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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
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EARTHLINK NETWORK, INC.
(Name of Subject Company)
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EARTHLINK NETWORK, INC.
(Name of Person(s) Filing Statement)
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COMMON STOCK, PAR VALUE $0.01 PER SHARE
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(Title of Class of Securities)
270322100
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(CUSIP Number of Class of Securities)
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CHARLES G. BETTY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
EARTHLINK NETWORK, INC.
3100 NEW YORK DRIVE
PASADENA, CALIFORNIA 91107
(626) 296-2400
(Name, address and telephone number of person authorized to receive
notices and communications on behalf of the person(s) filing statement)
Copies to:
J. STEPHEN HUFFORD, ESQ.
HUNTON & WILLIAMS
600 PEACHTREE STREET
SUITE 4100
ATLANTA, GEORGIA 30308
(404) 888-4000
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This Amendment No. 1 to the Solicitation/Recommendation Statement on
Schedule 14D-9 ("Amendment No. 1") is filed pursuant to Section 14(d)(4) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and relates to
a tender offer by Sprint Corporation, a Kansas corporation ("Sprint" or the
"Purchaser"), to purchase 1,250,000 shares (the "Shares") of the common stock,
$.01 par value per share of EarthLink Network, Inc., a Delaware corporation (the
"Company"), at $45 per share, net to each seller in cash. This Amendment No. 1
amends and restates, in its entirety, the Company's Soliciton/Recommendation
Statement on Schedule 14D-9 filed on February 18, 1998 (the "Schedule 14D-9").
ITEM 1. SECURITY AND SUBJECT COMPANY
The name of the subject company is EarthLink Network, Inc., a Delaware
corporation. The address of the principal executive offices of the Company is
3100 New York Dr., Pasadena, California 91107. The title of the class of equity
securities to which this Statement relates is the common stock, par value $.01
per share, of the Company (the "Common Stock").
ITEM 2. TENDER OFFER OF THE BIDDER
This Amendment No. 1 relates to the tender offer disclosed in the Tender
Offer Statement on Schedule 14D-1 dated February 18, 1998 (as amended or
supplemented, the "Schedule 14D-1") filed with the Securities and Exchange
Commission (the "SEC") by Sprint relating to its tender offer to purchase
1,250,000 Shares of Common Stock at $45.00 per share, net to each seller in
cash, for an aggregate cash consideration of $56,250,000, upon the terms and
subject to the conditions set forth in the Offer to Purchase (the "Offer to
Purchase") and the related Letter of Transmittal included as part of the
Schedule 14D-1 and filed as exhibits to this Schedule 14D-9. The address of the
principal executive offices of Sprint is 2330 Shawnee Mission Parkway, Westwood,
Kansas 66205.
ITEM 3. IDENTITY AND BACKGROUND
(a) The name and business address of the Company, which is the person
filing this Statement, are set forth in Item 1 above, which information is
incorporated herein by reference.
(b) Descriptions of (i) the Investment Agreement, (ii) the Governance
Agreement and (iii) the Registration Rights Agreement, together with
descriptions of certain other material agreements related to the Strategic
Alliance (as hereinafter defined), are set forth below. Other material
agreements related to the transaction are included as Exhibits hereto.
Copies of such material agreements may be examined and copies may be obtained at
the places and in the manner set forth in Section 8 of the Offer to Purchase.
Also, the Company's indemnification arrangements with its directors and officers
are described below.
INTRODUCTION
THE OFFER
Pursuant to the Offer to Purchase, Sprint is offering to purchase 1,250,000
Shares of Common Stock of the Company at $45.00 per Share (the "Offer Price"),
net to each seller in cash, upon the terms and subject to the conditions set
forth in the Offer to Purchase and in the
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related Letter of Transmittal (which, together with any amendments or
supplements hereto or thereto, collectively constitute the "Offer"). The Offer
is being made pursuant to the Investment Agreement dated as of February 10, 1998
(the "Investment Agreement"), by and among Sprint, Sprint Communications Company
L.P., a Delaware limited partnership ("Sprint L.P."), the Company, Dolphin,
Inc., a Delaware corporation created by the Company ("Newco"), and Dolphin Sub,
Inc., a Delaware corporation and a wholly-owned subsidiary of Newco ("Newco
Sub"), and certain related agreements described in the Offer to Purchase.
Sprint L.P. operates the long distance communications services division of
Sprint and is owned by affiliates of Sprint. Newco and Newco Sub are nominally
capitalized and were established to facilitate the transfer of assets to Newco
in exchange for the issuance to Sprint L.P. of 4,102,941 shares of Series A
Convertible Preferred Stock, par value $.01 per share of Newco (the "Convertible
Preferred Stock") in connection with the merger of Newco Sub with and into the
Company (the "Merger"). Upon consummation of the Merger, the Company will
become a subsidiary of Newco and all of the outstanding shares of Common Stock
will be converted into an equal number of shares of common stock, par value $.01
per share of Newco ("Newco Common Stock"), except for any shares of Common Stock
receivable upon the exercise of warrants or certain other rights to acquire
Common Stock which are not amended prior to the Merger to become exercisable
only for Newco Common Stock (the "Dilutable Securities"). The Offer and the
other transactions contemplated by the Investment Agreement are conditioned upon
the amendment of such Dilutable Securities so that not more than 8% of the
shares of
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Common Stock outstanding immediately prior to the Closing will be subject to
Dilutable Securities after the Merger (the "Amendment Condition").
The Board of Directors of the Company (the "Board of Directors") has, by
unanimous vote of all Directors, approved the Offer and the other transactions
described in this Schedule 14D-9 and determined that the terms of the Offer and
such other transactions, taken together, are fair to, and in the best interests
of, the stockholders of the Company and recommends that all stockholders of the
Company accept the Offer and tender their Shares pursuant to the Offer. See
"Item 4. The Solicitation or Recommendation."
The Company has retained Deutsche Morgan Grenfell Inc. ("DMG") as its
financial advisor. DMG has rendered an opinion to the Board of Directors that,
as of the date of such opinion, the Offer, the sale of the Convertible Preferred
Stock and the Merger, when taken together, are fair from a financial point of
view to the holders of Common Stock. Such opinion is set forth in full as
Exhibit (a)(4) to the Schedule 14D-9.
Consummation of the Offer is conditioned upon (i) there being validly
tendered and not withdrawn prior to the Expiration Date (as defined in the Offer
to Purchase) 1,250,000 Shares (the "Minimum Tender Condition"), and (ii) the
Amendment Condition and the other conditions to the obligations of the
Purchaser, Sprint L.P., Newco, Newco Sub, and the Company to consummate the
transactions contemplated by the Investment Agreement (other than the acceptance
for payment of Shares pursuant to the Offer) having been satisfied or waived
(collectively, the "Investment Agreement Conditions"), including the expiration
or termination of all waiting periods imposed upon consummation of the Offer and
the other transactions contemplated by the Investment Agreement by the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations
thereunder (the "HSR Act"), and the absence of any action taken or instituted by
the Department of Justice, the Federal Trade Commission or by any other
governmental entity to delay or otherwise enjoin the transactions contemplated
by the Investment Agreement (the "HSR Condition").
INVESTMENT AGREEMENT
GENERAL
The following summary of the Investment Agreement is qualified in its entirety
by the express terms of such agreement, which is included as Exhibit (c)(1) to
the Schedule 14D-9.
The Investment Agreement provides, among other things, that subject to the
terms and conditions set forth therein, immediately following the consummation
of the Offer, (i) the Merger will be effected and the issued and outstanding
Shares will be converted into shares of Newco Common Stock; (ii) Sprint L.P.
will acquire 4,102,941 shares of Convertible Preferred Stock, in exchange for
(A) an aggregate cash consideration of $23,750,000, (B) the assignment to Newco
of 100% of the Sprint Internet Passport(SM) Subscribers ("SIP Subscribers"), of
which there were approximately 130,000 as of the date of execution of the
Investment Agreement, and (C) Sprint L.P. having entered into a network
agreement whereby Newco and the Company will
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utilize Sprint L.P.'s long-distance network under specified terms and conditions
(the issuance of such Convertible Preferred Stock, "Convertible Preferred Stock
Issuance," and the consideration described in (A), (B) and (C), collectively,
the "Convertible Preferred Stock Consideration"); and (iii) Sprint will provide
Newco and the Company, as co-borrowers, with up to $25 million of convertible
senior debt financing on or after the Closing (as defined below), with such
amount to increase by $25 million on each of the first, second and third
anniversaries of the Closing Date (as defined below) for a total of up to $100
million of such financing at the end of such period (the "Convertible Debt
Financing"), such indebtedness to be evidenced by one or more Convertible Senior
Promissory Note(s) (the "Convertible Notes") and to be subject to the terms and
conditions of a Credit Agreement dated as of February 10, 1998 among Sprint,
Newco and the Company (the "Credit Agreement"). The closing of the Merger, the
Convertible Preferred Stock Issuance and the other transactions described herein
which will occur concurrently with the Merger is referred to as the "Closing"
and the date on which the Closing occurs is referred to as the "Closing Date."
Consummation of the transactions (other than the Offer) contemplated by the
Investment Agreement is conditioned upon Sprint having accepted for payment the
Shares to be purchased pursuant to the Offer (the "Offer Condition") and the
satisfaction of the HSR Condition, as well as the other conditions described in
the Offer to Purchase. For purposes of the Offer, the Sprint will be deemed to
have accepted for payment, and thereby purchased, Shares properly tendered and
not withdrawn as, if and when Sprint gives oral or written notice to the
Depositary of the Sprint's acceptance of such shares (the time of giving such
notice is the "Offer Acceptance Time" and the date on which such notice is given
is the "Offer Acceptance Date"). If the Shares have been accepted for payment
pursuant to the Offer, the Offer Acceptance Time will immediately precede the
Closing and the Offer Acceptance Date will occur on the same date as the Closing
Date.
In order to induce Sprint and Sprint L.P. to enter into the Investment
Agreement and perform the transactions contemplated thereby, certain members of
management and other stockholders (the "Granting Stockholders") have entered
into Agreement to Vote and Tender Stock dated February 10, 1998 ("Agreement to
Vote and Tender Stock"). That agreement obligates the Granting Stockholders to
tender all of the 3,989,114 Shares (representing 35.3% of the outstanding
Shares) which they own into the Offer, and to vote those Shares in favor of (i)
the Merger, (ii) the Convertible Preferred Stock Issuance, the issuance of the
Convertible Notes and the Newco Common Stock issuable upon conversion thereof,
(iii) the other transactions contemplated by the Investment Agreement, and (iv)
any related matter that must be approved by the holders of Common Stock or Newco
Common Stock in order for the transactions contemplated by the Investment
Agreement to be consummated (the matters referred to in (i), (ii), (iii) and
(iv) are referred to collectively as the "Company Stockholder Vote Matters"). In
order to ensure that the agreement to vote set forth in the Agreement to Vote
and Tender Stock will be fulfilled, each of the Granting Stockholders granted to
the Purchaser an Irrevocable Proxy, coupled with an interest, to vote in favor
of the Company Stockholder Vote Matters (the "Irrevocable Proxies"). The
Granting Stockholders are Sky Dayton, Chairman of the Board of the Company,
1,500,000 Shares; Kevin M. O'Donnell, a Director of the Company, 944,614 Shares;
Storie Partners, L.P., 521,892 Shares; Gregory Abbott, 427,212 Shares; Robert S.
London, 392,032 Shares; and George Abbott, 203,364 Shares.
In addition, certain other stockholders (the "Voting Stockholders") have
entered into an Agreement to Vote Stock dated February 10, 1998 ("Agreement to
Vote Stock") which obligates them to vote all of their 2,950,382 Shares
(representing 26.1% of the outstanding Shares) in favor of the Company
Stockholder Vote Matters, but did not grant any irrevocable proxies
thereunder. The Voting Stockholders are Quantum Industrial Partners LDC,
1,456,480 Shares; Reed Slatkin, a Director of the Company (through Reed
Slatkin & Associates), 1,042,473 Shares; Sidney Azeez, a Director of the
Company, 236,884 Shares; and George Soros, 214,545 Shares.
