event of regulatory or legislative changes having a
structural impact on the ISP marketplace which materially increase UUNET's
costs, EarthLink will renegotiate the agreement in good faith at UUNET's
request. There can be no assurance that EarthLink and UUNET will be able to
renegotiate the UUNET agreement with terms acceptable to UUNET and EarthLink or
that any renegotiation would not result in additional costs to the Company. Any
such renegotiated agreement or the failure to renegotiate the agreement could
have a material adverse affect on the Company.
As noted above, under the Company's current agreement with UUNET, the
Company pays UUNET a monthly fee equal to the greater of a specified minimum or
an amount that varies based primarily on peak
21
<PAGE>
customer usage. The specified minimum amount increases over the term of the
agreement. The Company's operating margins could be adversely affected if the
Company is unable to increase its customer base so as to avoid paying the
increasing minimum amount. See "Business -- EarthLink's Services" and "--
Customers, POPs and Network Infrastructure."
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 $1.8 million, or
123% of revenues, and $9.9 million, or 49% of revenues, for the nine months
ended September 30, 1995 and September 30, 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 personnel. The
Company intends to aggressively promote EarthLink's services 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 the finance and accounting and human
resources departments, professional expenses, rent and expenses, principally
compensation, related to certain executive officers and bad debts. General and
administrative expenses were approximately $168,000 and $2.1 million for the
Inception Period and the year ended December 31, 1995, respectively. General and
administrative expenses were approximately $990,000 and $7.8 million, for the
nine months ended September 30, 1995 and September 30, 1996, respectively. Since
inception, general and administrative expenses have increased as a result of
increased employee headcount, rent and other general and administrative
expenses. During the nine months ended September 30, 1996, the Company hired a
number of senior management personnel, moved into a new headquarters building
and engaged professional consultants to assist in the development of an
administrative infrastructure to accommodate anticipated increases in the number
of customers and employees, which resulted in a significant increase in general
and administrative expenses as compared to the same period in 1995. General and
administrative expenses for the nine months ended September 30, 1996, included
bad debt expense of $1.7 million resulting from difficulties in billing
customers and in disconnecting late-paying customers on a timely basis. This
increase occurred as a result of difficulties in billing customers and
disconnecting late paying customers on a timely basis. In addition, in September
1996, the Company issued 37,500 shares of Common Stock as consideration for the
termination of a consulting agreement. The value of the stock, $413,000, was
included in general and administrative expenses for the nine months ended
September 30, 1996. Management intends to implement new information systems and
continue to expand staff in order to support anticipated customer and
operational 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 support and customer
service to register and maintain customer accounts. 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 $1.0 million, or 72% of revenues, and $9.9 million, or 49% of
revenues, for the nine months ended September 30, 1995 and September 30, 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 the Company's customer base and anticipated
customer growth. 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 September 30,
1996. At September 30, 1996, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $24.7 million, which begin to
expire in 2010. The Internal Revenue Code of 1986, as amended, includes
provisions that 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
22
<PAGE>
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 a result, losses totaling
approximately $2.8 million flowed directly to the stockholders during the period
and are not included in the amount of net operating loss carryforwards.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results may 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, including upgrading the Company's
systems and infrastructure, the timing and market acceptance of new and upgraded
service introductions, changes in the pricing policies of the Company and its
competitors, changes in operating expenses (including telecommunications costs),
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 significant portion of the Company's
expenses are fixed; therefore, the Company's operating margins are particularly
sensitive to fluctuations in revenues.
In May 1996, the Company entered into an agreement with NMC, a producer of
infomercials and commercials, pursuant to which NMC agreed to produce and
broadcast 15-second and 60-second commercials for EarthLink's services. Under
this agreement, for customers who, in response to these commercials, subscribe
to and pay for the Company's services for 60 days from the date of registration,
the Company is obligated to pay NMC, at NMC's one-time election made prior to
the first airing of any such commercials, either a $45.00 per customer fee or
fees equal to 7% of all revenues received from such customers for five years
from their registration. In addition, the Company agreed to issue warrants to
NMC to purchase 50,000 shares of Common Stock, having an exercise price of $9.76
per share, upon the completion by NMC, subject to the Company's approval, of the
15-second and 60-second commercials, and to issue warrants to NMC to purchase
one share of Common Stock for each customer generated by this relationship, up
to 300,000 shares of Common Stock. The exercise price of such additional
warrants earned through December 31, 1997 will be $9.76 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 such 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 issuance.
LIQUIDITY AND CAPITAL RESOURCES
The Company has not generated net cash from operations since its inception.
The Company has funded its operations primarily through private sales of equity
securities, borrowings from third parties and capital leases of equipment. The
Company's operating activities used net cash of approximately $3.6 million and
$11.1 million during 1995 and the nine months ended September 30, 1996,
respectively. During 1995 and the nine months ended September 30, 1996, net cash
used in operations resulted primarily from net losses, partially 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 nine months ended September 30, 1996, capital expenditures amounted to
approximately $2.8 million and $13.6 million, respectively. The Company
estimates that capital expenditures for the remainder of 1996 and through the
end of 1997 will be approximately $20.0 million including network enhancements,
data center expansion, and procurement of telecommunication and office equipment
and furniture and fixtures. Where feasible, the Company will seek to finance
certain of these expenditures through capital leases.
Cash from financing activities provided the Company with approximately $8.2
million and $31.9 million during 1995 and the nine months ended September 30,
1996, respectively. The Company's financing activities have consisted of the
private sale of debt and equity securities and capital lease transactions,
primarily for
23
<PAGE>
equipment. From inception through September 30, 1996, the Company raised $29.1
million through the private sale of debt and equity securities and $9.8 million
relating to capital lease obligations, respectively. Capital lease obligations
generally result from the sale and leaseback of equipment.
As of December 31, 1995 and September 30, 1996, the Company had cash and
cash equivalents of approximately $290,000 and $8.7 million, respectively, and
negative working capital of approximately $2.0 million and $6.4 million,
respectively. During the second quarter of 1996, the Company received short-term
debt financing (issued in the form of 10% Promissory Notes that mature in June
1997) of $2,950,000 from a limited number of investors, including certain
directors and existing stockholders. As additional consideration for this
investment, EarthLink issued warrants to purchase 98,340 shares of Common Stock
having an exercise price of $11.00 per share. Also during the third quarter of
1996, the Company sold 2,727,273 shares of Series A Convertible Preferred Stock
to a limited number of investors, including certain directors, existing
stockholders, the Underwriter and certain of its affiliates and associates for
approximately $15.0 million in the aggregate, or $5.50 per share. In connection
with this financing, the Company issued to certain of the investors warrants to
purchase up to 100,000 shares of Common Stock at an exercise price of $11.00 per
share. The Series A Convertible Preferred Stock will automatically convert into
1,363,624 shares of Common Stock upon the consummation of this Offering. See
"Certain Transactions."
In connection with an amendment of its strategic network services
relationship with UUNET, in October 1996, the Company issued a $5.0 million,
one-year promissory note to UUNET. This note bears interest at prime plus 2% per
annum (an effective rate of 10.25% per annum at December 1, 1996), and is
convertible into up to approximately 382,500 shares of Common Stock at a
conversion price of between $13.20 and $16.00 per share, depending upon the
number of shares of Common Stock, if any, purchased in this Offering by certain
investors referred to in the preceding paragraph and the public offering price
of the Common Stock in this Offering. See "Certain Transactions."
EarthLink expects to use the net proceeds of this Offering to finance sales
and marketing activities, leasehold improvements, investments in network
equipment, information systems, office equipment and new service introductions,
and for working capital and other general corporate purposes. The Company
intends to use a portion of the net proceeds of this Offering to repay
approximately $2.95 million of short-term indebtedness. The Company also intends
to use a portion of the net proceeds of this Offering to repay its outstanding
convertible debt to UUNET, unless UUNET decides to convert such debt to Common
Stock prior to repayment. The Company also anticipates that it may use a portion
of the net proceeds to acquire complementary products and service 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 "Certain Transactions."
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
will be sufficient to meet the Company's operating expenses and capital
requirements for at least the next 12 months. However, 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 rate of expansion of the Company's network infrastructure,
the level of resources required to expand the Company's marketing and sales
organization, information systems and research and development activities, the
availability of hardware and software provided by third-party vendors 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 sooner than anticipated. 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.
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BUSINESS
OVERVIEW
EarthLink is an ISP that was formed to help users derive meaningful benefits
from the extensive resources of the Internet. The Company focuses on providing
access, information, assistance and services to its customers to encourage their
introduction to the Internet and to help them have a satisfying user experience.
The Company provides its services through its EarthLink Network TotalAccess
software package, which is designed to simplify access to the Internet through
an online registration feature and a "point and click" graphical user interface.
This software permits users to browse the Internet through use of Netscape
Navigator or Microsoft Explorer (one or the other of which is included in each
copy of TotalAccess), or any other third-party browser that a customer may wish
to use. The Company also provides useful information to its users through its
extensive World Wide Web site. On this site, a user can find technical
assistance information, an on-line newsletter, links to numerous popular
categories of information and entertainment and many other items and services
designed to enhance users' satisfaction with their Internet experience. In
addition, the Company provides a monthly printed newsletter to its customers, a
booklet entitled "Getting the Most Out of EarthLink" and 24 hour customer and
technical support.
The Company markets its services through print advertisements, an affinity
marketing program, a customer referral program and other marketing activities.
Its affinity marketing programs include relationships with, among others,
prominent print publication, software and hardware companies. Customer referrals
have also been an important source of new customers, and the Company provides
economic incentives to its customers to encourage referrals.
EarthLink also offers business services, including business Web sites,
high-speed ISDN communications capability and frame relay connectivity. In
addition, the Company offers consumer services such as multiplayer Internet
games and the EarthLink online store.
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 email. 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 users to easily access the
Internet and, in turn, have produced rapid growth in the number of Internet
users.
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, graphics, audio and video over the Internet has led to a
proliferation of Internet-based services, including chat, 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.
STRATEGY
The principal components of EarthLink's growth strategy are as follows:
RAPIDLY EXPAND ITS CUSTOMER BASE. EarthLink believes that a key to success
in the competitive ISP market is to expand its customer base as rapidly as
possible to establish a significant revenue base, thereby enhancing its ability
to enter into favorable arrangements with affinity marketing partners and
providers of content, network access and software enhancements. The Company
plans to devote significant effort and financial resources on sales and
marketing. The Company also plans to continue print advertising in major
computer
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magazines, expand its radio advertising program, seek to expand its affinity
marketing program, maintain a presence at national, regional and local trade
shows and continue to offer economic incentives to customers who refer new
customers.
RETAIN THE COMPANY'S EXISTING CUSTOMERS. The sales, marketing and other
costs to the Company of acquiring new customers are substantial relative to the
monthly fee derived from such customers. Accordingly, the Company believes that
its long-term success largely depends on maintaining customer satisfaction with
its services. EarthLink plans to devote significant resources to enhancing its
network operations capability, its World Wide Web site and its service
offerings. In addition, the Company will continue to expand its technical
support staff and enhance the staff 's effectiveness by implementing a new call
center and providing software tools that can assist the staff in identifying and
solving customer problems.
DEVELOP ADDITIONAL SERVICE OFFERINGS. EarthLink recognizes that the
introduction of additional service offerings can serve not only to expand and
maintain its customer base, but also, in certain instances, to enhance revenues.
Accordingly, the Company has introduced a variety of services for business
consumers, including business Web sites, high-speed ISDN communications
capability and frame relay connections, each of which involve a monthly service
charge plus set-up fees. The Company also plans to expand its service offerings
for consumers, including personalized start pages, chat and multiplayer Internet
games.
FOCUS ON CUSTOMER NEEDS. EarthLink seeks to help its customers derive
meaningful benefits from the extensive resources of the Internet. In order to
maintain its focus on customer needs, the Company has leveraged the
infrastructure and software development efforts of others by leasing POP
capacity from UUNET (and, in the future, PSINet) and licensing software from
software developers. The Company believes that this approach gives it
flexibility to rapidly expand its service coverage without the need for
substantial capital expenditures. The Company will continue to pursue this
strategy so that, in addition to its sales and marketing efforts, it can devote
its principal resources to improving its customers' experience with the
Internet.
EARTHLINK'S SERVICES
EarthLink provides a variety of competitively-priced Internet services to
consumer and business customers. The Company makes these services available
through its EarthLink Network TotalAccess software package. This software
incorporates a telephone dialer and email functionality with several leading
third-party Internet access tools, including either Netscape Navigator or
Microsoft Explorer, 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 prices quoted below are subject to change.
STANDARD EARTHLINK NETWORK INTERNET SERVICES. EarthLink provides its
customers with a core set of features 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 and a one-time setup fee of $25.
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 designed to be
reliable and easy to use.
EARTHLINK NETWORK WEB SITE. EarthLink has developed and maintains its own
Web site containing EarthLink content and links to third-party content.
EarthLink's in-house staff actively seeks out interesting content from across
the World Wide Web and categorizes it into subject areas of interest organized
on the EarthLink Web site under topics such as "What's Hot," "Hollywood,"
"News," "Finance" and "Games." The Company's Web site provides a road map to
volumes of information and services available on the Internet. A
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user can browse the site and click on topics of interest in order to link to
desired information. In addition, through search engines and the embedded
functionality of Netscape Navigator or Microsoft Explorer, a user can conduct
customized searches for other topics.
EMAIL. Each customer is provided a mailbox, or address, from which to send
and receive email. Email functionality allows customers to exchange an unlimited
number of multimedia text, graphics, audio and video messages with other
EarthLink customers as well as with non-EarthLink 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 Web home page.
This enables each customer to participate in the Internet community by
personally adding content to the World Wide Web.
PUBLICATIONS. EarthLink publishes BLINK, a monthly newsletter, which it
mails to each of its customers. Through this publication, the Company provides
its customers with useful information, such as tips on how to search for certain
categories of information on the Internet and information regarding new
EarthLink service offerings, new Internet sites and other items of interest.
This publication is also available as an online feature, updated daily, on the
EarthLink home page. Additionally, the Company's founder, Sky Dayton, has
authored and published a booklet entitled "Getting the Most Out of EarthLink,"
which the Company provides its new customers subscribing through dial-up sales
and provides to all other customers upon request.
CHAT. Chat enables customers to "talk" with one another in typed text in
real time, one-on-one or in groups known as chat rooms.
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 Web pages. Monthly fees for business
Web sites range from $89 to $439, plus one-time setup fees of $179 to $479,
depending on the size of 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. Additional charges, based on the volume of users accessing a site, may
apply.
ISDN CAPABILITY. EarthLink offers high-speed ISDN Internet access
communication lines on a nationwide basis. 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 33.6 Kbps). The monthly ISDN service charge is $35 for the
first 100 channel hours and $1 for each additional channel hour. A one-time
setup fee of $50 is also charged.
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 1,536 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 service fees range from $335 to $1,675 per
month depending on access speeds, data throughput and other data transfer
metrics. One-time setup fees range from $495 to $1,995.
MULTIPLAYER INTERNET GAMES. The Company recently introduced The Arena, a
multi-player Internet games service that allows EarthLink and non-EarthLink
users to play multimedia games through the EarthLink Network for an hourly fee.
The Company creates an incentive for non-EarthLink users to subscribe to
EarthLink by charging them a slightly higher fee to participate in The Arena.
SUPPLEMENTAL SERVICES. To augment its standard and premium services, the
Company provides its customers with the following supplemental 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
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"[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.
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.
TECHNICAL DEVELOPMENT AND SERVICE ENHANCEMENT
EarthLink places significant emphasis on expanding and refining its services
to enhance its customers' Internet experience. EarthLink's technical staff is
engaged in a variety of technical development and service enhancement
activities, including improvement of the functionality of the Company's
EarthLink Network TotalAccess software and reviewing new third-party software
products for potential incorporation into TotalAccess. EarthLink also regularly
updates and expands the online services provided through the EarthLink Web site.
These activities include organizing Web content and the development of online
guides, help screens and other user services.
The Company anticipates the near-term release of the following services:
PERSONALIZED START PAGE. When customers "sign on" to EarthLink, they
generally begin their Internet session at the EarthLink home page and proceed
from there to the other sites and services of their choice. A "personalized
start page," which the Company plans to introduce in late 1996 or early 1997,
will allow customers to customize the page that first appears when they log on
to the EarthLink Network. For example, a customer may include short-cuts to
favorite Web sites, find advertisements targeted to the customer's interests
automatically displayed, change the "look and feel" of the start page and
otherwise tailor the start page to accomodate his or her personal preferences.
PREMIUM SERVICE OFFERINGS. The Company is engaged in ongoing efforts to
provide its customers with access to premium services, such as the Wall Street
Journal online newspaper and the ESPN sports service. The Company intends to
bundle these third-party premium services in packages and offer them to its
customers at discounted rates. These services will be billed directly to the
user's EarthLink account rather than separately by the provider of the premium
services, and will not require EarthLink customers to establish separate user
names and passwords to access the premium services.
ONLINE COMMERCE. 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 and sell their products and services.
MARKETING
As of September 30, 1996, the Company marketed and sold its services through
its sales and marketing department comprised of 82 employees. EarthLink's sales
and marketing efforts consist of the following programs:
ADVERTISING. The Company advertises its services in print media and on
radio. Included in the advertisement is a toll-free 800 number to contact the
Company's internal sales staff. When a potential customer calls the Company's
sales staff, the customer is assigned a user name and password. Subsequently,
the new customer is sent a copy of EarthLink Network TotalAccess, which the
customer uses to log on to the Company's system.
AFFINITY MARKETING PROGRAM. EarthLink's affinity marketing program promotes
the Company through the distribution of the EarthLink Network TotalAccess
software package by its affinity marketing partners.
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These partners typically bundle EarthLink Network TotalAccess disks with their
own goods or services. Marketing partners include MacMillan Publishing USA,
Activision, Inc., Micro Warehouse Incorporated, Adobe Systems, Inc., United
Airlines, Inc., Iomega Corp., CompUSA, Inc. and Best Buy Co., Inc.
A significant number of EarthLink's customers have been generated through
its relationships with its affinity marketing partners, and the Company believes
that its affinity marketing relationships will continue to account for a
significant number of new customers. There can be no assurance, however, that
the Company's current affinity marketing partners will continue to distribute
the Company's software or will continue to generate new customers for the
Company's services. The Company's inability to maintain its affinity marketing
relationships or establish new affinity marketing relationships could result in
delays and increased costs in expanding its customer base, which could, in turn,
have a material adverse effect on the Company.
CUSTOMER REFERRAL PROGRAM. The Company believes that one of its most
important marketing tools is its existing customers. In order to encourage
customers to refer other users, the Company currently waives one month of
service fees per referred customer.
OTHER MARKETING ACTIVITIES. EarthLink maintains a presence at national
trade shows such as Comdex, MacWorld and OnLine Expo, as well as local and
regional trade shows. Additionally, the Company markets through computer,
Internet and related publications, and bundles EarthLink Network TotalAccess
with a few of these publications, either as disks that contain only the
EarthLink Network TotalAccess software package or as CD-ROMs that may include
numerous other software applications. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Potential Fluctuations in
Quarterly Results" for additional information concerning a marketing agreement
with NMC.
CUSTOMERS, POPS AND NETWORK INFRASTRUCTURE
As of December 1, 1996 the Company had approximately 200,000 customers.
The Company presently provides its customers with Internet access primarily
through UUNET's nationwide system of POPs. Substantially all of the Company's
customers access the EarthLink Network and the Internet by dialing into local
POPs. Of these, the Company owns 20 POP sites in California and currently offers
additional access through 336 UUNET POPs, to which it has access on a
non-exclusive basis. The following map depicts the Company's POP network, as of
October 31, 1996:
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[MAP]
Not reflected on this map are the approximately 350 POPs maintained by
PSINet, through which the Company has agreed to lease POP capacity on a
non-exclusive basis, which the Company anticipates becoming accessible to its
customers in early 1997. The Company is dependent on UUNET (and in the future
may also be dependent on PSINet) to continue to provide the Company's customers
with access to the Internet through its system of POPs. The inability or
unwillingness of either or both of these third-party network providers to permit
POP access to EarthLink's customers, or the Company's inability to secure
alternative POP arrangements, could have a material adverse effect on the
Company. See "Risk Factors -- Dependence on Third-Party Network Providers" and
"Risk Factors -- Dependence on Network Infrastructure; Capacity; Risk of System
Failure; Security Risks."
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 leased
high-speed fiber optic data lines. The Company intends to relocate its network
hub from Los Angeles to Pasadena. See "-- Facilities" and "Risk Factors --
Dependence on Network Infrastructure; Capacity; Risk of System Failure; Security
Risks."
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.
CUSTOMER AND TECHNICAL SUPPORT
The Company believes that reliable customer and technical support is
critical to retaining existing and attracting new customers. The Company
currently provides the following types of customer and technical support: (i)
toll-free, live telephone assistance available seven days a week, 24 hours a
day; (ii) email-based
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assistance available seven days a week, 24 hours a day; (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.
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
expanding its call center facilities and installing new call management database
software. The Company also intends to purchase new call center hardware and
software.
The Company's growth has placed, and is expected to continue to place, a
significant strain on its managerial, operational, financial and information
system resources. 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 experienced difficulties satisfying the demand for its
Internet services. There can be no assurance that the Company's infrastructure,
information systems, technical staff and resources will be adequate to
facilitate the Company's growth. See "Risk Factors -- Risks Associated with
Management of Potential Growth."
SUPPLIER RELATIONSHIPS
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 Netscape Navigator and Microsoft Explorer, the World Wide
Web browser software that the Company licenses from Netscape and Microsoft,
respectively. 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 materially adversely affect the Company's ability to
effectively support the growth of its customer base in a timely manner and
result in delays in and increase its costs of expansion. Moreover, because
Netscape Navigator and Microsoft Explorer are the two most widely used Web
browsers, the failure of Netscape or Microsoft to continue to provide World Wide
Web browser software to the Company could have a material adverse effect on the
Company.
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 such
as America Online, CompuServe, Prodigy and the Microsoft Network; (iii) computer
software and technology companies such as Microsoft; (iv) national
telecommunications 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 ISPs.
The entry of new participants from these categories and the potential entry
of competitors from other categories (such as computer hardware manufacturers)
would 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 telecommunications industry may be
able to provide customers with reduced communications costs in connection with
their Internet access services, reducing the overall cost of Internet access and
significantly increasing pricing pressures on the Company. Moreover, certain of
the Company's online competitors, including America Online, the Microsoft
Network and Prodigy, have recently announced unlimited access to the Internet
and their proprietary content at flat rates that are equal to the Company's flat
rate, and do not require a set-up fee. Certain of the RBOCs have also announced
competitive flat-rate pricing for unlimited
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access (without a set-up fee) for at least some period of time. As a result,
competition for active users of Internet services should intensify. There can be
no assurance that the Company will be able to offset the adverse effect on
revenues of any necessary price reductions resulting from competitive pricing
pressures by increasing the number of its customers, by generating higher
revenue from enhanced services, by reducing costs or otherwise. See "Risk
Factors -- Competition."
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 and technical 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 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. 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.
There can be no assurance that third parties will not assert that
EarthLink's services infringe their proprietary rights. From time to time, the
Company has received communications from third parties alleging that certain of
the names or marks for the Company's services infringe the trademarks of such
third parties. To date, no such claims have had an adverse effect on the
Company's ability to market and sell its services. However, there can be no
assurance that those claims will not have an adverse effect in the future or
that other parties will not assert infringement claims against the Company in
the future with respect to current or future services. Such claims could result
in substantial costs and diversion of resources even if ultimately decided in
favor of the Company and could have a material adverse effect on the Company,
particularly if judgments on such claims are adverse to the Company. In the
event a claim is asserted alleging that the Company has infringed the
intellectual property 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.
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
initial term of the license for which expires in December 1997 and thereafter
automatically renews for additional one-year terms unless either party
terminates the license on 120 days notice), Microsoft Explorer (the initial term
of the license for which expires in August 1998 and thereafter automatically
renews for additional one-year terms, although either party may terminate the
license at any time on 30 days notice), and MacTCP software from Apple (the
current term of the license for which expires on December 31, 1996 thereafter
and automatically renews for additional one-year terms unless either party
terminates the license on twelve-month notice). The only software in the
EarthLink Network TotalAccess package that is developed by the Company is the
front-end program and the installation/registration program. The Company
currently
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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. The failure to renew existing software licenses and authorizations
or license other applications could have a material adverse effect on the
Company.
TRADEMARKS. "EarthLink Network-Registered Trademark-," "EarthLink Network
TotalAccess-TM-," "bLink-TM-," "The Arena-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 telecommunications 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 FCC has requested comments on this
petition, but has not set a deadline for issuing a final decision.
The recently enacted Telecommunications Act contains certain provisions that
lift, or establish procedures for lifting, certain restrictions relating to the
RBOCs' ability 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
Telecommunications 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. The Telecommunications Act also
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, although a federal district court panel recently issued a
preliminary injunction preventing enforcement of this part of the
Telecommunications Act. This decision may be appealed. See "Risk Factors --
Potential Liability."
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 protection and infringement. Changes in the regulatory environment
relating to the Internet access industry, including regulatory changes that
directly or indirectly affect telecommunications costs or increase the
likelihood or scope of competition from regional telephone companies or others,
could have a material adverse effect on the Company. See "Risk Factors --
Competition."
EMPLOYEES
As of September 30, 1996, the Company employed 463 people on a full-time
basis, including 92 sales and marketing personnel, 27 Web site and content
development personnel, 75 MIS and information technologies personnel, 197
customer and technical support representatives and 72 administrative personnel.
As of that date, the Company also employed 81 people on a part-time basis, most
of whom serve as telephone customer and technical 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.
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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
and currently provides for rental payments of approximately $46,000 per month.
The Company has an option to extend this lease for an additional five years at
the then prevailing market rate. In addition to the Company's corporate
headquarters, the Company also leases approximately 7,200 square feet of office
space in Los Angeles that presently houses the Company's data center. The lease
for this space expires July 31, 1999 and currently provides for rental payments
of approximately $10,000 per month. EarthLink has signed a lease for an
additional 55,000 square feet in a facility located adjacent to its corporate
headquarters in which it plans to house its data center. The Company expects to
occupy this new space commencing February 1997 for an initial ten-year term at a
rent of $66,000 per month for the first 60 months and $77,000 per month for the
remaining 60 months. The Company has an option to extend this lease for an
additional ten years at the then prevailing market rate.
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Sky D. Dayton............................. 25 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........................ 45 Vice President, Strategic Planning
Sidney Azeez (1).......................... 64 Director
Robert M. Kavner (1)...................... 53 Director
Linwood A. Lacy, Jr. (2).................. 51 Director
Paul McNulty.............................. 35 Director
Kevin M. O'Donnell (2).................... 46 Director
John W. Sidgmore.......................... 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 co-owned 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.
CHARLES G. BETTY has served as the President and as a director of the
Company since January 1996, and in May 1996, was named the Company's Chief
Executive Officer. From February 1994 to January 1996, Mr. Betty was a strategic
planning consultant, advising Reply Corp., Perot Systems Corporation and
Microdyne, Inc. 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.
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 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, Inc., 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
Products, Inc.
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, Inc., a provider of
interactive training software. From 1982 to May 1992, he was employed by Real
World Software, Inc., a provider of accounting software, and served as its Vice
President of National Sales from 1990 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 repayment plan.
35
<PAGE>
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 1990 to 1996, Mr. Young was President of Young &
Associates, a consulting firm specializing in strategic planning for high growth
companies.
SIDNEY AZEEZ has been a director of the Company since June 1996. During the
past five years, Mr. Azeez has been a private investor. 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
September 1996, he has served as President and Chief Executive Officer of On
Command Corporation, a provider of on demand video for the hospitality industry.
From 1994 through August 1995, he was director of business advisory services for
Creative Artist Agency. 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.
Since October 1996, he has served as President and Chief Executive Officer of
Micro Warehouse Incorporated. From 1989 to May 1996, he served as the
Co-Chairman and Chief Executive Officer of Ingram Micro, Inc., a microcomputer
products distributor and a then wholly-owned subsidiary of Ingram Industries
Inc. From December 1993 to June 1995, Mr. Lacy was also President of Ingram
Industries Inc. From June 1995 until April 1996, he was President and CEO of
Ingram Industries Inc., and from April 1996 to May 1996 served as its Vice
Chairman. Mr. Lacy serves as a director of Ingram Industries Inc., Entex
Information Services, Inc. and Micro Warehouse Incorporated.
PAUL MCNULTY has been a Director of the Company since November 1996. Mr.
McNulty has been a Managing Director of Soros Fund Management ("SFM"), a New
York-based investment firm, since January 1996, and was a Securities Analyst at
SFM from January 1993 until January 1996. Prior thereto, Mr. McNulty was
employed as an Associate at MVP Ventures, a venture capital firm in Boston,
Massachusetts.
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.
JOHN W. SIDGMORE has served as a director of the Company since October 1996.
He has served as President and Chief Operating Officer of MFS Communications
Company, Inc. ("MFS") since August 1996 and as a director of MFS since October
1996. Mr. Sidgmore served as President, Chief Executive Officer and a director
of UUNET from June 1994 through August 1996 and has served as Chief Executive
Officer and a director of UUNET since August 1996. In 1989, he became President
and Chief Executive Officer of Intelicom Solutions Corporation (currently CSC
Intelicom), a telecommunications software company. In 1991, this company was
sold to Computer Sciences Corporation, and he remained President and Chief
Executive Officer until June 1994. From 1975 to 1989, Mr. Sidgmore was employed
by GEIS, where he was Vice President and General Manager of GEIS North America
from 1985 to 1989. Mr. Sidgmore is a director of Saville Systems PLC, a provider
of billing software for the telecommunications industry.
36
<PAGE>
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
Currently, all directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
Following the first meeting of its stockholders subsequent to this Offering, and
provided that there are 800 or more beneficial owners of the Common Stock, the
Company anticipates that it will seek stockholder approval to divide its Board
into three classes, each serving a staggered three-year term. See "Description
of Capital Stock--Common Stock." 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
setting cash and long-term incentive compensation for executive officers and
other key employees of the Company. The Compensation Committee also administers
the Company's 1995 Stock Option Plan.
The holders of the Company's outstanding Series A Convertible Preferred
Stock have the right to elect one director. Mr. McNulty was elected by the
holders of the Series A Convertible Preferred Stock. All outstanding shares of
the Series A Convertible Preferred Stock will automatically be converted into
Common Stock upon consummation of this Offering. In addition, pursuant to the
Note Purchase Agreement with UUNET, the Company agreed to fill a vacancy on the
Board of Directors with a designee of UUNET. Mr. Sidgmore has been designated by
UUNET pursuant to this provision.
TECHNOLOGY ADVISORY COUNCIL
The Company has established a Technology Advisory Council, the purpose of
which is to help the Company predict and overcome long-range technology barriers
and to help the Company attract talented engineers and technology executives.
The Council is chaired by Mr. Dayton, and it is intended that the Council meet
at least quarterly. Except for Mr. Dayton, the members received warrants to
purchase 7,500 shares of Common Stock which vest in equal quarterly increments
over two years and have an exercise price equal to the fair market value of a
share of Common Stock on the date of grant. Presently, the Council consists of
the following three members in addition to Mr. Dayton:
DAVID FARBER is an Alfred Fitler Moore Professor of Telecommunications
Systems holding appointments in the Computer and Information Science and
Electrical Engineering Departments at the University of Pennsylvania and is the
Director of the Center for Communications and Information Science and Policy.
Mr. Farber is a member of the boards of trustees of the Internet Society and the
Electronic Fronteir Foundation.
DR. PHILIP M. NECHES is recently retired as Group Technical Officer,
Multimedia Products Group of Lucent Technologies, Inc. He has served as Senior
Vice President and Chief Scientist of NCR Corp. and was Group Technical Officer
for NCR Corp. after its acquisition by AT&T in 1991. Dr. Neches co-founded
Teradata Corporation, a company engaged in commercial parallel computing and
large-scale relational database management systems, and served as its Vice
President and Chief Scientist.
DR. ARNO PENZIAS, a 1978 Nobel Prize recipient, is Chief Scientist at Lucent
Technologies, Inc. Previously he was head of research at Bell Laboratories.
37
<PAGE>
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 for the year ended December 31, 1995, certain
information regarding compensation paid 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. Messrs. Dayton and Johnson were the
Company's only executive officers who earned in excess of $100,000 of salary and
bonus in 1995.
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 $ 16,573 250,000 --
Robert E. Johnson, Jr................................ 87,578 21,646(1) 50,000 --
</TABLE>
- ------------
(1) Represents sales commissions.
The current annual salaries of the Company's executive officers for 1996 are
as follows: Charles G. Betty, $225,000; Sky D. Dayton, $165,000; David R.
Tommela, $128,000; Barry W. Hall, $125,000; Robert E. Johnson, Jr., $100,000;
and Brinton O.C. Young, $90,000. For a description of the Company's employment
agreement with Mr. Betty, see "-- Employment Agreement." All of the foregoing
executive officers are eligible to receive a cash performance bonus for 1996. In
the case of all executive officers other than Mr. Johnson, the bonus will be
based on the growth in the Company's customer base and such other factors as the
Compensation Committee may deem relevant. Mr. Johnson is expected to receive
cash bonuses in the form of sales commissions for 1996 in excess of $100,000.
STOCK OPTION INFORMATION
The following table sets forth certain information regarding options granted
in 1995 to the executive officers named in the Summary Compensation Table above.
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERMS (2)
OPTIONS IN FISCAL PRICE EXPIRATION ------------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% 10%
- ------------------------------ ----------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sky D. Dayton................. 250,000(1) 38.0% $ 1.81 6/18/05 $ 286,147 $ 725,153
Robert E. Johnson, Jr......... 50,000(1) 7.6 1.81 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 based upon the fair market value on the date of grant
as determined by the Board of Directors. 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.
38
<PAGE>
The following table sets forth certain information regarding options granted
during the nine months ended September 30, 1996 to the executive officers named
in the Executive Compensation section above.
OPTION GRANTS DURING NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION
OPTIONS EMPLOYEES EXERCISE FOR OPTION TERMS (2)
GRANTED IN FISCAL PRICE EXPIRATION ----------------------------
NAME (#)(1) YEAR ($/SH) DATE 5% 10%
- -------------------------------- ----------- ----------- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sky D. Dayton................... -- -- -- -- -- --
Robert E. Johnson, Jr........... -- -- -- -- -- --
Charles G. Betty................ 175,000 20.6% $ 4.84 1/15/06 $ 2,503,239 $ 3,380,589
75,000 8.8% 11.00 9/24/06 610,817 986,824
Barry W. Hall................... 50,000 5.9% 4.84 1/08/06 715,211 965,883
25,000 2.9% 9.76 5/07/06 234,606 359,971
David R. Tommela................ 12,500 1.5% 9.76 5/07/06 117,303 179,971
Brinton O.C. Young.............. 112,500 13.3% 9.76 5/07/06 1,055,725 1,619,736
</TABLE>
- ------------
(1) These options vest in equal increments of 5% per quarter over the five-year
period beginning on the respective dates of grant.
(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, based on an assumed initial public offering price of
$15.00 per share. 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.
The following table sets forth certain information regarding stock 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.
OPTION VALUES AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS (1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Sky D. Dayton............................................. 25,000 225,000 $ 75,500 $ 679,500
Robert E. Johnson, Jr..................................... 5,000 45,000 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 $4.84
per share as of December 31, 1995.
39
<PAGE>
The following table sets forth certain information regarding stock options
held at September 30, 1996 by the executive officers named in the Executive
Compensation section above. None of these options has been exercised.
OPTION VALUES AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS (1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Sky D. Dayton............................................. 62,500 187,500 $ 824,375 $ 2,473,125
Robert E. Johnson, Jr..................................... 12,500 37,500 164,875 494,625
Charles G. Betty.......................................... 17,500 232,500 177,800 2,371,425
Barry W. Hall............................................. 6,250 68,750 57,350 581,650
David R. Tommela.......................................... 6,250 43,750 60,425 386,075
Brinton O.C. Young........................................ 5,625 106,875 29,425 560,025
</TABLE>
- ------------
(1) The value of "in-the-money" options represents the difference between the
exercise price of stock options and the assumed initial public offering
price of $15.00.
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 a $24,000 a year travel allowance for Mr. Betty and his family and
such other benefits as are generally 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 has 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. In connection with
entering into the employment agreement, Mr. Betty purchased 25,000 shares of the
Common Stock at $4.84 per share, and also was granted options to purchase an
additional 175,000 shares of Common Stock at an exercise price of $4.84 per
share. In addition, in September 1996, Mr. Betty was granted options to purchase
an additional 75,000 shares of Common Stock at an exercise price of $11.00 per
share. All of Mr. Betty's options vest in equal quarterly increments of 5%
during the five-year period beginning on the respective dates of grant, January
15, 1996 and September 24, 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 AND OTHER OPTION AND WARRANT ISSUANCES
The EarthLink Network 1995 Stock Option Plan (the "1995 Plan") provides for
the grant of incentive stock options to employees of the Company within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and
non-qualified stock options to employees, officers, directors and consultants of
the Company. The 1995 Plan is administered by the Compensation Committee of the
Board of Directors, 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 non-qualified stock options) or 100%
of the fair market value (for incentive stock options) as of the date of grant.
As of September 30, 1996, options to purchase 1,005,750 shares of
40
<PAGE>
Common Stock were outstanding under the 1995 Plan. In addition, as of that date
the Company had issued non-plan options and warrants to purchase an aggregate of
1,331,438 shares of Common Stock at exercise prices ranging from $0.60 to $20.00
per share.
DIRECTORS STOCK OPTION PLAN AND OTHER DIRECTOR OPTION ISSUANCES
Under the Company's Directors Stock Option Plan (the "Directors Plan"),
options to purchase 62,500 shares of Common Stock may be granted to directors
who do not also serve as employees of the Company and do not beneficially own,
nor are employees, directors or officers of any entity that beneficially owns,
5% or more of the outstanding shares of the Company's capital stock. Under the
Directors Plan, grants of options to purchase 10,000 and 2,500 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. As of September 30, 1996, there
were no options to purchase shares of Common Stock outstanding under the
Directors Plan.
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 50,000
shares of Common Stock at an exercise price of $4.84 per share, the amount then
determined by the Board of Directors to constitute fair market value, in
consideration of Messrs. Kavner's and Lacy's agreement to serve on the Board of
Directors. These warrants vest over a five-year period from January 12, 1996,
the date of grant.
41
<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 75,000
shares of Common Stock at an exercise price of $1.81 per share, the amount then
determined by the Board of Directors to constitute the 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 50,000 shares of Common Stock at an exercise price
of $1.81 per share and 100,000 shares of Common Stock at an exercise price of
$4.84 per share, the amount then determined by the Board of Directors to
constitute the 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 50,000 shares of Common Stock at an exercise price
of $4.84 per share, the amount then determined by the Board of Directors to
constitute the 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 Common Stock at the
weighted average per share purchase prices as follows: Gregory Abbott, 338,625
shares, $4.08 per share; Charles G. Betty, 25,000 shares, $4.84 per share; Sky
D. Dayton, 1,500,000 shares, $.0006 per share; Sidney Azeez, 522,457 shares,
$6.26 per share; Linwood A. Lacy, Jr., 24,810 shares, $4.84 per share; Robert M.
Kavner, 20,675 shares, $4.84 per share; Robert London, 372,032 shares, $2.16 per
share; Kevin M. O'Donnell, 942,152 shares, $.84 per share; Reed E. Slatkin,
942,157 shares, $.84 per share; and Storie Partners, L.P., 415,598 shares, $6.26
per share.
In June 1996, the Company issued $2,950,000 of its 10% Promissory Notes to
17 purchasers, including certain of its directors and more than five percent
stockholders. In connection with this financing, and as additional consideration
for the investment of these purchasers, the Company also issued warrants to
purchase 98,340 shares of Common Stock having an exercise price of $11.00 per
share. The 10% Promissory Notes are due on or before June 6, 1997 with interest
payable monthly until such date. The warrants are exerciseable for five years
commencing on the date of issuance.
The following directors and more than five percent stockholders participated
in this financing: Gregory Abbott, $200,000 note, 6,667 warrants; Sidney Azeez,
$200,000 note, 6,667 warrants; Robert M. Kavner, $100,000 note, 3,334 warrants;
Robert S. London, $200,000 note, 6,667 warrants; Kevin M. O'Donnell, $225,000
note, 7,500 warrants; Reed E. Slatkin, $225,000 note, 7,500 warrants; and Storie
Partners, L.P., $300,000 note, 10,000 warrants.
42
<PAGE>
In September 1996, the Company sold 2,727,273 shares of its Series A
Convertible Preferred Stock to certain purchasers, including, among others,
certain directors, stockholders, the Underwriter and certain of its associates
for approximately $15,000,000 in the aggregate. In connection with this
transaction, Quantum Industrial Partners LDC and persons and entities associated
with or employed by Soros Fund Management ("SFM") received warrants to purchase
up to 100,000 shares of Common Stock at an exercise price of $11.00 per share.
Each two shares of Series A Convertible Preferred Stock will automatically
convert into one share of Common Stock upon the consummation of this Offering.
