<PAGE>
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EROLS INTERNET, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<TABLE>
<S> <C> <C>
Delaware 51339 54-1828700
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
Incorporation or Organization) Classification Code Number)
</TABLE>
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7921 Woodruff Court
Springfield, Virginia 22151
(703) 321-8000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
--------------------
Dennis J. Spina
Chief Executive Officer
Erols Internet, Inc.
7921 Woodruff Court
Springfield, Virginia 22151
(703) 321-8000
(Name, Address and Telephone Number of Agent for Service)
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Copies to:
John L. Sullivan, III, Esquire M. Ridgway Barker, Esquire
Anita J. Finkelstein, Esquire Randi-Jean G. Hedin, Esquire
Venable, Baetjer and Howard, LLP Kelley Drye & Warren LLP
2010 Corporate Ridge, Suite 400 Two Stamford Plaza
McLean, Virginia 22102 281 Tresser Boulevard
(703) 760-1600 Stamford, Connecticut 06901
(203) 324-1400
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<PAGE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Proposed Maximum
Title Of Each Class Of Aggregate Amount of
Securities To Be Registered Offering Price(1) Registration Fee(2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.001 per share $43,609,150 $13,215
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</TABLE>
(1) Includes 437,550 shares of Common Stock which may be purchased by the
Underwriters solely to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 456 under the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD, NOR MAY +
+OFFERS TO BUY BE ACCEPTED, PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, dated December 5, 1997
2,917,000 Shares
EROLS INTERNET, INC.
Common Stock
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Of the 2,917,000 shares of Common Stock, $0.001 par value per share (the
"Common Stock"), of Erols Internet, Inc. ("Erols" or the "Company") offered
hereby (the "Shares"), 2,500,000 Shares are being sold by the Company and
417,000 Shares are being sold by a principal stockholder (the "Selling
Stockholder") of the Company. The Company will not receive any of the proceeds
from the sale of Shares by the Selling Stockholder. See "Principal and Selling
Stockholders." Prior to this offering, there has been no public market for the
Common Stock. It currently is estimated that the initial public offering price
will be between $11.00 and $13.00 per Share. See "Underwriting." Application
will be made to have the Common Stock approved for quotation on the Nasdaq
National Market under the symbol "EROL."
--------------
An investment in the Shares involves a high degree of risk. See "Risk
Factors" beginning on page 7 of this Prospectus.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=====================================================================================================================
Underwriting
Price to Discounts Proceeds to Proceeds to
Public and Commissions(1) Company(2) Selling Stockholder(3)
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<S> <C> <C> <C> <C>
Per Share . . . . . . . . $ $ $ $
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Total (3) . . . . . . . . $ $ $ $
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</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
437,550 additional shares of Common Stock, on the same terms and conditions
set forth above, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Stockholder will
be $ , $ , $ and $ , respectively. See "Underwriting."
Cover of Prospectus continued on following page
The Shares are offered by the several Underwriters when, as, and if
delivered to and accepted by the Underwriters and subject to prior sale, the
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify this offering and to reject any order in whole or in part. It is expected
that delivery of certificates representing the Shares, against payment therefor,
will be made at the offices of Bear, Stearns Securities Corp., 1 Metrotech
Center No., Brooklyn, New York 11201, as agent for Gerard Klauer Mattison & Co.,
Inc., on or about , 1998.
----------
Gerard Klauer Mattison & Co., Inc.
EVEREN Securities, Inc.
Ferris, Baker Watts
Incorporated
The date of this Prospectus is , 1998.
<PAGE>
---------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT OVER-ALLOT, STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE
OF THE COMMON STOCK INCLUDING PURCHASING SHARES OF COMMON STOCK FOLLOWING THE
PRICING OF THE OFFERING TO COVER SYNDICATE SHORT POSITIONS IN THE COMMON STOCK
OR MAINTAINING THE PRICE OF THE COMMON STOCK AND IMPOSING PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, including the financial
statements and the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information set forth in this Prospectus gives
retroactive effect to (i) the consummation of a 2.3583672-for-1 reverse split of
the Common Stock effected on December 5, 1997 and (ii) the elimination of the
Company's class of non-voting common stock effected on December 5, 1997, and
assumes no exercise of the Underwriters' over-allotment option or of any
outstanding options exercisable for Common Stock. For definitions of certain
technical and other terms used herein, see "Glossary."
The Company
Erols is a rapidly growing Internet service provider ("ISP") offering an
attractive combination of low priced and high quality Internet access in
targeted markets located throughout the densely populated corridor stretching
from Massachusetts to Virginia. The Company's goal is to become the premier ISP
serving residential subscribers, small and medium-sized businesses and small
office/home office ("SOHO") customers in each of its targeted markets. The
Company believes that there is a growing demand for high quality Internet
access, fueled by heightened consumer awareness, expanding access to modem-
equipped computers and increasingly widespread Internet use. According to a
study by International Data Corporation ("IDC"), at the end of 1996
approximately 13 million households, or 13% of all U.S. households, were online.
By the end of 2001, according to this study, almost 40 million households, or
38% of all U.S. households, are expected to be online--an increase of over 200%.
Consistent with this anticipated surge in demand, the Company believes that a
key to its future success is its continued ability to expand its base of
subscribers while retaining existing ones. Since the inception of ISP operations
on August 1, 1995, the Company has become the largest regional ISP in the United
States and the eighth largest ISP nationwide, with approximately 272,000
subscribers as of October 31, 1997, a 101% increase from approximately 135,000
subscribers as of December 31, 1996. As of October 31, 1997, the Company's
monthly churn rate was approximately 2%, which, the Company believes, is
substantially below the prevailing industry average.
The Company selects its geographic markets based on a number of demographic
and economic characteristics, such as the prevalence of computer and modem
ownership and current Internet use. Current markets include New York City,
Philadelphia, Washington, DC and Boston--the four East Coast markets with the
highest density of residential computer ownership and four of the seven highest
density residential computer markets nationwide. The Company intends to
penetrate further the residential dial-access segment of the ISP market in its
existing service areas and enter additional high density urban and suburban
markets where demographic or economic attributes suggest a high concentration of
potential Internet users. The Company currently operates 56 physical points of
presence ("POPs") throughout its geographic markets and, therefore, exercises
substantial control over both the quality of its service and its network costs.
The Company also currently utilizes 28 "Virtual POPs," which permit subscribers
located adjacent to, but outside of the local calling areas of, physical POPs to
dial into the Erols network on a local basis through arrangements with local
exchange carriers ("LECs"). Because of its regional focus, the Company is
positioned to utilize its fixed network infrastructure effectively and to
achieve substantial economies of scale.
The Company focuses its marketing efforts on a geographic basis, making
efficient use of its marketing resources to build brand identification and
utilizing its existing subscriber base as a source of referrals. The Company's
primary direct marketing efforts employ a combination of television, radio, the
World Wide Web and print advertising, which is focused on its geographic markets
and on the most desirable populations within those markets. In order to design
and implement effective marketing programs and efficiently allocate resources
among media and markets, the Company monitors the reaction to, and effectiveness
of, its advertising programs on an ongoing basis.
A key element of the Company's strategy is its pricing structure, which
offers subscribers competitive fixed pricing for unlimited, high quality
Internet access on a month-to-month basis and pursuant to one-, two- and three-
year
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<PAGE>
prepaid service agreements. Erols currently offers four pricing plans, at prices
ranging from $19.95 per month for month-to-month access to as low as $10.95 per
month for a prepaid three-year plan. The Company targets its pricing below its
major national competitors, but does not believe that it is necessary to offer
the lowest prices in each market, in light of the quality of its network, as
well as its growing brand identification and subscriber loyalty. In conjunction
with its pricing packages, the Company offers a full money-back guarantee upon
cancellation, pro-rated over the unused duration of the service term.
The Company recently has begun to focus on, and intends to intensify its
efforts to penetrate, the market segment composed of small and medium-sized
businesses and SOHO users which, the Company believes, represents a natural
complement to the Company's existing residential subscriber base. A study by IDC
indicates that, nationwide, the market of small and medium-sized businesses
currently is comprised of approximately 7.2 million businesses, of which 20%
have Internet access. IDC also projects that the number of businesses in this
market will increase at an annual rate of 2.2% into the next century and that
the percentage of such companies with Internet access will rise to 52% by the
year 2000. Presently, the Company's subscriber base consists primarily of
residential users whose peak usage occurs during the evenings and weekends. By
attracting business customers who utilize network facilities during normal
business hours, when the Erols network otherwise is significantly underutilized
(as much as 70% idle), the Company aims to achieve optimal network utilization
and to generate substantial additional revenues from its targeted business
customers at modest incremental cost.
The Company's network infrastructure currently supports modems with dial-
access speeds of up to 56 Kbps. The Company provides new dial-access subscribers
with its easy-to-install proprietary access software package, which incorporates
a telephone dialer, an e-mail platform, a Web browser (either Netscape
Communication Corporation's ("Netscape") Navigator (a registered trademark of
Netscape) or Microsoft Corp.'s ("Microsoft") Microsoft(R) Internet Explorer) and
SurfWatch(TM) software for parental control over Internet content access. This
software package permits simplified access to the Internet through a "point and
click" graphical user interface ("GUI"). After installation, the subscriber has
a direct connection to the Internet using Point-to-Point Protocol ("PPP") and
access to all of the Internet's resources, including e-mail, the World Wide Web,
Usenet News service and Internet Relay Chat. The Company's access software
automatically displays the Erols World Wide Web site each time a subscriber logs
on, providing the Company with the opportunity to communicate with its
subscribers at the start of each session. The Company maintains "24 x 7"
subscriber and technical support 365 days a year.
The Company provides high quality Internet access services to its business
customers, utilizing high-speed access via ISDN, frame relay, fractional T-1, T-
1 and T-3 circuits. It also offers a broad range of Internet-based services,
including (i) Global Trader(SM), the Company's turn-key e-commerce solution for
small businesses; (ii) Internet security services, including security consulting
and virtual private networks; and (iii) Web hosting, design and development
services.
The Company believes that its ability to provide consistently high quality
Internet access is key to its future success and devotes substantial resources
to ensuring the reliability of its network and the quality of its services. In a
comparison of ISPs performed by Inverse Network Technology, Inc. ("Inverse"),
for the seven month period from May 1997 to November 1997, the Company's service
ranked above the industry average on seven of the eight criteria compared,
including rates of call failures.
----------------------
The Company's principal executive offices are located at 7921 Woodruff
Court, Springfield, Virginia 22151, and its telephone number is (703) 321-8000.
The Company's address on the World Wide Web is http://www.erols.com. Information
posted on the Company's Web site does not constitute a portion of this
Prospectus.
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<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock Offered by the Company........2,500,000 shares
Common Stock Offered by the Selling
Stockholder..............................417,000 shares
Common Stock to be Outstanding after
the Offering.............................8,336,779 shares (1)
Use of Proceeds............................For repayment of accounts payable and
bank debt; expansion and enhancement
of network infrastructure; increased
marketing efforts; and working
capital and general corporate
purposes. The Company will not
receive any of the proceeds from the
sale of Shares by the Selling
Stockholder.
Proposed Nasdaq National Market Symbol.....EROL
Risk Factors...............................An investment in the Shares involves
a high degree of risk. See "Risk
Factors" beginning on page 7 of this
Prospectus.
</TABLE>
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(1) Excludes (i) 1,067,550 shares of Common Stock underlying stock options
outstanding as of the date of this Prospectus; (ii) 83,670 additional
shares reserved for issuance pursuant to the Company's stock option plan;
and (iii) 437,550 shares reserved for issuance upon exercise of the
Underwriters' over-allotment option.
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<PAGE>
Summary Financial Data
(Dollar amounts and share data in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
August 1, 1995 Nine Months Ended
(inception) to Year Ended September 30,
December 31, December 31, -----------------------------
1995 1996 1996 1997
------------------ --------------- -------------- ---------------
(unaudited)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues............................. $ 126 $ 10,949 $ 5,972 $ 24,410
Costs and expenses:
Cost of revenues.................... 63 6,002 3,529 10,745
Operations and customer support..... 125 6,227 3,876 7,098
Sales and marketing................. 188 9,476 5,524 15,507
General and administrative.......... 91 2,092 1,377 2,992
Depreciation and amortization....... 17 2,014 1,053 4,360
--------- --------- --------- -------
Total costs and expenses................. 484 25,811 15,359 40,702
--------- --------- --------- --------
Loss from operations..................... (358) (14,862) (9,387) (16,292)
Other expense, net....................... (660) (1,779) (900) (155)
--------- --------- --------- ---------
Net loss................................. $ (1,018) $(16,641) $(10,287) $(16,447)
========= ========= ========= =========
Net loss per share (1)................... $ (0.49) $ (6.86) $ (4.99) $ (2.52)
========= ========= ========= =========
Weighted average shares outstanding (1).. 2,063 2,427 2,063 6,518
Other Operating Data:
Number of subscribers--end of period..... 6,344 135,378 95,866 263,418
Number of POPs--end of period............ 2 67 36 84
EBITDA(2)................................ $ (342) $(12,848) $ (8,334) $(11,932)
Capital expenditures..................... $ 417 $ 10,174 $ 9,183 $ 9,966
<CAPTION>
As of December 31, As of September 30, 1997
-------------------------------------- ------------------------------
As
1995 1996 Actual Adjusted(3)
---------------- ----------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital deficit (4).............. $ (1,350) $ (21,687) $ (38,712) $ (11,437)
Property and equipment, net.............. 400 10,499 16,075 16,075
Total assets............................. 415 14,559 18,813 41,588
Current portion of unearned revenues (5). 743 12,917 23,677 23,677
Long-term portion of unearned revenues(6) -- 3,441 7,887 7,887
Total liabilities........................ 1,433 29,450 49,100 44,600
Accumulated deficit...................... (1,018) (17,659) (34,106) (34,106)
Total stockholders' deficit.............. (1,018) (14,891) (30,286) (3,011)
</TABLE>
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(1) Computed on the basis described in Note 2 of the Company's financial
statements appearing elsewhere in this Prospectus.
(2) EBITDA represents net earnings (loss) before net interest expense, other
expense, income taxes, and depreciation and amortization. EBITDA is a
financial measure commonly used in the telecommunications industry. It is
presented to enhance an understanding of the Company's operating results
and is not intended to represent, and should not be considered more
meaningful than, or an alternative to, net earnings (loss), cash flow or
other measures of performance determined in accordance with generally
accepted accounting principles.
(3) Gives effect to the sale by the Company of 2,500,000 Shares and the initial
application of the estimated net proceeds therefrom (assuming an initial
public offering price of $12.00 per share).
(4) Includes the current portion of unearned revenues attributable to the
prepayment of long-term subscriptions.
(5) Represents the current portion of unearned revenues attributable to the
prepayment of long-term subscriptions.
(6) Represents the long-term portion of unearned revenues attributable to the
prepayment of long-term subscriptions.
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<PAGE>
RISK FACTORS
An investment in the Shares offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following Risk
Factors, as well as the other information contained in this Prospectus, before
making an investment decision. This Prospectus contains forward-looking
statements that involve risks and uncertainties. These statements appear
throughout this Prospectus and include statements as to the intent, belief or
current expectations of the Company and its directors, officers and management,
with respect to the future operations, performance or position of the Company.
Such forward-looking statements are not guarantees of future events and involve
risks and uncertainties. Actual events and results, including the results of the
Company's operations, could differ materially from those anticipated by such
forward-looking statements, as a result of various factors, including those set
forth below and elsewhere in this Prospectus. See " --Forward-Looking
Statements."
Limited Operating History; History of Operating Losses
The Company commenced ISP operations in August 1995 and, accordingly,
has a limited operating history. The Company has incurred operating losses and
generated negative earnings before net interest expense, other expense, income
taxes, and depreciation and amortization ("EBITDA") since it commenced ISP
operations, including operating losses of approximately $14.9 million and
negative EBITDA of approximately $12.8 million for the year ended December 31,
1996 and operating losses of $16.3 million and negative EBITDA of $11.9 million
for the nine months ended September 30, 1997. (EBITDA is a financial measure
commonly used in the telecommunications industry. It is presented to enhance an
understanding of the Company's operating results and is not intended to
represent, and should not be considered more meaningful than, or an alternative
to, net earnings (loss), cash flow or other measures of performance determined
in accordance with generally accepted accounting principles.) As of September
30, 1997, the Company had an accumulated deficit of approximately $34.1 million.
The Company expects that it will continue to incur operating losses at least
through October 1998. There can be no assurance that the Company will achieve or
sustain profitability or positive cash flow in the future.
Substantial Liabilities for Unearned Revenues
In addition to month-to-month service, the Company offers one-, two-
and three-year subscriptions for Internet access, which generally are paid for
in advance. Such subscriptions are subject to cancellation with a full refund
for the first 30 days and to cancellation with a pro-rated refund thereafter.
The Company recognizes such revenues over the term of each such subscription,
resulting in material short- and long-term liabilities for unearned revenues. As
of December 31, 1996, the Company's short- and long-term liabilities for
unearned revenues were approximately $12.9 million and $3.4 million,
respectively and, as of September 30, 1997, were approximately $23.7 million and
$7.9 million, respectively. Inasmuch as cancellation of subscriptions
necessitates the payment of refunds, cancellation by a significant number of the
Company's subscribers could require immediate cash payment of material sums.
Such payments could materially impair the Company's existing operations, planned
future expansion and ability to operate and compete effectively. If refunds were
to exceed the Company's available cash resources, the Company would be required
to seek additional resources through sales or issuances of equity or debt
securities, credit facilities or other borrowings. There can be no assurance
that such additional resources, if required, would be available in a timely
manner, on terms acceptable to the Company, or at all. Further, any additional
equity financing could be dilutive to the Company's then-existing stockholders
and any debt financing could involve restrictive covenants with respect to
future capital raising activities and other financial and operational matters.
If the Company were unable to obtain additional financing as needed, it could be
required to reduce the scope of its
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<PAGE>
operations or its anticipated expansion, which could have a material adverse
effect on the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Need for Additional Working Capital
The Company believes that the net proceeds from this offering, together
with other available cash, will be sufficient to meet its operating expenses and
capital requirements at least through March 1999. However, the Company's capital
requirements depend on numerous factors, including the number of subscriber
cancellations; the rate of market acceptance of the Company's services; the
Company's ability to maintain and expand its subscriber base; the rate of
expansion of the Company's network infrastructure; the level of resources
required to expand the Company's marketing and sales organization, information
systems and research and development activities; the availability of hardware
and software provided by third-party vendors; and other factors. In particular,
a significant decrease in the rate of expansion of the Company's subscriber base
could place a strain on or exhaust the Company's available cash resources. The
timing and amount of such capital requirements are not entirely within the
Company's control and cannot accurately be predicted. If capital requirements
materially exceed those currently anticipated, the Company may require
additional financing sooner than anticipated. The Company has no commitments for
additional financing, and there can be no assurance that any such additional
financing would be available in a timely manner, on terms acceptable to the
Company, or at all. Further, any additional equity financing could be dilutive
to the Company's then-existing stockholders and any debt financing could involve
restrictive covenants with respect to future capital raising activities and
other financial and operational matters. If the Company were unable to obtain
additional financing as needed, it could be required to reduce the scope of its
operations or its anticipated expansion, which could have a material adverse
effect on the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Competition
The market for Internet access services is extremely competitive and
highly fragmented. Inasmuch as there are no significant barriers to entry, the
Company believes that competition in this market will intensify. The Company
believes that its ability to compete successfully will depend on a number of
factors, including strong market presence in its targeted geographic regions;
the adequacy of the Company's subscriber and technical support services; the
capacity, reliability and security of its network infrastructure; the ease of
access to and navigation of the Internet provided by the Company's services; the
pricing policies of the Company, its competitors and its suppliers; the timing
of introductions of new services by the Company and its competitors; the
Company's ability to support existing and emerging industry standards; and
industry and general economic trends. There can be no assurance that the Company
will have the financial resources, technical expertise or marketing and support
capabilities to compete successfully.
The Company competes (or in the future may compete) directly or
indirectly with (i) national and regional ISPs; (ii) established online
services; (iii) computer software and technology companies; (iv) national
telecommunications companies; (v) regional Bell operating companies ("RBOCs");
(vi) cable operators; and (vii) nonprofit or educational ISPs. Many of these
present or potential future competitors have or can be expected to have
substantially greater market presence and financial, technical, marketing and
other resources than the Company. The entry of new participants would result in
substantially greater competition for the Company. The ability of competitors to
bundle services and products with Internet access could place the Company at a
significant competitive disadvantage. In addition, competitors in the
telecommunications industry may
-8-
<PAGE>
be able to offer their subscribers reduced communications costs in connection
with their Internet access services, thereby reducing the overall cost of
Internet access and significantly increasing pricing pressures on the Company.
Certain of the Company's online competitors, including America Online, Inc.
("America Online"), the Microsoft Network and Prodigy, have introduced unlimited
access to the Internet and their proprietary content at flat rates that are
equal to the Company's $19.95 monthly rate for month-to-month service. Certain
of the RBOCs have also introduced competitive flat-rate pricing for unlimited
access (without a set-up fee for at least some period of time). As a result,
competition for active users of Internet services has intensified. The Company
believes that its long-term subscriptions are a key to its future success. There
can be no assurance that its competitors will not introduce similar pricing
plans at comparable or more attractive prices in the future or that the Company
will not be required to reduce its prices to match competition. There also can
be no assurance that the Company will be able to offset any adverse effect on
revenues of any necessary price reductions resulting from competitive pricing
pressures by increasing the number of its subscribers, by generating higher
revenue from enhanced services, by reducing costs, or otherwise.
Future competition also may arise with respect to overseas markets in
which the introduction of Internet services is in an early stage. The Company is
not presently seeking to penetrate overseas markets. To the extent that the
ability to provide Internet services overseas becomes a competitive advantage in
the Internet services industry, any delay by or failure of the Company in
penetrating overseas markets may place the Company at a competitive
disadvantage.
Dependence on the Internet; Uncertain Acceptance of the Internet as a Medium of
Commerce and Communication
The Company's business is dependent upon use of the Internet, primarily
by individuals and, to a lesser extent, by businesses. The Company's success
will depend in part upon the continuing development and expansion of the
Internet and the market for Internet access. See "Business--Industry
Background." Critical issues concerning business and personal use of the
Internet (including security, reliability, cost, ease of use, access and quality
of service) remain unresolved and may significantly affect the growth of
Internet use, and additional use-related issues may arise in the future. In
addition, the volume of Internet traffic is constrained by available bandwidth.
To the extent that bandwidth is insufficient to efficiently carry an expanding
volume of traffic, users may find the Internet an unacceptable medium of
commerce and communication and, as a result, may seek alternative media.
Acceptance of the Internet for commerce and communications generally requires
that potential users accept a new way of conducting business and exchanging
information, industry participants continue to provide new and compelling
content and applications, and the Internet provide a reliable and secure
computer platform. There can be no assurance that the Internet market will grow
or as to the rate of such growth. Moreover, the novelty of the Internet
access market may also adversely affect the Company's ability to retain new
subscribers, as subscribers unfamiliar with the Internet may be more likely to
discontinue the Company's services after an initial trial period. See
"Business--Subscribers, Customers and Turnover." A diminution in the growth of
demand for Internet services or an absolute decrease in such demand could have a
material adverse effect on the Company.
Rapid Technological Change; Evolving Industry Standards
The market for Internet access services is characterized by rapidly
changing technology, evolving industry standards, changing user needs and
frequent new service and product introductions. The Company's success will
depend in part on its ability to identify and use leading technologies
effectively, to continue to develop its technical capabilities, to enhance its
existing services and to develop new services to meet changing user needs in a
timely and cost-effective manner. In addition, new industry standards have the
potential to replace or provide lower-cost alternatives to the Company's
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existing services. The adoption of such new industry standards could render the
Company's existing services obsolete and unmarketable or require reduction in
the fees charged therefor. For example, the Company's services currently rely on
the widespread commercial use of Transmission Control Protocol/Internet Protocol
("TCP/IP"). Alternative open and proprietary protocol standards that compete
with TCP/IP, including proprietary protocols developed by International Business
Machines Corporation ("IBM") and Novell, Inc. have been or are being developed.
The widespread acceptance of these or other protocols could have a material
adverse effect on the Company.
The Company's business is also sensitive to fundamental changes in the
method of Internet access delivery. Currently, the Internet is accessed
primarily via computers connected by telephone lines. A number of alternative
methods for users to connect to the Internet, including cable modems, satellites
and other wireless telecommunications technologies, currently are under
development. As the Internet becomes accessible through these technologies, or
as user requirements as to access methods change, the Company will have to
develop new technology or modify its existing technology. The Company's pursuit
of these technological advances may require substantial time and expense, and
there can be no assurance that the Company will succeed in adapting its Internet
access business to alternate access methods. Any failure on the part of the
Company to identify, adopt and use new technologies effectively, to develop its
technical capabilities or to develop new services or enhance existing services
in a timely and cost-effective manner could have a material adverse effect on
the Company.
ISPs participate in the Internet through contractual "peering
arrangements" with Internet companies. These contractual arrangements are not
subject to regulation and could be subject to revision in terms, conditions or
costs over time.
Dependence on Telecommunications Carriers and Other Suppliers
The Company relies on local telephone companies and others to provide
data communications via local telecommunications lines and leased long distance
lines. From time to time, the Company has experienced difficulties and delays in
receiving telecommunications services, and there can be no assurance that the
Company will be able to obtain such services on the scale and within the
time frame required by the Company, on acceptable terms or at all. Certain
components used by the Company in providing its network services are currently
acquired from limited sources. Ascend Communications, Inc. ("Ascend") is the
largest supplier providing servers and modems comprising 71.4% of network
hardware costs as of December 31, 1996 and 72.3% of such costs as of September
30, 1997. The Company also depends on third-party software vendors to provide
much of its Internet software, including Netscape's Navigator and Microsoft's
Internet Explorer, the World Wide Web browser software that the Company licenses
from Netscape and Microsoft, respectively. See "Business--Proprietary Rights."
Failure of the Company's suppliers to provide components and products in the
quantities, at the quality levels or at the times required by the Company, or
the Company's inability to develop alternative sources of supply if required,
could have a material adverse effect on the Company's ability to effectively
support its growth and result in delays in and increase its costs of expansion.
Moreover, because Netscape Navigator and Microsoft Internet Explorer are the two
most widely used Web browsers, the failure of both Netscape and Microsoft to
continue to provide World Wide Web browser software to the Company at
commercially acceptable costs could have a material adverse effect on the
Company. The Company's suppliers and telecommunications carriers also sell or
lease services and products to the Company's competitors, and some of these
carriers are, and in the future others may become, competitors of the Company.
There can be no assurance that the Company's suppliers and telecommunications
carriers will not enter into exclusive arrangements with the Company's
competitors
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or otherwise stop selling or leasing their services or products to the Company,
which events could have a material adverse effect on the Company.
Capacity Constraints
Demand in excess of capacity has occurred, and may occur in the future,
both at the level of particular POPs (affecting only subscribers attempting to
use that POP) and in connection with system-wide services (such as e-mail and
news services, which can affect all subscribers). From time to time, the Company
has experienced delayed delivery from suppliers of new telephone lines, modems,
servers and other equipment used by the Company in providing its services. Any
shortage of new telephone lines, modems, servers or other equipment could result
in a strain on incoming access lines during peak times, causing busy signals for
subscribers who are trying to connect to the Internet. Similar problems may
occur if the Company is unable to expand the capacity of its various servers to
keep pace with demand. If the capacity of such servers is insufficient to meet
demand, subscribers will experience delays when trying to use a particular
service. Further, if the Company does not maintain sufficient capacity in its
network connections, subscribers will experience a general slow-down of all
services. Any one of these events could cause subscribers to terminate use of
the Company's services. Accordingly, any failure of the Company to expand or
enhance its network infrastructure on a timely basis, or to adapt it to an
expanding subscriber base, changing subscriber requirements or evolving industry
standards, could have a material adverse effect on the Company.
Reliance on Network Infrastructure; Risk of System Failure; Security Risks
The Company's business and operations are dependent upon the capacity,
reliability and security of its network infrastructure and upon the Company's
ability to protect that infrastructure from, or construct infrastructure that is
not vulnerable to, damage from fire, earthquakes, floods, power loss,
telecommunications failures and similar events. The Company's system of POPs is,
and will continue to be, centralized at various locations within its service
areas. In addition, a significant portion of the Company's computer equipment,
including components critical to the operation of its Internet backbone, are
located in its Network Operations Center ("NOC") in Springfield, Virginia
(outside of Washington, DC). See "Business--Network Infrastructure." The Company
does not presently maintain redundant or backup Internet services or other
redundant computing and telecommunication facilities, although the Company's NOC
is equipped with a 175 kilowatt diesel emergency generator as well as multiple
uninterruptible power supplies ("UPS") and multiple independent heat,
ventilation and air-conditioning ("HVAC") systems. Therefore, any accident,
incident or system failure that causes disruptions in the Company's operations
either at the NOC or at one or more of the Company's POPs, could have a material
adverse effect on the Company. In addition, failure by the Company's
telecommunications providers to supply the data communications capacity required
by the Company, as a result of a natural disaster, operational disruption, or
for any other reason, likewise could cause disruptions in the provision of
services by the Company to its subscribers with the potential for a material
adverse effect on the Company.
The Company's network infrastructure is vulnerable to computer viruses
and other similar disruptive problems caused by its users, other Internet users
or other third parties. Computer viruses and other problems could lead to
interruptions of, delays in, or cessation of service, by the Company, as well as
corruption of the Company's or its subscribers' computer systems. Inappropriate
use of the Internet potentially could also cause dissemination of unwanted,
inappropriate or objectionable materials to Erols subscribers and jeopardize the
security of confidential information stored in the computer systems of the
Company or its subscribers, which could deter certain persons from using the
Company's services or cause losses to the Company or its subscribers. The
Company believes that its subscribers increasingly
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will use the Internet for commercial transactions. Any network malfunction or
security breach could cause these transactions to be delayed, not completed or
completed with compromised security. Although the Company intends to continue to
implement and maintain security measures, such measures have been circumvented
in the past and may be defeated in the future. Alleviating problems caused by
computer viruses or other inappropriate uses or security breaches may cause
interruptions, delays or cessation in service to the Company's subscribers,
which could have a material adverse effect on the Company. In addition, there
can be no assurance that subscribers or others will not assert claims of
liability against the Company as a result of these events. See "--Potential
Liability." Further, until more comprehensive security technologies are
developed and implemented, security and privacy concerns of existing and
potential subscribers may inhibit the growth of the Internet access services
industry in general and of the Company's user base in particular.
While the Company believes that its software applications are year 2000
compliant, there can be no assurance until the year 2000 that all systems then
will function adequately. Further, if the software applications of LECs, long
distance carriers or others on whose services the Company depends are not year
2000 compliant, such noncompliance could have a material adverse effect on the
Company.
Management of Growth
The Company has experienced significant growth. This growth has placed,
and may to continue to place, significant strain on the Company's managerial,
operational, financial and other resources. From time to time, in the past, the
Company has experienced difficulties satisfying the demand for its Internet
access services. The Company believes that its performance and success will
depend in part on its ability to manage its growth effectively. This, in turn,
will require ongoing enhancement of its operating, administrative and financial
and accounting systems, improvement of coordination among engineering,
accounting, finance, marketing and operations functions, and the expansion of
its work force and the training and management of its personnel. There can be no
assurance that the Company will be able to manage its growth effectively, or
that the Company's facilities, systems, procedures or controls will be adequate
to support its operations. The inability of the Company to manage its growth
effectively could have a material adverse effect on the Company.