The number of Shares obligated to be tendered and/or voted pursuant to these
agreements will ensure approval of the Company Stockholder Vote Matters,
satisfaction of the Minimum Tender Condition, and consummation of the
transactions contemplated by the Investment Agreement, unless the Investment
Agreement Conditions have not been satisfied or waived on or prior to the
Offer Acceptance Time.
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The Company has informed Sprint that as of February 13, 1998, there were
11,301,915 Shares issued and outstanding. Upon consummation of the Offer, Sprint
will own approximately 11.1% of such total number of issued and outstanding
Shares, which will be converted into the same number of shares of Newco Common
Stock pursuant to the Merger. The Company has also informed Sprint that as of
February 13, 1998, there were 1,901,969 Shares reserved for issuance upon the
exercise of outstanding employee stock options ("Stock Options"), 391,515 Shares
reserved for issuance pursuant to the Company's Convertible Note issued to UUNET
Technologies, Inc. ("UUNET Note") and 884,313 Shares reserved for issuance upon
the exercise of outstanding warrants ("Warrants"). Based upon the conversion
price in effect on the Closing Date, the Convertible Preferred Stock would be
convertible into 3,533,411 shares of Newco Common Stock, provided that the
Convertible Preferred Stock may not be converted prior to the first anniversary
of the Closing Date. Based on these figures, immediately after consummation of
the Offer, the Merger and the other transactions contemplated by the Investment
Agreement, Sprint would own approximately 26.6% of the total number of issued
and outstanding shares of Newco Common Stock on a fully diluted basis (that is,
assuming that (i) the UUNET Note has been converted into shares of Newco Common
Stock, (ii) the Convertible Preferred Stock is converted into Newco Common
Stock, and (iii) that all outstanding Warrants and Stock Options have been
exercised). However, the Convertible Preferred Stock will pay dividends thereon
for the first five years in the form of increases in its Liquidation Value
("Liquidation Accretion Dividends"), at a per annum rate of 3% of the
Liquidation Value, which will accrue and compound quarterly in arrears, but
which will accelerate in the event of a Business Combination (as hereinafter
defined) or an optional redemption by Newco. At the Closing, the Liquidation
Value will be the average of the closing price per share of Newco Common Stock
for the 30 trading days prior to the Closing Date. Increases in the Liquidation
Value will have the effect of increasing the number of shares of Newco Common
Stock which Sprint will receive upon conversion of the Convertible Preferred
Stock. Assuming that the Convertible Preferred Stock is held by Sprint for the
initial five-year period, or the Liquidation Accretion Dividends are
accelerated, Sprint will be entitled to receive 4,102,941 shares of Newco Common
Stock upon conversion thereof, subject to applicable antidilution provisions. If
the fully diluted number of Shares, as calculated above, were the same at that
time, Sprint would then own approximately 28.8% of the total number of issued
and outstanding shares of Newco Common Stock on that basis.
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Advances of funds under the Credit Agreement will be evidenced by
Convertible Notes, which are convertible into Newco Common Stock. The
Conversion Price per share at which the Convertible Notes may be converted into
Newco Common Stock is 130% of the average of the closing prices for Newco Common
Stock for the 30 trading days immediately preceding the applicable advance of
funds under the Credit Agreement. Because the number of shares receivable upon
conversion of the Convertible Notes is dependent upon future trading prices for
Newco Common Stock, and because the amount of advances under the Credit
Agreement is within Newco's discretion (provided it is in compliance with
applicable Credit Agreement conditions), it is not possible to predict the
extent to which, if any, Sprint fully diluted ownership would increase in the
event that advances are made under the Credit Agreement.
Simultaneously with the execution of the Investment Agreement, the
following agreements were executed and delivered by the parties thereto: (i) an
Agreement and Plan of Merger dated as of February 10, 1998 among Newco, Newco
Sub and the Company, setting forth, inter alia, the terms and conditions of the
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Merger of Newco Sub into the Company (the "Agreement and Plan of Merger"), (ii)
the Agreement to Vote and Tender Stock, (iii) the Agreement to Vote Stock, (iv)
the Credit Agreement, (v) a Governance Agreement dated as of February 10, 1998,
between the Company, Newco, Sprint and Sprint L.P. whereby certain terms and
conditions are established concerning the corporate governance of Newco, the
acquisition and disposition of equity securities of Newco by Sprint and its
affiliates, and the rights of the Newco Board of Directors with respect to
acquisition proposals and business combinations (the "Governance Agreement"),
(vi) a Marketing and Distribution Agreement dated as of February 10, 1998 among
the Company, Newco, Sprint and Sprint L.P., whereby such parties agree to
provide certain cooperation and support to each other in specified marketing
matters and Sprint L.P. grants Newco the right to utilize certain distribution
channels of Sprint L.P. and a license to use Sprint L.P.'s brand in the business
of the Company (the "Marketing Agreement"), (vii) a Network Services Agreement
dated as of February 10, 1998, between Sprint L.P., Newco and the Company, which
grants Newco and the Company the right to use a minimum and maximum number of
ports on Sprint L.P.'s long-distance network, along with pricing and other terms
set forth therein (the "Network Agreement"), (viii) a Registration Rights
Agreement dated as of February 10, 1998, between Sprint, Sprint L.P. and Newco
establishing the rights of Sprint and its affiliates with respect to public
offerings and sales of equity securities of Newco and to obtain registration
thereof under federal and state securities laws (the "Registration Rights
Agreement"), and (ix) a Stockholders Agreement dated as of February 10, 1998,
between Sprint and certain stockholders of the Company which provides for
certain rights and obligations with respect to such stockholders' voting and
disposition of equity securities of Newco in connection with an offer by Sprint
to acquire the remaining equity securities of Newco (the "Stockholders
Agreement"). The agreements referred to in (i), (iv), (v), (vi), (vii), (viii)
and (ix) will not become effective until the Closing and then only if the Offer
is consummated and the Investment Agreement Conditions are satisfied or waived
on or prior to the Closing. The Agreement and Plan of Merger, the Agreement to
Vote and Tender Stock, the Agreement to Vote Stock, the Credit Agreement, the
Governance Agreement, the Marketing Agreement, the Network Agreement, the
Registration Rights Agreement and the Stockholders' Agreement are referred to as
the "Ancillary Agreements."
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Following the consummation of the Offer, the Convertible Preferred Stock
Issuance, the Merger, and the other transactions contemplated by the Investment
Agreement, Newco will become a public company subject to the informational
filing requirements of the Exchange Act, and the Company will be its subsidiary.
Application will be made for the Newco Common Stock to trade under the ticker
symbol "ELNK" on The Nasdaq National Market of the National Association of
Securities Dealers Automated Quotation System after such transactions, and it is
expected that the Shares (after they are converted into shares of Newco Common
Stock) will continue to trade thereon.
The following are summaries of certain material provisions of the material
agreements entered into in connection with the Strategic Alliance, each of which
is qualified in its entirety by reference to such applicable agreement, which
are filed as Exhibits to the Schedule 14D-9 and incorporated herein by
reference.
THE INVESTMENT AGREEMENT
THE OFFER
Pursuant to the Investment Agreement, Sprint has commenced the Offer. See
"Introduction - The Offer" above for a summary of the Offer and the material
terms of the Investment Agreement relating to the Offer.
The obligations of Sprint, Sprint L.P., Newco, Newco Sub and the Company to
consummate the transactions contemplated to occur at the Closing other than the
Offer are subject to the satisfaction of the condition that Sprint shall have
accepted for payment shares of Common Stock pursuant to the Offer in accordance
with the Investment Agreement. The conditions to the consummation of the Offer
are described in Section 14 of the Offer to Purchase.
THE MERGER
Immediately following the consummation of the Offer, the Company, Newco and
Newco Sub will effect the Merger whereby Newco Sub, a wholly-owned subsidiary of
Newco, will merge with and into the Company. All of the then issued and
outstanding Shares of Common Stock, including the Shares acquired by Sprint in
the Offer, will be converted into an equal number of shares of Newco Common
Stock in the Merger. Upon consummation of Merger, the Company will be a
subsidiary of Newco. Pursuant to the Merger, the Certificate of Incorporation
and Bylaws of Newco Sub will become the Certificate of Incorporation and Bylaws
of the surviving corporation and the Certificate of Incorporation and Bylaws of
Newco will take effect as the constitutive documents of the corporation whose
stock is registered pursuant to the Exchange Act. The Certificate of
Incorporation and Bylaws of Newco are substantially similar to the Certificate
of Incorporation and Bylaws of the Company, except that the number of authorized
shares of Preferred Stock was increased from 10 million to 25 million and that
the scope of indemnification of officers and directors was increased consistent
with the Delaware General Corporation Law (the "DGCL"). Also, the directors and
officers of the Company will become the directors and officers of Newco until
their successors have been duly
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elected or appointed and qualified or until their earlier death, resignation or
removal in accordance with Newco's Certificate of Incorporation and Bylaws,
except that the two directors elected by the holders of the Convertible
Preferred Stock of Newco will be elected immediately following the Closing.
While the Merger is subject to the approval of the stockholders of the
Company, the votes to be cast pursuant to the Agreement to Vote and Tender Stock
and the Agreement to Vote Stock will ensure approval of the Merger. The Merger
will create a holding company structure which may provide certain advantages if
the scope of the Company's business expands in the future, as well as
facilitating the economic efficiency of the strategic relationship with Sprint.
THE ISSUANCE OF CONVERTIBLE PREFERRED STOCK
Concurrently with the Merger, Sprint L.P. will receive 4,102,941 shares of
Convertible Preferred Stock in exchange for the Convertible Preferred Stock
Consideration. Such consideration consists of (i) $23,750,000 of cash, (ii)
Sprint L.P. contributing the SIP Subscribers to Newco, and (iii) Sprint L.P.,
the Company and Newco having entered into the Network Agreement.
The Convertible Preferred Stock will initially be convertible into
3,533,411 Shares of Newco Common Stock at the Closing. Based on these figures,
immediately after consummation of the Offer, the Merger and the other
transactions contemplated by the Investment Agreement, Sprint would own
approximately 26.6% of the total number of issued and outstanding shares of
Newco Common Stock on a fully diluted basis (that is, assuming that the UUNET
Note has been converted into Shares and that all outstanding Warrants and Stock
Options have been exercised including the Convertible Preferred Stock). However,
the Convertible Preferred Stock will pay dividends thereon for the first five
years in the form of increases in its Liquidation Value, at a per annum rate of
3% of the Liquidation Value, which will accrue and compound quarterly in
arrears, but which will accelerate in the event of a Business Combination (as
hereinafter defined) or an optional redemption of the Convertible Preferred
Stock by Newco. At the Closing, the Liquidation Value will be the average of the
closing price per share of Newco Common Stock for the 30 trading days prior to
the Closing Date. Increases in the Liquidation Value will have the effect of
increasing the number of shares of Newco Common Stock which Sprint will receive
upon conversion of the Convertible Preferred Stock. Assuming that the
Convertible Preferred Stock is held by Sprint for the initial five year period,
or the Liquidation Accretion Dividends are accelerated, Sprint will be entitled
to receive 4,102,941 shares of Newco Common Stock upon conversion thereof. If
the fully diluted number of Shares, as calculated above, were the same at that
time, Sprint would then own approximately 28.8% of the total number of issued
and outstanding shares of Newco Common Stock on that basis.
Cash dividends at such rate are payable after five years from the Closing
Date when declared by the Board of Directors of Newco out of funds legally
available therefor and such dividends accumulate if not declared and paid. After
the twentieth anniversary of the Closing Date, such cumulative cash dividends
accrue at the rate per annum of 8% of the Liquidation Value, which rate
increases annually by 200 basis points up to a maximum rate of 12% per annum.
Holders of Convertible Preferred Stock are entitled to a liquidation preference
upon any voluntary or involuntary liquidation, dissolution or winding up of
Newco ("Liquidation Event")
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in an amount per share equal to the sum of (i) the average closing price per
share of Common Stock for the 30 trading days preceding the Closing Date, (ii)
the amount of all Liquidation Accretion Dividends that have been paid (including
an amount equal to a prorated dividend for the period from the latest Dividend
Accrual Date through the date of the Liquidation Event), and (iii) all
accumulations of accrued but unpaid cash dividends (such sum is referred to
herein as the Liquidation Value). Each share of Convertible Preferred Stock
initially converts into less than one share of Newco Common Stock, subject to
antidilution adjustments, but increases to a one-for-one conversion (subject to
certain antidilution adjustments) over a five-year period.