The following directors and more than five percent stockholders (including
certain of their family members and affiliates) participated in this financing
(share numbers reflect shares of Common Stock to be issued upon conversion of
the Series A Convertible Preferred Stock): Quantum Industrial Partners LDC
(933,063 shares of Common Stock and 95,300 shares of Common Stock underlying
warrants, which includes 214,545 shares of Common Stock and warrants to purchase
23,600 shares of Common Stock held by George Soros, who may be deemed to have
sole and ultimate control over SFM, in which Quantum Industrial Partners LDC has
vested investment discretion with respect to its portfolio investments, and
45,455 shares of Common Stock and 5,000 shares of Common Stock underlying
warrants held by trusts established for the benefit of certain children of Mr.
Soros); Storie Partners, L.P. (90,909 shares of Common Stock); Reed E. Slatkin
(39,273 shares of Common Stock); Gregory Abbott (15,000 shares of Common Stock);
Sidney Azeez (15,000 shares of Common Stock); Linwood A. Lacy, Jr. (10,000
shares of Common Stock); Robert S. London (10,000 shares of Common Stock); Paul
McNulty (454 shares of Common Stock and 50 shares of Common Stock underlying
warrants); Kevin M. O'Donnell (10,000 shares of Common Stock); and Charles G.
Betty (5,000 shares of Common Stock).
John W. Sidgmore, a member of the Company's Board of Directors, also serves
as a director and Chief Executive Officer of UUNET and as President and Chief
Operating Officer and as a director of UUNET's corporate parent, MFS. UUNET is
the Company's primary provider of POP capacity. In connection with the Company's
and UUNET's execution of a new network services agreement in May 1996, the
Company agreed to issue warrants to UUNET to purchase 10,000 shares of Common
Stock having an exercise price of $20.00 per share.
In connection with an amendment to the Company's network services agreement
with UUNET, the Company issued a $5.0 million, one-year promissory note to UUNET
and filled a vacancy on the Board of Directors with a designate of UUNET, John
W. Sidgmore. This note bears interest at prime plus 2% per annum (an effective
rate of 10.25% per annum at December 1, 1996), and is convertible into a maximum
of 382,500 shares of Common Stock at a conversion price at between $13.20 and
$16.00 per share, depending on the number of shares of Common Stock, if any,
purchased in this Offering by certain investors referred to two paragraphs
above, and the public offering price of the Common Stock in this Offering. The
Company also granted UUNET registration rights identical to those presently held
by most of the Company's existing stockholders. For the year ended December 31,
1995 and the nine-month period ended September 30, 1996, EarthLink paid UUNET
approximately $52,000 and approximately $2.0 million for network services.
Linwood A. Lacy, Jr., a member of the Company's Board of Directors, also
serves as President and Chief Executive Officer of Micro Warehouse Incorporated
("Micro Warehouse"), one of the Company's affinity marketing partners. For the
nine-month period ended September 30, 1996, the Company paid Micro Warehouse
approximately $177,000 in bounties for new Company customers generated by Micro
Warehouse.
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 such directors believe are
no less favorable to the Company than could be obtained from unaffiliated
parties.
43
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of November 30, 1996 by (i) each
person or entity who is known by the Company to own beneficially more than five
percent of the Common Stock (a "5% Holder"), (ii) each of the Company's
directors and executive officers, and (iii) all directors and executive officers
of the Company as a group. This table gives effect to the automatic conversion,
upon consummation of this Offering, of all of the Company's outstanding Series A
Convertible Preferred Stock and includes options, warrants and other convertible
securities that are exercisable or convertible within 60 days of November 30,
1996.
<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................................................... 1,575,000(2) 21.1% 16.6%
Kevin M. O'Donnell.............................................. 1,134,677(3) 15.0 11.8
Reed E. Slatkin................................................. 1,163,930(4) 15.4 12.2
Sidney Azeez.................................................... 544,124(5) 7.4 5.8
Charles G. Betty................................................ 70,799(6) 1.0 *
Linwood A. Lacy, Jr............................................. 37,310(7) * *
Robert M. Kavner................................................ 26,510(8) * *
Robert E. Johnson, Jr........................................... 15,000(9) * *
John W. Sidgmore................................................ 392,500 (10 5.0 4.0
Paul McNulty.................................................... 504 (11 * *
Brinton O.C. Young.............................................. 21,250 (12 * *
Barry W. Hall................................................... 12,500 (13 * *
David R. Tommela................................................ 8,750 (14 * *
Quantum Industrial Partners LDC................................. 673,063 (15 9.0 7.1
c/o Curacao Corporation Company N.V.
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
UUNET Technologies, Inc......................................... 392,500 (16 5.0 4.0
3060 Williams Drive
Fairfax, Virginia 22031
Storie Partners, L.P............................................ 506,507 6.9 5.4
One Bush Street
San Francisco, CA 94104
Robert S. London................................................ 388,699 (17 5.3 4.1
Cruttenden Roth Incorporated
809 Presidio Ave.
Santa Barbara, CA 93101
All directors and executive officers as a group (13 persons).... 5,002,854 (18 60.1% 48.5%
<FN>
- ------------
</TABLE>
* Represents beneficial ownership of less than 1% of the Common Stock.
(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 75,000 shares of Common Stock.
(3) Includes (i) 7,538 shares of Common Stock held by Mr. O'Donnell's son, (ii)
warrants to purchase 182,500 shares of Common Stock, and (iii) options to
purchase 25 shares of Common Stock held by Mr. O'Donnell's son. 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 182,500 shares of Common Stock and (ii)
7,428 shares of Common Stock held in trust for Mr. Slatkin's minor children.
(5) Includes (i) 302,861 shares of Common Stock held by Mr. Azeez's family and
(ii) warrants to purchase 6,667 shares of Common Stock.
(6) Includes (i) options to purchase 38,750 shares of Common Stock and (ii)
2,049 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 2,500 shares of Common Stock.
(8) Includes warrants to purchase 5,835 shares of Common Stock.
(9) Includes options to purchase 15,000 shares of Common Stock.
(10) Includes 10,000 shares of Common Stock issuable upon the exercise of
warrants and up to 382,500 shares of Common Stock issuable upon the
conversion of outstanding indebtedness. Mr. Sidgmore is Chief Executive
Officer and a director of UUNET and shares voting and investment power with
the other UUNET directors.
(11) Includes warrants to purchase 50 shares of Common Stock.
(12) Includes options to purchase 11,250 shares of Common Stock.
(13) Includes options to purchase 12,500 shares of Common Stock.
(14) Includes options to purchase 8,750 shares of Common Stock.
(15) Includes warrants to purchase 66,700 shares of Common Stock. Quantum
Industrial Partners LDC ("Quantum Industrial") has vested investment
discretion with respect to its portfolio investments, including the Common
Stock, in SFM, a sole proprietorship of Mr. George Soros, over which
44
<PAGE>
Mr. Soros may be deemed to have sole and ultimate control. Mr. Soros may be
deemed to be the beneficial owner of the Common Stock held by Quantum
Industrial. The shares shown exclude 214,545 shares of Common Stock and
warrants to purchase 23,600 shares of Common Stock held directly by Mr.
Soros and 45,455 shares of Common Stock and warrants to purchase 5,000
shares of Common Stock held by trusts established for the benefit of certain
children of Mr. Soros. The shares shown also exclude 42,727 shares of Common
Stock and warrants to purchase 4,700 shares of Common Stock held by certain
managing directors and other employees of SFM, of which Mr. Soros disclaims
beneficial ownership.
(16) Includes 10,000 shares of Common Stock issuable upon the exercise of
warrants and up to 382,500 shares of Common Stock issuable upon the
conversion of outstanding indebtedness.
(17) Includes warrants to purchase 6,667 shares of Common Stock.
(18) Includes (i) options and warrants to purchase 551,300 shares of Common
Stock and (ii) 319,876 shares of Common Stock owned by family members or
affiliates of certain members of the group, (iii) options and warrants held
by family members or affiliates of certain members of the group to purchase
25 shares of Common Stock and (iv) up to 382,500 shares of Common Stock
issuable upon the conversion of outstanding indebtedness held by UUNET, of
which Mr. Sidgmore serves as Chief Executive Officer and a director.
45
<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, of which there is one authorized
series, Series A Convertible Preferred Stock, consisting of 2,727,273 authorized
shares. As of September 30, 1996, there were 6,022,724 shares of Common Stock
outstanding and 2,727,273 shares of Series A Convertible Preferred Stock. The
shares of Series A Convertible Preferred Stock will automatically convert into
1,363,624 shares of Common Stock upon consummation of this Offering. 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. The Company's Certificate of Incorporation provides for cumulative
voting rights in the election of directors, meaning that in such elections (i)
each stockholder is entitled to cast such number of votes as is equal to the
product of the number of shares owned by such stockholder multiplied by the
number of directors standing for election and (ii) each stockholder may cast all
of such votes for a single director or may distribute them among any two or more
candidates for election as such stockholder chooses. Following the first meeting
of its stockholders subsequent to this Offering, and provided that there are 800
or more beneficial owners of the Common Stock, the Company anticipates that it
will seek stockholder approval to eliminate cumulative voting. 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. All shares of Common Stock outstanding
immediately following this Offering will be fully paid and non-assessable.
Pursuant to Section 2115 of the California Corporations Code (the
"California Law"), a corporation incorporated in a state other than California
(such as the Company, which is incorporated in Delaware) may nevertheless be
subject to certain of the provisions of the California Law (as specified in
Section 2115 of the California Law) applicable to California corporations
(commonly designated a "Quasi-California Corporation") if more than one-half of
its outstanding voting securities are owned of record by persons having
addresses in California and more than half of its business is conducted in
California (generally, the average of its property factor, payroll factor and
sales factor (as defined in Sections 25129, 25132 and 25134 of the California
Revenue and Taxation Code) is more than 50 percent during its latest full income
year). Such a foreign corporation will not be treated as a Quasi-California
Corporation, however, if it has outstanding securities trading on the Nasdaq
National Market and has at least 800 holders of its equity securities as of the
record date of its most recent annual shareholders' meeting. Prior to this
Offering, a substantial majority of the Company's outstanding voting securities
were owned of record by persons having addresses in California. It is expected
that such percentage will be reduced as a result of this Offering. To the
extent, however, that the Company meets the requirements set forth in Section
2115 of the California Law, the Company could become a Quasi-California
Corporation subject to the California Law which, among other things, requires
cumulative voting and is more restrictive than Delaware Law concerning dividends
and other distributions to stockholders and, generally with respect to a
Quasi-California Corporation, does not permit classification of the Board of
Directors.
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
46
<PAGE>
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 Common Stock at a premium, or otherwise adversely affect the market
price of the Common Stock.
CERTAIN CHARTER AND BYLAW PROVISIONS
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,
such as the approval of a majority of certain members of the Board of Directors.
The term "business combination" includes mergers and stock and asset sales. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
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 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 has included in its Certificate of Incorporation provisions that
limit the personal liability of its officers and directors for monetary damages
for breach of their fiduciary duty of directors, except for liability that
cannot be eliminated under the Delaware General Corporation Law. The Certificate
of Incorporation provides that, to the fullest extent provided by the Delaware
General Corporation Law, directors of the Company will not be personally liable
for monetary damages for breach of their fiduciary duty as directors. The
Delaware General Corporation Law does not permit a provision in a corporation's
certificate of incorporation that would eliminate such liability (i) for any
breach of their duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) for any unlawful payment of a dividend or
unlawful stock repurchase or redemption, as provided in Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care. The provisions described above apply to an
officer of a corporation only if he or she is a director of such corporation and
is acting in his or her capacity as director, and do not apply to the officers
of the corporation who are not directors.
The Company's Bylaws provide that, to the fullest extent permitted by the
Delaware General Corporation Law, the Company may indemnify its directors,
officers and employees. The Bylaws further provide that the Company may
similarly indemnify its other employees and agents. In addition, the Company
anticipates that each director will enter into an indemnification agreement with
the Company pursuant to which the Company will indemnify such director to the
fullest extent permitted by the Delaware General Corporation 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.
47
<PAGE>
REGISTRATION RIGHTS
The holders of substantially all of the shares of Common Stock and all of
the shares of Series A Convertible Preferred 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
and convertible debt are parties to registration rights agreements with the
Company. These agreements provide 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. These agreements also permit demand registrations on Form S-3
registration statements at such time when the Company is eligible to register
its capital stock on such form. These agreements do not permit holders of
registration rights to include their shares of Common Stock in this Offering. In
addition, the Company has agreed to register 20,000 shares of Common Stock to be
issued pursuant to a consulting agreement in equal increments in January 1998
and January 1999. See "Shares Eligible for Future Sale."
TRANSFER AGENT AND REGISTRAR
The Company's Transfer Agent and Registrar is American Stock Transfer &
Trust Company.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock.
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 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, 9,386,348 shares of Common Stock will
be outstanding. Of these shares, the 2,000,000 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.
The remaining 7,386,348 shares were issued and sold by the Company in
private transactions and may be publicly sold only if registered under the
Securities Act or sold in accordance with an applicable exemption from
registration, such as those provided under Rules 144 and 701 under the
Securities Act. Of such shares, 2,220,590 shares will be immediately available
for sale upon completion of the offering (subject to the volume limitations of
Rule 144) and 2,054,815 shares will become eligible for sale during 1997.
However, the holders of 7,019,803 shares of Common Stock (including shares of
Common Stock issuable upon conversion of the Series A Convertible Preferred
Stock) and warrants, options and convertible debt securities exercisable or
convertible into an aggregate of 1,608,583 shares of Common Stock (including all
of the Company's directors and officers) 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 one year after the date of this Prospectus,
without the prior written consent of the Underwriter. 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, warrants and convertible securities.
The holders of substantially all of the shares of the shares of Common Stock
and all of the shares of Series A Convertible Preferred Stock outstanding prior
to this Offering (including the Company's founder and Chairman and its President
and Chief Executive Officer) as well as certain holders of warrants and
convertible debt are parties to registration rights agreements with the Company
that provide 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. Such
registration rights agreements also permit demand registrations on Form S-3
registration statements at such time as the Company is eligible to register
securities on such form. The number of shares sold in the public market could
increase if such rights are exercised. See "Description of Capital Stock --
Registration Rights."
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, 1,005,750 shares of Common Stock subject to outstanding options will
become eligible for sale, to the extent they are vested, without restriction in
the public market pursuant to Rule 701; however, 487,500 of such shares will be
subject to lock-up agreements for an additional 275 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 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 or (ii) the
average weekly trading volume of the Common Stock during the four
49
<PAGE>
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.
The Securities and Exchange Commission (the "Commission") has recently
proposed reducing the initial Rule 144 holding period to one year. There can be
no assurance as to if or when 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.
50
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1996 (the "Underwriting Agreement"), the
Underwriter has agreed to purchase from the Company 2,000,000 shares of Common
Stock at the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to certain conditions precedent and that the Underwriter will be
obligated to purchase all of the shares of Common Stock offered hereby if any
are purchased.
The Company has granted the Underwriter an option, expiring at the close of
business on the 30th day after the date of this Prospectus, to purchase up to
300,000 additional shares of Common Stock at the initial public offering price
less the underwriting discounts and commissions as set forth on the cover page
of this Prospectus. Such option may be exercised only to cover over-allotments
in the sale of the shares of Common Stock.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the Common Stock to the public initially at the offering price
set forth on the cover page of this Prospectus. The Underwriter may allot to
certain dealers a concession of $ per share, and the Underwriter and such
dealers may re-allow a concession of $ per share on sales to certain other
dealers. After the initial public offering, the public offering price and
concessions to dealers may be changed by the Underwriter.
The Company, the holders of 6,969,162 shares of Common Stock, (including
shares issuable upon conversion of the Series A Convertible Preferred Stock) and
warrants, options and convertible debt securities exercisable or convertible
into an aggregate of 1,608,583 shares of Common Stock (including all of the
Company's officers and directors) have entered into lock-up agreements under
which they have agreed, subject to limited exceptions, not to offer, issue, 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 one year after the
date of this Prospectus, without the prior written consent of the Underwriter.
See "Shares Eligible for Future Sale."
The Company has agreed to indemnify the Underwriter against certain
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments which the Underwriter may be required to make with
respect thereto.
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 Underwriter 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 an estimate of the business potential of the
Company, the present state of the Company's development, an assessment of the
Company's management, prevailing market conditions, the demand for similar
securities of comparable companies and other factors deemed relevant.
As of October 31, 1996, the Underwriter and certain officers and employees
of the Underwriter held 113,635 shares of Series A Convertible Preferred Stock
(which will be converted into 56,815 shares of Common Stock upon completion of
the offering). In addition, two minority shareholders and directors of the
Underwriter's corporate parent own an aggregate of 13,636 shares of Series A
Convertible Preferred Stock which will be converted into 6,817 shares of Common
Stock upon completion of the offering. Such Series A Convertible Preferred Stock
was purchased in September 1996 for $5.50 per share. For a period of one year
following the date of this Prospectus, the Underwriter and the other holders of
Series A Convertible Preferred Stock described in this paragraph will not sell,
transfer, assign, pledge or hypothecate the Series A Convertible Preferred Stock
or the Common Stock issuable upon conversion of the Series A Convertible
Preferred Stock, other than to the Underwriter or an officer of the Underwriter.
51
<PAGE>
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 Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania.
EXPERTS
The financial statements as of December 31, 1994 and 1995 and September 30,
1996 and for the period from inception through December 31, 1994, the year ended
December 31, 1995 and the nine months ended September 30, 1996 included in this
Prospectus 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. 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 Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of that site is http://www.sec.gov.
52
<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 September 30, 1996..... F-3
Statement of Operations for the period from inception (May 26, 1994)
through December 31, 1994, the year ended December 31, 1995 and the nine
months ended September 30, 1995 (unaudited) and September 30, 1996....... F-4
Statement of Stockholders' Equity (Deficit) for the period from inception
(May 26, 1994) through December 31, 1994, the year ended December 31,
1995 and the nine months ended September 30, 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 nine
months ended September 30, 1995 (unaudited) and September 30, 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.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of EarthLink
Network, Inc. at December 31, 1994 and 1995 and September 30, 1996, and the
results of its operations and its cash flows for the period from inception (May
26, 1994) through December 31, 1994, the year ended December 31, 1995 and the
nine months ended September 30, 1996 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
December 4, 1996
F-2
<PAGE>
EARTHLINK NETWORK, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
--------- --------- ---------------- PRO FORMA
STOCKHOLDERS'
EQUITY AT
SEPTEMBER 30,
1996
--------------
(UNAUDITED)
NOTE 7)
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Current assets:
Cash and cash equivalents...................................... -- $ 290 $ 8,688
Restricted short-term investment (Note 6)...................... -- 1,500 296
Accounts receivable, net of allowance of $664
at September 30, 1996......................................... $ 27 218 1,765
Prepaid expenses............................................... -- 123 712
Other assets (Note 4).......................................... 122 653
--------- --------- --------
Total current assets....................................... 27 2,253 12,114
Property and equipment, net (Notes 1 and 3)...................... 90 2,551 13,453
Intangibles, net (Notes 2, 5 and 8).............................. 69 70 466
--------- --------- --------
Total assets............................................... $ 186 $ 4,874 $ 26,033
--------- --------- --------
--------- --------- --------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable......................................... $ 18 $ 1,766 $ 5,878
Accrued payroll and related expenses........................... 4 193 1,522
Other accounts payable and accrued liabilities................. -- 405 3,809
Lines of credit (Note 6)....................................... -- 1,494 --
Current portion of capital lease obligations (Note 10)......... -- 159 2,857
Notes payable (Note 6)......................................... 67 -- 2,950
Deferred revenue............................................... -- 212 1,537
--------- --------- --------
Total current liabilities.................................. 89 4,229 18,553
Capital lease obligations, net of current portion (Note 10)...... -- 355 5,388
--------- --------- --------
Total liabilities.......................................... 89 4,584 23,941
--------- --------- --------
Commitments and contingencies (Note 10)
Mandatorily redeemable convertible preferred stock (Note 7)...... -- -- 14,013 $ --
Stockholders' equity (deficit)
Preferred Stock, $0.01 par value, 5,000,000 shares authorized,
nil, nil and 2,727,273 shares outstanding as redeemable
preferred stock............................................... -- -- --
Common Stock, $0.01 par value, 50,000,000 shares authorized,
2,941,180, 5,057,165 and 6,022,732 issued and outstanding
7,386,348 outstanding on a pro forma basis (Note 7)........... 29 51 60 74
Additional paid-in capital..................................... 147 5,122 14,236 28,235
Warrants to purchase common stock (Note 8)..................... 69 124 599 599
Accumulated deficit............................................ (148) (5,007) (26,816) (26,816)
--------- --------- --------
Total stockholders' equity (deficit)............................. 97 290 (11,921) 2,092
--------- --------- --------
$ 186 $ 4,874 $ 26,033
--------- --------- --------
--------- --------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
EARTHLINK NETWORK, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION NINE MONTHS ENDED
(MAY 26, 1994) YEAR ENDED ----------------------------
THROUGH DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, 1994 1995 1996
----------------- ------------ -------------
SEPTEMBER 30,
1995
-------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Recurring revenues............................. $ 53 $ 2,422 $ 1,057 $ 15,914
Other revenues................................. 58 606 390 4,248
-------- ------------ ------------- -------------
Total revenues............................... 111 3,028 1,447 20,162
Operating costs and expenses:
Cost of recurring revenues..................... 4 1,055 448 11,736
Cost of other revenues......................... 12 349 105 2,020
Sales and marketing............................ 37 3,711 1,775 9,867
General and administrative expenses............ 168 2,062 990 7,838
Operations and customer support................ 38 1,869 1,043 9,941
-------- ------------ ------------- -------------
Total operating costs and expenses........... 259 9,046 4,361 41,402
-------- ------------ ------------- -------------
Loss from operations............................. (148) (6,018) (2,914) (21,240)
Interest expense................................. -- (136) (70) (683)
Interest income.................................. -- 34 12 114
-------- ------------ ------------- -------------
Net loss................................... $ (148) $ (6,120) $ (2,972) $ (21,809)
-------- ------------ ------------- -------------
-------- ------------ ------------- -------------
Net loss per share (Note 1)...................... $ (0.04) $ (1.15) $ (0.59) $ (3.15)
-------- ------------ ------------- -------------
-------- ------------ ------------- -------------
Weighted average shares outstanding (Note 1)..... 4,062 5,312 5,005 6,924
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
EARTHLINK NETWORK, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------------ PAID-IN WARRANTS ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL ISSUED DEFICIT (DEFICIT)
----------- ----------- ----------- ----------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock........................ 2,941 $ 29 $ 147 $ -- $ -- $ 176
Warrants issued in connection with line of
credit
(Note 8)...................................... -- -- -- 69 -- 69
Net loss........................................ -- -- -- -- (148) (148)
----- ----- ----------- ----- ------------ --------------
Balance at December 31, 1994.................... 2,941 29 147 69 (148) 97
Issuance of Common Stock........................ 2,116 22 6,236 -- -- 6,258
Reclassification of S Corporation accumulated
deficit (Note 8).............................. -- -- (1,261) -- 1,261 --
Warrants issued for lease guarantee (Note 8).... -- -- -- 50 -- 50
Warrants issued for non-competition agreement
(Notes 2 and 8)............................... -- -- -- 5 -- 5
Net Loss........................................ -- -- -- -- (6,120) (6,120)
----- ----- ----------- ----- ------------ --------------
Balance at December 31, 1995.................... 5,057 51 5,122 124 (5,007) 290
Issuance of Common Stock........................ 923 9 8,651 -- -- 8,660
Issuance of Common Stock for services........... 43 -- 463 -- -- 463
Warrants issued in connection with equipment
leases and other financings................... -- -- -- 475 -- 475
Net loss........................................ -- -- -- -- (21,809) (21,809)
----- ----- ----------- ----- ------------ --------------
Balance at September 30, 1996................... 6,023 $ 60 $ 14,236 $ 599 $ (26,816) $ (11,921)
----- ----- ----------- ----- ------------ --------------
----- ----- ----------- ----- ------------ --------------
</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) NINE MONTHS ENDED
THROUGH YEAR ENDED ----------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
--------------- ------------- -------------
SEPTEMBER 30,
1995
-------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $ (148) $ (6,120) $ (2,972) $ (21,809)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 7 305 167 2,773
Provision for doubtful accounts receivable......... -- -- -- 664
Issuance of common stock in exchange for
professional services............................. -- -- -- 50
Issuance of common stock in exhange for termination
of consulting agreement........................... -- -- -- 413
Increase in accounts receivable.................... (27) (191) (62) (2,211)
Increase in prepaid expenses and other assets...... -- (141) (164) (1,120)
Increase in accounts payable and accrued
liabilities....................................... 22 2,292 1,308 8,845
Increase in deferred revenue....................... -- 212 118 1,325
----- ------ ------ -------------
Net cash used in operating activities............ (146) (3,643) (1,605) (11,070)
----- ------ ------ -------------
Cash flows from investing activities:
Purchases of property and equipment.................. (97) (2,766) (1,161) (13,596)
Liquidation of restricted short-term investment...... -- (1,500) (500) (296)
Purchase of restricted short-term investment......... -- -- -- 1,500
----- ------ ------ -------------
Net cash used in investing activities............ (97) (4,266) (1,661) (12,392)
----- ------ ------ -------------
Cash flows from financing activities:
Proceeds from (payment of) line of credit............ -- 1,494 494 (1,494)
Increase (decrease) in note payable.................. 67 (67) (67) 2,950
Proceeds from capital lease obligations.............. -- 556 298 9,220
Principal payments under capital lease obligations... -- (42) (1) (1,489)
Proceeds from issuance of Mandatorily Redeemable
Preferred Stock..................................... -- -- -- 14,013
Proceeds from issuance of Common Stock............... 176 6,258 3,365 8,660
Proceeds from Common Stock pending issuance.......... -- -- 1,800 --
----- ------ ------ -------------
Net cash provided by financing activities........ 243 8,199 5,889 31,860
----- ------ ------ -------------
Net increase in cash and cash equivalents.............. -- 290 2,623 8,398
Cash and cash equivalents, beginning of year........... -- -- -- 290
----- ------ ------ -------------
Cash and cash equivalents, end of period............... $ -- $ 290 $ 2,623 $ 8,688
----- ------ ------ -------------
----- ------ ------ -------------
</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 an Internet service provider that was formed to help users
derive meaningful benefits from the extensive resources of the Internet.
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 to expend substantial resources on
sales, marketing and administration, building its network systems, developing
new service offerings and improving its management information systems.
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 positive cash flow. The failure of
the Company to achieve or sustain profitability or positive cash flow may
require the Company to reduce the scope of its operations or its anticipated
expansion, which could adversely affect the Company's business and results of
operations.
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 the registration process is completed.
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.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
or credit risk consist principally of cash investments and trade receivables.
The Company's cash investment policies limit investments to short-term,
investment grade 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.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated 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,
ranging from one to five years.
F-7
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 amortized over the
lesser of their estimated useful lives of three years or the term of the lease.
INTANGIBLES
Intangible assets consist primarily of deferred financing and professional
service 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, which range from two to three years. The Company regularly reviews the
recoverability of intangible assets based on estimated undiscounted future cash
flows from operating activities compared with the carrying values of the
intangibles.
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 other potentially dilutive
instruments 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 $15.00 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.
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 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.
F-8
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
RECENT PRONOUNCEMENTS
The Company has adopted, as of January 1, 1996, SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
and SFAS 123 and "Accounting for Stock-Based Compensation". The adoption of SFAS
No. 121 has not had any effect on the Company's financial position or results of
operations. The Company continues to account for its employee stock based
compensation in accordance with the provisions of APB 25 and provides pro forma
disclosures in the notes to the financial statements (see note 8), as if the
measurement provisions of SFAS No. 123 had been adopted. As such SFAS 123 has
not had a material effect on the Company's financial position or results of
operations.
INTERIM FINANCIAL STATEMENTS
The interim financial data for September 30, 1995 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 10,330 shares of the
Company's Common Stock at $4.84 per share as consideration for an agreement 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, SEPTEMBER 30,
-------------------- -------------
1994 1995 1996
--------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Data communications equipment.......................................... $ 71 $ 2,167 $ 10,246
Office and other equipment............................................. 26 661 5,564
Leasehold improvements................................................. -- 35 624
Construction in progress............................................... -- -- 25
--- --------- -------------
97 2,863 16,459
Less accumulated depreciation and amortization......................... (7) (312) (3,006)
--- --------- -------------
$ 90 $ 2,551 $ 13,453
--- --------- -------------
--- --------- -------------
</TABLE>
Property under capital lease, primarily data communications equipment
included above, aggregated $556,000 and $9,775,000 at December 31, 1995 and
September 30, 1996, respectively. Included in accumulated depreciation and
amortization are amounts related to property under capital lease of $56,000 and
$1,720,000 at December 31, 1995 and September 30, 1996, respectively.
Depreciation expense charged to operations was $7,000, $305,000 and $2,694,000
in 1994, 1995 and for the nine months ended September 30, 1996, respectively,
and included nil, $56,000, and $1,664,000, 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>
SEPTEMBER 30,
1996
DECEMBER 31, ---------------
1995
---------------
(IN THOUSANDS)
<S> <C> <C>
Deposits................................................................ $ 122 $ 327
Deferred offering costs................................................. -- 277
Other................................................................... -- 49
----- -----
$ 122 $ 653
----- -----
----- -----
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred financing costs............................................ $ 69 $ -- $ 347
Lease guarantee..................................................... -- 50 110
Rights to client lists.............................................. -- 10 10
Professional Services............................................... -- -- 56
Other............................................................... -- 10 22
--- --- -----
69 70 545
Less: Accumulated amortization...................................... -- -- (79)
--- --- -----
$ 69 $ 70 $ 466
--- --- -----
--- --- -----
</TABLE>
6. NOTES PAYABLE
In 1995 the Company had three secured revolving credit agreements with its
banks. The outstanding principal balances under these lines of credit were
$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. The
Company repaid amounts outstanding on such lines of credit on April 6, 1996,
March 15, 1996 and June 8, 1996 respectively. The lines of credit subsequently
expired.
In June 1996, the Company issued to 17 investors, promissory notes
aggregating $2,950,000. Certain of the investors are directors and stockholders
of the Company. The 10% promissory notes expire on June 6, 1997. As described in
Note 7, the Company issued warrants valued at $116,000 to note holders. The fair
value of the warrants is included in deferred financing costs and is being
amortized as interest expense over the life of the notes resulting in a 14.30%
effective interest rate. Interest expense, which is paid in advance, on these
notes was approximately $123,000 for the nine months ended September 30, 1996.
7. CAPITAL STOCK AND MANDATORILY REDEEMABLE EQUITY SECURITIES
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
F-10
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
COMMON STOCK
The Company issued 45,485 shares of Common Stock at $4.84 per share and
25,000 shares of Common Stock at $4.84 per share on January 18, 1996 and March
20, 1996, respectively. On May 6, 1996, the Company issued 852,460 shares of
common stock at $9.76 per share in a private placement. As a result of these
placements, EarthLink raised, in the aggregate, $8,660,000.
COMMON STOCK ISSUANCES FOR OTHER THAN CASH
On May 5, 1996, the Company issued 5,122 shares of Common Stock at $9.76 per
share, to a sub-contractor in lieu of cash for services provided to the Company.
In September 1996, the Company issued 37,500 shares of Common Stock at $11.00
per share as consideration for the termination of a consulting agreement.
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
On September 10, 1996, the Company issued 2,727,273 shares of its Series A
Redeemable Convertible Preferred Stock to investors including among others,
certain directors, stockholders and the Underwriter associated with the proposed
initial public offering and certain of its associates for $15,000,000. Each two
shares of the Series A Convertible Preferred Stock is convertible into one
share, adjusted for stock splits or recapitalizations, of the Company's Common
Stock at the option of the holder through March 10, 1997 and is automatically
converted upon consummation of an underwritten public offering of the Company's
common stock in which the proceeds are at least $20 million. Stock issuance
costs of $987,000 have been charged to redeemable convertible preferred stock.
Assuming conversion of the Series A Redeemable Convertible Preferred Stock into
shares of common stock on September 30, 1996, the pro forma number of, and par
value of common stock shares outstanding would be 7,386,348 and $74,000,
respectively.
Holders of Series A Convertible Preferred Stock are entitled to voting
rights and participation in dividends equivalent to the number of common shares
issuable if converted. The Series A Convertible Preferred Stockholders have the
exclusive right to elect one director and participate in the election of other
directors along with holders of Common Stock. In the event of a change in
ownership, as defined, the holders of the Company's Series A Convertible
Preferred Stock have the right to demand complete redemption. The holders of the
Company's Series A Convertible Preferred Stock have a liquidation preference
equal to their initial investment. Any assets remaining after the preferred
liquidation preference plus declared and unpaid dividends will be distributed to
the holders of Common Stock.
8. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
1995 STOCK OPTION PLAN
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 purchase up to 1,250,000 shares of common stock 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
F-11
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 100%
of the fair market value on the date of grant. Options generally vest in equal
quarterly increments over a five year period.
DIRECTORS STOCK OPTION PLAN
In September 1995, the Company established the EarthLink Directors Stock
Option Plan (the "Directors Plan"). The Directors Plan as amended and restated
in December 1996, provides for the grant of options to purchase 62,500 shares of
Common Stock to directors who do not also serve as employees of the Company and
do not beneficially own, nor are employees, directors or officers of any entity
which owns 5% or more of the outstanding shares of the Company's capital stock.
Under the Directors Plan, grants of options to purchase 10,000 and 2,500 shares
of Common Stock are automatically made to each non-management director at such
time as the person first becomes a member of the Board of Directors and at the
beginning of each fiscal year, respectively. Options generally vest in equal
quarterly increments over a five year period. As of September 30, 1996, there
were no options to purchase shares of Common Stock outstanding under the
Directors Plan.
NON-QUALIFIED OPTION GRANTS
In addition to the options granted under the plan described above, the
Company granted non-qualified stock options to certain employees, officers and
directors. Non-qualified options have a maximum term of ten years and generally
vest in equal quarterly increments over a five-year period.
F-12
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the status of the incentive stock and
non-qualified options during the year ended December 31, 1995 and the nine
months ended September 30, 1996.
<TABLE>
<CAPTION>
INCENTIVE STOCK OPTIONS
----------------------------------------
OPTIONS OUTSTANDING
---------------------------
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
----------- -------------- -----------
<S> <C> <C> <C>
Plan Creation 1995
Granted................................................................... 232,500 $ 4.84 $ 4.84
----------- -------------- -----
Balance at December 31, 1995.............................................. 232,500 $ 4.84 $ 4.84
Granted................................................................... 783,750 $ 4.84-11.00 $ 8.17
Forfeited................................................................. (10,500) $ 9.76 $ 9.76
----------- -------------- -----
Balance at September 30, 1996............................................. 1,005,750 $ 4.84-11.00 $ 7.40
----------- -------------- -----
<CAPTION>
OPTIONS EXERCISABLE
---------------------------
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
----------- -------------- -----------
<S> <C> <C> <C>
Plan Creation 1995
Granted................................................................... 36,125 $ 4.84 $ 4.84
----------- -------------- -----
Balance at December 31, 1995.............................................. 36,125 $ 4.84 $ 4.84
Granted................................................................... 48,031 $ 4.84-11.00 $ 6.94
----------- -------------- -----
Balance at September 30, 1996............................................. 84,156 $ 4.84-11.00 $ 6.04
----------- -------------- -----
<CAPTION>
NON-QUALIFIED STOCK OPTIONS
----------------------------------------
OPTIONS OUTSTANDING
---------------------------
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
----------- -------------- -----------
<S> <C> <C> <C>
Granted in 1995........................................................... 425,000 $ 0.60-1.81 $ 1.60
Forfeited................................................................. (60,208) $ 0.60 $ 0.60
----------- -------------- -----
Balance at December 31, 1995.............................................. 364,792 $ 0.60-1.81 $ 1.76
Granted................................................................... 175,000 $ 4.84-11.00 $ 7.48
----------- -------------- -----
Balance at September 30, 1996............................................. 539,792 $ 0.60-11.00 $ 3.62
----------- -------------- -----
<CAPTION>
OPTIONS EXERCISABLE
---------------------------
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
----------- -------------- -----------
<S> <C> <C> <C>
Granted in 1995........................................................... 97,292 $ 0.60-1.81 $ 1.63
----------- -------------- -----
Balance at December 31, 1995.............................................. 97,292 $ 0.60-1.81 $ 1.63
Granted................................................................... -- -- --
----------- -------------- -----
Balance at September 30, 1996............................................. 97,292 $ 0.60-1.81 $ 1.63
----------- -------------- -----
</TABLE>
F-13
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The summary of non-qualified options includes warrants to purchase 100,000
shares of Common Stock at $4.84. These warrants were issued for service on the
Board of Directors and as such are accounted for under APB 25.
Had compensation cost been determined on the basis of fair value pursuant to
SFAS 123, net loss and net loss per share would have been increased as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
1995 SEPTEMBER 30, 1996
------------- ------------------
<S> <C> <C>
Net Loss
As reported....................................................... $ 6,120,000 $ 21,809,000
------------- ------------------
Pro forma......................................................... $ 6,405,000 $ 23,052,000
------------- ------------------
Net loss per share
As reported....................................................... $ 1.15 $ 3.15
------------- ------------------
Pro forma......................................................... $ 1.21 $ 3.33
------------- ------------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions used for grants during
both periods: dividend yield of 0.0%, risk free interest rate of 5.83% and
expected option term of 10 years.
WARRANTS
The Company has issued to certain Board members, consultants, lease
providers, creditors and others 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. The loan balance, including
interest expense of $15,000, was repaid during the year ended December 31, 1995.
The Company issued warrants to the stockholders to purchase 150,000 shares of
Common Stock at $1.81 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 50,000 shares of
Common Stock at $1.81 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.
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 to purchase 50,000 shares at $4.84 per share, valued at $25,000, based
upon an appraisal obtained by the Company. These warrants expire December 1,
2000.
On January 11, 1996, certain stockholders guaranteed a $1,500,000 lease for
networking equipment. The Company issued warrants to purchase 100,000 shares of
Common Stock at $4.84 per share. The value of the warrants has been reflected in
intangible assets. These warrants expire January 11, 2001.
F-14
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On January 12, 1996 the Company issued warrants to purchase 100,000 shares
of Common Stock at $4.84 to Board members. The warrants vest quarterly over five
years. As these warrants were issued for service on the Board of Directors they
are accounted for under APB 25 and as such are included in the summary of
nonqualified options and are not included in the summary of warrant grants
below.
On January 18, 1996, LINC Capital Partners, Inc. ("LINC") provided a
$1,500,000 lease line for equipment. The Company issued warrants to LINC to
purchase 50,000 shares of Common Stock at $4.84 per share. The value of the
warrants has been reflected as deferred financing costs. These warrants expire
January 18, 2006.
On February 15, 1996, Boston Financial & Equity Corporation ("Boston
Financial") provided a $700,000 lease line for equipment. The Company issued
warrants to Boston Financial to purchase 5,000 shares of Common Stock at $9.76
per share. The value of the warrants has been reflected as deferred financing
costs. These warrants expire February 15, 2006.
On May 6, 1996, the Company agreed to issue warrants to a producer of
infomercials and commercials to purchase 50,000 shares of Common Stock at an
exercise price of $9.76 per share upon completion, subject to the Company's
approval, of 15-second and 60-second commercials for the Company's services. In
addition, the Company agreed to issue additional warrants to purchase a maximum
of 300,000 shares of Common Stock based upon the number of customers obtained
through the commercials. Through December 31, 1997, the exercise price will be
$9.76; per share thereafter, the exercise price will be set at the then fair
value of the Common Stock. The value of the warrants will be reflected as
consideration upon issuance.
On May 10, 1996, the Company issued warrants to purchase 45,478 shares of
Common Stock at $9.76 per share to various lessors in return for lease lines and
other services to the Company. The value of the warrants has been reflected as
deferred financing costs. The warrants expire on May 10, 2006.
On May 31,1996, in connection with the amendment and restatement of the
UUNET Agreement, the Company agreed to issue warrants to purchase 10,000 shares
of Common Stock at an exercise price of $20.00 per share.
In connection with the issuance of promissory notes aggregating $2,950,000,
the Company issued to the lenders warrants to purchase an aggregate of 98,335
shares of Common Stock at an exercise price of $11.00 per share, as adjusted.
The value of the warrants has been reflected as deferred financing costs.
In connection with the execution of the PSINet Inc. ("PSINet") agreement on
July 22, 1996 (Note 10) the Company issued warrants to purchase 100,000 shares
of Common Stock at an exercise price of $20.00 per share. The value of the
warrants has been reflected as deferred financing costs.
In connection with the private placement of Series A Convertible Preferred
Stock, described above, the Company granted to certain purchasers of the Series
A Convertible Preferred Stock warrants to purchase 100,000 shares of common
stock at $11.00 per share.
On September 24, 1996 the Company issued warrants to purchase 7,500 shares
of the Company's common stock at $11.00 per share to each of the three members
of the Company's Technology Advisory Council. The warrants vest quarterly over
two years. The value of the warrants is reflected as deferred professional
services expense and amortized ratably over the vesting period.