Dependence on Key Personnel
The Company is highly dependent on the technical and managerial skills
of its key employees, including technical, sales, marketing, information
systems, financial and executive personnel. Therefore, the success of its
business is highly dependent upon its ability to retain such personnel and to
identify, hire and retain additional personnel as the need arises. Competition
for key personnel, particularly persons having technical expertise, is intense
and there can be no assurance that the Company will be able to retain existing
personnel or to identify or hire additional qualified personnel. The need for
such personnel is particularly important in light of the anticipated demands of
future growth. The inability of the Company to attract, hire or retain necessary
personnel could have a material adverse effect on the Company. See "Management."
The Company also is highly dependent on the continued services of its
senior management team, which currently is composed of a small number of
individuals. While certain executive officers and key employees are parties to
employment agreements with the Company, such agreements are of limited duration
and are subject to termination under certain circumstances. See
"Management--Employment Agreements and Related Arrangements."
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Government Regulation
The Company provides Internet access services in part through data
transmissions over public telephone lines. These transmissions are governed by
regulatory policies establishing charges and terms for wire-line communications.
Although the Company is not currently subject to direct regulation by the
Federal Communications Commission (the "FCC") or any other governmental agency
(other than regulations applicable to businesses generally), due to the
increasingly widespread use of the Internet it is possible that additional laws
and regulations may be adopted with respect to the Internet, covering issues
such as content, user privacy, pricing, libel, intellectual property protection
and infringement, and technology export and other controls. It also is possible
that the Company could become subject to regulation by the FCC or another
regulatory agency as a provider of basic telecommunications services. Such
changes in the regulatory structure and environment affecting the Internet
access market, including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood of competition from the
RBOCs or other telecommunications companies, could affect the prices at which
the Company may sell its services. For example, the FCC is considering whether
ISPs should be required to pay access charges to local telephone companies for
each minute that dial-access users spend connected to ISPs through telephone
company switches. In addition, some telephone companies are seeking similar
relief through state regulatory agencies. Such rules, if adopted at either the
federal or state level, could have a material adverse effect on the Company.
The Telecommunications Act of 1996 (the "Telecommunications Act")
contains provisions that lift certain restrictions relating to the RBOCs'
ability to engage directly in the Internet access business. The
Telecommunications Act also makes it easier for national long distance carriers
such as AT&T Corp. ("AT&T") to offer local telephone service and allows RBOCs to
provide electronic publishing of information and databases. Competition from
these companies could have a material adverse effect on the Company. See
"--Competition."
The Company, through a to-be-formed wholly owned subsidiary, intends to
apply to the Commonwealth of Virginia, the State of Maryland and the District of
Columbia to become a competitive local exchange carrier ("CLEC") and may, in the
future, seek CLEC status in other states as well. To the extent the Company
obtains such authorizations and commences CLEC operations, the
telecommunications services provided by such operations will be subject to
regulation. At the federal level, the FCC has jurisdiction over interstate
telecommunications services. State regulatory commissions exercise jurisdiction
over intrastate services. Additionally, municipalities and other local
government agencies may regulate certain aspects of the Company's business, such
as use of rights-of-way. The Telecommunications Act requires the FCC to
establish a subsidy mechanism for universal telephone service, to which the
Company will be required to contribute based on its telecommunications revenues.
In addition, the Telecommunications Act requires all LECs, including CLECs, to
make services available for resale by other carriers, provide nondiscriminatory
access to rights-of-way, offer reciprocal compensation for termination of local
telecommunication traffic, provide dialing parity and telephone number
portability, and ensure that their services are accessible to and usable by
persons with disabilities. The Telecommunications Act reserves to the individual
states the authority to impose their own regulations of local exchange services,
including state universal service subsidy programs, so long as this regulation
is not inconsistent with the requirements of the Telecommunications Act. The
Company is unable to predict the final form of such regulation or its potential
impact on the Company. In its provision of interstate, international and
intrastate services as a CLEC, the Company generally will be subject to tariff
filing requirements setting forth the terms, conditions and prices for services,
prior to offering telecommunications services. At the state level, the Company
will also be subject to state certification proceedings as a CLEC. These
certifications generally require a showing that the carrier has adequate
financial, managerial and technical resources to offer the proposed services
consistent with the
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public interest. Under some state statutes, changes in the ownership of the
Company's outstanding voting securities also may trigger additional state public
utility commission approval. For example, in certain jurisdictions, an investor
who acquires as little as 10% of the Company's voting securities may have to
obtain prior approval of the acquisition of such securities because such
ownership might be deemed to constitute an indirect controlling interest in a
CLEC. While uncommon, challenges to these tariffs and certificates by third
parties could cause the Company to incur substantial legal and administrative
expenses. Many states also have additional regulatory requirements such as
minimum service quality reporting, subscriber service and uniform LEC accounting
requirements.
Although the Telecommunications Act has eliminated most legal barriers
to entry into the CLEC market, no assurance can be given that changes in current
or future regulations adopted by the FCC or state regulators or other
legislative or judicial initiatives relating to the telecommunications industry
would not have a material adverse effect on the Company's ability to offer such
services. For example, with the passage of the Telecommunications Act and the
anticipated increase in the level of competition faced by incumbent LECs, the
FCC could grant incumbent LECs substantial pricing flexibility with regard to
interstate access services. It is also anticipated that the prices incumbent
LECs charge for access services will be substantially reduced as a result of the
FCC's reform of the current access charge regime and the adoption of universal
service rules. Similarly, a number of states have allowed incumbent LECs rate
and tariff flexibility, particularly for services deemed subject to competition.
Such price competition could have a material adverse affect on the Company.
Potential Liability
The law relating to the liability of ISPs and online services companies
for information carried on or disseminated through their networks currently is
unsettled, and while a number of private lawsuits seeking to impose such
liability have been litigated, the absence of decisional law in most
jurisdictions results in substantial uncertainty. Prior to the enactment of the
Communications Decency Act of 1996 (the "CDA"), which is Title V of the
Telecommunications Act, a federal district court held that an online service
provider could be found liable for defamation, on the ground that the service
provider exercised active editorial control over postings to its service. The
CDA contains a provision which, one court has held, shields ISPs from such
liability for material posted to the Internet by their subscribers or other
third parties. Other courts have held that online service providers and ISPs
may, under certain circumstances, be subject to damages for copying or
distributing copyrighted materials. Although only a few such claims have been
asserted against the Company to date and all have been resolved in a manner
favorable to the Company, there can be no assurance that such claims will not be
asserted in the future, or if asserted, will not be successful. Furthermore,
although the Company has attempted to limit its liability by the terms of its
standard service agreement, there can be no assurance that the Company's
liability would be so limited in the event of any litigation or other claim
against the Company.
As enacted, the CDA imposed fines on any entity that (i) by means of a
telecommunications device, knowingly sends indecent or obscene material to a
minor; (ii) by means of an interactive computer service, sends or displays
indecent material to a minor; or (iii) permits any telecommunications facility
under such entity's control to be used for the foregoing purposes. That
provision, as applied to indecent material, has been declared unconstitutional
by the United States Supreme Court. While the Clinton Administration has
announced that it will not seek passage of similar legislation to replace this
provision, action by Congress in this area remains possible. At present, the
Company exercises editorial control over Internet postings only to the extent of
blocking Web sites and Usenet News groups when the Company becomes aware that
such sites or groups offer child pornography. Counsel has informed the Company
that such material is illegal in all U. S. jurisdictions.
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The Company also exercises control over postings to Usenet News groups
in order to mitigate "spamming," or the excessive posting of multiple messages
to those groups. The Company believes that its policies with respect to control
of spamming are consistent with those of other ISPs.
As the law in this area develops, the potential that liability might be
imposed on the Company for information carried on and disseminated through its
network could require the Company to implement measures to comply with
applicable law and reduce its exposure to such liability, which could require
the expenditure of substantial resources or the discontinuation or modification
of certain service offerings. Any costs incurred as a result of such
expenditures or in contesting any such asserted claims, the consequent
imposition of liability, or any adverse publicity resulting from any of the
foregoing, could have a material adverse affect on the Company.
Proprietary Rights; Risk of Infringement
The Company believes that its success is dependent in part on its
technology and its continuing right to use such technology. The Company relies
on a combination of copyright, trademark and trade secret laws and contractual
restrictions to establish and protect its technology. Since December 1996, it
has been the Company's policy to require employees and consultants and, when
appropriate, suppliers, to execute confidentiality agreements upon the
commencement of their relationships with the Company. There can be no assurance
that the steps taken by the Company will be sufficient to prevent
misappropriation of its technology and other proprietary property or that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology.
There can be no assurance that third parties will not assert that the
Company's services or its users' content infringe their proprietary rights. From
time to time, the Company has received communications from third parties
alleging that certain of the names or marks for the Company's services or its
users' content infringe the trademarks of such third parties. In such event, it
is the Company's practice to inform its user of receipt of such notice and to
disavow any control over the user to the complaining party. To date, no such
claims have had an adverse effect on the Company's ability to market and sell
its services. See "Business--Legal Proceedings." However, there can be no
assurance that infringement claims will not be asserted against the Company in
the future. Such claims could result in substantial costs and diversion of
resources, even if ultimately decided in favor of the Company, and could have a
material adverse effect on the Company, particularly if judgments on such claims
were adverse to the Company. In the event a claim is asserted alleging that the
Company has infringed the intellectual property or information of a third party,
the Company may be required to seek licenses to continue to use such
intellectual property. There can be no assurance, however, that such licenses
would be offered or could be obtained on commercially acceptable terms, if at
all. The failure to obtain necessary licenses or other rights could have a
material adverse effect on the Company.
The Company has obtained authorization, typically in the form of a
license, to distribute third-party software incorporated in the Erols access
software product for Windows 3.1, Windows 95, Windows NT and Macintosh
platforms. The Company plans to maintain or negotiate renewals of existing
software licenses and authorizations. The Company may want or need to license
other applications in the future. The failure to renew existing software
licenses and authorizations or license other applications could have a material
adverse effect on the Company. See "Business--Proprietary Rights."
In 1991, a corporation owned by Erol M. Onaran, the Selling
Stockholder, sold its video rental business assets to Blockbuster Entertainment
Corporation, now a division of Viacom, Inc.
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("Blockbuster"). In 1992, the Company (then under the name "OEO, Inc.")
purchased from Blockbuster the exclusive license to the registered service marks
"Erol's" and "Erol's Since 1963" (the "Service Mark License"), for use in
connection with the sale, rental and/or service of videocassette recorders,
camcorders, color televisions and other video equipment and related accessories.
The Service Mark License contains certain restrictions on the use of these marks
for other purposes. The initial Service Mark License was for a three-year term,
and was renewable at the option of the licensee (the Company) for successive
three-year terms. Under the terms of the Service Mark License, the licensee was
to pay a renewal fee of $100. While the Company tendered the $100 payment of
this fee in 1995, this check has not been cashed. Although the Company has sent
correspondence to Blockbuster regarding this matter, no replies have been
forthcoming. Given the lack of response from Blockbuster, there can be no
assurance that Blockbuster will not assert a claim for trademark infringement or
breach of contract or that the Company will not be required to take other
actions, which may include changing its name, in the future. In the event that
Blockbuster were to assert such a claim, the Company believes that it has
substantial defenses to, and the Company would vigorously defend against, any
such claim. See "Business--Proprietary Rights."
Continued Control by Current Stockholders
The Company's principal stockholders, officers and directors will
beneficially own an aggregate of approximately 65.0% of the Company's
outstanding shares of Common Stock (assuming no exercise of outstanding options
exercisable on or prior to January 29, 1998) after completion of this offering
(approximately 61.7% if the Underwriters' over-allotment option is exercised in
full). If outstanding options held by such holders exercisable on or prior to
January 29, 1998 were exercised, the Company's principal stockholders, officers
and directors would own an aggregate of approximately 65.5% of the outstanding
shares of Common Stock (approximately 62.3% if the Underwriters' over-allotment
option is exercised in full). Therefore, purchasers of the Shares will not have
the ability to approve or disapprove matters affecting the Company that are
submitted to a vote of the stockholders, and will not have the ability to elect
any of the Company's directors, all of which power will be retained by the
Company's principal stockholders. Because they will not have the ability to
control decisions with respect to management and operations of the Company, no
one should invest in the Shares unless such purchaser is willing to entrust all
aspects of the Company's business to the discretion of the principal
stockholders. See "Management" and "Principal and Selling Stockholders."
Dilution
Purchasers of Shares in this offering will incur immediate and
substantial dilution of $12.36 per Share (assuming an initial public offering
price of $12.00 per Share). To the extent that outstanding options are
exercised, purchasers of Shares will experience additional dilution. See
"Dilution."
Certain Anti-Takeover Provisions
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Charter") and Bylaws and of the Delaware General Corporation
Law (the "Delaware Corporation Law") could delay or impede the removal of
incumbent directors, make more difficult a merger, tender offer or proxy contest
involving the Company, and could discourage a third party from attempting to
acquire control of the Company, even if such events would be beneficial to the
interests of some or all of the Company's stockholders. In particular, the
classification of the Board of Directors could have the effect of delaying a
change in control of the Company. See "Management--Classified Board of
Directors." In addition, the Charter authorizes the Board of Directors to
provide for the issuance of shares of Preferred Stock of the Company in one or
more series. The Board of Directors is authorized to determine the rights,
preferences, privileges and restrictions granted to, and imposed upon, any
series of Preferred Stock and to fix the number of shares of any series of
Preferred
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Stock and the designation of any such series, subject to the consent of the
existing holders of Preferred Stock in certain instances. The Company has no
current plans to issue any such Preferred Stock. The Company is also subject to
the provisions of Section 203 of the Delaware Corporation Law. In general,
Section 203 prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
"interested stockholder," unless certain conditions are met. See "Description of
Capital Stock--Certain Provisions of the Company's Charter and Bylaws and of
Delaware Law."
No Prior Public Market for Common Stock; Arbitrary Determination of Offering
Price; Potential Volatility of Stock Price
Prior to this offering, there has been no public market for the Common
Stock. Although the Company intends to apply to have the Common Stock approved
for quotation on the Nasdaq National Market, there can be no assurance that that
application will be approved, that a public trading market for the Common Stock
will develop or continue after this offering, or that the initial public
offering price will correspond to the price at which the Common Stock will trade
subsequent to this offering. The initial public offering price will be
determined through negotiations among the Company, the Selling Stockholder and
the representatives of the Underwriters, will not necessarily be related to the
Company's book value, net worth or other established criteria of value, and may
not be indicative of the market price of the Common Stock following this
offering. Factors to be considered in determining the initial public offering
price, in addition to prevailing market conditions, include the history and
prospects of the Company's industry; the Company's past, present and anticipated
operations; its past, present and anticipated earnings and current financial
position; and an assessment of the Company's management.
The stock market has experienced price and volume fluctuations that
have particularly affected the stocks of technology companies, resulting in
changes in the market prices of stocks of many companies that may not have been
directly related to the operating performance of those companies. Such broad
market fluctuations may adversely affect the market price of the Common Stock
following this offering. In addition, the market price of the Common Stock
following this offering may be highly volatile. Factors such as variations in
the Company's interim financial results, comments by securities analysts,
announcements of technological innovations or new products by the Company or its
competitors, changing market conditions in the industry (including changing
demand for Internet access) changing government regulations, developments
concerning the Company's proprietary rights or litigation, many of which are
beyond its control, may have a material adverse effect on the market price of
the Common Stock.
The Company's operating results, cash flows and liquidity may fluctuate
significantly over time. The Company's revenues depend on its ability to attract
and retain subscribers. The Company generally offers its new subscribers a
money-back guarantee pro-rated over the unused duration of the service term and
subscribers to the Company's services have the option of discontinuing their
service for any reason. The Company's expense levels are based in part on its
expectations as to future revenues. To the extent that revenues are below
expectations, the Company may be unable or unwilling to reduce expenses
proportionately, and operating results, cash flows and liquidity therefore could
be adversely affected. Due to the foregoing factors, it is likely that, from
time to time in the future, the Company's quarterly or other operating results
and/or growth rate will be below the expectations of public market analysts and
investors. Such a failure to meet market expectations could have a material
adverse effect on the market price of the Common Stock.
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Shares Eligible for Future Sale
Upon completion of this offering, there will be 8,336,779 shares of
Common Stock outstanding (8,774,329 shares if the Underwriters' over-allotment
option is exercised in full) and 1,067,550 shares reserved for issuance pursuant
to currently outstanding stock options under the Erol's Internet, Inc. Stock
Plan (the "Stock Plan") and other outstanding options. Of the outstanding
shares, the 2,917,000 Shares (3,354,550 Shares if the Underwriters'
over-allotment option is exercised in full) offered hereby will be freely
tradable without restriction. 4,240 of the remaining shares will become freely
tradable and an additional 4,923,445 of the remaining shares held by affiliates
of the Company will become eligible for sale pursuant to the volume and other
restrictions and requirements of Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act") 90 days following the date of this Prospectus.
The balance of the outstanding shares are held by affiliates of the Company and
will become eligible for sale pursuant to the volume and other restrictions and
requirements of Rule 144 on May 9, 1998 (262,894 shares) and September 16, 1998
(229,200 shares). The Company intends to register the issuance and resale of
shares of Common Stock issuable upon exercise of outstanding options and,
accordingly, when so registered and issued, such shares will be freely tradable
except to the extent held by affiliates of the Company, as to which the volume
and other restrictions and requirements of Rule 144 will apply.
Sales of a substantial number of shares of Common Stock in the public
market following this offering, or the perception that such sales could occur,
could adversely affect the market price of the Common Stock prevailing from time
to time and could impair the Company's future ability to raise capital through a
sale of its equity securities. The Company and each of its directors, officers,
stockholders, and option holders has agreed not to, directly or indirectly,
offer for sale, sell or otherwise dispose of (or enter into any transaction or
device which is designed to, or could be expected to, result in the disposition
by any person at any time in the future of) any shares of Common Stock, each of
its directors, officers, stockholders and option holders has agreed not to
exercise any registration rights relating to any shares of Common Stock and the
Company has agreed that it will not file with the Securities and Exchange
Commission (the "Commission") a registration statement under the Securities Act
relating to any securities, for a period of 180 days after the date of this
Prospectus, without the prior written consent of Gerard Klauer Mattison & Co.,
Inc., except that the Company may grant options under the Stock Plan and may
issue shares of Common Stock upon exercise of outstanding options after the date
of this Prospectus pursuant to the Stock Plan without such consent so long as
such option holders become subject to the same restrictions. See "Principal and
Selling Stockholders," "Shares Eligible for Future Sale" and "Underwriting."
Absence of Cash Dividends
The Company has never declared or paid any cash dividends on its
capital stock and does not anticipate paying cash dividends in the foreseeable
future. See "Dividend Policy."
Forward-Looking Statements
The statements contained in this Prospectus that are not historical
fact are "forward-looking statements," which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates," the negatives thereof or other variations thereon or
comparable terminology, and include statements as to the intent, belief or
current expectations of the Company and its directors, officers and management
with respect to the future operations, performance or position of the Company.
These forward-looking statements are predictions. No assurances can be given
that the future results indicated, whether expressed or implied, will be
achieved. While sometimes presented with numerical specificity, these
forward-looking statements are based upon a variety of
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<PAGE>
assumptions relating to the business of the Company, which, although considered
reasonable by the Company, may not be realized. Because of the number and range
of the assumptions underlying the Company's forward-looking statements, many of
which are subject to significant uncertainties and contingencies beyond the
reasonable control of the Company, some of the assumptions inevitably will not
materialize and unanticipated events and circumstances may occur subsequent to
the date of this Prospectus. These forward-looking statements are based on
current information and expectation, and the Company assumes no obligation to
update. Therefore, the actual experience of the Company and results achieved
during the period covered by any particular forward-looking statement may differ
substantially from those anticipated. Consequently, the inclusion of
forward-looking statements should not be regarded as a representation by the
Company or any other person that these estimates will be realized, and actual
results may vary materially. There can be no assurance that any of these
expectations will be realized or that any of the forward-looking statements
contained herein will prove to be accurate.
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares are
estimated to be approximately $27.3 million at an assumed initial public
offering price of $12.00 per share (the mid-point of the range set forth on the
cover page of this Prospectus), after deducting estimated underwriting discounts
and commissions and offering expenses payable by the Company. The Company will
not receive any of the proceeds from the sale of Shares by the Selling
Stockholder. The Company intends to use approximately $22.5 million of such net
proceeds from this offering to (i) repay accounts payable and outstanding bank
debt (the "Bank Debt") ($4.5 million); (ii) expand and enhance network
infrastructure to support anticipated growth in the Company's subscriber base,
further penetrate existing markets and expand into new markets ($12 million);
and (iii) increase marketing efforts associated with further penetration and
expansion of markets ($6 million). The remaining net proceeds will be available
for working capital and general corporate purposes.
The Bank Debt had an outstanding balance of approximately $500,000 and
an interest rate of 10.0% on October 31, 1997, and is due September 25, 1998.
The Company intends to repay the Bank Debt immediately following this offering.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Transactions."
The amounts expended for each purpose described above, other than for
repayment of accounts payable and the Bank Debt, and the timing of such
expenditures will be determined in the Company's discretion. The Company's
future capital requirements and the allocation of the net proceeds of this
offering will depend on many factors, including the rate of market acceptance of
the Company's services, the Company's ability to expand and maintain its
subscriber base, the rate of expansion of the Company's network infrastructure,
the level of resources required to expand the Company's marketing and sales
organization, information systems and research and development activities, the
availability of hardware and software provided by third-party vendors and other
factors. While the Company has, from time to time, engaged in preliminary
discussions involving potential acquisitions of complementary product or service
lines, other companies or interests in other companies, and may consider or
enter into such transactions in the future, it currently has no understandings,
commitments or agreements, and is engaged in no active negotiations, with
respect to any such transaction.
Pending application in the Company's business, the net proceeds of this
offering will be invested in government securities or short-term, investment
grade, interest-bearing securities. The Company believes that the net proceeds
from this offering, together with other available cash, will be sufficient to
meet the Company's operating expenses and capital requirements at least through
March 1999.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its
capital stock and does not anticipate paying cash dividends in the foreseeable
future. The payment of cash dividends, if any, in the future will be at the sole
discretion of the Board of Directors.
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<PAGE>
DILUTION
The net tangible book value (deficit) of the Company as of September
30, 1997 was approximately $(30,286,000), or $(5.19) per share of Common Stock.
Net tangible book value per share represents the amount of total tangible assets
of the Company, less the amount of total liabilities, divided by the number of
---- ------- --
shares of Common Stock outstanding. After giving effect to the sale of the
2,500,000 Shares offered by the Company at an assumed initial public offering
price of $12.00 per share, and after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company, the
Company's pro forma as adjusted net tangible book value (deficit) as of
September 30, 1997 would have been approximately $(3,011,000), or $(0.36) per
share of Common Stock. This represents immediate dilution of $12.36 per share to
new investors and an immediate increase in net tangible book value per share of
$4.83 to existing stockholders. The following table illustrates the calculation
of this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per Share ................................. $12.00
Net tangible book deficit per share as of September 30, 1997 .................. $(5.19)
Pro forma increase in net tangible book value per share attributable
to new investors............................................................ 4.83
-----------
Net tangible book deficit per share after this offering.......................... $(0.36)
-----------
Pro forma dilution per Share to new investors.................................... $12.36
===========
</TABLE>
The following table summarizes, as of September 30, 1997, the differences
between existing stockholders and new investors purchasing Shares in this
offering with respect to the number of shares purchased or to be purchased from
the Company and the total consideration and the average price per share paid and
to be paid (before deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
----------------------------- ------------------------------ Price
Number Percent Amount Percent Per Share
------------ ------------ --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1).. 5,834,659 70.0% $ 4,014,925 11.8% $ 0.69
New investors (1).......... 2,500,000 30.0 30,000,000 88.2 $ 12.00
--------- ------ ----------- ------
Total 8,334,659 100.0% $34,014,925 100.0%
========= ====== =========== ======
</TABLE>
- -----------
(1) The sale of Shares by the Selling Stockholder will reduce the number of
shares of Common Stock held by existing stockholders to 5,417,659
shares, or approximately 65.0% of the outstanding Common Stock
(approximately 61.8%, if the Underwriters' over-allotment option is
exercised in full), and will increase the number of shares held by new
investors to 2,917,000 shares, or approximately 35.0% (3,354,550 shares,
or approximately 38.2%, if the Underwriters' over-allotment option is
exercised in full), of the total number of shares of Common Stock
outstanding after this offering. See "Principal and Selling
Stockholders."
The foregoing tables assume no exercise of the Underwriters'
over-allotment option or of outstanding options. As of September 30, 1997, there
were outstanding options to purchase up to 1,070,518 shares of Common Stock, at
a weighted average exercise price of $2.39 per share. To the extent that such
options are exercised, there will be further dilution to new investors. See
"Risk Factors--Dilution," "Management--Stock Plan," "--Employment Agreements and
Related Arrangements," "Principal and Selling Stockholders" and "Underwriting."
-21-
<PAGE>
CAPITALIZATION
(Dollar amounts in thousands)
The following table sets forth the capitalization of the Company as of
September 30, 1997, on an actual basis and as adjusted to reflect the sale by
the Company of 2,500,000 Shares (at an assumed initial public offering price of
$12.00 per share), and the initial application of the estimated net proceeds
therefrom. This table should be read in conjunction with "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Company's financial statements and the notes thereto,
which appear elsewhere in this Prospectus.
<TABLE>
<CAPTION>
As of
September 30, 1997
-------------------------------------
As
Actual Adjusted(1)
------------------ ---------------
<S> <C> <C>
Current maturities of long-term obligations:
Current portion of capital lease obligations.................. $ 601 $ 601
Notes payable................................................. 500 --
------------------ ---------------
1,101 601
Long-term portion of capital lease obligations.................... 585 585
------------------ ---------------
Total debt........................................................ 1,686 1,186
------------------ ---------------
Stockholders' deficit:
Preferred Stock, $0.001 par value; 10,000,000 shares
authorized, no shares issued or outstanding, actual or as
adjusted...................................................... -- --
Common Stock, $0.001 par value; 60,000,000 shares
authorized 5,834,659 shares issued and outstanding actual;
8,334,659 shares issued and outstanding as adjusted........... 6 8
Additional paid-in capital...................................... 4,057 31,330
Deferred stock compensation (2)................................. (243) (243)
Accumulated deficit............................................. (34,106) (34,106)
------------------ ---------------
Total stockholders' deficit....................................... (30,286) (3,011)
------------------ ---------------
Total capitalization........................................ $ (28,600) $ (1,825)
================== ===============
</TABLE>
- -----------
(1) Excludes (i) 1,070,518 shares underlying outstanding stock options at a
weighted average exercise price of $2.39 per share; (ii) 82,822 additional
shares reserved for issuance pursuant to the Stock Plan; and (iii) 437,550
shares reserved for issuance upon exercise of the Underwriters'
over-allotment option.
(2) Consists of the difference between the aggregate exercise price and the
aggregate fair market value of a total of 328,617 nonqualified stock
options granted to the Company's Chairman, President and Chief Executive
Officer to be recognized as an expense over the vesting period of the
options.
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<PAGE>
SELECTED FINANCIAL DATA
(Dollar amounts and share data in thousands, except per share data)
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's financial statements and the notes thereto, which
appear elsewhere in this Prospectus. The Statement of Operations Data for the
period from inception (August 1, 1995) through December 31, 1995 and for the
year ended December 31, 1996, and the Balance Sheet Data as of December 31, 1995
and 1996, have been derived from financial statements audited by Ernst & Young,
LLP, independent auditors, whose report with respect thereto appears elsewhere
in this Prospectus. The Statement of Operations Data for the nine months ended
September 30, 1996 and 1997 and the Balance Sheet Data as of September 30, 1997,
have been derived from the Company's unaudited financial statements. In the
opinion of management, the unaudited financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results for the period presented. Operating results for
interim periods are not necessarily indicative of the results that might be
expected for the entire year.
<TABLE>
<CAPTION>
Period from
August 1, 1995 Nine Months Ended
(inception) to Year Ended September 30,
December 31, December 31, ---------------------------
1995 1996 1996 1997
--------------- --------------- ------------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues........................... $ 126 $ 10,949 $ 5,972 $ 24,410
Costs and expenses:
Cost of revenues.................. 63 6,002 3,529 10,745
Operations and customer support... 125 6,227 3,876 7,098
Sales and marketing............... 188 9,476 5,524 15,507
General and administrative........ 91 2,092 1,377 2,992
Depreciation and amortization..... 17 2,014 1,053 4,360
--------- --------- --------- ---------
Total costs and expenses 484 25,811 15,359 40,702
--------- --------- --------- ---------
Loss from operations................... (358) (14,862) (9,387) (16,292)
Other expense, net..................... (660) (1,779) (900) (155)
--------- --------- --------- ---------
Net loss............................... $ (1,018) $(16,641) $(10,287) $(16,447)
========= ========= ========= =========
Net loss per share (1)................. $ (0.49) $ (6.86) $ (4.99) $ (2.52)
========= ========= ========= =========
Weighted average shares
outstanding (1)................... 2,063 2,427 2,063 6,518
Other Operating Data:
Number of subscribers--end of period... 6,344 135,378 95,866 263,418
Number of POPs--end of period.......... 2 67 36 84
EBITDA(2).............................. $ (342) $ (12,848) $ (8,334) $(11,932)
Capital expenditures........................ $ 417 $ 10,174 $ 9,183 $ 9,966
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
As of As of
December 31, September 30,
---------------------------------- ---------------
1995 1996 1997
------------- -------------- ---------------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital deficit (4)............. $(1,350) $(21,687) $ (38,712)
Property and equipment, net............. 400 10,499 16,075
Total assets............................ 415 14,559 18,813
Current portion of unearned revenues (5) 743 12,917 23,677
Long-term portion of unearned
revenues (6)...................... -- 3,441 7,887
Total liabilities....................... 1,433 29,450 49,100
Accumulated deficit..................... (1,018) (17,659) (34,106)
Total stockholders' deficit............. (1,018) (14,891) (30,286)
</TABLE>
- -------
(1) Computed on the basis described in Note 2 of the Company's financial
statements appearing elsewhere in this Prospectus.
(2) EBITDA represents net earnings (loss) before net interest expense, other
expense, income taxes, and depreciation and amortization. EBITDA is a
financial measure commonly used in the telecommunications industry. It is
presented to enhance an understanding of the Company's operating results
and is not intended to represent, and should not be considered more
meaningful than, or an alternative to, net earnings (loss), cash flow or
other measures of performance determined in accordance with generally
accepted accounting principles.
(3) Gives effect to the sale by the Company of 2,500,000 Shares and the initial
application of the estimated net proceeds therefrom (assuming an initial
public offering price of $12.00 per share).
(4) Includes the current portion of unearned revenues attributable to the
prepayment of long-term subscriptions.
(5) Represents the current portion of unearned revenues attributable to the
prepayment of long-term subscriptions.
(6) Represents the long-term portion of unearned revenues attributable to the
prepayment of long-term subscriptions.
-24-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Erols is a rapidly growing ISP offering an attractive combination of
low priced and high quality Internet access in targeted markets located
throughout the densely populated corridor stretching from Massachusetts to
Virginia. The Company's goal is to become the premier ISP serving residential
subscribers, small and medium-sized businesses and SOHO customers in each of its
targeted markets. The Company believes that there is a growing demand for high
quality Internet access, fueled by heightened consumer awareness, expanding
access to modem-equipped computers and increasingly widespread Internet use.
According to a study by IDC/LINK, at the end of 1996 approximately 13 million
households, or 13% of all U.S. households, were online. By the end of 2001,
according to this study, almost 40 million households, or 38% of all U.S.
households, are expected to be online--an increase of over 200%. Consistent with
this anticipated surge in demand, the Company believes that a key to its future
success is its continued ability to expand its base of subscribers while
retaining existing ones. Since the inception of ISP operations on August 1,
1995, the Company has become the largest regional ISP in the United States and
the eighth largest ISP nationwide, with approximately 272,000 subscribers as of
October 31, 1997, a 101% increase from approximately 135,000 subscribers as of
December 31, 1996. As of October 31, 1997, the Company's monthly churn rate was
approximately 2%, which, the Company believes, is substantially below the
prevailing industry average.