At Newco's option, the shares of Convertible Preferred Stock are redeemable
after the third anniversary of the Closing Date at a redemption price initially
of 103% of the Liquidation Value and decreasing to 100% of Liquidation Value by
Newco's 2004 fiscal year. The holders of Convertible Preferred Stock may elect
two directors to the Board of Directors of Newco, for so long as they hold 20%
or more of Newco's fully diluted shares outstanding (subject to adjustment for
certain dilutive events) and one director for so long as they hold 10% of such
outstanding shares (subject to adjustment for certain dilutive events).
Otherwise, the Convertible Preferred Stock is non-voting except in the limited
circumstances when required under the DGCL.
SIP SUBSCRIBERS
Pursuant to the Investment Agreement, concurrently with the Merger, Sprint
L.P. will contribute to Newco all of its SIP Subscribers. Thereafter, the SIP
Subscribers shall be subscribers of Newco, together with all rights under
customer contracts and relationships related thereto. The Investment Agreement
provides that, if the final number of paid SIP Subscribers at Closing is less
than 130,000, then Sprint L.P. will forfeit to Newco a number of shares of
Convertible Preferred Stock equal to the product of (i) five, multiplied by
(ii) 130,000 less the final number of paid SIP Subscribers.
MARKETING AGREEMENT
Concurrently with the Merger, the Marketing Agreement among Sprint, Sprint
L.P., Newco and the Company will become effective, whereby certain cooperation
and support will be provided to each other in specified marketing matters and
Sprint L.P. will grant to Newco and the Company the right to utilize certain
distribution channels of Sprint. Sprint will also license the use of its brand
to Newco and the Company, and Newco and the Company will agree to use such brand
in conjunction with the Company's brand in the business of the Company, subject
to specified terms and conditions. The Marketing Agreement applies only to the
parties' activities in the 48 contiguous states of the United States (the
"Territory").
Pursuant to the Marketing Agreement, Sprint has appointed Newco and its
controlled affiliates as agents to sell Sprint's long distance services and
certain other telecommunications services as are agreed to by the parties. In
addition, Newco has appointed Sprint and its subsidiaries as agents to sell
Internet-related services offered by Newco and its controlled affiliates. The
Marketing Agreement provides for a joint marketing committee.
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The Marketing Agreement also contains certain exclusivity arrangements. The
Marketing Agreement restricts Sprint and its controlled affiliates from
promoting, advertising, marketing, co-branding, packaging, bundling, developing,
offering or selling, or entering into any express or tacit agreement to permit
its name to be used in connection with, a set of Internet-related products and
services (whether as a series of individual products and services or as an
integrated grouping or package of products and services) that is the same as or
substantially similar to the Company's core Internet service package (the "Core
Internet Application Set"), as in effect from time to time, other than as
offered by Newco and its controlled affiliates. Sprint and its controlled
affiliates further agree that they will not bid on, acquire or directly or
indirectly own, manage, operate, join, control or finance, or participate in the
management, operation, control or financing of, any provider of any set of
Internet-related products and services that is the same as or substantially
similar to the Core Internet Application Set (as in effect from time to time).
The Marketing Agreement specifies that these exclusivity restrictions do not
restrict Sprint and its controlled affiliates from (i) appointing one or more
other Internet service providers ("ISP's") as Sprint's agents for the sale of
its branded long distance services and telecommunications services so long as
the Internet-related services provided by such ISP are not billed on an
integrated basis with any services provided by Sprint, (ii) providing Internet
service packages that are designed primarily for large corporate accounts and
offering enhanced features that are not included in the Core Internet
Application Set and (iii) offering or selling individual components that are
included in the Core Internet Application Set so long as the Company has a first
right of refusal to provide Sprint with such elements or components.
Newco and its controlled affiliates are restricted from promoting,
advertising, marketing, co-branding, bundling, developing, offering or selling
any long distance services or telecommunications services that are the same as
or substantially similar to the long distance services or telecommunications
services offered by Sprint and its controlled affiliates, other than as offered
by Sprint and its controlled affiliates. Newco and its controlled affiliates are
further prohibited from bidding on, acquiring or directly or indirectly owning,
managing, operating, joining, controlling or financing, or participating in the
management, operation, control or financing of, or acting as an agent or
representative for, or entering into any express or tacit agreement to permit
its name to be used in connection with, or permit its Internet services to be
marketed, sold or distributed by, any "Material Provider" of long distance
services or telecommunication services other than Sprint and its controlled
affiliates. A business or entity is deemed to be a "Material Provider" of long
distance services or telecommunications services if such business or entity
(together with its affiliates) derives from the sale of long distance services
and certain telecommunications services (i) more than 5% of its gross revenues
in any fiscal year or (ii) more than $25 million of gross revenues in any fiscal
year. The exclusivity restrictions will restrict Newco and its controlled
affiliates with respect to PCS and cellular services only if Sprint PCS enters
into sales agency relationships with Newco and its controlled affiliates on the
terms set forth in the Marketing Agreement. Newco and its controlled affiliates
are not prohibited from (i) continuing to offer a co-branded Core Internet
Application Set under currently existing agreements (subject to certain
restrictions), (ii) offering Internet telephony services under certain
circumstances, provided that Sprint has the first right to provide that service
at such time as it has developed an Internet telephony product and (iii) selling
ATM and frame relay telecommunications services of a third party for the sole
purpose of providing access to the public Internet.
Sprint and its controlled affiliates will seek to generate customers for
the Company's Core Internet Application Set through Sprint's customer base and
its third party marketing channels. The Company will pay Sprint varying amounts
for each customer generated by Sprint. In addition, Sprint is obligated to pay
varying shortfall amounts if Sprint fails to generate a minimum number of new
subscribers per year for the Core Internet Application Set in any year during
the five-year period commencing September 1, 1998. Newco and its controlled
affiliates will seek to generate customers for Sprint's long distance and other
telecommunications services from the users of its Core Internet Application Set.
Newco and its controlled affiliates will be entitled to payment from Sprint of a
market rate commission based on the monthly revenue generated from such
customers.
The Company and Sprint have agreed to negotiate a billing and collection
agreement for integrated billing services for Sprint's long distance and
telecommunications services and the Company's Internet services. The Company
will also cooperate with Sprint in developing Internet-related developments and
enhancements that are requested by Sprint.
Sprint and the Company have agreed to use the "EarthLink-Sprint" co-brand
in all of Sprint's marketing, advertising and other similar material relating to
or referencing any of the Company's Internet services and in all of the
Company's marketing, advertising and other similar material used to promote and
offer for sale or otherwise relating to its Internet services and/or Sprint's
long distance services and telecommunications services. Each party has extended
to the other a non-exclusive, royalty-free, non-transferable license to use its
brand in the Territory to the extent described above.
The Marketing Agreement has a 10-year term and may be extended by either
party for an additional five years. The Agreement is subject to early
termination upon the occurrence of certain events, including (i) a change of
control of Sprint or Newco, (ii) a business combination between Sprint and an
entity engaged in a business that is competitive with the Company's Core
Internet Application Set, (iii) the termination of the Governance Agreement
under certain circumstances and (iv) a material breach by either party that is
not cured after notice. Upon termination of the Marketing Agreement under the
circumstances described in clause (ii) above, Sprint will be required to pay a
termination fee to the Company, which will equal $60 million if such termination
occurs during the first two years following the Merger, dropping to $36 million
on the day following the second anniversary of the Merger and thereafter
declining on a daily pro rata basis to zero on and after the fifth anniversary
of the Merger. In case of such termination, Sprint must also pay an additional
fee (up to a maximum of $17.5 million, but declining to zero after five years)
to compensate the Company for the loss of customers that would have been
generated for the Company through Sprint's marketing channels. The termination
fee described above represents the sole amount that will be payable by either
party upon a termination of the Marketing Agreement, except for payment
obligations accrued prior to termination and damages from the party's breach of
the Marketing Agreement.
NETWORK AGREEMENT
Concurrently with the Merger, the Network Agreement between and among
Sprint L.P., Newco and the Company will become effective, whereby Sprint L.P.
agrees to provide, and Newco and the Company agree to utilize, certain dial-up
Internet access Ports ("Ports") for use by the Company's Internet dial-up
access customers. The Network Agreement provides for the provision of a minimum
number of Ports together with the option for the Company to order an additional
quantity of Ports over the initial minimum term of four years.
The Network Agreement sets forth the schedule for implementation of service
in locations and in such quantities as agreed to by the parties. The Network
Agreement also specifies the rates and charges for the use of the Ports during
the initial term and a process for negotiating continued use of the Ports beyond
the initial term. The Network Agreement describes the performance parameters
associated with the Ports and allocates responsibilities for network and
customer support activities between the parties. In addition, the Network
Agreement specifies other commercial terms customarily found in network service
agreements, such as payment terms, force majeure and governing law.
CONVERTIBLE DEBT FINANCING
Concurrently with the Merger, the Credit Agreement will become effective.
Sprint will initially provide up to $25 million in debt financing to be
evidenced by the Convertible Notes. Each year after the Closing Date, the
aggregate amount that Sprint is obligated to advance is increased by $25 million
to a maximum of $100 million on a cumulative basis. The Convertible Notes are
convertible into shares of Newco Common Stock at a conversion price of 130% of
the average market price (i.e., the closing sale price over a 30 trading day
period) at the time a particular Convertible Note is issued to evidence an
advance under the Credit Agreement. The Convertible Notes bear interest at a
rate equal to 6% per annum.
Sprint's obligation to make advances under the Credit Agreement terminates
upon the earlier of (i) the fifth anniversary of the Closing Date, (ii)
acceleration of the indebtedness evidenced by the Convertible Notes upon an
Event of Default (as defined below), (iii) consummation of a Business
Combination (as defined below), or (iv) termination of the Marketing Agreement
pursuant to certain provisions thereof. An Event of Default shall occur if (i)
there is a breach or there are breaches of any of the representations or
warranties unless such breach or breaches would not in the aggregate have a
Material Adverse Effect on Newco, the Company and their subsidiaries, taken as a
whole, (ii) nonpayment of principal or interest within 14 days after the same
becomes due, (iii) a breach of certain financial and other covenants, and in
certain cases, a failure to cure such breach with the applicable cure period,
(iv) a default by Newco or the Company in any agreement or agreements under
which indebtedness in excess of $5 million was created, or the occurrence of any
other event or existence of any condition, the effect of any of which causes, or
permits the holder of such indebtedness to cause,
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such indebtedness to become due prior to its stated maturity, or any such
indebtedness shall be declared due and payable prior to the stated maturity
thereof, (v) Newco or the Company files for relief under bankruptcy,
receivership, or similar laws, or fails to contest any involuntary petition in
bankruptcy filed with regard to Newco or the Company, (vi) any condemnation of a
substantial portion of the property of Newco or the Company, or (vii) Newco or
the Company fails within 30 days to pay, bond or otherwise discharge any
judgments or orders for the payment of money in excess of $1 million; which are
not stayed on appeal or otherwise contested in good faith. "Material Adverse
Effect" is defined to mean any change or effect having a material adverse effect
(or any development as to which there is a substantial likelihood, insofar as
can be foreseen, that would have such an effect) on the business, properties,
assets, condition (financial or otherwise), or results of operations of the
Company, Newco, Newco Sub, Sprint, Sprint L.P. and Sprint's subsidiaries, as the
case may be.