F-15
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of these warrant grants is as follows:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING
----------------------------------------
WEIGHTED
AVERAGE
NUMBER OF WARRANT PRICE EXERCISE
SHARES PER SHARE PRICE
----------- -------------- -----------
<S> <C> <C> <C>
Granted.................................................................. 150,000 $ 1.81 $ 1.81
----------- -------------- -----------
Balance at December 31,1994.............................................. 150,000 $ 1.81 $ 1.81
Granted.................................................................. 110,330 $ 1.81-4.84 $ 3.47
----------- -------------- -----------
Balance at December 31,1995.............................................. 260,330 $ 1.81-11.00 $ 2.51
Granted.................................................................. 531,315 $ 4.84-20.00 $ 11.01
----------- -------------- -----------
Balance at September 30,1996............................................. 791,645 $ 1.81-20.00 $ 8.21
----------- -------------- -----------
----------- -------------- -----------
</TABLE>
<TABLE>
<CAPTION>
WARRANTS EXERCISABLE
----------------------------------------
WEIGHTED
AVERAGE
NUMBER OF WARRANT PRICE EXERCISE
SHARES PER SHARE PRICE
----------- -------------- -----------
<S> <C> <C> <C>
Granted.................................................................. 150,000 $ 1.81 $ 1.81
----------- -------------- -----------
Balance at December 31,1994.............................................. 150,000 $ 1.81 $ 1.81
Granted.................................................................. 110,330 $ 1.81-4.84 $ 3.47
----------- -------------- -----------
Balance at December 31,1995.............................................. 260,330 $ 1.81-11.00 $ 2.51
Granted.................................................................. 508,815 $ 4.84-20.00 $ 11.01
----------- -------------- -----------
Balance at September 30,1996............................................. 769,145 $ 1.81-20.00 $ 8.13
----------- -------------- -----------
----------- -------------- -----------
</TABLE>
9. 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 and
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 and September 30, 1996, the Company had net operating loss carryforwards
for federal income tax purposes totaling approximately $3,328,000 and
$24,707,000 respectively, which begin to expire in 2010. The Internal Revenue
Code of 1986, as amended, 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.
F-16
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets include the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
-------------- --------------
<S> <C> <C>
Net operating loss carryforwards...................................... $ 1,304,000 $ 9,920,000
Deferred financing costs.............................................. -- 60,000
Depreciation.......................................................... -- 40,000
Vacation accrual...................................................... 27,000 56,000
-------------- --------------
Gross deferred tax assets............................................. 1,331,000 10,076,000
Deferred tax asset valuation allowance................................ (1,331,000) (10,076,000)
-------------- --------------
$ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
The Company recorded a full valuation allowance for net deferred tax assets
due to the uncertainty of future taxable income.
10. 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 and for the nine months ended
September 30, 1996 for all operating leases amounted to $24,000, $145,000 and
$541,000, respectively. The Company also leases equipment, primarily data
communications equipment, under non-cancelable capital leases. Most of the
Company's capital leases include purchase options at the end of the lease term.
Minimum lease commitments under non-cancelable leases at September 30, 1996
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- ------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
1996 (three months)...................................................... $ 908,000 $ 188,000
1997..................................................................... 3,523,000 713,000
1998..................................................................... 3,458,000 698,000
1999..................................................................... 1,505,000 647,000
2000..................................................................... 309,000 650,000
thereafter............................................................... 78,000 332,000
------------- -------------
Total minimum lease payments............................................. 9,781,000 $ 3,228,000
Less amount representing interest........................................ (1,536,000)
-------------
Present value of future lease payments................................... 8,245,000
Less current portion..................................................... (2,857,000)
-------------
$ 5,388,000
-------------
-------------
</TABLE>
F-17
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTEED USAGE LEVELS
Guaranteed usage levels of data and voice communication with certain of the
Company's telecommunication vendors at September 30, 1996 aggregate to the
following annual amounts:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -----------------------------------------------------------------------
<S> <C>
1996 (three months).................................................. $ 63,000
1997................................................................. 3,135,000
----------
Total.................................................................. $3,198,000
----------
----------
</TABLE>
SIGNIFICANT AGREEMENTS
Access to the Internet for customers outside of the Company's California
regional base is provided through points of presence ("POP") capacity 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. UUNET was
recently acquired by MFS Communications, Inc. ("MFS"), a supplier of local and
long distance telephone service. In August 1996, MFS and WorldCom, Inc.
("WorldCom) announced that MFS and WorldCom had executed a definitive agreement
for the merger of MFS into WorldCom. At September 30, 1996, $2.4 million and
$2.3 million in amounts due to UUNET were recorded in accounts payable and other
accrued liabilities, respectively.
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.
On July 22, 1996 the Company entered into an agreement with PSINet pursuant
to which the Company intends to lease POP access from PSINet, becoming in effect
a reseller of PSINet services in a similar fashion to the Company's UUNET
arrangement, as amended.
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1996
YEAR ENDED ---------------
DECEMBER 31,
1995
-----------------
(IN THOUSANDS)
<S> <C> <C>
Cash paid for:
Interest.............................................................. $ 60 $ 759
Income taxes.......................................................... $ 1 $ 1
</TABLE>
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 a standby letter
of credit as a performance guarantee 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.
F-18
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. REINCORPORATION
On June 27, 1996, the Company effected a reincorporation in Delaware. As a
result of the reincorporation, the Company's authorized shares of Common Stock
were increased to 25,000,000 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 effected
splits of the Company's Common Stock of 100-for-1 and 10-for-1, respectively. In
December 1996, the Company effected a 1-for-2 reverse stock split. The
accompanying financial statements have been retroactively adjusted to give
effect to the reincorporation, the stock splits and the reverse stock split.
13. SUBSEQUENT EVENTS
CONVERTIBLE DEBT
In October, 1996, the Company issued a $5 million, one year promissory note
at prime plus 2% to UUNET. The note is convertible into approximately 382,500
shares of Common Stock at a conversion price between $13.20 per share and $16.00
per share depending upon the number of shares of Common Stock purchased in the
proposed initial offering by certain investors in Series A Convertible Preferred
Stock. UUNET is a provider of service to the Company and has a designate on the
Company's board of directors.
SIGNIFICANT AGREEMENTS
In October 1996, the Company's agreement with UUNet was amended. Under the
amended agreement, the Company pays UUNET a monthly fee equal to the greater of
a specified minimum or an amount that varies based primarily on peak customer
usage. The Company also pays UUNET an additional fee to the extent that hours of
usage exceed a formula set forth in the agreement. This agreement has a term
that expires in March 1999 (subject to earlier cancellation after March 1998
with one year's prior notice, but provided that if this notice is given, the
Company is required to begin to reduce its usage of UUNET's POPs in accordance
with a schedule set forth in the agreement). If the agreement expires at the end
of its term, it is automatically renewed for consecutive one-year terms unless
prior notice of termination is given. Minimum fees under the agreement are:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, IN MILLIONS
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
1996 (three months)...................................................................... $ 3.0
1997..................................................................................... 16.2
1998..................................................................................... 22.8
1999..................................................................................... 6.0
-----
Total...................................................................................... $ 48.0
-----
-----
</TABLE>
LEASES
Earthlink has signed a lease for an additional 55,000 square feet in a
facility located adjacent to its corporate headquarters in which it plans to
house its data center. The lease term commences and the Company expects to
occupy this new space in February 1997 for an inital ten-year term. Monthly
rental will be $66,000 for the first 60 months increasing to $77,000 for the
remaining 60 months.
F-19
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
No dealer, saleperson or other person has been authorized to give any
information or make any representation other than those contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company or the Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer or solicitation in such jurisdiction.
Neither the delivery of this Prospectus nor any offer or sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company or that information contained herein is
correct as of any time subsequent to its date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 25
Management................................................................ 35
Certain Transactions...................................................... 42
Principal Stockholders.................................................... 44
Description of Capital Stock.............................................. 46
Shares Eligible for Future Sale........................................... 49
Underwriting.............................................................. 51
Legal Matters............................................................. 52
Experts................................................................... 52
Additional Information.................................................... 52
Financial Statements...................................................... F-1
</TABLE>
------------------------
UNTIL , 1997 (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.
EARTHLINK NETWORK-REGISTERED TRADEMARK-
2,000,000 SHARES
COMMON STOCK
----------------
PROSPECTUS
-------------------
INVEMED ASSOCIATES, INC.
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<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............................ $ 10,455
NASD filing fee................................................................ 3,950
Nasdaq National Market listing fee............................................. 23,000
Blue Sky fees and expenses..................................................... 15,000
Printing and engraving expenses................................................ 150,000
Legal fees and expenses........................................................ 150,000
Accounting fees and expenses................................................... 125,000
Transfer Agent and Registrar fee............................................... 3,000
Miscellaneous.................................................................. 19,595
-----------
Total...................................................................... $ 500,000
-----------
-----------
</TABLE>
- ------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporation Law of the State of Delaware,
as amended, the Company has the power to indemnify directors and officers under
certain prescribed circumstances and subject to certain limitations against
certain costs and expenses, including attorneys' fees actually and reasonably
incurred in connection with any action, suit or proceeding, whether civil,
criminal, administrative or investigative, to which any of them is a party by
reason of his or her being a director or officer of the Company if it is
determined that he acted in accordance with the applicable standard of conduct
set forth in such statutory provision.
Article XII of the Company's By-laws generally permits indemnification of
directors and officers to the fullest extent authorized by the General
Corporation Law of the State of Delaware.
The Company intends to purchase directors' and officers' liability
insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since its inception in May 1994, the Company 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. See Note 12 to Notes to Financial Statements.
Shares of Common Stock
1. On May 27, 1994, the Company issued 1,500,000 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 500,000 shares of Common Stock to
each of Messrs. Slatkin and O'Donnell, directors of the Company, at a purchase
price of $0.10 per share.
3. On October 17, 1994, the Company sold 220,590 shares of Common Stock to
each of Messrs. Slatkin and O'Donnell, directors of the Company, at a purchase
price of $0.18 per share.
II-1
<PAGE>
4. On March 30, 1995, the Company sold 61,170 shares of Common Stock, to
each of Messrs. Slatkin and O'Donnell, directors of the Company, and 244,815
shares of Common Stock to Robert London, at a purchase price of $0.82 per share.
5. On June 19, 1995, the Company sold 827,085 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 $1.81 per
share.
6. On October 31, 1995, the Company sold 921,745 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 45,485 shares of Common Stock to
Messrs. Linwood Lacy, Jr. and Robert Kavner, directors of the Company, at a
purchase price of $4.84 per share.
8. On March 20, 1996, the Company sold 25,000 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 $4.84 per share.
9. On May 6, 1996, the Company sold 5,122 shares of Common Stock to a
sub-contractor at a purchase price of $9.76 per share, which purchase price was
paid by performance of certain services.
10. On May 6, 1996, the Company sold 852,453 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
$9.76 per share.
11. On September 8, 1996, the Company issued 37,500 shares of Common Stock
to a consultant in consideration of the cancellation of the consulting agreement
between the consultant and the Company.
12. On December 11, 1996, the Company agreed to enter into a consulting
agreement with New Media Group, Inc. pursuant to which the Company will issue an
aggregate of 20,000 shares of Common Stock in equal increments on January 1996
and 1999 as consideration for the consulting services to be performed.
Shares of Series A Convertible Preferred Stock
13. On September 10, 1996, the Company issued 1,363,624 shares of Series A
Convertible Preferred Stock to certain investors, including Messrs. Azeez,
Betty, Slatkin, O'Donnell and Lacy, directors of the Company, at a purchase
price of $11.00 per share which shares will be automatically converted into
shares of Common Stock upon consummation of this offering. In connection with
this transaction, certain of these investors were also granted warrants to
purchase 100,000 shares of Common Stock having an exercise price of $11.00 per
share.
Warrants to Purchase Common Stock
14. In December 1994 the Company agreed to grant, and on June 18, 1995, the
Company granted, Warrants to purchase 75,000 shares of Common Stock at an
exercise price of $1.81 per share to each of Messrs. Slatkin and O'Donnell in
connection with their provision of a $400,000 credit line to the Company.
15. On August 31, 1995, the Company granted Warrants to purchase 50,000
shares of Common Stock at an exercise price of $1.81 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.
16. On October 31, 1995, the Company granted Warrants to purchase 10,330
shares of Common Stock at an exercise price of $4.84 per share to David
Beckemeyer as partial consideration for the sale of certain of the assets of
Beckemeyer Consulting.
II-2
<PAGE>
17. On December 1, 1995, the Company granted Warrants to purchase 50,000
shares of Common Stock at an exercise price of $4.84 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.
18. Effective January 11, 1996, the Company granted Warrants to purchase
100,000 shares of Common Stock at an exercise price of $4.84 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.
19. On January 12, 1996, the Company granted warrants to purchase 50,000
shares of Common Stock at an exercise price of $4.84 per share to each of
Messrs. Lacy and Kavner as consideration for their agreeing to serve on the
Company's Board of Directors.
20. On January 18, 1996, the Company granted warrants to purchase 50,000
shares of Common Stock at an exercise price of $4.84 per share to LINC Capital
Partners, Inc. ("LINC") in connection with LINC's provision of a $2,000,000
equipment lease credit line.
21. On February 15, 1996, the Company granted warrants to purchase 5,000
shares of Common Stock at an exercise price of $9.76 per share to Boston
Financial & Equity Corporation ("BFE") in connection with BFE's provision of a
$700,000 equipment lease credit line.
22. On May 6, 1996, the Company agreed to issue warrants to purchase up to
50,000 shares of Common Stock at an exercise price of $9.76 per share to
National Media Corporation in connection with the production of commercials on
behalf of the Company. In addition, the Company agreed to issue additional
warrants to National Media Corporation to purchase up to a maximum of 300,000
shares of Common Stock based upon the number of subscribers obtained through the
commercials. Through December 31, 1997, the exercise price will be $9.76 per
share; thereafter, the price will be set at the fair market value of the Common
Stock of the Company.
23. On May 10, 1996, the Company issued warrants to purchase an aggregate of
45,477 shares of Common Stock at an exercise price of $9.76 per share to
MM/GATX, LINC Capital Corporation, Charter Equipment Leasing, El Camino
Resources for lease lines.
24. On May 10, 1996, the Company entered into consulting agreements with two
consultants, David Hayes and Allen Claypool. In connection with these
agreements, the Company agreed that it will issue warrants to purchase an
aggregate of 10,000 shares of Common Stock at a per share exercise price of
$9.76 per share upon completion of the consulting services.
25. On May 31, 1996, in connection with the amendment of its agreement with
UUNET, the Company agreed to issue warrants to purchase 10,000 shares of Common
Stock at $20.00 per share.
26. On June 6, 1996, the Company issued warrants to purchase 98,340 shares
of Common Stock at an exercise price equal to the lesser of (i) $20.00 or (ii)
the price at which Common Stock is first sold in a public or private sale after
the issuance of the warrants and prior to the issuance of Common Stock subject
to such warrants. Messrs. Azeez, Kavner, O'Donnell and Slatkin were granted
6,667, 3,334, 7,500 and 7,500 of these warrants, respectively.
27. On July 22, 1996, the Company issued warrants to purchase 100,000 shares
of Common Stock at an exercise price of $20.00 per share in connection with the
execution of its agreement with PSINet.
28. In September 1996, the Company issued Warrants to purchase 7,500 shares
of Common Stock at an exercise price of $11.00 per share to each of three
members of the Company's Technology Advisory Council.
II-3
<PAGE>
Convertible Debt Obligation
29. Effective October 31, 1996, UUNET Technology, Inc. purchased from the
Company, a $5 million convertible promissory note, convertible into a maximum of
382,500 shares of Common Stock.
Options to Purchase Common Stock
30. On March 18, 1995, the Company granted non-plan Options to purchase
75,000 shares of Common Stock at an exercise price of $0.60 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, 14,791 of these
shares had vested and the balance expired.
31. On June 19, 1995, the Company granted non-plan Options to purchase
250,000 shares of Common Stock at an exercise price of $1.81 to Mr. Dayton in
consideration for his continuing efforts to develop the Company and its
business.
32. On June 19, 1995, the Company granted non-plan Options to purchase
50,000 shares of Common Stock at an exercise price of $1.81 per share to Mr.
Robert E. Johnson, Jr. in consideration for his accepting employment with the
Company.
33. On December 1, 1995, the Company granted non-plan Options to purchase
50,000 shares of Common Stock at an exercise price of $4.84 to Mr. Leland C.
Thoburn in consideration for his accepting employment with the Company.
34. In addition to the options described, between September 30, 1995 and
September 24, 1996, the Registrant granted options to purchase an aggregate of
1,016,250 shares of Common Stock to employees of the Registrant at exercise
prices ranging from $4.84 to $11.00 per share as incentives under the
Registrant's 1995 Stock Option Plan. Of these, options for 10,500 shares of
Common Stock have been forfeited due to the termination of the employment of
various grantees.
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 Section 3(b) of the Securities Act of 1933 and Rule 701 thereunder. The
Company believes that all of the securities were acquired by the investors for
investment and with no view toward the resale or 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 -- Amended and Restated Certificate of Incorporation**
(a) Certificate of Amendment of Amended and Restated Certificate of Incorporation
3.2 -- Bylaws**
3.3 -- Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock++
(a) Certificate of Amendment of EarthLink Network, Inc. Certificate of Designation,
Preferences and Rights of Series A Convertible Preferred Stock
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------
<C> <C> <S>
4.1 -- See exhibits 3.1, 3.2 and 3.3 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 -- Registration Rights Agreement, Amendment No. 1 to Registration Rights Agreement and
Amendment No. 2 to Registration Rights Agreement (See also Exhibit 10.23(c))
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 -- Amended and Restated 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+**
(a) Amendment No. 1 to Netscape Communications Corporation Internet Service Provider
Agreement++
(b) Amendment No. 2 to Netscape Communications Corporation Internet Service Provider
Agreement+, ++
10.7 -- Network Services Agreement dated May 31, 1996, between the Registrant and UUNET
Technologies, Inc.+**
(a) Addendum No. 1 to Network Services Agreement+,++
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 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-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------
<C> <C> <S>
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.**
10.16 -- Production and Distribution Agreement, dated May 6, 1996, between the Registrant and
National Media Corporation**
10.17 -- Documents evidencing the Company's sale of $2,950,000 of its 10% Promissory Notes, dated
June 18, 1996:
(a) Form of Subscription Agreement***
(b) Form of Warrant***
(c) Form of 10% Promissory Note***
10.18 -- Amended and Restated Stock Purchase Agreement Relating to 2,727,273 Shares of Series A
Convertible Preferred Stock between the Company and the Investors named therein, dated
September 10, 1996
(a) Form of stock purchase Warrant
10.19 -- Internet Wizard Sign-Up Agreement between the Company and Microsoft Corporation, dated
August 16, 1996+, ++
10.20 -- Network Access Agreement between the Company and PSINet, Inc., dated July 22, 1996 and
Amendment No. 1 to Network Access Agreement+, ++
10.21 -- Office Lease by and between The Mutual Life Insurance Company of New York, as Landlord, and
the Company, as Tenant, dated September 20, 1996++
10.22 -- Standard Office Lease -- Gross, by and between Glen Feliz Properties, as Landlord, and the
Company, as Tenant, dated July 2, 1996++
10.23 -- Amended and Restated Note Purchase Agreement between the Company and UUNET Technologies,
Inc., dated as of October 31, 1996
(a) $5,000,000 Convertible Note
(b) Stockholders Agreement
(c) Addendum to Amended and Restated Registration Rights Agreement
11.1 -- Statement of 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.
** Incorporated by reference to the exhibit designated by the same exhibit
number and filed as an exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 333-5055) filed with the Commission on June 3,
1996.
*** Incorporated by reference to the exhibit designated by the same exhibit
number and filed as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-5055) filed with
the Commission on June 27, 1996.
+ Confidential treatment requested.
++ Previously filed.
(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
II-6
<PAGE>
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 Underwriter at the closing
specified in the underwriting agreement, certificates in such denominations and
registered in such names as required by the Underwriter to permit prompt
delivery to each Purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, 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-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Pasadena, State of
California, on the 11th day of December, 1996.
EARTHLINK NETWORK, INC.
By: /S/ SKY D. DAYTON
-----------------------------------
Sky D. Dayton
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to Registration Statement has been signed by the following persons in
the capacities indicated below on the 11th day of December, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------- --------------------------------------
<C> <S>
/S/ SKY D. DAYTON
- -------------------------------------- Chairman of the Board of Directors
Sky D. Dayton
/S/ CHARLES G. BETTY President, Chief Executive Officer and
- -------------------------------------- Director (Principal Executive
Charles G. Betty Officer)
/S/ BARRY W. HALL Chief Financial Officer (Principal
- -------------------------------------- Financial and
Barry W. Hall Accounting Officer)
SIDNEY AZEEZ*
- -------------------------------------- Director
Sidney Azeez
ROBERT M. KAVNER*
- -------------------------------------- Director
Robert M. Kavner
LINWOOD A. LACY, JR.*
- -------------------------------------- Director
Linwood A. Lacy, Jr.
KEVIN M. O'DONNELL*
- -------------------------------------- Director
Kevin M. O'Donnell
JOHN W. SIDGMORE*
- -------------------------------------- Director
John W. Sidgmore
REED E. SLATKIN*
- -------------------------------------- Director
Reed E. Slatkin
/s/ PAUL MCNULTY
- -------------------------------------- Director
Paul McNulty
*By: /S/ SKY D.
DAYTON
- --------------------------------------
Sky D. Dayton
Attorney-in-fact
</TABLE>
II-8
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------- ---------
<C> <S> <C>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Certificate of Incorporation**
(a) Certificate of Amendment of Amended and Restated Certificate of Incorporation
3.2 Bylaws**
3.3 Certificate of Designation Preferences and Rights of Series A Convertible Preferred Stock++
(a) Certificate of Amendment of EarthLink Network, Inc. Certificate of Designation,
Preferences and Rights of Series A Convertible Preferred Stock
4.1 See exhibits 3.1, 3.2 and 3.3 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 Registration Rights Agreement, Amendment No. 1 to Registration Rights Agreement and Amendment
No. 2 to Registration Rights Agreements (See also Exhibit 10.23(c))
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 Amended and Restated 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+**
(a) Amendment No. 1 to Netscape Communications Corporation Internet Service Provider
Agreement++
(b) Amendment No. 2 to Netscape Communications Corporation Internet Service Provider
Agreement+, ++
10.7 Network Services Agreement dated May 31, 1996, between the Registrant and UUNET Technologies,
Inc.+**
(a) Addendum No. 1 to Network Services Agreement+,++
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 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***
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------- ---------
<C> <S> <C>
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.**
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.**
10.16 Production and Distribution Agreement, dated May 6, 1996, between the Registrant and National
Media Corporation**
10.17 Documents evidencing the Company's sale of $2,950,000 of its 10% Promissory Notes, dated June
18, 1996:
(a) Form of Subscription Agreement***
(b) Form of Warrant***
(c) Form of 10% Promissory Note***
10.18 Amended and Restated Stock Purchase Agreement Relating to 2,727,273 Shares of Series A
Convertible Preferred Stock between the Company and the Investors named therein, dated
September 10, 1996
(a) Form of Stock Purchase Warrant
10.19 Internet Wizard Sign-Up Agreement between the Company and Microsoft Corporation, dated August
16, 1996+, ++
10.20 Network Access Agreement between the Company and PSINet, Inc., dated July 22, 1996 and
Amendment No. 1 to Network Access Agreement+, ++
10.21 Office Lease by and between The Mutual Life Insurance Company of New York, as Landlord, and
the Company, as Tenant, dated September 20, 1996++
10.22 Standard Office Lease -- Gross, by and between Glen Feliz Properties, as Landlord, and the
Company, as Tenant, dated July 2, 1996++
10.23 Amended and Restated Note Purchase Agreement between the Company and UUNET Technologies, Inc.,
dated October 31, 1996
(a) $5,000,000 Convertible Note
(b) Stockholders Agreement
(c) Addendum to Amended and Restated Registration Rights Agreement
11.1 Statement of 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.
** Incorporated by reference to the Exhibit designated by the same exhibit
number and filed as an exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 333-5055) filed with the Commission on June 3,
1996.
*** Incorporated by reference to the exhibit designated by the same exhibit
number and filed as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-5055) filed with
the Commission on June 27, 1996.
+ Confidential treatment requested.
++ Previously filed.
<PAGE>
EXHIBIT 3.1(a)
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
EARTHLINK NETWORK, INC.
________________________________________
Pursuant to Section 242
of the General Corporation Law of the
State of Delaware
_______________________________________
The undersigned, EARTHLINK NETWORK, INC. (the "Corporation"), a
corporation existing under and by virtue of the General Corporation Law of
the State of Delaware, as amended, desiring to give notice of corporate
action effectuating amendment of its Amended and Restated Certificate of
Incorporation,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, as of
November 15, 1996, duly adopted resolutions setting forth an amendment to the
Amended and Restated Certificate of Incorporation of the Corporation,
declaring said amendment to be advisable and calling a special meeting of the
stockholders of the Corporation for consideration thereof. The resolution
setting forth the amendment is as follows:
"RESOLVED FURTHER, that the existing Amended and Restated Certificate
of Incorporation of the Corporation be amended by inserting the
following as Article XV thereof:
'XV. STOCK COMBINATION (REVERSE STOCK SPLIT)
Upon filing of the Certificate of Amendment of the
Amended and Restated Certificate of Incorporation effecting
this Section XV, each two shares of Common Stock of the
Corporation issued and outstanding immediately prior to such
filing shall be combined into one share of Common Stock,
$.01 par value per share (the "New Common Stock").
Fractional shares of New Common Stock to which any
stockholder would be entitled as a result of the foregoing
calculation shall be canceled in exchange for cash in lieu
of such fractional share. With respect to each such
fractional share, cash shall be paid therefor in an amount
equal to the fair market value of a share of New Common
Stock on the effective date of the Stock Combination
contemplated by this Article XV, as determined by the
Corporation's Board of Directors
<PAGE>
in its sole discretion, multiplied by such fraction.'"
SECOND: That thereafter, pursuant to resolution of the Board of
Directors, a special meeting of the stockholders of the Corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary
number of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal
to be affixed hereto and this Certificate of Amendment to be signed by its
President this 2nd day of December, 1996.
EARTHLINK NETWORK, INC.
By: /s/ CHARLES G. BETTY
--------------------
Charles G. Betty
President
<PAGE>
EXHIBIT 3.3(a)
CERTIFICATE OF AMENDMENT
OF
EARTHLINK NETWORK, INC.
CERTIFICATE OF DESIGNATION,
PREFERENCES AND RIGHTS OF
SERIES A CONVERTIBLE PREFERRED STOCK
________________________________________
Pursuant to Section 242
of the Corporation Law of the
State of Delaware
_______________________________________
The undersigned, EARTHLINK NETWORK, INC. (the "Corporation"), a
corporation existing under and by virtue of the General Corporation Law of
the State of Delaware, as amended, desiring to give notice of corporate
action effectuating amendment of its Certificate of Designation, Preferences
and Rights of Series A Convertible Preferred Stock (the "Certificate of
Designation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, as of
November 15, 1996, duly adopted resolutions setting forth an amendment to the
Certificate of Designation, declaring said amendment to be advisable and
calling a special meeting of the stockholders of the Corporation for
consideration thereof. The resolution setting forth the amendment is as
follows:
"RESOLVED FURTHER, that the text of Section 4(a)(ii) of the EarthLink
Network, Inc. Certificate of Designation, Preferences and Rights of
Series A Convertible Preferred Stock be amended to read as follows:
'(ii) Each share of Series A Convertible Preferred Stock
shall automatically be converted into such number of shares
of Common Stock as is determined by dividing 5.50 by the
Conversion Factor at the time in effect for such Series A
Preferred Stock immediately upon the consummation of the
Corporation's sale of its Common Stock in a bona fide, firm
commitment underwriting pursuant to a registration statement
on Form S-1 under the Securities Act of 1933, as amended (or
any equivalent successor form), (A) the public offering
price of which was not less than $8.00 per share (adjusted
to reflect changes after September 9, 1996 in the number of
shares of Common Stock outstanding by reason of stock
dividends, stock splits or recapitalizations or the like)
and (B) the net proceeds to the Corporation of which were
not less than $20 million (a "Qualifying Public Offering");
PROVIDED, HOWEVER, that a "Qualifying Public Offering" shall
exist for all purposes hereof without regard to any minimum
public offering price per share (including, without
<PAGE>
limitation, the $8.00 per share minimum public offering
price per share referred to above) if such public offering
meets the requirement set forth in clause (B) above, is the
subject of a Registration Statement filed by the Company on
November 8, 1996 (SEC Registration No. 333-15781) and is
underwritten by Invemed Associates, Inc.'"
SECOND: That thereafter, pursuant to resolution of the Board of
Directors, a special meeting of the stockholders of the Corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary
number of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal
to be affixed hereto and this Certificate of Amendment to be signed by its
President this 2nd day of December, 1996.
EARTHLINK NETWORK, INC.
By: /s/ CHARLES G. BETTY
--------------------
Charles G. Betty
President
<PAGE>
ELN [Logo]
EARTH LINK NETWORK, INC.
SEE REVERSE FOR CERTAIN DEFINITIONS
COMMON STOCK
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 270322 10 0
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK $.01 PAR VALUE OF
EARTH LINK NETWORK, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney on surrender of this certificate properly endorsed.
This certificate is not valid unless countersigned by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
[EARTHLINK NETWORK INC, DELAWARE SEAL]
SECERTARY PRESIDENT
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is made and entered into as of June 1,
1996, by and between Earthlink Network, Inc., a California corporation
("Company") and the holders of "Restricted Stock" (as that term is defined
below) listed on Exhibit "A" hereto.
WHEREAS, the Company has agreed to provide certain registration rights to
the holders of Restricted Stock and the parties hereto desire to set forth
their agreement with respect thereto;
NOW; THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and based upon the mutual covenants
contained herein, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the following respective meanings:
"COMMISSION" shall mean the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"COMMON STOCK" shall mean the Common Stock of the Company, as constituted
as of the date of this Agreement.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended,
or any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"REGISTRATION EXPENSES" shall mean the expenses so described in Section 6.
"RESTRICTED STOCK" shall mean the number of shares of Common Stock listed
beside each of their respective names held or hereafter acquired by the persons
listed on Exhibit "A" hereto, including shares issuable pursuant to the exercise
of warrants listed on Exhibit "A" hereto, but excluding such shares of Common
Stock (including shares of Common Stock issuable upon the exercise of such
warrants) which (a) have been registered under the Securities Act pursuant to an
effective Registration Statement filed thereunder and disposed of in accordance
with the registration statement covering them or (b) have been publicly sold
pursuant to Rule 144 (or any similar provision then in force) under the
Securities Act or (c) have been otherwise transferred, if new certificates or
other evidences of ownership for them not bearing a legend restricting further
transfer and not subject to any stop-transfer order or other restriction or
transfer shall have been delivered by the Company and subsequent disposition of
such securities shall not require registration or qualification of such
securities under the Securities Act or any state securities laws then in
force or (d) in the opinion of counsel satisfactory to the Company, may be
publicly sold without registration under the Securities Act.
"SECURITIES ACT" shall meant he Securities Act of 1933, as amended, or any
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
1
<PAGE>
"SELLING EXPENSES" shall mean the expenses so described in Section 6.
2. REQUIRED REGISTRATION.
(a) At any time after the first to occur of (i) the date six months
after a registrations statement covering the initial public offering of
securities of the Company under the Securities Act shall have become effective,
(ii) the date six months after the Company becomes a reporting Company under
Section 12 of the Exchange Act, and (iii) June 1, 2001, the holders of
Restricted Stock constituting at least 20% of the total shares of Restricted
Stock then eligible to make such a demand may request the Company to register
under the Securities Act (in an underwritten public offering if the Company is
not already a public company), all or any portion of the shares of Restricted
Stock held by such requesting holder or holders for sale in the manner specified
in such notice, PROVIDED that the Company's founder and principal stockholder,
Sky D. Dayton, shall not be eligible to make or participate in the making of
such a demand, or sell shares of Common Stock pursuant to a demand made under
this Section 2, for a period of 360 days after the effective date of the
registration statement for the Company's initial public offering, and PROVIDED
FURTHER that the shares of Restricted Stock for which registration has been
requested shall reasonably be anticipated to have an aggregate value to the
public in excess of $5,000,000. Notwithstanding anything to the contrary
contained herein, no request may be made under this Section 2 within 120 days
after the effective date of a registration statement filed by the Company
covering a firm commitment underwritten public offering in which the holders
of Restricted stock shall have been entitled to join pursuant to Sections 3 or
4 and in which there shall have been effectively registered all shares of
Restricted Stock as to which registration shall have been requested.
(b) Following receipt of any notice under this Section 2, the Company
shall immediately notify all holders of Restricted Stock from whom notice has
been received and shall use its best efforts to register under the Securities
Act, for public sale in accordance with the method of disposition specified in
such notice from requesting holders, the number of shares of Restricted Stock
specified in such notice (and in all notices received by the Company from other
holders within 30 days after the giving of such notice by the Company). If such
method of disposition shall be an underwritten public offering, the holders of a
majority of the shares of Restricted Stock to be sold in such offering may
designate the managing underwriter of such offering, subject to the approval of
the Company, which approval shall not be unreasonably withheld or delayed. The
Company shall be obligated to register Restricted Stock pursuant to this Section
2 on two occasions only, PROVIDED, HOWEVER, that such obligation shall be deemed
satisfied only when a registration statement covering all shares of Restricted
Stock specified in notices received as aforesaid, for sale in accordance with
the method of disposition specified by the requesting holders, shall have become
effective and, if such method of disposition is a firm commitment underwritten
public offering, all such shares shall have been sold pursuant thereto.
(c) The Company shall be entitled to include in any registration statement
referred to in this Section 2, for sale in accordance with the method of
disposition specified by the requesting
2
<PAGE>
holders, shares of Common Stock to be sold by the Company for its own account,
except as and to the extent that, in the opinion of the managing underwriter (if
such method of disposition shall be an underwritten public offering), such
inclusion would adversely affect the marketing of the Restricted Stock to be
sold. Except for registration statements on Form S-4, S-8 or any successor
thereto, the Company will not file with the Commission any other registration
statement with respect to its Common Stock, whether for its own account or
that of other stockholders, from the date of receipt of a notice from
requesting holders pursuant to this Section 2 until the completion of the period
of distribution of the registration contemplated thereby.
3. INCIDENTAL REGISTRATION. If the Company at any time (other than
pursuant to Section 2 or Section 4) proposes to register any of its
securities under the Securities Act for sale to the public, whether for its
own account or for the account of other security holders or both (except with
respect to registration statements on Forms S-4, S-8 or another form not
available for registering the Restricted Stock for sale to the public or in
connection with the Company's initial public offering of Common Stock), each
such time it will give written notice to all holders of outstanding
Restricted Stock of its intention so to do. Upon the written request of any
such holder, received by the Company within 20 days after the giving of any
such notice by the Company, to register any of its Restricted Stock (which
request shall state the intended method of disposition thereof), the Company
will use its best efforts to cause the Restricted Stock as to which
registration shall have been so requested to be included in the securities to
be covered by the registration statement proposed to be filed by the Company,
all to the extent requisite to permit the sale or other disposition by the
holder (in accordance with said written request) of such Restricted Stock so
registered. In the event that any registration pursuant to this Section 3
shall be, in whole or in part, an underwritten public offering of Common
Stock, the number of shares of Restricted Stock to be included in such an
underwriting may be reduced (pro rata among the requesting holders based upon
the number of shares of Restricted Stock owned by such holders or to zero) if
and to the extent that the managing underwriter shall be of the opinion that
such inclusion would adversely affect the marketing of the securities to be
sold by the Company therein, PROVIDED, HOWEVER, that such number of shares of
Restricted Stock shall not be reduced if any shares are to be included in
such underwriting for the account of any person other than the Company or
requesting holders of Restricted Stock, except on a pro rata basis with a
reduction in the number of shares included for the account of any person
other than the Company or requesting holders of Restricted Stock.
4. REGISTRATION ON FORM S-3. If at any time (i) a holder or holders of
Restricted Stock request that the Company file a registration statement on Form
S-3 or any successor thereto for a sale or public offering of all or any portion
of the shares of Restricted Stock held by such requesting holder or holders, the
reasonably anticipated aggregate price to the public of which would exceed
$5,000,000, and (ii) the Company is a registrant entitled to use Form S-3 or any
successor thereto to register such shares, than the Company shall use its best
efforts to register under the Securities Act on Form S-3 or any successor
thereto, for public sale in accordance with the method of disposition specified
in such notice, the number of
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<PAGE>
shares of Restricted Stock specified in such notice. Whenever the Company is
required by this Section 4 to use its best efforts to effect the registration of
Restricted Stock, each of the procedures and requirements of Section 2
(including but not limited to the requirement that the Company notify all
holders of Restricted Stock from whom notice has not been received and provide
them with the opportunity to participate in the offering) shall apply to such
registration, PROVIDED, HOWEVER, that the total number of registrations on Form
S-3 which may be requested and obtained under this Section 4 shall be three, and
PROVIDED, FURTHER, HOWEVER, that the requirements contained in the first
sentence of Section 2(a) shall not apply to any registration on Form S-3 which
may be requested and obtained under this Section 4.
5. REGISTRATION PROCEDURES. If and whenever the Company is required by
the provisions of Sections 2, 3 or 4 to use its best efforts to effect the
registration of any shares of Restricted Stock under the Securities Act, the
Company will, as expeditiously as possible:
(a) before filing the registration statement or prospectus or
amendments or supplements thereto, furnish to one counsel selected by the
sellers of Restricted Stock copies of such documents proposed to be filed which
shall be subject to the reasonable approval of such counsel;
(b) permit any holder of Restricted Stock which holder, in its sole
and exclusive judgment, might be deemed to be an underwriter or a controlling
person of the Company, to participate in the preparation of such registration
statement or prospectus or amendments or supplements thereto, and to require the
insertion therein of material, furnished to the Company in writing, which in the
reasonable judgment of such holder and its counsel should be included;
(c) prepare and file with the Commission a registration statement
(which, in the case of an underwritten public offering pursuant to Section 2,
shall be on Form S-1 or other form of general applicability satisfactory to the
managing underwriter selected as therein provided) with respect to such
securities and use its best efforts to cause such registration statement to
become and remain effective for the period of the distribution contemplated
thereby (determined as hereinafter provided);
(d) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and comply with the provisions of
the Securities Act with respect to the disposition of all Restricted Stock
covered by such registration statement in accordance with the sellers' intended
method of disposition set forth in such registration statement for such period;
(e) furnish to each seller of Restricted Stock and to each
underwriter such number of copies of the registration statement and the
prospectus included therein (including each preliminary prospectus) as such
persons reasonably may request in order to facilitate the public sale or
other disposition of the Restricted Stock covered by such registration
statement;
-4-
<PAGE>
(f) use its best efforts to register or qualify the Restricted Stock
covered by such registration statement under the securities or "blue sky" laws
of such jurisdictions as the sellers of Restricted Stock or, in the sale of an
underwritten public offering, the managing underwriter reasonably shall request,
PROVIDED, HOWEVER, that the Company shall not for any such purpose be required
to qualify generally to transact business as a foreign corporation in any
jurisdiction where is it not so qualified or to consent to general service of
process in any such jurisdiction;
(g) use its best efforts to (i) list the Restricted Stock covered by
such registration statement with any securities exchange on which the Common
Stock of the Company is then listed and, if not so listed, to be listed on the
National Association of Securities Dealers, Inc. ("NASD") automated quotation
system ("NASDAQ") and, if listed on NASDAQ, use its best efforts to secure
designation of all such Restricted Stock covered by such registration Statement
as a NASDAQ "national market system security" within the meaning of Rule 11Aa2-1
of the Commission under the Exchange Act or, failing that, to secure NASDAQ
authorization for such Restricted Stock and, (ii) without limiting the
generality of the foregoing, to arrange for at least two market makers to
register as such with respect to such Restricted Stock with the NASD;
(h) immediately notify each seller of Restricted Stock and each
underwriter under such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event of which the Company has knowledge as a result of which
the prospectus contained in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing;
(i) make available for inspection by each seller of Restricted Stock,
any underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by such seller
or underwriter, all financial and other records, pertinent corporate documents
and properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such registration
statement;
(j) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months beginning with the first day of the Company's
first full calendar quarter after the effective date of the registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 thereunder; and
(k) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in such registration statement for sale in any
jurisdiction, the Company shall use its best efforts promptly to obtain the
withdrawal of such order.
-5-
<PAGE>
For purposes of Section 5(c) and 5(d) and of Section 2(c), the period of
distribution of Restricted Stock in a firm commitment underwritten public
offering shall be deemed to extend until each underwriter has completed the
distribution of all securities purchased by it, and the period of distribution
of Restricted Stock in any other registration shall be deemed to extend until
the earlier of the sale of all Restricted Stock covered thereby or 120 days
after the effective date thereof.
In connection with each registration hereunder, the sellers of Restricted
Stock will furnish to the Company in writing such information with respect to
themselves and the proposed distribution by them as reasonably shall be
necessary in order to assure compliance with federal and applicable state
securities laws.
In connection with each registration pursuant to Sections 2, 3 or 4
covering an underwritten public offering, the Company and each seller agree to
enter into a written agreement with the managing underwriter selected in the
manner herein provided in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
underwriter and companies of the Company's size and investment stature.