The Company began operations on August 1, 1995 as a division of OEO,
Inc. ("OEO"), a company that sold and repaired computers, televisions, and video
cassette recorders (the "Retail Sales Business"). On December 2, 1996, OEO
reincorporated in the State of Delaware and changed its name to "Erol's
Internet, Inc." The assets and liabilities of the Retail Sales Business were
spun off to a newly formed company named Erol's Computer & TV/VCR Service, Inc.
(the "Repair Company") owned by OEO's sole stockholder pursuant to the terms of
an Asset Purchase Agreement dated December 28, 1996 (the "Spin-off"). The growth
in the Company's subscriber base, along with the expansion of its service
offerings, has resulted in significant increases in both revenues and expenses.
As a result, period-to-period comparisons of the Company's results of operations
may not be as meaningful as these comparisons would be for mature companies.
The Company offers subscribers competitive fixed pricing for unlimited,
high quality Internet access on a month-to-month basis and pursuant to one-,
two- and three-year prepaid service agreements. The Company currently offers
four pricing plans, at prices ranging from $19.95 per month for month-to-month
access to as low as $10.95 per month for a prepaid three-year plan.
The Company recognizes revenues in the period in which service is
available to the subscriber. Cash received upon sale of a prepaid subscription
is recorded as unearned revenue and reflected as a liability. The prepaid amount
is amortized over the life of the subscription, with the monthly amortization
recognized as revenue and the unearned revenue liability decreased by a like
amount. Thus, subscription revenues are primarily composed of three
elements--the amortized portion of revenues attributed to the existing base of
subscribers with prepaid plans; the amortized portion of new prepaid plans which
are received during the period; and the amortized portion of expiring agreements
which are renewed each period. Erols offers its subscribers a full money-back
guarantee upon cancellation, pro-rated over the unused duration of the service
term. Therefore, in the event of a cancellation during the
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<PAGE>
term of a prepaid plan, the Company refunds the pro-rated portion of the
prepayment to the subscriber and the unearned revenue liability is reduced by
the unamortized portion of the prepayment.
The Company believes that a key to its future success is its continued
ability to expand its base of subscribers while retaining existing ones. In
light of the Company's long-term pricing programs and subscriber prepayments,
the Company believes that changes in the size of its subscriber base provide a
very strong predictor of its future revenue stream, which will increase as the
subscriber base grows and diminish as the subscriber base decreases. Two factors
affect changes in the size of the subscriber base over time--the monthly
addition of new subscribers and the Company's churn rate, which consists of (i)
cancellations of month-to-month service and long-term subscriptions prior to
expiration and (ii) non-renewal of long-term subscriptions upon expiration.
The Company generates additional revenues through the sale of high
quality Internet services and related products to its business customers,
utilizing high-speed access via ISDN, frame relay and fractional T-1, T-1 and
T-3 circuits. It also offers a broad range of Internet-based services, such as
(i) Global Trader, the Company's turn-key e-commerce solution for small
businesses; (ii) Internet security services, including security consulting and
virtual private networks; and (iii) Web hosting, design and development
services. Such revenues generally represent one-time billings for deliverable
products and other service revenues recognized over the period during which the
services are performed. To date, such other service and product revenues have
not represented a significant portion of the Company's overall revenues.
The Company's cost of revenues principally consists of
telecommunications expenses inherent in its network infrastructure. Cost of
revenues includes fees paid for lease of the Company's backbone, as well as
license fees for Web browser software based on a per user charge, other license
fees paid to third-party software vendors, product costs, and contractor fees
for distribution of software to new subscribers. A substantial portion of cost
of revenues consists of fixed and semi-variable or "step" costs. Consequently,
continued expansion of the Company's subscriber base results in economies of
scale and cost-effective utilization of the Company's network infrastructure.
Operations and customer support expenses consist primarily of expenses
associated with day-to-day support of the subscriber base, including technical
support and subscriber service. The most significant element of operations and
customer support expenses is the personnel costs associated with the Company's
staff, which consisted of 111 full-time and 92 part-time technical and customer
support representatives as of October 31, 1997. The Company intends to continue
to expand its technical support and customer service operations in keeping with
the growth of its subscriber base and, therefore, operations and customer
support expenses can be expected to increase.
Sales and marketing expenses consist primarily of marketing costs,
sales commissions, and salaries, which the Company expenses as incurred. The
Company's primary direct marketing efforts employ a combination of television,
radio, the World Wide Web and print advertising, which is focused on its
geographic markets and on the most desirable populations within those markets.
To supplement these advertising efforts, the Company has developed a network of
21 kiosk service centers, located in major shopping malls throughout its service
areas, to reach additional residential subscribers. The Company's cost of
attracting new subscribers, which consists of advertising and marketing
expenditures, currently averages approximately $60 per subscriber. Over time,
the Company expects this per subscriber cost to decrease, approaching the
Company's average cost of $30 per subscriber in its most mature markets as
market penetration increases and the Company's subscriber base expands.
-26-
<PAGE>
Additional marketing efforts focus on subscriber retention. The Company
has developed a number of direct mail and e-mail programs which offer a range of
service extensions and discounted renewal programs to subscribers who have been
utilizing the Company's service for more than six months. The Company's research
indicates that within one year of its entry into a new geographic market a
significant number of new subscribers results from referrals rather than from
media advertising. This, in turn, generally permits the Company to reduce its
advertising expenditures in maturing markets.
As of October 31, 1997, the Company's sales and marketing staff
consisted of 81 full-time and 99 part-time personnel employed as telephone and
kiosk sales personnel or in its in-house marketing and advertising functions.
The Company's telephone sales personnel are compensated on a partial commission
basis, pursuant to which they receive a base salary and a commission based on
revenues generated. Consequently, the compensation component of sales and
marketing expenses increases both as the Company hires additional commissioned
personnel and as a function of the success of its sales personnel in selling the
Company's products and services.
The Company's general and administrative expenses consist primarily of
costs associated with management, finance, accounting, facilities, information
services and human resources functions.
Prior to the Spin-off, certain expenses of the Retail Sales Business
were borne by the Company. These expenses amounted to approximately $658,000 and
$1.6 million for the period from August 1, 1995 (inception) to December 31, 1995
and for the year ended December 31, 1996, respectively.
The Company's depreciable assets consist of property and equipment,
including leasehold improvements, digital modems, routers and other network
equipment. Depreciation is calculated using the straight-line method over the
respective estimated useful lives of the assets, which range from three to seven
years. Leasehold improvements are amortized over the lesser of the related lease
term or the improvements' useful lives.
Results of Operations
Nine Months ended September 30, 1997 and Nine Months Ended September
30, 1996
Revenues. Revenues increased 309%, to $24.4 million for the nine months
ended September 30, 1997 (the "1997 Interim Period"), from $6.0 million for the
nine months ended September 30, 1996 (the "1996 Interim Period"). This increase
was principally due to an increase of 174% in the Company's subscriber base, to
263,000 subscribers as of September 30, 1997, from 96,000 as of September 30,
1996.
Cost of Revenues. Cost of revenues increased 204%, to $10.7 million
(44% of revenues) for the 1997 Interim Period, from $3.5 million (59% of
revenues) for the 1996 Interim Period. The absolute increase in cost of revenues
was primarily attributable to the growth in the Company's subscriber base. The
decrease in cost of revenues as a percentage of revenues was principally due to
economies of scale resulting from improved network utilization as new markets
matured and the subscriber base expanded.
Operations and Customer Support. Operations and customer support
expenses increased 83%, to $7.1 million (29% of revenues) for the 1997 Interim
Period, from $3.9 million (65% of revenues) for the 1996 Interim Period. The
absolute increase in operations and customer support expenses was primarily
attributable to the growth in the Company's subscriber base. The decrease in
operations and
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<PAGE>
customer support expenses as a percentage of revenues was principally due to the
increase in the Company's revenue base and to economies of scale attributable to
the growth in the subscriber base.
Sales and Marketing. Sales and marketing expenses increased 181%, to
$15.5 million (64% of revenues) for the 1997 Interim Period, from $5.5 million
(92% of revenues) for the 1996 Interim Period. The absolute increase in sales
and marketing expenses was primarily attributable to the use of television,
radio and print advertising in penetrating new markets, including New York and
Boston, during the 1997 Interim Period. The decrease in sales and marketing
expenses as a percentage of revenues was principally due to the increase in the
Company's revenue base and, to a lesser extent, to reduced advertising
expenditures in maturing markets.
General and Administrative. General and administrative expenses
increased 117%, to $3.0 million (12% of revenues) for the 1997 Interim Period,
from $1.4 million (23% of revenues) for the 1996 Interim Period. The absolute
increase in general and administrative expenses was primarily attributable to
the employment of additional personnel. The decrease in general and
administrative expenses as a percentage of revenues was principally due to the
larger revenue base.
Depreciation and Amortization. Depreciation and amortization expenses
increased 314%, to $4.4 million (18% of revenues) for the 1997 Interim Period,
from approximately $1.1 million (18% of revenues) for the 1996 Interim Period.
The absolute increase in depreciation and amortization expenses was primarily
attributable to the purchase of depreciable equipment in connection with
expansion of the Company's network infrastructure in support of its expanding
subscriber base.
Calendar Year 1996 and Inception Period from August 1, 1995 to December
31, 1995
Revenues. Revenues increased to $10.9 million for the year ended
December 31, 1996, from $126,000 for the period from August 1, 1995 (inception)
through December 31, 1995 (the "Inception Period"). This increase was primarily
attributable to the fact that the Company operated for a full 12-month period
during 1996, while the Inception Period reflects only five months of operations,
and to growth in the Company's subscriber base to 135,000 at December 31, 1996,
from 6,000 at December 31, 1995.
Cost of Revenues. Cost of revenues increased to $6.0 million (55% of
revenues) for 1996, from $63,000 (50% of revenues) for the Inception Period. The
increase in cost of revenues was primarily attributable to the significant
growth in the Company's subscriber base. The increase in cost of revenues as a
percentage of revenues was due to network expansion efforts in new markets
during 1996.
Operations and Customer Support. Operations and customer support
expenses increased to $6.2 million (57% of revenues) for 1996, from $125,000
(99% of revenues) for the Inception Period. The absolute increase in operations
and customer support expenses was primarily attributable to growth in the
Company's subscriber base during 1996. The decrease in operations and customer
support expenses as a percentage of revenues was principally due to high
start-up costs, which are reflected in the results of the Inception Period.
Sales and Marketing. Sales and marketing expenses increased to $9.5
million (87% of revenues) for 1996, from $188,000 (150% of revenues) for the
Inception Period. The absolute increase in sales and marketing expenses was
primarily attributable to utilizing television, radio and print advertising to
stimulate subscriber growth, especially in connection with the Company's entry
into the Philadelphia and Tidewater, Virginia markets during 1996. The decrease
in sales and marketing
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<PAGE>
expenses as a percentage of revenues was principally due to the increase in the
Company's revenue base and, to a lesser extent, to reduced advertising
expenditures in maturing markets.
General and Administrative. General and administrative expenses
increased to $2.1 million (19% of revenues) for 1996, from $91,000 (72% of
revenues) for the Inception Period. The absolute increase in general and
administrative expenses was primarily attributable to the fact that the Company
operated for a full 12-month period during 1996, while the Inception Period
reflects only five months of operations. The decrease in general and
administrative expenses as a percentage of revenues was principally due to the
larger revenue base.
Depreciation and Amortization. Depreciation and amortization expenses
increased to $2.0 million (18% of revenues) for 1996, from $17,000 (13% of
revenues) for the Inception Period. The absolute increase in depreciation and
amortization expenses (both in absolute terms and as a percentage of revenues)
was primarily attributable to the purchase of depreciable equipment in
connection with expansion of the Company's network infrastructure in support of
its increasing subscriber base.
Quarterly Results
The following table, which presents unaudited quarterly financial data
for each of the four quarters in the period ended September 30, 1997, has been
derived from the Company's unaudited financial statements. In the opinion of
management, these unaudited quarterly results include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results for the period presented. The operating results for
any quarter are not necessarily indicative of results for any other period.
<TABLE>
<CAPTION>
Three Months Ended
(Dollar amounts in thousands)
------------------------------------------------------------------------------
December 31, March 31, June 30, September 30,
1996 1997 1997 1997
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net revenues............................ $ 4,977 $ 6,253 $ 8,151 $10,006
Costs and expenses:
Costs of revenues.................... 2,473 3,640 3,924 3,181
Operations and customer support...... 2,351 2,192 2,401 2,505
Sales and marketing.................. 3,952 5,210 5,537 4,760
General and administrative........... 715 793 1,011 1,188
Depreciation and amortization........ 961 1,129 1,552 1,679
-------- -------- -------- --------
Total costs and expenses................ 10,452 12,964 14,425 13,313
-------- -------- -------- --------
Loss from operations.................... (5,475) (6,711) (6,274) (3,307)
Other income (expense), net............. (878) (68) (45) (42)
-------- -------- -------- --------
Net loss................................ $(6,353) $(6,779) $(6,319) $(3,349)
======== ======== ======== ========
</TABLE>
The Company expects to experience fluctuations in future quarterly
operating results that may be caused by many factors. These factors include,
among others, the timing or introduction of, or enhancement to, the Company's
products and services, the demand for such products and services, the timing of
the expansion into new markets, the timing and rate at which the Company
increases its expenses to support projected growth, seasonality, pricing and
competitive conditions in the industry and
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<PAGE>
general economic conditions. The Company believes that period-to-period
comparisons of its operating results are not meaningful and should not be relied
upon as any indication of future performance.
Liquidity and Capital Resources
The Company has generated cash from operations and through private
sales of equity securities, borrowings from third parties, and capital leases of
equipment. The Company's operating activities provided net cash of $7.6 million
during the 1997 Interim Period. Cash provided from operations has consisted
primarily of increases in unearned revenues and accounts payable. A substantial
portion of such cash was used to fund operations. The increases in unearned
revenues resulted from advance payments of an increasing number of multi-year
subscriptions.
Cash used by investing activities has consisted primarily of equipment
purchases for POP and network expansion in support of the increased subscriber
base. For the 1997 Interim Period, capital expenditures amounted to $10.0
million. The Company expects to continue to incur capital expenditures levels
commensurate with its expanding business. Where feasible, the Company will seek
to finance certain of these expenditures through capital leases.
Cash provided by financing activities was $308,000 during the 1997
Interim Period. As of September 30, 1997, the Company had cash and cash
equivalents of $533,000, restricted cash of $883,000 in connection with certain
capital lease obligations, and negative working capital of $38.7 million. The
deficit in working capital primarily represents the current portion of unearned
revenues attributable to prepayment of long-term subscriptions. The Company
intends to enter into financing arrangements to reduce accounts payable to
Ascend by approximately $4 million.
The Company is a party to the Bank Debt, which is a loan agreement with
a commercial bank, pursuant to which the Company may borrow up to $700,000. The
Bank Debt bears interest at the rate of 1.5% above the prime rate, which
resulted in a rate of 10.0% as of October 31, 1997. The outstanding principal
balance of the Bank Debt is due and payable on September 25, 1998. A principal
balance of $500,000 was outstanding under the Bank Debt at October 31, 1997.
Erol M. Onaran, the Vice Chairman of the Company and the Selling
Stockholder, has agreed to provide additional working capital to the Company as
needed through October 1998.
The Company intends to use the net proceeds of this offering to (i)
repay accounts payable and the Bank Debt; (ii) expand and enhance network
infrastructure, further penetrate existing markets and expand into new markets;
and (iii) increase marketing efforts associated with further penetration and
expansion of markets. The remaining net proceeds will be available for working
capital and general corporate purposes. Pending such uses, the net proceeds of
this offering will be invested in short-term, investment grade, interest-bearing
securities. See "Use of Proceeds."
As of September 30, 1997, the Company had net operating loss
carryforwards of approximately $7,041,000 for federal income tax purposes, which
would expire at various dates through 2012. The Company's ability to utilize all
of its net operating losses and credit carryforwards may be limited by changes
in ownership upon completion of this offering.
The Company believes that the net proceeds from this offering, together
with other available cash, will be sufficient to meet the Company's operating
expenses and capital requirements at least through March 1999. However, the
Company's capital requirements depend on numerous factors,
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<PAGE>
including the rate of subscriber cancellations; the rate of market acceptance of
the Company's services; the Company's ability to maintain and expand its
subscriber base; the rate of expansion of the Company's network infrastructure;
the level of resources required to expand the Company's marketing and sales
organization, information systems and research and development activities; and
the availability of hardware and software provided by third-party vendors. The
timing and amount of such capital requirements are not entirely within the
Company's control and cannot accurately be predicted. If capital requirements
materially exceed those currently anticipated, the Company may require
additional financing sooner than anticipated. The Company has no commitments for
additional financing, and there can be no assurance that any such additional
financing would be available in a timely manner, on terms acceptable to the
Company or at all. Further, any additional equity financing could be dilutive to
the Company's then-existing stockholders and any debt financing could involve
restrictive covenants with respect to future capital-raising activities and
other financial and operational matters. If the Company were unable to obtain
additional financing as needed, it could be required to reduce the scope of its
anticipated expansion, which could have a material adverse effect on the
Company.
Effects of Inflation
To date, inflation has not had a significant effect on the Company.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"), which is required to be adopted in financial statements for
periods ending after December 15, 1997 Accordingly, the Company will be required
to change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The impact of
SFAS No. 128 on the calculation of primary and fully diluted earnings per share
for the periods presented herein is not expected to be material.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Comprehensive Income" ("SFAS No. 130"), which is required to
be adopted in financial statements for periods ending on or after December 31,
1998. SFAS No. 130 requires that an enterprise (i) classify in the financial
statements items of other comprehensive income by their nature and (ii) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the statement of stockholders'
equity. The Company will be required to restate prior periods for comparative
purposes.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), which is required to be adopted in financial
statements for periods ending on or after December 31, 1998. SFAS No. 131
changes the way public companies report segment information in annual financial
statements and requires such companies to report selected segment information in
interim financial reports to stockholders. The disclosure of segment information
in the Company's financial statements in accordance with SFAS No. 131 is not
expected to be material.
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<PAGE>
BUSINESS
Overview
Erols is a rapidly growing ISP offering an attractive combination of
low priced and high quality Internet access in targeted markets located
throughout the densely populated corridor stretching from Massachusetts to
Virginia. The Company's goal is to become the premier ISP serving residential
subscribers, small and medium-sized businesses and SOHO customers in each of its
targeted markets. The Company believes that there is a growing demand for high
quality Internet access, fueled by heightened consumer awareness, expanding
access to modem-equipped computers and increasingly widespread Internet use.
According to a study by IDC, at the end of 1996 approximately 13 million
households, or 13% of all U.S. households, were online. By the end of 2001,
according to this study, almost 40 million households, or 38% of all U.S.
households, are expected to be online--an increase of over 200%. Consistent with
this anticipated surge in demand, the Company believes that a key to its future
success is its continued ability to expand its base of subscribers while
retaining existing ones. Since the inception of ISP operations on August 1,
1995, the Company has become the largest regional ISP in the United States and
the eighth largest ISP nationwide, with approximately 272,000 subscribers as of
October 31, 1997, a 101% increase from approximately 135,000 subscribers as of
December 31, 1996. As of October 31, 1997, the Company's monthly churn rate was
approximately 2%, which, the Company believes, is substantially below the
prevailing industry average.
The Company selects its geographic markets based on a number of
demographic and economic characteristics, such as the prevalence of computer and
modem ownership and current Internet use. Current markets include New York City,
Philadelphia, Washington, DC and Boston--the four East Coast markets with the
highest density of residential computer ownership and four of the seven highest
density residential computer markets nationwide. The Company intends to
penetrate further the residential dial-access segment of the ISP market in its
existing service areas and to enter additional high density urban and suburban
markets where demographic or economic attributes suggest a high concentration of
potential Internet users. The Company currently operates 56 physical POPs
throughout its geographic markets and, therefore, exercises substantial control
over both the quality of its service and its network costs. The Company also
currently utilizes 28 "Virtual POPs," which permit subscribers located adjacent
to, but outside of the local calling areas of, physical POPs to dial into the
Erols network on a local basis through arrangements with LECs. Because of its
regional focus, the Company is positioned to utilize its fixed network
infrastructure effectively and to achieve substantial economies of scale.
The Company focuses its marketing efforts on a geographic basis, making
efficient use of its marketing resources to build brand identification and
utilizing its existing subscriber base as a source of referrals. The Company's
primary direct marketing efforts employ a combination of television, radio, the
World Wide Web and print advertising, which is focused on its geographic markets
and on the most desirable populations within those markets. In order to design
and implement effective marketing programs and efficiently allocate resources
among media and markets, the Company monitors the reaction to, and effectiveness
of, its advertising programs on an ongoing basis.
A key element of the Company's strategy is its pricing structure, which
offers subscribers competitive fixed pricing for unlimited, high quality
Internet access on a month-to-month basis and pursuant to one-, two- and three-
year prepaid service agreements. Erols currently offers four pricing plans, at
prices ranging from $19.95 per month for month-to-month access to as low as
$10.95
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<PAGE>
per month for a prepaid three-year plan. The Company targets its pricing below
its major national competitors, but does not believe that it is necessary to
offer the lowest prices in each market, in light of the quality of its network,
as well as its growing brand identification and subscriber loyalty. In
conjunction with its pricing packages, the Company offers a full money-back
guarantee upon cancellation, pro-rated over the unused duration of the service
term.
The Company recently has begun to focus on, and intends to intensify
its efforts to penetrate, the market segment composed of small and medium-sized
businesses and SOHO users which, the Company believes, represents a natural
complement to the Company's existing residential subscriber base. A study by IDC
indicates that, nationwide, the market of small and medium-sized businesses
currently is comprised of approximately 7.2 million businesses, of which 20%
have Internet access. IDC also projects that the number of businesses in this
market will increase at an annual rate of 2.2% into the next century and that
the percentage of such companies with Internet access will rise to 52% by the
year 2000. Presently, the Company's subscriber base consists primarily of
residential users whose peak usage occurs during the evenings and weekends. By
attracting business customers who utilize network facilities during normal
business hours, when the Erols network otherwise is significantly underutilized
(as much as 70% idle), the Company aims to achieve optimal network utilization
and to generate substantial additional revenues from its targeted business
customers at modest incremental cost.
The Company's network infrastructure currently supports modems with
dial-access speeds of up to 56 Kbps. The Company provides new dial-access
subscribers with its easy-to-install proprietary access software package, which
incorporates a telephone dialer, an e-mail platform, a Web browser (either
Netscape Navigator or Microsoft Internet Explorer) and SurfWatch software for
parental control over Internet content access. This software package permits
simplified access to the Internet through a "point and click" GUI. After
installation, the subscriber has a direct connection to the Internet using PPP,
and access to all of the Internet's resources, including e-mail, the World Wide
Web, Usenet News service and Internet Relay Chat. The Company's access software
automatically displays the Erols World Wide Web site each time a subscriber logs
on, providing the Company with the opportunity to communicate with its
subscribers at the start of each session. The Company maintains "24 x 7"
subscriber and technical support 365 days a year.
The Company believes that its ability to provide consistently high
quality Internet access is key to its future success and devotes substantial
resources to ensuring the reliability of its network and the quality of its
Internet access services. In a comparison of ISPs performed by Inverse for the
seven month period from May 1997 to October 1997, the Company's service ranked
above the industry average for measured criteria on seven of the eight criteria
compared, including the rate of call failures.
The Company provides high quality Internet access services to its
business customers utilizing high-speed access via ISDN, frame relay, fractional
T-1, T-1 and T-3 circuits. It also offers a broad range of Internet-based
services, including (i) Global Trader, the Company's turn-key e-commerce
solution for small businesses; (ii) Internet security services including
security consulting and virtual private networks; and (iii) Web hosting, design
and development services.
In order to reduce its local access costs and permit increased network
utilization through expanded service offerings, the Company, through a
to-be-formed wholly owned subsidiary, intends to apply to the Commonwealth of
Virginia, the State of Maryland and the District of Columbia to become a CLEC
and may, in the future, seek CLEC status in other states as well.
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<PAGE>
Comparative Performance
The Company believes that its ability to provide consistently high
quality Internet access is key to its future success and devotes substantial
resources to ensuring the reliability of its network and the quality of its
Internet access services. In a comparison of ISPs performed by Inverse for the
seven month period from May 1997 to November 1997, the Company's service ranked
above the industry average on seven of the eight criteria compared, including
rates of call failures. The Company believes that the three call failure rates
are the most relevant performance criteria for ISPs. The companies included in
the industry averages were America Online, AT&T, CompuServe Corporation
("CompuServe"), Concentric Network Corporation ("Concentric"), EarthLink
Network, Inc. ("EarthLink"), IBM, MCI Communications Corporation ("MCI"),
Microsoft, MindSpring Enterprises, Inc. ("MindSpring"), NETCOM On-Line
Communication Services, Inc. ("NETCOM"), Prodigy, Sprint Corporation ("Sprint")
and UUNet Technologies, Inc. ("UUNet").
The following table sets forth the comparison of the various measured
criteria for the Company and the industry as a whole:
<TABLE>
<CAPTION>
Industry
Criterion Erols Average
- ------------------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
24-Hour Call Failure Rate (%) (1) 3.9 7.8
Evening Hours Call Failure Rate (6:00 PM--midnight local time)(%) (1) 4.8 12.0
Business Hours Call Failure Rate (9:00 AM--6:00 PM local time)(%) (1) 4.8 8.6
Initial Modem Connect Speed (Kbps) 29.0 28.3
Average time to Login (seconds) 28.7 32.0
Average DNS Lookup Time (milliseconds) (2) 427.1 492.6
Average Web Latency (seconds) (3) 2.0 2.1
Average Web Throughput (Kbps) (4) 1.6 1.8
- -------
</TABLE>
(1) Call failures consist of (i) busy signals; (ii) ringing without answer;
(iii) modem problems; and (iv) login failures.
(2) The average time it takes a user to access a particular host for the
first time.
(3) The average time between a user's request for a Web page and the
appearance of that Web page on the user's screen.
(4) The average speed at which a user downloads and displays a complete Web
page.
Industry Background
The Internet is a global collection of thousands of interconnected
computer networks that enables commercial organizations, educational
institutions, governmental agencies and individuals to communicate
electronically, access and share information and conduct commerce. Unlike other
public and private telecommunications networks that are managed by businesses,
governmental agencies or other entities, the Internet is a cooperative
interconnection of many such public and private networks. The networks that
comprise the Internet are connected in a variety of ways, including by the
public-switched telephone network and by dedicated high-speed leased lines. Open
communications on the Internet are enabled by TCP/IP, the common Internet
communications protocol, which enables communication across the Internet
regardless of the hardware and software used.
Recent technological advances, including the development of easy-to-use
GUIs, combined with cultural changes and evolving business practices, have led
to integration of the Internet into the activities of individuals and the
operations and strategies of commercial organizations. Use of the Internet by
individuals and relatively small businesses and other organizations has been
accelerated by dramatic
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<PAGE>
increases in cost-effective processing power and data storage capabilities in
personal computers, as well as widespread availability of multimedia, fax/modem,
and networking capabilities to the home computing market. Much of the recent
growth in Internet use by businesses and individuals has been driven by the
emergence of a network of servers and information available on the Internet
called the World Wide Web. The World Wide Web, which is based on a client/server
model and a set of standards for information access and navigation, can be
accessed using software that allows non-technical users to exploit the
capabilities of the Internet. The World Wide Web enables users to find, retrieve
and link information on the Internet easily and consistently. The development of
World Wide Web technology and associated easy-to-use software has made the
Internet easier to navigate and more accessible to a larger number of users and
for a broader range of applications.
Until recently, individuals could access the Internet only through an
organization with a direct Internet connection, or through traditional online
services employing closed, proprietary networks that allowed access only to
limited Internet resources. With the growth and increasing commercialization of
the Internet, a number of ISPs, including the Company, have emerged to provide
Internet software and direct access to individuals. Traditional online services
also have begun to increase the scope and capacity of their access to the
Internet. Access providers vary widely in the geographic coverage, subscriber
focus and levels of Internet access. For example, access providers may
concentrate on certain types of subscribers (such as businesses or individuals)
that differ substantially in the type of service and support required. Providers
may also differ according to whether they provide direct or non-direct access to
the Internet. Direct access through Internet protocols such as SLIP (Serial Line
Interface Protocol) or PPP (Point-to-Point Protocol), enable users to establish
direct connections to other computers on the Internet, including World Wide Web
sites or computers operated by other users, and thereby have access to the full
range of Internet resources. The Company, like most regional and national ISPs,
offers direct Internet access. To compete with these direct ISPs, consumer
online services (including America Online and NETCOM), which do not provide
direct Internet access, have introduced Internet access gateways.
Strategies
The Company intends to (i) expand its base of residential dial-access
subscribers while retaining its current subscribers; (ii) intensify its efforts
to penetrate the small and medium-sized business and SOHO markets; (iii) use its
regional focus and geographically concentrated subscriber base to continue to
optimize network utilization and reduce network costs; (iv) continue to offer an
attractive combination of low priced and high quality Internet access; and (v)
enhance its relationship with its subscribers by providing access to a range of
e-commerce products and services at preferential prices.
Expand Subscriber Base and Retain Existing Subscribers
The Company plans to devote significant effort and financial resources
to further penetrate the residential dial-access market within its existing
service areas and to enter selected high-density urban and suburban markets in
other regions, or where demographic or economic attributes suggest a high
concentration of potential Internet users. As it enters a new market, the
Company intends to establish quickly a subscriber base utilizing focused
marketing tactics targeting demographic groups with characteristics that the
Company has identified as correlative with likely Internet use. The Company
believes that, over time, this expansion strategy will result in increasingly
cost-effective marketing expenditures.
The Company's goal is to maintain its churn rate at or below its
current level of 2% per month. The Company believes that a low churn rate
assists in increasing the Company's subscriber base by
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<PAGE>
minimizing the need to replace existing subscribers. Additionally, the Company
believes that its subscriber base represents a powerful and cost-effective
source of additional subscribers. The Company's research indicates that within
one year of its entry into a new geographic market, a significant number of new
subscribers results from referrals rather than from media advertising. This, in
turn, permits the Company to reduce its advertising expenditures in maturing
markets. Ease of use, high quality service, reliable network facilities and
responsive technical support will continue to be central to subscriber
retention. In addition, the Company intends to continue to utilize direct mail
and e-mail programs offering service extensions and discounted renewal programs
to current subscribers.
Penetrate the Small and Medium-Sized Business and SOHO Market
The Company intends to optimize its network utilization by targeting
the market segment composed of small and medium-sized business and SOHO users,
which, the Company believes, represents a natural complement to the Company's
existing residential subscriber base. A study by IDC indicates that, nationwide,
the market of small and medium-sized businesses currently is comprised of
approximately 7.2 million businesses, of which 20% have Internet access. IDC
also projects that the number of businesses in this market will increase at an
annual rate of 2.2% into the next century and that the percentage of such
companies with Internet access will rise to 52% by the year 2000. To date, the
Company's subscriber base has consisted primarily of residential users whose
peak usage occurs during the evenings and weekends. By attracting new business
customers who utilize network facilities during normal business hours, when the
Erols network otherwise is significantly underutilized (as much as 70% idle),
the Company aims to achieve optimal network utilization and to generate
substantial additional revenues from its targeted business customers at modest
incremental cost. Accordingly, the Company intends to offer extremely
competitive rates and enhance and expand the Company's business-related
services, including new e-commerce products and services such as (i) Global
Trader, the Company's turn-key e-commerce solution for small businesses; (ii)
Internet security services including security consulting and virtual private
networks; and (iii) Web hosting, design and development services.