ACQUISITION PROPOSALS
The Investment Agreement provides that prior to the Closing the Company
will not, nor will it authorize or permit any officer, director or employee, or
any investment banker, attorney or other advisor or representative, of the
Company or any of its subsidiaries to (i) solicit or initiate, or encourage the
submission of, any Acquisition Proposal or (ii) participate in any discussions
or negotiations regarding, or furnish to any person any information with respect
to, or take any other action to expedite any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal. However, that to the extent required by the fiduciary
obligations of the Board of Directors of the Company, as determined in good
faith by the Board of Directors based on the advice of outside counsel, the
Company may, (A) in response to an unsolicited request therefor, furnish
information with respect to the Company to any person pursuant to a customary
confidentiality agreement and discuss such information with such person, (B)
upon receipt by the Company of an Acquisition Proposal, following delivery to
Sprint of the required notice, participate in negotiations regarding such
Acquisition Proposal and (C) modify or withdraw its recommendation that the
stockholders of the Company, accept the Offer or its recommendation to such
stockholders that they vote in favor of the transactions contemplated by the
Investment Agreement. Neither the Company nor its Board of Directors may, under
any circumstances, (A) terminate the Investment Agreement or any of the
Ancillary Agreements or withdraw its approval of such agreements, or (B) approve
or authorize the solicitation, initiation or encouragement of additional
Acquisition Proposals.
In addition to the obligations of the Company set forth in the preceding
paragraph, the Investment Agreement provides that the Company shall promptly
advise Sprint of the existence of any request for information or of any takeover
proposal, or any inquiry with respect to, or which could lead to, any
Acquisition Proposal.
The Investment Agreement further provides that the Company shall not take
any action that would enhance the ability of any other person proposing a
takeover proposal to obtain the approval of the Company's stockholders or
otherwise consummate such Acquisition Proposal without also taking a comparable
action that would similarly enhance the ability of Sprint to obtain any
necessary approval of the Company's stockholders of, and otherwise to
consummate,
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the transactions contemplated in the Investment Agreement and the Ancillary
Agreements or an alternative transaction initiated by Sprint and concurrently
withdrawing any impediments thereto that do not similarly impede such other
person.
The Investment Agreement provides that nothing contained therein shall
prohibit the Company from taking and disclosing to its stockholders a position
contemplated by Rule 14e-2 promulgated under the Exchange Act.
TRANSACTION COSTS
The Investment Agreement provides that all fees and expenses incurred in
connection with the Offer, the Investment Agreement and the transactions
contemplated thereby and the Ancillary Agreements shall be paid by the party
incurring such fees or expenses, whether or not the Offer or other transactions
contemplated by the Investment Agreement are consummated. However, one-half of
the reasonable out-of-pocket expenses incurred by the Company in preparing the
Proxy Statement and the S-4 Registration Statement, printing and mailing the
Proxy Statement, the Commission filing fees for the S-4 Registration Statement
and in holding the special meeting of Company stockholders to approve the Merger
shall be paid by Sprint.
CONDUCT OF BUSINESS BY THE COMPANY
The Investment Agreement provides that during the period from the date of
the Investment Agreement to the Closing Date, the Company shall carry on its
business in the usual, regular and ordinary course in substantially the same
manner as theretofore conducted and, to the extent consistent therewith, use all
reasonable efforts to preserve intact its current business organizations, keep
available the services of its current officers and other employees and preserve
its relationships with customers, suppliers, licensors, licensees, distributors,
joint ventures and others having business dealings with it except to the extent
that the failure to do so would not have a Material Adverse Effect on the
Company. In addition, during the period from the date of the Investment
Agreement to the Closing Date, the Company shall not, without first consulting
with Sprint take certain material actions relating to, among other matters,
dividends, acquisitions, dispositions, capital issuances or changes in capital
structure, research and development agreements, incurrence of indebtedness,
capital expenditures and satisfaction of claims.
TERMINATION OF THE INVESTMENT AGREEMENT
The Investment Agreement may be terminated at any time prior to the Closing
Date (i) by mutual written consent of the parties thereto, (ii) by any of the
parties if the Offer has not been consummated on or before June 15, 1998, (iii)
by Sprint and Sprint L.P. if any of the conditions to the obligations of Sprint
and Sprint L.P. with respect to Offering shall have become incapable of
fulfillment, and shall not have been waived by Sprint, or (iv) by the Company,
Newco and Newco Sub if any of the conditions precedent to Sprint's right to
consummate the Offer shall have become incapable of fulfillment and shall not
have been waived by the Company, Newco and Newco Sub.
REPRESENTATIONS AND WARRANTIES
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The Investment Agreement contains various customary representations and
warranties made by the parties thereto which will not survive the Closing except
for survival thereof for 24 months in the case of fraud or willful material
breaches of such representations and warranties.
THE GOVERNANCE AGREEMENT
GENERAL
In connection with the Investment Agreement, Sprint, Sprint L.P., Newco and
the Company entered into the Governance Agreement, which will take effect upon
the Closing. The Governance Agreement establishes certain terms and conditions
concerning the corporate governance of Newco, the acquisition and disposition of
equity securities of Newco ("Equity Securities") by Sprint, Sprint L.P. and any
of their respective affiliates (collectively, "Affiliated Equity Holders"), the
rights of Sprint to make offers to purchase all of the outstanding securities of
Newco not owned by Affiliated Equity Holders and the rights of the Board of
Directors of Newco to receive and entertain offers to effect "Business
Combinations" (as defined below), all as more particularly described in the
Governance Agreement. The following summary is qualified in its entirety by the
express terms of the Governance Agreement, which is filed as Exhibit (C)(2) to
the Schedule 14D-9.
CORPORATE GOVERNANCE
The Governance Agreement establishes that the fundamental policies and
strategic direction of Newco, the Company and any significant subsidiary of
Newco will be determined by their respective Boards of Directors. Consistent
with the voting rights granted to the holders of Convertible Preferred Stock,
the Governance Agreement provides for two individuals to be designated as
"Investor Directors." Following conversion of the Convertible Preferred Stock
into Newco Common Stock, Newco and the Company are obliged to elect the
individuals designated as "Investor Directors" to their respective Boards of
Directors. In addition, the Governance Agreement permits one Investor Director
to participate on any Strategic Business Planning Committee, Finance Committee
or other significant committee of the Board of Directors of Newco, the Company
or any significant subsidiary, to the extent those committees exist. If there is
no such committee, the Governance Agreement allows Sprint a reasonable
opportunity to review and discuss Newco's strategic and business plans and
financing plans with the management of Newco prior to the submission of any such
plan to the Board of Directors, and to receive advance copies of information and
materials to be provided to the Board of Directors with respect to such matters.
Notwithstanding the foregoing, no Investor Director is entitled to participate
on any committee of the Board of Directors of Newco, the Company or any
significant subsidiary created for the purpose of considering a Business
Combination or any matter related thereto (including a "Sprint Offer" or a
"Qualified Offer," as described in more detail below), or to participate in the
Board's deliberations with respect to any of the foregoing. Consistent with the
terms of the Convertible Preferred Stock, Sprint is entitled to two Investor
Directors for so long as it holds 20% or more of Newco's fully diluted shares
outstanding
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(subject to adjustment for certain dilutive events, the "Higher Threshold"), and
one Investor Director for so long as it holds 10% or more of Newco's fully
diluted shares outstanding (subject to adjustment for certain dilutive events,
the "Lower Threshold").
At such time as the Convertible Preferred Stock has been converted into
Newco Common Stock, the Governance Agreement obligates Newco to use its best
efforts to solicit from its stockholders proxies in favor of Sprint's Investor
Director nominees. The Governance Agreement also obligates the Affiliated
Equity Holders to vote in favor of any other nominee or director selected by the
Board of Newco in accordance with the agreement. The voting obligations of
Affiliated Equity Holders under the Governance Agreement are supported by an
"Irrevocable Proxy" granted by Sprint and Sprint L.P. to Newco and the Company.
See "--Irrevocable Proxies."
For so long as "Sprint's Percentage Interest" (a term that measures
Sprint's equity stake in Newco, including its ownership of both Newco Common
Stock and Convertible Preferred Stock, as a percentage of Newco's fully-diluted
stock outstanding) is greater than the Lower Threshold, Newco is prohibited from
taking or authorizing certain actions without the concurrence of all Investor
Directors serving in such capacity at that time. These actions include (i) the
execution or performance of any "Discriminatory Transaction" (as defined below);
(ii) the issuance of any class or series of stock of Newco that provides for
voting rights in excess of one vote per share; (iii) certain events involving
the dissolution or liquidation of Newco or any subsidiary thereof, or the
commencement by or with respect to Newco or any subsidiary thereof of certain
bankruptcy or bankruptcy-related events or proceedings; (iv) the conduct by
Newco or any significant subsidiary of business substantially outside its
current general field of enterprise; or (v) the issuance by Newco of
"Transaction Securities" (Equity Securities of Newco issued in connection with
joint ventures, strategic alliances, acquisitions, mergers and other business
combination transactions) representing (A) in any twelve-month period, in one or
more transactions, 50% or more of the number of shares of Newco Common Stock
outstanding prior to giving effect to such issuances, or (B) in any one
transaction, 35% or more of the number of shares of Newco Common Stock
outstanding prior to giving effect to such issuance.
The term "Discriminatory Transaction" is defined in the Governance
Agreement as any transaction or corporate action that would (i) impose
limitations on the legal rights of any Affiliated Equity Holder as a stockholder
of Newco, (ii) deny any benefit to any Affiliated Equity Holder, proportionately
as a holder of any class of voting Equity Securities, that is made available to
other holders, or (iii) otherwise materially adversely discriminate against any
Affiliated Equity Holders as stockholders of Newco. However, excepted from the
definition of Discriminatory Transactions are various transactions, including
(A) the adoption and implementation by Newco of a Stockholders' Rights Plan, (B)
the adoption and implementation by Newco of a classified Board of Directors, (C)
a Business Combination if in that transaction (x) neither the Liquidation Value
nor the Conversion Price of the Convertible Preferred Stock is changed, and (y)
upon consummation of such transaction, the holders of Convertible Preferred
Stock are offered the right to receive consideration at the same times, in the
same amount and the same form per share as all other holders of Newco Common
Stock, (D) any transaction having a discriminatory effect against any Affiliated
Equity Holder that occurs as a result of a material
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breach or violation by any such holder of the Governance Agreement, and (E) the
execution by Newco, the Company or any significant subsidiary of a definitive
agreement with respect to a Business Combination, if such agreement meets
certain requirements set forth in the Governance Agreement. See "--Purchases of
Additional Equity Securities; Business Combinations."
EQUITY PURCHASES FROM THE COMPANY; SUBSCRIPTION RIGHTS
So long as Sprint's Percentage Interest is greater than an amount defined
as the "Top-Up Threshold" (20%, subject to adjustment for certain dilutive
events and for Newco's incurrence of indebtedness under the Convertible Debt
Financing), the Affiliated Equity Holders have certain anti-dilution and
subscription rights set forth in Article III of the Governance Agreement. In
addition to their rights to subscribe for stock of Newco directly from Newco,
Sprint may effect its rights under Article III by making purchases of Equity
Securities at any time from any person other than Newco as long as, after giving
effect to such purchases, Sprint's Percentage Interest is less than or equal to
the "Pro Rata Share," a formula that limits the maximum equity stake in Newco
that the Affiliated Equity Holders may have. The Pro Rata Share, which adjusts
only upon the incurrence of indebtedness by Newco under the Convertible Debt
Financing, has been established, as of the date of the Governance Agreement, at
an amount equal to .278.
Upon proposing to issue "New Securities" (other than New Securities that
are "Transaction Securities"), if Sprint's Percentage Interest is greater than
the Top-Up Threshold, Newco must provide Sprint written notice of its intent to
effect such issuance at least five business days prior to the date on which the
meeting of the Board is to be held to authorize such issuance. For a period of
ten business days after Sprint's receipt of such notice, Sprint has the right to
purchase the Pro Rata Share of such issuance and, if it does so, the Equity
Securities offered pursuant to such notice shall be issued and sold to Sprint by
Newco at the same times and on the same terms and conditions as the New
Securities are issued and sold to third parties. If for any reason the issuance
of such New Securities to third parties is not consummated, Sprint's right to
purchase its Pro Rata Share of such issuance shall lapse.