6. EXPENSES. All expenses incurred by the Company in complying with
Sections 2, 3 and 4, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees and expenses (including counsel fees)
incurred in connection with complying with state securities or "blue sky" laws,
fees of the National Association of Securities Dealers, Inc., transfer taxes,
fees of transfer agents and registrars, costs of insurance and fees and
disbursements of one counsel for the sellers of Restricted Stock, but excluding
any Selling Expenses, are called "Registration Expenses". All underwriting
discounts and selling commissions applicable to the sale of Restricted Stock are
called "Selling Expenses".
The Company will pay all reasonable Registration Expenses in connection
with each registration statement under Sections 2, 3 or 4. All Selling Expenses
in connection with each registration statement under Sections 2, 3 or 4 shall be
borne by the participating sellers in proportion to the number of shares sold by
each, or by such participating sellers other than the Company (except to the
extent the Company shall be a seller) as they may agree.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) In the event of a registration of any of the Restricted Stock
under the Securities Act pursuant to Sections 2, 3 or 4, the Company will
indemnify and hold harmless each seller of such Restricted Stock thereunder,
each underwriter of such Restricted Stock thereunder and each other person, if
any, who controls such seller or underwriter within the meaning of the
Securities Act, against any losses, claims, damages or liability, joint or
several, to which such seller, underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such
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<PAGE>
Restricted Stock was registered under the Securities Act pursuant to Sections 2,
3 or 4, any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse each such seller, each such underwriter and each such controlling
person for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action, PROVIDED, HOWEVER, that the Company will not be liable in any such case
if and to the extent that any such loss, claim, damage or liability arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission so made in conformity with information furnished by any such
seller, any such underwriter or any such controlling person in writing
specifically for use in such registration statement or prospectus.
(b) In the event of a registration of any of the Restricted Stock
under the Securities Act pursuant to Sections 2, 3 or 4, each seller of such
Restricted Stock thereunder, severally and not jointly, will indemnify and hold
harmless the Company, each person, if any, who controls the Company within the
meaning of the Securities Act, each officer of the Company who signs the
registration statement, each director of the Company, each underwriter and each
person who controls any underwriter within the meaning of the Securities Act,
against all losses, claims, damages or liabilities, joint or several, to which
the Company or such officer, director, underwriter or controlling person may
become subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the registration statement under which such Restricted Stock
was registered under the Securities Act pursuant to Sections 2, 3 or 4, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company and each such officer, director, underwriter and controlling person for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action,
PROVIDED, HOWEVER, that such seller will be liable hereunder in any such case if
and only to the extent that any such loss, claim, damage or liability arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in reliance upon and in conformity with information
pertaining to such seller, as such, furnished in writing to the Company by such
seller specifically for use in such registration statement or prospectus, and
PROVIDED, FURTHER, HOWEVER, that the liability of each seller hereunder shall be
limited to the proportion of any such loss, claim, damage or liability or
expense which is equal to the proportion that the public offering price of the
shares sold by such seller under such registration statement bears to the total
public offering price of all securities sold thereunder, but not in any event to
exceed the proceeds received by such seller from the sale of Restricted Stock
covered by such registration statement.
-7-
<PAGE>
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to such indemnified party other than under this Section 7 and shall only relieve
it from any liability which it may have to such indemnified party under this
Section 7 if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate in and, to the extent is
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 7 for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected, PROVIDED,
HOWEVER, that, if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be reasonable defenses available to it which are
different from or additional to those available to the indemnifying party or if
the interests of the indemnified party reasonably may be deemed to conflict with
the interests of the indemnifying party, the indemnified party shall have the
right to select a separate counsel and to assume such legal defenses and
otherwise to participate in the defense of such action, with the expenses and
fees of such separate counsel and other expenses related to such participation
to be reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) any holder of
Restricted Stock exercising rights under this Agreement, or any controlling
person of any such holder, makes a claim for indemnification pursuant to this
Section 7 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 7 provides for
indemnification in such case, or (ii) contribution under the Securities Act may
be required on the part of any such selling holder or any such controlling
person in circumstances for which indemnification is provided under this Section
7; then, and in each such case, the Company and such holder will contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportion so that such holder
is responsible for the portion represented by the percentage that the public
offering price of its Restricted Stock offered by the registration statement
bears to the public offering price of all securities offered by such
registration statement, and the Company is responsible for the remaining
portion; PROVIDED, HOWEVER, that, in any such case, (A) no such holder will be
required to contribute any amount in excess of the public offering price of all
such Restricted Stock offered by it pursuant to such registration statement; and
(B) no person or entity guilty of
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<PAGE>
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) will be entitled to contribution from any person or entity who
was not guilty of such fraudulent misrepresentation.
(e) The parties hereto acknowledge and agree that the terms and
provisions of this Section 7 may be superseded by the indemnification and
contribution terms of an underwriting agreement relating to an underwritten
public offering.
8. CHANGES IN COMMON STOCK. If, and as often as, there is any change in
the Common Stock by way of a stock split, stock dividend, combination or
reclassification, or through a merger, consolidation, reorganization or
recapitalization, or by any other means, appropriate adjustment shall be made in
the provisions hereof so that the rights an privileges granted hereby shall
continue with respect to the Common Stock as so changed.
9. RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Registered Stock to the public without registration, at all times
after 90 days after any registration statement covering a public offering of
securities of the Company under the Securities Act shall have become effective,
the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
(c) furnish to each holder of Restricted Stock forthwith upon request
a written statement by the Company as to its compliance with the reporting
requirements of such Rule 144 and of the Securities Act and the Exchange Act, a
copy of the most recent annual or quarterly report of the Company, and such
other reports and documents so filed by the Company as such holder may
reasonably request in availing itself of any rule or regulation of the
Commission allowing such holder to sell any Restricted Stock without
registration.
10. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants as follows:
(a) The execution, delivery and performance of this Agreement by the
Company have been duly authorized by all requisite corporate action and will not
violate any provision of law, any order of any court or other agency of
government, the Charter or By-laws of the Company or any provision of any
indenture, agreement or other instrument to which it or any or its properties or
assets is bound, conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under any such indenture, agreement
or other instrument or result in the creation or imposition of any lien, charge
or encumbrance of any nature whatsoever upon any of the properties or assets of
the Company.
(b) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms, subject to
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<PAGE>
limitations as to enforcement, as a matter of public policy, pertaining to
rights of indemnification and contribution under Section 7 hereof.
11. MISCELLANEOUS.
(a) All covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto (including without
limitation transferees of any Restricted Stock), whether so expressed or not,
PROVIDED, HOWEVER, that registration rights conferred herein on the holders of
Restricted Stock shall only inure to the benefit of a transferee of Restricted
Stock if (i) there is transferred to such transferee at least 50% of the total
shares of Restricted Stock held by the transferor immediately prior to such
transfer or (ii) such transferee is a partner, shareholder or affiliate of a
transferor partnership or corporation and, (iii) such transferee agrees in
writing to be bound by the terms thereof.
(b) All notices, requests, consents and other communications
hereunder shall be in writing and shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by telecopier,
addressed as follows:
if to the Company, at 3100 New York Drive, Pasadena, California 91107;
if to any other party hereto, at the most recent address or telecopier
number of such party set forth on the books and records of the Company;
if to any subsequent holder of Restricted Stock, to it at such address
or telecopier number as may have been furnished to the Company in writing by
such holder;
or, in any case, at such other address, addresses or telecopier number as shall
have been furnished in writing to the Company (in the case of a holder of
Restricted Stock) or to the holders of Restricted Stock (in the case of the
Company) in accordance with the provisions of this paragraph.
(c) This Agreement shall be governed by and construed in accordance
with the laws of the State of California.
(d) This Agreement may not be amended or modified, and no provision
hereof may be waived, without the written consent of the Company and the holders
of at least 25% of the outstanding shares of Restricted Stock. Notwithstanding
the foregoing, no amendment, modification or waiver approved in accordance
herewith shall be effective if and to the extent that such amendment,
modification or waiver grants to any one or more holders of Restricted Stock any
rights more favorable than any rights granted to all other holders of Restricted
Stock or otherwise treats any one or more holders of Restricted Stock
differently than all other holders of Restricted Stock.
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<PAGE>
(e) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
(f) The obligations of the Company to register shares or Restricted
Stock under Sections 2, 3, or 4 shall terminate in accordance with the specific
terms thereof or upon the earlier of the (i) date on which all of the securities
subject hereto shall no longer be Restricted Stock, as defined herein, or (ii)
on the fifteenth anniversary of the date of this Agreement.
(g) If requested in writing by the underwriters for a firm commitment
initial underwritten public offering of securities of the Company, each holder
of Restricted Stock who is a party to this Agreement shall agree not to sell
publicly any shares of Restricted Stock or any other shares of Common Stock held
by such person immediately prior to such offering (other than shares of
Restricted Stock or other shares of Common Stock being registered in such
offering), without the consent of such underwriters, for a period of not more
than 180 days following the date of the final prospectus relating to such
offering; PROVIDED, HOWEVER, that all persons entitled to registration rights
with respect to shares of Common Stock who are not parties to this Agreement,
all other persons selling shares of Common Stock in such offering, and all
executive officers and directors of the Company shall also have agreed not to
sell publicly their Common Stock under the circumstances and pursuant to the
terms set forth in this Section 11(g).
(h) Notwithstanding the provisions of Section 5(a), the Company's
obligation to file a registration statement hereunder, or cause such
registration statement to become and remain effective, shall be suspended for a
period not to exceed 120 days in any 12-month period if there exists at the time
material non-public information relating to the Company which, in the reasonable
opinion of the Company, should not be disclosed or if the filing of such
registration statement would, in the opinion of the Board of Directors of the
Company, arrived at in good faith, adversely affect a material financing project
or a material proposal or pending acquisition, merger or other corporate
reorganization to which the Company is or is expected to be a party.
(i) The Company shall not grant to any third party any registration
rights more favorable than, or inconsistent with, any of those contained herein,
so long as any of the registration rights under this Agreement remain in effect;
provided, however, that upon the approval of the Board of Directors, the Company
may extend the rights set forth herein to additional proposed stockholders and
warrant holders of the Company.
(j) If a holder or holders of Restricted Stock requests registration
at a time when such registration would require an audit of the financial
statements of the Company, other than the regular and usual audit as of its
fiscal year end, the Company shall have the privilege of postponing filing such
registration statement until a registration statement can be filed incorporating
the audited financial statements of the Company as of its fiscal year end.
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<PAGE>
(k) If any provision of this agreement shall be held to be illegal,
invalid or unenforceable, such illegality, invalidity or unenforceability shall
attach only to such provision and shall not in any manner affect or render
illegal, invalid or unenforceable any other provision of this Agreement, and
this Agreement shall be carried out as if any such illegal, invalid or
unenforceable provision were not contained herein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
EARTHLINK NETWORK, INC.
By: /s/ Charles G. Betty
-------------------------------
Charles G. Betty, President
<PAGE>
EXHIBIT A
HOLDERS OF RESTRICTED STOCK
NO. OF
NAME SHARES SIGNATURE
- ---- ------ ----------
Abbott, Gregory 677,250 -------------------------
Abbott, George 313,704 -------------------------
Aster Corp. Employee
Retirement Trust 63,638 -------------------------
Azeez, Anne 44,960 -------------------------
Azeez, Anne Family Trust 268,584 -------------------------
Azeez, Michael 129,141 -------------------------
Azeez, Sidney Trust 26,680 -------------------------
Azeez, Sidney 412,513 -------------------------
Bernstein, Barry 67,769 -------------------------
Besserman, Linda 44,100 -------------------------
Betty, Gary 50,000 -------------------------
Boren, Thomas & Patricia 10,246 -------------------------
Boston Financial & Equity 14,286 * -------------------------
Charter Equipment Leasing
Corp. 15,369 * -------------------------
Claypool, Alan 10,000 * -------------------------
Cohen, Norman 14,412 -------------------------
Dayton, Sky 3,000,000 -------------------------
Earle-Tones Music Retirement
Trust 61,860 -------------------------
El Camino Resources, Ltd. 30,738 * -------------------------
El Dorado Tech. IV 6,283 -------------------------
El Dorado Ventures III 151,042 -------------------------
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<PAGE>
El Dorado C&L Fund 2,794 -------------------------
Flying Barzini Brothers
Trust 41,350 -------------------------
Hayes, David 10,000 * -------------------------
Hudson, William 5,000 -------------------------
Jackson, Cynthia 44,100 -------------------------
Jardina, Paul 5,122 -------------------------
Kavner, Robert 41,350 -------------------------
Lacy, Linwood, Jr. 49,620 -------------------------
Lewinter & Rosman 9,221 -------------------------
Lichtenberg, Mathew 10,250 -------------------------
Licklider Living Trust 82,690 -------------------------
LINC Capital Management 133,607 * -------------------------
London, Robert 744,065 -------------------------
McMullen, Richard 23,140 -------------------------
Mindful Partners 61,475 -------------------------
MMC/GATX Partnership No. 1 16,393 * -------------------------
Musser, Warren 41,000 -------------------------
National Media Corp. 256,147 -------------------------
O'Donnell, David 13,259 -------------------------
O'Donnell, Kevin 1,871,046 -------------------------
Reines, David Ben 12,000 -------------------------
Reines, Daniel Ben 12,000 -------------------------
Reines Family Trust 91,373 -------------------------
Reso, Brian 20,670 -------------------------
Rudick, Martin 3,900 -------------------------
Rudick, Stuart IRA Rollover 10,245 -------------------------
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Rudick, Stuart 34,000 ________________________
Rudick, Tmima 4,100 ________________________
Scarpa, John 30,738 ________________________
Scott Madden & Associates 10,245 ________________________
Shapiro, Betty E. Trust 30,738 ________________________
Slatkin, Reed 1,873,095 ________________________
Slatkin, Reed
Custodian FBO Brett Slatkin 5,610 ________________________
Slatkin, Reed
Custodian FBO Justin Slatkin 5,610 ________________________
Storie Partners, L.P. 831,197 ________________________
Taylor, Juyne 2,049 ________________________
Taylor, Marvin 2,049 ________________________
Van Der Merwe, Susan 44,100 ________________________
Vasilakos Family Trust 82,690 ________________________
Walton, Joseph 53,506 ________________________
Walton, James M. 88,295 ________________________
Walton, James M., Jr. 26,148 ________________________
Walton, Mary T. 26,148 ________________________
Walton, Rachel M. 26,148 ________________________
Total 12,200,858
*Shares issuable on exercise of warrants
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AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT
This Amendment No. 1 to Registration Rights Agreement ("Amendment") is made
and entered into as of June 27, 1996 by and between EarthLink Network, Inc., a
California corporation ("Company") and the holders Stock of "Restricted Stock"
(as that term is defined in the Registration Rights Agreement) listed on Exhibit
"A" hereto.
WHEREAS, the Company and all of the holders of Restricted Stock have
previously entered into that certain Registration Rights Agreement, dated as of
June 1, 1996 ("Agreement") pursuant to which the Company agreed to provide
certain demand and shelf registration rights to the holders of Restricted Stock;
and,
WHEREAS, the Company and the holders of 75% or more of the Restricted Stock
believe it to be in the best interests of the Company and of its shareholders to
amend the Agreement to delete said demand and shelf registration rights;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and based upon the mutual covenants
contained in the Agreement and herein, the parties hereto agree that the
Agreement shall be amended in the following manner:
1. Section 2 of the Agreement is hereby amended to read as follows:
"2. INCIDENTAL REGISTRATION. If the Company at any time
proposes to register any of its securities under the Securities Act
for sale to the public, whether for its own account or for the account
of other security holders or both (except with respect to registration
statements on Forms S-4, S-8 or another form not available for
registering the Restricted Stock for sale to the public or in
connection with the Company's initial public offering of Common
Stock), each such time it will give written notice to all holders of
outstanding Restricted Stock of its intention so to do. Upon the
written request of any such holder, received by the Company within 20
days after the giving of any such notice by the Company, to register
any of its Restricted Stock (which request shall state the intended
method of disposition thereof), the Company will use its best efforts
to cause the Restricted Stock as to which registration shall have been
so requested to be included in the securities to be covered by the
registration statement proposed to be filed by the Company, all to the
extent requisite to permit the sale or other disposition by the holder
(in accordance with said written request) of such Restricted Stock so
registered. In the event that any regisration pursuant to this
Section 2 shall be, in whole or in part, an underwritten public
offering of Common Stock, the number of shares of Restricted Stock to
be included in such underwriting may be reduced (pro rata among the
requesting holders based upon
<PAGE>
the number of shares of Restricted Stock owned by such holders or to
zero) if and to the extent that the managing underwriter shall be of
the opinion that such inclusion would adversely effect the marketing
of the securities to be sold by the Company therein, PROVIDED,
HOWEVER, that such number of shares of Restricted Stock shall not be
reduced if any shares are to be included in such underwriting for the
account of any person other than the Company or requesting holders of
Restricted Stock, except on a pro rata basis with a reduction in the
number of shares included for the account of any person other than the
Company or requesting holders of Restricted Stock.
2. Section 3 of the Agreement is deleted in its entirety;
3. Section 4 of the Agreement is deleted in its entirety;
4. Sections 5 through 11, inclusive, of the Agreement are hereby
renumbered as Sections 3 through 9, inclusive and are hereby further amended by
deleting all references to Sections 3 and 4 therein.
5. All other provisions of the Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first written above.
EARTHLINK NETWORK, INC.
By: /s/Charles G. Betty
-------------------------------
Charles G. Betty, President
<PAGE>
AMENDMENT NO. 2 TO REGISTRATION RIGHTS AGREEMENT
This Amendment No. 2 to Registration Rights Agreement ("Amendment") is made
and entered into as of September 10, 1996, by and among EarthLink Network, Inc.,
a Delaware corporation ("Company"), the holders of the "Restricted Stock" (as
that term is defined in the Registration Rights Agreement as previously amended)
listed on Exhibit "A" hereto, and the additional parties, including certain of
the "Investors" (as defined below), that are signatories hereto (such additional
parties are collectively referred to herein as "New Holders").
WHEREAS, the Company and all of the holders of Restricted Stock have
previously entered into that certain Registration Rights Agreement dated June 1,
1996 and as amended by the holders of 75% or more of the Restricted Stock by
Amendment No. 1 dated June 27, 1996 (the "Agreement"); and,
WHEREAS, the Company and the holders of the requisite number of shares
required to amend the Agreement believe it to be in the best interests of the
Company and its shareholders to amend the Agreement to include certain
additional registration and related rights;
WHEREAS, the Company desires that the New Holders become parties to the
Agreement, and the New Holders are willing to become parties to the Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree that the
Agreement shall be amended in the following manner:
1. Section 1 is hereby amended by replacing sub-section (d) of the definition
of "Restricted Stock" with the following:
"(d) may otherwise be publicly sold without registration under the
Securities Act."
2. Section 2 is hereby amended by renumbering existing Section 2 as Section
2(a) and adding the following new Section 2(b):
2(b) FORM S-3 REGISTRATION. After its initial public offering or
registration of any class of its securities pursuant to Section 12 of
the Exchange Act, the Company shall use its best efforts to qualify
for registration on Form S-3 or any successor form. After the Company
has qualified for the use of Form S-3, and in addition to the rights
contained in Section 2(a), if at any time a holder or holders of
Restricted Stock requests that the Company file a registration
statement on Form S-3 or any successor form for a sale or public
offering of all or any portion of the shares of Restricted Stock held
by such requesting holder or holders, the reasonably anticipated
aggregate price to the public of which would exceed $5,000,000, then
the Company will use its best efforts to register under the Securities
Act on Form S-3 or any successor form, for public sale in accordance
with the method of disposition specified in such notice, the number of
shares of Restricted Stock specified in such notice. Promptly, but in
no event more than three business days following receipt of such
request, the Company will notify each other holder of Restricted Stock
and shall include in such registration all Restricted Stock with
respect to which each such holder has given notice to the Company of
such holder's request for inclusion therein
1
<PAGE>
within 20 days after the giving of such notice by the Company. If the
registration pursuant to this Section 3 is an underwritten offering,
the holders of a majority of the Restricted Stock to be included in
such registration will have the right to select one or more investment
banker(s) and manager(s), reasonably acceptable to the Company and
subject to the approval of Quantum Industrial Partners LDC, if shares
of its Restricted Stock are included in the registration, to
administer the offering. Notwithstanding anything herein to the
contrary, the total number of registrations pursuant to this section
which may be requested and obtained shall be three (or such greater
number as may be requested to permit Quantum Industrial Partners LDC
to make such a request on two occasions)."
3. Section 2(a) is amended replacing the phrase "shall be of the opinion" with
"shall provide a written opinion to the Company".
4. Section 3 shall be amended by adding the following new Section 3(l):
"(l) upon request, furnish to each holder of Restricted Stock included
in such registration, a signed counterpart, addressed to such holder,
of an opinion of counsel for the Company, dated the effective date of
such Registration Statement (or, if such registration includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), and (ii) upon request, use its best efforts
to furnish to each holder of Restricted Stock included in such
registration, a signed counterpart, addressed to such holder, of a
"comfort letter", dated the effective date of such Registration
Statement (and, if such registration includes an underwritten public
offering, dated the date of the closing under the underwriting
agreement), signed by the independent public accountants who have
certified the Company's financial statements included in such
Registration Statement; such legal opinion and accountants letter
shall cover substantially the same matters with respect to such
Registration Statement (and the Prospectus included therein) and, in
the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are
customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities and, in the case of the accountants' letter, such other
financial matters, as the principal underwriter with respect to such
registration may reasonably request (or, if such registration does not
involve an underwritten offering, as may reasonably (i.e., in
conformity with Statement on Auditing Standards No. 72, as amended, or
any successor statement thereto) be requested by holders of a majority
of the Restricted Stock included in such registration and, if any of
its shares are included in the registration, by Quantum Industrial
Partners LDC.)."
5. Section 3(a) is hereby amended by inserting the phrase "generally, and one
counsel selected by Quantum Industrial Partners LDC, if its Restricted Stock is
included in such registration," immediately after the phrase "by the sellers of
Restricted Stock."
6. Section 3(c) is hereby amended by adding the phrase, "Form S-3 (if
available for use by the Company)" immediately after the phrase "shall be on
Form S-1".
7. Section 3(d) is hereby amended by replacing the phrase "in paragraph (a)
above" with the phrase "below in this Section".
8. Section 3(h) is hereby amended by adding the following text at the end of
the section:
2
<PAGE>
"and at the request of any such holder, promptly prepare and furnish
to such holder a reasonable number copies of a supplement to or an
amendment of such Prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such Restricted Stock, such
Prospectus shall not include an untrue statement of a material fact or
omit to state material fact required to be stated therein or necessary
to make the statements therein not misleading in light of the
circumstances then existing".
9. Section 3(j) is hereby amended by adding immediately after the phrase "as
soon as reasonably practicable" the phrase "but not later than the "Availability
Date" (as defined below)" and by adding at the end of the section the following:
"Availability Date" means the 45th day following the end of such
twelve month period, except that, if such fourth fiscal quarter in
such twelve month period is the last quarter of the Company's fiscal
year, "Availability Date" means the 90th day after the end of such
fourth fiscal quarter".
10. The third to the last of the unnumbered paragraph of Section 3 is hereby
amended by adding the following phrase at the end of such paragraph:
"(one year if the registration is effective on Form S-3)".
11. Section 4(a) is hereby amended by inserting the phrase "which counsel shall
be selected by Quantum Industrial Partners LDC, if its Restricted Stock is
included in such registration" immediately after the phrase "one counsel for the
sellers of Restricted Stock".
12. Section 5(a) shall be amended by inserting "(i)" immediately after the
phrase "arise out of or are based upon". Section 5(a) shall be further amended
by adding the following language immediately prior to the text "and will
reimburse each seller":
"(ii) any violation by the Company of any federal, state or common
law, rule or regulation applicable to such registration statement,
preliminary prospectus, final prospectus, or amendment or supplement
thereto."
13. Section 5(a) is further amended by adding the phrase "and as incurred"
immediately following the phrase "other expenses reasonably incurred by them".
14. Section 5(b) is hereby amended by adding the phrase "and as incurred"
immediately following the phrase "other expenses reasonably incurred by them"
and is further amended by adding the following language at the end of said
section:
"(net of all expenses paid by such seller and the amount of damages
such seller has otherwise been required to pay by reason of such
untrue statement or omission)".
15. Section 5(c) is hereby amended by adding the following language to the end
of said section:
"No indemnifying party will, except with the consent of the
indemnified party, consent to entry of any judgment or enter into any
settlement that does not include as an unconditional
3
<PAGE>
term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such
claim or litigation".
and by adding the word "materially" prior to the phrase "prejudiced
by such omission."
16. Section 5(d) shall be amended by deleting the text thereof in its entirety
and replacing it with the following language:
"If for any reason the indemnification provided for in the preceding
clauses (a) and (b) is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of
appeal) to be unavailable to an indemnified party or insufficient to
hold it harmless, notwithstanding the fact that this Section 5
provides for indemnification in such case, then the indemnifying party
shall contribute to the amount paid or payable by the indemnified
party as a result of such loss, claim, damage or liability in such
proportion as is appropriate to reflect the relative fault of the
indemnified party and the indemnifying party, as well as any other
relevant equitable considerations. The relative fault of the
indemnifying party and of the indemnified party shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the
indemnified party and the parties' relative intent, knowledge, access
to information, and opportunity to correct or prevent such statement
or omission. No person guilty of fraudulent misrepresentation within
the meaning of Section 11(f) of the 1933 Act shall be entitled to
contribution from any person not guilty of such fraudulent
misrepresentation. In no event shall the contribution obligation of a
holder of Restricted Stock be greater in amount than the lesser of (i)
an amount equal to the proportion that the public offering price of
the Restricted Stock sold by the holder in such registration bears to
the total public offering price of all securities sold thereunder or
(ii) the dollar amount of the proceeds (net of all expenses paid by
such holder and the amount of any damages such holder has otherwise
been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission) received by it upon the
sale of the Restricted Stock giving rise to such contribution
obligation."
17. Section 5(e) shall be amended by adding the following language immediately
at the end of said section:
"; provided, that if the underwriting agreement does not provide terms
relating to indemnification or contribution as between the Company and
sellers of Restricted Stock, the provisions of this Agreement relating
thereto shall continue to be in effect."
18. Section 5 is further amended by adding the following Section 5(f):
"(f) SURVIVAL OF OBLIGATIONS. The obligations of the parties under
this Section 5 shall survive the completion of the offering of
Restricted Stock and shall remain in full force and effect regardless
of any investigation made by or on behalf of any indemnified party."
19. Section 9(a) is hereby amended by renumbering subsection (iii) as
subsection (iv) and inserting the following text at the end of subsection (ii):
4
<PAGE>
"or (iii) such transferee is a charitable trust or foundation
established by the holder of such Restricted Stock, a member of the
immediate family of the transferee, a trust for the benefit of the
holder of Restricted Stock or a member of the immediate family of such
holder, a partnership of which the holder of the Restricted Stock or
members of such holder's immediate family are partners, or, with
respect to Restricted Stock held by Quantum Fund Management LDC, any
investment vehicle managed by Soros Management or any successors".
20. Section 9(c) is hereby amended by replacing the word "California" with "New
York".
21. Section 9(d) is hereby amended by adding the text "(i)" immediately before
the phrase "no amendment" in the second sentence thereof and adding the
following text at the end of said subsection:
"and (ii) no amendment, modification or waiver that adversely affects
the rights of any holders hereunder shall be effective without the
written consent of holders of 60% of the Restricted Stock (excluding
any Restricted Stock held by holders that were officers, directors or
beneficial owners of 5% or more of the Company's outstanding Common
Stock on September 1, 1996 or any affiliates or immediate family
members of such persons) acquired pursuant to that certain Stock
Purchase Agreement relating to 2,727,273 shares of Series A
Convertible Preferred Stock of the Company, dated September ___, 1996
(the "SPA"), and acquired upon conversion thereof (calculated on the
basis of 60% of the aggregate number of shares of Common Stock issued
and issuable upon conversion of such Restricted Stock). If the
registration rights of the holders of Restricted Stock granted
pursuant to this Agreement are less favorable to such holders than
registration rights available to any other holder ("Other Holder") of
securities of the Company on the date hereof ("Other Rights") are to
such Other Holder, this Agreement shall be immediately and
automatically amended, without the requirement of any action by the
parties hereto, to provide the holders of Restricted Stock under this
Agreement with registration rights at least as favorable as such Other
Rights. From and after the date of this Agreement, the Company shall
not, without the prior written consent of 66 2/3% in interest of the
holders of Restricted Stock and holders of 60% of the Restricted Stock
(excluding any Restricted Stock held by holders that were officers,
directors or beneficial owners of 5% or more of the Company's
outstanding Common Stock on September 1, 1996 or any affiliates or
immediate family members of such holders) acquired pursuant to the SPA
(calculated on the basis of 60% of the aggregate number of shares of
Common Stock issued and issuable upon conversion of the Restricted
Stock sold pursuant to the SPA), enter into any agreement with any
holder or prospective holder of any securities of the Company giving
such holder or prospective holder any registration rights the terms of
which are more favorable than the registration rights granted to the
holders hereunder. For the purposes of this Section 9(d), beneficial
ownership shall be determined in
5
<PAGE>
accordance with Rule 13d 3 under the Exchange Act."
22. Section 9(h) shall be amended by replacing the number "120" with "60".
23. Section 11(j) is amended by deleting the text thereof in its entirety and
replacing it with the phrase "[RESERVED]".
24. The "Investors", as that term is defined in that certain Stock Purchase
Agreement relating to 2,727,273 shares of Series A Convertible Preferred Stock
of the Company, dated September ___, 1996, are hereby made parties to the
Agreement and the shares or Common Stock into which their shares of Series A
Convertible Preferred Stock may be converted shall, upon issuance, be deemed
Restricted Shares for all purposes under the Agreement. Reference to Quantum
Industrial Partners LDC includes its successors and assigns. Robert Zangrillo
is also hereby made a party to this Agreement, effective as of the date shares
of Restricted Stock are issued to him.
25. Each New Holder, by such holder's signature hereon, agrees to become a
party to the Agreement, as amended.
26. Except as otherwise set forth herein, the Agreement shall continue in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first written above and in conformity with Section 9(d) of the Agreement.
EARTHLINK NETWORK, INC.
By: /s/ Charles G. Betty /s/ Sky Dayton
----------------------------- ----------------------------
Charles G. Betty, President Sky Dayton
/s/ Reed Slatkin /s/ Kevin O'Donnell
- -------------------------------- ----------------------------
Reed Slatkin Kevin O'Donnell
6
<PAGE>
EXHIBIT 10.2
AMENDED AND RESTATED
EARTHLINK NETWORK, INC.
STOCK OPTION PLAN FOR DIRECTORS
1. PURPOSE. The purpose of this Amended and Restated Stock Option Plan
for Directors ("Plan") of EarthLink Network, Inc. (the "Company"), a Delaware
corporation, is to encourage stock ownership by non-Affiliate 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. DEFINITION OF "AFFILIATE." As used herein, "Affiliate" shall mean:
(a) Any employee or officer of the Company;
(b) Any director of the Company who beneficially owns 5% or more of
the outstanding shares of capital stock of the Company; or
(c) Any director who is an employee, officer or director of, or who
beneficially owns 5% or more of the outstanding shares of capital stock of,
any entity, other than the Company, that itself beneficially owns 5% or
more of the outstanding shares of capital stock of the Company.
3. 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, or until earlier termination by the Board of Directors of
the Company (the "Board"), whichever occurs first.
4. 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 canceled 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.
5. PLAN ADMINISTRATION:
(a) The Plan shall be administered by the Compensation Committee of
the Board of Directors (the "Committee").
(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
<PAGE>
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.
6. 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 6 and Section 7.
(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 6(d)) per share
of Common Stock.
(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 6(d)) per share
of Common Stock.
(c) CONDITIONS TO GRANTS. Options awarded pursuant to this Section 6
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.
7. GENERAL TERMS AND CONDITIONS OF OPTIONS. Options awarded under
Section 6 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
<PAGE>
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. Options granted under the
Plan shall become exercisable on the first day following the expiration of
the six month period commencing on the date of grant; PROVIDED, HOWEVER,
that in the event of retirement, death or disability of a Director prior to
the date that granted options become exercisable, all such granted but
unexercisable options shall terminate and all of the Director's rights
thereto shall cease. 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 7(b).
(b) DEATH OF DIRECTOR. Any option granted to a Director and
outstanding on the date of his or her death and which was otherwise
exercisable as of such date 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.
8. 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 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 8 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.
9. 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
<PAGE>
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 CONTINUED PARTICIPATION. A Director's right to
participate in the Plan shall automatically terminate if and when a
Director becomes an Affiliate of the Company.
10. 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 sell,
transfer or otherwise dispose of any of the Common Stock acquired pursuant
to the exercise of an Option until six months from the date of grant of the
Option.
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.
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.
<PAGE>
By: /s/ BARRY W. HALL
-----------------------
Barry W. Hall
Chief Financial Officer
Date: NOVEMBER 15, 1996
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AMENDED AND RESTATED
STOCK PURCHASE AGREEMENT
RELATING TO 2,727,273 SHARES OF
SERIES A CONVERTIBLE PREFERRED STOCK
EARTHLINK NETWORK, INC.
DATED AS OF: SEPTEMBER 10, 1996
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AMENDED AND RESTATED
STOCK PURCHASE AGREEMENT
THIS AMENDED AND RESTATED STOCK PURCHASE AGREEMENT is made as of September
10, 1996, by and between EARTHLINK NETWORK, INC., a Delaware corporation (the
"Company"), and the investors listed on SCHEDULE I hereto, each of which is
herein referred to as an "Investor."
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1 SALE AND ISSUANCE OF SERIES A PREFERRED STOCK.
(a) The Company shall adopt and file with the Secretary of State
of the State of Delaware on or before the Closing (as defined below) the
Certificate of Designation, Preferences and Rights of Series A Convertible
Preferred Stock in the form attached hereto as EXHIBIT A.
(b) Subject to the terms and conditions of this Agreement and in
reliance upon the representations and warranties and covenants contained
herein, each Investor agrees, severally but not jointly, to purchase at the
Closing, and the Company agrees to sell and issue to each Investor at the
Closing, that number of shares of the Company's Series A Convertible Preferred
Stock, $.01 par value (the "Series A Preferred Stock"), set forth opposite such
Investor's name on SCHEDULE I hereto for the aggregate purchase price set forth
thereon, which shall be equivalent to $5.50 per share.
1.2 CLOSING. The purchase and sale of the Series A Preferred Stock
shall take place at the offices of Morgan, Lewis & Bockius LLP, 2000 One Logan
Square, Philadelphia, Pennsylvania 19103, at 9:00 A.M., on September 10, 1996,
or at such other time and place as the Company and Investors acquiring in the
aggregate more than 1,900,000 of the shares of Series A Preferred Stock sold
pursuant hereto agree upon orally or in writing (which time and place are
designated as the "Closing"). At the Closing, the Company shall deliver to
each Investor a certificate representing the Series A Preferred Stock which
such Investor is purchasing against delivery to the Company by such Investor of
the full purchase price therefor by bank check payable to the Company's order
or by wire transfer to such account as the Company shall designate, at the
option of such Investor. With respect to Invemed Associates, Inc., ("Invemed")
payment may be made by applying to the purchase price for the shares being
purchased hereunder by Invemed amounts due to Invemed under that certain
promissory note in the initial principal amount of $500,000, dated August 21,
1996, issued by the Company to Invemed. No Investor shall be obligated to
purchase any shares of Series A Preferred Stock at the Closing unless an
aggregate of at least 2,727,273 (2,713,637 shares in the event that the sale of
13,636 shares to North Carolina residents must be delayed to comply with
applicable state securities law) shares of Series A Preferred Stock to be sold
hereunder pursuant to Section 1.1(b) are purchased
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concurrently therewith.
1.3 SUBSEQUENT SALE OF SERIES A PREFERRED STOCK.
(a) To the extent that any Investor does not comply with its
obligations hereunder, until the 30th day immediately following the Closing the
Company may sell, to any Investor or to any other person approved by the Board
of Directors of the Company, up to the balance of the shares of Series A
Preferred Stock to be sold hereunder pursuant to Section 1.1(b) hereof but
which are not purchased by such Investors at the Closing, at a price not less
than the price per share paid by the Investors herein. In addition, during
such 30-day period, the Company may sell 13,636 shares of Series A Preferred
Stock to the North Carolina residents referred to in Section 1.2.
(b) No purchase of any shares of Series A Preferred Stock hereof
shall be deemed to have been made pursuant to this Agreement and no rights
hereunder shall inure to any such purchaser, unless such purchase is made at
the Closing pursuant to Section 1.1(b) hereof or thereafter in accordance with
Section 1.3(a) hereof.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each Investor that, except as set forth on a
SCHEDULE OF EXCEPTIONS attached as SCHEDULE II hereto, each of which exceptions
shall specifically identify the relevant subparagraph hereof to which it
relates and shall be deemed to be representations and warranties as if made
hereunder:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business as now conducted and as proposed to be
conducted (described in the preliminary prospectus of the Company, dated June
27, 1996 (the "Prospectus"), attached hereto as EXHIBIT B, heretofore furnished
to the Investors). The Company is duly qualified to transact business and is
in good standing in each jurisdiction except where the failure so to qualify
would not have a material adverse effect on its business, condition (financial
or other), results of operations, properties or prospects (a "Material Adverse
Effect").
2.2 CAPITALIZATION. The authorized capital stock of the Company
consists, or will consist at or prior to the Closing, of:
(a) PREFERRED STOCK: 10,000,000 shares of Preferred Stock (the
"Preferred Stock"), par value $.01 per share, of which 2,727,273 shares have
been designated Series A Preferred Stock. No shares of Preferred Stock,
including without limitation any shares of Series A Preferred Stock, are
presently issued and outstanding, although up to 2,727,273 shares of Series A
Preferred Stock will be sold pursuant to this Agreement. The rights,
privileges and preferences of the Series A Preferred Stock will be as stated in
the Company's Certificate of Designations, Preferences and Rights of Series A
Preferred Stock attached hereto as EXHIBIT A.
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(b) COMMON STOCK: 50,000,000 shares of Common Stock of which
11,970,465 shares are issued and outstanding and are owned by the persons and
in the amounts specified in SCHEDULE III hereto.
(c) Except for the conversion or exercise privileges of the
Series A Preferred Stock to be issued under this Agreement and the Warrants, a
form of which is attached as EXHIBIT E hereto, 2,625,000 shares of Common
Stock reserved for issuance upon the exercise of options granted to employees,
directors or consultants, 1,338,305 shares of Common Stock reserved for
issuance upon the exercise of outstanding warrants, and 723,333 shares of
Common Stock reserved for issuance upon the exercise of warrants the Company
may issue pursuant to outstanding agreements, there are not outstanding, nor
are there any agreements or understandings to issue in the future, any options,
warrants, rights for (including conversion or preemptive rights), nor are there
or agreements for the purchase or acquisition from the Company of any shares of
its capital stock. Except as provided in that certain Buy-Sell Agreement dated
June 10, 1994 among the Company, Sky Dayton, Reed Slatkin and Kevin O'Donnell,
no shares of the Company's outstanding capital stock, or stock issuable upon
exercise or exchange of any outstanding options, warrants or rights, or other
stock issuable by the Company, are subject to any rights of first refusal or
other rights to purchase such stock in favor of the Company. All holders of
options and warrants, together with exercise prices, vesting provisions and
termination dates of their respective options and warrants, are listed in
SCHEDULE III hereto.
2.3 SUBSIDIARIES. The Company does not presently own any equity
interest in any other corporation, association, or other business entity.
2.4 AUTHORIZATION. All corporate action on the part of the Company,
its officers, directors and shareholders necessary for the authorization,
execution and delivery of this Agreement and the agreements listed in Section
4.7 and attached as exhibits hereto (such agreements being herein referred to
as the "Ancillary Agreements"), the performance of all obligations of the
Company under each of this Agreement and the Ancillary Agreements, and the
authorization, issuance (or reservation for issuance) and delivery of the
Series A Preferred Stock being sold hereunder and the Common Stock issuable
upon conversion of the Series A Preferred Stock has been taken or will be taken
prior to the Closing, and this Agreement and the Ancillary Agreements
constitute (or will constitute upon the execution thereof) the valid and
legally binding obligations of the Company and each of the other parties
thereto (other than the Investors), enforceable in accordance with their
respective terms, except as may be limited by (a) applicable bankruptcy,
insolvency, reorganization or other laws of general application relating to or
affecting the enforcement of creditors' rights generally and (b) the effect of
rules of law governing the availability of equitable remedies.
2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK.
(a) The Series A Preferred Stock which is being purchased by the
Investors hereunder, when issued, sold and delivered in accordance with the
terms hereof or thereof, will be duly authorized and validly issued, fully paid
and nonassessable and, assuming the accuracy of the representations of the
Investors in this Agreement, will be issued in compliance
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with all applicable federal and state securities laws. The Common Stock
issuable upon conversion of the Series A Preferred Stock purchased under this
Agreement has been or, as of the Closing, will be duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the Certificate of
Designation, Preferences and Rights of the Series A Preferred Stock shall be
duly and validly issued, fully paid and nonassessable, and, assuming the
accuracy of the representations of the Investors in this Agreement, will be
issued in compliance with all applicable securities laws, as presently in
effect, of the United States and each of the states whose securities laws
govern the issuance of any of the Series A Preferred Stock hereunder.