Optimize Network Utilization and Reduce Network Costs
The Company intends to continue its strategy of operating its own POPs,
thus eliminating per-line access charges and retaining substantial control over
both the quality of its service and its network costs. As the Company's
subscriber base expands within the regions served by its physical POPs, the
Company expects to achieve higher network utilization and economies of scale,
thereby more effectively utilizing its fixed network costs. In addition, the
Company intends to continue to expand to areas adjacent to its established
market areas through the use of Virtual POPs. A Virtual POP, as utilized by the
Company, is a local telephone number (outside of the local calling area of a
physical POP) through which calls are aggregated by a service provider, often a
Competitive Access Provider ("CAP") or a CLEC, and then transferred to the
Company on a dedicated trunk route between the Company and that provider. By
utilizing Virtual POPs, the Company can postpone the start-up expenditures for
physical POPs in expansion areas until a substantial subscriber base has been
established. As traffic and the aggregate cost of service from the LEC (which is
charged on a per call basis) increases, the Company can establish a physical POP
and capture the efficiencies of a substantial user base.
In order to reduce its local access costs and permit increased network
utilization through expanded service offerings, the Company, through a
to-be-formed wholly owned subsidiary, intends to apply to the Commonwealth of
Virginia, the State of Maryland and the District of Columbia to become a CLEC
and may, in the future, seek CLEC status in other states as well. There can be
no assurance,
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<PAGE>
however, that the Company will be granted CLEC licenses in any jurisdiction or
that it will operate profitably as a CLEC. See "--Government Regulation" and
"Risk Factors--Government Regulation."
Continue to Offer High Quality, Competitively Priced Internet Access
The Company believes that providing consistently high quality access
and responsive technical support at very competitive prices is key to the
Company's future success. The Company intends to continue to control the quality
and cost of its services by operating all of its physical POPs and believes that
its initiatives to optimize network usage, as well as its marketing
expenditures, will enable the Company to continue to offer its Internet access
services at attractive rates. Further, the Company intends to continue to expand
its technical support and subscriber service capabilities in keeping with the
growth of its subscriber base.
Enhance Subscriber Relationships
In order to build strong, long-term relationships with its subscribers,
the Company intends to continue to implement and expand programs to provide its
subscribers with a range of e-commerce product and service offerings at
preferential prices. The Company believes that the successful creation of such
relationships will differentiate Erols from its competitors and, ultimately,
will contribute to both enhanced revenues and improved margins. In order to
enhance subscriber relationships, and as part of its commitment to subscriber
satisfaction, the Company intends to continue to seek out new opportunities for
developing strategic alliances that will provide more complete subscriber
solutions, as well as access to additional content and product offerings. The
Company has entered into a number of partnering relationships with merchants,
such as PC Flowers & Gifts, Book Express and Net Grocer, to provide Erols
subscribers with access to products at discounted prices. In addition to
enhancing subscriber relationships, the Company expects to realize revenues from
transaction fees associated with the purchase of such products and services
through the Erols network. In addition, the Company plans to expand its recently
launched "Erols Store", where Erols subscribers can shop online for discounted
items. The Company anticipates that its subscribers will enjoy the benefits of
simplified access and proprietary discount shopping while the Company realizes
increased revenues from advertising and transactions fees.
Services
A substantial majority of the Company's current users are residential
subscribers and, to a lesser extent, small and medium-sized business and SOHO
users, who connect to the Internet via modem. The Company's infrastructure
currently supports modems with dial-access speeds of up to 56 Kbps. The Company
also offers high-speed, dedicated connections for larger business users who
utilize Local Area Network ("LAN") access to the Internet. For these accounts,
the Company offers a wide variety of connectivity options which vary in price
depending on the throughput, or bandwidth, of the connection, as well as on the
features selected.
The Company provides dial-access service for a minimum radius of 25
miles from the center of each of its geographic markets. The dial-access radius
presently extends up to 50 miles in the Company's larger markets, which
currently include Washington, DC, Philadelphia and New York City. The Company
primarily utilizes physical POPs to provide service within these dial-access
areas. Beyond these areas, the Company provides dial-access to selected densely
populated areas with attractive
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<PAGE>
demographic and economic characteristics primarily through the initial
utilization of Virtual POPs, followed by the installation of physical POPs when
justified by user demand.
Residential and Business Access Plans
Dial-Access Service. The Company's dial-access service allows
residential and other dial-access subscribers to obtain unrestricted high-speed
Internet access for a fixed fee by dialing into one of the Company's POPs. The
Company currently offers four pricing plans, at prices ranging from $19.95 per
month for month-to-month access to as low as $10.95 per month for a prepaid
three-year plan. There are no set-up fees for prepaid plans, although a $15.00
fee is charged for monthly dial-access. A key element of the Company's marketing
and pricing package is its full money-back guarantee upon cancellation,
pro-rated over the unused duration of the service term.
ISDN and Dedicated Line Service. The Company offers high-speed ISDN
Internet access in selected markets. ISDN provides a faster, more efficient
method for communicating digital data over telephone lines. ISDN speeds are
significantly faster than conventional modem speeds (up to 128 Kbps versus up to
the current maximum of 56 Kbps). The monthly ISDN service charge ranges from
approximately $200 per year for dial-access 64 Kbps ISDN Service up to $2,400
per year for dedicated 128 Kbps lines, with charges determined by speed and
distance. A one-time set-up fee which ranges from $50 to $400 is charged for
this service.
Frame Relay Service. Frame relay enables direct, high-speed, continuous
connection of an organization's internal local area network to the Internet
using dedicated circuits at speeds ranging from 56 Kbps to 1.5 Mbps. This
service enables businesses to connect an entire LAN or high-end workstation to
the Internet and provides the fastest data transfer rate generally available.
Frame relay service fees, exclusive of LEC charges (which are passed through to
the customer), range from $200 to $750 per month depending on access speeds,
data throughput and other data transfer metrics. One-time set-up fees range from
$470 to $1,000.
iPass Remote Access. The Company provides worldwide remote access to
its network for subscribers who do not have access to an Erols POP through
iPass, a consortium of regional ISPs. Pursuant to its relationship with iPass,
the Company has ensured its users access to high quality POP sites by specifying
that, where available, the Company's traffic must go through UUNet sites, which
the Company believes are consistently the highest quality sites available. In
areas where UUNet POPs are not available, the Company has designated that the
highest quality available POPs be utilized for its traffic. The availability of
iPass remote access permits the Company to provide high quality worldwide
Internet access to its subscribers while permitting it to retain its regional
focus.
Standard Services
Erols subscribers use their accounts for communicating and for
retrieving and publishing information on the Internet. The Company provides new
dial-access subscribers with its easy-to-install proprietary access software
package, which incorporates a telephone dialer, an e-mail platform, a Web
browser (either Netscape Navigator or Microsoft Internet Explorer) and SurfWatch
software for parental control over Internet content access. This software
package permits simplified access to the Internet through a "point and click"
GUI. After installation, the subscriber has a direct connection to the Internet
using PPP. The Company's access software automatically displays the Erols World
Wide Web site each time a subscriber logs on to the Erols network, providing the
Company with the opportunity to communicate with its subscribers upon each
startup. The Erols access package eliminates complex set-
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up procedures, automatically upgrades to new version releases and provides
subscribers with internal help files. The Company's non-proprietary architecture
provides users with the option of employing their client applications without
prior configuration or support.
The Company is focusing significant resources on continuing to develop
its own home page, which provides access to technical assistance, as well as
e-commerce and other interactive applications. Applications currently available
include the following:
World Wide Web. The World Wide Web supports multimedia (text, graphic,
audio and video) presentation of information and images. Users can move among
World Wide Web sites by clicking on available hypertext links to such sites and
can interact with World Wide Web information providers through typed input.
Usenet News. Usenet News provides Internet-wide, subject-specific
forums on thousands of subjects. Users can post information to, and retrieve
information from, each of these forums.
E-mail. Each Erols subscriber is provided with a "mailbox," or e-mail
address, which allows users to exchange an unlimited number of multimedia text,
graphics, audio and video messages with anyone with an Internet e-mail address.
For those subscribers who require more than one mailbox, the Company makes
available additional mailboxes for a per mailbox set-up fee of $9.95 and a
monthly service fee of $4.95.
Internet Relay Chat. Internet Relay Chat permits participants to
engage in "chat" sessions, in which typed comments from all participants appear
on each screen, allowing simultaneous, multi-person, real-time "conversations."
Planet Direct. The Company, with its strategic partner, Planet Direct,
provides Erols subscribers with personalized information and services, as well
as easy access to various Internet information sources. The Planet Direct Info
Center provides subscribers with world, national, business and sports news from
Reuters, as well as live satellite feeds from Reuters and the Sports Network,
providing breaking news and real time sports scores, yellow pages, travel and
product information. In addition, subscribers can receive personalized weather,
sports scores, stock ticker information and additional news. The Planet Direct
reminder service permits subscribers to enter important dates, such as
birthdays, anniversaries and appointments and to receive timely reminders as
those dates approach. Subscribers also can send free animated birthday cards via
Planet Direct.
Supplemental Services
Domain Name Registration. The Company provides unique domain names for
those subscribers who prefer an individualized address. For example, instead of
"[email protected]", the user Joe Smith may prefer the name "[email protected]", or a
business user may prefer a domain name that reflects the name of his business,
such as "[email protected]." The Company charges $100 to assist its subscribers in
establishing unique domain names. In addition, subscribers pay an initial fee of
$100 directly to an Internet domain registration agency and thereafter pay an
annual renewal fee to that registration agency.
Global Trader. The Company has developed "Global Trader," a
state-of-the-art, turn-key e-commerce application incorporating Microsoft's
Merchant Server, the credit card processing of Cardservice International, Inc.,
transaction security of CyberCash, Inc. and digitized graphical images by
PictureVision, Inc. A small business utilizing this application can operate as
an Internet merchant with a
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minimum of technical expertise or Internet experience. The Company believes that
this end-to-end solution will attract small and medium-sized businesses from
across the United States and will both generate direct revenues and provide
ongoing revenues from transactions fees. In addition, the Company believes that
Global Trader clients may purchase Web site development and hosting services.
Erols Store. Through "Erols Store," strategic partners of the Company
offer various products and services to Erols subscribers at discounted prices.
For example, subscribers can download upgrades to Microsoft Internet Explorer
and Netscape Navigator and both "comparison shop" and purchase special PC
hardware and communications products. Similarly, a subscriber may order and send
flowers or a gift through Erols PC Flowers & Gifts, order a book through Book
Express or groceries through Net Grocer. Prices, products and special discounted
items vary from week to week. Depending upon the terms of its partnering
arrangement, the Company generates revenues from Erols Store transactions
through product sales or commissions through Erols' partnering arrangements. The
Company intends to continue to expand the range of its product and service
offerings, as Erols continues to establish relationships with marketing partners
throughout its service area.
Web Hosting, Design and Development Services. Each Erols subscriber is
provided one megabyte of disk space on the Company's Web server to create a
personal Web home page. Up to five megabytes of additional storage may be
purchased for a $49 annual fee. Small business subscribers pay $295 per year for
ten megabytes and $495 per year for 15 megabytes of storage. The Company also
provides higher-end Web site solutions for businesses, including monitoring and
security applications, at annual fees of $880 and higher. Each Web site comes
with a 100 Mbps connection to the Company's T-3 network, technical support,
monthly usage statistics, one domain name registration, unlimited Common Gateway
Interface ("CGI") access and monthly backups.
In addition, as a "one-stop" ISP, the Company offers Web page
development services. Businesses that wish to conduct commercial activities from
their home page or communicate with shareholders, customers or suppliers are
able to do so with a professional Web site incorporating graphics, CGI,
scripting and Java. The Company targets its Web creation services to small and
medium-sized businesses. The Company offers "pre-fab" Web sites at prices
starting at $220 and provides custom design services at an hourly rate of $80 to
$100.
Subscribers, Customers and Turnover
As of October 31, 1997, the Company had approximately 250,000
dial-access residential subscribers and 22,000 small business and SOHO customers
purchasing ISDN, dedicated line and/or Web hosting services from the Company. By
comparison, as of December 31, 1996, the Company had approximately 135,000
subscribers. Prior to 1997, the Company did not offer significant business
services or differentiate its subscriber base by user type.
Subscriber retention is a major focus of the Company's marketing
efforts. The Company has developed a number of direct mail and e-mail programs
which offer a range of service extensions and discounted renewal programs to
subscribers who have been utilizing the Company's service for more than six
months.
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The Company has been successful in its efforts to retain existing
subscribers. As of October 31, 1997, the Company's churn rate (consisting of (i)
cancellations of month-to-month service and long term subscriptions prior to
expiration and (ii) non-renewal of long term contracts upon expiration) was
approximately 2%, which, the Company believes, is substantially below the
prevailing industry average. A substantial percentage of the Company's
cancellations occur during the first 90 days of service.
Marketing
General
The Company's marketing strategy is tied to its expansion plans, which
call for the gradual build-out of the Erols network in densely populated urban
markets with high concentrations of potential Internet users. The Company
focuses its marketing efforts on a geographic basis, making efficient use of its
marketing resources to build brand identification and subscriber loyalty, and to
utilizing its existing subscriber base as a source of referrals.
The Company began its operations in the greater Washington, DC area,
including adjacent portions of Maryland and Virginia and, during 1997 expanded
into the Philadelphia, New York City, Hartford and Boston metropolitan areas. A
key element of the Company's marketing strategy is its pricing structure, which
offers subscribers competitive fixed pricing for unlimited, high quality
Internet access on a month-to-month basis and pursuant to one-, two- and
three-year prepaid service agreements. Erols targets its pricing below its major
national competitors, but does not believe that it is necessary to offer the
lowest prices in each market, in light of the quality of its network and its
growing brand identification and subscriber loyalty. The Company's marketing and
pricing package provides for a full money-back guarantee upon cancellation,
pro-rated over the unused duration of the service term.
Targeted Marketing
The Company selects its geographic markets based on a number of
demographic and economic characteristics, such as the prevalence of computer and
modem ownership and current Internet use, and then directs its marketing toward
the most desirable populations within those selected markets. By targeting
densely populated urban markets with predictably high demand for Internet access
services, the Company is able to make efficient use of its marketing resources.
Subscriber Referrals
The Company's research indicates that within one year of its entry into
a new geographic market, a significant number of new subscribers results from
referrals rather than from media advertising. This, in turn, permits the Company
to reduce its advertising expenditures in maturing markets. In order to utilize
the marketing power of its existing subscriber base, the Company currently
offers one free month of access to each existing subscriber identified as a
referral source by a new subscriber.
Advertising Media, Telephone Sales and Follow-Up
The Company's primary direct marketing tools are television, radio, the
World Wide Web and print advertising, which are focused on the most desirable
populations within its targeted geographic markets. In order to design and
implement effective marketing programs and efficiently allocate resources among
media and markets, the Company monitors the reaction to, and effectiveness of,
its advertising programs on an ongoing basis. The Company's cost of attracting
new subscribers, which
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consists of advertising and marketing expenditures, currently averages
approximately $60 per subscriber. Over time, the Company expects this per
subscriber cost to decrease, approaching an average cost of $30 per subscriber
in the Company's most mature markets as market penetration increases and the
Company's subscriber base expands.
As of October 31, 1997, the Company employed approximately 40 sales
representatives at its Springfield, Virginia headquarters dedicated to
responding to telephone inquiries from potential and current residential
subscribers. To the extent that a telephone inquiry does not result in the
purchase of service, the Company captures the name and address of the caller in
its data base and sends out follow-up information. For new subscribers who do
not require personal assistance, the Company provides an automated online
sign-up service.
Other Marketing Strategies
The Company employs approximately 40 full- and part-time employees to
staff its 21 kiosk service centers. These sales employees, like the Company's
telephone sales personnel, are trained to identify service needs and priorities
of potential subscribers and to identify the package of services that is best
suited to fit those needs. In addition, kiosk personnel are trained to lead new
subscribers through the set-up process on a step-by-step basis and to offer
potential subscribers the opportunity to "test drive" the Company's service at a
kiosk.
The Company has established a discount program for organizations that
open a group of dial-access accounts. To date, the typical participant in this
program has been a business, charity or trade association that wants to provide
Internet access for its employees. The Company believes that this program is
effective both because it permits the Company to enroll substantial blocks of
new subscribers and because it supplements the Company's direct marketing
efforts.
Marketing to the Business User
Since inception, the Company has focused on providing Internet services
to residential subscribers, the majority of whom subscribe to the Company's
dial-access service. The Company has begun expanding its existing marketing
efforts to attract small and medium-sized business and SOHO customers. The
Company plans to continue to develop a "Partner's Program" with regional Web
site developers, systems integrators and network integrators. These strategic
partners will provide the Company's business customers with local experts to
assist in the development of Web sites or in the installation of a network to
access the Internet.
The Company maintains a staff of approximately ten sales
representatives in its Business Services Group dedicated to serving the needs of
its business customers and supporting business applications. The Company strives
to retain and expand its business customer base by supplying high quality,
reliable technical support.
Network Infrastructure
POPs
The Company presently provides its subscribers with Internet access
primarily through a system of physical and Virtual POPs in its regional markets.
The Company currently maintains a system of 56
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physical POPs and 28 Virtual POPs in eight states (Massachusetts, Connecticut,
New Jersey, New York, Pennsylvania, Maryland, Delaware and Virginia) and the
District of Columbia. All of the Company's physical POPs are housed in secured
space, typically co-located with a communications services provider, such as MFS
Communications Company, Inc. ("MFS") or Cable & Wireless. A physical POP
includes network access server (dial-access terminal server) hardware, along
with a router and associated leased-line interface equipment. The terminal
server's modem subsystem is interconnected to the switched telephone network
serving the local area, and high-speed data circuits connect the POP's router to
other sites within the Erols network. Because the Company operates its physical
POPs, it is able to eliminate per-line access charges and retain substantial
control over both the quality of its service and its network costs.
A Virtual POP, as utilized by the Company, is a local telephone number
(outside of the local calling area of a physical POP) through which calls are
aggregated by a service provider, often a CAP or a CLEC, and then transferred to
the Company on a dedicated trunk route between the Company and that provider. By
utilizing Virtual POPs, the Company can postpone the start-up expenditures for
physical POPs in expansion areas until a substantial subscriber base has been
established. As traffic increases and the aggregate cost of service from the
service provider (which is charged on a per call basis) increases, the Company
can install a physical POP and capture the efficiencies of a substantial user
base.
For subscribers located in a geographic area not presently serviced by
a physical or Virtual POP, the Company provides worldwide remote access to its
network through iPass, a consortium of regional ISPs. Pursuant to its
relationship with iPass, the Company has ensured its users access to high
quality POP sites by specifying that, where available, the Company's traffic
must go through UUNet POPs, which the Company believes are consistently the
highest quality sites available. In areas where UUNet POPs are not available,
the Company has designated that the highest quality available POPs be utilized
for its traffic. The availability of iPass remote access permits the Company to
provide high quality worldwide Internet access to its subscribers while
permitting it to benefit from its regional focus.
The Erols internal network provides widespread IP connectivity between
the Company's POPs, its NOC and external Internet access paths. Subscriber
interaction with the external Internet does not necessarily require that data be
routed through the Company's NOC. The Erols NOC is used to authenticate access
and provide back-end assist functions such as e-mail and Usenet News groups.
Through network expansion, Erols intends to acquire additional Internet access
paths and further reduce reliance on its NOC. See "Use of Proceeds."
The following diagram depicts the structure of the Erols network:
[schematic diagram]
The Company's server and communications infrastructure utilizes the
open Internet standard TCP/IP protocol suite. The Erols network infrastructure
interconnects dial-access POP terminal servers throughout the Company's service
areas with the NOC in Springfield, Virginia, which houses the Company's back-end
server complex, as well as multiple high-speed pathways to the Internet.
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Dial-Tone Trunking
The Company's dial-access infrastructure provides the subscriber with
high-speed, low error rate connectivity, leading to maximum throughput. The
Company's POP hardware must interface with the public switched telephone network
in order to communicate with the dial-access subscriber's computer or modem. The
Company has selected the most advanced method of high-capacity interconnection
to the public switched network, predominantly utilizing digital Primary Rate
Interface ("PRI") ISDN where available. This ensures that dial-access
subscribers will receive the best possible connect speeds and fewest
throughput-degrading error events. To enhance system availability, the Company
has arranged for dial tone providers to deliver PRI ISDN circuits over
fault-tolerant SONET fiber ring infrastructure or other high quality redundant
infrastructure where available.
Through third-party service contracts and its NOC in Springfield,
Virginia, the Company constantly monitors network utilization and security,
including equipment at its POPs, to ensure reliable Internet connectivity. The
Company utilizes Ascend's advanced Max and TNT products to provide efficiencies
for both the Company's subscribers and for its network. The Company's
telecommunications staff has engineered network connectivity to ensure that
subscribers will receive the fewest possible busy signals by keeping the ratio
of users per port at approximately 10:1. As the network gains efficiencies, the
Company believes that it will be possible to increase the ratio of users per
port to in excess of 14:1 without degradation of service. Company personnel
track peak time usage daily to ensure high quality access service.
The Company's telecommunications department routinely evaluates the
many telephone service offerings in a continuous effort to identify and utilize
the most cost-effective local connections to the local telephone network. Erols
uses both LEC and CLEC providers to secure competitive pricing without
sacrificing technical quality. The Company believes that the increasing
availability of CLEC service, such as from MFS, Teleport Communications Group,
Inc. and others will be a major force in driving down its telecommunications
costs.
The Company currently is increasing the data capacity, speed,
reliability and security of its network. To this end, the Company has purchased
network management software that allows the Company to monitor network traffic
and service quality. The Company is also developing plans to expand the
capabilities of its NOC and to add route diversity which will further upgrade
the security and reliability of the network.
Internal Network
The Company's POPs, external interconnect links and NOC are
interconnected by a robust, router-based TCP/IP network. Many POPs are
interconnected via two or more T-1 rate facilities and major POPs are
interconnected by T-3 rate facilities. Physical local loop connectivity is
typically provided over fault tolerant SONET fiber facilities, or over
diverse-route conventional facilities. Most short-haul circuits are engineered
raw pipes leased from a LEC or CLEC, some long-haul circuits are engineered as
IP-in-IP tunnels across the Cable & Wireless backbone. The Company is augmenting
its internal backbone along the Eastern seaboard through the installation of a
router-based native DS3 backbone from Washington, DC to New York. When complete,
Cable & Wireless paths will serve as redundant backup.
The Company's NOC is staffed on a "24 x 7" basis, 365 days a year. A
175 kilowatt diesel emergency generator and multiple UPS systems minimize the
possibility of service interruptions caused
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by outages of commercial power. Multiple independent HVAC systems provide
reliable climate controlled conditions for the equipment. The Company controls
all of the equipment constituting its physical POPs. In addition, the Company
leases two T-3 backbones--one from New York City to Northern Virginia with
breakouts in Philadelphia, Baltimore, and Washington DC, and one from Boston to
Norfolk, Virginia with intermediate connections at Hartford, New York City,
Philadelphia, Baltimore, Washington, DC and Tysons Corner and Richmond,
Virginia. The Company also leases two redundant T-3 connections from its NOC to
the MAE-East inter-carrier interconnect.
External Connectivity
The Company maintains multiple high bandwidth paths to the Internet.
Present connectivity includes a 100 Mbps FDDI MAE-East inter-carrier
interconnect including a private-use Gigaswitch port; Fast Ethernet and DS3
connections to Cable & Wireless; and a DS3 connection to CAIS. Present expansion
plans include a DS3 connection to the Sprint-NAP in Pensaulken, New Jersey.
Back-End Servers
The Company operates many application-specific server systems to
provide assist-functionality for client applications and to support Web page
hosting and other business services. The Company has a substantial and growing
hardware base to support its business activities including new Sun Microsystems,
Inc. ("Sun") equipment, NT servers, as well as a number of dual Pentium Pro PC
servers. The Company has in-house technical capabilities devoted to optimization
of its hardware investment. The Company believes this in-house competence in
understanding and solving performance bottlenecks is a key factor that
differentiates the Company from its competitors.
The Company utilizes two types of operating systems for its subscriber
base. The Internet Services network (dial-access residential, e-mail, news,
residential Web) utilizes UNIX for its scalability and security features. The
Erols Business Services Group uses Microsoft-based technology (NT, Frontpage,
commerce server, chat, business Web sites) based on customer demands and ease of
customer configuration.
As the Company expands, so does its need for off-site server systems.
The Company currently provides direct service in eight states (Massachusetts,
Connecticut, New Jersey, New York, Pennsylvania, Delaware, Maryland and
Virginia) and the District of Columbia. However, in light of the network's
structure, a disruption in or around the Company's Springfield, Virginia NOC
could disrupt service both locally and in otherwise undisturbed remote regions.
Likewise, Web content hosted on servers at the Company's Springfield facility is
accessible throughout the entire worldwide IP Internet. In order to lessen the
potential effects of disruption at its Springfield, Virginia facility, the
Company intends to install redundant and/or load sharing server systems at a
location outside of its present Springfield, Virginia NOC. See "Use of
Proceeds."
Technical Support
The Company believes that reliable sales and technical support is
critical to retaining existing subscribers and attracting new ones. The Company
currently provides (i) toll-free, live telephone assistance; (ii) e-mail-based
assistance; (iii) help sites and Internet guide files on the Erols Web site;
(iv) automated "fax back" and "fax on demand" assistance; and (v) printed
reference material available on a "24 x 7" basis, 365 days a year. Additionally,
the Company employs approximately ten representatives dedicated to supporting
its business customers.
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As of October 31, 1997, the Company employed a staff of 111 full-time
and 92 part-time technical services personnel, who are available to assist
subscribers. The Company has found that most users of its technical support are
new subscribers in the first month of their subscriptions who may not be
familiar with the Internet and the basic operating systems and software which
run their computers. Thus, the service staff must be, and is, conversant in a
range of subjects that extend beyond basic installation issues.
The Company utilizes automated software for tracking and monitoring the
number of incoming phone calls and length of wait time. By monitoring average
time on hold in different support areas, the Company can adjust its staffing to
actual traffic patterns, thus reducing waiting time.
Quality Assurance
The Company believes that one of the principal reasons for the success
of its subscriber retention efforts is its attention to subscriber satisfaction.
The Company is committed to providing its customers with high quality, reliable
service, by employing both in-house and external service monitoring techniques.
The Company uses HP Openview and Seagate Nerve Center as in-house
network management software. These are installed on dedicated Sun workstations
and permit the Company to verify the vitality of the Company's access network
and server components and provide "real time" identification of service outages
and delays. The Company utilizes Simple Network Monitoring Protocol ("SNMP") to
monitor routers, switches, and other network components. The Company also
monitors server functionality and availability by regularly sending artificial
transactions and monitoring the results.
The Company monitors its performance through Inverse. Inverse provides
market analysis from a user's viewpoint, measuring subscriber satisfaction
factors such as the ability to dial in without blockage, speed and reliability
of authentication, and availability and adequacy of the servers and
connectivity. By testing these factors objectively and in a quantifiable manner,
Inverse is able to supply the Company with regular feedback as to the adequacy
of its existing service, and to provide proactive trending reports for use in
planning future system expansion.
Supplier Relationships
The Company is dependent on certain third-party suppliers of hardware
components. Ascend is the largest supplier providing servers and modems
comprising 71.4% of network hardware costs as of December 31, 1996 and 72.3% of
such costs as of September 30, 1997. Certain telecommunications services used by
the Company in providing its network services currently are acquired from
limited sources. The Company also depends on third-party software vendors to
provide the Company with much of its Internet software, including Netscape
Navigator and Microsoft Internet Explorer, the World Wide Web browser software
that the Company licenses from Netscape and Microsoft, respectively.
Competition
The market for Internet access services is extremely competitive and
highly fragmented. Inasmuch as there are no significant barriers to entry, the
Company believes that competition in this market will intensify. The Company
believes that its ability to compete successfully will depend on a number of
factors, including strong market presence in its chosen regions; the adequacy of
the Company's
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subscriber and technical support services; the capacity, reliability and
security of its network infrastructure; the ease of access to and navigation of
the Internet provided by the Company's services; the pricing policies of the
Company, its competitors and its suppliers; the timing of introductions of new
services by the Company and its competitors; the Company's ability to support
existing and emerging industry standards; and industry and general economic
trends. There can be no assurance that the Company will have the financial
resources, technical expertise or marketing and support capabilities to compete
successfully.
The Company competes (or in the future may compete) directly or
indirectly with (i) national and regional ISPs such as BBN Corporation, IDT
Corporation, MindSpring, NETCOM, PSINet, UUNET, EarthLink and Concentric; (ii)
established online services such as America Online, CompuServe, Prodigy and the
Microsoft Network; (iii) computer software and technology companies; (iv)
national telecommunications companies such as AT&T, MCI and Sprint; (v) RBOCs
such as Bell Atlantic; (vi) cable operators such as Comcast, TCI and Time
Warner; and (vii) nonprofit or educational ISPs. Most of these present or
potential future competitors have or can be expected to have substantially
greater market presence and financial, technical, marketing and other resources
than the Company.
The entry of new participants from existing categories of competitors,
and the potential entry of competitors from other categories (such as computer
hardware manufacturers) would result in substantially greater competition for
the Company. The ability of these competitors or others to bundle services and
products with Internet access services could place the Company at a significant
competitive disadvantage. In addition, competitors in the telecommunications
industry may be able to provide subscribers with reduced communications costs in
connection with their Internet access services, reducing the overall cost of
Internet access and significantly increasing pricing pressures on the Company.
While the Company's prepaid annual subscriptions are priced below most
competitors, certain online competitors, including America Online, the Microsoft
Network and Prodigy, also offer unlimited access to the Internet and their
proprietary content at flat rates that are equal to the Company's $19.95 monthly
rate for month-to-month service. Certain of the RBOCs have also introduced
competitive flat-rate pricing for unlimited access (without a set-up fee) for at
least some period of time. As a result, competition for active users of Internet
services has intensified.
Proprietary Rights
The Company believes that its success is dependent in part on its
technology and its continuing right to use such technology. The Company relies
on a combination of copyright, trademark and trade secret laws and contractual
restrictions to establish and protect its technology. Since December 1996, it
has been the Company's policy to require employees and consultants and, when
possible, suppliers, to execute confidentiality agreements upon the commencement
of their relationships with the Company.
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The Company has obtained authorization, typically in the form of a
license, to distribute third-party software incorporated in the Erols access
software product for Windows 3.1, Windows 95, Windows NT and Macintosh
platforms. Applications licensed by the Company include Netscape Navigator (the
initial term of the license for which expires in December 1998 (provided no
notice for termination is given) and thereafter automatically renews for
additional one-year terms unless either party terminates the license on 60 days
notice), Microsoft Internet Explorer (the initial term of the license for which
expires in October 1998 and thereafter automatically renews for additional
one-year terms, although either party may terminate the license at any time on
30 days notice), and MacTCP software from Apple (the current term of the license
for which expires on December 31, 1997 and thereafter automatically renews for
additional one-year terms unless either party terminates the license on 12
months notice). The only software in the Erols Internet access package that is
developed by the Company is the front-end program and the
installation/registration program. The Company intends to maintain or negotiate
renewals of existing software licenses and authorizations. The Company may want
or need to license other applications in the future.
In 1991, a corporation owned by Erol M. Onaran, the Selling
Stockholder, sold its video rental business assets to Blockbuster. In 1992, the
Company (then under the name "OEO, Inc.") purchased from Blockbuster the Service
Mark License, the exclusive license to the registered service marks "Erol's" and
"Erol's Since 1963", for use in connection with the sale, rental and/or service
of videocassette recorders, camcorders, color televisions and other video
equipment and related accessories. The Service Mark License contains certain
restrictions on the use of these marks for other purposes. The initial Service
Mark License was for a three-year term, and was renewable at the option of the
licensee (the Company) for successive three-year terms. Under the terms of the
Service Mark License, the licensee was to pay a renewal fee of $100. While the
Company tendered the $100 payment of this fee in 1995, this check has not been
cashed. Although the Company has sent correspondence to Blockbuster regarding
this matter, no replies have been forthcoming. Given the lack of response from
Blockbuster, there can be no assurance that Blockbuster will not assert a claim
for trademark infringement or breach of contract at some future date. In the
event that Blockbuster were to assert such a claim, the Company believes that it
has substantial defenses to, and the Company would vigorously defend against,
any such claim.