As noted above, Sprint's general subscription rights do not apply to the
issuance of Transaction Securities. However, if Newco determines that Sprint's
Percentage Interest has decreased by .05 or more as a result of issuances of
Transaction Securities, Newco must notify Sprint of such event. In addition,
not later than the second anniversary of Sprint's receipt of that notice (the
"Window Period"), Newco is obligated to make written offers (each, a "Primary
Share Offer") to Sprint to purchase, in the aggregate, a number of shares
sufficient to enable Sprint to bring Sprint's Percentage Interest up to the
amount in effect prior to the issuances of Transaction Securities. The number
of shares Newco is obligated to offer pursuant to such provision is defined in
the Governance Agreement as the "Available Top-Up Shares" and the aggregate
number of Available Top-Up Shares resulting from all issuances of Transaction
Securities is defined as the "Aggregate Number of Top-Up Shares." Sprint may
accept a Primary Share Offer within five business days of its receipt thereof,
and the offer is to be made at a purchase price equal to an average stock price
for Newco Common Stock for the ten trading days prior to the date of such
issuance, less the underwriting discount applied in the most recent underwritten
offering of Newco Common Stock.
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If Newco determines that Sprint's Percentage Interest has decreased by .10
or more solely as a result of the issuance of Transaction Securities (after
giving effect to any and all Primary Share Offers), the Window Period shall be
accelerated such that Newco shall be obligated to make one or more Primary Share
Offers with respect to not less than the Aggregate Number of Top-Up Shares, as
then calculated, at the earlier of (i) the expiration of the Window Period, as
determined above, or (ii) six months after the date Sprint receives notice to
that effect from Newco. Notwithstanding anything else in the Governance
Agreement to the contrary, in no event is Newco obligated to make Sprint a
Primary Share Offer that, after giving effect to such transaction, would cause
Sprint's Percentage Interest to exceed the Pro Rata Share.
In addition, with respect to a purchase of New Securities pursuant to
Article III of the Governance Agreement, Sprint may, at its option, purchase New
Securities in the form of "Alternative Securities" convertible into the
applicable number of shares of Newco Common Stock. "Alternative Security" is
defined as a new series of Preferred Stock having terms that are structured and
priced in the same manner as the Convertible Preferred Stock. Such terms are
determined, if applicable, by reference to the average stock price for a share
of Newco Common Stock for the 30 trading days prior to the date of issuance of
such Alternative Securities. Sprint's purchase of New Securities in the form of
Alternative Securities are limited (i) to not more than 75% of any issuance of
New Securities from the Closing to the second anniversary thereof, (ii) to not
more than 66.67% of any issuance of New Securities after the second anniversary
of the Closing until the third anniversary thereof and (iii) after the third
anniversary, Newco is not obligated to issue any New Securities in the form of
Alternative Securities.
STANDSTILL PROVISIONS
The Governance Agreement sets forth certain "Standstill Provisions"
applicable to Affiliated Equity Holders. These Standstill Provisions are
summarized below. See "--Effectiveness; Termination; Survival" for additional
information concerning the survival of the Standstill Provisions following
termination of the Governance Agreement.
Except for purchases of shares and related activities by Sprint otherwise
permitted under the Governance Agreement, the Affiliated Equity Holders may not,
directly or indirectly, (i) acquire, offer to acquire or agree to acquire any
Equity Securities, or any equity securities of any subsidiary of Newco, or
material assets of Newco or any subsidiary or division of Newco; (ii) make or
participate in any "solicitation" of proxies or otherwise seek to influence any
person with respect to the voting of any voting Equity Securities of Newco;
(iii) make any public announcement with respect to, or submit a proposal for, or
offer to effect any purchase of any significant portion of the assets of Newco
or any subsidiary or division of Newco, any tender or exchange offer for any
Equity Securities of Newco, or a merger, consolidation or other extraordinary
transaction involving Newco or any of its Equity Securities; (iv) form, join or
in any way participate in a "group" as defined in Rule 13d-5(b) under the
Exchange Act; or (v) request Newco or any of its representatives to amend or
waive any provision of the foregoing.
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In addition, the Affiliated Equity Holders may not, directly or indirectly,
sell, transfer or otherwise dispose of any Equity Securities except (i) pursuant
to a registered underwritten public offering in accordance with the Registration
Rights Agreement, (ii) in accordance with Rule 144 under the Securities Act,
(iii) to any direct or indirect subsidiary of Sprint and (iv) in a transaction
effected in accordance with the so-called "Section 4(1 1/2)" exemption under
the Securities Act. In addition, notwithstanding the foregoing, none of the
Affiliated Equity Holders may sell, transfer or otherwise dispose of any equity
interest in any Equity Securities to any purchaser or group of purchasers if,
after giving effect to such sale, such purchaser or group of purchasers would,
to Sprint's knowledge, own, or have the right to acquire, 5% or more of the
Equity Securities then outstanding, except to any person that is not obligated
(or would not, by virtue of such purchase, reasonably be anticipated to be
obligated) to file a Schedule 13D with the Commission pursuant to each of
paragraphs (b) and (e) of Rule 13d-1 under the Exchange Act.
PURCHASES OF ADDITIONAL EQUITY SECURITIES; BUSINESS COMBINATIONS
Following the 39-month anniversary of Closing and prior to the 63-month
anniversary of Closing (the "Right to Offer Period"), Sprint shall have the
right to make a "Sprint Offer," by offering to purchase all (but not less than
all) of the outstanding Equity Securities that it does not already own at a
price per share equal to the per share price determined by dividing the "Fair
Private Market Value" by the total number of shares of Newco Common Stock
outstanding on a fully-diluted basis. The "Fair Private Market Value" is
defined as the aggregate private market equity value (including control premium)
that an unrelated third party would pay if it were to acquire all of Newco's
outstanding Equity Securities (including Equity Securities held by Affiliated
Equity Holders) in an arm's length transaction, assuming (i) that all credible
buyers are given an equal opportunity by Newco to make and effectuate an
Acquisition Proposal with respect to Newco, (ii) the absence of any commercial
relations between Newco and the Company, on the one hand, and Sprint and its
affiliates, on the other hand, and (iii) the absence of any ownership stake in
Newco by Affiliated Equity Holders. The Fair Private Market Value is to be
determined as follows.
The respective Boards of Newco and Sprint shall negotiate the amount of the
Fair Private Market Value to be paid pursuant to the Sprint Offer. In the event
the two parties are unable to agree on this amount, within 30 days after
submission of the Sprint Offer to the Board, the parties shall agree to be bound
to the valuation arrived at pursuant to the following formula: (i) two
appraisals shall be made by recognized investment banks, one selected by each of
Sprint and Newco (the "Initial Values"), (ii) if the lower of the Initial Values
is more than 10% less than the higher, a third independent valuation will be
made by an investment bank jointly selected by Newco and Sprint (the
"Independent Valuation"); otherwise, the Fair Private Market Value shall be the
average of the Initial Values; and (iii) if the Independent Valuation is greater
or less than the average of the Initial Values by more than 5%, the Fair Private
Market Value shall be deemed to equal the average of the two closest valuations.
If the Independent Valuation does not differ by such amount, it shall be the
Fair Private Market Value.
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A Sprint Offer shall not be subject to any financing contingency, and shall
be reflected in a form of definitive agreement that Sprint is prepared to
execute. The conditions to consummation of the Sprint Offer and the
representations and warranties set forth therein shall be reasonable and
customary for transactions in which a similarly situated stockholder offers to
purchase all of the Equity Security not held by such stockholder or its
affiliates.
The Board of Directors of Newco shall have a one-time right, exercisable
within 14 days after receipt of the Sprint Offer, to postpone the making of that
offer for nine months. Upon exercise of such right, Sprint is obligated to
withdraw the Sprint Offer for a period of nine months, provided that (i) the
Right to Offer Period shall be extended to the 72-month anniversary of Closing
and (ii) the exercise by Newco of its postponement right shall not limit
Sprint's right to respond to a "Third-Party Offer" as set forth below.
In addition, upon the determination of the amount of the Fair Private
Market Value, Sprint shall be obligated to commence and effectuate the Sprint
Offer, provided that Sprint shall have a one-time right, exercisable within 14
days after receipt of the determination of Fair Private Market Value, to
determine not to proceed to make such Sprint Offer. There are, however, certain
limitations on Sprint's exercise of this "Walk-Away Right." If Sprint does not
exercise such right, the Board of Directors of Newco shall, unless an
"Intervening Offer" (as defined below) is then outstanding, (i) support the
Sprint Offer by approving and recommending it to Newco's stockholders and (ii)
cause Newco to take all steps reasonable and necessary to facilitate
consummation of such Sprint Offer. However, at such time as a "Third-Party
Offer" shall constitute an Intervening Offer, Sprint shall be released from its
obligation to commence and effectuate the Sprint Offer, and Newco shall be
released from its obligation to support and facilitate consummation of the
Sprint Offer. If the Intervening Offer is undertaken in the form of a tender
offer, at the consummation of such tender offer, the offeror shall have an
option to purchase from all Affiliated Equity Holders, at the tender offer
price, in the aggregate, a "Specified Number of Equity Securities" (a number of
Equity Securities owned by Affiliated Equity Holders equal to the proportion of
Equity Securities held by unaffiliated equity holders and tendered into or voted
for a competing Business Combination), less the number of Equity Securities that
have already been tendered to such offeror. In addition, if the Intervening
Offer (or a related matter) must be approved by the stockholders of Newco in
order for such offer to be effectuated, the Affiliated Equity Holders are
obligated to cast in favor of the Intervening Offer (and such related matters)
such number of votes as is equal to the Specified Number of Equity Securities,
provided that the Business Combination does not constitute a Discriminatory
Transaction. Affiliated Equity Holders are not entitled to exercise rights of
appraisal with respect to any Business Combination effected in connection with
an Intervening Offer.
The Governance Agreement defines an Intervening Offer as an offer for
aggregate consideration reasonably determined in good faith by the Board of
Newco to be in excess of the aggregate consideration proposed to be paid by
Sprint in a Sprint Offer or a "Qualified Offer" by Sprint (as defined below), as
applicable. The conditions to consummation of an Intervening Offer and the
representations, warranties and covenants set forth in the Intervening Offer
shall be customary for a transaction of that type.
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THIRD-PARTY OFFERS
Newco is obligated to provide Sprint with prompt written notice of its
receipt of a bona fide, written offer to effect a Business Combination from a
third party ("Offer"). Upon receipt of such Offer, the Board is to determine
whether it intends to recommend that offer to the stockholders (a "Recommended
Third-Party Offer") or that such offer is not in the best interests of Newco's
stockholders, in which event it intends not to recommend such offer to the
stockholders (a "Non-Recommended Third-Party Offer" and, together with a
Recommended Third-Party Offer, a "Third-Party Offer").
For a period of ten days following the giving of notice of receipt of an
Offer, Newco may not enter into a definitive agreement with respect to that
Offer. Sprint has an option to make a "Qualified Offer" with respect to either
(i) an Offer that is a Recommended Third-Party Offer or (ii) an Offer that is a
Non-Recommended Third-Party Offer if the Board of Sprint reasonably determines
that the conditions to the Non-Recommended Third-Party Offer are reasonably
likely to be satisfied and the Offer consummated. A "Qualified Offer" is
defined as an offer made by an Affiliated Equity Holder to acquire all of the
Equity Securities not already owned by the Affiliated Equity Holders at a price
per share in excess of the equivalent per share price set forth in a Third-Party
Offer or an Intervening Offer, as the case may be. A Qualified Offer shall be
reflected in a form of definitive agreement that Sprint is prepared to execute,
and the conditions to consummation of such offer and the representations,
warranties and covenants set forth in it shall be customary for transactions in
which a similarly situated stockholder offers to purchase all of the Equity
Securities not held by such stockholder and may not, in any event, be more
onerous in any material respect than those set forth in the Third-Party Offer or
the Intervening Offer, as the case may be.
Newco may not adopt any takeover defenses, enter into any agreement or take
any other action in connection with a Recommended Third-Party Offer that would
materially impair Sprint's ability to make and consummate a Qualified Offer or
materially increase Sprint's cost of consummating a Qualified Offer. However,
notwithstanding the foregoing, Newco is permitted to enter into a definitive
agreement with respect to a Recommended Third-Party Offer that provides for a
termination fee not to exceed 3% of the consideration to be received per share
of Newco Common Stock multiplied by the number of shares of Newco Common Stock
outstanding on a fully diluted basis (less the number of shares beneficially
owned by the offering party), plus customary fees and expenses. Nevertheless,
the definitive agreement with respect to such Recommended Third-Party Offer must
provide that such fees and expenses shall not be payable if Sprint makes a
Qualified Offer within 72 hours of the first public announcement of such
Recommended Third-Party Offer.