(b) The outstanding shares of Common Stock are all duly and
validly authorized and issued, fully paid and nonassessable, and were issued in
compliance with all applicable federal and state securities laws, subject to
such exceptions relating to certain issuances that will not individually or in
the aggregate have a Material Adverse Effect.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or foreign governmental authority on the
part of the Company is required in connection with the execution of this
Agreement and the consummation of the transactions contemplated hereby or
thereby, except for filings under the Blue Sky laws of such states where such
filings are required and the filing of a Form D with the Securities and
Exchange Commission, which filings have been made or will be timely made, as
appropriate.
2.7 LITIGATION. Except as set forth in the SCHEDULE OF EXCEPTIONS,
and except for matters involving claims by individual customers of the Company
relating to termination or service interruption that will not, individually or
in the aggregate, have a Material Adverse Effect, there is no action, suit,
proceeding or investigation pending or currently threatened against the Company
of any nature whatsoever, including without limitation any action, suit,
proceeding, arbitration, claim or investigation which questions the validity of
this Agreement or the right of the Company to enter into it or to consummate
the transactions contemplated hereby, nor is the Company aware that there is
any basis for the foregoing. The foregoing also includes, without limitation,
actions pending or threatened (or any basis therefor known to the Company)
involving the prior employment of any of the Company's employees, their use in
connection with the Company's business of any information or techniques
allegedly proprietary to any of their former employers, or their obligations
under any agreements with prior employers. The Company is not a party or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality. There is no action, suit,
proceeding, arbitration, claim or investigation by the Company currently
pending or which the Company intends to initiate.
2.8 INTELLECTUAL PROPERTY. The Company has sufficient title and
ownership of all patents, trademarks, service marks, trade names, copyrights,
trade secrets, information, proprietary rights and processes (the foregoing,
"Intellectual Property") necessary for its business as now conducted and as
proposed to be conducted as described in the Prospectus without any conflict
with or infringement of the rights of others. A list of all patents, patent
applications, trademarks, service marks, tradenames, and copyrights other than
common law marks and unregistered copyrights owned by the Company is set forth
in the SCHEDULE OF EXCEPTIONS. There
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are no outstanding options, licenses, or agreements of any kind to which the
Company is a party or by which it is bound relating to any Intellectual
Property, whether owned by the Company or another person or entity, except as
set forth in the SCHEDULE OF EXCEPTIONS and except for rights granted by the
Company to third parties for the distribution, resale, marketing or bundling of
its products and services. The Company has not received any communications
alleging that the Company has violated or, by conducting its business as
proposed, would violate any of the Intellectual Property or other proprietary
rights of any other person or entity except as set forth in the SCHEDULE OF
EXCEPTIONS. The Company has no knowledge that any of its employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of such
employee's best efforts to promote the interests of the Company or that would
conflict with the Company's business as proposed to be conducted. To the
Company's knowledge, neither the execution nor delivery of this Agreement, nor
the carrying on of the Company's business by the employees of the Company, nor
the conduct of the Company's business as proposed, will conflict with or result
in a breach of the terms, conditions or provisions of, or constitute a default
under, any contract, covenant or instrument under which any of such employees
is now obligated. The Company does not presently utilize or intend to utilize
any inventions of any of its employees (or people it currently intends to hire)
made prior to their employment by the Company.
2.9 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is in compliance
with each, and is not in violation, breach or default of any, provision of its
Certificate of Incorporation or By-Laws, or any judgment, order, writ, or
decree, or any material contract, agreement, instrument or commitment to which
it is a party or by which it or its properties is bound, or provision of any
statute, rule or regulation applicable to the Company, its assets or its
business (except, with respect to statutes, rules or regulations, for such
violations that, individually or in the aggregate, would not have a Material
Adverse Effect). The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby will not result in any
such violation or breach or be in conflict with or constitute, with or without
the passage of time or giving of notice, either a default under any such
provision, instrument, judgment, order, writ, decree or contract or an event
which results in the creation or any lien, charge or encumbrance upon any
assets of the Company except such as would not, individually or in the
aggregate, have a Material Adverse Effect.
2.10 AGREEMENTS.
(a) Except for agreements explicitly contemplated hereby and
except as set forth in the SCHEDULE OF EXCEPTIONS, there are no binding
agreements between the Company and any of its officers, directors, affiliates,
employees, former employees or shareholders.
(b) Except as set forth in the SCHEDULE OF EXCEPTIONS, there are
no binding agreements to which the Company is a party or by which it is bound
which involve obligations of, or payments to, the Company in excess of $200,000.
2.11 REGISTRATION RIGHTS. Except as set forth in the SCHEDULE OF
EXCEPTIONS, the
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Company has not granted or agreed to grant any registration rights, including
without limitation piggyback rights, to any person or entity. Notwithstanding
anything contained in the SCHEDULE OF EXCEPTIONS, the Company is not obligated
to include securities of the Company held by any person or entity in an initial
public offering of the Company's common stock pursuant to any grant or
agreement to grant registration rights to any person or entity except for
registration rights with respect to 13,334 shares of Common Stock.
2.12 TITLE TO PROPERTY AND ASSETS. The Company has good and
marketable title to its material property and assets, free and clear of all
mortgages, liens, claims and encumbrances, except such encumbrances and liens
which arise in the ordinary course of business and do not materially impair the
Company's ownership or use or the value of such property or assets. With
respect to the property and assets it leases, the Company is in compliance in
all material respects with such leases, enjoys peaceful and undisturbed
possession thereunder, and holds a valid leasehold interest free of any
material liens, claims or encumbrances.
2.13 FINANCIAL STATEMENTS. Contained in the Prospectus, which is
attached hereto as EXHIBIT B, is (a) an audited balance sheet at December 31,
1994 and 1995 and statements of operations, cash flows and stockholders' equity
for the period from May 26, 1994 through December 31, 1994 and the year ended
December 31, 1995, and (b) an unaudited balance sheet at March 29, 1996 (the
"Balance Sheet"), unaudited statements of operations and cash flows for the
three months ended March 31, 1995 and March 29, 1996 and unaudited statements
of stockholders' equity for the three months ended March 29, 1996. In
addition, attached hereto as EXHIBIT C are (c) an unaudited balance sheet at
June 28, 1996, unaudited statements of operations and cash flows for the three
and six months ended June 30, 1995 and June 28, 1996 and unaudited statements
of stockholders' equity for the six months ended June 28, 1996 (all of the
financial statements referenced in (a), (b) and (c) are collectively referred
to herein as the "Financial Statements"). The Financial Statements (x) have
been prepared in accordance with the books and records of the Company, which
books and records, in reasonable detail, accurately and fairly reflect the
transactions and disposition of assets of the Company, (y) present fairly the
financial position of the Company at the date or dates therein indicated and
the results of operations for the periods therein specified, and (z) have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis through the periods indicated and with each other, except,
with respect to the statements referred to in (b) or (c) for the omission of
notes thereto as permitted pursuant to Regulation S-X promulgated by the
Securities and Exchange Commission. Except as set forth in the Financial
Statements, the Company has no liabilities, contingent or otherwise, other than
liabilities incurred in the ordinary course of business subsequent to June 28,
1996 and obligations under contracts and commitments incurred in the ordinary
course of business and not required under generally accepted accounting
principles to be reflected in the Financial Statements, which, individually or
in the aggregate, are not material to the financial condition of the Company.
The Company maintains and will continue to maintain a standard system of
accounting established and administered in accordance with generally accepted
accounting principles.
2.14 CHANGES. There has not been, since June 28, 1996 with respect to
the matters set forth in (a)-(c) below, and since March 29, 1996 with respect
to the matters set forth
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in (d)-(h) below:
(a) any change in the assets, liabilities, financial condition or
operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business which have not
been, in the aggregate, materially adverse;
(b) any declaration or payment of any dividend, or any authorization
or payment of any distribution, on any of the capital stock of the Company, or
any redemption or repurchase of any capital stock of the Company;
(c) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results, prospects or business of the Company (as such
business is presently conducted and as it is proposed to be conducted);
(d) any waiver by the Company of a valuable right or of a material
debt owed to it;
(e) any satisfaction or discharge of any lien, claim or encumbrance or
payment of any obligation by the Company, except in the ordinary course of
business and which is not material to the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and as it is proposed to be conducted);
(f) any change or amendment to a material contract or arrangement by
which the Company or any of its assets or properties is bound or subject;
(g) any material change in any compensation arrangement or agreement
with any employee; or
(h) to the Company's knowledge, any other event or condition of any
character which could reasonably be expected to have a Material Adverse Effect.
2.15 EMPLOYEE BENEFIT PLANS. Except as set forth in the SCHEDULE OF
EXCEPTIONS, the Company has no pension, retirement, bonus, stock option, profit
sharing, health, disability, life insurance, hospitalization or similar plans
or arrangements maintained for the benefit of, or relating to, present or
former officers, directors or employees. The Company does not have any
employee benefit plan as defined in the Employee Retirement Income Security Act
of 1974, as amended ("ERISA").
2.16 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has timely
filed all tax returns and reports as required by law. These returns and
reports are true and correct in all material respects. The Company has paid
all taxes and other assessments due, except those contested by it in good faith
which are listed in the SCHEDULE OF EXCEPTIONS. The provision for taxes of the
Company as shown in the Financial Statements is adequate for taxes due or
accrued as of the dates thereof.
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2.17 INSURANCE. The Company has in full force and effect (i) fire and
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its material
properties that might be damaged or destroyed, and (ii) such other insurance
policies as are listed in the SCHEDULE OF EXCEPTIONS.
2.18 MINUTE BOOKS. The minute books of the Company provided to
Morgan, Lewis & Bockius LLP contain a complete summary of all meetings of
directors and stockholders since the time of incorporation and all meetings of
directors and stockholders of the Company's predecessor corporation, EarthLink
Network, Inc., a California corporation, and reflect all transactions referred
to in such minutes or records accurately in all material respects.
2.19 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the knowledge of the
Company, has sought to represent any of the employees, representatives or
agents of the Company. There is no strike or other labor dispute involving the
Company pending, or to the knowledge of the Company threatened, which could
have a Material Adverse Effect, nor is the Company aware of any labor
organization activity involving its employees. The Company is not aware that
any officer or key employee, or that any group of key employees, intends to
terminate their employment with the Company, nor does the Company have a
present intention to terminate the employment of any of the foregoing. Except
as set forth in the SCHEDULE OF EXCEPTIONS, the employment of each employee of
the Company is terminable at the will of the Company without further liability
of the Company to such employee except for the payment of such employee's
normal salary accrued but not paid through the date of such termination.
2.20 ENVIRONMENTAL MATTERS. To the Company's knowledge, the Company
is not in violation of any statute, rule, regulation, decision or order of any
governmental agency or body or any court, domestic or foreign, relating to the
use, disposal or release of hazardous or toxic substances or relating to the
protection or restoration of the environment or human exposure to hazardous or
toxic substances (collectively, "environmental laws"), does not own or operate
any real property contaminated with any substance that is subject to any
environmental laws, is not liable for any off-site disposal or contamination
pursuant to any environmental laws, and is not subject to any claim relating to
any environmental laws, which violation, contamination, liability or claim
would individually or in the aggregate have a Material Adverse Effect, and the
Company is not aware of any pending investigation which might lead to such a
claim.
2.21 DISCLOSURE. The Company has fully provided each Investor with
all the information which such Investor has requested for deciding whether to
purchase the Series A Preferred Stock and all information which the Company
believes is reasonably necessary to enable such Investor to make such decision.
Neither this Agreement, nor any other agreement, document, certificate or
written statement furnished to the Investors or Morgan, Lewis & Bockius LLP by
or on behalf of the Company in connection with the transactions contemplated
hereby (including without limitation, the Financial Statements, the Prospectus,
and the Exhibits and
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Schedules hereto) when read together contain any untrue statement of a material
fact or omits to state a material fact necessary in order to make the
statements contained herein or therein not misleading; except that, with
respect to any financial projections submitted to the Investors, the Company
represents and warrants only that such financial projections were prepared in
good faith based on reasonable assumptions and are not inconsistent with any
other projections prepared by or for the Company or reflected in any internal
Company plans, budgets or forecasts. To the best of the Company's knowledge,
the particular financial projections submitted to the Investors, based upon the
investment in the Series A Preferred Stock contemplated hereby, fairly present
its management's good faith estimates as of the date of this Agreement.
2.22 TERMINATION OF LETTER AGREEMENT. The Company has terminated its
letter agreement with New Media Group dated August 7, 1996, and has no
obligations or liabilities of any nature whatsoever to New Media Group, its
partners, directors, officers, employees, agents, successors or assigns arising
under such letter agreement or the termination thereof except as set forth in
the Termination Agreement with New Media Group dated September 9, 1996, a true
and correct copy of which has been furnished to the Investors or Morgan, Lewis
& Bockius LLP.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor,
severally with respect to such Investor but not jointly nor with respect to any
other Investor, hereby represents and warrants that:
3.1 AUTHORIZATION. The Investor has full power and authority to enter
into this Agreement and this Agreement constitutes its valid and legally
binding obligation, enforceable in accordance with its terms, except as may be
limited by (A) applicable bankruptcy, insolvency, reorganization or other laws
of general application relating to or affecting the enforcement of creditors'
rights generally and (b) the effect of rules of law governing the availability
of equitable remedies.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. The Series A Preferred Stock
to be received by such Investor will be acquired for investment for such
Investor's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and such Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same, but subject to the ability of such of the Investors as may be
partnerships to to its partners and any of the Investors to transfer shares to
an affiliate (within the meaning of Rule 405 promulgated under the Securities
Act of 1933, as amended (the "Act")) of such Investor.
3.3 DISCLOSURE OF INFORMATION. Each Investor has had an opportunity
to ask questions and receive answers from the Company regarding the terms and
conditions of the offering of the Series A Preferred Stock. The foregoing,
however, does not limit or modify the representations and warranties of the
Company in Section 2 of this Agreement or the right of the Investors to rely
thereon.
3.4 INVESTMENT EXPERIENCE. Each Investor is an experienced investor
in securities and acknowledges that it is able to fend for itself, can bear the
economic risk of its investment and has such knowledge and experience in
financial or business matters that it is
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capable of evaluating the merits and risks of the investment in the Series A
Preferred Stock. Each Investor also represents it is an "accredited investor"
within the meaning of Rule 501(a) promulgated under the Act.
3.5 RESTRICTED SECURITIES. Such Investor understands that the shares
of Series A Preferred Stock it is purchasing are characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction not involving a public offering and
that under such laws and applicable regulations such securities may not be
resold without registration under the Act and applicable state securities laws,
except in certain limited circumstances. In this connection, each Investor
represents that it is familiar with Rule 144 under the Act, as presently in
effect, and understands the resale limitations imposed thereby and by the Act.
Each Investor understands that the Company is under no obligation to register
any of the securities sold hereunder except as provided in the Registration
Rights Agreement as described below. Each Investor understands that no public
market now exists for the Series A Preferred Stock and that it is uncertain
whether a public market will ever exist for the Series A Preferred Stock.
3.6 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting
the representations set forth above, each Investor further agrees not to make
any disposition of all or any portion of the Series A Preferred Stock or Common
Stock issuable upon conversion thereof unless and until:
(a) There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a statement of
the circumstances surrounding the proposed disposition, and (ii) such Investor
shall have furnished the Company with an opinion of counsel, reasonably
satisfactory to the Company, that such disposition will not require
registration of such shares under the Act. It is agreed that the Company will
not require opinions of counsel for transactions made pursuant to Rule 144 by
an Investor except in unusual circumstances.
(c) Notwithstanding the provisions of paragraphs (a) and (b)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by an Investor (i) that is a partnership to a partner of such
partnership or a retired partner of such partnership who retires after the date
hereof, or (ii) to an affiliate of such Investor, or (iii) that is an
individual to any member of his immediate family, trusts for the benefit of the
Investor or his immediate family members or partnerships of which the Investor
or his immediate family members are partners or (iv) to any charitable trusts
or foundations established by the holder (and in the case of Quantum Industrial
Partners LDC, to any investment vehicle managed by Soros Management or any
successors), if the transferee agrees in writing to be subject to the terms
hereof to the same extent as if he were an original Investor hereunder.
Moreover, no such registration statement or opinion of counsel shall be
necessary for a transfer by an Investor at any time after the provisions of
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subparagraph (k) of Rule 144 are applicable to an Investor or transferee
thereof. Notwithstanding the foregoing, no such transfers will be permitted to
the extent that such a transfer violates applicable securities law or
regulation.
3.7 LEGENDS. It is understood that the certificates evidencing the
Series A Preferred Stock (and the Common Stock issuable upon conversion or
exercise thereof) may bear the following legend as well as any other legends as
may be required by applicable law:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF
ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT
AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS."
3.8 ACCURACY OF CERTAIN INFORMATION. The state or country of each
individual Investor's residence or principal office, as appropriate, is
accurately reflected on the signature page hereto, and, unless otherwise noted,
is the same state as in the address included on the signature page.
4. CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING. The obligations of
each Investor under Section 1.1(b) of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective against any Investor who does not
consent in writing thereto:
4.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in this Agreement shall be true on and as
of the Closing in all material respects with the same effect as though such
representations and warranties had been made on and as of the date of such
Closing.
4.2 PERFORMANCE. The Company shall have performed and complied in all
material respects with all agreements, obligations and conditions contained in
this Agreement that are required to be performed or complied with by it on or
before the Closing.
4.3 COMPLIANCE CERTIFICATE. If the Closing does not occur
simultaneously with the execution of this Agreement, the President of the
Company shall deliver to each Investor at the Closing an accurate certificate
certifying that the conditions specified in Sections 4.1 and 4.2 have been
fulfilled and stating that the representations and warranties of the Company
are true and correct on the date of Closing as if made on the date of Closing.
4.4 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in
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connection with the transactions contemplated at the Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to each
Investor and Morgan, Lewis & Bockius LLP, counsel to Quantum Industrial
Partners LDC, Invemed and certain of their associates, and they shall have
received all such counterpart original and certified or other copies of such
documents as they may reasonably request.
4.5 BOARD OF DIRECTORS. The directors of the Company shall consist of
the following persons: Sky D. Dayton, Charles G. Betty, Sidney Azeez, Robert M,
Kavner, Linwood A. Lacy, Jr., Kevin M. O'Donnell, Reed E. Slatkin and Robert
Zangrillo.
4.6 BUSINESS AND LEGAL REVIEW. The Investors and Morgan, Lewis &
Bockius LLP shall have completed a business and legal review of the Company,
which reasonably meets with their satisfaction.
4.7 CERTAIN ANCILLARY AGREEMENTS. The Registration Rights Agreement
in the form attached as EXHIBIT D shall have been executed by the respective
parties identified on such Exhibits other than such Investor, and the Warrant
in the form attattached as EXHIBIT E shall have been issued to the parties
listed in such EXHIBIT E.
4.8 OPINION OF COMPANY COUNSEL. Each Investor shall have received
from Hunton & Williams, counsel for the Company, an opinion, dated as of the
Closing, in the form attached hereto as EXHIBIT F.
4.9 BLUE SKY COMPLIANCE. The Company shall have complied with all
requirements of federal and state securities or "blue sky" laws with respect to
the issuance of the Series A Preferred Stock to the Investors hereunder.
5. CONDITIONS TO THE COMPANY'S OBLIGATIONS. The obligations of the
Company to each of the Investors under this Agreement are subject to the
fulfillment or waiver, on or before the Closing, of each of the following
conditions by each of the Investors:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of each Investor contained in this Agreement are true and correct in
all material respects as of the Closing as if made on and as of the date of
such Closing.
5.2 PAYMENT OF PURCHASE PRICE. The Investors shall have delivered to
the Company, in the aggregate, the Purchase Price for at least 2,727,273 shares
of Series A Preferred Stock (2,713,637 shares in the event that the sale of
13,636 share to North Carolina residents must be delayed to comply with
applicable state securities law).
5.3 ANCILLARY AGREEMENTS. Each of the Ancillary Agreements shall have
been executed and delivered by the parties thereto other than the Company, its
officers and directors.
6. COVENANTS OF THE COMPANY.
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6.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver to
Quantum Industrial Partners LDC and to Invemed (or their respective designated
representatives):
(a) as soon as practicable, but in any event within ninety (90)
days after the end of each fiscal year of the Company, statements of
operations, cash flow and stockholders' equity for such fiscal year and a
balance sheet of the Company as of the end of such year, such year-end
financial reports to be in reasonable detail, prepared in accordance with
generally accepted accounting principles ("GAAP"), and audited and certified by
independent public accountants of nationally recognized standing selected by
the Company;
(b) as soon as practicable, but in any event within forty-five
(45) days after the end of each of the first three (3) quarters of each fiscal
year of the Company, unaudited statements of operations, cash flow and
stockholders' equity for such fiscal quarter and an unaudited balance sheet as
of the end of such fiscal quarter, in reasonable detail and prepared in
accordance with GAAP;
(c) within thirty (30) days of the end of each month, unaudited
statements of operations and cash flow for such month and an unaudited balance
sheet as of the end of such month, in reasonable detail and prepared in
accordance with GAAP, together with an analysis by management of the Company's
financial condition and results of operations during such period and
explanation by management of any differences between such condition or results
and the budget and business plan for such period;
(d) as soon as practicable, but in any event thirty (30) days
prior to the end of each fiscal year, a budget and business plan for the next
fiscal year, prepared on a monthly basis, including balance sheets and sources
and applications of funds statements for such months and, as soon as prepared,
any other budgets or revised budgets prepared by the Company;
(e) with respect to the financial statements called for in
subsections (b) and (c) of this Section 6.1, an instrument executed by the
Chief Financial Officer or President of the Company and certifying that such
financial statements were prepared in accordance with GAAP consistently applied
with prior practice for earlier periods and fairly present the financial
condition of the Company and its results of operation for the period specified,
subject to normal year-end audit adjustment, and certifying that such officer
has reviewed the provisions of this Agreement and has no knowledge of any
default by the Company in the performance or observance of any of the
provisions of this Agreement or, if such officer has such knowledge, specifying
such default and the nature thereof;
(f) such other information relating to the financial condition,
business, prospects or corporate affairs of the Company as the Investor may
from time to time reasonably request, provided, however, that the Company shall
not be obligated to provide any information which it reasonably considers to be
a trade secret the disclosure of which the Company reasonably believes may
adversely affect its business.
6.2 INSPECTION; OBSERVER RIGHTS. The Company shall permit each
Investor (so
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long as such Investor holds shares of Series A Preferred Stock or shares of
Common Stock issued upon conversion thereof, that represent, in the aggregate,
at least 5% of total number of shares of Common Stock issued or issuable upon
conversion of the Series A Preferred Stock purchased hereunder by the
Investors, adjusted to reflect subsequent changes after the date hereof in the
number of shares of Common Stock outstanding by reason of stock dividends,
stock splits or recapitalization or the like), to visit and inspect the
Company's properties, to examine its books of account and records and to
discuss the Company's affairs, finances and accounts with its officers, all at
such reasonable times as may be requested by the Investor; provided, however,
that the Company shall not be obligated pursuant to this Section 6.2 to provide
access to any information which it reasonably considers to be a trade secret
the disclosure of which the Company reasonably believes may adversely affect
its business. The Company will give each of Quantum Industrial Partners LDC
and Invemed (or their respective designated representatives) not less than
three days' prior written notice of each meeting of the Board of Directors of
the Company and of any other committee or group exercising responsibilities
comparable to those exercised by the Board of Directors, specifying the time
and place of such meeting and, to the extent then known, the matters to be
discussed thereat and inviting each such Investor (or such representative) to
attend and participate therein (without, however, a right to vote thereat in
such capacity). In connection with proposed actions by unanimous consent in
writing, copies of the proposed form of unanimous consent shall be transmitted
to Quantum Industrial Partners LDC and Invemed at the time and in the manner
transmitted to the Board of Directors.
6.3 EMPLOYEE STOCK ISSUANCES. The Company covenants and agrees that
it shall not issue, or grant options with respect to, any securities to
employees unless the amount and terms of each such issuance or grant shall
first have been approved by the Compensation Committee constituted as specified
in by Section 6.5(j) hereof.
6.4 BOARD OF DIRECTORS. The Company shall use its best efforts to
maintain a Board of Directors consisting of not more than nine persons, one of
whom shall be elected by the holders of Series A Preferred Stock in accordance
with the Certificate of Designation, Preferences and Rights of the Series A
Preferred Stock. The Company shall promptly reimburse such director or the
director elected by holders of Series A Preferred Stock for any reasonable
expenses incurred by him in connection with his activities as a director of the
Company. The Company shall indemnify such director against liability to the
fullest extent permitted by applicable law. The Company shall use its best
efforts to hold meetings of its Board of Directors not less than once every
three months.
6.5 OTHER AFFIRMATIVE COVENANTS. Without limiting any other covenants
and provisions hereof, the Company covenants and agrees that it will perform
and observe, and cause each of its subsidiaries in existence from time to time
to observe and perform, the following covenants and provisions, unless, with
respect to a specific transaction, a waiver of certain specified provisions of
this Section 6.5 in connection solely with such transaction is given by the
affirmative vote of the holders of no less than 60% of the outstanding shares
of Series A Preferred Stock voting as a separate class:
(a) PAYMENT OF TAXES AND TRADE DEBT. Pay and discharge all
taxes,
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Page 16
assessments and governmental charges or levies imposed upon it or upon its
income, profits or business, or upon any properties belonging to it, prior to
the date on which penalties attach thereto, and all lawful claims which, if
unpaid, might become a lien or charge upon any properties of the Company,
provided that the Company shall not be required to pay any such tax,
assessment, charge, levy or claim which is being contested in good faith and by
appropriate proceedings if the Company shall have set aside on its books
sufficient reserves (segregated to the extent required by generally accepted
accounting principles), if any, with respect thereto; and pay, when due, or in
conformity with customary trade terms but not later than 90 days from the due
date, all lease obligations, all trade debt, and all other indebtedness
incident to the operations of the Company, except such as are being contested
in good faith and by proper proceedings if the Company shall have set aside on
its books sufficient reserves (segregated to the extend required by generally
accepted accounting principles), if any, with respect thereto.
(b) MAINTENANCE OF INSURANCE. Maintain insurance with
responsible and reputable insurance companies or associations in such amounts
and covering such risks as is customarily carried by companies engaged in
similar businesses and owning similar properties in the same general areas in
which the Company operates.
(c) PRESERVATION OF CORPORATE EXISTENCE. Preserve and maintain
its corporate existence, rights, franchises and privileges in the jurisdiction
of its incorporation, and qualify and remain qualified as a foreign corporation
in each jurisdiction in which such qualification is necessary or desirable in
view of its business and operations or the ownership or lease of its
properties; and preserve and maintain all licenses and other rights to use
Intellectual Property owned or possessed by it and deemed by the Company to be
necessary or useful to the conduct of its business; provided, however, that
nothing herein shall be construed to prevent the Company from ceasing or
omitting to exercise any rights, powers, privileges or franchises that in the
reasonable judgment of its Board of Directors can no longer be exercised in its
best interests.
(d) COMPLIANCE WITH LAWS. Comply in all material respects with
the requirements of all applicable laws, rules, regulations and orders of any
governmental authority.
(e) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. Keep adequate
records and books of account in which complete entries will be made in
accordance with generally accepted accounting principles consistently applied,
reflecting all financial transactions of the Company and in which, for each
fiscal year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection with its
business shall be made.
(f) MAINTENANCE OF PROPERTIES. Maintain and preserve all of its
material properties and assets, necessary or useful in the proper conduct of
its business, in good repair, working order and condition, ordinary wear and
tear excepted.
(g) BUDGETS APPROVAL. Prior to the commencement of each fiscal
year commencing after the date hereof, prepare and submit to, and obtain
approval by the Board of Directors of, monthly capital and operating expense
budgets, cash flow projections, profit and loss
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projections, and a business plan. The Company shall not enter into any
material activity not envisioned by the budget and business plan except as
authorized by the Board of Directors.
(h) FINANCINGS. Promptly, fully and in detail, inform the Board
of Directors of any discussions, offers or contracts relating to possible
financings of any nature for the Company, whether initiated by the Company or
any other person, except for minor financings of less than $200,000 which do
not include as a feature thereof any right to acquire any of the equity
securities of the Company.
(i) COMPENSATION. Prepare and submit to, and obtain the approval
of, the Compensation Committee of the Board of Directors (which shall consist
of four members of the Board of Directors of which at least one member shall be
a director elected by the holders of the Series A Preferred Stock and the other
three members shall be persons who are not employees of the Company) of
compensation for Company officers.
6.6 CERTAIN NEGATIVE COVENANTS. Without limiting any other covenants
and provisions hereof, the Company covenants and agrees that it will comply
with and observe the following negative covenants and provisions and will not,
unless, with respect to a specific transaction, a waiver of certain specified
provisions of this Section 6.6 in connection solely with such transaction is
given by the affirmative vote of the holders of no less than 60% of the
outstanding shares of Series A Preferred Stock voting as a separate class:
(a) DEALINGS WITH AFFILIATES. Enter into any transaction,
including, without limitation, any loans or extensions of credit or royalty
agreements with any officer or director of the Company or holder of any class
of capital stock of the Company, or any member of their respective immediate
families or any corporation or other entity directly or indirectly controlled
by one or more of such officers, directors or stockholders or members of their
immediate families except in the ordinary course of business and on terms not
less favorable to the Company than it would obtain in a transaction between
unrelated parties.
(b) CHANGE IN NATURE OF BUSINESS. Make, or permit any material
change in the nature of its business as carried on at the date hereof or as
contemplated in the Prospectus.
(c) ACQUISITION OF SHARES BY THE COMPANY. Redeem, purchase or
otherwise acquire for value (or pay into or set aside for a sinking fund for
such purchase), any share or shares of any equity security of the Company.
6.7 TERMINATION OF CERTAIN COVENANTS. The covenants set forth in
subsections 6.1(c), (d), (e) and (f), and Sections 6.2, 6.3, 6.4, 6.5, and 6.6
shall terminate as to Investors and be of no further force or effect upon the
consummation of a public offering of the Common Stock with a minimum offering
price per share of $8.00 (adjusted to reflect changes after the Closing in the
number of shares of Common Stock outstanding by reason of stock dividends,
stock splits or recapitalizations or the like) and net proceeds to the Company
of not less than $20 million.
7. MISCELLANEOUS.
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7.1 SURVIVAL OF WARRANTIES. The warranties, representations and
covenants of the Company and Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing for a period ending on the later of one year from Closing or 90 days
following receipt by each Investor of audited financial statements for the
fiscal year ended December 27, 1996 and shall in no way be affected by any
investigation of the subject matter thereof made by or on behalf of the
Investors or the Company. The termination of such provisions shall not
constitute a waiver of the Company's or the Investors' compliance with
applicable law.
7.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
7.3 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of New York as applied to agreements entered into
and to be performed entirely within New York.
7.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.5 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement. All references in this Agreement to
sections, paragraphs, exhibits and schedules shall, unless otherwise provided,
refer to sections and paragraphs hereof and exhibits and schedules attached
hereto, all of which exhibits and schedules are incorporated herein by this
reference.
7.6 PRONOUNS. Whenever from context it appears appropriate, pronouns
stated in one gender shall include the masculine, the feminine and the neuter.
7.7 NOTICES. All notices and other communications provided for or
permitted hereunder shall be in writing, addressed to the party to be notified
at the address indicated for such party on the signature page hereof, or at
such other address as such party may designate (in the case of the Investors,
upon ten days' advance written notice to the Company, in the case of the
Company upon ten days' advance notice to the Investors), and shall be deemed to
have been duly delivered (a) when delivered by hand, if personally delivered,
(b) if sent by mail to a party whose address is in the same country as the
sender, three days after being deposited in the mail, postage prepaid, (c) if
sent by facsimile transmission on a Business Day, when receipt is acknowledged
or, if sent on a day that is not a Business Day, on the next Business Day
following the day on which receipt is acknowledged, (d) if sent by a recognized
commercial delivery service that guarantees delivery on the following Business
Day with respect to such notice (e.g., Federal Express, United Parcel Service),
on the Business Day following delivery to such service and (e) if sent by
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recognized international courier, freight prepaid, with a copy sent by
telecopier, to a party whose address is not in the same country as the sender,
three Business Days after the later of (i) being telecopied and (ii) delivery
to such courier. As used herein, the term "Business Day" means any day other
than a Saturday, Sunday, or a day on which banks in the State of California or
New York are required or permitted to close.
7.8 FINDER'S FEE. Each party represents that it neither is nor will
be obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the
Company from any liability for any commission or compensation in the nature of
a finders' fee (and the costs and expenses of defending against such liability
or asserted liability) for which the Investor or any of its officers, partners,
employees, or representatives is responsible. The Company agrees to indemnify
and hold harmless each Investor from any liability for any commission or
compensation in the nature of a finders' fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Company
or any of its officers, employees or representatives is responsible.
7.9 EXPENSES. Irrespective of whether the Closing is effected, the
Company shall pay all reasonable costs and expenses incurred by the Investors
with respect to the negotiation, execution, delivery and performance of this
Agreement, including without limitation, the reasonable fees and expenses of
Morgan, Lewis & Bockius LLP, special counsel for the Quantum Industrial
Partners, Invemed Associates, Inc. and certain of their associates.
7.10 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
shares of Series A Preferred Stock (or Common Stock issuable upon conversion of
such shares) that represent at least 60% of the total number of shares of
Common Stock issued or issuable upon conversion of all of the Series A
Preferred Stock sold to the Investors pursuant to this Agreement. Any
amendment or waiver effected in accordance with this Section shall be binding
upon each holder of any securities purchased under this Agreement at the time
outstanding (including securities into which such securities are convertible),
each future holder of such securities, and the Company; provided, however, that
no condition set forth in Section 4 hereof may be waived with respect to any
Investor who does not consent thereto.
7.11 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
7.12 AGGREGATION OF STOCK. All shares of the Series A Preferred Stock
held or acquired by affiliated entities or persons shall be aggregated together
for the purpose of determining the availability of any rights under this
Agreement.
7.13 EFFECTIVENESS. This Amended and Restated Stock Purchase Agreement
shall be effective when it is signed by or on behalf of the holders of shares
of Series A Preferred Stock
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Page 20
that represent at least 60% of the total number of shares of Common Stock
issuable upon conversion of all of the Series A Preferred Stock sold to the
Investors pursuant to this Agreement.
<PAGE>
Page 21
IN WITNESS WHEREOF, the undersigned holders of shares of Series A
Preferred Stock that represent at least 60% of the total number of shares of
Common Stock issuable upon conversion of all of the Series A Preferred Stock
sold to the Investors pursuant to this Agreement have executed, or caused to be
executed on their behalf by an agent thereunto duly authorized, this Amended
and Restated Agreement as of the date first above written.
The Company: EARTHLINK NETWORK, INC.
By:
Title: President and CEO
Address: 3100 New York Drive
Pasadena, CA 91107
The Investors:
QUANTUM INDUSTRIAL PARTNERS LDC
By:
Title:
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
With copy to: Soros Fund Management
888 Seventh Avenue
New York, New York 10106
Attention: Michael C. Neus, Esquire
LLOYD E. CAMPBELL
44 Greenway Terrace
Forest Hills Garden, NY 11375
STANLEY F. DRUCKENMILLER
c/o Soros Fund Management
888 Seventh Avenue
New York, New York 10106
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Page 22
ARMINIO FRAGA
c/o Soros Fund Management
888 Seventh Avenue
New York, New York 10106
State of Residence: New Jersey
GARY S. GLADSTEIN
c/o Soros Fund Management
888 Seventh Avenue
New York, New York 10106
State of Residence: Connecticut
ROBERT K. JERMAIN
c/o Soros Fund Management
888 Seventh Avenue
New York, New York 10106
State of Residence: Connecticut
THOMAS W. KEAVENEY
10 Wagon Way
Holmdel, NJ 07733
ELIZABETH R. LARSON
c/o Soros Fund Management
888 Seventh Avenue
New York, New York 10106
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Page 23
PAUL McNULTY
c/o Soros Fund Management
888 Seventh Avenue
New York, New York 10106
MICHAEL C. NEUS
c/o Soros Fund Management
888 Seventh Avenue
New York, New York 10106
State of Residence: New Jersey
SEAN C. WARREN
c/o Soros Fund Management
888 Seventh Avenue
New York, New York 10106
TRUST FOR ALEXANDER G. SOROS UNDER
GEORGE SOROS 1982 PRIVATE LEAD TRUST
DATED AS OF APRIL 1, 1982
By: ___________________________________
TRUSTEE
TRUST FOR ANDREA SOROS UNDER
GEORGE SOROS 1982 PRIVATE LEAD TRUST
DATED AS OF APRIL 1, 1982
By: ___________________________________
TRUSTEE
<PAGE>
Page 24
TRUST FOR GREGORY SOROS UNDER
GEORGE SOROS 1982 PRIVATE LEAD TRUST
DATED AS OF APRIL 1, 1982
By: ___________________________________
TRUSTEE
TRUST FOR JONATHAN SOROS UNDER
GEORGE SOROS 1982 PRIVATE LEAD TRUST
DATED AS OF APRIL 1, 1982
By: ___________________________________
TRUSTEE
TRUST FOR ROBERT SOROS UNDER
GEORGE SOROS 1982 PRIVATE LEAD TRUST
DATED AS OF APRIL 1, 1982
By: ___________________________________
TRUSTEE
GEORGE SOROS
c/o Soros Fund Management
888 Seventh Avenue
New York, New York 10106
INVEMED ASSOCIATES, INC.
By:
Title:
22nd Floor
375 Park Avenue
New York, New York 10152
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Page 25
CRISTINA H. KEPNER
c/o Invemed Associates, Inc.
22nd Floor
375 Park Avenue
New York, New York 10152
G. ALLEN MEBANE
c/o UNIFI, INC.
7201 West Friendly Road
Greensboro, North Carolina 27410
JONATHAN PLUTZIK
312 West 102nd Street
New York, NY 10025
THOMAS L. TEAGUE
c/o Steve Dula
Salem Nationalease, Corp.
245 Charlois Blvd.
Winston-Salem, North Carolina 27103
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Page 26
ANDREW R. TAUSSIG
c/o CS First Boston Corporation
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
HARRIS BERENHOLZ
c/o Invemed Associates, Inc.
22nd Floor
375 Park Avenue
New York, New York 10152
CARLISLE JONES
c/o Invemed Associates, Inc.
22nd Floor
375 Park Avenue
New York, New York 10152
BALDWIN SMITH
c/o Invemed Associates, Inc.
22nd Floor
375 Park Avenue
New York, New York 10152
GREG ABBOTT
312 We1200 Kessler Drive
Aspen, CO 81611
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Page 27
STEPHEN ABRAMS
803 East Hyman
Aspen, CO 81611
ALAN ANDREINI
6111 North River Road
Rosemont, IL 60018
SYDNEY AZEEZ
207 Ridge Road
Jupiter, FL 33477
GARRY BETTY
125 N. Devereux Court
Atlanta, GA 30327
BOSTON INTERNATIONAL BOSTON INTERNATIONAL
PARTNERS, L.P., II PARTNERS, L.P.
By:_______________________ By:
Name:_____________________ Name:
Title:____________________ Title:
12th Floor 12th Floor
250 Park Avenue 250 Park Avenue
New York, NY 10177 New York, NY 10177
TOM DiBENEDETTO
84 State Street
Boston, MA 02109
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Page 28
STEVE DIETZ
2121 Avenue of the Stars
Suite 3000
Los Angeles, CA 90067
INTERNET TECHNOLOGY VENTURES
By:
Name:
Title:
101 West 67th Street, PH2A
New York, NY 10023
CHIP LACY
2304 Cranborne Road
Midlothian, VA 23113
STEVE LEBOW
2121 Avenue of the Stars
Suite 3050
Los Angeles, CA 90067
BOB LONDON
212 Aurora Drive
Montecito, CA 93108
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FRANK MALOOF
2669 Mercedes Drive
Atlanta, GA 30345
STEVE MALOOF
2669 Mercedes Drive
Atlanta, GA 30345
RICHARD McMULLIN
c/o Reed Slatkin
890 N. Kellogg Avenue
Santa Barbara, CA 93111
MINDFUL PARTNERS
By:
Name:
Title:
591 Redwood Highway
Suite 5285
Mill Valley, CA 94941
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Page 30
DAVID O'DONNELL
9933 Beverly Grove Drive
Beverly Hills, CA 90210
KEVIN O'DONNELL
9933 Beverly Grove Drive
Beverly Hills, CA 90210
WILLIAM PLUMMER
Suite 900
300 South Wacker Drive
Chicago, IL 60606
JANICE ROBINSON
45 East 89th Street
New York, NY 10028
JOSEPH ROBINSON
305 Second Avenue
New York, NY 10003
FRAN SALDUTTI
39th Floor
200 Park Avenue
New York, NY 10166
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SUSAN SCHNABEL
2121 Avenue of the Stars
Suite 3050
Los Angeles, CA 90067
YVES SISTERONE
2121 Avenue of the Stars
Suite 3050
Los Angeles, CA 90067
REED SLATKIN, FBO BRET SLATKIN
890 N. Kellogg Avenue
Santa Barbara, CA 93111
REED SLATKIN, FBO JUSTIN SLATKIN
890 N. Kellogg Avenue
Santa Barbara, CA 93111
REED SLATKIN
890 N. Kellogg Avenue
Santa Barbara, CA 93111
RON STEWART
44 Blackland Road
Atlanta, GA 30342
<PAGE>
Page 32
STORIE PARTNERS
By:
Name:
Title:
Suite 1350
One Bush Street
San Francisco, CA 94104
DONALD TORESCO
170 Route 22
Springfield, NJ 07081
___________________________________
CARLO CANNELL
60 Ridge Way
Point-of-Woods, NY 11706
EASTERN STATES REINSURANCE CO.