"Erol's Store," "www.erols.com Erol's and Design," "Erol's (Stylized),"
"Erols.com," "Erol's Internet," "Web While You Wait," "The Fastest Way to the
World," "Global Trader," and "Erols Internet and Design" are trademarks and/or
service marks of the Company. In addition, trademark and/or service mark
applications currently are pending before the United States Patent and Trademark
Office for "www.erols.com Erol's and Design," "Erol's (Stylized)," "Erols.com,"
"Erol's Internet," "Web While You Wait," "The Fastest Way to the World," "Global
Trader," and "Erols Internet and Design." This Prospectus includes trademarks of
companies other than the Company.
Government Regulation
ISPs
The Company provides Internet access services in part through data
transmissions over public telephone lines. These transmissions are governed by
regulatory policies establishing charges and terms for wire-line communications.
The Company currently is not subject to direct regulation by the FCC or any
other governmental agency, other than regulations applicable to businesses
generally. However, in the future the Company could become subject to regulation
by the FCC or another regulatory agency as a provider of basic
telecommunications services. For example, a number of long distance telephone
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carriers recently filed a petition with the FCC seeking a declaration that
Internet telephone service is a "telecommunications service" subject to common
carrier regulation. Such a declaration, if enacted, would create substantial
barriers to the Company's entry into the Internet telephone market. The FCC has
requested comments on this petition, but has not set a deadline for issuing a
final decision. Also, a number of local telephone companies have asked the FCC
to levy access charges on "enhanced service providers," which may be deemed to
include ISPs. Although the former Chairman of the FCC has indicated his
opposition to levying service charges against ISPs, local interconnection
charges could be levied in the future. Moreover, the public service commissions
of certain states are exploring the adoption of regulations that might subject
ISPs to state regulation.
The recently enacted Telecommunications Act contains provisions that
lift certain restrictions relating to the RBOCs' ability to engage directly in
the Internet access business. The Telecommunications Act also makes it easier
for national long distance carriers such as AT&T to offer local telephone
service. In addition, the Telecommunications Act allows the RBOCs to provide
electronic publishing of information and databases. Competition from these
companies could have an adverse effect on the Company's business. See "Risk
Factors--Competition."
Due to the increasing use of the Internet, it is possible that
additional laws and regulations may be adopted with respect to the Internet,
covering issues such as content, user privacy, pricing, libel, intellectual
property protection and infringement and technology export and other controls.
Changes in the regulatory environment relating to the Internet access industry,
including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition from
regional telephone companies or others, could have a material adverse effect on
the Company. See "Risk Factors--Competition."
Competitive Local Exchange Carriers
The Company, through a to-be-formed wholly owned subsidiary, intends to
apply to the Commonwealth of Virginia, the State of Maryland and the District of
Columbia to become a CLEC and may, in the future, seek CLEC status in other
states as well. To the extent the Company obtains such authorizations and
commences CLEC operations, the telecommunications services provided by such
operations will be subject to regulation by federal, state and local
governmental agencies. At the federal level, the FCC has jurisdiction over
interstate telecommunications services. State regulatory commissions exercise
jurisdiction over intrastate services. Additionally, municipalities and other
local government agencies may regulate certain aspects of the Company's
business, such as use of rights-of-way. Typically, start-up telecommunications
carriers are not as heavily regulated as incumbent LECs. For example, under
current regulations, the Company would not be subject to price cap or rate of
return regulation by the FCC. However, the Telecommunications Act requires the
FCC to establish a subsidy mechanism for universal telephone service to which
the Company will be required to contribute based on its telecommunications
revenues and requires all LECs, including CLECs, to make services available for
resale by other carriers, provide nondiscriminatory access to rights-of-way,
offer reciprocal compensation for termination of local telecommunication traffic
and provide dialing parity and telephone number portability, and ensure that
their services are accessible to and usable by persons with disabilities. The
Telecommunications Act reserves to the individual states the authority to impose
their own regulations of local exchange services, including state universal
service subsidy programs, so long as this regulation is not inconsistent with
the requirements of the Telecommunications Act. The Company is unable to predict
the final form of such regulation or its potential impact on the Company. In its
provision of interstate and international services as a CLEC, the Company
generally will be subject to tariff filing requirements setting forth the terms,
conditions and prices for its services, prior to offering
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<PAGE>
telecommunications services. At the state level, the Company will also be
subject to state certification proceedings and intrastate and local tariff
regulations as a CLEC. These certifications generally require a showing that the
carrier has adequate financial, managerial and technical resources to offer the
proposed services consistent with the public interest. While uncommon,
challenges to these tariffs and certificates by third parties could cause the
Company to incur substantial legal and administrative expenses. Many states also
have additional regulatory requirements such as minimum service quality
reporting and customer service requirements and uniform LEC accounting
requirements. Under some state statutes, changes in the ownership of the
Company's outstanding voting securities also may trigger additional state public
utility commission approval. For example, in certain jurisdictions an investor
who acquires as little as 10% of the Company's voting securities may have to
obtain prior approval for the acquisition of such securities because such
ownership might be deemed to constitute an indirect controlling interest in the
CLEC. See "Risk Factors--Government Regulation."
Employees
As of October 31, 1997, the Company employed 293 people on a full-time
basis, including 81 sales and marketing personnel, 45 engineering and network
development personnel, 111 technical and customer support representatives and
56 general management and administrative personnel. As of that date, the Company
also employed 204 people on a part-time basis, most of whom serve as telephone
subscriber and technical support representatives. None of the Company's
employees are represented by a labor union, and the Company is not a party to
any collective bargaining agreement. The Company believes its employee relations
are good.
Properties
The Company's corporate headquarters and NOC are located in a
35,000-square foot facility in Springfield, Virginia. The lease for this space
expires on December 31, 2002, and currently provides for rental payments of
approximately $14,500 per month, subject to stated annual increases to a maximum
of $20,100 per month in the last year of the term. The Company has the option to
extend this lease for two additional five-year terms. Rent during each year of
the renewals will represent a 4% increase over rent in the prior year.
The Company leases 56 POP sites throughout its service area. As of
October 31, 1997, aggregate monthly rental payments on these POP sites were
approximately $24,600. The Company also rents kiosk space, ranging from 32 to 60
square feet, in 21 major shopping malls throughout its service areas. As of
October 31, 1997, aggregate monthly rental payments on these kiosks were
approximately $43,600.
The Company intends to apply certain of the proceeds of this offering
to relocate and expand its physical facilities in connection with the expansion
and enhancement of its network infrastructure. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." The Company believes that its
current facilities are adequate for its current needs, that such relocation and
expansion will support anticipated future growth and that suitable additional
space will be available on commercially acceptable terms as required in the
future.
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Legal Proceedings
On September 1, 1997, a motion for judgment was filed against the
Company in Virginia state court by Paul Boudrye, the Company's former Vice
President, Marketing. The motion for judgment alleges breach of contract and
wrongful termination and seeks punitive and compensatory damages of
approximately $1,000,000. Additionally, Mr. Boudrye seeks to exercise certain
stock options. Discovery recently has been initiated and, therefore, it is
premature to reach an opinion on liability or the extent of exposure. However,
the Company believes that it has a meritorious defense and is conducting a
vigorous defense.
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<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The executive officers, directors and key employees of the Company are
as follows:
Executive Officers and Directors
<TABLE>
<CAPTION>
Name Age* Position
---- --- --------
<S> <C> <C>
Dennis J. Spina............... 53 Chairman, President and Chief Executive Officer
Erol M. Onaran................ 63 Vice Chairman
Michael W. Berkley............ 38 Vice President and Chief Information Officer
Orhan E. Onaran............... 40 Vice President, Marketing and Director
Salvatore M. Quadrino......... 50 Vice President, Treasurer and Chief Financial Officer
Walt Anderson................. 44 Director
David A. Stortz............... 51 Director
[Additional Director]......... Director
[Additional Director]......... Director
Key Employees
Name Age* Position
---- --- --------
Robert M. Enger............... 43 Director of Internet Technology
Charles R. Money.............. 30 Director of Telecommunications Operations
Michael J. O'Connor........... 49 Director of Internet Development
Keith N. Poulsen.............. 40 Corporate Controller
</TABLE>
- --------------
*As of December 1, 1997.
Executive Officers and Directors
Dennis J. Spina has served as Chief Executive Officer since joining the
Company in August 1996. From January 1996 until July 1996, he worked as an
independent consultant in the service and distribution industry. From November
1994 to December 1995, he served as President and Chief Executive Officer of
International Service Systems, a company engaged in the business of janitorial
and energy management. From August 1990 to October 1994, he served as President
and Chief Executive Officer of Suburban Propane, Inc. ("Suburban Propane"), a
division of Hanson PLC. He was hired in a turnaround capacity and also served as
President and Chief Executive Officer of Petrolane, Inc. ("Petrolane"), a
propane distribution company managed by Suburban Propane, from August 1990 until
its sale in July 1993. Petrolane was reorganized in a "prepackaged" proceeding
in July 1993 under the U.S. Bankruptcy Code. From 1973 to 1990, he worked at
Federal Express Corporation, ultimately serving as Vice President and Officer.
Erol M. Onaran currently serves as Vice Chairman of the Company and
served as the Chairman from August 1995 until November 1997 and of Erol's
Computer & TV/VCR Service, Inc. since its
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<PAGE>
inception. In August 1992, he founded OEO where he served as Chairman and Chief
Executive Officer. From 1991 to 1995, he was Chairman of Diane Fashion, Inc., a
fashion manufacturing company. During that time he was also President and
General Partner of Backlick Springfield Limited Partnership, an owner of an
office building in Springfield, Virginia. He is the father of Orhan E. Onaran, a
director and Vice President of the Company.
Michael W. Berkley has served as Vice President and Chief Information
Officer since joining the Company in December 1996. From October 1994 to
November 1996, he served as Director of Technical Services for Reliance Standard
Life. From May 1989 to September 1994, he worked as an Acting Director for
Sprint, developing technologies such as frame relay and ATM.
Orhan E. Onaran has served as Vice President, Marketing since August
1996 and as President and Chief Operating Officer from August 1995 to July 1996.
From August 1992 to July 1995, he served as President and Chief Operating
Officer of OEO, a company selling and providing service for televisions, video
cassette recorders and computers. Mr. Onaran is Chairman of the United States
Internet Providers Association (USIPA). He is the son of Erol M. Onaran.
Salvatore M. Quadrino has served as Vice President, Treasurer and Chief
Financial Officer since joining the Company in September 1997. From October 1996
to August 1997, he worked as an independent financial consultant in the service
and distribution industry. From October 1994 to September 1996, he served as
President and Chief Executive Officer of Suburban Propane, a division of Hanson
PLC, which conducted its initial public offering in March 1996, and from March
to October 1996 he served as a member of Suburban Propane's Board of
Supervisors. Mr. Quadrino initially was hired in a turn around capacity, served
as Vice President and Chief Financial Officer of Suburban Propane from October
1990 to September 1994 and as Vice President, Chief Financial Officer and
Treasurer of Petrolane from August 1990 until its sale in July 1993. Petrolane
was reorganized in a "prepackaged" proceeding in July 1993 under the U.S.
Bankruptcy Code. Mr. Quadrino is a Certified Public Accountant.
Walt Anderson has served on the Company's Board of Directors since
December 1996. He is a co-founder of Esprit Telecom Group plc, a publicly held
European telecommunications company, and has been Chief Executive Officer,
Chairman of the Board and a director of that company since 1991. Prior to that
time, Mr. Anderson was President of Mid-Atlantic Telecom, which he founded in
1984. Mr. Anderson is a founding member of the Board of Directors of the
International Space University.
David A. Stortz has served on the Company's Board of Directors since
December 1996. In 1980, he founded David A. Stortz & Associates Certified Public
Accountants, where he serves as President and Managing Shareholder. Since 1990,
he has served as Treasurer, Audit Committee Chairman and director of East Penn
Bank. Since 1996, he has served as Secretary and as a director of the Broadside
Country Club. Mr. Stortz is a Certified Public Accountant.
[Additional Director]
[Additional Director]
Key Employees
Robert M. Enger has served as Director of Internet Development since
August 1996. From January 1991 to August 1996, he was a Senior Staff Engineer
for ANS Communications, a division of
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<PAGE>
America Online ("ANS"). Mr. Enger is a long-standing member of the Internet
Engineering Task Force (IETF) and has published several articles dealing with
connectivity and network solutions.
Charles R. Money has served as Director of Telecommunications
Operations since January 1996. From February 1993 to January 1996, he worked
with Cable & Wireless as Operations Service Manager; from June 1991 to January
1993 as Shift Supervisor of Network Operations; from March 1990 to May 1991 as a
Centralized Tester; and from September 1989 to February 1990 as a Technical
Control Operator. Mr. Money has extensive experience in the design,
implementation, and troubleshooting of a variety of communications systems
including switched voice, point-to-point circuitry from DS-0 to fiber optic
networks, nationwide customer networks, and frame relay networks.
Michael J. O'Connor has served as Engineer since joining the Company in
June 1997. From March 1992 to June 1997, he worked for ANS as a Senior Staff
Engineer.
Keith N. Poulsen has served as Corporate Controller since joining the
Company in March 1996. From August 1995 to February 1996, he served as Cost
Accounting Manager for Penril Datability Networks. Prior to that time, he served
as Director of Accounting Programs and Sourcing for Star Technologies from
October 1992 to July 1995 and as Manager of Cost Accounting from November 1989
to September 1992.
Board Committees and Compensation
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee oversees the Company's independent
auditors, recommends the engagement of auditors and reviews any internal audits
the Company may perform. David A. Stortz currently serves as the Audit
Committee. As required by the rules of the Nasdaq Stock Market, following the
offering the Audit Committee will be constituted such that a majority of its
members will not be employees of the Company. The Compensation Committee
approves the compensation of executives of the Company, makes recommendations to
the Board of Directors with respect to standards for setting compensation levels
and administers the Company's Stock Plan. The members of the Compensation
Committee currently are Walt Anderson, Erol M. Onaran and Dennis J. Spina. Upon
completion of this offering, the Compensation Committee will be constituted such
that all of its members will be "non-employee directors" for purposes of Rule
16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
and "outside directors" within the meaning of Section 162(m) of the Internal
Revenue Code. See "--Compensation Interlocks and Insider Participation."
Non-employee directors are reimbursed for their travel expenses in
attending Board and Committee meetings. Neither employee nor non-employee
directors currently receive any compensation for their services as such.
Classified Board of Directors
The Company's Board of Directors is divided into three classes of
directors, designated Class A, Class B and Class C, serving staggered three-year
terms. With respect to the present Board (consisting of seven members), the term
of the Class A director (Erol M. Onaran) will expire at the 1999 annual meeting
of stockholders, the terms of the Class B directors (Orhan E. Onaran and David
A. Stortz) will expire at the 2000 annual meeting of stockholders and the terms
of the Class C directors (Walt Anderson and Dennis J. Spina) will expire at the
2001 annual meeting of stockholders. Two additional directors will be designated
prior to completion of this offering in order to fill the two vacancies
presently existing
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<PAGE>
on the Board of Directors. The number of directors is fixed from time to time
exclusively by the Board, and a majority of the Board then in office may fill
any vacancies.
Executive Compensation
The following table sets forth all compensation awarded to, earned by,
or paid for services rendered to the Company in all capacities during the fiscal
year ended December 31, 1996 by the following executive officers (the "Named
Executive Officers"): (i) the Company's Chief Executive Officer and (ii) the
Company's other executive officers whose salary and bonus for fiscal year 1996
exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
----------------------------------
Annual Compensation Securities
--------------------------- Underlying
Name and Principal Position Salary ($) Bonus ($) Options (#)
------------------------------ ------------- ----------- ----------------------------------
<S> <C> <C> <C>
Dennis J. Spina (1)........... $131,538 -- 328,617
Erol M. Onaran................ 256,000 -- --
Orhan E. Onaran............... 114,491 -- --
</TABLE>
- --------
(1) The stated salary reflects compensation paid to Mr. Spina from the
commencement of his employment in August 1996 through December 31, 1996.
The following table sets forth information regarding the grant of
options to purchase the Company's Common Stock to each of the Named Executive
Officers during the fiscal year ended December 31, 1996.
Option Grants in Fiscal 1996
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------
Potential Realizable
Value at Assumed Annual Value at
Number of Percentage of Rates of Stock Price Grant Date
Securities Total Options Appreciation for Option Market
Underlying Granted to Exercise Term (1) Price (2)
Options Employees in Price Expiration ----------------------- -----------
Name Granted Fiscal 1996 Per Share Date 5% 10% 0%
- ----------------- ------------ -------------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Dennis J. Spina.. 328,617 72.1% $1.18 12/28/06 $837,022 $1,562,346 $364,250
</TABLE>
- -------------------
(1) Potential Realizable Value assumes that the Common Stock appreciates at the
indicated annual rate (compounded annually) from the grant date until the
expiration of the option term and is calculated based on the requirements
promulgated by the Commission. Potential Realizable Value does not
represent the Company's estimate of future stock price growth.
(2) At the grant date, the exercise price of $1.18 was below the market price
of $2.29 determined by the Company.
The following table sets forth certain information regarding the number
and value of securities underlying options held by each of the Named Executive
Officers at the end of fiscal 1996. No options were exercised by any of the
Named Executive Officers during 1996.
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<PAGE>
Aggregate Option Exercises and Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised "In-the-Money" Options
Options at December 31, 1996 at December 31, 1996
----------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---------------------- ----------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Dennis J. Spina...... -- 328,617 -- $364,250
</TABLE>
- -----------------------
(1) Value for "in-the-money" options represents the positive spread between
the exercise price of outstanding options and the fair market value of
$2.29 on December 31, 1996.
Stock Plan
The Company has adopted the Stock Plan for the purpose of enabling
employees and officers, as well as "eligible independent contractors" (as
defined), of the Company and its "affiliates" (as defined) to (i) own shares of
stock in the Company; (ii) participate in the stockholder value of the Company;
(iii) have a mutuality of interest with other stockholders of the Company; and
(iv) enable the Company to attract, retain and motivate employees, officers and
independent contractors of particular merit.
The Stock Plan provides for the award to eligible participants,
including employees, officers, directors and consultants, of stock options,
stock appreciation rights and/or restricted stock. 826,843 shares of Common
Stock initially were reserved for issuance pursuant to the Stock Plan,
representing 9.0% of the shares of Common Stock expected to be outstanding
immediately subsequent to this offering. As of the date of this Prospectus,
options to purchase a total of 738,933 shares of Common Stock were outstanding,
at exercise prices ranging from $2.29 to $4.55 per share. As of such date, 4,240
options had been exercised. No stock appreciation rights or restricted stock
have been granted under the Stock Plan.
Subsequent to this offering, the Stock Plan will be administered by the
Compensation Committee of the Board of Directors, each of whose members will be
a "non-employee director" for purposes of Rule 16b-3 under the Exchange Act and
"outside directors" within the meaning of Section 162(m) of the Internal Revenue
Code. The Compensation Committee will select the participants and establish the
terms and conditions of each option or other equity right granted under the
Stock Plan, including the exercise price, the number of shares subject to
options or other equity rights and the time at which such options become
exercisable. See "--Board Committees and Compensation." The exercise price of
all "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code, granted under the Stock Plan must be at least equal to 100% of the
fair market value of the option shares on the date of grant. The term of any
incentive stock option granted under the Stock Plan may not exceed ten years.
To the extent required to comply with Rule 16b-3 under the Exchange
Act, if applicable, and in any event in the case of an incentive stock option,
no award granted under the Stock Plan is transferable by a grantee otherwise
than by will or by the laws of descent and distribution. Other terms and
conditions of each award are set forth in the grant agreement governing that
award. The Stock Plan constitutes an unfunded plan for incentive compensation
purposes.
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<PAGE>
Employment Agreements and Related Arrangements
As of August 12, 1996, the Company entered into an Employment Agreement
with Dennis J. Spina, providing for Mr. Spina's employment as the President and
Chief Executive Officer of the Company for an initial term of three years
(through August 12, 1999), subject to automatic annual extensions thereafter
unless either Mr. Spina or the Company notifies the other in writing at least 90
days prior to the next anniversary of the date of the Employment Agreement that
he or it elects to not renew the Employment Agreement. Mr. Spina's Employment
Agreement provides for an annual salary of $360,000, subject to such adjustment,
if any, as may be approved from time to time by the Compensation Committee of
the Board of Directors. In addition, pursuant to the Employment Agreement, Mr.
Spina is entitled to participate in any employee benefits plans and arrangements
when and as implemented by the Company, to the extent determined by the
Compensation Committee of the Board of Directors to be commensurate with his
level of responsibility within the Company.
Under his Employment Agreement, if Mr. Spina's employment is terminated
(i) by the Company other than for "cause" (as defined) or (ii) by Mr. Spina for
"good reason" (as defined), he is generally entitled to (a) receive his salary
accrued through the date of termination and for the remainder of the term of the
Employment Agreement or extension thereof, as the case may be and (b) continue
to participate in the Company's sickness or health insurance programs for the
remainder of such term. If Mr. Spina's employment is terminated (i) by the
Company for "cause;" (ii) by Mr. Spina without "good reason;" or (iii) upon Mr.
Spina's death or "total disability" (as defined), Mr. Spina (or his estate) is
entitled to receive his salary accrued through the date of termination. If Mr.
Spina's employment is terminated by reason of his death, his estate also is
entitled to receive an amount equal to one-half of his then-current annual
salary. If Mr. Spina's employment is terminated by the Company without "cause"
within one year of a "change in control" (as defined) or if he resigns with
"good reason" within one year following such a "change in control," he is
entitled to receive, in lieu of payments otherwise due under his Employment
Agreement, the sum of $1,080,000. If any payment or distribution by the Company
to Mr. Spina is determined to be excessive under Section 280G of the Internal
Revenue Code, so as to prompt a tax loss to Mr. Spina, the amount of payment or
distribution may be reduced so that the tax liability is minimized.
The Company has granted to Mr. Spina options to purchase 328,617 shares
of the Company's Common Stock at a per share exercise price of $1.18 (subject to
adjustment upon certain subsequent events) pursuant to a non-qualified Stock
Option Agreement dated December 28, 1996. The options vest ratably on August 13,
1997, 1998 and 1999, except that all non-vested options vest upon the occurrence
of a "change in control" subsequent to the effective date of a registration
statement filed by the Company pursuant to the Securities Act, or upon
termination of Mr. Spina's employment either by the Company for any reason other
than "cause" or by Mr. Spina with "good reason" (in each case defined in a
substantially similar manner as in his Employment Agreement). In the event of
termination by the Company for "cause," by Mr. Spina without "good reason," or
upon Mr. Spina's death or "total disability" (as defined), any non-vested
options will terminate. Upon termination of Mr. Spina's employment by the
Company for "cause" or Mr. Spina's resignation from the Company for any reason
other than at the expiration of the "employment period," as defined in his
Employment Agreement, the Company, at its option, may repurchase any shares of
Common Stock issued upon prior exercises of stock options. Any such repurchase
shall be at the "fair market value" of the Common Stock, as defined in the Stock
Option Agreement. Mr. Spina is entitled to the same registration rights in
respect of the Common Stock as is Erol M. Onaran, to the extent that the Company
should grant such rights to Mr. Onaran.
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<PAGE>
As of September 2, 1997, the Company entered into an Employment
Agreement with Salvatore M. Quadrino providing for Mr. Quadrino's employment as
the Vice President, Treasurer and Chief Financial Officer of the Company for an
initial term of one year (through September 1, 1998), subject to automatic
annual extensions thereafter unless either Mr. Quadrino or the Company notifies
the other in writing at least 90 days prior to the next anniversary of the date
of the Employment Agreement that he or it elects to not renew the Employment
Agreement. Mr. Quadrino's Employment Agreement provides for an annual salary of
$175,000, plus such increases, if any, as may be approved from time to time by
the Compensation Committee of the Board of Directors. In addition, pursuant to
the Employment Agreement, Mr. Quadrino is entitled to participate in such
employee benefits plans and programs established by the Company as determined in
the discretion of the Compensation Committee to be commensurate with his level
of responsibility within the Company.
Under his Employment Agreement, if Mr. Quadrino's employment is
terminated (i) by the Company other than for "cause" (as defined) or (ii) by Mr.
Quadrino for "good reason" (as defined), he is generally entitled to (a) receive
his salary accrued through the date of termination and an additional 12 months
salary, as well as any annual bonus to which he otherwise would have been
entitled during such period under the Company's bonus policies as in effect at
the time of termination and (b) continue in the Company's sickness or health
insurance and other benefit programs for such period. If Mr. Quadrino's
employment is terminated (i) by the Company for "cause;" (ii) by Mr. Quadrino
without "good reason;" or (iii) upon Mr. Quadrino's death or "total disability"
(as defined), Mr. Quadrino (or his estate) is entitled to receive his salary
accrued through the date of termination. If Mr. Quadrino's employment is
terminated by reason of his death, his estate also is entitled to receive an
amount equal to his then-effective salary for a period of three months.
If Mr. Quadrino's employment is terminated by the Company without
"cause" within six months of a "change in control" (as defined) or if he resigns
with "good reason" within six months following such a "change in control," he
shall be entitled to receive his salary accrued through the date of termination
and an amount equal to 12 months of his then-effective salary. If any payment or
distribution by the Company to Mr. Quadrino is determined to be excessive under
Section 280G of the Internal Revenue Code, so as to prompt a tax loss to Mr.
Quadrino, the amount of payment or distribution may be reduced so that the tax
liability is minimized.
The Company has granted to Mr. Quadrino options to purchase 135,687
shares of the Company's Common Stock at a per share exercise price of $4.36
(subject to adjustment upon certain subsequent events) pursuant to a Stock
Option Agreement dated September 2, 1997. The options vest ratably on September
2, 1998, 1999 and 2000, except that all non-vested options vest upon the
occurrence of (i) involuntary termination of Mr. Quadrino's employment without
"cause" (as defined) or (ii) a "change in control" (as defined) occurring on or
after February 1, 1998.
As of December 27, 1996, the Company entered into an Employment
Agreement with Orhan E. Onaran providing for his employment as Vice President,
Marketing for an initial term of one year (through December 26, 1997), subject
to automatic annual extensions thereafter unless either Mr. Onaran or the
Company notifies the other in writing at least 90 days prior to the next
anniversary of the date of the Employment Agreement that he or it elects to not
renew the Employment Agreement. The Employment Agreement provides for an annual
salary of $142,500, plus increases, if any, as may be approved from time to time
by the Compensation Committee of the Board of Directors. The other terms and
conditions of Mr. Onaran's Employment Agreement are substantially identical to
those of Mr. Quadrino's Employment Agreement, as described above, except as
follows: (1) if his employment is
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<PAGE>
terminated (i) by the Company other than for "cause" (as defined) or (ii) by Mr.
Onaran for "good reason" (as defined), he is generally entitled to (a) receive
his salary accrued through the date of termination and the longer of (y) the
remainder of the then current term of the Employment Agreement or (z) three
months (Mr. Onaran is required to mitigate such payments by actively seeking
employment) and (2) Mr. Onaran's Employment Agreement contains no special
provisions for termination upon a "change in control."
Messrs. Spina, Quadrino and Onaran also have entered into Proprietary
Information and Inventions Agreements pursuant to which each has agreed to
nondisclosure of the Company's "proprietary information" (as defined) and to
assign to the Company any and all "inventions" (as defined) made, conceived,
reduced to practice or learned by him while he is on the Company's premises or
utilizing its property, or based on any information or knowledge gained by him
during his employment with the Company. Messrs. Spina, Quadrino and Onaran each
also has agreed that, during the period of his employment (and, in the case of
Mr. Spina, during any period subsequent to termination of his employment during
which he receives any form of compensation from the Company and for a period of
one year after his employment is terminated), he will not compete or interfere
with the Company. Each also has agreed, for the period of his employment and for
one year thereafter, to not induce any employees of the Company to leave its
employ or solicit business from any client or customer of the Company.
Agreements not to compete are not favored in the law and will generally only be
enforced to the extent necessary to protect the employer's legitimate business
interests. Accordingly, a court determining whether to enforce the
noncompetition clauses may enforce such clauses as drafted or to a lesser extent
than provided for therein, or may deny enforcement altogether.
The Company maintains key man life insurance policies for Dennis J.
Spina, Robert M. Enger and Charles R. Money providing for coverage in the
amounts of $800,000, $100,000 and $100,000, respectively.
Compensation Interlocks and Insider Participation
The current members of the Compensation Committee are Walt Anderson,
Erol M. Onaran and Dennis J. Spina. Accordingly, to date, the Compensation
Committee, including directors who are or were executive officers of the
Company, has made all determinations concerning compensation of the Company's
executive officers. The Board of Directors has provided for the reconfiguration
of the Compensation Committee which, upon completion of this offering, will be
composed of non-employee directors of the Company. See "--Board Committees and
Compensation" and "--Stock Plan."
Limitation on Liability of Directors
As permitted by the Delaware Corporation Law, the Charter limits, in
certain circumstances, the monetary liability of directors of the Company for a
breach of their fiduciary duty as directors. These provisions do not eliminate
the liability of a director (i) for a breach of the director's duty of loyalty
to the Company or its stockholders; (ii) for acts or omissions by a director not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) for liability arising under Section 174 of the Delaware Corporation
Law (relating to the declaration of dividends and purchase or redemption of
shares in violation of the Delaware Corporation Law); or (iv) for any
transaction from which the director derived an improper personal benefit.
However, the Charter provides that, if the Delaware Corporation Law is amended
to authorize further elimination of or limitation on the liability of directors,
then the liability of directors of the Company shall be eliminated or limited to
the fullest extent permitted by the Delaware Corporation Law, as so amended.
These provisions do not eliminate the liability of a director
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for violations of federal securities laws, and do not limit the rights of the
Company or its stockholders, in appropriate circumstances, to seek equitable
remedies such as injunctive or other forms of non-monetary relief.
While the Charter provides directors with protection from having to pay
monetary damages for breaches of their fiduciary duty, it does not eliminate
such duty. Accordingly, the Charter will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her fiduciary duty. The provisions of the Charter described
above apply to an officer of the Company only if such person is a director of
the Company and is acting in the capacity of a director, and do not apply to
officers of the Company who are not directors.
Indemnification of Directors and Officers
The Company's Charter and Bylaws provide that the Company shall
indemnify all directors and officers of the Company to the full extent permitted
by the Delaware Corporation Law. Under such provisions, any director or officer
who, in such person's capacity as such, is made or threatened to be made a party
to any suit or proceeding, may be indemnified if the Board determines such
director or officer acted in good faith and in a manner such director reasonably
believed to be in or not opposed to the best interest of the Company. The
Charter, Bylaws, and the Delaware Corporation Law further provide that such
indemnification is not exclusive of any other rights to which such individuals
may be entitled under the Charter, the Bylaws, any agreement, any vote of
stockholders or disinterested directors, or otherwise.
The Company has power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or agent of the Company,
or is or was serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust, or
other enterprise against any expense, liability, or loss incurred by such person
in any such capacity or arising out of his status as such, whether or not the
Company would have the power to indemnify such person against such liability
under Delaware law.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of shares of Common Stock as of December 1,
1997, and as adjusted to give effect to the sale of the Shares offered hereby,
concerning (i) each person or group known by the Company to beneficially own
more than 5% of the outstanding Common Stock; (ii) each current director of the
Company; (iii) each Named Executive Officer; and (iv) all directors and
executive officers of the Company, as a group. The address of Messrs. Erol
Onaran, Dennis Spina and Orhan Onaran is 7921 Woodruff Court, Springfield,
Virginia 22151. All information with respect to beneficial ownership has been
furnished to the Company by the various stockholders.