If Sprint has the option to make a Qualified Offer and does so more than
five days prior to the date of a stockholders' meeting held to consider a Third-
Party Offer or an Intervening Offer, the Board of Directors shall, unless an
Intervening Offer is then outstanding, support the Qualified Offer by approving
and recommending it to Newco's stockholders and cause Newco to take all steps
reasonable and necessary to facilitate consummation of the Qualified Offer.
However, at such time as a Third-Party Offer made subsequent to a Qualified
Offer shall
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constitute an Intervening Offer, Newco's obligations to support and facilitate a
Qualified Offer shall terminate and Newco shall be free to consider and act upon
such Intervening Offer. Sprint is nonetheless entitled, at any time prior to
consummation of the Intervening Offer, to make another Qualified Offer, and in
such event, the most recent Third-Party Offer shall cease to constitute an
Intervening Offer.
If a Recommended Third-Party Offer or an Intervening Offer is undertaken
in the form of a tender offer, at the consummation of such tender offer, the
offeror shall have an option, to purchase from all Affiliated Equity Holders, at
the tender offer price, in the aggregate, a Specified Number of Equity
Securities, less the number of Equity Securities that have already been tendered
to such offeror. In addition, if a Recommended Third-Party Offer or an
Intervening Offer, as the case may be (or a related matter) must be approved by
the stockholders of Newco in order for such offer to be effectuated, the
Affiliated Equity Holders are obligated to cast in favor of such offer (and such
related matter) such number of votes as is equal to the Specified Number of
Equity Securities, provided that the Business Combination does not constitute a
Discriminatory Transaction. Affiliated Equity Holders are not entitled to
exercise rights of appraisal with respect to any Business Combination effected
in connection with a Recommended Third-Party Offer or Intervening Offer.
The Governance Agreement defines "Business Combination" to mean a
transaction, undertaken in any form whatsoever, involving (i) the purchase or
acquisition of Equity Securities if the consummation of such transaction would
result in the purchaser beneficially owning 35% or more of the Equity Securities
outstanding, or (ii) a merger, consolidation, combination or other extraordinary
transaction with respect to Newco in which, upon consummation thereof, the
shareholders or owners of the other entity that is a party thereto, or the
controlling persons thereof, would acquire beneficial ownership of 50% or more
of the Equity Securities outstanding. The term Business Combination includes a
"Significant Sale," which means the sale of assets of Newco or any subsidiary or
the sale of capital stock of any subsidiary by Newco, in any such case, for
which the consideration proposed to be paid in such transaction represents 35%
or more of the market capitalization of Newco on the date that Newco agrees to
such sale.
SOLICITATION OF OFFERS
From the Closing Date until the earlier of the 27-month anniversary of such
date or the termination of the Governance Agreement in accordance with its
terms, Newco may not, directly or indirectly, (i) solicit or initiate, or
encourage the submission of, any "Acquisition Proposal" (as defined below), or
(ii) participate in any discussions or negotiations regarding, or take any
action that may reasonably be expected to lead to any Acquisition Proposal;
provided, however, that to the extent required by the fiduciary obligations of
the Board of Directors, as determined in good faith by the Board based on the
advice of outside counsel, Newco may (A) furnish information in response to any
unsolicited requests therefor and discuss such information, (B) upon receipt by
Newco of an Acquisition Proposal, following delivery to Sprint of notice
thereof, participate in negotiations regarding such Acquisition Proposal and (C)
enter into an agreement respecting such Acquisition Proposal or any related
agreements or take any other action ancillary thereto.
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After the 27-month anniversary of the Closing Date until the 39-month
anniversary thereof or the termination of the Governance Agreement in accordance
with its terms, Newco may not, directly or indirectly, take any of the actions
identified in the prior paragraph except through an investment banking firm
formally engaged by Newco for such purpose; provided, that, 30 days prior to so
engaging such investment banking firm for that purpose, Newco shall notify
Sprint of its intention to effect such engagement, and Sprint shall be permitted
to prepare and make a Sprint Offer for so long as such investment banking firm
remains engaged by Newco for that specific purpose. Subject to the terms and
conditions of the Sprint Offer and unless an Intervening Offer is then
outstanding, Sprint is entitled to pursue any such Sprint Offer for so long as
necessary to permit it to be consummated. Newco is obligated to furnish Sprint
with copies of all information provided by Newco to such investment banking firm
at the time such information is provided to such firm, subject to Sprint
entering into a customary confidentiality agreement with respect to that
information.
The Board of Directors of Newco is obligated to (i) promptly notify Sprint
in writing of (A) its receipt of an Acquisition Proposal, (B) any inquiries or
discussions that may reasonably be expected to lead to an Acquisition Proposal,
(C) the execution by Newco of a confidentiality agreement with respect to an
Acquisition Proposal or (D) the furnishing of any confidential information in
contemplation of an Acquisition Proposal, whether or not pursuant to a
confidentiality agreement; (ii) describe the terms and conditions of any
Acquisition Proposal in reasonable detail; (iii) provide to Sprint copies of any
definitive agreements with respect to any Acquisition Proposal and any
confidentiality agreements with respect thereto; and (iv) subject to Sprint's
obligation to hold such information in strict confidence, make available to
Sprint all information made available to the party making the Acquisition
Proposal at the same time it is provided to such party.
An "Acquisition Proposal" means any proposal for a tender or exchange
offer, a merger, consolidation, share exchange or other business combination, in
which Newco is a constituent party to such transaction, or a sale of securities
(other than Transaction Securities), recapitalization, liquidation, dissolution
or similar transaction involving Newco, or any proposal or offer to acquire in
any manner, directly or indirectly, a material equity interest in, or a material
amount of voting securities (with the acquisition of beneficial ownership of 20%
or more of the voting Equity Securities being deemed to be material for this
purpose) or assets of, Newco. In addition, a "Material Sale," defined as any
proposal involving the sale of assets of Newco or any subsidiary or the sale of
capital stock of any subsidiary, in any such case, for which the consideration
proposed to be paid in such transaction represents 20% or more of the market
capitalization on the date that Newco receives such proposal, is also defined as
an Acquisition Proposal.
Subject to certain exceptions, Newco is obligated under the Governance
Agreement not to take any action or omit to take any action that would result in
(i) any Affiliated Equity Holder being deemed an "Acquiring Person" or similar
designation under any Stockholders' Rights Plan, (ii) any Affiliated Equity
Holder being prejudiced under any applicable state takeover statute, including
Section 203 of the DGCL, or (iii) otherwise causing any takeover defense to
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materially impair or obstruct, or prevent (either legally or financially) the
exercise by any Affiliated Equity Holder of rights granted under Article IV of
the Governance Agreement.
STOCKHOLDERS' AGREEMENT
In connection with the Investment Agreement, Sprint and certain principal
stockholders of the Company (the "Stockholders") entered into the Stockholders'
Agreement, which will become effective at Closing. The Stockholders' Agreement
obligates the Stockholders to support the obligations of Newco under the
Governance Agreement by (i) voting all of the "Covered Shares" (as defined in
the Stockholders' Agreement) in favor of a Sprint Offer or a Qualified Offer and
(ii) tendering all of the Covered Shares into a tender offer initiated by Sprint
to effect a Sprint Offer or a Qualified Offer, unless, in each case, an
Intervening Offer is then outstanding. The term "Covered Shares" includes
Shares, shares of Newco Common Stock received in the Merger and other Equity
Securities. However, it does not include shares of Newco Common Stock or other
Equity Securities subsequently sold by the Stockholders in accordance with the
terms of the Stockholders' Agreement. The name and number of Covered Shares
held by each Stockholder is as follows: Sky Dayton, Chairman of the Board of
Directors of the Company, 1,500,000 Shares; Quantum Industrial Partners LDC,
1,456,480 Shares; Reed Slatkin, a Director of the Company, 1,042,473 Shares;
Kevin M. O'Donnell, a Director of the Company, 944,614 Shares; Sidney Azeez, a
Director of the Company, 236,884 Shares; and George Soros, 214,545 Shares.
IRREVOCABLE PROXIES
In order to provide for enforcement of the various provisions of the
Governance Agreement requiring the Affiliated Equity Holders to vote voting
Equity Securities in a certain manner, Sprint and Sprint L.P. have provided an
Irrevocable Proxy to the Company and Newco.
EFFECTIVENESS; TERMINATION; SURVIVAL
The Governance Agreement becomes effective at the Closing. Thereafter, the
Governance Agreement terminates at the earliest of the following to occur: (i)
the termination of the Investment Agreement in accordance with its terms; (ii)
such time as Sprint's percentage interest is greater than 90% or less than the
Lower Threshold; (iii) the expiration of the Right to Offer Period; (iv) the
first date on which any Person or group as defined in Rule 13d-5(b) of the
Exchange Act is determined (A) to beneficially own or control more than 35% of
the Equity Securities outstanding by virtue of the acquisition of such
securities pursuant to a Third-Party Offer if the rights granted and process
contemplated by Article IV of the Governance Agreement have been effected in
accordance with the terms thereof or (B) to beneficially own or control 50% or
more of the voting Equity Securities outstanding; (v) upon the termination of
the Marketing Agreement in accordance with certain of its provisions; or (vi)
upon the exercise of registration rights (demand or incidental) by any "Holder"
of "Registrable Securities" under the Registration Rights Agreement.
Notwithstanding the termination of the Governance Agreement, until the
sixth anniversary of the Closing Date and thereafter for as long as Sprint's
percentage interest is greater than the Lower Threshold, Sprint shall still be
subject to the Standstill Provisions. In addition, for so long as Sprint's
Percentage Interest remains greater than the Lower Threshold, Sprint shall still
have certain governance and anti-dilution rights under the Governance Agreement.
In such event, the Standstill Provisions and such other provisions (as well as
any definitional provisions with respect to the foregoing) shall remain in full
force and effect until such time as Sprint's Percentage Interest is lower than
the Lower Threshold; provided, however, that during any period in which the
Standstill Provisions survive, Sprint and its affiliates may directly approach
the Board of Newco in order to make an offer to effect a Business Combination.
REGISTRATION RIGHTS AGREEMENT
Sprint and Newco have entered into the Registration Rights Agreement with
respect to Newco Common Stock held by Sprint. Under the Registration Rights
Agreement, Sprint has the right (the "Demand Registration Right") to at any time
require Newco to file up to four registration statements under the Securities
Act to effect the registration of Newco Common Stock held by Purchaser. This
right may be exercised after 27 months following the Closing
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Date, but only once every nine months. Expenses relating to the exercise of the
Demand Registration Right will generally be payable by Newco.
Under the Registration Rights Agreement, Sprint also has the right (the
"Incidental Registration Right"), with respect to any underwritten offerings,
including registered offerings, of Newco Common Stock for cash proposed by
Newco, to require Newco to include Newco Common Stock of Sprint in such offering
and registration, if applicable after 27 months following the Closing Date.
Incremental expenses relating to exercises of the Incidental Registration Right
will generally be payable by Newco.
In other respects, the Registration Rights Agreement contains terms that
are customary to registration rights agreements of its type.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to Section 145 of the DGCL, corporations incorporated under the
laws of the State of Delaware are permitted to indemnify their current and
former directors, officers, employees and agents under certain circumstances
against certain liabilities and expenses incurred by them by reason if their
serving in such capacities, if such persons acted in good faith and in a manner
which they reasonably believed to be in or not opposed to the best interests of
the corporation, and with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful.
The Company's Amended and Restated Certificate of Incorporation
("Certificate of Incorporation") includes a provision that eliminates the
personal liability of its directors for monetary damages for breach of their
fiduciary duty as directors of the Company, to the fullest extent permitted by
the DGCL, as such laws may be amended from time to time. The DGCL 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
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violation of law, (iii) for any unlawful payment of a dividend or unlawful stock
repurchase or redemption, as provided in Section 174 of the DGCL, or (iv) for
any transaction from which the director derived an improper personal benefit.