By:___________________________________
Name:_________________________________
Title:________________________________
c/o Andrea Karison
170 Route 22
Springfield, NJ 07081
___________________________________
<PAGE>
Page 33
JAMES WALTON
3412 Oleander Way
Gulf Stream, FL 33483
HARDING WILLINGER
324 E 1 Bravo Way
Palm Beach, FL 33480
BRINTON YOUNG
2041 N. Altadena
Altadena, CA 91001
For purposes of Section 7.13 only:
SHARES HELD IN VOTING TRUST, pursuant to that
certain Voting Trust Agreement effective June 10,
1995.
REED SLATKIN, Trustee
KEVIN O'DONNELL, Trustee
<PAGE>
Page 34
THE FOLLOWING SCHEDULES AND EXHIBITS WILL BE PROVIDED UPON REQUEST:
SCHEDULE I Schedule of Investors
SCHEDULE II Schedule of Exceptions to Representations,
Financial Statements
SCHEDULE III List of Stockholders
EXHIBIT A Certificate of Designation Preferences and Rights of Series A
Convertible Preferred Stock
EXHIBIT B Preliminary Prospectus, dated June 27, 1996
EXHIBIT C Unaudited balance sheet at June 28, 1996, unaudited statements of
operations and cash flows for the three and six month periods
ended June 28, 1996, and unaudited statement of stockholders'
equity for the six months ended June 28, 1996.
EXHIBIT D Registration Rights Agreement
EXHIBIT E Form of Warrant
EXHIBIT F Opinion of Company Counsel
<PAGE>
Page 35
SCHEDULE I
A. SFM Investors
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES OF PURCHASE PRICE
SERIES A PREFERRED STOCK
- -----------------------------------------------------------------------------------
<S> <C> <C>
Quantum Industrial Partners LDC 1,212,727 $ 6,669,998.50
Lloyd E. Campbell 1,364 7,502.00
Stanley F. Druckenmiller 45,455 250,002.50
Arminio Fraga 4,546 25,003.00
Gary S. Gladstein 13,636 74,998.00
Robert K. Jermain 4,546 25,003.00
Thomas W. Keaveney 1,364 7,502.00
Elizabeth R. Larson 11,818 64,999.00
Paul McNulty 909 4,999.50
Michael C. Neus 909 4,999.50
Sean C. Warren 3,636 19,998.00
Trust for Alexander G. Soros Under 18,182 100,001.00
George Soros 1982 Private Lead Trust
Dated as of April 1, 1982
Trust for Andrea Soros Under George 18,182 100,001.00
Soros 1982 Private Lead Trust Dated
as of April 1, 1982
Trust for Gregory Soros Under George 18,182 100,001.00
Soros 1982 Private Lead Trust Dated
as of April 1, 1982
<PAGE>
Page 36
Trust for Jonathan Soros Under George 18,182 $ 100,001.00
Soros 1982 Private Lead Trust Dated
as of April 1, 1982
Trust for Robert Soros Under George 18,182 100,001.00
Soros 1982 Private Lead Trust Dated
as of April 1, 1982
George Soros 429,090 2,359,995.00
Invemed Associates, Inc. 90,909 499,999.50
Cristina H. Kepner 9,091 50,000.50
G. Allen Mebane 9,091 50,000.50
Jonathan Plutzik 2,727 14,998.50
Thomas L. Teague 4,545 24,997.50
Andrew R. Taussig 7,273 40,001.50
Harris Berenholz 4,545 24,997.50
Carlisle Jones 4,545 24,997.50
Baldwin Smith 4,545 24,997.50
</TABLE>
B. Other Investors
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES OF PURCHASE PRICE
SERIES A PREFERRED STOCK
- -----------------------------------------------------------------------------------
<S> <C> <C>
Greg Abbott 30,000 $ 165,000.00
Steve Abrams 18,182 100,001.00
Alan Andreini 18,182 100,001.00
<PAGE>
Page 37
Sydney Azeez 30,000 $ 165,000.00
Garry Betty 10,000 55,000.00
Boston International Partners, L.P. 11,363 62,496.50
Boston International Partners, L.P. II 11,364 62,502.00
Carlo Cannell 4,000 22,000.00
Tom DiBenedetto 22,727 124,998.50
Steve Dietz 4,545 24,997.50
Eastern States Reinsurance Company 36,364 200,002.00
Internet Technology Ventures 90,909 499,999.50
Chip Lacy 20,000 110,000.00
Steve Lebow 4,546 25,003.00
Bob London 20,000 110,000.00
Frank Maloof 10,000 55,000.00
Steve Maloof 10,000 55,000.00
Richard McMullin 9,091 50,000.50
Mindful Partners 11,818 64,999.00
David O'Donnell 1,818 9,999.00
Kevin O'Donnell 18,182 100,001.00
Bill Plummer 18,182 100,001.00
Janice Robinson 13,637 75,003.50
<PAGE>
Page 38
Joseph Robinson 4,545 $ 24,997.50
Fran Saldutti 4,545 24,997.50
Susan Schnabel 4,545 24,997.50
Yves Sisteron 4,546 25,003.00
Reed Slatkin, FBO Bret Slatkin 1,818 9,999.00
Reed Slatkin, FBO Justin Slatkin 1,818 9,999.00
Reed Slatkin 74,911 412,010.50
Ron Stewart 2,000 11,000.00
Storie Partners 181,818 999,999.00
James Walton 39,091 215,000.50
Harding Willinger 4,545 24,997.50
Brinton Young 20,000 110,000.00
</TABLE>
<PAGE>
No. of Stock Units: _____ Warrant No. ___
WARRANT
to Purchase Common Stock of
EARTHLINK NETWORK, INC.
THIS IS TO CERTIFY THAT _______________________, or registered
assigns, is entitled to purchase from Earthlink Network, Inc., a Delaware
Corporation, (hereinbelow called the "COMPANY"), at any time on and after the
Closing Date (as defined below), but not later than 5:00 p.m., Los Angeles time,
on the date that is five (5) years after the Closing Date (the "EXPIRATION
DATE"), _____ Stock Units, in whole or in part, at a purchase price per Stock
Unit of $5.50 (adjusted as provided below), all on the terms and conditions
hereinbelow provided.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") NOR IS SUCH REGISTRATION CONTEMPLATED. SUCH SECURITIES MAY
NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED AT ANY TIME
WHATSOEVER UNLESS REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS
OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE, EXCEPT UPON DELIVERY TO THE
COMPANY OF AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION
IS NOT REQUIRED FOR SUCH TRANSFER OR THE SUBMISSION TO THE COMPANY OF SUCH OTHER
EVIDENCE AS MAY BE SATISFACTORY TO IT AND TO ITS COUNSEL TO THE EFFECT THAT ANY
SUCH TRANSFER WILL NOT BE IN VIOLATION OF THE ACT, OR APPLICABLE STATE
SECURITIES LAWS OR ANY RULE OR REGULATION PROMULGATED THEREUNDER.
Section 1. CERTAIN DEFINITIONS. As used in this Warrant, unless the
context otherwise requires:
"ADDITIONAL SHARES OF NONPREFERRED STOCK" shall mean all shares of
Nonpreferred Stock issued by the Company after the Closing Date, other than the
Warrant Stock.
"AFFILIATE" means a Person (1) that directly or indirectly controls, or is
controlled by, or is under common control with, the Company, (2) that
beneficially owns ten percent (10%) or more of the Voting Stock of the Company,
or (3) as to whom ten percent (10%) or more of the Voting Stock (or in the case
of a Person which is not a corporation, ten percent (10%) or more of
-1-
<PAGE>
the equity interest) is owned by the Company. The term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"APPRAISED VALUE" shall mean the fair market value of all outstanding
shares of Common Stock (on a fully diluted basis including any fractional shares
and assuming the exercise in full of all then-outstanding Warrants and all other
options, warrants or other rights to purchase shares of Common Stock that are
then currently exercisable at exercise prices less than the Current Market
Price), as determined by a written appraisal prepared by an appraiser acceptable
to the Company and the holders of Warrants evidencing a majority in number of
the total number of Stock Units at the time purchasable upon the exercise of all
then outstanding Warrants. "Fair market value" is defined for this purpose as
the price in a single transaction determined on a going-concern basis that would
be agreed upon by the most likely hypothetical buyer for a 100% controlling
interest in the equity capital of the Company (on a fully diluted basis
including any fractional shares and assuming the exercise in full of all then
outstanding Warrants and all other options, warrants or other rights to purchase
shares of Common Stock that are then currently exercisable at exercise prices
less than the Current Market Price), with consideration given to the effect of a
noncompete covenant signed by the seller and employment agreements signed by key
management personnel of the Company (and of its subsidiaries), each extending
for a period of time considered sufficient by all parties to effect the transfer
of goodwill from the seller to the buyer and disregarding any discounts for
nonmarketability of Common Stock of the Company. In the event that the Company
and said holders cannot, in good faith, agree upon an appraiser, then the
Company, on the one hand, and said holders, on the other hand, shall each select
an appraiser, the two appraisers so selected shall select a third appraiser who
shall be directed to prepare such a written appraisal (the "APPRAISAL") and the
term Appraised Value shall mean the appraised value set forth in the Appraisal
prepared in accordance with this definition. Except as otherwise set forth
herein, the entire cost of the appraisal process shall be borne by the Company,
but the cost thereof shall be deemed an account payable of the Company and shall
be considered in the determination of the Appraised Value.
"BOARD OF DIRECTORS" shall mean either the board of directors of the
Company or any duly authorized committee of that board.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a day on
which banks in the State of California or New York are required or permitted to
close.
"CERTIFICATE OF INCORPORATION" shall mean the certificate of incorporation
of the Company, as in effect on the Closing Date and as at any time amended or
otherwise modified.
"CLOSING DATE" shall mean September 10, 1996.
"COMMISSION" shall mean the Securities and Exchange Commission and any
other similar or successor agency of the federal government administering the
Securities Act and
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<PAGE>
the Exchange Act.
"COMMON STOCK" shall mean the Company's authorized Common Stock, $.01 par
value, irrespective of class unless otherwise specified, as constituted on the
date of original issuance of this Warrant, and any stock into which such Common
Stock may thereafter be changed, and shall also include stock of the Company of
any other class, which is not preferred as to dividends or assets over any other
class of stock of the Company issued to the holders of shares of Common Stock
upon any reclassification thereof.
"COMPANY" shall mean Earthlink Network, Inc., a Delaware corporation.
"CONVERTIBLE SECURITIES" shall mean evidences of indebtedness, shares of
stock or other securities which are convertible into or exchangeable for
Additional Shares of Nonpreferred Stock, either immediately or upon the arrival
of a specified date or the happening of a specified event.
"CURRENT MARKET PRICE" per share of Common Stock for the purposes of any
provision of this Warrant at the date herein specified, shall be deemed to be
the price determined pursuant to the first applicable of the following methods:
(i) If the Common Stock is traded on a national securities exchange or is
traded in the over-the-counter market, the Current Market Price per share of
Common Stock shall be deemed to be the average of the daily market prices for 20
consecutive Business Days commencing 20 Business Days before such date. The
market price for each such Business Day shall be, if the Common Stock is traded
on a national securities exchange or in the over-the-counter market, its closing
bid quotation on the next preceding Business Day on the principal market for the
Common Stock.
(ii) If the Current Market Price per share of Common Stock cannot be
ascertained by the method set forth in paragraph (i) immediately above, the
Current Market Price per share of Common Stock shall be deemed to be the price
equal to the quotient determined by dividing the Appraised Value by the number
of outstanding shares of Common Stock (on a fully diluted basis including any
fractional shares and assuming the exercise in full of all then-outstanding
Warrants and all other options, warrants or other rights to purchase shares of
Common Stock that are then currently exercisable at exercise prices equal to or
less than the Current Market Price).
"CURRENT WARRANT PRICE" per share of Common Stock, for the purpose of any
provision of this Warrant at the date herein specified, shall mean the amount
equal to the quotient resulting from dividing the Exercise Price in effect on
such date by the number of shares (including any fractional share) of Common
Stock comprising a Stock Unit on such date.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended,
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<PAGE>
and any similar or successor federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at any applicable
time.
"EXERCISE PRICE" shall mean the purchase price per Stock Unit as set forth
on the first page of this Warrant on the Closing Date and thereafter shall mean
such dollar amount as shall result from the adjustments specified in Section 4.
"HOLDER" shall mean, initially, ____________ and thereafter any Person that
is or Persons that are the registered holder(s) of the Warrants or Warrant Stock
as registered on the books of the Company.
"NONPREFERRED STOCK" shall mean the Common Stock and shall also include
stock of the Company of any other Class which is not preferred as to dividends
or assets over any other class of stock of the Company and which is not subject
to redemption.
"PERSON" shall include an individual, a corporation, an association, a
partnership, a trust or estate, a government, foreign or domestic, and any
agency or political subdivision thereof, or any other entity.
"PROSPECTUS" means the Company's preliminary prospectus, dated June 27,
1996, relating to a Registration Statement on Form S-1 (File No. 333-5055),
filed with the Securities and Exchange Commission.
"REGISTER", "REGISTERED" and "REGISTRATION" shall refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of the effectiveness of such
registration statement.
"REGISTRABLE SECURITIES" shall mean the Common Stock held from time to time
by the Holders pursuant to their exercise of the Warrants, provided, however,
that Registrable Securities shall not include any shares of Common Stock which
have been previously Registered and sold to the public or which have been sold
in a private transaction in which the transferor's rights under this Agreement
were not transferred.
"REGISTRATION EXPENSES" means all expenses incurred in effecting any
Registration pursuant to this Agreement, including, without limitation, all
registration, qualification, and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, fees under Blue Sky laws, and
expenses of any regular or special audits incident to or required by any such
Registration, and fees and disbursements of one counsel for the selling Holders,
but shall not include Selling Expenses, fees and disbursements of additional
counsel for the Holders and the compensation of regular employees of the
Company, which shall be paid in any event by the Company.
-4-
<PAGE>
"RESTRICTED CERTIFICATE" shall mean a certificate for Common Stock or a
Warrant bearing the restrictive legend set forth in Section 10.1.
"RESTRICTED SECURITIES" shall mean Restricted Stock and Restricted
Warrants.
"RESTRICTED STOCK" shall mean Common Stock evidenced by a Restricted
Certificate.
"RESTRICTED WARRANT" shall mean a Warrant evidenced by a Restricted
Certificate.
"RULE 144" shall mean Rule 144 as promulgated by the Commission under the
Securities Act, as such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission.
"RULE 145" shall mean Rule 145 as promulgated by the Commission under the
Securities Act, as such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission.
"SPA" shall mean the Stock Purchase Agreement, dated September 10, 1996,
among the Company and the investors named therein, relating to the sale by the
Company of 2,727,273 shares of its Series A Convertible Preferred Stock, $.01
par value, and including exhibits and schedules to such agreement.
"SECURITIES" shall mean the Warrants, and the certificates and other
instruments from time to time evidencing the same.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and any
similar or successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at any applicable
time.
"SELLER" shall mean a holder of Restricted Securities of the Company for
which the Company shall be required to file a registration statement or which
shall be registered under the Securities Act at the request of such holder
pursuant to any of the provisions of Section 10.
"SELLING EXPENSES" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and fees and
disbursements of counsel for any Holder (other than fees and disbursements of
counsel included in Registration Expenses).
"STOCK UNIT" shall constitute one share of Common Stock, as such Common
Stock was constituted on the Closing Date and thereafter shall constitute such
number of shares (including any fractional shares) of Common Stock as shall
result from the adjustments specified in Section 4.
-5-
<PAGE>
"VOTING STOCK" shall mean any equity security entitling the holder of such
security to vote at meetings of shareholders except an equity security which
entitles the holder of such security to vote only upon the occurrence of some
contingency, unless that contingency shall have occurred and be continuing.
"WARRANTS" shall mean the Warrants issued pursuant to the Amended and
Restated Stock Purchase dated September 10, 1996, among the Company and the
persons listed therein, of which this warrant is one, evidencing rights to
purchase an aggregate of 200,000 Stock Units, and all Warrants issued upon
transfer, division or combination of, or in substitution for, any thereof. All
Warrants shall at all times be identical as to terms and conditions and date,
except as to the number of Stock Units for which they may be exercised.
"WARRANT STOCK" shall mean the shares of Common Stock purchasable by the
holder of a Warrant upon the exercise of such Warrant.
Section 2. EXERCISE OF WARRANT; REPURCHASE RIGHTS. The holder of this
Warrant may, at any time on and after Closing Date, but not later than the
Expiration Date, exercise this warrant in whole at any time or in part from time
to time for the number of Stock Units which such holder is then entitled to
purchase hereunder. The Holder may exercise this Warrant, in whole or in part,
by either of the following methods:
(a) The Holder may deliver to the Company at its office maintained
pursuant to Section 15 for such purpose (i) a written notice of such Holder's
election to exercise this warrant, which notice shall specify the number of
Stock Units to be purchased, (ii) this Warrant and (iii) a sum equal to the
aggregate Exercise Price therefor in immediately available funds; or
(b) The Holder may also exercise this Warrant, in whole or in part, in a
"cashless" or "net-issue" exercise by delivering to the Company at its office
maintained pursuant to Section 15 for such purpose (i) a written notice of such
Holder's election to exercise this Warrant, which notice shall specify the
number of Stock Units to be delivered to such Holder and the number of Stock
Units with respect to which this Warrant is being surrendered in payment of the
aggregate Exercise Price for the Stock Units to be delivered to the Holder, and
(ii) this Warrant. For purposes of this subparagraph (b), each Stock Unit as to
which this Warrant is surrendered shall be attributed a value equal to the
product of (x) the Current Market Price per share of Common Stock minus the
Current Warrant Price per share of Common Stock, multiplied by (y) the number of
shares of Common Stock then comprising a Stock Unit.
Any notice required under this Section 2 may be in the form of Subscription
attached as Exhibit A hereto. Upon delivery thereof, the Company shall as
promptly as practicable and in any event within ten Business Days thereafter,
cause to be executed and delivered to such holder a certificate or certificates
representing the aggregate number of fully-paid and nonassessable shares of
Common Stock issuable upon such exercise.
-6-
<PAGE>
The stock certificate or certificates for Warrant Stock so delivered shall
be in such denominations as may be specified in said notice and shall be
registered in the name of such holder or, subject to Section 10, such other name
or names as shall be designated in said notice. Such certificate or
certificates shall be deemed to have been issued and such holder or any other
Person so designated to be named therein shall be deemed to have become a holder
of record of such shares with all rights pursuant thereto, including to the
extent permitted by law the right to vote such shares or to consent or to
receive notice as a stockholder, as of the time said notice is delivered to the
Company as aforesaid. If this Warrant shall have been exercised only in part,
the Company shall, at the time of delivery of said certificate or certificates,
deliver to such holder a new Warrant dated the date it is issued, evidencing the
rights of such holder to purchase the remaining Stock Units called for by this
Warrant, which new Warrant shall in all other respects be identical with this
Warrant, or, at the request of such holder, appropriate notation may be made on
this Warrant and the Warrant shall be returned to such holder.
The Company shall pay all expenses, taxes (other than income or similar
taxes imposed on any Holder) and other charges payable in connection with the
preparation, issue and delivery of stock certificates under this Section 2.
All shares of Common Stock issuable upon the exercise of this Warrant shall
be validly issued, fully paid and nonassessable, and free from all liens and
other encumbrances thereon.
Except as may otherwise be required by law, the Company shall not close its
books against the transfer of this Warrant or of any share of Warrant Stock in
any manner which interferes with the timely exercise of this Warrant. The
Company shall from time to time take all such action as may be necessary to
assure that the par value per share of the unissued Common Stock acquirable upon
exercise of this Warrant is at all times equal to or less than the Exercise
Price then in effect.
If the Company would be required to issue fractional shares of stock upon
any exercise of this Warrant, then it shall issue certificates for one (1) share
of stock in respect to such fraction.
Section 3. TRANSFER, DIVISION AND COMBINATION. Subject to Section 10,
this Warrant and all rights hereunder are transferable, in whole or in part, on
the books of the Company to be maintained for such purpose, upon surrender of
this Warrant at the office of the Company maintained for such purpose pursuant
to Section 15, together with a written assignment in the form attached as
Exhibit B hereto duly executed by the holder hereof or its agent or attorney and
payment of funds sufficient to pay any stock transfer taxes payable upon the
making of such transfer. Upon such surrender and payment the Company shall,
subject to Section 10, execute and deliver a new Warrant or Warrants in the name
of the assignee or assignees and in the denominations specified in such
instrument of assignment, and this Warrant shall promptly be canceled. If and
when this warrant is assigned in blank (in case the restrictions
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<PAGE>
on transferability in Section 10 shall have been terminated), the Company may
(but shall not be obliged to) treat the bearer hereof as the absolute owner of
this Warrant for all purposes and the Company shall not be affected by any
notice to the contrary. This Warrant, if properly assigned in compliance with
this Section 3 and Section 10, may be exercised by an assignee for the purchase
of shares of Common Stock without having a new Warrant issued.
This Warrant may, subject to Section 10, be divided or combined with other
Warrants upon presentation at the aforesaid office of the Company, together with
a written notice specifying the names and denominations in which new Warrants
are to be issued, signed by the holder hereof or its agent or attorney. Subject
to compliance with the preceding paragraph and with Section 10, as to any
transfer which may be involved in such division or combination, the Company
shall execute and deliver a new Warrant or Warrants in exchange for the Warrant
or Warrants to be divided or combined in accordance with such notice.
The Company shall pay all expenses, taxes and other charges incurred by the
Company in the performance of its obligations in connection with the
preparation, issue and delivery of Warrants under this Section 3.
The Company agrees to maintain at its aforesaid office books for the
registration and transfer of the Warrants; provided, however, that the Company
shall have the right to appoint a reputable, licensed financial institution to
act as warrant agent hereunder upon notice to the Holders.
Section 4. ADJUSTMENT OF STOCK UNIT OR EXERCISE. The number of shares of
Common Stock comprising a Stock Unit, and the Exercise Price per Stock Unit,
shall be subject to adjustment from time to time as set forth in this Section 4
and in Section 5. The Company shall not take any action with respect to its
Nonpreferred Stock of any class requiring an adjustment pursuant to any of the
following Subsections 4.1, 4.2, or 4.7 without at the same time taking like
action with respect to its Nonpreferred Stock of each other class; and the
Company shall not create any class of Nonpreferred Stock which carries any
rights to dividends or assets differing in any respect from the rights of the
Common Stock on the Closing Date.
Section 4.1. STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In case at
any time or from time to time the Company shall:
(a) take a record of the holders of its Nonpreferred Stock for the purpose
of entitling them to receive a dividend payable in, or other distribution of,
Nonpreferred Stock, or
(b) subdivide its outstanding shares of Nonpreferred Stock into a larger
number of shares of Nonpreferred Stock, or
(c) combine its outstanding shares of Nonpreferred Stock into a smaller
number of shares of Nonpreferred Stock, then the number of shares of Common
Stock
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<PAGE>
comprising a Stock Unit immediately after the happening of any such event shall
be adjusted so as to consist of the number of shares of Common Stock which a
record holder of the number of shares of Common Stock comprising a Stock Unit
immediately prior to the happening of such event would own or be entitled to
receive after the happening of such event; PROVIDED, HOWEVER, that no such
event may take place with respect to any shares of Nonpreferred Stock unless it
shall also take place for all shares of Nonpreferred Stock.
4.2. CERTAIN OTHER DIVIDENDS AND DISTRIBUTIONS. In case at any time or
from time to time the Company shall take a record of the holders of any of its
Nonpreferred Stock for the purpose of entitling them to receive any dividend or
other distribution of:
(a) cash (other than a cash distribution made as a dividend and
payable out of earnings or earned surplus legally available for the payment of
dividends under the laws of the jurisdiction of incorporation of the Company, to
the extent, but only to the extent, that the aggregate of all such dividends
paid or declared after the Closing Date, does not exceed the consolidated net
income of the Company earned subsequent to the Closing Date determined in
accordance with generally accepted accounting principles, consistently applied),
or
(b) any evidence of its indebtedness (other than Convertible
Securities), any shares of its stock (other than Additional Shares of
Nonpreferred Stock) or any other securities or property of any nature whatsoever
(other than cash and other than Convertible Securities or Additional Shares of
Nonpreferred Stock), or
(c) any warrants or other rights to subscribe for or purchase any
evidences of its indebtedness (other than Convertible Securities), any shares of
its stock (other than Additional Shares of Nonpreferred Stock) or any other
securities or property of any nature whatsoever (other than cash and other than
Convertible Securities or Additional Shares of Nonpreferred Stock), then the
number of shares of Common Stock thereafter comprising a Stock Unit shall be
adjusted to that number determined by multiplying the number of shares of Common
Stock comprising a Stock Unit immediately prior to such adjustment by a fraction
(i) the numerator of which shall be the Current Market Price per share of Common
Stock at the date of taking such record, and (ii) the denominator of which shall
be such Current Market Price per share minus the portion applicable to one share
of Nonpreferred Stock of any such cash so distributable and of the fair value of
any and all such evidences of indebtedness, shares of stock, other securities or
property, or warrants or other subscription or purchase rights, so
distributable. Such fair value shall be determined in good faith by the Board
of Directors of the Company, PROVIDED that if such determination is objected to
by the holders of Warrants evidencing a majority in number of the total number
of Stock Units at the time purchasable upon the exercise of all then outstanding
Warrants, such determination shall be made by an independent appraiser chosen in
the manner specified in the definition of Appraised Value. The fees and
expenses of any appraisers shall be paid in equal shares by the Company (as to
one-half) and the objecting Warrant holders (as to one-half). A
reclassification of the Nonpreferred Stock into shares of Nonpreferred Stock and
shares of any other class of stock shall be deemed a distribution by the
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<PAGE>
Company to the holders of its Nonpreferred Stock of such shares of such other
class of stock within the meaning of this Subsection 4.2 and, if the
outstanding shares of Nonpreferred Stock shall be changed into a larger or
smaller number of shares of Nonpreferred Stock as a part of such
reclassification, shall be deemed a subdivision or combination, as the case may
be, of the outstanding shares of Nonpreferred Stock within the meaning of
Subsection 4.1 or 4.2 of this Section 4.
4.3. ISSUANCE OF ADDITIONAL SHARES OF NONPREFERRED STOCK. In case at any
time or from time to time the Company shall (except as hereinafter provided)
issue, whether in connection with the merger of a corporation into the Company
or otherwise, any Additional Shares of Nonpreferred Stock for a consideration
per share less than the greater of the Current Warrant Price or the Current
Market Price per share of Common Stock, then the number of shares of Common
Stock thereafter comprising a Stock Unit shall be adjusted to be that number
determined by multiplying the number of shares of Common Stock comprising a
Stock Unit immediately prior to such adjustment by a fraction (x) the numerator
of which shall be the number of shares of Nonpreferred Stock, plus the number of
such Additional Shares of Nonpreferred Stock so issued, and (y) the denominator
of which shall be the number of shares of Nonpreferred Stock, plus the number of
shares of Nonpreferred Stock which the aggregate consideration for the total
number of such Additional Shares of Nonpreferred Stock would purchase at the
greater of the Current Warrant Price or the Current Market Price per share of
Common Stock. For purposes of this Subsection 4.3, the date as of which the
Current Warrant Price and the Current Market Price per share of Common Stock
shall be computed shall be the earlier of (i) the date on which the Company
shall enter into a firm contract for the issuance of such Additional Shares of
Nonpreferred Stock, or (ii) the date of actual issuance of such Additional
Shares of Nonpreferred Stock. The provisions of this Subsection 4.3 shall not
apply to any issuance of Additional Shares of Nonpreferred Stock for which an
adjustment is provided under Subsection 4.1 of this Section 4. No adjustment of
the number of shares of Common Stock comprising a Stock Unit shall be made under
this Subsection 4.3 upon the issuance of any Additional Shares of Nonpreferred
Stock which are issued pursuant to the exercise of any options, warrants or
other subscription or purchase rights or pursuant to the exercise of any
conversion or exchange rights in any Convertible Securities, if any such
adjustment shall previously have been made upon the issuance of such options,
warrants or other rights or upon the issuance of such Convertible Securities (or
upon the issuance of any option, warrant or other right therefor) pursuant to
Subsection 4.4 or 4.5 of this Section 4.
4.4. ISSUANCE OF WARRANTS, OPTIONS OR OTHER RIGHTS. In case at any time or
from time to time the Company shall take a record of the holders of its
Nonpreferred Stock for the purpose of entitling them to receive a distribution
of, or shall otherwise issue, any warrants, options or other rights to subscribe
for or purchase any Additional Shares of Nonpreferred Stock or any Convertible
Securities and the consideration per share for which additional shares of
Nonpreferred Stock may at any time thereafter be issuable pursuant to such
warrants, options or other rights or pursuant to the terms of such Convertible
Securities shall be less than the greater of the Current Warrant Price or the
Current Market Price per share of Common Stock, then the
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number of shares of Common Stock thereafter comprising a Stock Unit shall be
adjusted as provided in Subsection 4.3 of this Section 4 on the basis that (i)
the maximum number of Additional Shares of Nonpreferred Stock issuable pursuant
to all such warrants, options or other rights or necessary to effect the
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued as of the date specified in the last sentence of this
Subsection 4.4, (ii) the aggregate consideration for such maximum number of
Additional Shares of Nonpreferred Stock shall be deemed to be the minimum
consideration received and receivable by the Company for the issuance of such
Additional Shares of Nonpreferred Stock pursuant to such warrants, options or
other rights or pursuant to the terms of such Convertible Securities and (iii)
the consideration per share received by the Company for such Additional Shares
of Nonpreferred Stock shall be that number determined by dividing (a) the
aggregate consideration for such maximum number of Additional Shares of
Nonpreferred Stock (determined as set forth in clause (ii) of this sentence) by
(b) the maximum number of Additional Shares of Nonpreferred Stock issuable
pursuant to all such warrants, options or other rights or necessary to effect
the conversion or exchange of all such Convertible Securities (determined as
set forth in clause (i) of this sentence). For purposes of this Subsection
4.4, the computation date for subclause (i) above and as of which the Current
Warrant Price and the Current Market Price per share of Common Stock shall be
computed shall be the earliest of (x) the date on which the Company shall take
a record of the holders of its Nonpreferred Stock for the purpose of entitling
them to receive any such warrants, options or other rights, (y) the date on
which the Company shall enter into a firm contract for the issuance of such
warrants, options or other rights, and (z) the date of actual issuance of such
warrants, options or other rights.
4.5. ISSUANCE OF CONVERTIBLE SECURITIES. In case at any time or from time
to time the Company shall take a record of the holders of its Nonpreferred
Stock for the purpose of entitling them to receive a distribution of, or shall
otherwise issue, any Convertible Securities and the consideration per share for
which Additional Shares of Nonpreferred Stock may at any time thereafter be
issuable pursuant to the terms of such Convertible Securities shall be less
than the greater of the Current Warrant Price or Current Market Price per share
of Common Stock, then the number of shares of Common Stock thereafter
comprising a Stock Unit shall be adjusted as provided in Subsection 4.3 of this
Section 4 on the basis that (i) the maximum number of Additional Shares of
Nonpreferred Stock necessary to effect the conversion or exchange of all such
Convertible Securities shall be deemed to have been issued as of the
computation date specified in the following sentence of this Subsection 4.5,
(ii) the aggregate consideration for such maximum number of Additional Shares
of Nonpreferred Stock shall be deemed to be the minimum consideration received
and receivable by the Company for the issuance of such Additional Shares of
Nonpreferred Stock pursuant to the terms of such Convertible Securities and
(iii) the consideration per share received by the Company for such Additional
Shares of Nonpreferred Stock shall be that number determined by dividing (a)
the aggregate consideration for such maximum number of Additional Shares of
Nonpreferred Stock (determined as set forth in clause (ii) of this sentence) by
(b) the maximum number of Additional Shares of Nonpreferred Stock necessary to
effect the conversion or exchange of all such Convertible Securities
(determined as set forth in clause (i) of this sentence). For purposes of this
Subsection 4.5, the
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computation date for clause (i) above and as of which the Current Warrant Price
and the Current Market Price per share of Common Stock shall be computed shall
be the earliest of (x) the date on which the Company shall take a record of the
holders of its Nonpreferred Stock for the purpose of entitling them to receive
any such Convertible Securities, (y) the date on which the Company shall enter
into a firm contract for the issuance of such Convertible Securities, and (z)
the date of actual issuance of such Convertible Securities. No adjustment of
the number of shares of Common Stock comprising a Stock Unit shall be made under
this Subsection 4.5 upon the issuance of any Convertible Securities which are
issued pursuant to the exercise of any warrants or other subscription or
purchase rights therefor, if any such adjustment shall previously have been made
upon the issuance of such warrants or other rights pursuant to Subsection 4.4 of
this Section 4. The adjustments made in this Section 4 shall remain in effect
regardless of whether any Convertible Securities are converted or any warrants,
options or other rights to purchase Additional Shares of Nonpreferred Stock or
Convertible Securities are ever exercised.
4.6. OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS. The following provisions
shall be applicable to the making of adjustments of the number of shares of
Common Stock comprising a Stock Unit hereinbefore provided for in this Section
4:
(a) TREASURY STOCK. The sale or other disposition of any issued
shares of Nonpreferred Stock owned or held by or for the account of the Company
shall be deemed an issuance thereof for purposes of this Section 4.
(b) COMPUTATION OF CONSIDERATION. To the extent that any Additional
Shares of Nonpreferred Stock or any Convertible Securities or any warrants,
options or other rights to subscribe for or purchase any Additional Shares of
Nonpreferred Stock or any Convertible Securities shall be issued for a cash
consideration, the consideration received by the Company therefor shall be
deemed to be the amount of cash received by the Company therefor, or, if such
Additional Shares of Nonpreferred Stock or Convertible Securities are offered by
the Company for subscription, the subscription price, or, if such Additional
Shares of Nonpreferred Stock or Convertible Securities are sold to underwriters
or dealers for public offering without a subscription offering, the initial
public offering price, in any such case excluding any amounts paid or receivable
for accrued interest or accrued dividends and without deduction of any
compensation, discounts or expenses paid or incurred by the Company for and in
the underwriting of, or otherwise in connection with, the issue thereof. To the
extent that such issuance shall be for a consideration other than solely for
cash, then, except as herein otherwise expressly provided, the amount of such
consideration shall be deemed to be the fair value of such consideration at the
time of such issuance as determined in good faith by the Board of Directors of
the Company. If such determination is objected to by the holders of Warrants
evidencing a majority in number of the total number of Stock Units at the time
purchasable upon the exercise of all then outstanding Warrants, such
determination shall be made by an independent appraiser chosen in the manner
specified in the definition of Appraised Value. The fees and expenses of any
appraisers shall be shared equally by such objecting holders (as to one-half)
and the Company (as to one-half). The consideration for any Additional Shares
of Nonpreferred Stock
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issuable pursuant to any warrants, options or other rights to subscribe for or
purchase the same shall be the consideration received or receivable by the
Company for issuing such warrants, options or other rights, plus the additional
consideration payable to the Company upon the exercise of such warrants,
options or other rights. The consideration for any Additional Shares of
Nonpreferred Stock issuable pursuant to the terms of any Convertible Securities
shall be the consideration received or receivable by the Company for issuing
any warrants, options or other rights to subscribe for or purchase such
Convertible Securities, plus the consideration paid or payable to the Company
in respect of the subscription for or purchase of such Convertible Securities,
plus the additional consideration, if any, payable to the Company upon the
exercise of the right of conversion or exchange in such Convertible Securities.
In case of the issuance at any time of any Additional Shares of Nonpreferred
Stock or Convertible Securities in payment or satisfaction of any dividend upon
any class of stock other than Nonpreferred Stock, the Company shall be deemed
to have received for such Additional Shares of Nonpreferred Stock or
Convertible Securities a consideration equal to the amount of such dividend so
paid or satisfied.
(c) WHEN ADJUSTMENTS TO BE MADE. The adjustments required by the
preceding Subsections of this Section 4 shall be made whenever and as often as
any specified event requiring an adjustment shall occur, except that no
adjustment shall be made except pursuant to Subsection 4.1 of this Section 4 if
it would decrease the number of shares of Common Stock comprising a Stock Unit
immediately prior to such adjustment. For the purpose of any adjustment, any
specified event shall be deemed to have occurred at the close of business on the
date of its occurrence.
(d) FRACTIONAL INTERESTS. In computing adjustments under this
Section 4, fractional interests in Nonpreferred Stock shall be taken into
account to the nearest one-thousandth of a share.
(e) WHEN ADJUSTMENT NOT REQUIRED. If the Company shall take a record
of the holders of its Nonpreferred Stock for the purpose of entitling them to
receive a dividend or distribution or subscription or purchase rights and
shall, thereafter and before the distribution thereof to shareholders, legally
abandon its plan to pay or deliver such dividend, distribution, subscription or
purchase rights, then thereafter no adjustment shall be required by reason of
the taking of such record and any such adjustment previously made in respect
thereof shall be rescinded and annulled.
4.7. MERGER, CONSOLIDATION OR DISPOSITION OF ASSETS. In case the Company
shall merge or consolidate into another corporation, or shall sell, transfer or
otherwise dispose of all or substantially all of its property, assets or
business to another corporation and pursuant to the terms of such merger,
consolidation or disposition of assets, shares of common stock of the successor
or acquiring corporation are to be received by or distributed to the holders of
Nonpreferred Stock of the Company, then each holder of a Warrant shall have the
right thereafter to receive, upon exercise of such Warrant, Stock Units each
comprising the number of shares of common stock of the successor or acquiring
corporation receivable upon or as a result of such
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merger, consolidation or disposition of assets by a holder of the number of
shares of Nonpreferred Stock comprising a Stock Unit immediately prior to such
event. If, pursuant to the terms of such merger, consolidation or disposition
of assets, any cash, shares of stock or other securities or property of any
nature whatsoever (including warrants or other subscription or purchase rights)
are to be received by or distributed to the holders of Nonpreferred Stock of
the Company, there shall be either, at the Holder's option, (i) a reduction of
the Exercise Price equal to the amount applicable to the number of shares of
Common Stock then comprising a Stock Unit of any such cash and of the fair
value of any and all such shares of stock or of other securities or property to
be received by or distributed to the holders of Nonpreferred Stock of the
Company, or (ii) such Holder shall have the right to receive, upon exercise of
its Warrant, such cash, shares of stock or other securities or property of any
nature as a holder of the number of shares of Nonpreferred Stock underlying a
Stock Unit would have been entitled to receive upon the occurrence of such
event. Such fair value shall be determined in good faith by the Board of
Directors of the Company, PROVIDED that if such determination is objected to by
the holders of Warrants evidencing a majority in number of the total number of
Stock Units at the time purchasable upon the exercise of all then outstanding
Warrants, such determination shall be made by an independent appraiser selected
in the manner specified in the definition of Appraised Value. The fees and
expenses of any appraisers shall be paid by the Company. In case of any such
merger, consolidation or disposition of assets, the successor acquiring
corporation shall expressly assume the due and punctual observance and
performance of each and every covenant and condition of this Warrant to be
performed and observed by the Company and all of the obligations and
liabilities hereunder, subject to such modification as shall be necessary to
provide for adjustments of Stock Units which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 4. For the
purposes of this Section 4, "COMMON STOCK OF THE SUCCESSOR OR ACQUIRING
CORPORATION" shall include stock of such corporation of any class, that is not
preferred as to dividends or assets over any other class of stock of such
corporation and that is not subject to redemption, and shall also include any
evidences of indebtedness, shares of stock or other securities which are
convertible into or exchangeable for any such stock, either immediately or upon
the arrival of a specified date or the happening of a specified event, and any
warrants or other rights to subscribe for or purchase any such stock. The
foregoing provisions of this Subsection 4.7 shall similarly apply to successive
mergers, consolidations or dispositions of assets.
4.8. OTHER ACTION AFFECTING NONPREFERRED STOCK. In case at any time or
from time to time the Company shall take any action affecting its Nonpreferred
Stock, other than (i) an action described in any of the foregoing Subsections
4.1 to 4.7, inclusive, of this Section 4, or (ii) the issuance of stock and
options therefor issued under the Company's current employee stock incentive
plan, or (iii) the issuance of stock pursuant to the exercise of any and all
warrants which, as of the date hereof, are outstanding and listed in the SPA,
then, unless in the opinion of the Board of Directors of the Company such
action shall not have a materially adverse effect upon the rights of the
holders of the Warrants, the number of shares of Common Stock or other stock
comprising a Stock Unit, or the purchase price thereof, shall be adjusted in
such manner and at such time as the Board of Directors of the Company may in
good faith determine to be
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equitable in the circumstances.