<TABLE>
<CAPTION>
Common Stock (1)
------------------------------------------------------------------------------
Number of Shares Percent of Class
Name and Address Beneficially Owned --------------------------------------------------
of Beneficial Owner Before Offering Before Offering After Offering
- --------------------------------------- ---------------------- --------------------- -------------------------
<S> <C> <C> <C>
Erol M. Onaran ............................. 4,025,976 68.98% 43.29% (2)
Dennis J. Spina (3)......................... 109,539 1.84% 1.30%
Orhan E. Onaran (4)......................... 2,120 * *
Gold & Appel Transfer, S.A. (5)............. 1,806,563 30.95% 21.67%
Omar Hodges Building
Wickhams Cay
Road Town, Tortola
British Virgin Islands
All directors and executive officers
as a group (6 persons) (6).................. 4,158,836 69.67% 49.10% (2)
</TABLE>
- ------------
* Less than 1%.
(1) Except as otherwise indicated, each of the parties listed has sole
voting and investment power with respect to all shares of Common Stock
indicated. Beneficial ownership is calculated in accordance with Rule
13d-3(d) under the Exchange Act. Shares of Common Stock subject to
options which are currently exercisable or are exercisable within 60
days of December 1, 1997, are deemed outstanding with respect to the
person holding such options but are not deemed outstanding for purposes
of computing the percentage ownership of any other person. Unless
otherwise indicated, each person possesses sole voting and investment
power with respect to the shares identified as beneficially owned
thereby.
(2) Mr. Onaran, the Selling Stockholder, is selling 417,000 Shares in the
offering. Therefore, immediately subsequent to the offering, he will
own 3,608,976 shares of Common Stock.
(3) Represents shares underlying currently exercisable options.
(4) Represents shares underlying currently exercisable options held by Mr.
Onaran's wife.
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(5) Gold & Appel is a wholly owned subsidiary of Iceberg Transport, S.A., a
Panamanian company. Walt Anderson, a director of the Company, is
attorney-in-fact and secretary of Gold & Appel. Mr. Anderson disclaims
"beneficial ownership" of the shares held by Gold & Appel within the
meaning of Rule 13d-3 under the Exchange Act.
(6) Includes 132,860 shares underlying currently exercisable options.
Excludes 401,407 shares underlying outstanding options that are not
currently exercisable.
CERTAIN TRANSACTIONS
From the inception of its ISP operations on August 1, 1995 through
December 2, 1996, the Company operated as a separate division of OEO, which had
two divisions, consisting of the Company's ISP operations and the Retail Sales
Business. OEO was 100% owned by Erol M. Onaran. See "Principal and Selling
Stockholders." On December 2, 1996, OEO reincorporated in the State of Delaware
and changed its name to "Erol's Internet, Inc." 4,272,023 shares of Common Stock
were issued to Erol M. Onaran in connection with the reincorporation. On
December 28, 1996, the Spin-off occurred and the assets and liabilities of the
Retail Sales Business were transferred to the Repair Company (also 100% owned by
Erol M. Onaran) pursuant to the terms of an Asset Purchase Agreement. In
connection with the Asset Purchase Agreement, the Company retained the rights to
and in certain trade names and trademarks, together with the goodwill of the
business symbolized thereby.
On December 28, 1996, the Company sold a total of 1,314,469 shares of
Common Stock to Gold & Appel at a price of $2.29 per share, representing gross
proceeds of approximately $3,000,000. In connection with this transaction, the
Company granted to Gold & Appel certain registration rights with respect to the
Common Stock so purchased pursuant to a Registration Rights Agreement. See
"Shares Eligible for Future Sale--Registration Rights." In addition, in
connection with that transaction, the Company, Gold & Appel and Erol M. Onaran
entered into a Stockholders' Agreement providing for certain rights of first
refusal with respect to shares of the Company's Common Stock.
Pursuant to a Stock Purchase Agreement dated May 8, 1997, the Company
and Erol M. Onaran each sold to Gold & Appel 131,447 shares of the Company's
Common Stock (for a total of 262,894 shares) at a price of $3.80 per share (for
total consideration of $1,000,000, $500,000 of which was paid to the Company)
and the Registration Rights Agreement among the parties was amended accordingly.
Pursuant to a Stock Purchase Agreement dated September 15, 1997, the
Company and Erol M. Onaran each sold to Gold & Appel, 114,600 shares of the
Company's Common Stock (for a total of 229,200 shares) at a price of $4.36 per
share (for total consideration of $1,000,000, $500,000 of which was paid to the
Company) and the Registration Rights Agreement among the parties was amended
accordingly.
The Company paid all of the transactions costs in connection with the
foregoing stock sale transactions and is paying all of the fees and expenses in
connection with this offering.
The Company has executed a promissory note agreement with Erol M.
Onaran and the Repair Company, pursuant to which the Company has made a loan in
the amount of $350,000 to Mr. Onaran and the Repair Company. The note bears
annual interest at a rate equivalent to the federal rate, as defined in the
Internal Revenue Code. The principal amount of the note, plus compounded
interest, will become due to the Company three weeks after the date on which the
Company repays its note payable to a
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financial institution. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Erol M. Onaran has agreed to provide additional working capital to the
Company as needed through October 1998.
Effective January 1, 1997, the Company and the Repair Company entered
into a Management Agreement, pursuant to which the Company agreed to provide
office and retail space, general and administrative services and employment
services to the Repair Company on an arm's length basis. As of October 31, 1997,
the Repair Company owed $50,000 under the Management Agreement. The Management
Agreement will terminate on December 31, 1997, and thereafter the Company does
not intend to provide services to the Repair Company.
Prior to the Spin-off, the Company shared some administrative and
overhead costs, including management salaries, accounting, supplies and
marketing costs, with the Retail Sales Business. During the Inception Period and
1996, approximately $12,000 and $722,000, respectively, was charged by the
Company to the Repair Company for such shared facilities and costs. In addition,
prior to the Spin-off certain expenses of the Retail Sales Business were borne
by the Company. These expenses, which amounted to approximately $658,000 and
$1.6 million for the Inception Period and 1996, respectively, have been recorded
as expenses of the Company. The Company also made certain purchases of computer
hardware from the Repair Company totaling approximately $477,000 for the first
ten months of 1997 and anticipates additional purchases in the approximate
amount of $140,000 during the remainder of 1997.
Erol M. Onaran and Orhan E. Onaran have guaranteed certain obligations
of the Company. The material obligations associated with such guarantees are as
follows:
By agreement dated August 20, 1997, Erol M. Onaran became the
guarantor of the Business Loan Agreement between the Company and The
Horizon Bank of Virginia, effective as of June 20, 1997, through
September 28, 1998.
By agreement dated February 27, 1997, Erol M. Onaran became
the guarantor of the Master Equipment Lease Agreement by and between
the Company and General Electric Capital Computer Leasing Corporation,
dated February 23, 1996, through March 31, 1999 (subject to renewal).
By agreement dated April 11, 1996, Erol M. Onaran became the
guarantor of a Master Lease Agreement by and between Ascend Credit
Corporation and the Company, dated April 11, 1996.
By agreement dated November 7, 1996, Erol M. Onaran and Orhan
E. Onaran became the guarantors of the Master Equipment Lease Agreement
by and between MicroTech Leasing Corporation and the Company, dated
September 27, 1996, through April 30, 1998 (subject to renewal).
The Company believes that each of the foregoing transactions was on
terms no less favorable to the Company than could have been obtained in arm's
length transactions with unaffiliated parties. Future transactions between the
Company and its officers, directors and principal stockholders, and their
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respective affiliates, will be on terms no less favorable to the Company than
can be obtained from unaffiliated parties.
DESCRIPTION OF CAPITAL STOCK
The Company has an authorized capital of 60,000,000 shares of Common
Stock, par value $0.001 per share, and 10,000,000 shares of Preferred Stock, par
value $0.001 per share. As of October 31, 1997, 5,836,779 shares of Common Stock
were outstanding, held of record by four persons, and no shares of Preferred
Stock were outstanding.
Common Stock
The holders of Common Stock are entitled to one vote per share on all
matters voted on by stockholders, including the election of directors. Except as
otherwise required by law or provided in any resolution adopted by the Board
with respect to any series of Preferred Stock, the holders of Common Stock
exclusively possess all voting power. Subject to any preferential rights of any
outstanding series of Preferred Stock of the Company, the holders of Common
Stock are entitled to such dividends as may be declared from time to time by the
Board from funds available for distribution to such holders. No holder of Common
Stock has any preemptive right to subscribe to any securities of the Company of
any kind or class or any cumulative voting rights. The outstanding shares of
Common Stock are, and the Shares, upon issuance and sale as contemplated hereby
will be, duly authorized, validly issued, fully paid and nonassessable.
Preferred Stock
Shares of the Company's Preferred Stock may be issued from time to time
in one or more series. The Board of Directors is authorized to determine the
rights, preferences, privileges and restrictions granted to, and imposed upon,
any series of Preferred Stock and to fix the number of shares of any series of
Preferred Stock and the designation of any such series, subject to the consent
of the existing holders of Preferred Stock in certain instances. The issuance of
Preferred Stock could be used, under certain circumstances, as a method of
preventing a takeover of the Company and could permit the Board of Directors,
without any action of the holders of the Common Stock to issue Preferred Stock
which could have a detrimental effect on the rights of holders of the Common
Stock, including loss of voting control. See ""--Certain Provisions of the
Company's Charter and Bylaws and of Delaware Law" and "Risk Factors--Certain
Anti-Takeover Provisions."
Certain Provisions of the Company's Charter and Bylaws and of Delaware Law
General
The Company's Charter and Bylaws contain certain provisions that could
make difficult the acquisition of control of the Company by means of a tender
offer, open market purchases, proxy fight or otherwise. These provisions may
discourage certain types of coercive takeover practices and inadequate takeover
bids and encourage persons seeking to acquire control of the Company first to
negotiate with the Company. The Company believes that the benefits of its
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to take over or restructure the Company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms. See
"Risk Factors--Certain Anti-Takeover Provisions."
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Set forth below is a summary of certain provisions in the Charter and
Bylaws.
Classified Board of Directors
The Charter and Bylaws provide for a Board divided into three classes
of directors serving staggered three-year terms. With respect to the present
Board, the term of the first class of directors will expire at the 1999 annual
meeting of stockholders, the term of the second class of directors will expire
at the 2000 annual meeting of stockholders and the term of the third class of
directors will expire at the 2001 annual meeting of stockholders. See
"Management--Classified Board of Directors." The Charter and the Bylaws provide
that the number of directors will be fixed from time to time exclusively by the
Board, and a majority of the Board then in office may fill any vacancies on the
Board.
Delaware General Corporation Law
The Company is subject to the provisions of Section 203 of the Delaware
Corporation Law. Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or affiliate or associate of such person who is an "interested
stockholder" for a period of three years from the date such person became an
interested stockholder unless (i) the transaction resulting in a person's
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquires 85% or more of
the outstanding voting stock of the corporation in the same transaction which
makes it an interested stockholder (excluding certain employee stock plans); or
(iii) on or after the date the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors and by
the holders of at least 66 2/3% of the corporation's outstanding voting stock at
an annual or special meeting, excluding shares owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (x)
the owner of 15% or more of the outstanding voting stock of the corporation or
(y) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three year-period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
Limitations on Directors' Liability
The Charter contains provisions to (i) eliminate the personal liability
of its directors for monetary damages resulting from breaches of their fiduciary
duty (other than breaches of the duty of loyalty, acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
violations under Section 174 of the Delaware Corporation Law or for any
transaction from which the director derived an improper personal benefit) and
(ii) indemnify its directors and officers to the fullest extent permitted by
Section 145 of the Delaware Corporation Law, including circumstances in which
indemnification is otherwise discretionary. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company, the Company has been advised
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. The
Company believes that these provisions are necessary to attract and retain
qualified persons as directors and officers.
Transfer Agent and Registrar
is the transfer agent and registrar for the Common Stock.
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Stock Exchange Listing
The Company intends to apply to have the shares of Common Stock
approved for quotation on the Nasdaq National Market under the symbol "EROL."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock.
Sales of a substantial number of shares of Common Stock in the public market
following this offering, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock prevailing from time to
time and could impair the Company's future ability to raise capital through an
offering of its equity securities.
Upon completion of this offering, there will be 8,336,779 shares of
Common Stock outstanding (8,774,329 shares, if the Underwriters' over-allotment
option is exercised in full) and 822,603 shares reserved for issuance under the
Stock Plan and 328,617 shares reserved for issuance under other outstanding
options. Of the outstanding shares, the 2,917,000 Shares (3,354,550 Shares if
the Underwriters' over-allotment is exercised in full) offered hereby will be
freely tradable without restriction or registration under the Securities Act,
except for any shares purchased by an affiliate of the Company for purposes of
Rule 144 under the Securities Act. The remaining 5,419,779 outstanding shares,
which were issued by the Company in private transactions not involving any
public offering, and any shares issued upon the exercise of options are
"restricted securities" for purposes of Rule 144 and may not be resold in a
public distribution, except in compliance with the registration requirements of
the Securities Act or pursuant to a valid exemption from registration. As those
restrictions under the Securities Act lapse, such shares may be sold to the
public.
Of the 5,419,779 shares which are "restricted securities," as of the
date of this Prospectus, 4,240 shares will become eligible for sale in the
public market beginning 90 days after the date of this Prospectus in reliance
upon Rule 701 under the Securities Act. An additional 4,923,445 shares held by
affiliates of the Company will become eligible for sale pursuant to the volume
and other restrictions and requirements of Rule 144 under the Securities Act 90
days following the date of this Prospectus. The balance of the outstanding
shares are held by affiliates of the Company and will become eligible for sale
pursuant to the volume and other restrictions and requirements of Rule 144 on
May 9, 1998 (262,894 shares) and September 16, 1998 (229,200 shares). The
Company intends to register the issuance and resale of shares of Common Stock
issuable under the Stock Plan and under other currently outstanding options and,
accordingly, when so registered and issued, such shares will be freely tradable
except to the extent held by affiliates of the Company, as to which the volume
and other restrictions and requirements of Rule 144 will apply.
In general, under Rule 144 as currently in effect, beginning 90 days
after the date of this Prospectus, a person (or persons whose shares are
aggregated) who has beneficially owned "restricted securities" for at least one
year (including the holding period of any prior owner except an affiliate of the
Company) would be entitled to sell within any three month period a number of
shares that does not exceed the greater of 1% of the number of shares of Common
Stock then outstanding or the average weekly trading volume of the Common Stock
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain manner of sale provisions and notice requirements and to
the availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an affiliate at any time during
the three months immediately preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years (including the holding
period of any prior owner except an affiliate), is entitled to sell such shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors prior to the date the issuer
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becomes subject to the reporting requirements under the Exchange Act pursuant to
written compensatory benefit plans or written contracts relating to the
compensation of such persons. The Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject to
the reporting requirements of the Exchange Act, along with the securities
acquired upon exercise of such options (including exercises after the issuer
becomes subject to such reporting requirements). Securities issued in reliance
on Rule 701 are "restricted securities" as described above.
After this offering, Gold & Appel, which holds 1,806,563 shares of
Common Stock (the "Registrable Securities"), will be entitled to certain rights
with respect to the registration of such shares under the Securities Act. If the
Company proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders
exercising registration rights, Gold & Appel is entitled to notice of such
registration and is entitled to include in such registration any or all of the
Registrable Securities. Additionally, beginning 180 days after the closing of
this offering, Gold & Appel is entitled to certain demand registration rights
with respect to the Registrable Securities, pursuant to which Gold & Appel may
require the Company to register any or all of the Registrable Securities under
the Securities Act at its expense, and the Company is required to use its best
efforts to effect such registration. These registration rights are subject to
certain conditions and limitations, including the right of the underwriters in a
registered offering to limit the number of Registrable Securities included in
such registration.
Pursuant to his employment agreement with the Company, Dennis J. Spina,
Chairman, Chief Executive Officer and President of the Company is entitled to
the same registration rights in respect of the Common Stock as is Erol M.
Onaran, to the extent that the Company should grant such rights to Mr. Onaran.
Mr. Spina has waived his registration rights with respect to this offering. See
"Management--Employment Agreements and Related Arrangements."
Promptly after this offering, and subject to the prior written consent
of Gerard Klauer Mattison & Co., Inc., the Company intends to file a
registration statement on Form S-8 under the Securities Act covering shares of
Common Stock reserved for issuance under the Stock Plan, as well as shares
underlying other currently outstanding options. See "Management--Stock Plan."
The Company and each of its directors, officers, stockholders and
option holders has agreed not to, directly or indirectly, offer for sale,
contract to sell, sell, grant any other person the right to acquire, or
otherwise dispose of (or enter into any transaction or arrangement which is
designed to, or could be expected to, result in the disposition at any time in
the future of) any shares of Common Stock, each of its directors, officers,
stockholders and option holders has agreed not to exercise any registration
rights shares of Common Stock and the Company has agreed that it will not file
with the Commission a registration statement under the Securities Act relating
to any securities, for a period of 180 days after the date of this Prospectus,
without the prior written consent of Gerard Klauer Mattison & Co., Inc., except
that the Company may grant options under the Stock Plan and may issue shares of
Common Stock upon exercise of outstanding options after the date of this
Prospectus pursuant to the Stock Plan without such consent so long as such
option holders become subject to the same restrictions.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement dated
, 1998 (the "Underwriting Agreement") among the Company, the Selling
Stockholder and the underwriters named below (the "Underwriters") for whom
Gerard Klauer Mattison & Co., Inc. ("GKM"), EVEREN Securities, Inc. and Ferris,
Baker Watts, Incorporated are acting as representatives (the "Representatives"),
the Underwriters have severally agreed to purchase from the Company and the
Selling Stockholder, and the Company and the Selling Stockholder have agreed to
sell to the Underwriters, the number of Shares set forth below opposite the name
of each Underwriter at the initial offering price per share, less underwriting
discounts and commissions, set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
Underwriters Shares
------------ ------
<S> <C>
Gerard Klauer Mattison & Co., Inc. ...............................
EVEREN Securities, Inc. ..........................................
Ferris, Baker Watts, Incorporated ................................
----------
Total ..................................................... 2,917,000
==========
</TABLE>
The Company and the Selling Stockholder have been advised by the
Representatives that the Underwriters propose initially to offer the Shares to
the public at the initial public offering price set forth on the cover page of
this Prospectus and, through the Representatives, to certain dealers at such
price less a concession of $ per Share, and that the Underwriters and such
dealers may allow a discount of $ per Share on sales of Shares to certain
other dealers. After commencement of the initial public offering, the public
offering price, concession and discount to dealers may be changed by the
Representatives.
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Shares is subject to the
approval of certain legal matters by their counsel and certain other conditions
precedent. The Underwriters are obligated to purchase all of the Shares (other
than those covered by the over-allotment option described below) if any of the
Shares are purchased.
The Company, the Selling Stockholder and the Underwriters have agreed
to indemnify each other against, or to contribute to losses arising out of,
certain civil liabilities in connection with this offering, including
liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof. The Company and the
Selling Stockholder also have agreed to reimburse the Representatives for
certain out-of-pocket expenses.
The Company has granted the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase from the Company up to an
additional 437,550 shares of Common Stock,
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at the initial public offering price per share, less underwriting discounts and
commissions, set forth on the cover page of this Prospectus. The Underwriters
may exercise the option only for the purpose of covering over-allotments, if
any, made in the sale of Shares. To the extent that the Underwriters exercise
such option, the Company will be obligated to sell the additional shares of
Common Stock, and each Underwriter will be obligated, subject to certain
conditions, to purchase the number of additional shares of Common Stock
proportionate to such Underwriter's initial obligation reflected in the
preceding table.
The Company and each of its directors, officers, stockholders and
option holders has agreed not to, directly or indirectly, offer for sale,
contract to sell, sell, grant any other person the right to acquire or otherwise
dispose of (or enter into any transaction or arrangement which is designed to,
or could be expected to, result in the disposition at any time in the future of)
any shares of Common Stock, each of its directors, officers, stockholders and
option holders has agreed not to exercise any registration rights relating to
any shares of Common Stock and the Company has agreed that it will not file with
the Commission a registration statement under the Securities Act relating to any
securities, for a period of 180 days after the date of this Prospectus, without
the prior written consent of GKM, except that the Company may grant options
under the Stock Plan and may issue shares of Common Stock upon exercise of
outstanding options after the date of this Prospectus pursuant to the Stock Plan
without such consent so long as such option holders become subject to the same
restrictions. Promptly after this offering, and subject to the prior written
consent of GKM, the Company intends to file a registration statement on Form S-8
under the Securities Act covering shares of Common Stock reserved for issuance
under the Stock Plan, as well as shares underlying other currently outstanding
options. See "Management--Stock Plan."
Application will be made to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol "EROL."
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Shares will be determined by
negotiation among the Company, the Selling Stockholder and the Representatives.
Factors to be considered in determining the initial public offering price, in
addition to prevailing market conditions, include the history and prospects of
the Company's industry; the Company's past, present and anticipated operations;
its past, present and anticipated earnings and current financial position; and
an assessment of the Company's management. There can be no assurance that the
initial public offering price will correspond to the price at which the Common
Stock will trade subsequent to this offering or that a public trading market for
the Common Stock will develop or continue after this offering.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase shares of Common Stock so long as the stabilizing bids do not exceed a
specific maximum. Syndicate covering transactions involve purchases of shares of
Common Stock in the open market after distribution has been completed in order
to cover syndicate short positions. Penalty bids permit the Representatives, on
behalf of the Underwriters, to reclaim a selling concession from a syndicate
member when the Shares originally sold by such member are purchased in a
syndicate covering transaction to cover syndicate short positions. Such
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it
otherwise would have been in the absence of such
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transactions. These transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Shares will be passed upon for the Company by its
counsel, Venable, Baetjer and Howard, LLP, McLean, Virginia. Certain legal
matters in connection with this offering will be passed upon for the
Underwriters by Kelley Drye & Warren LLP, Stamford, Connecticut and Washington,
DC.
EXPERTS
The financial statements of Erols Internet, Inc. at December 31, 1995
and 1996, and for the period from August 1, 1995 (inception) to December 31,
1995 and for the year ended December 31, 1996, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, DC, a Registration Statement on Form S-1 (together
with all amendments, schedules and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the Shares. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are omitted in accordance with the rules and regulations of the
Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document are not necessarily complete. With respect
to each such contract, agreement or other document filed with the Commission as
an exhibit to the Registration Statement, reference is made to the copy of such
contract, agreement or document for a more complete description and each such
statement shall be deemed qualified in its entirety by such reference. For
further information with respect to the Company and the Common Stock, reference
is made to the Registration Statement, which may be inspected, without charge,
at the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, NW, Washington, DC 20549; Seven World Trade Center,
13th Floor, New York, New York 10048; and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials may be obtained from the
public reference section of the Commission at 450 Fifth Street, NW, Washington,
DC 20549, at prescribed rates. The Registration Statement is also publicly
available through the Commission's Web site located at http://www.sec.gov.
The Company is not currently subject to the periodic reporting and
information requirements of the Exchange Act. Subsequent to this offering, the
Company will be required to file reports and other information with the
Commission pursuant to the Exchange Act. Such reports and other information may
be obtained from the Commission's Public Reference Section, copied at the
Commission's public reference facilities and obtained at the Commission's Web
site referred to above.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent auditors for each
fiscal year and quarterly reports containing unaudited financial information for
the first three quarters of each fiscal year.
-71-
<PAGE>
GLOSSARY
ATM. Asynchronous Transfer Mode. An information transfer standard for
routing traffic based on an address contained within the first five bytes of a
35-byte fixed length packet.
Back-End Server. A computer, usually found in a data center (such as
the Company NOC), designed to provide high availability of data to multiple
clients.
Backbone. A centralized high-speed network that interconnects smaller,
independent networks, often over geographically disparate areas.
Bandwidth. The number of bits of information that can move over a
communications medium in a given amount of time.
BRI. Basic Rate Interface. The ISDN standard commonly used for
providing residential or small business access. It provides for two 64-Kbps data
paths, along with a 16-Kbps control channel.
Broadband. A transmission medium that can carry signals from multiple
independent network carriers on a single coaxial or fiberoptic cable by
establishing different bandwidth channels.
Bps. Bits per second. A measure of data transmission speed, Bps rates
are frequently used to measure the performance of modems.
CAP. Competitive Access Provider. A company that provides its customers
with an alternative to the local telephone company for local transport of
private lines, special access and interstate transport of switched access
telecommunications services. CAPs are the predecessors of the CLECs.
CLEC. Competitive Local Exchange Carrier. A telecommunications company
that provides alternative service, in competition with the pre-existing, or
incumbent LEC.
Diverse-Route Conventional Facilities. Multiple paths to a single
destination, so that, if one path fails, an alternate is available.
Domain Names. In the system used to identify individual Internet
computers, a single word or abbreviation that makes up a part of a computer's
unique name. The name space is hierarchical, with the most specific component on
the left, and the most general component on the right. Naming components are
separated by periods.
Firewall. A system placed between networks that filters data passing
through it and removes unauthorized traffic, thereby enhancing the security of
the network.
Frame Relay. An information transfer standard for relaying traffic
based on an address contained in the six byte header of a variable length packet
that is up to 2,106 bytes long. Frame relay has less overhead than asynchronous
transfer mode but may be difficult to implement at speeds greater than 45 Mbps.
Gigaswitch. A high-speed multiport bridge with FDDI interfaces sold by
Cabletron Systems.
G-1
<PAGE>
A number of inter-carrier interconnection sites utilize one or more Gigaswitch
units as the underlying media fabric used to interconnect routers.
GUI. Graphical User Interface. A means by which the user communicates
with the computer by manipulating icons, menus and windows rather than by using
text commands.
IP. Internet Protocol. Part of the standard that describes how an
Internet-connected computer should break data down into packets for transmission
across the network, and how those packets should be addressed so that they
arrive at their destination. IP is the connectionless part of the TCP/IP
protocol.
IP-in-IP Tunnels. The use of IP in IP encapsulation to hide or isolate
the inner IP packet from the IP internetwork used to convey the outer IP packet.
Tunnels facilitate the independence of the enclosed IP traffic. They allow
remote sites to achieve IP connectivity without interaction with (or knowledge
of) the network infrastructure outside of the tunnel.
ISDN. Integrated Services Digital Network. An information transfer
standard for transmitting digital voice and data over telephone lines at speeds
up to 128 Kbps.
Java. An object-oriented programming language. Java is a device-
independent language, meaning that programs compiled in Java can be run on any
computer.
Kbps. Kilobits per second. A measure of data transmission speed. One
kilobit is equal to one thousand bits of information.
LAN. Local Area Network. A data communications network designed to
interconnect personal computers, workstations, minicomputers, file servers and
other communications and computing devices within a localized environment.
LEC. Local Exchange Carrier. A telecommunications company that provides
telecommunications services in a geographic area in which calls generally are
transmitted without toll charges.
Mb. Megabit. One million bits of information.
MB or Mbyte. Megabyte. One million bytes, eight million bits.
NOC. Network Operations Center. A location from which the operation of
a network or Internet is monitored. Additionally, this center usually serves as
a clearinghouse for addressing network access problems.
POP. Point of Presence. As used by the Company, a collection of
telecommunications equipment at a local geographic site where subscribers can
access the Company's services via a local telephone call.
PPP. Point-to-Point Protocol. A communications protocol that allows
direct dial-up access to the Internet over phone lines. Unlike SLIP, PPP can
automatically retransmit information packets if they become corrupted.
G-2
<PAGE>
PRI. Primary Rate Interface. The ISDN standard used primarily to supply
digital service to business customers. It is typically conveyed over T-1
facilities. It provides 23 64-Kbps data channels, and one 64-Kbps control
channel for the conveyance of call set-up and status messages.
Protocol. A formal description of message formats and the rules that
two or more computers must follow in order to exchange messages.
Server. Software that allows a computer to offer a service to another
computer. Other computers contact the server program by means of matching client
software. In addition, such term usually includes the computer on which server
software runs.
SLIP. Serial Line Internet Protocol. A communications protocol that
allows direct, dial-up access to the Internet over phone lines.
SNMP. Single Network Monitoring Protocol. A standard protocol for
monitoring network equipment.
SONET. Synchronous Optical Network. American National Standard
Institute's standard for broadband public networks using fiber optics, initiated
by the regional bell operating companies. SONET makes it possible for
telecommunications products from different vendors to communicate at very high
speeds over networks, with data transmission rates from 51.84 Mbps to 48 Gbps.
T-1. A data communications circuit capable of transmitting data at 1.54
Mbps in each direction.
T-3. A data communications circuit capable of transmitting data at 44
Mbps in each direction.
TCP/IP. Transmission Control Protocol/Internet Protocol. A suite of
network protocols that allow computers with different architectures and
operating system software to communicate with other computers on the Internet.
UNIX. An operating system used on a wide variety of computers, from
mainframes to personal computers. Unix is a very flexible operating system which
supports multi-tasking and is ideally suited to multi-user applications.
UPS. Uninterruptible Power Supply. A battery that can supply continuous
power to a computer system in the event of a power failure. The battery, charged
while the computer is switched on, starts supplying power if the primary power
system fails and provides power for ten minutes or more, during which time the
operator can save files and shut down the computer.
Virtual POP. As utilized by the Company, a local telephone number
(outside of the local calling area of a physical POP) through which calls are
aggregated by a service provider, often a CAP or a CLEC, and then transferred to
the Company on a dedicated trunk route between the Company and that provider. By
utilizing Virtual POPs, the Company can postpone the start-up expenditures for
physical POPs in expansion areas until a substantial subscriber base has been
established. As traffic increases and the aggregate cost of service from the
service provider (which is charged on a per call
G-3
<PAGE>
basis) increases, the Company can install a physical POP and capture the
efficiencies of a substantial user base.
Virtual Private Network. A service offering by which two or more
customer sites are interconnected using a shared-access communications
infrastructure, such as the Internet, but in which techniques are employed to
isolate the customer traffic from the underlying infrastructure. Isolation
precludes certain addressing and routing constraints from impinging on the
customer. With the addition of adequate encryption and authentication, the
customer sites may achieve adequate security from intrusion or eavesdropping
from other users of the underlying infrastructure.
Web Server. A server connected to the Internet from which Internet
users can obtain information.
G-4
<PAGE>
EROLS INTERNET, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.............................................................................. F-2
Balance Sheets as of December 31, 1995 and 1996................................................................................ F-3
Statements of Operations for the period from August 1, 1995 (inception) to December 31, 1995 and the year ended
December 31, 1996............................................................................................................. F-4
Statements of Stockholders' Deficit for the period from August 1, 1995 (inception) to December 31, 1995 and the year ended
December 31, 1996............................................................................................................. F-5
Statements of Cash Flows for the period from August 1, 1995 (inception) to December 31, 1995 and the year ended
December 31, 1996............................................................................................................. F-6
Notes to Financial Statements.................................................................................................. F-7
Balance Sheet as of September 30, 1997 (unaudited)............................................................................. F-18
Statements of Operations for the nine months ended September 30, 1996 and 1997 (unaudited)..................................... F-19
Statements of Stockholders' Deficit for the nine months ended September 30, 1996 and 1997 (unaudited).......................... F-20
Statements of Cash Flows for the nine months ended September 30, 1996 and 1997 (unaudited)..................................... F-21
Notes to Financial Statements (unaudited)...................................................................................... F-22
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Erols Internet, Inc.