Although the Certificate of Incorporation does not expressly set forth such
limitations, such provisions are effective as to the Company's directors. The
foregoing provisions do not apply to officers of the Company who are not
directors, but would apply to an officer of the Company if he or she is a also a
director of the Company and is acting in his or her capacity as director.
The Company's Bylaws provide that the Company may indemnify its directors,
officers and employees, including advancement of expenses, to the fullest extent
and under the circumstances permitted by the DGCL, as such laws may be amended
from time to time.
OTHER MATTERS
The Company has been advised that, except as otherwise described in the
Offer to Purchase, the Purchaser has no current plans or proposals that would
relate to, or result in, any extraordinary corporate transaction involving Newco
or the Company, such as a merger, reorganization or liquidation involving Newco
or the Company, a sale or transfer of a material amount of assets of Newco or
the Company, any change in Newco's or the Company's capitalization or dividend
policy or any other material change in Newco's business, corporate structure or
personnel. Any plans or proposals relating thereto would be subject to the terms
of the Governance Agreement, the Stockholders Agreement and the other Ancillary
Agreements, as applicable. Subject to the provisions of the Investment Agreement
and the Governance Agreement, the Purchaser and its affiliates reserve the right
to purchase, following consummation or termination of the Offer, additional
Shares from Newco, in the open market or otherwise. Any additional purchases of
Newco Common Stock could be at a price greater or less than the price to be paid
for the Shares in the Offer.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
Recommendation of the Board of Directors. The Board of Directors of the
Company has, by unanimous vote of all Directors, approved the Offer and the
other transactions contemplated by the Investment Agreement, and determined that
the terms of the Offer and such other transactions, when taken together, are
fair to, and in the best interests of, the stockholders of the Company.
Accordingly, the Board unanimously recommends that stockholders of the Company
accept the Offer and tender their shares of Common Stock.
As set forth in the Offer, Sprint will purchase 1,250,000 Shares tendered
prior to the close of the Offer if the conditions of the Offer have been
satisfied or are waived. A copy of a letter to all stockholders of the Company
communicating the recommendation of the Board of Directors is included as
Exhibit (a)(3) hereto and a copy of the press release issued jointly by the
Company and Sprint on February 11, 1998 announcing the Offer and the other
transactions contemplated by the Investment Agreement is filed as Exhibit (a)(5)
hereto.
Background of the Offer. The following description was prepared by the
Company and Sprint. Information about Sprint and Sprint L.P. was provided by
Sprint, and the Company takes no responsibility for the accuracy or completeness
of any information regarding meetings or discussions in which the Company or its
representatives did not participate.
During August, September and October of 1997, the Company's senior
management analyzed the Company's strategic position in the Internet industry
and its prospects for continuing and accelerating the growth of its business and
achieving critical mass in its subscriber base and greater scale in its
operations. In light of this analysis, management discussed with the Company's
Board of Directors (on both a formal and an informal basis) an array of
strategic alternatives designed to enhance the Company's strategic, operational,
financial, marketing and distribution capabilities.
At a regular meeting of the Board of Directors of the Company held on
October 29, 1997, the Board conducted an open-ended discussion of these
alternatives, which included (i) a proposed strategic alliance with Sprint; (ii)
an underwritten equity offering or other financing transactions; (iii) a
significant infusion of equity capital by a
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financial investor, the proceeds of which would be used by the Company to make
strategic acquisitions; (iv) a significant equity investment in the Company by,
and/or a joint venture involving the Company with, one or more Regional Bell
Operating Companies; and (v) either alone or in combination with certain of the
foregoing, the making of a business combination proposal to one or more other
providers of Internet services. At the conclusion of this discussion, the Board
did not recommend that any particular alternative be pursued to the exclusion of
others, but rather directed that management take further steps to explore the
availability of various options (without committing the Company to any
alternative without further action of the Board) and periodically report to the
Board on the results of such initiatives. The Board also authorized senior
management and the Company's financial advisor, DMG, to make selective inquiries
to determine whether certain firms in the telecommunications industry would have
any interest in a potential joint venture, strategic alliance or minority
investment relationship with the Company. The Board also instructed management
and DMG not to foreclose the possibility of a business combination involving the
Company, although it believed that the better approach, in terms of enhancing
the Company's long-term value, was to solicit a strategic alliance or minority
investment. Ultimately, no proposals to effect a business combination emerged.
As a result of management's exploratory initiatives, based on the strategic,
operational and financial considerations described below and Sprint's dynamic
and prompt expression of interest in pursuing a strategic alliance with the
Company, the Board determined that focusing primarily on the Sprint alternative
was most likely to produce the best transaction reasonably available.
During early October, 1997, with the permission of Garry Betty, President
and Chief Executive Officer of the Company, Sidney Azeez, one of the Company's
directors, contacted Carl Peterson, General Manager, President and CEO of the
Kansas City Chiefs, inquiring whether he was acquainted with William T. Esrey,
Chairman and Chief Executive Officer of Sprint Corporation. After learning that
Mr. Peterson and Mr. Esrey were acquaintances, Mr. Betty requested that Mr.
Peterson arrange an introduction so the Company could explore whether Sprint
would have any interest in discussing the possibility of a strategic alliance or
other relationship. Mr. Peterson contacted Sprint and suggested a meeting during
which the companies could discuss their respective businesses and the possible
benefits of a strategic or other relationship.
Theodore H. Schell, Senior Vice President Strategic Planning & Corporate
Development, phoned Mr. Betty on October 8, 1997 to express Sprint's interest in
exploratory discussions and to arrange for a visit by a Sprint representative to
the Company's headquarters in Pasadena, California. On October 10, 1997, Chuck
Chakravarty, Manager Corporate Development, visited the Company's headquarters
in Pasadena, California and had discussions with Mr. Betty and other members of
the Company's management. The discussions focused on the operational and
financial aspects of the Company.
On October 29, 1997, Sprint and the Company executed a reciprocal
confidentiality agreement in which they agreed to maintain the confidentiality
of nonpublic information concerning their businesses. On October 31, 1997, Mr.
Schell, Timothy S. Sutton, Vice President Strategic Planning & Corporate
Development and James Dodd, Vice President Internet Access Services met with Mr.
Peterson, Sky Dayton, Chairman of the Board of the Company, and Mr.
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Betty in Kansas City to obtain a strategic overview of the Company's business.
Following that discussion, the participants concluded that there were several
areas of shared perspective with regard to the importance of expanded scale in
the Internet access business, the technological evolution of the Internet, and
business philosophies regarding quality of customer service and operations.
In early November, 1997, Mr. Sutton and Mr. Betty had phone conversations
confirming the desire of both parties to engage in further exploration of a
strategic or other relationship. On November 19, 1997, Mr. Sutton, Mr. Dodd and
certain other officers and employees of Sprint met in Pasadena with Mr. Dayton,
Mr. Betty and certain other officers and employees of the Company, and a
representative of DMG, the Company's financial advisor. The Company's
representatives presented a high-level overview of the Company's business from
an operational, financial and strategic perspective. The participants then
engaged in a high-level discussion of possible alternatives for a strategic or
other relationship between Sprint and the Company. Sprint's representatives
discussed the factors of importance to Sprint in assessing a potential
relationship with the Company. These factors included: continued reliance on the
Sprint brand (either alone or co-branded with the Company's brand); marketing
rights to the Internet product; utilization of Sprint's network services; and
the financial implications of the nature and amount of the investment requisite
to scaling up to achieve critical mass and profitability. Each party expressed
the lack of a desire to consider a business combination or similar type of
transaction with the other party at the time. However, each party expressed an
interest in Sprint acquiring a minority equity interest in the Company if a
structure could be developed that would be acceptable from a strategic,
operational and financial point of view.
Additional meetings were held in Pasadena on November 21 and 22, 1997 among
officers and employees of Sprint and the Company to continue discussions of the
strategic, financial and operational characteristics of a strategic relationship
between Sprint and the Company with respect to their Internet businesses. The
possible marketing opportunities and synergies of such an alliance were also
explored. These meetings were followed by several telephone calls between
officers of Sprint and the Company with regard to these matters.
A meeting was held in Pasadena on December 4, 1997 which was attended by
Messrs. Esrey, Schell, Sutton, Dodd, Dayton, Betty and certain other officers
and employees of the Company at which the possible components of a strategic
relationship were discussed. These discussions focused on strategic and
operational matters, including co-branding the Internet access service,
accessing Sprint's marketing and distribution channels, the nature of any
minority investment capital Sprint might make available to the Company and the
opportunity by which Sprint might acquire the equity securities of the Company
not already owned by Sprint and its affiliates at some point in the future.
Further meetings were held in Pasadena on December 11 and 12, 1997 among
Messrs. Sutton, Betty and Dayton, internal Sprint counsel, outside counsel to
the Company, and the financial advisers of Sprint and the Company. These
discussions focused on the valuation of Sprint's in-kind contributions,
including Sprint Internet Passport subscribers, the Sprint brand, access to the
Sprint network and access to the Sprint marketing channels. The discussions also
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focused on the terms and structure for a minority investment by Sprint in the
Company, the terms of any credit arrangements Sprint might provide, governance
rights, and the timing and possible approaches under which Sprint would be
permitted in the future to seek to acquire the remaining equity securities of
the Company.
Further meetings were held in Pasadena on December 19 and 20, 1997 to
discuss a proposed preliminary term sheet prepared by Sprint. The term sheet
contemplated that Sprint would acquire a minority interest in the Company
through a cash tender offer. It also contemplated that in exchange for the
contribution of the Sprint Internet Passport subscribers and favorable terms for
access to the Sprint L.P. network, Sprint L.P. would receive a newly created
series of convertible preferred stock from the Company. The parties also
discussed a marketing agreement whereby the parties would jointly brand their
Internet products and Sprint would make its marketing channels available to the
Company with certain exclusivity and sales commitments.
Also involved in the negotiations were terms of a standstill arrangement
which would preclude further acquisitions of the Company's equity securities by
Sprint, except in limited situations designed to ensure the receipt of fair
value by all stockholders in the event Sprint acquired additional equity
securities above agreed upon thresholds. The parties also discussed convertible
debt financing of up to $100,000,000. There were also discussions of limited
governance rights, stock registration rights, limitations on the Company
soliciting acquisition proposals (subject to the Board's fiduciary obligations)
and other customary rights of a financial investor. Throughout these and
subsequent meetings, considerable negotiations took place regarding all
strategic, operational, financial and governance aspects of the proposed
transactions.
These proposals, counter proposals and revisions were reflected in numerous
further discussion drafts of possible terms which were circulated between Sprint
and the Company and their respective financial and legal advisers. Conference
and telephone calls were held in the latter part of December 1997 and in early
January 1998 among various members of management and the financial and legal
advisers to Sprint and the Company to discuss and refine these proposals.
Various members of management and employees of Sprint and the Company visited
Sprint's facilities in Reston, Virginia on December 30, 1997 in an attempt to
reach a common view on applicable network economics, network technologies and
engineering set ups.
Meetings among various members of management and the financial and legal
advisers to Sprint and the Company were held during the evening of January 12,
1998 in Kansas City and during the following day to continue negotiation of the
terms of the transactions. Based on these negotiations, the parties agreed to
proceed immediately with the preparation of drafts of definitive agreements to
cover the matters encompassed by the Investment Agreement and Ancillary
Agreements. Numerous conference calls took place after January 12, 1998 to
divide drafting responsibilities, establish schedules and address issues arising
as part of the documentation effort. Prior to January 27, 1998, initial drafts
of most of the documents (and comments on most initial drafts) were exchanged.
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Negotiating sessions were held in Kansas City from January 27 through
February 1, 1998. Negotiations continued thereafter via numerous conference
calls and exchanges of drafts and comments through February 10, 1998, in an
effort to reach agreement on the matters encompassed by the Investment Agreement
and the Ancillary Agreements. Some of the negotiations between legal counsel for
Sprint and the Company occurred in person between February 6 and February 10,
1998.
An overview of the possible transaction with the Company and related issues
were discussed at Sprint's Board of Directors meeting on December 9, 1997. A
meeting of Sprint's Board of Directors was held on February 10, 1998 and the
execution, delivery and performance of the Investment Agreement, the Ancillary
Agreements and the transactions contemplated thereby were approved.