Section 5. NOTICE TO WARRANT HOLDERS.
5.1. NOTICE OF ADJUSTMENT OF STOCK UNIT OR EXERCISE PRICE. Whenever the
number of shares of Common Stock comprising a Stock Unit, or the price at which
a Stock Unit may be purchased upon exercise of the warrants, shall be adjusted
pursuant to Section 4, the Company shall forthwith obtain a certificate signed
by its chief financial officer, setting forth, in reasonable detail, the event
requiring the adjustment and the method by which such adjustment was calculated
(including a statement of the fair value, as determined by the Board of
Directors of the Company or by appraisal (if applicable), of any evidences of
indebtedness, shares of stock, other securities or property or warrants or
other subscription or purchase rights referred to in Section 4.2, Section
4.6(b) or Section 4.7) and specifying the number of shares of Common Stock
comprising a Stock Unit and, if such adjustment was made pursuant to Section
4.7 or Section 4.8, describing the number and kind of any other shares of stock
comprising a Stock Unit and any change in the purchase price or prices thereof,
after giving effect to such adjustment or change. The Company shall promptly,
and in any case within three Business Days after the making of such adjustment,
cause a signed copy of such certificate to be delivered to each holder of a
Warrant in accordance with Section 16. The Company shall keep at its office or
agency, maintained for the purpose pursuant to Section 15, copies of all such
certificates and cause the same to be available for inspection at said office
during normal business hours by any holder of a Warrant or any prospective
purchaser of a warrant designated by a holder thereof.
5.2. NOTICE OF CERTAIN CORPORATE ACTION. In case the Company shall
propose (a) to pay any dividend payable in stock of any class to the holders of
its Nonpreferred Stock or to make any other distribution to the holders of its
Nonpreferred Stock (other than a cash dividend), or (b) to offer to the holders
of its Nonpreferred Stock rights to subscribe for or to purchase any Additional
Shares of Nonpreferred Stock or shares of stock of any class or any other
securities, rights or options, or (c) to effect any reclassification of its
Nonpreferred Stock (other than a reclassification involving only the
subdivision, or combination, of outstanding shares of Nonpreferred Stock), or
(d) to effect any capital reorganization, or (e) to effect any consolidation,
merger or sale, organic change, transfer or other disposition of all or
substantially all of its property, assets or business, or (f) to effect the
liquidation, dissolution or winding up of the Company, then, in each such case,
the Company shall deliver to each holder of a Warrant, in accordance with
Section 16, a notice of such proposed action, which shall specify the date on
which a record is to be taken for the purposes of such stock dividend,
distribution or rights, or the date on which such reclassification,
reorganization, consolidation, merger, sale, organic change, transfer,
disposition, liquidation, dissolution, or winding up is to take place and the
date of participation therein by the holders of Nonpreferred Stock, if any such
date is to be fixed, and shall also set forth such facts with respect thereto
as shall be reasonably necessary to indicate the effect of such action on the
Nonpreferred Stock and the number and kind of any other shares of stock which
shall comprise a Stock Unit, and the purchase price or prices thereof, after
giving effect to any adjustment which shall be required as a result of such
action. Such notice shall be
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so delivered thirty (30) days prior to (i) the record date for determining
holders of the Nonpreferred Stock for purposes of any action covered by clause
(a) or (b) above, and (ii) in the case of any other such action, the date of
the taking of such proposed action or the date of participation therein by the
holders of Nonpreferred Stock, whichever shall be the earlier.
Section 6. RESERVATION AND AUTHORIZATION OF NONPREFERRED STOCK;
REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY. The Company shall
at all times reserve and keep available for issue upon the exercise of Warrants
such number of its authorized but unissued shares of Common Stock as shall be
sufficient to permit the exercise in full of all outstanding Warrants. The
Company shall not amend its Certificate of Incorporation in any respect
relating to the Common Stock other than to increase or decrease the number of
shares of authorized capital stock (subject to the provisions of the preceding
sentence) or to decrease the par value of any shares of Nonpreferred Stock.
All shares of Common Stock which shall be so issuable, when issued upon
exercise of any Warrant or upon such conversion, as the case may be, shall be
duly and validly issued and fully-paid and nonassessable.
Before taking any action which would cause an adjustment reducing the
Current Warrant Price per share of Common Stock below the then par value, if
any, of the shares of Common Stock issuable upon exercise of the Warrants, the
Company shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
fully-paid and nonassessable shares of Common Stock at such adjusted Current
Warrant Price.
Before taking any action which would result in an adjustment in the number
of shares of Common Stock comprising a Stock Unit or in the Current Warrant
Price per share of Common Stock, the Company shall obtain all such
authorizations or exemptions thereof, or consents thereto, as may be necessary
from any public regulatory body or bodies having jurisdiction thereof.
If any shares of Common Stock required to be reserved for issue upon
exercise of warrants require registration with any governmental authority under
any federal or state law (otherwise than as provided in Section 10) before such
shares may be so issued, the Company shall in good faith and as expeditiously as
possible and at its expense endeavor to cause such shares to be duly registered.
Section 7. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS. In the
case of all dividends or other distributions by the Company to the holders of
its Nonpreferred Stock with respect to which any provision of Section 4 refers
to the taking of a record of such holders, the Company shall in each such case
take such a record and shall take such record as of the close of business on a
Business Day. The Company shall not at any time, except upon dissolution,
liquidation or winding up or as otherwise may be required by law, close its
stock transfer books or Warrant transfer books so as to result in preventing or
delaying the exercise or transfer of any Warrant.
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Section 8. TAXES. The Company shall pay all taxes (other than federal,
state, local or foreign income taxes) which may be payable in connection with
the execution and delivery of this Warrant or the issuance and sale of the
Restricted Securities hereunder or in connection with any modification of the
Restricted Securities and shall save the Holder harmless without limitation as
to time against any and all liabilities with respect to or resulting from any
delay in paying, or omission to pay, such taxes. The obligations of the
Company under this Section 8 shall survive any redemption, repurchase or
acquisition of Restricted Securities by the Company.
Section 9. [Intentionally Deleted]
Section 10. RESTRICTIONS ON TRANSFERABILITY. The Restricted Securities
shall not be transferable except upon the conditions specified in this Section
10; PROVIDED that, notwithstanding any other provisions of this Section 10, the
Holder (and each other Person mentioned below in this clause) shall have the
right to transfer any Restricted Securities to any Affiliate; any Holder that
is a partnership shall have the right to transfer any Restricted Securities to
its partners or a retired partner of such partnership who retires after the
date hereof; any Holder that is an individual may transfer any Restricted
Securities to any member of his or her immediate family, trusts for the benefit
of the Investor or his or her immediate family members or partnerships of which
the investor or his immediate family members are partners; and any Holder may
transfer Restricted Securities to any charitable trusts or foundations
established by the holder (and in the case of Quantum Industrial Partners LDC,
to any investment vehicle managed by Soros Management or any successors), in
each case free of the restrictions imposed by this Section 10 other than the
requirement as to the legending of the certificates for such Restricted
Securities specified in Section 10.01. Notwithstanding the foregoing, no such
transfer shall be permitted to the extent it violates any federal or state
securities law or regulation. Each transferee shall be subject to the same
transfer restrictions imposed on the Holder by this Agreement.
10.01. RESTRICTIVE LEGEND. Unless and until otherwise permitted by this
Section 10, each certificate for Warrants issued under this Agreement, each
certificate for any Warrants issued to any transferee of any such certificate,
each certificate for any Warrant Stock issued upon exercise of any Warrant and
each certificate for any Warrant Stock issued to any transferee of any such
certificate, shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") NOR IS SUCH REGISTRATION CONTEMPLATED. SUCH SECURITIES MAY
NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED AT ANY TIME
WHATSOEVER UNLESS REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS
OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE, EXCEPT
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UPON DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER OR THE SUBMISSION
TO THE COMPANY OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO IT AND TO ITS
COUNSEL TO THE EFFECT THAT ANY SUCH TRANSFER WILL NOT BE IN VIOLATION OF THE
ACT, OR APPLICABLE STATE SECURITIES LAWS OR ANY RULE OR REGULATION PROMULGATED
THEREUNDER."
10.02. NOTICE OF PROPOSED TRANSFERS; "PIGGYBACK" REGISTRATION.
(a) If at any time, or from time to time, the Company shall determine to
Register any of its securities either for its own account or for the account of
any holder of its securities (including a Holder) (other than pursuant to
Section 10.05 hereof), other than pursuant to a registration statement relating
to the initial public offering of Company securities, a Registration relating
solely to employee benefit plans, or a Registration relating solely to a Rule
145 transaction or a Registration on any Registration form that does not permit
secondary sales, the Company will:
(1) promptly give to each Holder written notice thereof;
(2) include in such Registration (and any related qualification under
Blue Sky Laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests made within 20 days after receipt of such written notice from the
Company, by any Holder or Holders, except as set forth in Section 10.02(b)
hereof. Any such written request may specify all or a part of a Holder's
Registrable Securities.
(b) If the Registration of which the Company gives notice is for a
Registered public offering involving an underwriting, the Company shall so
advise the Holders as part of the written notice given pursuant to Section
10.02(a) hereof. In such event, the right of a Holder to Registration pursuant
to this Section 10.02 shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's Registrable Securities in
the underwriting to the extent provided herein. All Holders proposing to
distribute their Registrable Securities through such underwriting shall
(together with the Company and the other holders of securities of the Company
with registration rights to participate therein distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 10.02, if the
underwriter advises the Company in writing that marketing factors require a
limitation on the number of shares to be underwritten, the underwriter may limit
the amount of Registrable Securities to be included in the Registration and
underwriting, and the number of shares to be included in such underwriting or
Registration shall be allocated as set forth in Section 10.11 hereof.
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10.03. EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any Registration, qualification or compliance pursuant to
Sections 10.02 and 10.04 hereof, shall be borne by the Company, including
reasonable fees and expenses of one counsel for the Holders. All Selling
Expenses relating to the Registrable Securities so Registered shall be borne by
the Holders of such Registrable Securities pro rata on the basis of the number
of shares of Registrable Securities so Registered on their behalf.
10.04. REGISTRATION ON FORM S-3. After its initial public offering, the
Company shall use its best efforts to quality for registration on Form S-3 or
any comparable or successor form or forms. After the Company has qualified for
the use of Form S-3, in addition to the rights contained in the foregoing
provisions of this Article 10, the Holders of Registrable Securities shall have
the right to request registrations on Form S-3 (such requests shall be in
writing and shall state the number of shares of Registrable Securities to be
disposed of and the intended methods of disposition of such shares by such
Holder or Holders), provided, however, that the amount reasonably anticipated
to be raised in the offering in question is at least Two Million Dollars
($2,000,000) and that the Company shall not be obligated to effect any such
Registration if (1) the Company shall have delivered to such Holder an opinion
of counsel to the Company, addressed to such Holder and reasonably satisfactory
in form and substance to such Holder to the effect that such Registrable
Securities proposed to be included may lawfully be so disposed of without
Registration or (2) within a period of 180 days after the effective date of any
previous such Registration. If the Company shall receive a written request
pursuant to this Section 10.04 for Registration, then the Company shall
promptly notify all other Holders of such request and shall use its best
efforts to cause all Registrable Securities that Holders have requested within
20 days after receipt of the Company's notice to be registered under the
Securities Act. Any registration statement filed pursuant to this Section
10.04 may, subject to the provisions of Section 10.11 hereof, include other
securities of the Company with respect to which Registration rights have been
granted.
10.05. REGISTRATION PROCEDURES. In the case of each Registration effected
by the Company pursuant to this Article 10, the Company will keep each Holder
advised in writing as to the initiation of each registration and as to the
completion thereof. At its expense, the Company will:
(a) Keep such registration effective for a period of 180 days or until the
Holder or Holders have completed the distribution described in the registration
statement relating thereto, whichever first occurs; provided, however, that (i)
such 180-day period shall be extended for a period of time equal to the period
the Holder refrains from selling any securities included in such Registration
at the request of an underwriter of Common Stock (or other securities) of the
Company; and (ii) in the case of any registration of Registrable Securities on
Form S-3 which are intended to be offered on a continuous or delayed basis,
such 180-day period s0hall be extended, if necessary, to keep the registration
statement effective until all such Registrable Securities are sold, provided
that Rule 415, or any successor rule under the Securities Act, permits an
offering on a continuous or delayed basis, and provided further that applicable
rules under the Securities
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<PAGE>
Act governing the obligation to file a post-effective amendment permit, in lieu
of filing a post-effective amendment that (i) includes any prospectus required
by Section 10(a) (3) of the Securities Act or (2) reflects facts or events
representing a material or fundamental change in the information set forth in
the registration statement, the incorporation by reference of information
required to be included in (1) and (2) above to be contained in periodic
reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the
registration statement;
(b) Prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement;
(c) Furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as a Holder
from time to time may reasonably request;
(d) Register or qualify the securities covered by such registration
statement under the Blue Sky Laws of such jurisdictions as shall be reasonably
appropriate for the distribution of the securities covered thereby;
(e) [Intentionally Deleted]
(f) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make such statements therein not misleading or
incomplete in the light of the circumstances then existing.
(g) Cause all such Registrable Securities registered pursuant hereunder to
be listed on each securities exchange on which similar securities issued by the
Company are then listed;
(h) Provide a transfer agent and registrar for all Registrable Securities
registered pursuant to such registration statement and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration;
(i) Otherwise use its best efforts to comply with all applicable rules and
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regulations of the Commission, and make available to its security holders, as
soon as reasonably practicable, an earnings statement covering the period of at
least twelve months, but not more than eighteen months, beginning with the first
month after the effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities Act;
and
(j) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 10.03 hereof, the Company will
enter into an underwriting agreement in form reasonably necessary to effect the
offer and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions and provided further than if the underwriter
so requests the underwriting agreement will contain customary contribution
provisions.
10.06. FURNISH INFORMATION. The Holder or Holders of Registrable
Securities included in any Registration shall furnish to the Company such
information regarding such Holder or Holders and the distribution proposed by
such Holder or Holders as the Company may request in writing and as shall be
reasonably required in connection with any Registration, qualification or
compliance referred to in this Article 10.
10.07. INDEMNIFICATION.
(a) The Company will indemnify each Holder, each of its officers,
directors and partners, legal counsel, and accountants and each Person
controlling such Holder within the meaning of Section 15 of the Securities Act,
with respect to which Registration, qualification, or compliance has been
effected pursuant to this Article 10; and each underwriter, if any, and each
Person who controls within the meaning of Section 15 of the Securities Act any
underwriter, against all expenses, claims, losses, damages, and liabilities (or
actions, proceedings, or settlements in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular, or other document (including any
related registration statement, notification, or the like) incident to any such
registration, qualification, or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such Registration, qualification, or compliance, and will
reimburse each such Holder, each of its officers, directors, partners, legal
counsel, and accountants and each person controlling such Holder, each such
underwriter, and each Person who controls any such underwriter, for any legal
and any other expenses reasonably incurred in connection with investigating and
defending or settling any such claim, loss, damage, liability, or action,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability, or expense arises out of or is based on
any untrue statement or omission based upon written information furnished to the
Company by such Holder or underwriter and stated to be specifically for use
therein. It is agreed that the indemnity agreement contained in this
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Section 10.07(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Company (which consent has not been unreasonably
withheld).
(b) Each Holder will, if Registrable Securities held by such Holder are
included in the securities as to which such Registration, qualification, or
compliance is being effected, indemnify the Company, each of its directors,
officers, partners, legal counsel, and accountants and each underwriter, if any,
of the Company's securities covered by such a registration statement, each
Person who controls the Company of such underwriter within the meaning of
Section 15 of the Securities Act, each other such Holder, and each of their
officers, directors, and partners, and each person controlling such Holder
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular, or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company and such Holders, directors, officers, partners, legal counsel, and
accountants, persons, underwriters, or control persons for any legal or any
other expenses reasonably incurred in connection with investigating or defending
any such claim, loss, damage, liability, or action, in each case to the extent,
but only to the extent, that such untrue statement (or alleged untrue statement)
or omission (or alleged omission) is made in such registration statement,
prospectus, offering circular, or other document in reliance upon and in
conformity with written information furnished to the Company by such Holder and
stated to be specifically for use therein provided, however, that the
obligations of such Holder hereunder shall not apply to amounts paid in
settlement of any such claims, losses, damages, or liabilities (or actions in
respect thereof) if such settlement is effected without the consent of such
Holder (which consent shall not be unreasonably withheld); and provided that in
no event shall any indemnity under this Section 10.07(b) exceed the gross
proceeds from the offering received by such Holder.
(c) Each party entitled to indemnification under this Section 10.07 (the
"Indemnified Party") shall give notice to the party required to provide
indemnity (the "Indemnifying Party") promptly after such Indemnified Party has
actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Article 10, to the extent such
failure is not prejudicial. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
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<PAGE>
claim or litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 10.07 is held by a
court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the Indemnifying Party, in lieu of indemnifying such Indemnified Party
hereunder, shall contribute to the amount paid or payable by such Indemnified
Party hereunder as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) The obligations of the parties under this Section 10.07 shall survive
the completion of the offering of Registrable Securities under the registration
statement and otherwise.
10.08. LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after
the date of this Agreement, the Company shall not, without the prior written
consent of a majority in interest of the Holders, enter into any agreement with
any holder or prospective holder of any securities of the Company giving such
holder or prospective holder any registration rights the terms of which are more
favorable than the registration rights granted to the Holders hereunder.
10.09. RULE 144 REPORTING. With a view to making available to the
Holders the benefits of certain rules and regulations of the Commission that may
permit the sale of the Restricted Securities to the public without registration,
the Company agrees, so long as any Holder owns Registrable Securities:
(a) Make and keep public information regarding the Company available as
those terms are understood and defined in Rule 144 under the Securities Act, at
all times from and after 90 days following the effective date of the first
Registration under the Securities Act filed by the Company for a public offering
of its securities;
(b) File with the Commission in a timely manner all reports and other
documents required of the company under the Securities Act and the Exchange Act
at any time after it has become subject to such reporting requirements;
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(c) Furnish to the Holder forthwith upon written request a written
statement by the Company as to its compliance with the reporting requirements of
Rule 144 (at any time from and after 90 days following the effective date of the
first registration statement filed by the Company for an offering of its
securities to the general public), and of the Securities Act and the Exchange
Act (at any time after it has become subject to such reporting requirements), a
copy of the most recent annual or quarterly report of the Company, and such
other reports and documents so filed as a Holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing a Holder to
sell any such securities without registration.
10.10. TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights of any
Holder under this Agreement including, without limitation, the registration
rights under Article 10 may be transferred or assigned by a Holder only to a
transferee or assignee of not less than 1000 shares of Registrable Securities
(as presently constituted and subject to subsequent adjustments for stock
splits, stock dividends, reverse stock splits, and the like), provided that the
Company is given written notice at the time of or within a reasonable time after
said transfer or assignment, stating the name and address of the transferee or
assignee and identifying the securities with respect to which such registration
rights are being transferred or assigned.
10.11. ALLOCATION OF REGISTRATION OPPORTUNITIES. In any circumstance in
which all of the Registrable Securities and other shares of Common Stock of the
Company (including shares of Common Stock issued or issuable upon conversion of
shares of any currently unissued series of Preferred Stock of the Company) with
Registration rights (the "Other Shares") requested to be included in a
Registration on behalf of the Holders or other selling stockholders cannot be so
included as a result of limitations on the aggregate number of shares of
Registrable Securities and Other Shares that may be so included, the number of
shares of Registrable Securities and Other Shares that may be so included shall
be allocated among the Holders and other selling stockholders requesting
inclusion of shares pro rata based upon total number of shares requested to be
so included. In the event a Holder or other selling stockholder subsequently
withdraws or reduces a request for inclusion in such Registration, the number of
shares which may be so included shall be reallocated in the same manner. The
Company may not limit the number of Registrable Securities to be included in a
Registration pursuant to this Agreement or with respect to Registrations under
Section 10.05 hereof, in order to include in such Registration securities
registered for the Company's own account; provided, however, that the provisions
of this sentence shall not apply to any circumstance which would render the
Company in default of its registration obligations which are in existence as of
the date hereof and which are disclosed in the SPA or require it to amend or
modify such existing obligations.
10.12. SUSPENSION OF REGISTRATION RIGHTS. No Holder may request
Registration pursuant to Section 10.04 at any time that all Registrable
Securities held by such Holder may immediately be sold under Rule 144 during any
90-day period.
Section 11. LIMITATION OF LIABILITY. No provision hereof, in the absence
of affirmative action by the Holder hereof to purchase shares of Common Stock,
and no mere
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enumeration herein of the rights or privileges of the Holder hereof, shall give
rise to any liability of such Holder for the purchase price of the Warrant
Stock or as a stockholder of the Company, whether such liability is asserted by
the Company or by creditors of the Company.
Section 12. LOSS OR DESTRUCTION OF WARRANT CERTIFICATES. Upon receipt
of evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Company
(the original Warrant holder's or any other institutional Warrant holder's
indemnity being satisfactory indemnity in the event of loss, theft or
destruction of any Warrant owned by such institutional holder), or, in the case
of any such mutilation, upon surrender and cancellation of such Warrant, the
Company shall make and deliver, in lieu of such lost, stolen, destroyed or
mutilated Warrant, a new Warrant of like tenor and representing the right to
purchase the same aggregate number of shares of Common Stock.
Section 13. FURNISH INFORMATION. The Company agrees that it shall
deliver to the holder of record hereof promptly after their becoming available
copies of all financial statements, reports and proxy statements which the
Company shall have sent to its stockholders generally.
Section 14. AMENDMENTS. The terms of this Warrant and all other
Warrants may be amended, and the observance of any term therein may be waived,
but only with the written consent of the holders of Warrants evidencing a
majority in number of the total number of Stock Units at the time purchasable
upon the exercise of all then outstanding Warrants, PROVIDED that no such action
may change the number of shares of stock comprising a Stock Unit or the Exercise
Price, without the written consent of the holders of Warrants evidencing 100% in
number of the total number of Stock Units at the time purchasable upon the
exercise of all then outstanding Warrants.
Section 15. OFFICE OF THE COMPANY. So long as any of the Warrants
remains outstanding, the Company shall maintain an office in Los Angeles,
California where the Warrants may be presented for exercise, transfer, division
or combination as in this Warrant provided. Such office shall be at 3100 New
York Drive, Pasadena, California 91107, unless and until the Company shall
designate and maintain some other office for such purposes and deliver written
notice thereof to the holders of all outstanding Warrants.
Section 16. NOTICES GENERALLY.
16.1. All communications (including all required or permitted notices)
pursuant to the provisions hereof shall be in writing and shall be sent to the
address of such holder as it appears in the stock or warrant ledger of the
Company.
16.2. Any notice shall be deemed to have been duly delivered (a) when
delivered by hand, if personally delivered, (b) if sent by mail to a party whose
address is in the
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same country as the sender, two Business Days after being deposited in the
mail, postage prepaid, (c) if sent by facsimile transmission on a Business Day,
when receipt is acknowledged or, if sent on a day that is not a Business Day,
on the next Business Day following the day on which receipt is acknowledged and
(d) if sent by recognized international courier, freight prepaid, with a copy
sent by telecopier, to a party whose address is not in the same country as the
sender, three Business Days after the later of (i) being telecopied and (ii)
delivery to such courier.
Section 17. GOVERNING LAW. This Warrant shall be governed by and
construed in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its name
by its President or a Vice President and its corporate seal to be impressed
hereon and attested by its Secretary or an Assistant Secretary.
Dated: September 10, 1996
EARTHLINK NETWORK, INC.,
a Delaware corporation
By: ____________________________________
Name: Barry Hall
Title: Vice President, Finance and Administration
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EXHIBIT A
SUBSCRIPTION FORM
(to be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably exercises this
Warrant for and purchases Stock Units of Earthlink Network, Inc., a Delaware
corporation, purchasable with this Warrant, and herewith makes payment therefor
(by check in the amount of $_________), or hereby tenders Stock Units as
payment therefor, all at the price and on the terms and conditions specified
in this Warrant and requests that certificates for the shares of Common Stock
hereby purchased (and any securities or other property issuable upon such
exercise) be issued in the name of and delivered to __________________ whose
address is ________________________ and, if such Stock Units shall not include
all of the Stock Units issuable as provided in this Warrant that a new Warrant
of like tenor and date for the balance of the Stock Units issuable thereunder
be delivered to the undersigned.
Dated: ________________________________
(Signature of Registered Owner)
_________________________________
(Street Address)
_________________________________
(City) (State) (Zip Code)
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EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby
sells, assigns and transfers unto the Assignee named below all of the rights of
the undersigned under this Warrant, with respect to the number of Stock Units
set forth below:
No of Stock
Name and Address of Assignee Units
---------------------------- -----
and does hereby irrevocably constitute and appoint _______________________
Attorney-in-Fact to make sure transfer on the books of Earthlink Network, Inc.,
a Delaware corporation, maintained for the purpose, with full power of
substitution in the premises.
Dated: _______________________________
Signature
_______________________________
Witness
NOTICE: The signature to the assignment must correspond with the name as
written upon the face of the within Warrant in every particular,
without alteration or enlargement or any change whatever.
The signature to this assignment must be guaranteed by a bank or
trust company having an office or correspondent in New York, New
York, or by a firm having membership on the New York Stock Exchange.
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EXECUTION COPY.
AMENDED AND RESTATED
NOTE PURCHASE AGREEMENT
THIS AMENDED AND RESTATED NOTE PURCHASE AGREEMENT (this "AGREEMENT") is
made and entered into as of the 31st day of October, 1996, by and between
EARTHLINK NETWORK, INC. (the "COMPANY"), and UUNET TECHNOLOGIES, INC. ("UUNET").
RECITALS
A. UUNET will purchase a one-year term, unsecured convertible promissory
note in the original principal amount of $5,000,000, bearing a simple rate of
interest equal to the prime rate as established by CoastFed Bank, N.A. as of the
Closing Date (as defined below) plus 2%, and convertible into shares of the
Company's Common Stock, par value $0.01 per share (the "CONVERSION SHARES"), in
the form of EXHIBIT A attached hereto (the "CONVERTIBLE NOTE"), for an aggregate
cash purchase price of Five Million Dollars ($5,000,000).
B. The Company currently plans to file a Registration Statement with
respect to a proposed initial public offering of its capital stock (the
"PROPOSED PUBLIC OFFERING").
C. The Company and UUNET agree that, subject to Section 6.3 hereof, UUNET
shall be entitled to convert the principal and accrued but unpaid interest under
the Convertible Note into Conversion Shares at the applicable "Conversion Price"
determined pursuant to Section 6.1 hereof.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. AUTHORIZATION AND CLOSING.
1.1 AUTHORIZATION. As of the Closing (as defined below), the Company
shall have authorized the issuance and the reservation for issuance, as
applicable, pursuant to the terms and conditions of this Agreement, of (i)
the Convertible Note, and (ii) the Conversion Shares into which the
Convertible Note may be converted.
1.2 PURCHASE AND SALE OF CONVERTIBLE NOTE; PAYMENT. At the Closing,
subject to the terms and conditions set forth herein, the Company shall
issue and sell to UUNET and UUNET shall purchase from the Company the
Convertible Note for the purchase price of FIVE MILLION DOLLARS
($5,000,000) (the "PURCHASE PRICE") payable by cashier's check or by wire
transfer at the Company's direction; PROVIDED, HOWEVER, that UUNET may
offset from such purchase price any amounts due or "past due" from the
Company to UUNET according to the payment terms of invoices for network
services
<PAGE>
previously rendered by UUNET to the Company.
1.3 CLOSING. The closing of the purchase and sale of the Convertible Note
(the "CLOSING") shall take place at the Company's offices, 3100 New York
Drive, Pasadena, California at 9:00 a.m., local time, on October 31, 1996
or at such other time and place as the Company and UUNET may mutually agree
upon (the "CLOSING DATE").
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to UUNET that:
2.1 INCORPORATION. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and
has all requisite corporate power and authority to own and operate its
properties and to conduct its business as now conducted or proposed to be
conducted.
2.2 AUTHORIZED CAPITAL STOCK; QUALIFICATION. The Company has authorized
and outstanding capital stock as set forth on SCHEDULE 2.2 hereto. All of
the outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable. The
Company is qualified to do business in each jurisdiction except where the
failure to be so qualified would have a material adverse effect on the
business, results of operations or financial condition of the Company (a
"MATERIAL ADVERSE EFFECT").
2.3 OPTIONS, WARRANTS, RESERVED SHARES. Except as set forth on SCHEDULE
2.3 hereto, there are no outstanding options, warrants, rights (including
conversion or preemptive rights) or agreements for the purchase or
acquisition from the Company of any shares of its capital stock or any
securities convertible into or ultimately exchangeable or exercisable for
any shares of the Company's capital stock. Except as set forth on SCHEDULE
2.3, no shares of the Company's outstanding capital stock, or stock
issuable upon exercise or exchange of any outstanding options, warrants or
rights, or other stock issuable by the Company, are subject to any rights
of first refusal or other rights to purchase such stock in favor of the
Company.
2.4 DUE AUTHORIZATION. All corporate action on the part of the Company
necessary for the authorization, execution, delivery and performance of the
Company under this Agreement and the Convertible Note, and the
authorization, issuance, reservation for issuance and delivery of all of
the Conversion Shares has been taken or will be taken prior to the Closing,
and this Agreement constitutes, and the Convertible Note when executed,
will constitute, valid and legally binding obligations of the Company,
enforceable in accordance with their respective terms, except as
enforcement may be limited by (a) applicable bankruptcy, insolvency,
reorganization or others laws of general application relating to or
affecting the enforcement of creditors' rights generally, and (b) the
effect of rules of law governing the availability of equitable remedies.
The Conversion Shares have
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<PAGE>
been duly and validly reserved for issuance and, upon issuance in
accordance with the terms of this Agreement, will be duly and validly
issued, fully paid and nonassessable.
2.5 LITIGATION. Except as set forth on SCHEDULE 2.5 hereto, there is no
action, suit, proceeding, claim, arbitration or investigation (an "ACTION")
pending or, to the best of the Company's knowledge, currently threatened,
against the Company or its properties or assets. The Company is not a party
to or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality.
2.6 STATUS OF PROPRIETARY ASSETS.
(a) OWNERSHIP. Except as set forth on SCHEDULE 2.6(a) hereto,
the Company has full title and ownership of, or has license to,
all patents, patent applications, trademarks, service marks,
trade names, copyrights, moral rights, mask works, trade secrets,
confidential and proprietary information, compositions of matter,
formulas, designs, proprietary rights, know-how and processes
(all of the foregoing collectively hereinafter referred to as the
"PROPRIETARY ASSETS") necessary to enable it to carry on its
business as now conducted. No third party has any ownership
right, title, interest, claim in or lien on any of the
Proprietary Assets owned by the Company.
(b) LICENSES; OTHER AGREEMENTS. Except as set forth on SCHEDULE
2.6(b) hereto, the Company has not granted, and, to the best of
the Company's knowledge, there are not outstanding, any options,
licenses or agreements of any kind relating to any Proprietary
Asset of the Company.
(c) NO INFRINGEMENT. To the best of the Company's knowledge,
the Company has not violated or infringed, and is not currently
violating or infringing, and except as set forth on SCHEDULE
2.6(c) hereto, the Company has not received any communications
alleging that the Company has violated or infringed, any
Proprietary Asset of any other person or entity.
2.7 COMPLIANCE WITH CHARTER DOCUMENTS AND MATERIAL AGREEMENTS. The
Company is not in violation of any provisions of its Certificate of
Incorporation or Bylaws. The execution, delivery and performance of this
Agreement and the Convertible Note and the consummation of the transactions
contemplated hereby or thereby will not result in any such violation, nor
will they conflict with or constitute, with or without the passage of time
or the giving of notice or both, a default under any agreement or contract
of the Company or result in the creation of any lien, charge or encumbrance
upon any asset of the Company thereunder, which default or lien would
reasonably be expected to have a Material Adverse Effect.
2.8 TITLE TO PROPERTY AND ASSETS. Except as set forth on SCHEDULE 2.8,
the Company
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<PAGE>
owns all of its properties and assets free and clear of all mortgages,
deeds of trust, liens, encumbrances, security interests and claims except
for statutory liens for the payment of current taxes that are not yet
delinquent and liens, encumbrances and security interests which arise in
the ordinary course of business and which do not materially affect material
properties and assets of the Company.
2.9 FINANCIAL STATEMENTS. SCHEDULE 2.9 consists of (a) an audited balance
sheet of the Company as of December 31, 1994 and 1995 and March 29, 1996,
(b) the results of its operations and cash flows for the period from May
26, 1994 through December 31, 1994 and for the year ended December 31,
1995, (c) an unaudited balance sheet of the Company at June 30, 1996, and
(d) unaudited statements of operations and cash flows of the Company for
the six months ended June 30, 1995 and June 30, 1996 (the items referenced
in (a) through (d) above being collectively referred to as the "FINANCIAL
STATEMENTS"). The Financial Statements (x) have been prepared in
accordance with the books and records of the Company, (y) present fairly
the financial position of the Company at the date or dates therein
indicated and the results of operations for the periods therein specified,
and (z) have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis except, with respect to quarterly
statements included therein, for the omission of notes thereto and normal
year-end audit adjustments. Such Financial Statements supersede any
similar statements relating to the same dates or periods previously
provided by the Company to UUNET.
2.10 ACTIVITIES SINCE BALANCE SHEET DATE. Since June 28, 1996, the date of
the most recent balance sheet included in the Financial Statements, there
has not been:
(a) except as set forth on SCHEDULE 2.10, any damage, destruction or
loss, whether or not covered by insurance, materially and adversely
affecting the assets, properties, financial condition, operating
results, prospects or business of the Company (as presently conducted
and as presently proposed to be conducted);
(b) any waiver by the Company of a valuable right or of a material
debt owed to it;
(c) any satisfaction or discharge of any lien, claim or encumbrance
or payment of any obligation by the Company except such a
satisfaction, discharge or payment made in the ordinary course of
business that is not material to the assets, properties, financial
condition, operating results or business of the Company;
(d) any material change or amendment to a material contract or
arrangement by which the Company, or any of its assets or properties
is bound or subject, except for changes or amendments which are
contemplated by or disclosed in this Agreement;
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(e) to the Company's knowledge, any other event or condition of any
character which could reasonably be expected to have a Material
Adverse Effect.
2.11 DISCLOSURE. This Agreement and the Exhibits and Schedules hereto do
not contain any untrue statement of a material fact and, when read together
with that certain Prospectus of the Company dated June 27, 1996 and that
certain Draft Prospectus of the Company relating to the Proposed Public
Offering and dated October 17, 1996, do not omit to state a material fact
necessary to make the statements made pursuant hereto, in light of the
circumstances under which they were made, not misleading; except that, with
respect to any financial projections submitted to UUNET, the Company
represents and warrants only that such financial projections were prepared
based on reasonable assumptions and management's good faith estimates as of
the date thereof.
3. REPRESENTATIONS AND WARRANTIES OF UUNET. UUNET hereby represents and
warrants to the Company that:
3.1 AUTHORIZATION. This Agreement constitutes a valid and legally binding
obligation of UUNET, enforceable in accordance with its terms except as
enforcement may be limited by (a) applicable bankruptcy, insolvency,
reorganization or other laws of general application relating to or
affecting the enforcement of creditors' rights generally, and (b) the
effect of rules of law governing the availability of equitable remedies.
UUNET represents that it has full power and authority to enter into this
Agreement.
3.2 PURCHASE FOR OWN ACCOUNT. The Convertible Note and the Conversion
Shares, if and when issued, are being and will be acquired for investment
for UUNET's own account, not as a nominee or agent for any other person or
entity, and not with a view to the public resale or distribution thereof
within the meaning of the Securities Act of 1933, as amended (the "1933
Act"), and UUNET has no present intention of selling, granting any
participation in, or otherwise distributing the same.
3.3 DISCLOSURE OF INFORMATION. UUNET has received or has had full access
to all the information it considers necessary or appropriate to make an
informed investment decision with respect to the Convertible Note and
Conversion Shares. UUNET further has had an opportunity to ask questions
and receive answers from the Company regarding the terms and conditions of
this Agreement, the Convertible Note and the Conversion Shares and to
obtain additional information (to the extent the Company possessed such
information or could acquire it without unreasonable effort or expense)
necessary to verify any information furnished to UUNET or to which UUNET
had access. UUNET has received the Prospectus and has conducted due
diligence of the Company satisfactory to UUNET.
3.4 INVESTMENT SOPHISTICATION AND EXPERIENCE. UUNET is a sophisticated
investor that understands that the purchase of the Convertible Note
involves substantial risk.
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UUNET has experience as an investor in securities of companies in similar
stages of development as is the Company. UUNET is able to fend for itself,
can bear the economic risk of its investment in the Convertible Note and
the Conversion Shares and has such knowledge and experience in financial or
business matters that it is capable of evaluating the merits and risks of
its investment in the Convertible Note and the Conversion Shares and
protecting its own interests in connection with such investment.
3.5 RESTRICTED SECURITIES. UUNET understands that the Convertible Note
and any Conversion Shares that may later be acquired by UUNET are
"restricted securities" under the 1933 Act inasmuch as they are being
acquired from the Company in a transaction not involving a public offering
and that under the 1933 Act, applicable state securities laws and the
applicable regulations thereunder such securities may be resold only in
certain limited circumstances. In this connection, UUNET represents that
UUNET is familiar with Rule 144 promulgated under the 1933 Act and
understands the resale limitations imposed thereby and by applicable state
securities laws. UUNET understands that the Company is under no obligation
to register any of the securities sold hereunder except as provided in the
Registration Rights Agreement as described below. UUNET understands that no
public market now exists for the Common Stock of the Company and that,
notwithstanding the Company's efforts to effect the Proposed Public
Offering, no assurance can be given that a public market will ever exist
for the Conversion Shares.
3.6 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the
generality of the representations set forth above, UUNET further agrees not
to make any disposition of all or any portion of the Convertible Note or
the Conversion Shares unless and until:
(a) there is then in effect a registration statement under the 1933
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) (i) UUNET shall have notified the Company of the proposed
disposition and shall have furnished the Company with a statement of
the circumstances surrounding the proposed disposition, and (ii) UUNET
shall have furnished the Company, at the expense of UUNET or its
transferee, with an opinion of counsel, reasonably satisfactory to the
Company, that such disposition will not require registration of such
securities under the 1933 Act or any applicable state securities laws.
4. CONDITIONS TO UUNET'S OBLIGATIONS. The obligations of UUNET under this
Agreement shall be subject to the fulfillment or waiver, at or before the
Closing, of each of the following conditions, the waiver of which shall not be
effective against UUNET unless given by written, oral or telephone communication
to the Company or to its counsel:
4.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and
warranties of
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the Company made or contained herein are true and correct in all material
respects at and as of the Closing Date as if made on and as of the Closing
Date.
4.2 PERFORMANCE. The Company has performed and complied in all material
respects with all agreements and conditions contained herein required to be
performed or complied with by it at or before the Closing.
4.3 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in
connection with the transactions contemplated hereby and all documents
incident thereto shall be reasonably satisfactory in form and substance to
UUNET and to its counsel, and they shall each have received all such
counterpart originals and certified or other copies of such documents as
they may reasonably request. Such documents shall include:
(a) CERTIFIED CHARTER DOCUMENTS. A copy of the Certificate of
Incorporation and the Bylaws of the Company, certified by its
Secretary as true and correct copies thereof; and
(b) GOOD STANDING CERTIFICATE. A good standing certificate issued by
the Secretary of State of the State of Delaware, dated within five (5)
business days of the Closing Date, with respect to the Company.
4.4 NO MATERIAL CHANGE. There shall not have been, since the date of
execution of this Agreement, any material adverse change in the business,
operations, properties, assets or financial condition of the Company.
4.5 ELECTION OF DIRECTOR. All necessary corporate action shall have been
taken for John Sidgmore to have been added to the Board of Directors of the
Company.
4.6 RELATED AGREEMENTS. Each of the following related agreements shall
have been executed and delivered by the parties thereto:
(a) CONVERTIBLE NOTE substantially in the form of EXHIBIT A hereto;
(b) AN ADDENDUM TO THE COMPANY'S AMENDED AND RESTATED REGISTRATION
RIGHTS AGREEMENT, adding UUNET as a party thereto and granting to
UUNET with respect to the Conversion Shares, if and when issued, those
certain "piggyback" and Form S-3 registration rights as set forth
therein, substantially in the form of EXHIBIT B hereto;
(c) STOCKHOLDERS AGREEMENT, executed by the stockholders named
therein agreeing to vote their shares, following the Closing of the
transactions contemplated hereby, to elect to the Company's board of
directors the nominee as specified in writing by UUNET, substantially
in the form of EXHIBIT C hereto; and
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(d) ADDENDUM NO. 1 (THE "ADDENDUM") TO NETWORK SERVICES AGREEMENT
(the "Commercial Agreement"), pursuant to which UUNET provides certain
network services for the Company's products and services,
substantially in the form of EXHIBIT D hereto.