We have audited the accompanying balance sheets of Erols Internet, Inc. as of
December 31, 1995 and 1996, and the related statements of operations,
stockholders' deficit, and cash flows for the period from August 1, 1995
(inception) to December 31, 1995 and for the year ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Erols Internet, Inc. at
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the period from August 1, 1995 (inception) to December 31, 1995 and for the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Vienna, Virginia
July 31, 1997, except Note 9, as to which the
date is December 4, 1997
F-2
<PAGE>
EROLS INTERNET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1995 1996
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ -- $ 2,540,857
Accounts receivable, less allowance of $42,000
at December 31, 1996 14,764 233,508
Note receivable from related parties -- 350,000
Prepaid expenses and other current assets -- 21,815
----------- ------------
Total current assets 14,764 3,146,180
Property and equipment, net 400,204 10,499,332
Restricted cash -- 850,166
Deposits -- 63,321
----------- ------------
Total assets $ 414,968 $ 14,558,999
=========== ============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable and accrued expenses $ 121,641 $ 10,560,133
Current portion of unearned revenues 743,496 12,916,864
Notes payable 500,000 700,000
Current portion of capital lease obligations -- 613,506
Current portion of deferred gain -- 42,444
----------- ------------
Total current liabilities 1,365,137 24,832,947
Long-term portion of unearned revenues -- 3,440,928
Long-term portion of capital lease obligations -- 994,343
Long-term portion of deferred gain -- 60,722
Deferred rent 68,105 120,611
Commitments -- --
Stockholders' deficit:
Preferred Stock, $.001 par value; 10,000,000
shares authorized -- --
Common Stock, $.001 par value; 60,000,000 shares
authorized; 5,586,492 shares issued and
outstanding at December 31, 1996 -- 5,586
Additional paid-in capital -- 3,127,239
Deferred stock compensation -- (364,250)
Accumulated deficit (1,018,274) (17,659,127)
----------- ------------
Total stockholders' deficit (1,018,274) (14,890,552)
----------- ------------
Total liabilities and stockholders' deficit $ 414,968 $ 14,558,999
=========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
EROLS INTERNET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
August 1, 1995
(inception) to Year ended
December 31, December 31,
1995 1996
-------------- ---------------
<S> <C> <C>
Net revenues:
Dial access revenues $ 125,752 $ 10,948,863
Other revenues -- --
----------- ------------
Total net revenues 125,752 10,948,863
Costs and expenses:
Cost of dial access revenues 63,030 6,002,155
Cost of other revenues -- --
Operations and customer support 125,095 6,227,011
Sales and marketing 188,313 9,475,585
General and administrative 90,880 2,092,421
Depreciation and amortization 16,741 2,013,967
----------- ------------
Total costs and expenses 484,059 25,811,139
Loss from operations (358,307) (14,862,276)
Other expense:
Other expense, net (658,422) (1,628,201)
Interest expense, net (1,545) (150,376)
----------- ------------
Net loss $(1,018,274) $(16,640,853)
=========== ============
Net loss per share $ (0.49) $ (6.86)
=========== ============
Weighted average shares outstanding 2,062,540 2,427,072
=========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
EROLS INTERNET, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Additional Deferred Total
Common Stock Paid-in Stock Accumulated Stockholders'
Shares Amount Capital Compensation Deficit Deficit
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1995 -- $ -- $ -- $ -- $ -- $ --
Net loss -- -- -- -- (1,018,274) (1,018,274)
----------------------------------------------------------------------------------------
Balance at December 31, 1995 -- -- -- -- (1,018,274) (1,018,274)
Contribution of divisional equity
to Erols Internet, Inc. (see Note 1) 424 -- 1,000 -- -- 1,000
Recapitalization of Erols Internet,
Inc. (see Note 1):
Retirement of Common Stock of OEO,
Inc. (424) -- (1,000) -- -- (1,000)
Issuance of Common Stock of Erols
Internet, Inc. 4,272,023 4,272 5,803 -- -- 10,075
Issuance of Common Stock 1,314,469 1,314 2,757,186 -- -- 2,758,500
Compensatory stock options -- -- 364,250 (364,250) -- --
Net loss -- -- -- -- (16,640,853) (16,640,853)
----------------------------------------------------------------------------------------
Balance at December 31, 1996 5,586,492 $ 5,586 $3,127,239 $ (364,250) $(17,659,127) $(14,890,552)
========================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
EROLS INTERNET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
August 1, 1995
(inception) Year ended
to December 31, December 31,
1995 1996
---------------- -----------------
<S> <C> <C>
Operating activities
Net loss $(1,018,274) $(16,640,853)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation of property and equipment 16,741 1,533,583
Amortization of capital leased equipment -- 480,384
Allowance for doubtful accounts -- 42,000
Changes in operating assets and liabilities:
Accounts receivable (14,764) (260,744)
Prepaid expenses and other current assets -- (21,815)
Restricted cash -- (850,166)
Deposits -- (63,321)
Accounts payable and accrued expenses 121,641 10,438,492
Unearned revenues 743,496 15,614,296
Deferred rent 68,105 52,506
---------------- -----------------
Net cash (used in) provided by operating activities (83,055) 10,324,362
Investing activities
Purchases of property and equipment (416,945) (10,174,143)
Advance under note receivable from related parties -- (350,000)
---------------- -----------------
Net cash used in investing activities (416,945) (10,524,143)
Financing activities
Proceeds from notes payable 500,000 700,000
Payments of notes payable -- (500,000)
Payments on obligations under capital leases -- (227,937)
Net proceeds from issuance of common stock -- 2,768,575
---------------- -----------------
Net cash provided by financing activities 500,000 2,740,638
---------------- -----------------
Net increase in cash and cash equivalents -- 2,540,857
Cash and cash equivalents at beginning of period -- --
---------------- -----------------
Cash and cash equivalents at end of period $ -- $ 2,540,857
================ =================
Supplemental cash flow information
Interest paid $ 1,545 $ 159,196
================ =================
</TABLE>
See accompanying notes.
F-6
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization
Erols Internet, Inc., (the "Company") began operations on August 1, 1995 as a
division of OEO, Inc., which changed its name to Erols Internet, Inc. on
December 2, 1996. The Company is an Internet service provider ("ISP"), offering
a combination of low priced, high quality Internet access in targeted markets
located throughout the corridor stretching from Massachusetts to Virginia.
From its inception on August 1, 1995 through December 2, 1996, the Company
operated as a division of OEO, Inc., a company that had two divisions consisting
of the Company's ISP operations and a computer, television and video cassette
recorder repair division. On December 2, 1996, OEO, Inc. reincorporated in the
State of Delaware and changed its name to Erols Internet, Inc. Shortly
thereafter, on December 28, 1996, the assets and liabilities of the computer,
television and video cassette recorder repair division were spun-off to a newly
formed Virginia corporation named Erol's Computer & TV/VCR, Inc.
The financial statements of Erols Internet, Inc. as of December 31, 1995 have
been prepared on the basis that Erols Internet, Inc. operated as a division of
OEO, Inc. and accordingly, there are no equity accounts such as common stock or
paid-in capital related to the Internet division. The financial statements of
Erols Internet, Inc. as of December 31, 1996 have been prepared on the basis
that Erols Internet, Inc. operated as a separately incorporated company and
accordingly, reflect the shares of Common Stock issued to the former stockholder
of OEO, Inc. as a result of the reincorporation and recapitalization of Erols
Internet, Inc. Additionally, the balance sheet as of December 31, 1995 and the
statements of operations for the period from August 1, 1995 (inception) to
December 31, 1995 and for the period from January 1, 1996 to December 28, 1996
have been prepared from the historical books and records of the Internet
division and include all amounts directly attributable and identifiable to the
Internet business as well as indirect expenses, such as physical operating costs
and management salaries. The physical operating costs and management salaries
were charged based on square feet and hours attributable to the Internet
business, respectively.
The Company has experienced operating losses since its inception as a result of
efforts to build its network infrastructure, increase internal staffing, develop
its systems and expand into new markets. The Company expects to continue to
focus on increasing its subscriber base and geographic coverage. Accordingly,
the Company expects its costs and operating expenses and capital expenditures to
continue to increase significantly, all of which will have a negative impact on
short-term operating results. The online services and Internet markets are
highly competitive. The Company believes that existing competitors, Internet-
based services, Internet service providers, Internet directory services and
telecommunication companies are likely to enhance their service offerings
resulting in greater competition for the Company. The competitive conditions
could have the following effects: require additional pricing programs, increase
spending on marketing, limit the Company's ability to expand its subscriber base
and result in increased attrition in the existing subscriber base. There can be
no assurance that growth in the Company's revenues or subscriber base will
continue or that the Company will be able to achieve or sustain profitablility
or positive cash flow.
F-7
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents.
Restricted Cash
Certain capital lease agreements generally require the Company to maintain
restricted cash deposit accounts with a bank. As of December 31, 1996,
restricted cash amounted to $850,166.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property and
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121, ("SFAS
121"), "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of." The Company made no adjustments to the carrying values of
the assets during the period from August 1, 1995 (inception) to December 31,
1995 and during the year ended December 31, 1996.
Stock Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." SFAS 123 allows companies to account for stock-based compensation
under either the new provisions of SFAS 123 or the provisions of Accounting
Principle Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees," but requires pro forma disclosure in the footnotes to the financial
statements as if the measurement provisions of SFAS 123 had been adopted. The
Company has chosen to continue accounting for its stock-based compensation in
accordance with the provisions of APB 25.
Revenue Recognition
The Company recognizes Internet access revenue when the services are provided.
During 1995, the Company offered one year contracts for Internet access that
were generally paid for in advance by customers. During 1996, the Company
offered one, two, three and six year contracts for Internet access that were
generally paid for in advance by customers. The Company has deferred recognizing
revenue on these advance payments and amortizes the amounts to revenue on a
straight-line basis as the services are provided.
F-8
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
The Company allows for cancellations of up to thirty days after service is
initiated for a full refund. Any cancellations in the period subsequent to the
first thirty days of service are refunded on a pro-rata schedule. The Company
reviews its history of cancellations periodically and, when appropriate, records
a reserve for the estimated amount of returns.
Cost of Revenues
Cost of revenues primarily consists of telecommunication expenses inherent in
the network infrastructure. Cost of revenues also includes fees paid for lease
of the Company's backbone, as well as license fees for Web browser software
based on a per user charge, other license fees paid to third-party software
vendors, product costs, and contractor fees for distribution of software to new
subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the period
from August 1, 1995 (inception) to December 31, 1995 and the year ended December
31, 1996, the Company expensed $121,451 and $6,530,877, respectively, as
advertising costs.
Income Taxes
Prior to December 28, 1996, the Internet business operated as a division of OEO,
Inc. and accordingly, a consolidated tax return for OEO, Inc. was filed. Since
OEO, Inc. generated consolidated net losses for the period from August 1, 1995
to December 28, 1996, no provision for income taxes would have been recorded for
the consolidated company and, as such, no additional disclosure has been made as
to the Internet division's portion of the net losses for tax purposes. In
connection with the reincorporation of OEO, Inc. and the spin-off of Erol's
Computer & TV/VCR, Inc., the provision for income taxes and the resulting
deferred tax asset (see Note 8) for the Company using the liability method was
calculated for the period from December 2, 1996 through December 31, 1996.
There was no provision for income taxes required for this period.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash, restricted cash and accounts receivable.
The cash and restricted cash are held by a high credit quality financial
institution. For accounts receivable, the Company performs ongoing credit
evaluations of its customers' financial condition and generally does not require
collateral. The Company maintains reserves for credit losses, and such losses
have been within management's expectations. The concentration of credit risk is
mitigated by the large customer base. The carrying amount of the receivables
approximates their fair value.
Sources of Supplies
The Company relies on local telephone companies and other companies to provide
data communications. Although management feels alternative telecommunications
facilities could be found in a timely manner, any disruption of these services
could have an adverse effect on operating results.
F-9
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Sources of Supplies (continued)
Although the Company attempts to maintain multiple vendors for required product,
its modems, terminal servers, and high-performance routers, which are important
components of its network, are currently acquired from two sources. In
addition, some of the Company's suppliers have limited resources and production
capacity. If the suppliers are unable to meet the Company's needs as it builds
out its network infrastructure, then delays and increased costs in the expansion
of the Company's network infrastructure could result, which could affect
operating results adversely.
Net Loss Per Share
The Company's net loss per share calculations are based upon the weighted
average number of shares of Common Stock outstanding. Pursuant to the
requirements of the Securities and Exchange Commission Staff Accounting Bulletin
No. 83, Common Stock and options to purchase Common Stock issued at prices below
the estimated initial public offering ("IPO") price during the twelve months
immediately preceding the initial filing of the registration statement relating
to the IPO have been included in the computation of net loss per share as if
they were outstanding for all periods presented (using the treasury method
assuming repurchase of Common Stock at the estimated IPO price). Other shares
issuable upon the exercise of stock options have been excluded from the
computation because the effect of their inclusion would be anti-dilutive due to
the Company's net losses. Subsequent to the Company's IPO, options to purchase
Common Stock under the treasury stock method will be included to the extent they
are dilutive.
Recent Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share", which
is required to be adopted in the December 31, 1997 financial statements. At
that time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of SFAS 128 on the calculation of
primary and fully diluted earnings per share for the periods presented herein is
not expected to be material.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Comprehensive Income",
which is required to be adopted in the year ended December 31, 1998. SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statements and (b) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the Statement of Stockholders' Deficit. The Company will be
required to restate earlier periods provided for comparative purposes.
F-10
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Recent Pronouncements (continued)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information", which is required to be adopted for
the year ended December 31, 1998. SFAS 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The disclosure for segment information on the financial
statements is not expected to be material.
3. Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation is calculated using the straight-line method over estimated
useful lives ranging between three and seven years. Leasehold improvements are
amortized over the lesser of the related lease term or the useful life.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
1995 1996
----------- ------------
<S> <C> <C>
Computer equipment $306,646 $11,570,218
Furniture, fixtures, and office equipment 110,299 721,218
Leasehold improvements -- 238,604
----------- ------------
416,945 12,530,040
Less accumulated depreciation and amortization 16,741 2,030,708
----------- ------------
$400,204 $10,499,332
=========== ============
</TABLE>
4. Notes Payable and Short-Term Borrowings
Pursuant to a promissory note agreement dated December 20, 1995, the Company
owed $500,000 to a financial institution as of December 31, 1995. The loan bore
interest at an annual rate of 1.5% plus prime rate (10% at December 31, 1995).
Prior to the repayment of the loan balance, the loan was collateralized by
certain assets of the Company and was guaranteed by an officer and stockholder
of the Company. During 1996, the Company repaid the balance of the note plus
unpaid interest totaling $16,131.
As of December 31, 1996, the Company had a short-term line of credit arrangement
with a bank which allowed for aggregate borrowings of up to $700,000. As of
December 31, 1996, $700,000 was outstanding under this arrangement. The line of
credit bears interest at a rate of 9.75% per annum. As of December 31, 1996, the
Company has accrued $2,051 of interest on this note payable. The note is due on
September 25, 1998. The line of credit is personally guaranteed by an officer
and stockholder of the Company. See Note 6.
F-11
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. Commitments
Operating Leases
The Company leases office space and various office and computer equipment under
non-cancelable operating lease agreements. The leases generally provide for
renewal terms and the Company is required to pay a portion of the common areas'
expenses including maintenance, real estate taxes and other expense. Rent
expense for the period from August 1, 1995 (inception) to December 31, 1995 and
for the year ended December 31, 1996 was $12,601 and $843,615, respectively.
The Company is also required to pay additional rent based on certain percentages
of revenues recorded by the various stores (kiosks) when the revenues exceed
certain predetermined amounts. The Company has not incurred any significant
additional rent charges to date. As of December 31, 1996, payments due under
non-cancelable operating leases are as follows:
<TABLE>
<S> <C>
1997 $1,014,506
1998 661,893
1999 507,623
2000 461,279
2001 354,114
Thereafter 241,450
----------------
$3,240,865
================
</TABLE>
Capital Leases
The Company leases certain computer equipment as a result of sales-leaseback
agreements, which will be accounted for as capital leases. The Company recorded
approximately $120,000 of deferred gain related to the difference between the
sales price of the equipment and present value of the minimum lease payments.
The Company will amortize the deferred gain to other income over the lease term.
Computer equipment and accumulated amortization related to this equipment
amounted to $1,956,407 and $480,384 at December 31, 1996, respectively.
Amortization related to capital leased equipment is included in depreciation and
amortization expense. The non-cash portion of these transactions has been
excluded from the Statements of Cash Flows.
Future minimum lease payments under the capital leases are as follows:
<TABLE>
<S> <C>
1997 $ 812,861
1998 701,015
1999 427,921
--------------
1,941,797
Less interest (333,948)
--------------
Present value of net minimum payments 1,607,849
Less current portion (613,506)
--------------
$ 994,343
==============
</TABLE>
F-12
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. Commitments (continued)
Letters of Credit
During 1996, in connection with capital lease agreements, the Company obtained
several letters of credit with a financial institution in the amounts of the
lease obligations. As collateral for these letters of credit, the financial
institution required that the Company invest certain amounts in certificate of
deposits at the financial institution. The total amount of cash restricted in
connection with these letters of credit is approximately $770,000. The $770,000
is included in restricted cash on the balance sheets. The certificates of
deposit bear interest at a rate of 4.7%, mature in one year and are renewable
at the option of the financial institution. The letters of credit expire in
1997 and will be automatically renewed by the financial institution for an
additional one year period for each year under which the capital lease
obligations are outstanding.
Employment Agreements
During 1996, the Company executed employment agreements with certain key
executives under which the Company is required to pay the following base
salaries annually over the next three years:
<TABLE>
<S> <C>
1997 $ 709,500
1998 360,000
1999 360,000
---------------
$1,429,500
===============
</TABLE>
6. Related Party Transactions
Since inception, the Company has shared common facilities and operating costs
such as executive management salaries, accounting, supplies, marketing, etc.,
with Erol's Computers & TV/VCR, Inc. (the "Affiliated Company") which shares
common ownership with the Company. During the period from August 1, 1995
(inception) to December 31, 1995 and the year ended December 31, 1996, $11,530
and $721,557 were charged to operations related to shared facilities and
operating costs, respectively.
The Company executed a promissory note agreement with an individual (the
"Individual"), an officer and stockholder of the Company, and the Affiliated
Company, whereby the Company agreed to loan $350,000 to the Individual and the
Affiliated Company. The note bears annual interest at a rate equivalent to the
federal rate, defined by the Internal Revenue Code. The balance of the note
plus compounded interest will become due to the Company three weeks after the
date on which the short-term line of credit arrangement expires and the
Individual has been released as a guarantor of the line of credit arrangement
with the bank.
F-13
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Related Party Transactions (continued)
Since inception in August 1995, Erols Internet has paid certain expenses related
to the Affiliated Company on behalf of the Affiliated Company. These expenses
amounted to $658,422 and $1,645,511 during the period from August 1, 1995
(inception) to December 31, 1995 and during the year ended December 31, 1996,
respectively. Since there is no intention to repay these amounts to the
Company, the Company has written off the receivable and has included the amount
in other expense in the Statements of Operations.
7. Stockholders' Deficit
Equity transactions
During 1995, the Company operated as a division of OEO, Inc. and accordingly,
had no Common Stock outstanding. During 1996, as a part of the reorganization,
the sole common stockholder was issued 4,272,023 shares of voting Common Stock,
par value $0.001 in Erols Internet.
In December 1996, the Company completed a private placement to raise total
proceeds of approximately $3,000,000 from an outside investor (the "Minority
Stockholder"). The Company sold 1,314,469 shares of voting Common Stock at
$2.29 per share.
Stock Option Plan
During late 1996, the Company adopted a stock option plan (the "Option Plan")
which permits the Company to grant up to 657,234 voting Common Stock options to
employees, board members and others who contribute materially to the success of
the Company. Stock options are generally granted at prices which the Company's
Board of Directors believes approximates the fair market value of its Common
Stock at the date of grant. Individual grants generally become exercisable
ratably over a period of three years from the date of hire. The contractual term
of the options is ten years from the date of grant.
In late December 1996, the Company issued 328,617 options to a certain officer
outside of the Option Plan at an exercise price of $1.18 which was considered to
be below fair market value at the time of the option grant. Accordingly, the
Company recorded deferred stock compensation of $364,250 which will be amortized
to expense over the vesting period of three years beginning in January 1997.
Common Stock option activity was as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
Outstanding at December 31, 1995 -- $ --
Options granted 455,823 1.49
Options exercised -- --
Options canceled or expired -- --
--------- --------
Outstanding at December 31, 1996 455,823 $ 1.49
========= ========
Exercisable at December 31, 1996 -- $ --
========= ========
</TABLE>
F-14
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Stockholders' Deficit (continued)
Stock Option Plan (continued)
As of December 31, 1996, there were 530,028 options available for future grants
under the Option Plan.
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding
Number Average Weighted-
Outstanding at Remaining Average
Range of Exercise December 31, Contractual Exercise
Prices 1996 Life Price
- ------------------- ------------------- -------------------- -----------------
<S> <C> <C> <C>
$0 - $1.25 328,617 10 $1.18
$1.26 - $2.29 127,206 10 2.29
------------------- -----------------
$0 - $2.29 455,823 $1.49
=================== =================
</TABLE>
Had compensation expense related to the stock option plan been determined based
on the fair value at the grant date for options granted during the period from
August 1, 1995 (inception) to December 31, 1995 and the year ended December 31,
1996, consistent with the provisions of SFAS 123, the Company's net loss and net
loss per share would have been as follows:
<TABLE>
<CAPTION>
Period from
August 1, 1995
(inception) to Year ended
December 31, December 31,
1995 1996
------------------- -------------------
<S> <C> <C>
Net loss - pro forma $ (1,018,274) $ (16,690,399)
=================== ===================
Net loss per share - pro forma $ (0.49) $ (6.88)
=================== ===================
</TABLE>
The effect of applying SFAS 123 on 1995 and 1996 pro forma net loss as stated
above is not necessarily representative of the effects on reported net loss for
future years due to, among other things, the vesting period of the stock options
and the fair value of additional stock options in future years.
The fair value of each option grant is estimated on the date of grant using the
minimum value option-pricing fair value model with the following weighted-
average assumptions used for grants in 1996: divided yield of 0%, risk-free
interest rate of 6.125%, and expected life of the option term of 3 years. The
weighted average fair values of the options granted in 1996 with a stock price
equal to the exercise price and with a stock price greater than the exercise
price is $0.38 and $1.31, respectively.
Reserve for Issuance
As of December 31, 1996, the Company had reserved 10,985,851 shares of Preferred
Stock and Common Stock options for future issuances.
F-15
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. Income Taxes
Net deferred income tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
1996
---------------------
<S> <C>
Unearned revenues $ 1,307,553
Operating loss carryforwards 1,913,864
Provision for bad debts 15,960
Depreciation (228,000)
---------------------
Deferred tax assets 3,009,377
Valuation allowance (3,009,377)
=====================
Net deferred tax assets $ --
=====================
</TABLE>
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $5,036,000. Operating loss carryforwards expire in 2011.
9. Subsequent events
Effective January 1, 1997, the Company entered into a five year management
agreement with the Affiliated Company. Pursuant to this agreement, the Company
will provide office space, general and administrative services, sales services
and print advertising services to the Affiliated Company in exchange for a
management fee. The management fee is based on actual direct labor charges to
the Affiliated Company and an allocation of facilities costs based on square
feet used by the Affiliated Company. During December 1997, the parties agreed
to terminate the agreement effective December 31, 1997.
Effective January 31, 1997, the Company entered into an ISP License Agreement
with a vendor. The Company agreed to license a minimum of 1,000,000 software
mailbox products in exchange for $3,000,000, which is to be paid in quarterly
installments over the next three years. After exceeding the 1,000,000 software
mailbox products, the Company may license additional mailbox products for a fee
of $3.00 per mailbox.
F-16
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. Subsequent events (continued)
In May 1997, the Company sold 131,447 shares of voting Common Stock to the
Minority Stockholder for total proceeds of $500,000 at $3.80 per share. In
September 1997, the Company sold 114,600 shares of voting Common Stock to the
Minority Stockholder for total proceeds of $500,000 at $4.36 per share. These
per-share prices were determined by the Company's Board of Directors and
represent the fair value of the Company's Common Stock on the date of purchase
computed on a basis consistent with past practice.
In September 1997, the Board of Directors increased the number of shares of
Common Stock available under the Option Plan by 169,609 options.
On September 1, 1997, a motion for judgment was filed against the Company in a
Virginia state court by the Company's former Vice President, Marketing. The
motion for judgment alleges breach of contract and wrongful termination and
seeks punitive and compensatory damages of approximately $1,000,000.
Additionally, the Company's former Vice President, Marketing seeks to exercise
certain stock options. Discovery has been initiated and, therefore, it is
premature to reach an opinion on liability or the extent of exposure. However,
the Company believes that it has a meritorious defense and is conducting a
vigorous defense. The Company doesn't believe that the conclusion of this matter
will materially affect the Company's financial position or results of
operations.
On December 4, 1997, the Board of Directors and stockholders of the Company
approved a 1 for 2.3583672 reverse stock split of the Company's $0.001 par value
voting Common Stock, which became effective on December 5, 1997. In addition,
the Company eliminated the authorized non-voting Common Stock. All references in
the accompanying financial statements to the number of shares of Common Stock
and per-share amounts have been restated to reflect these transactions.
F-17
<PAGE>
EROLS INTERNET, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30,
1997
--------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 532,665
Accounts receivable, less allowance of $42,000 492,766
Note receivable from related parties 350,000
Restricted cash 125,000
Prepaid expenses and other current assets 265,477
--------------
Total current assets 1,765,908
Property and equipment, net 16,075,346
Restricted cash 758,240
Deposits 213,845
--------------
Total assets $ 18,813,339
==============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable and accrued expenses $ 15,660,066
Current portion of unearned revenues 23,677,017
Notes payable 500,000
Current portion of capital lease obligations 601,525
Current portion of deferred gain 39,016
--------------
Total current liabilities 40,477,624
Long-term portion of unearned revenues 7,887,331
Long-term portion of capital lease obligations 584,602
Long-term portion of deferred gain 34,617
Deferred rent 115,503
Commitments -
Stockholders' deficit:
Preferred Stock, $.001 par value; 10,000,000
shares authorized -
Common Stock, $.001 par value; 60,000,000 shares
authorized; 5,834,659 shares issued and outstanding 5,835
Additional paid-in capital 4,056,840
Deferred stock compensation (242,833)
Accumulated deficit (34,106,180)
--------------
Total stockholders' deficit (30,286,338)
--------------
Total liabilities and stockholders' deficit $ 18,813,339
==============
</TABLE>
See accompanying notes
F-18
<PAGE>
EROLS INTERNET, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1997
------------ ------------
<S> <C> <C>
Net revenues:
Dial access revenues $ 5,972,132 $ 22,829,785
Other revenues - 1,579,868
------------ ------------
Total net revenues 5,972,132 24,409,653
Costs and expenses:
Cost of dial access revenues 3,528,874 10,080,621
Cost of other revenues - 664,069
Operations and customer support 3,876,094 7,098,341
Sales and marketing 5,523,732 15,506,732
General and administrative 1,377,203 2,991,762
Depreciation and amortization 1,053,081 4,360,158
------------ ------------
Total costs and expenses 15,358,984 40,701,683
Loss from operations (9,386,852) (16,292,030)
Other income (expense):
Other income (expense), net (798,260) 9,122
Interest expense, net (102,071) (164,145)
------------ ------------
Net loss $(10,287,183) $(16,447,053)
============ ============
Net loss per share $ (4.99) $ (2.52)
============ ============
Weighted average shares outstanding 2,062,540 6,517,771
============ ============
</TABLE>
See accompanying notes.
F-19
<PAGE>
EROLS INTERNET, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Deferred Total
Common Stock Paid-in Stock Accumulated Stockholders'
Shares Amount Capital Compensation Deficit Deficit
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1995 - $ - $ - $ - $ - $ -
Net loss - - - - (1,018,274) (1,018,274)
------------------------------------------------------------------------------
Balance at December 31, 1995 - - - - (1,018,274) (1,018,274)
Contribution of divisional equity to
Erols Internet, Inc. (see Note 1) 424 - 1,000 - - 1,000
Recapitalization of Erols Internet,
Inc. (see Note 1):
Retirement of Common Stock of OEO, Inc. (424) - (1,000) - - (1,000)
Issuance of Common Stock of Erols
Internet, Inc. 4,272,023 4,272 5,803 - - 10,075
Issuance of Common Stock 1,314,469 1,314 2,757,186 - - 2,758,500
Compensatory stock options - - 364,250 (364,250) - -
Net loss - - - - (16,640,853) (16,640,853)
------------------------------------------------------------------------------
Balance at December 31, 1996 5,586,492 5,586 3,127,239 (364,250) (17,659,127) (14,890,552)
Issuance of Common Stock 248,167 249 929,601 - - 929,850
Compensatory stock options - - - 121,417 - 121,417
Net loss - - - - (16,447,053) (16,447,053)
------------------------------------------------------------------------------
Balance at September 30, 1997 5,834,659 $5,835 $4,056,840 $(242,833) $(34,106,180) $(30,286,338)
==============================================================================
</TABLE>
See accompanying notes.
F-20
<PAGE>
EROLS INTERNET, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1997
------------- -------------
<S> <C> <C>
Operating activities
Net loss $(10,287,183) $(16,447,053)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation of property and equipment 563,238 3,840,655
Amortization of capital leased equipment 489,843 519,503
Stock option compensation - 121,417
Allowance for doubtful accounts 29,788 -
Changes in operating assets
and liabilities:
Accounts receivable (166,876) (259,258)
Prepaid expenses and other current assets (825) (243,662)
Deposits (250) (150,524)
Restricted cash (427,595) (33,074)
Accounts payable and accrued expenses 7,625,149 5,099,933
Unearned revenues 12,033,334 15,206,556
Deferred rent 33,876 (5,108)
------------- -------------
Net cash provided by operating activities 9,892,499 7,649,385
Investing activities
Purchases of property and equipment (9,182,829) (9,965,705)
------------- -------------
Net cash used in investing activities (9,182,829) (9,965,705)
Financing activities
Proceeds from notes payable - 400,000
Payments of notes payable (500,000) (600,000)
Payments on obligations under capital leases (137,269) (421,722)
Net proceeds from issuance of common stock - 929,850
------------- -------------
Net cash (used in) provided by financing activities (637,269) 308,128
------------- -------------
Net increase (decrease) in cash and cash equivalents 72,401 (2,008,192)
Cash and cash equivalents at beginning of period - 2,540,857
------------- -------------
Cash and cash equivalents at end of period $ 72,401 $ 532,665
============ ============
Supplemental cash flow information
Interest paid $ 92,128 $ 188,642
============ ============
</TABLE>
See accompanying notes.
F-21
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization
Erols Internet, Inc. (the "Company") began operations on August 1, 1995 as a
division of OEO, Inc., which changed its name to Erols Internet, Inc. on
December 2, 1996. The Company is an Internet service provider ("ISP"), offering
a combination of low priced, high quality Internet access in targeted markets
located throughout the corridor stretching from Massachusetts to Virginia.
From its inception on August 1, 1995 through December 2, 1996, the Company
operated as a division of OEO, Inc., a company that had two divisions consisting
of the Company's ISP operations and a computer, television and video cassette
recorder repair division. On December 2, 1996, OEO, Inc. reincorporated in the
State of Delaware and changed its name to Erols Internet, Inc. Shortly
thereafter, on December 28, 1996, the assets and liabilities of the computer,
television and video cassette recorder repair division were spun-off to a newly
formed Virginia corporation named Erol's Computer & TV/VCR, Inc.
The statements of operations of Erols Internet, Inc. for the nine months ended
September 30, 1996 have been prepared from the historical books and records of
the Internet division and include all amounts directly attributable and
identifiable to the Internet business as well as indirect expenses, such as
physical operating costs and management salaries. The physical operating costs
and management salaries were charged based on square feet and hours attributable
to the Internet business, respectively.