An overview of the possible transaction and related issues were discussed
at the Company's Board of Directors meeting on January 11, 1998. At a special
meeting held on January 20, 1998, senior management provided the Board with a
report on the status of the negotiations with Sprint and developments with
respect to other potential strategic alternatives. Draft agreements were first
presented to the Company's Board of Directors at a regular meeting held on
February 2, 1998. A special meeting of the Company's Board of Directors was held
on February 10, 1998 and the execution, delivery and performance of the
Investment Agreement, the Ancillary Agreements and the transactions contemplated
thereby were approved.
Following approval by the Board of Directors of Sprint and the Company, the
Investment Agreement and the Ancillary Agreements were executed and delivered
after the close of financial markets in the United States on February 10, 1998.
The Offer and the other transactions contemplated by these agreements were
publicly announced before the financial markets in the United States opened on
February 11, 1998.
Reasons for the Recommendation. At a meeting held on February 10, 1998,
the Board of Directors of the Company, by unanimous vote of all Directors, (i)
approved the Offer and the other transactions contemplated by the Investment
Agreement, (ii) determined that the Offer and such other transactions are fair
to, and in the best interests of, the stockholders of the Company, and (iii)
resolved to recommend that stockholders accept the Offer and tender their shares
of Common Stock, and approve the Company Stockholder Vote Matters.
In arriving at its decision to approve the Offer and such other
transactions contemplated by the Investment Agreement and to recommend
acceptance of the Offer and approval of the Company Stockholder Vote Matters,
the Board of Directors gave careful consideration to the following factors:
(i) The opportunity for each stockholder of the Company to receive cash
for approximately 11% of the total number of shares of Common Stock held by each
such stockholder;
(ii) The fact that the $45 per share price of the Offer represented a
premium of approximately 32.4% over the last reported
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sales price of $34.00 per share on February 9, 1998 (the last full trading date
prior to the date of the Board's approval of the Offer) and a premium of
approximately 53.7% over the average of the last reported sales prices for the
30 trading days preceding February 10, 1998 (as reported, in each case, on The
Nasdaq National Market);
(iii) The Board's thorough evaluation of a variety of other potential
strategic alternatives and its analysis of the viability of and risks associated
with such alternatives. In particular, the Board placed great value on the
overall strategic importance of a potential relationship with Sprint, including
(A) the value of creating an EarthLink-Sprint brand for Internet access and
related services, (B) the potential commercial impact of having access to
Sprint's nationwide marketing channels, with a commitment from Sprint to deliver
not less than 150,000 net subscribers per year, (C) the addition to the
Company's business of approximately 130,000 subscribers from Sprint L.P.
immediately upon consummation of the transactions contemplated by the Investment
Agreement, which would result in the Company having more than 600,000
subscribers in the aggregate at Closing, (D) favorable terms for access to
Sprint's network pursuant to a network agreement, which diversifies the
Company's operational risk by giving it another credible provider of Internet
backbone services, and (E) the availability of additional capital through $100
million of convertible debt financing from Sprint and Sprint L.P.'s purchase of
Convertible Preferred Stock in exchange for $23.75 million in cash (in addition
to the contribution by Sprint of SIP Subscribers and access to its network on
favorable terms);
(iv) The terms of the Governance Agreement, which allow Newco to remain an
independent public company and which provide Newco and its stockholders with
alternative paths to the realization of a control premium in a subsequent
business combination transaction, including (A) the right of Sprint to make a
Sprint Offer at the "Fair Private Market Value" of Newco (a term that, by
definition, contemplates an appropriate control premium in the context of a
competitive environment for that premium) and (B) Newco's right to receive and,
in certain instances, pursue and solicit, third-party offers to effect business
combinations;
(v) The competitive environment in the Internet industry and the perceived
beneficial effect of the strategic alliance on the Company's relationships with
its employees and customers;
(vi) The probability that the Offer and the other transactions contemplated
by the Investment Agreement will be consummated, given the achievable nature of
the conditions to consummation of the Offer; and
(vii) The opinion of DMG that the Offer, the sale of the Convertible
Preferred Stock and the Merger, when taken together, are fair, from a financial
point of view, to holders of Common Stock. The opinion of DMG contains a
description of the factors considered, the assumptions made and the scope of
review undertaken by DMG in rendering its opinion. The
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full text of the opinion received by the Board of Directors from DMG is included
as Exhibit (a)(4) hereto. Stockholders are urged to read such opinion in its
entirety.
In light of all of the factors set forth above, the Board of Directors
unanimously approved the Offer and the other transactions contemplated by the
Investment Agreement. In view of the variety of factors considered in
connection with its evaluation of the Offer and these other transactions, the
Board of Directors did not assign relative weights to the specific factors
considered in reaching its decision, although the overall strategic value of the
relationship with Sprint, as reflected in paragraph (iii) above, was of
paramount importance to the Board's decision. In evaluating the Offer and the
other transactions contemplated by the Investment Agreement, the Board concluded
that the Company's prospects for growth would be substantially improved by
entering into this strategic relationship with Sprint, while the Company could,
at the same time, significantly reduce its operational risk.
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ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
DMG has been retained by the Company to render financial advisory services
to the Company in connection with potential equity investments by and commercial
arrangements with other entities. In exchange for such services, the Company is
obligated to pay DMG a fee of approximately $7.4 million upon Closing. In
addition, the Company agreed to indemnify DMG and certain related persons
against certain liabilities and expenses arising out of or in conjunction with
DMG's engagement by the Company, including certain liabilities under the federal
securities laws. In addition, the Company has agreed to pay Mr. Carl Peterson,
the General Manager of the Kansas City Chiefs, a fee of $200,000 for introducing
the Company to Sprint.
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ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
(a) Following are the transactions in the Common Stock effected during the
past 60 days by the Company and, to the best of the Company's knowledge, by any
executive officer, director, affiliate or subsidiary of the Company.
On February 4, 1998, the following persons were granted incentive stock
options under the Company's 1995 Stock Option Plan to acquire the indicated
amount of Company Common Stock:
Person/Title Number of Shares
- ------------ ----------------
Dr. Richard Edmiston, 10,000
Vice President--Research and Development
Robert Johnson, 10,000
Vice President--Marketing and Marketing Development
Brinton Young 50,000
Vice President--Strategic Planning
David Tommela, 10,000
Vice President--Operations
(b) Pursuant to the Agreement to Tender and Vote (and the related
Irrevocable Proxies), (i) Sky D. Dayton, Chairman of the Board of the Company,
has agreed to tender all of the shares of Common Stock owned beneficially or of
record by him (1,500,000 shares) to Sprint in connection with the Offer, and
(ii) Kevin M. O'Donnell, a director of the Company, has agreed to tender all of
the shares of Common Stock owned beneficially or of record by him (944,614) to
Sprint in connection with the Offer.
Pursuant to the Agreement to Vote, Reed E. Slatkin and Sidney Azeez,
directors of the Company, each agreed to vote all the shares of Common Stock
owned beneficially or of record by each of them (1,042,473 shares and 236,884
shares, respectively) in favor of the Company Stockholder Vote Matters, all as
set forth in the Investment Agreement and applicable Ancillary Documents.
However, such persons did not agree to tender their Common Stock to Sprint in
the Offer.
Mr. Paul McNulty, a director of the Company, is a Managing Director of
Soros Fund Management LLC ("SFM"), of which Mr. George Soros is the Chairman.
Mr. Soros may be deemed to be the beneficial owner of shares held for the
account of Quantum Industrial Partners LDC ("QIP") and for his personal account.
Mr. Soros and QIP each are parties to the Agreement to Vote, pursuant to which
Mr. Soros and QIP each agreed, pursuant to the terms and conditions of the
Agreement to Vote, to vote all the shares of Common Stock owned beneficially or
of record by each of them (214,545 shares and 1,456,480 shares, respectively) in
favor of the Company Stockholder Vote Matters. However, neither Mr. Soros nor
QIP agreed to tender their respective Common Stock to Sprint in the Offer.
Other than as identified above, the Company, to the best of its knowledge,
does not otherwise know the intentions of its directors, executive officers,
affiliates or subsidiaries regarding tendering their shares of Common Stock to
Sprint in the Offer.
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ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY SUBJECT COMPANY.
(a) None, except as set forth in response to Item 3(b) above.
(b) None, except as described in response to Item 3(b) and Item 4(b) above.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
The information contained in all of the Exhibits referenced to in Item
9 below is incorporated herein by reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
Each of the following exhibits was filed as an exhibit to the Schedule
14D-9 as originally filed.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Exhibit (a)(1) Offer to Purchase dated February 18, 1998.
Exhibit (a)(2) Letter of Transmittal.
Exhibit (a)(3) Letter to Stockholders of EarthLink Network, Inc., dated
February 18, 1998, from Charles G. Betty, President and
Chief Executive Officer of the Company.
Exhibit (a)(4) Opinion of Deutsche Morgan Grenfell Inc.
Exhibit (a)(5) Text of Press Release, dated February 11, 1998, issued
jointly by Sprint Corporation and EarthLink Network, Inc.
announcing commencement of the Offer.
Exhibit (c)(1) Investment Agreement, dated as of February 10, 1998, by and
among EarthLink Network, Inc., Sprint Corporation, Sprint
Communications Company L.P., Dolphin, Inc. and Dolphin Sub,
Inc. (Incorporated by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K (Date of Earliest
Reported Event: February 10, 1998)).
Exhibit (c)(2) Governance Agreement, dated as of February 10, 1998, by and
among EarthLink Network, Inc., Sprint Corporation, Sprint
Communications Company L.P. and Dolphin, Inc. (Incorporated
by reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K (Date of Earliest Reported Event:
February 10, 1998)).
Exhibit (c)(3) Stockholders' Agreement, dated as of February 10, 1998, by
and among the EarthLink Network, Inc., Sprint Corporation,
Sprint Communications Company L.P. and Dolphin, Inc. and
certain stockholders of the Company (Incorporated by
reference to Exhibit 99.2 of the Company's Current Report
on Form 8-K (Date of Earliest Reported Event: February 10,
1998)).
Exhibit (c)(4) Registration Rights Agreement, dated as of February 10,
1998, by and among Dolphin, Inc., Sprint Corporation and
Sprint Communications Company L.P. (Incorporated by
reference to Exhibit 99.1 of the Company's Current Report
on Form 8-K (Date of Earliest Reported Event:
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February 10, 1998)).
Exhibit (c)(5) Credit Agreement, dated as of February 10, 1998, by and
among EarthLink Network, Inc., Dolphin, Inc. and Sprint
Corporation (Incorporated by reference to Exhibit 10.3 of
the Company's Current Report on Form 8-K (Date of Earliest
Reported Event: February 10, 1998)).
Exhibit (c)(6) Proposed form of Certificate of Designation, Preferences
and Rights of Series A Convertible Preferred Stock of
Dolphin, Inc. (Incorporated by reference to Exhibit 10.2 of
the Company's Current Report on Form 8-K (Date of Earliest
Reported Event: February 10, 1998)).
Exhibit (c)(7) Agreement to Vote and Tender Stock, dated as of February
10, 1998, by and among Sprint Corporation, Sprint
Communications L.P. and certain Stockholders of the Company
(Incorporated by referenced to Exhibit 99.3 of the
Company's Current Report on Form 8-K (Date of Earliest
Reported Event: February 10, 1998)).
Exhibit (c)(8) Agreement to Vote and Tender Stock, dated as of February
10, 1998, by and among Sprint Corporation, Sprint
Communications L.P. and certain Stockholders of the Company
(Incorporated by reference to Exhibit 99.4 of the Company's
Current Report on Form 8-K (Date of Earliest Reported
Event: February 10, 1998)).
Exhibit (c)(9) Agreement and Plan of Meyer, dated as of February 10, 1998,
by and among EarthLink Network Inc., Dolphin, Inc. and
Dolphin Sub, Inc.
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SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
EARTHLINK NETWORK, INC.
By: /s/ Charles G. Betty
---------------------------------
Charles G. Betty
President and Chief Executive Officer
Dated: February 19, 1998
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