5. CONDITIONS TO THE COMPANY'S OBLIGATIONS. The obligations of the Company to
UUNET under this Agreement are subject to the fulfillment or waiver, on or
before the Closing, of each of the following conditions by UUNET:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
UUNET made or contained herein are true and correct in all material
respects at and as of the Closing Date as if made on and as of the Closing
Date.
5.2 PAYMENT OF PURCHASE PRICE. UUNET shall have delivered to the Company
the Purchase Price.
5.3 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in
connection with the transactions contemplated hereby and all documents
incident thereto shall be reasonably satisfactory in form and substance to
the Company and to the Company's legal counsel, and the Company shall have
received all such counterpart originals and certified or other copies of
such documents as it may reasonably request.
5.4 RELATED AGREEMENTS. UUNET shall have executed and delivered the
Addendum to Registration Rights Agreement and the Addendum substantially in
the forms of Exhibits B and D hereto, respectively.
6. CONVERSION OF CONVERTIBLE NOTE.
6.1 CONVERSION PRICE.
(a) IPO CONVERSION PRICE. If the conversion of the Convertible Note
occurs following a "Qualifying Public Offering" as described in
Section 6.3(a)(i) hereof, the "Conversion Price" shall be the lesser
of (i) $8.00 per share or (ii) 120% of the weighted average price per
share of Common Stock paid by the holders of the Series A Convertible
Preferred Stock of the Company named on Schedule II hereto (the
"Holders"), after giving effect to (i) the conversion by the Holders
of 1,818,182 shares of Series A Preferred Stock into an equivalent
number of shares of Common Stock at a conversion price of $5.50 per
share and (ii) any purchase of shares of Common Stock the Holders may
make in the Proposed Public Offering.
By way of example and not limitation, in September 1996, the
Holders
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purchased 1,818,182 shares at $5.50 per share of Series A Convertible
Preferred Stock, which shares are convertible on a one-for-one basis
into shares of Common Stock. If the price at which the Common Stock
is sold in the Proposed Public Offering is $8.00 per share and the
Holders purchase 625,000 such shares in that offering, then the
Holders' weighted average purchase price per share in the two
transactions would be calculated as follows:
$15,000,000 (total investment) DIVIDED BY 2,443,182 shares =
$6.14 per share;
and, 120% thereof would equal $7.37. Because that amount is less than
$8.00 per share, in this example it would represent the Conversion
Price.
(b) NON-IPO CONVERSION PRICE. If the conversion of the Convertible
Note does not occur pursuant to subsection (a) above (e.g., does not
occur following a Qualifying Public Offering), the "Conversion Price"
shall equal $6.60 per share.
(c) ADJUSTMENT. Notwithstanding anything set forth in (a) and (b)
above the Conversion Price shall be subject to adjustment as provided
in SECTION 6.2 hereof.
6.2 ADJUSTMENTS.
(a) If the Company shall declare and pay on shares of its Common
Stock a dividend payable in Common Stock or shall split the then
outstanding Common Stock into a greater number of shares, the
Conversion Price shall be proportionately decreased and, conversely,
if at any time the Company shall combine shares of Common Stock into a
smaller number of shares, the Conversion Price shall be
proportionately increased as of such time.
(b) In the case of (i) any reclassification of or changes in the
Common Stock other than as provided in SECTION 6.2(a) above, (ii) a
consolidation, merger, share exchange or other business combination
transaction involving the Company, or (iii) a sale or conveyance to
another corporation of the property and assets of the Company as an
entirety or substantially as an entirety, in each case as a result of
which holders of Common Stock shall be entitled to receive shares,
other securities or other property or assets (including cash) with
respect to or in exchange for such Common Stock, UUNET will be
entitled thereafter to receive, upon conversion of the Convertible
Note contemporaneous with the closing of any such transaction, the
kind and amount of shares, other securities or other property or
assets which UUNET would have owned or been entitled to receive upon
such reclassification, change, consolidation, merger, share exchange,
combination, sale or conveyance had the Convertible Note been
converted immediately prior to such transaction.
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(c) If the Company shall issue or sell shares of Common Stock
(including shares now or hereafter held in the treasury of the
Company) at a price per share, or shall grant rights, options or
warrants having an exercise price per share, or securities convertible
into Common Stock having a conversion price per share, less than the
Conversion Price in effect at that time, then, forthwith upon such
issue or sale, the Conversion Price shall be reduced to the amount
(calculated to the nearest one hundredth of a cent) determined by
dividing (x) an amount equal to the sum of (A) the number of shares of
Common Stock outstanding immediately prior to such issue or sale
multiplied by the then existing Conversion Price, and (B) the
aggregate consideration, if any, received by the Company upon such
issue or sale, by (y) the total number of shares of Common Stock
outstanding immediately after such issue or sale; PROVIDED, HOWEVER,
that no such adjustment shall be made with respect to (i) the issuance
of shares of Common Stock upon the exercise or conversion of rights,
options, warrants or other securities convertible into Common Stock
outstanding on the date of this Agreement, (ii) rights, options or
warrants granted by the Company, with the approval of its Board of
Directors or the Compensation Committee thereof, to employees,
directors and consultants of the Company as compensation for service
to the Company in any such capacities, if such rights, options or
warrants are granted at an exercise price not less than the fair
market value of a share as of the date of grant ("Compensatory
Securities") or (iii) Common Stock issued upon exercise of
Compensatory Securities. The securities described in clauses (i),
(ii) and (iii) preceding are referred to in Schedule I hereof as
"Exempted Securities." For purposes of this Section 6.2(c),
paragraphs 1. through 3., inclusive, of Schedule I hereto shall also
be applicable.
(d) Whenever the Conversion Price or number of Conversion Shares are
adjusted, as herein provided, the Company shall promptly notify UUNET
of such adjustment(s) setting forth its computations of such
adjustment.
6.3 CONVERSION RIGHT; TIME OF CONVERSION. (a) The Convertible Note
shall be convertible at the option of UUNET, subject to the following:
(i) If the Company effects a "Qualifying Public Offering" within
the meaning of the Company's Certificate of Designation,
Preferences and Rights of Series A Convertible Preferred Stock
filed with the Delaware Secretary of State on September 10, 1996,
as it may be amended from time to time, not later than the first
anniversary of the Closing Date, then the Convertible Note may,
at any time thereafter, be converted into Conversion Shares at
the Conversion Price set forth in Section 6.1(a) hereof.
(ii) If the Company does not effect a "Qualifying Public
Offering" not
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later than the first anniversary of the Closing Date or if, prior
to the first anniversary of the Closing Date, a "Conversion
Event" (as defined in paragraph (iii) below) occurs, then the
Convertible Note may be converted into Conversion Shares at the
Conversion Price set forth in Section 6.1(b) hereof.
(iii) A "Conversion Event" entitling UUNET to convert the
Convertible Note into Convertible Shares prior to the first
anniversary of the Closing Date at the Conversion Price set forth
in Section 6.1(b) hereof shall have occurred if (A) the Company
terminates the Commercial Agreement for convenience pursuant to
Section D of the Addendum, (B) the Company is in material breach
or default under the Commercial Agreement or (C) UUNET's
continued holding of the indebtedness represented by the
Convertible Note shall cause UUNET or its parent corporation, MFS
Communications Company, Inc. ("MFS"), to be in default under
existing debt obligations of UUNET or MFS or if such debt shall
cause MFS to be unable to obtain its lenders' consents to the
pending merger of MFS and WorldCom, Inc.; PROVIDED THAT in order
to avail itself of this subsection (C), an appropriate financial
officer of UUNET or MFS, as appropriate, shall provide a
certification to the Company concerning the bona fide nature of
such event, including without limitation, supporting
documentation with respect thereto, such as, if applicable,
detailed calculations of ratios or coverage requirements
underlying the same.
(b) Notwithstanding paragraph (a) above, the Convertible Note may not
be converted prior to the Due Date (as defined therein) in the absence
of (i) a Qualifying Public Offering, (ii) the occurrence of a
Conversion Event or (iii) pursuant to the exercise by the Company of
the prepayment option set forth in Section 2 of the Convertible Note.
6.4 CALCULATION OF CONVERSION SHARES. The Convertible Note shall be
converted into such number of whole Conversion Shares as are calculated by
dividing all unpaid principal and accrued interest due and owing under the
Convertible Note by the Conversion Price, as adjusted pursuant to Section
6.2. Any resulting fractional share shall be paid in cash at the
Conversion Price.
6.5 SURRENDER AND DELIVERY. Upon delivery to UUNET of certificates
representing the number of fully paid and non-assessable Conversion Shares
computed pursuant to this SECTION 6, UUNET shall surrender the Convertible
Note to the Company for cancellation.
6.6 RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall at
all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion
of the Convertible Note, such
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number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of the entire principal balance and
accrued interest of the Convertible Note. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of the Convertible Note, the Company will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number
of shares as shall be sufficient for such purpose.
7. EVENTS OF DEFAULT; REMEDIES.
7.1 EVENTS OF DEFAULT. If any one or more of the following events shall
occur, it shall be deemed an "Event of Default" hereunder and under the
Convertible Note:
(a) default by the Company in the due and punctual payment of the
principal, interest or both on the Convertible Note when and as the
same shall become due and payable or any material breach by the
Company of any covenant set forth in Section 8 hereof;
(b) any representation or warranty made by the Company herein shall
have been false or misleading in any material respect when made;
(c) the Company becomes insolvent or unable to meet its obligations
as they mature, makes a general assignment for the benefit of its
creditors, consents to the appointment of a trustee or a receiver or
admits in writing its inability to pay its debts as they mature;
(d) a trustee or receiver for the Company or for any part of the
properties of the Company is appointed without the consent of the
Company and such trustee or receiver is not discharged within sixty
(60) days of its appointment;
(e) bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings are instituted by or against the Company and,
if instituted against it, the same are consented to by the Company or
remain undismissed for a period of sixty (60) days; or
(f) the Company terminates the Commercial Agreement for convenience
pursuant to Section D of the Addendum; provided, however, that if upon
such termination UUNET elects to convert the Convertible Note pursuant
to Section 6.3, no Event of Default shall be deemed to have occurred.
7.2 DEFAULT. Upon an Event of Default, in addition to the remedies
provided elsewhere in this Agreement, and at law and in equity, UUNET may,
at any time thereafter, at its option, declare the Convertible Note to be
immediately due and payable,
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whereupon the maturity of the then unpaid balance of the Convertible Note
shall be accelerated and the same and all interest accrued thereon shall
forthwith become due and payable.
7.3 REMEDIES. In case any one or more Events of Default shall occur and be
continuing, UUNET may proceed to protect and enforce its rights or remedies
either by suit in equity or by action at law, or both, whether for the
specific performance of any covenant, agreement or other provisions
contained herein, or in the Convertible Note, or proceed to enforce any
other legal, equitable or statutory right or remedy or the remedies it may
have including those set forth in SECTION 7.2 hereof.
7.4 REMEDIES NOT EXCLUSIVE. No right or remedy conferred herein is
intended to be exclusive of any other right or remedy contained herein or
in any instrument or document delivered in connection with or pursuant to
this Agreement, and every such right or remedy contained herein and therein
or now or hereafter existing at law or in equity or by statute, or
otherwise may be exercised separately or in any combination.
7.5 COURSE OF DEALING. No course of dealing between the Company and UUNET
or any failure or delay on either party's part in exercising any rights or
remedies hereunder shall operate as a waiver of any rights or remedies of
the parties and no single or partial exercise of any rights or remedies
hereunder shall operate as a waiver or preclude the exercise of any other
rights or remedies hereunder.
7.6 TRANSFER. The Convertible Note shall be registered in the name of
UUNET on the books of the Company. No transfer of the Convertible Note
shall be valid unless made by UUNET or by its attorney duly authorized in
writing for that purpose. Upon due presentment for registration of
transfer of the Convertible Note, a new Convertible Note (also a
"CONVERTIBLE NOTE") in the face amount of the then unpaid principal balance
of the Convertible Note being transferred, shall be issued to the
transferee, whose name shall then be registered on the books of the Company
and who shall be subject to the terms of this Agreement as if such
transferee were an original party to this Agreement. No service charge
shall be made for any such transfer, but the Company may require payment of
a sum sufficient to cover any tax or other governmental charge that may be
imposed in relation thereto. UUNET may transfer the Convertible Note and/or
the Conversion Shares and assign its rights thereunder, provided that the
transfer of the Convertible Note and/or the Conversion Shares will be
subject to the restriction that no such transfer will be effected until
UUNET has obtained either an opinion of counsel satisfactory to the Company
and its counsel to the effect that the proposed transfer will not result in
a violation of the 1933 Act or applicable state securities laws.
8. COVENANTS OF THE COMPANY. The Company further covenants and agrees that,
so long as the Convertible Note is outstanding, the Company shall:
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8.1 PAYMENTS. Promptly make all payments of principal and interest on the
Convertible Note when due, and comply with the other provisions hereof;
8.2 COMPLIANCE WITH LAWS. Comply in all material respects with all
federal, state and local laws, ordinances and regulations applicable to its
business;
8.3 CONDUCT OF BUSINESS. Conduct its business in the usual and ordinary
course;
8.4 CORPORATE EXISTENCE. Maintain its corporate existence and right to
carry on its business and duly procure all necessary renewals and
extensions thereof and use its best efforts to maintain, preserve and renew
all such rights, powers, privileges and franchises; provided, however, that
nothing herein contained shall be construed to prevent the Company from
ceasing or omitting to exercise any rights, powers, privileges or
franchises that in the judgment of its board of directors can no longer be
exercised in its best interests, but provided further that any such
cessation or omission shall not adversely affect the Convertible Note or
the obligations of the Company under this Agreement;
8.5 BOOKS AND RECORDS. At all times maintain proper books or records of
account in which full, true and correct entries will be made of its
transactions in accordance with generally accepted accounting principles,
consistently applied, and set aside on its books reserves for depreciation,
depletion, obsolescence and amortization of its properties, determined in
accordance with generally accepted accounting principles, consistently
applied, and all other proper reserves, similarly determined, that should
be set aside in connection with its business;
8.6 TAXES. Pay and discharge promptly all taxes, assessments, and
governmental charges or levies imposed upon it or upon its income or upon
any part thereof, as well as all claims of any kind (including claims for
labor, materials and supplies) that, if unpaid, might by law become a lien
or charge upon its property; provided, however, that the Company shall not
be required to pay any such tax, assessment, charge, levy, or claim if the
amount, applicability or validity thereof shall be contested in good faith
by appropriate proceedings and if it shall have set aside on its books
reserves (segregated to the extent required by generally accepted
accounting principles) deemed by it adequate with respect thereto;
8.7 INDEBTEDNESS. Pay or cause to be paid the principal of and interest
on all material indebtedness for borrowed monies heretofore or hereafter
incurred or assumed by the Company when and as the same shall become due
and payable unless such indebtedness be renewed or extended on terms no
less favorable than the original terms thereof;
8.8 REGISTRATION RIGHTS. If the Company shall take action pursuant to
Section 9(d) of its Amended and Restated Registration Rights Agreement
dated as of June 1, 1996 to grant more favorable registration rights than
those set forth in such Agreement to any
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party other than UUNET, then the Company shall notify UUNET thereof and
shall use its best efforts to grant also to UUNET registration rights
comparable to those being granted to such other party; and
8.9 COMPLIANCE WITH INDEBTEDNESS. Faithfully observe, perform, and
discharge all covenants, conditions and obligations that are imposed on it
by any and all indentures and other agreements securing or evidencing such
indebtedness or pursuant to which such indebtedness was incurred, and not
permit the occurrence of any act or omission that is or may be declared to
be a default thereunder, unless waived by the holder of such indebtedness;
provided, however, that the Company shall not be required to make any
payment or to take any other action by reason of the provisions of this
Section if it is contesting in good faith its obligation to make such
payment or to take such action and shall have set aside on its books
adequate reserves (to the extent, and segregated if and to the extent,
required by generally accepted accounting principles) with respect thereto.
9. COVENANT OF UUNET; CONFIDENTIALITY. UUNET further covenants and agrees
that UUNET will not publish or disclose, either directly or indirectly, any
information relating to the Proposed Public Offering, including, but not limited
to, (i) the fact that the Company is in the process of effectuating the Proposed
Public Offering, or (ii) a prospectus or any information contained in a
prospectus or any other document filed by the Company with the Securities and
Exchange Commission in connection with the Proposed Public Offering.
10. MISCELLANEOUS.
10.1 SURVIVAL OF WARRANTIES. The representations, warranties and covenants
of the Company and UUNET contained in or made pursuant to this Agreement
shall survive the execution and delivery of this Agreement and the Closing
until the conversion of the Convertible Note or until the first anniversary
of this Agreement, whichever occurs first.
10.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors
and assigns of the parties.
10.3 GOVERNING LAW. This Agreement shall be governed by and construed
under the internal laws of the State of Delaware without reference to
principles of conflict of laws or choice of laws.
10.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.5 HEADINGS. The headings and captions used in this Agreement are used
for convenience only and are not to be considered in construing or
interpreting this Agreement. All references in this Agreement to sections,
paragraphs, exhibits and
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schedules shall, unless otherwise provided, refer to sections and
paragraphs hereof and exhibits and schedules attached hereto, all of which
exhibits and schedules are incorporated herein by this reference.
10.6 NOTICES. Unless otherwise provided, any notice required or permitted
under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or
upon deposit with the United States Post Office, by registered or certified
mail, postage prepaid and addressed as follows:
If to UUNET: UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, Virginia 22031
Attn: Mr. David Foster
with a copy to: Martina W. Knee, Esq., at the foregoing
address
If to the Company: EarthLink Network, Inc.
3100 New York Drive
Pasadena, California 91107
Attn: President
with a copy to: Scott M. Hobby, Esq.
Hunton & Williams
NationsBank Plaza
600 Peachtree Street, NE
Suite 4100
Atlanta, Georgia 30308
or at such other address as either may designate by giving ten (10) days
advance written notice to all other parties.
10.7 NO FINDER'S FEES. Each party represents that it neither is nor will
be obligated for any finder's or broker's fee or commission in connection
with this transaction. UUNET agrees to indemnify and to hold harmless the
Company from any liability for any commission or compensation in the nature
of a finder's or broker's fee (and any asserted liability) for which UUNET
or any of its officers, partners, employees, or representatives is
responsible. The Company agrees to indemnify and hold harmless UUNET from
any liability for any commission or compensation in the nature of a
finder's or broker's fee (and any asserted liability) for which the Company
or any of its officers, employees or representatives is responsible.
10.8 COSTS, EXPENSES. Each party shall be responsible for its own costs
and expenses,
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including without limitation professional fees and expenses, related to the
negotiation, preparation and execution of this Agreement, the Convertible
Note and the other agreements related thereto.
10.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively) only with the written consent of the Company and UUNET.
10.10 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable
in accordance with its terms.
10.11 ENTIRE AGREEMENT. This Agreement, together with all Exhibits and
Schedules hereto, and the Convertible Note constitute the entire agreement
and understanding of the parties with respect to the subject matter hereof
and supersede any and all prior negotiations, correspondence, agreements,
understandings, duties or obligations between the parties with respect to
the subject matter hereof.
10.12 FURTHER ASSURANCES. From and after the date of this Agreement,
upon the request of either party, the other party shall execute and deliver
such instruments, documents or other writings as may be reasonably
necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
UUNET TECHNOLOGIES, INC. EARTHLINK NETWORK, INC.:
/s/ David Foster /s/ Sky D. Dayton
- ------------------------- -------------------------
(Authorized Signature) Sky D. Dayton
David Foster Sky D. Dayton
- ------------------------- -------------------------
(Printed Name) (Printed Name)
V.P. Chairman
- ------------------------- -------------------------
(Title) (Title)
17
<PAGE>
SCHEDULE I
For purposes of Section 6.2(c) hereof, the following clauses 1. through 3.,
inclusive, of this Schedule I shall also be applicable:
1. If the Company shall grant any rights, options or warrants to purchase
Common Stock or to purchase securities convertible into Common Stock (other than
Exempted Securities), and the purchase price per share for which Common Stock is
issuable upon the exercise or conversion of such securities (determined by
dividing (x) the total amount, if any, received or receivable by the Company as
consideration for the granting of all such rights, options or warrants, plus the
minimum aggregate amount of additional consideration payable to the Company upon
the exercise of all such rights, options or warrants, plus, in the case of
convertible securities, the minimum aggregate amount of additional consideration
payable upon the conversion thereof, by (y) the maximum aggregate number of
shares of Common Stock issuable upon the exercise of such rights, options or
warrants or upon the conversion of any such convertible securities issuable upon
the exercise of such rights, options or warrants) shall be less than the
Conversion Price in effect immediately prior to the time of the granting of such
rights, options, warrants or convertible securities, then the maximum aggregate
number of shares of Common Stock issuable upon the exercise of such rights,
options or warrants or upon the conversion of the total maximum amount of such
convertible securities issuable upon the exercise of such rights, options or
warrants shall (as of the date of grant thereof) be deemed to be outstanding and
to have been issued for such price per share. No further adjustments of the
Conversion Price shall be made upon the actual issue of such Common Stock or
convertible securities upon the exercise or conversion of such securities,
except as otherwise provided in clause 3. below;
2. If the Company shall issue or sell any convertible securities (other
than Exempted Securities), and the purchase per share for which Common Stock is
issuable upon such conversion (determined by dividing (x) the total amount
received or receivable by the Company as consideration for the issue or sale of
all such convertible securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion thereof, by
(y) the maximum aggregate number of shares of Common Stock issuable upon the
conversion of all such convertible securities) shall be less than the Conversion
Price in effect immediately prior to the time of such issue or sale, then the
maximum number of shares of Common Stock issuable upon conversion of all such
convertible securities shall (as of the date of the issue or sale thereof) be
deemed outstanding and to have been issued for such price per share, PROVIDED
THAT, except as otherwise specified in clause 3. below, (A) no further
adjustments of the Conversion Price shall be made upon the actual issue of such
Common Stock upon conversion of such convertible securities, and (B) if any such
issue or sale of such convertible securities is made upon the exercise of any
rights to subscribe for or to purchase or upon exercise of any option to
purchase any such convertible securities, no further adjustment of the
Conversion Price shall be made by reason of such issue or sale; and
18
<PAGE>
3. If the purchase price or number of shares purchasable provided for in
any right, warrant or option referred to in clause 1. above, or the rate at
which any convertible securities referred to in clause 1. or 2. above are
convertible into Common Stock shall change at any time (other than under or by
reason of provisions designed to protect against dilution in connection with
events for which provision for adjustments in the Conversion Price are provided
for herein), the Conversion Price then in effect hereunder shall forthwith be
readjusted to such Conversion Price as would have been obtained had the
adjustments made upon the issuance of such rights, warrants, options or
convertible securities been made upon the basis of the changed terms; and on the
expiration of any such right, warrant or option referred to in clause 1. above
or the termination of any such right to convert such Convertible Securities
referred to in clause 1. or 2. above, the Conversion Price then in effect
hereunder shall forthwith be readjusted to such Conversion Price as would have
been obtained had the adjustments made upon the issuance of such rights,
warrants or options or convertible securities been made upon the basis of the
issuance of only the number of shares of Common Stock, if any, theretofore
actually delivered upon the exercise of such rights, warrants or options or upon
the conversion of such convertible securities.
19
<PAGE>
SCHEDULE II
NAME
Quantum Industrial Partners LDC
Stanley F. Druckenmiller
Arminio Fraga
Gary S. Gladstein
Robert R. Jermain
Elizabeth R. Larson
Paul McNulty
Michael C. Neus
Sean C. Warren
Trust for Alexander G. Soros Under George
Soros 1982 Private Lead Trust Dated as of
April 1, 1982
Trust for Andrea Soros Under George Soros
1982 Private Lead Trust Dated as of
April 1, 1982
Trust for Gregory Soros Under George Soros
1982 Private Lead Trust Dated as of
April 1, 1982
Trust for Jonathan Soros Under George Soros
1982 Private Lead Trust Dated as of
April 1, 1982
Trust for Robert Soros Under George Soros
1982 Private Lead Trust Dated as of
April 1, 1982
George Soros
20
<PAGE>
EXECUTION COPY
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF
ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT
AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. THE HOLDERS HEREOF SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR
THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE
ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR
RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
EARTHLINK NETWORK, INC.
CONVERTIBLE NOTE
DUE DATE: OCTOBER 31, 1997
$5,000,000 OCTOBER 31, 1996
FOR VALUE RECEIVED, the undersigned, EARTHLINK NETWORK, INC., a Delaware
corporation (the "COMPANY"), hereby promises to pay to UUNET TECHNOLOGIES, INC.
or its registered assigns ("UUNET"), the principal sum of FIVE MILLION DOLLARS
($5,000,000), together with simple interest from the date hereof (computed on
the basis of a 365-day year) at a rate equal to the prime rate of interest as
established by CoastFed Bank, N.A. as of the date hereof plus two percent (2%)
per annum on the principal amount from time to time remaining unpaid hereof.
Capitalized terms used but not defined herein shall have the meanings given
such terms in the Note Purchase Agreement, dated as of October 31, 1996, between
the Company and UUNET (the "NOTE PURCHASE AGREEMENT").
1. PAYMENT. The principal amount of this Note shall be due and payable
on the Due Date noted above, or on such later date as may be agreed to in
writing by UUNET, unless this Convertible Note shall have first been converted
into Conversion Shares as provided herein. Interest on the outstanding
principal amount of this Note shall be payable monthly commencing November 30,
1996, and continuing to be due and payable on the 30th day of each month
thereafter (or the immediately following business day if such day falls on a
weekend), unless this Convertible Note shall have first been converted into
Conversion Shares as provided herein.
1
<PAGE>
Payments shall be made at UUNET's offices at 3060 Williams Drive, Fairfax,
Virginia or at such other place as UUNET may from time to time in writing
designate.
2. PREPAYMENT OPTION. The Company may elect to prepay all or part of the
principal plus accrued but unpaid interest hereunder upon not less than 10 days'
prior written notice to UUNET of the proposed date of prepayment. Upon receipt
of such notice, UUNET may, at its option, in lieu of such prepayment, elect to
have the principal plus accrued but unpaid interest due and owing hereunder (or,
in the case of proposed partial prepayment, may elect to convert all or a
portion of the principal plus accrued but unpaid interest) converted into
Conversion Shares at the appropriate Conversion Price determined pursuant to
Section 6 of the Note Purchase Agreement; provided that such election shall have
been made by written notice to the Company not later than two business days
prior to the proposed date of prepayment.
3. CONVERSION.
(a) This Convertible Note is convertible into Conversion Shares as
provided in Section 6 of the Note Purchase Agreement. Upon the conversion of
this Convertible Note in full in accordance with the Note Purchase Agreement,
this Convertible Note shall be deemed canceled and all amounts then due and
owing hereunder shall be considered fully paid. Upon the conversion of this
Convertible Note in part in accordance with the Note Purchase Agreement, this
Convertible Note, to the extent of the amount of principal and accrued but
unpaid interest converted, shall be deemed canceled and fully paid and UUNET
shall be entitled to a replacement note, substantially in the form hereof, with
respect to the principal balance and accrued interest, if any, remaining due.
(b) The Company shall at all times reserve and keep available a number of
its authorized but unissued shares of Common Stock sufficient to permit the full
conversion hereof.
4. SALE OF CONVERTIBLE NOTE. Neither this Convertible Note nor the
shares of Conversion Shares issuable upon its conversion have been registered
under the Act or under the securities laws of any state. Neither this
Convertible Note nor the Conversion Shares may be sold, transferred, encumbered
or otherwise disposed of except in accordance with the Note Purchase Agreement
including without limitation SECTION 7.6 thereof.
5. DEFAULT.
(a) An "EVENT OF DEFAULT" under this Convertible Note shall have the
meaning, and shall entitle UUNET to exercise the remedies, set forth in the Note
Purchase Agreement.
(b) Any delay by UUNET in exercising or any failure of UUNET to exercise
the option to accelerate with respect to an Event of Default by the Company
shall not constitute a waiver of its right to exercise such option with respect
to that or any subsequent default. Acceleration of maturity, once claimed
hereunder by UUNET may be rescinded, at UUNET's option, by written
acknowledgment to that effect, but the tender and acceptance of partial
2
<PAGE>
payment or partial performance alone shall not in any way affect or rescind such
acceleration of maturity.
6. MISCELLANEOUS.
(a) Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Convertible Note, and (in
case of loss, theft or destruction) of indemnity reasonably satisfactory to it,
and upon reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Convertible Note, if
mutilated, the Company will make and deliver a new Convertible Note of like
tenor in the principal amount of this Convertible Note in lieu of such
Convertible Note. Any Convertible Note so made and delivered shall be dated as
of the date to which interest shall have been paid on the Convertible Note lost,
stolen, destroyed or mutilated.
(b) The Company agrees that it shall remain liable for the payment hereof
notwithstanding any agreement for the extension of the due date of any amount
payable hereunder made by UUNET after the maturity thereof.
(c) All notices, requests, demands and other communications with respect
hereto shall be delivered in accordance with the applicable sections of the Note
Purchase Agreement.
(d) This Convertible Note shall be binding upon and inure to the benefit
of the Company and UUNET and their respective successors and assigns; provided,
however, that neither party may assign or delegate its obligations hereunder
without the prior written consent of the other party, which consent shall not be
unreasonably withheld.
(e) The terms of this Convertible Note shall be governed by and construed
in accordance with the laws of the State of Delaware.
This Convertible Note has been issued pursuant to the Note Purchase
Agreement and is subject to the terms thereof and such terms shall be deemed
incorporated herein as if fully set forth herein.
IN WITNESS WHEREOF, the Company has caused this Convertible Note to be
signed in its corporate name by its President and its corporate seal affixed
hereto duly attested by its Secretary, by authority duly given, all as of the
day and year first above written.
ATTEST: EARTHLINK NETWORK, INC.
/s/ Barry W. Hall By: /s/ Charles G. Betty
- -------------------------- ----------------------------
Secretary Charles G. Betty
President
3
<PAGE>
EXECUTION COPY
STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT ("Agreement") is, dated and effective as of the
30th day of October, 1996, by and among EARTHLINK NETWORK, INC. (the "Company"),
UUNET TECHNOLOGIES, INC. ("UUNET"), and SKY D. DAYTON, REED E. SLATKIN, KEVIN
M. O'DONNELL, SIDNEY AZEEZ, CHARLES G. BETTY AND GREG ABBOTT (each such
stockholder referred to herein as a "Stockholder").
A. This Agreement is the Stockholders Agreement referenced in that
certain Note Purchase Agreement (the "Note Purchase Agreement") of even date
herewith between the Company and UUNET.
B. As a condition to and as further consideration for UUNET entering the
Note Purchase Agreement and consummating the investment transactions
contemplated thereby, the Company and the Stockholders have agreed to execute
and deliver this Agreement for the purpose of agreeing to designate and elect to
the Company's Board of Directors the director nominee to be specified by UUNET
(the "Director Nominee").
NOW THEREFORE, for and in consideration of the mutual representations,
warranties and covenants contained herein, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to them in the Note Purchase Agreement.
1. STOCKHOLDER REPRESENTATIONS AND WARRANTIES. Each Stockholder hereby
represents and warrants that:
(a) OWNERSHIP OF SHARES. The Stockholder owns his shares of the Company's
common stock, par value $0.01 per share, or, in the case of Quantum
Industrial Partners LDC ("Quantum"), shares of Series A Convertible
Preferred Stock with voting rights (collectively, the "Company Stock"),
free and clear of all liens, restrictions, pledges and encumbrances;
(b) NO TRANSFERS. The Stockholder has made no transfer of Company Stock
since it acquired such stock;
(c) NO VOTING RIGHTS GRANTED. The Stockholder has granted no proxy rights
or other voting rights with respect to any Company Stock; and
(d) NUMBER OF SHARES. The number of shares of Company Stock set forth
beside the Stockholder's name on the signature page hereto represents those
shares of Company
1
<PAGE>
Stock owned by such Stockholder which are subject to this Agreement.
2. COMPANY REPRESENTATION. A vacancy presently exists on the Board of
Directors of the Company, which vacancy may be filled by a majority of the
members of the Board of Directors.
3. OBLIGATIONS OF THE COMPANY AND THE STOCKHOLDERS.
(a) DESIGNATION AND NOMINATION OF UUNET NOMINEE. The Company agrees to
take such action as is necessary (i) to cause the Director Nominee to be
designated by a majority of the members of the Board of Directors, as the
person designated to fill the vacancy thereon identified in Section 2
hereof, effective no later than the date of closing of the Note Purchase
Agreement and the date of signing of Addendum No. 1 to The Network Services
Agreement between the Company and UUNET dated October 28, 1996, and (ii) to
cause the Board of Directors to nominate the Director Nominee to stand for
election in subsequent elections of the Board of Directors held during the
term of this Agreement.
(b) ELECTION OF UUNET NOMINEE. Each Stockholder agrees to vote his, her
or its shares of Company Stock in favor of the Director Nominee in any
election of the Board of Directors held during the term of this Agreement.
(c) CONDITION PRECEDENT. If the Closing of the transactions contemplated
by the Note Purchase Agreement (as that term is defined in the Note
Purchase Agreement) shall not occur, this Agreement shall be null and void
and of no effect.
4. AFTER-ACQUIRED STOCK. Whenever, during the term of this Agreement, any
Stockholder acquires any additional shares of Company Stock other than the
shares of Company Stock listed on the signature page hereto, such shares of
Company Stock so acquired shall be subject to all of the terms of this Agreement
to the extent such shares have voting rights.
5. TERMINATION. This Agreement shall terminate on the earlier of (i) the
termination of the Note Purchase Agreement for any reason whatsoever, or (ii)
the consummation of an initial public offering such that the Company becomes a
reporting company under the Securities Exchange Act of 1934, as amended.
6. NOTICES. All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given on the date of
delivery if personally delivered, five (5) days after the date of mailing if
mailed by United States certified or registered mail postage prepaid, or one day
after the date deposited with the courier if delivered by Federal Express or
similar overnight courier service, to the parties at the following addresses (or
at such other addresses as shall be given in writing by any party to the other
parties hereto):
2
<PAGE>
If to EarthLink Network, Inc.
a Stockholder 3100 New York Drive
or the Company: Pasadena, CA 91107
Attn: Garry Betty
Telecopy No.: (818) 398-4161
With a copy to: Hunton & Williams
41st Floor
600 Peachtree Street, N.E.
Atlanta, Georgia 30308
Attn: Scott M. Hobby, Esq.
Telecopy No.: (404) 888-4263
7. BINDING EFFECT, ASSIGNMENT AND AMENDMENT. This Agreement shall be binding
upon and inure to the benefit of and be enforceable against the parties hereto
and their respective executors, legal or personal representatives, heirs,
successors and permitted assigns. This Agreement may not be assigned by any
party without the prior written consent of the other parties hereto. This
Agreement may be amended, supplemented or interpreted only by a written
instrument executed by all the parties hereto.
8. ENTIRE AGREEMENT. This Agreement contains the entire agreement between the
parties concerning the transactions contemplated herein and supersede all prior
agreements or understandings between the parties relating to the subject matter
hereof. No representation, agreement or understanding, written or oral, express
or implied, heretofore made by any party shall be binding upon such party or any
other party hereto unless set forth herein.
9. CAPTIONS AND SECTION HEADINGS. Captions and section headings used herein
are for convenience only and are not a part of this Agreement and shall not be
used in construing it.
10. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Delaware.
11. SEVERABILITY. If any one or more of the provisions of this Agreement shall
be determined to be invalid, illegal or unenforceable in any respect for any
reason the validity, legality and enforceability of any such provision in every
other respect and of the remaining provisions of this Agreement shall not be
impaired in any way.
12. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
[The Next Following Pages are the Signature Pages]
3
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the date and
year first above written.
EARTHLINK NETWORK, INC.
By: /s/ Charles G. Betty
--------------------------------
Printed Name: Charles G. Betty
----------------------
Title: President and CEO
----------------------------
UUNET TECHNOLOGIES, INC.
By: /s/ David Foster
--------------------------------
Printed Name: David Foster
----------------------
Title: V.P
-----------------------------
STOCKHOLDERS:
/s/ Sky D. Dayton
-----------------------------------
Sky D. Dayton (3,000,000 shares)
/s/ Reed E. Slatkin
-----------------------------------
Reed E. Slatkin (1,873,095 shares)
/s/ Kevin M. O'Donnell
-----------------------------------
Kevin M. O'Donnell (1,871,046 shares)
/s/ Sidney Azeez
-----------------------------------
Sidney Azeez (412,513 shares)
/s/ Charles G. Betty
-----------------------------------
Charles G. Betty (50,000 shares)
/s Greg Abbott
-----------------------------------
Greg Abbott (677,250)
4
<PAGE>
ADDENDUM TO AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
This Addendum, dated as of October 31, 1996 ("Addendum"), to that certain
Amended and Restated Registration Rights Agreement, dated as of June 1, 1996
(the "Registration Rights Agreement"), is entered into by and between UUNET
Technologies, Inc. ("UUNET") and EarthLink Network, Inc. (the "Company").
WHEREAS, the Company has granted registration rights to a substantial
number of its stockholders pursuant to the Registration Rights Agreement;
WHEREAS, pursuant to a Note Purchase Agreement of even date herewith, UUNET
is purchasing from the Company a one-year, promissory note ("Note") in the
original principal amount of $5,000,000;
WHEREAS, such Note is convertible into a specified number of shares of
Common Stock of the Company, $.01 par value ("Conversion Shares"), as is more
fully described therein; and
WHEREAS, the Company desires to extend the benefits of the Registration
Rights Agreement to any Conversion Shares held in the future by UUNET.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. UUNET is hereby added as a party to the Registration Rights Agreement
and any Conversion Shares held by UUNET pursuant to the conversion of the Note
shall be included as shares of "Restricted Stock" subject to the Registration
Rights Agreement, as such term is defined in Section 1 thereof and subject to
the limitations set forth therein.
2. Subject to the approval of the Board of Directors of the Company, this
Addendum shall be deemed an amendment to the Registration Rights Agreement for
the limited purposes set forth herein. In all other respects, the Registration
Rights Agreement shall not be deemed amended.
3. Like the Registration Rights Agreement itself, this Addendum shall be
governed and construed in accordance with the laws of the State of New York.
4. This Addendum constitutes the entire agreement and understanding of
the parties with respect to the subject matter hereof, and supercedes any and
all prior negotiations, correspondence, agreements, understandings, duties or
obligations between the parties with
<PAGE>
respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Addendum as of
the date first above written.
UUNET TECHNOLOGIES, INC. EARTHLINK NETWORK, INC.:
/s/ David Foster /c/ C. Garry Betty
- ----------------------- ------------------------
(Authorized Signature) (Authorized Signature)
David Foster C. Garry Betty
- ----------------------- ------------------------
(Printed Name) (Printed Name)
V.P. President and CEO
- ----------------------- ------------------------
(Title) (Title)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11.1
EARTHLINK NETWORK, INC.
STATEMENT OF COMPUTATION OF
PER SHARE EARNINGS*
(In thousands except for per share data)
Inception
(May 26,
1994)
through Year ended Nine months ended
December 31, December 31, ---------------------------------------------
1994 1995 September 30, 1995 September 30, 1996
------------ ------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net loss ($148) ($6,120) ($2,972) ($21,809)
------------ ------------ ------------------ ------------------
------------ ------------ ------------------ ------------------
Average shares oustanding 2,587 3,837 3,532 5,658
Common equivalent shares:
Purchase of shares of Common
Stock below the expected IPO
price during fiscal 1995 0 0 0 0
Purchase of shares of Common
Stock below the expected IPO
price during fiscal 1996 711 711 711 502
Assumed exchange of warrants
for Common Stock 280 280 280 280
Assumed exchange of options
for Common Stock 484 484 484 484
------------ ------------ ------------------ ------------------
Weighted average
shares outstanding 4,062 5,312 5,007 6,924
------------ ------------ ------------------ ------------------
------------ ------------ ------------------ ------------------
Net loss per share (0.04) (1.15) (0.59) (3.15)
------------ ------------ ------------------ ------------------
------------ ------------ ------------------ ------------------
* 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.
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated December 4, 1996 relating
to the financial statements of EarthLink Network, Inc., which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
and "Selected Financial Data" in such Prospectus. However, it should be noted
that Price Waterhouse LLP has not prepared or certified such "Selected Financial
Data."
PRICE WATERHOUSE LLP
Costa Mesa, California
December 10, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 1,790 8,984
<SECURITIES> 0 0
<RECEIVABLES> 218 2,429
<ALLOWANCES> 0 664
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,253 12,114
<PP&E> 2,883 16,454
<DEPRECIATION> 305 2,773
<TOTAL-ASSETS> 4,874 26,033
<CURRENT-LIABILITIES> 4,229 18,553
<BONDS> 0 0
0 14,013
0 0
<COMMON> 51 60
<OTHER-SE> 239 (11,981)
<TOTAL-LIABILITY-AND-EQUITY> 4,874 26,033
<SALES> 0 0
<TOTAL-REVENUES> 3,028 20,162
<CGS> 0 0
<TOTAL-COSTS> 1,404 13,756
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 136 683
<INCOME-PRETAX> (6,120) (21,809)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,120) (21,809)
<EPS-PRIMARY> (1.15) (2.81)
<EPS-DILUTED> 0 0
</TABLE>