The Company has experienced operating losses since its inception as a result of
efforts to build its network infrastructure, increase internal staffing, develop
its systems and expand into new markets. The Company expects to continue to
focus on increasing its subscriber base and geographic coverage. Accordingly,
the Company expects its costs and operating expenses and capital expenditures to
continue to increase significantly, all of which will have a negative impact on
short-term operating results. The online services and Internet markets are
highly competitive. The Company believes that existing competitors, Internet-
based services, Internet service providers, Internet directory services and
telecommunication companies are likely to enhance their service offerings
resulting in greater competition for the Company. The competitive conditions
could have the following effects: require additional pricing programs, increase
spending on marketing, limit the Company's ability to expand its subscriber base
and result in increase attrition in the existing subscriber base. There can be
no assurance that growth in the Company's revenues or subscriber base will
continue or that the Company will be able to achieve or sustain profitablility
or positive cash flow.
F-22
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
(UNAUDITED)
2. Summary of Significant Accounting Policies
Interim Financial Information
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
interim period are not necessarily indicative of the results that may be
expected for any future period, including the year ended December 31, 1997. For
further information, refer to the audited financial statements and footnotes
thereto included elsewhere herein.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents.
Restricted Cash
Certain capital lease agreements generally require the Company to maintain
restricted cash deposit accounts with a bank. As of September 30, 1997,
restricted cash amounted to $883,240.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property and
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of." The Company made no adjustments to the carrying values of the
assets during the nine month periods ended September 30, 1996 and 1997.
Stock Compensation
The Company accounts for its stock-based compensation in accordance with APB No.
25 "Accounting for Stock Issued to Employees" ("APB 25") using the intrinsic
value method. The Company has made pro forma disclosures required by SFAS No.
123 "Accounting for Stock Based Compensation" ("SFAS 123") using the fair value
method.
F-23
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
(UNAUDITED)
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition
The Company recognizes Internet access revenue when the services are provided.
During the nine month periods ended September 30, 1996 and 1997, the Company
offered one, two and three year contracts for Internet access that are generally
paid for in advance by customers. The Company has deferred recognizing revenue
on these advance payments and amortizes the amounts to revenue on a straight-
line basis as the services are provided.
The Company allows for cancellations of up to thirty days after service is
initiated for a full refund. Any cancellations in the period subsequent to the
first thirty days of service are refunded on a pro-rata schedule. The Company
reviews its history of cancellations periodically and, when appropriate, records
a reserve for estimated amount of returns.
Cost of Revenues
Cost of revenues primarily consists of telecommunication expenses inherent in
the network infrastructure. Cost of revenues also includes fees paid for lease
of the Company's backbone, as well as license fees for Web browser software
based on a per user charge, other license fees paid to third-party software
vendors, product costs, and contractor fees for distribution of software to new
subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the nine
month periods ended September 30, 1996 and 1997, the Company expensed $3,760,270
and $10,041,536, respectively, as advertising costs.
Income Taxes
The Company provides for income taxes in accordance with the liability method.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash, restricted cash and accounts receivable.
The cash and restricted cash are held by a high credit quality financial
institution. For accounts receivable, the Company performs ongoing credit
evaluations of its customers' financial condition and generally does not require
collateral. The Company maintains reserves for credit losses, and such losses
have been within management's expectations. The concentration of credit risk is
mitigated by the large customer base. The carrying amount of the receivables
approximates their fair value.
F-24
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
(UNAUDITED)
2. Summary of Significant Accounting Policies (continued)
Sources of Supplies
The Company relies on local telephone companies and other companies to provide
data communications. Although management feels alternative telecommunications
facilities could be found in a timely manner, any disruption of these services
could have an adverse effect on operating results. Although the Company attempts
to maintain multiple vendors for each required product, its modems, terminal
servers, and high-performance routers, which are important components of its
network, are currently acquired from two sources. In addition, some of the
Company's suppliers have limited resources and production capacity. If the
suppliers are unable to meet the Company's needs as it builds out its network
infrastructure, then delays and increased costs in the expansion of the
Company's network infrastructure could result, which would affect operating
results adversely.
Net Loss Per Share
The Company's net loss per share calculations are based upon the weighted
average number of shares of Common Stock outstanding. Pursuant to the
requirements of the Securities and Exchange Commission Staff Accounting Bulletin
No. 83, Common Stock and options to purchase Common Stock issued at prices below
the estimated initial public offering ("IPO") price during the twelve months
immediately preceding the initial filing of the registration statement relating
to the IPO have been included in the computation of net loss per share as if
they were outstanding for all periods presented (using the treasury method
assuming repurchase of Common Stock at the estimated IPO price). Other shares
issuable upon the exercise of stock options have been excluded from the
computation because the effect of their inclusion would be anti-dilutive due to
the Company's net losses. Subsequent to the Company's IPO, options to purchase
Common Stock under the treasury stock method will be included to the extent they
are dilutive.
Recent Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share", which
is required to be adopted in the December 31, 1997 financial statements. At that
time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of SFAS 128 on the calculation of
primary and fully diluted earnings per share for the interim periods presented
herein is not expected to be material.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Comprehensive Income",
which is required to be adopted for the year ended December 31, 1998. SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statements and (b) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the Statements of
F-25
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
(UNAUDITED)
2. Summary of Significant Accounting Policies (continued)
Recent Pronouncements (continued)
Stockholders' Deficit. The Company will be required to restate earlier periods
provided for comparative purposes.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information", which is required to be adopted for
the year ended December 31, 1998. SFAS 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The disclosure for segment information on the financial
statements is not expected to be material.
3. Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation is calculated using the straight-line method over an estimated
useful lives ranging between three and seven years. Leasehold improvements are
amortized over the lesser of the related lease term or the useful life.
<TABLE>
<CAPTION>
Property and equipment consisted of the following:
September 30,
1997
-------------
<S> <C>
Computer equipment $ 21,150,950
Furniture, fixtures, and office equipment 980,934
Leasehold improvements 334,328
-------------
22,466,212
Less accumulated depreciation and amortization 6,390,866
-------------
$ 16,075,346
=============
</TABLE>
4. Short-Term Borrowings
As of September 30, 1997, the Company had a short-term line of credit
arrangement with a bank which allowed for aggregate borrowings up to $700,000.
As of September 30, 1997, $500,000 was outstanding under this arrangement.
Borrowings under this arrangement bear interest at the Horizon Bank of
Virginia's prime lending rate plus 1 1/2% per annum. As of September 30,
1997, the Company has accrued $12,881 of interest on this line of credit. The
agreement expires on September 25, 1998. The line of credit is personally
guaranteed by an officer and stockholder of the Company. See Note 6.
F-26
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
(UNAUDITED)
5. Commitments
Operating Leases
The Company leases office space and various office and computer equipment under
non-cancelable operating lease agreements. The leases generally provide for
renewal terms and the Company is required to pay a portion of the common areas'
expenses including maintenance, real estate taxes and other expense. Rent
expense for the nine months ended September 30, 1996 and 1997 was $224,024 and
$802,556, respectively . The Company is also required to pay additional rent
based on certain percentages of revenues recorded by the various stores (kiosks)
when the revenues exceed certain predetermined amounts. The Company has not
incurred any significant additional rent charges to date. As of September 30,
1997, payments due under non-cancelable operating leases are as follows:
<TABLE>
<S> <C>
Three months ended December 31, 1997 $ 253,627
1998 661,893
1999 507,623
2000 461,279
2001 354,114
Thereafter 241,450
-------------
$ 2,479,986
=============
</TABLE>
Capital Leases
The Company leases certain computer equipment as a result of sales-leaseback
agreements, which will be accounted for as capital leases. The Company recorded
approximately $120,000 of deferred gain related to the difference between the
sales price of the equipment and present value of the minimum lease payments.
The Company will amortize the deferred gain to other income over the lease term.
Computer equipment and accumulated amortization related to this equipment
amounted to $1,956,407 and $969,486, respectively, at September 30, 1997.
Amortization related to capital leased equipment is included in depreciation and
amortization expense. The non-cash portion of these transactions has been
excluded from the Statements of Cash Flows.
F-27
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
(UNAUDITED)
5. Commitments (continued)
Capital Leases (continued)
Future minimum lease payments under the capital leases are as follows:
<TABLE>
<S> <C>
Three months ended December 31, 1997 $ 204,005
1998 701,015
1999 427,921
-------------
1,332,941
Less interest (146,814)
-------------
Present value of net minimum payments 1,186,127
Less current portion (601,525)
-------------
$ 584,602
=============
</TABLE>
Letters of Credit
During 1996, in connection with capital lease agreements, the Company obtained
several letters of credit with a financial institution in the amounts of the
lease obligations. As collateral for these letters of credit, the financial
institution required that the Company invest certain amounts in certificate of
deposits at the financial institution. The total amount of cash restricted in
connection with these letters of credit is approximately $770,000. The
certificates of deposit bear interest at a rate of 4.7%, mature in one year and
are renewable at the option of the financial institution. The letters of credit
expire in 1997 and 1998 and will be automatically renewed by the financial
institution for an additional one year period for each year under which the
capital lease obligations are outstanding.
Employment Agreements
During 1996 and 1997, the Company executed employment agreements with certain
key executives under which the Company is required to pay the following base
salaries annually over the next three years:
<TABLE>
<S> <C>
Three months ended December 31, 1997 $ 182,500
1998 360,000
1999 360,000
----------------
$ 902,500
================
</TABLE>
F-28
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
(UNAUDITED)
5. Commitments (continued)
Other Commitments
Effective January 31, 1997, the Company entered into an ISP License Agreement
with a vendor. The Company agreed to license a minimum of 1,000,000 software
mailbox products in exchange for $3,000,000, which is to be paid in quarterly
installments over the next three years. After exceeding the 1,000,000 software
mail box products, the Company may license additional mailbox products for a fee
of $3.00 per mailbox.
6. Related Party Transactions
Effective January 1, 1997, the Company entered into a five year management
agreement with the Erol's Computer & TV/VCR (the "Affiliated Company"). Pursuant
to this agreement, the Company will provide office space, general and
administrative services, sales services and print advertising services to the
Affiliated Company in exchange for a management fee. The management fee is based
on actual direct labor charges to the Affiliated Company and an allocation of
facilities costs based on square feet used by the Affiliated Company. During the
nine months ended September 30, 1997, the management fee amounted to $21,374.
The $21,374 is included in accounts receivable as of September 30, 1997. During
December 1997, the parties agreed to terminate the agreement effective December
31, 1997.
The Company executed a promissory note agreement with an Individual (the
"Individual"), an officer and stockholder of the Company, and the Affiliated
Company, whereby the Company agreed to loan $350,000 to the Individual and the
Affiliated Company. The note bears annual interest at a rate equivalent to the
federal rate, defined by the Internal Revenue Code. The balance of the note plus
compounded interest will become due to the Company three weeks after the date on
which the short-term line of credit arrangement expires and the Individual has
been released as a guarantor of the line of credit arrangement with the bank.
The Company purchased computer equipment for resale and internal use from the
Affiliated Company. During the nine months ended September 30, 1997, purchases
amounted to $402,985.
Since inception in August 1995 through December 31, 1996, Erols Internet paid
certain expenses related to the Affiliated Company on behalf of the Affiliated
Company. These expenses amounted to $808,590 for the nine months ended September
30, 1996. Since there is no intention to repay these amounts to the Company, the
Company has written off the receivable and has included the amount in other
expense in the Statements of Operations.
F-29
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
(UNAUDITED)
7. Stockholders' Deficit
Equity transactions
In December 1996, the Company completed a private placement to raise total
proceeds of approximately $3,000,000 from an outside investor (the "Minority
Stockholder"). The Company sold 1,314,469 shares of voting Common Stock at $2.29
per share.
In May 1997, the Company completed a private placement to raise total proceeds
of approximately $500,000 from the Minority Stockholder. The Company sold
131,447 shares of voting Common Stock at $3.80 per share.
In September 1997, the Company completed a private placement to raise total
proceeds of approximately $500,000 from the Minority Stockholder. The Company
sold 114,600 shares of voting Common Stock at $4.36 per share.
Stock Option Plan
During 1996, the Company adopted a stock option plan (the "Option Plan") which
permits the Company to grant up to 657,234 voting Common Stock options to
employees, board members and others who contribute materially to the success of
the Company. During 1997 the Company increased the number of options available
for grant under the plan to 826,843. Stock options are generally granted at
prices which the Company's Board of Directors believes approximates the fair
market value of its Common Stock at the date of grant. Individual grants
generally become exercisable ratably over a period of three years from the date
of hire. The contractual term of the options is ten years from the date of
grant.
In December 1996, the Company issued 328,617 options to a certain officer at an
exercise price of $1.18 which was considered to be below fair market value at
the time of the option grant. Accordingly, the Company recorded deferred stock
compensation of $364,250 which will be amortized to expense over the vesting
period of three years beginning in January 1997.
F-30
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
(UNAUDITED)
7. Stockholders' Deficit (continued)
Stock Option Plan (continued)
<TABLE>
<CAPTION>
Common stock option activity was as follows:
Weighted-
Average
Exercise
Shares Price
------------- -------------
<S> <C> <C>
Outstanding at January 1, 1997 455,823 $ 1.49
Options granted 667,979 2.99
Options exercised (2,120) 2.29
Options canceled or expired (51,164) 2.29
------------- -------------
Outstanding at September 30, 1997 1,070,518 $ 2.39
============= =============
Exercisable at September 30, 1997 227,247 $ 1.82
============= =============
</TABLE>
As of September 30, 1997, there were 82,822 options available for future grants
under the Option Plan.
The following table summarizes information about fixed-price stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Number Average Weighted- Number Weighted-
Range of Outstanding at Remaining Average Exercisable at Average
Exercise September 30, Contractual Exercise September 30, Exercise
Prices 1997 Life Price 1997 Price
- ---------------- -------------- ------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Less than $2.30 818,866 9.3 $ 1.84 218,843 $ 1.73
$2.31 - $4.50 251,652 9.9 4.15 8,404 4.12
-------------- ----------- -------------- -----------
$1.18 - $4.50 1,070,518 $ 2.39 227,247 $ 1.82
============== =========== ============== ===========
</TABLE>
Had compensation expense related to the stock option plan been determined based
on the fair value at the grant date for options granted during the nine months
ended September 30, 1996 and 1997 consistent with the provisions of SFAS 123,
the Company's net loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
1996 1997
--------------- -------------
<S> <C> <C>
Net loss--pro forma $(10,287,183) $(16,691,211)
=============== =============
Net loss per share--pro forma $ (4.99) $ (2.56)
=============== =============
</TABLE>
F-31
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
(UNAUDITED)
7. Stockholders' Deficit (continued)
Stock Option Plan (continued)
The effect of applying SFAS 123 on 1996 and 1997 pro forma net loss as stated
above is not necessarily representative of the effects on reported net loss for
future years due to, among other things, the vesting period of the stock options
and the fair value of additional stock options in future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing fair value model with the following weighted-
average assumptions used for grants in 1997: dividend yield of 0%, expected
volatility of 70%; risk-free interest rate of 6.5%; and expected life of the
option term of 4 years. The weighted average fair values of the options granted
in 1997 with a stock price equal to the exercise price is $1.71.
Reserve for Issuance
As of September 30, 1997, the Company had reserved 11,153,340 shares of
Preferred Stock and Common Stock options for future issuances.
8. Income Taxes
Net deferred income tax assets are as follows:
<TABLE>
<CAPTION>
September 30,
1997
---------------------
<S> <C>
Unearned revenues $ 6,601,444
Operating loss carryforwards 2,675,532
Other 116,739
Depreciation (167,367)
---------------------
Deferred tax assets 9,226,348
Valuation allowance (9,226,348)
---------------------
Net deferred tax assets $ -
=====================
</TABLE>
At September 30, 1997, the Company has net operating loss carryforwards of
approximately $7,041,000. Operating loss carryforwards expire in 2012.
F-32
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
(UNAUDITED)
9. Contingencies
On September 1, 1997, a motion for judgment was filed against the Company
in Virginia state court by the Company's former Vice President, Marketing.
The motion for judgment alleges breach of contract and wrongful termination
and seeks punitive and compensatory damages of approximately $1,000,000.
Additionally, the Company's former Vice President, Marketing seeks to
exercise certain stock options. Discovery has just been initiated and,
therefore, it is premature to reach an opinion on liability or the extent
of exposure. However, the Company believes that it has a meritorious
defense and is conducting a vigorous defense. The Company doesn't believe
that the conclusion of this matter will materially affect the Company's
financial position or results of operations.
10. Subsequent events
On December 4, 1997, the Board of Directors and stockholders of the Company
approved a 1 for 2.3583672 reverse stock split of the Company's $0.001 par
value voting Common Stock, which became effective on December 5, 1997. In
addition, the Company eliminated the authorized non-voting Common Stock.
All references in the accompanying financial statements to the number of
shares of Common Stock and per share amounts have been restated to reflect
the split.
F-33
<PAGE>
================================================================================
No dealer, sales representative or other person has been authorized in
connection with this offering to give any information or to make any
representation other than those contained in this Prospectus, and, if given or
made, such information or representation must not be relied upon as having been
authorized by the Company, the Selling Stockholder or any Underwriter. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to the date hereof. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the Shares or by anyone in any jurisdiction in which such
offer or solicitation is unlawful or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation.
---------
TABLE OF CONTENTS
Prospectus Summary.............................
Risk Factors...................................
Use of Proceeds................................
Dividend Policy................................
Dilution.......................................
Capitalization.................................
Selected Financial Data........................
Management's Discussion and Analysis
of Financial Condition and Results of
Operations...................................
Business.......................................
Management.....................................
Principal and Selling Stockholders.............
Certain Transactions...........................
Description of Capital Stock...................
Shares Eligible for Future Sale................
Underwriting...................................
Legal Matters..................................
Experts........................................
Available Information..........................
Glossary.......................................
Index to Financial Statements..................
------------------
Until , 1998, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligations of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
EROLS INTERNET, INC.
2,917,000 Shares
of
Common Stock
- --------------------------------------------------------------------------------
PROSPECTUS
- --------------------------------------------------------------------------------
GERARD KLAUER
MATTISON & CO., INC.
EVEREN Securities, Inc.
FERRIS, BAKER WATTS
Incorporated
,1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates except
for the Securities and Exchange Commission registration fee and the NASD filing
fee.
<TABLE>
<S> <C>
SEC Registration.......................................... $13,215
NASD Filing Fee........................................... 4,861
Nasdaq National Market Listing Fee........................ 39,000
Blue Sky Fees and Expenses ............................... 10,000
Transfer Agent and Registrar Fees and Expenses............ 10,000
Accounting Fees and Expenses.............................. 130,000
Legal Fees and Expenses................................... 300,000
Printing and Engraving.................................... 100,000
Miscellaneous............................................. 17,924
----------
Total................................................ $625,000
==========
</TABLE>
- ---------
Item 14. Indemnification of Directors and Officers.
Section 102 of the Delaware General Corporation Law, as amended, allows
a corporation to eliminate the personal liability of directors of a corporation
to the corporation or its stockholders for monetary damages for a breach of
fiduciary duty as a director, except where the director breached his or her duty
of loyalty, failed to act in good faith, engaged in intentional misconduct or
knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit. The Registrant has limited the liability of its directors for
money damages in Article VIII of its Amended and Restated Certificate of
Incorporation (its "Charter"), which reads as follows:
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except liability for (i) any breach of the
director's duty of loyalty to the Corporation or its stockholders; (ii)
any acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) under Section 174 of the
General Corporation Law; or (iv) any transaction from which the director
derived any improper personal benefit. The foregoing sentence
notwithstanding, if the General Corporation Law is hereafter amended to
authorize further elimination or a limitation on the liability of a
director of a corporation, then the liability of a director of this
Corporation shall be
II-1
<PAGE>
eliminated or limited to the fullest extent permitted by the General
Corporation Law, as so amended.
Any repeal or modification of this Article VIII by (i) the stockholders
of the Corporation or (ii) amendment to the General Corporation Law of
Delaware (unless such statutory amendment specifically provides to the
contrary) shall not adversely affect any right or protection, existing
immediately prior to the effectiveness of such repeal or modification
with respect to any acts or omissions occurring either before or after
such repeal or modification, of a person serving as a director at the
time of such repeal or modification.
Section 145 of the Delaware General Corporation Law, as amended,
provides that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation), by reason of the
fact that he is or was a director, officer, employee or agent of the corporation
or is or was serving at its request in such capacity in another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he 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 reasonable cause to believe his
conduct was unlawful. The Registrant has provided for indemnification of
directors, officers, employees and agents in Article VII of its Charter, which
reads as follows:
The Corporation shall indemnify, and advance expenses to, its
directors, officers, employees and agents, and all persons who at any
time served as directors, officers, employees or agents of the
Corporation, to the maximum extent permitted, and in the manner
provided by, Section 145 of the Delaware General Corporation Law, as
amended, or any successor provisions, and shall have power to make any
other or further indemnity permitted under the laws of the State of
Delaware. The indemnification provided for herein shall not be deemed
exclusive of any other right to which those indemnified may be entitled
under any Bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and
as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such a person.
Any repeal or modification of this Article VIII by (i) the stockholders
of the Corporation or (ii) amendment to the General Corporation Law of
Delaware (unless such statutory amendment specifically provides to the
contrary) shall not adversely affect any right or protection, existing
immediately prior to the effectiveness of such repeal or modification
with respect to any acts or omissions occurring either before or after
such repeal or modification, of a person serving as a director at the
time of such repeal or modification.
II--2
<PAGE>
In addition, Section 5 of Article VII of the Bylaws of the Registrant,
as amended, provides as follows:
The Corporation shall indemnify and advance expenses to, its directors,
officers, employees and agents, and all persons who at any time served
as directors, officers, employees or agents of the Corporation, to the
fullest extent permitted, and in the manner provided by, Section 145 of
the Delaware General Corporation Law, as amended, or any successor
provisions, and shall have power to make any other or further indemnity
permitted under the laws of the State of Delaware. Without limiting the
foregoing, to the fullest extent permitted by the Delaware General
Corporation Law, the Corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or
permitted to be indemnified pursuant to these Bylaws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities.
The following sets forth certain information regarding sales of, and
other transactions with respect to, securities of the Company issued within the
past three years, which sales and other transactions were not registered
pursuant to the Securities Act. All information reported below takes into
account the 2.3583672-for-1 reverse split of the Company's Common Stock effected
on December 5, 1997.
On December 2, 1996, the Registrant reincorporated under the laws of
the State of Delaware. 4,272,023 shares of Common Stock were issued to Erol
Onaran, the Company's sole stockholder, in connection with the reincorporation.
Pursuant to a Stock Purchase Agreement dated December 28, 1996, the
Company sold a total of 1,314,469 shares of Common Stock to Gold & Appel
Transfer, S. A. ("Gold & Appel") at a price of $2.29 per share (for total
consideration of approximately $3,000,000).
Pursuant to a Stock Purchase Agreement dated May 8, 1997, the Company
sold to Gold & Appel 131,447 shares of Common Stock at a price of $3.80 per
share (for total consideration of $500,000).
II--3
<PAGE>
Pursuant to a Stock Purchase Agreement dated September 15, 1997, the
Company sold to Gold & Appel 114,600 shares of Common Stock at a price of $4.36
per share (for total consideration of $500,000).
Through November 10, 1997, the Company granted incentive stock options
to purchase a total of 813,417 shares of Common Stock pursuant to the Stock Plan
at exercise prices ranging from $2.29 to $4.55 per share. These options vest in
three increments of one-third each on the first, second and third anniversary of
the date of grant subject to acceleration under certain circumstances. Of such
options, options to purchase 4,240 shares have been exercised, options to
purchase 70,244 shares have been canceled and options to purchase 738,933 shares
remain outstanding.
On December 28, 1996, the Company granted to Dennis J. Spina, the
President and Chief Executive Officer, nonqualified stock options to purchase a
total of 328,617 shares of Common Stock at an exercise price of $1.18 per share
in connection with his employment agreement. These options vest in increments of
one-third each on August 13, 1997, 1998, and 1999, subject to an acceleration
under certain circumstances.
Except as may be set forth above, no underwriters were engaged in
connection with any of the foregoing sales of securities. The securities issued
in the above transactions were offered and sold in reliance upon the exemption
from registration under Section 4(2) of the Securities Act or Regulation D or
Rule 701 promulgated thereunder.
II--4
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed as part of this Registration
Statement:
<TABLE>
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation of Erol's Internet, Inc.
3.2** Bylaws of Erol's Internet, Inc., as amended.
4.1** Form of Specimen of Common Stock Certificate.
5.1** Opinion of Venable, Baetjer and Howard, LLP with regard to the legality of securities
being registered.
10.1* Management Agreement between Erol's Computer & TV/VCR Service, Inc. and Erol's
Internet, Inc., dated January 1, 1997.
10.2* Asset Purchase Agreement by and among Erol's Internet, Inc., Erol Onaran, and Erol's
Computer and TV/VCR Service, Inc., dated December 28, 1996.
10.3* Promissory Note by Erol Onaran and Erol's Computer & TV/VCR Service, Inc. in
favor of Erol's Internet, Inc., dated December 28, 1996.
10.4* Stock Purchase Agreement by and among Erol's Internet, Inc., Erol Onaran, Dennis J.
Spina, and Gold & Appel Transfer, S.A., dated December 28, 1996.
10.5* Stockholders Agreement by and among Erol's Internet, Inc., Erol Onaran, and Gold &
Appel Transfer, S.A., dated December 28, 1996, as amended.
10.6* Registration Rights Agreement by and among Erol's Internet, Inc. and Gold & Appel
Transfer, S.A., dated December 28, 1996, as amended.
10.7* Stock Purchase Agreement by and among Erol's Internet, Inc., Erol Onaran, and Gold
& Appel Transfer, S.A., dated May 8, 1997.
10.8* Stock Purchase Agreement by and among Erol's Internet, Inc., Erol Onaran, and Gold
& Appel Transfer, S.A., dated September 15, 1997.
10.9* Employment Agreement between Erol's Internet, Inc. and Dennis J. Spina, dated
August 12, 1996.
10.10* Employment Agreement between Erol's Internet, Inc. and Orhan E. Onaran, dated
December 27, 1996.
10.11* Employment Agreement between Erol's Internet, Inc. and Salvatore M. Quadrino,
dated September 2, 1997.
10.12* Erol's Internet, Inc. Stock Plan, as amended, including Forms of Qualified and Non-
Qualified Stock Option Grant Agreements, as amended.
10.13* Non-Qualified Stock Option Agreement by and among Erol's Internet, Inc., Erol
Onaran, and Dennis Spina, dated December 28, 1996.
</TABLE>
II--5
<PAGE>
<TABLE>
<C> <S>
10.14** Agreement of Lease between 7921 Woodruff Court Partnership and OEO,
Inc., dated August 5, 1992, as amended on September 28, 1992, as
amended on December 12, 1994.
11.1* Statement regarding computation of loss per share
23.1* Consent of Ernst & Young LLP, Independent Auditors
23.2** Consent of Venable, Baetjer and Howard, LLP (included in their opinion filed as Exhibit 5.1).
24.1* Powers of Attorney (included in Signature Pages)
27.1* Financial Data Schedule
</TABLE>
(b) The following financial statement schedule together with the Report of
Independent Auditors thereon is filed as part of this Registration
Statement:
Schedule II. Valuation and Qualifying Accounts.
- ---------
* Filed herewith.
** To be filed by amendment.
II--6
<PAGE>
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Charter or Bylaws of the
Registrant and the laws of the State of Delaware, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be a part of this Registration
Statement as of the time it was declared to be effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II--7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in Springfield, Virginia,
on the 5th day of December 1997.
EROL'S INTERNET, INC.
By: /s/ Dennis J. Spina
---------------------------------------
Dennis J. Spina
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Dennis J. Spina and Salvatore M.
Quadrino and each of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place, and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, or any
related registration statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended (the "Securities Act"),
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or any of them, or their, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
II--8
<PAGE>
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------------- --------------------------------- ---------------
<S> <C> <C>
/s/ Dennis J. Spina Chairman, President and Chief December 1, 1997
- ------------------------------------------- Executive Officer (Principal
Dennis J. Spina Executive Officer)
/s/ Salvatore M. Quadrino Vice President, Treasurer and December 5, 1997
- ------------------------------------------- Chief Financial Officer (Principal
Salvatore M. Quadrino Financial and Accounting Officer)
/s/ Erol M. Onaran Vice Chairman December 1, 1997
- -------------------------------------------
Erol M. Onaran
/s/ Orhan E. Onaran Director December 1, 1997
- -------------------------------------------
Orhan E. Onaran
/s/ Walt Anderson Director December 5, 1997
- -------------------------------------------
Walt Anderson
/s/ David A. Stortz Director November 28, 1997
- -------------------------------------------
David A. Stortz
</TABLE>
II--9
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Erols Internet, Inc.
We have audited the financial statements of Erols Internet, Inc. as of
December 31, 1995 and 1996 and for the period from August 1, 1995 (inception) to
December 31, 1995 and for the year ended December 31, 1996 and have issued our
report thereon dated July 31, 1997, except Note 9, as to which the date is
December 4, 1997, (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 16 (b) of
this Registration Statement. The schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Vienna, Virginia
July 31, 1997, except Note 9, as to which the date is December 4, 1997
<PAGE>
SCHEDULE 1 - VALUATION AND QUALIFYING ACCOUNT AND RESERVE
(in thousands)
Erols Internet, Inc.
<TABLE>
<CAPTION>
Balance at
Classification Beginning of Balance at End
Period Additions Deductions of Period
------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Period ended December 31, 1995 -- -- -- --
Year ended December 31, 1996 -- 42 -- 42
</TABLE>
S-1
<PAGE>
Exhibit 10.1
MANAGEMENT AGREEMENT
This Management Agreement ("Agreement") effective as of the 1st day of
January, 1997, by and between Erol's Computer & TV/VCR Service, Inc., a Virginia
corporation (hereinafter referred to as the "Company") and Erol's Internet,
-------
Inc., a Delaware corporation (hereinafter referred to as the "Manager").
-------
WHEREAS, the Manager provides internet access services to the public (the
"Internet Business") and wishes to contract with the Company to provide office
-----------------
and retail space, general and administrative services and employment services,
in support of and with respect to the Company's sale and repair of electronic
devices including, but not limited to, televisions, video cassette recorders and
computers (the "Service Business"), and the Company wishes to secure such office
----------------
space and such services from the Manager all upon the terms and conditions set
forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto, intending to be legally bound, hereby
covenant and agree as follows:
1. OFFICE SPACE.
------------
(a) Office and Retail Space. If, in its sole discretion, the Manager
-----------------------
determines that it owns or is the lessee of any office, retail, workshop,
storage or other commercial space ("Office Space") in excess of its commercially
------------
reasonable needs (the "Excess Space") and the Company has requested that the
------------
Manager provide any Office Space (the "Requested Space") to the Company for its
---------------
use in the conduct of the Service Business, then, to the extent of the Excess
Space, the Manager shall provide the Requested Space to the Company under the
terms and conditions set forth in this Agreement. The initial Office Space to
be occupied utilized by the Company is described in Exhibit A, attached hereto
and made a part hereof.
(b) Use of Office Space. The Company shall use and occupy any Office Space
-------------------
in a safe and reasonable manner, in accordance with applicable governmental
laws, regulations and/or orders.
(c) Reasonable Access. The Company agrees to allow the Manager reasonable
-----------------
access to any Office Space, where such entry will not unreasonably interfere
with the Company's use or occupancy, in order to provide any of the services or
fulfill any of the duties of the Manager set forth in this Agreement.
(d) No Liens. The Company shall not cause or permit materialmen's,
--------
mechanics or other liens to be filed against any Office Space or the interest of
the Manager
<PAGE>
or any mortgagee in contravention of any lease or mortgage, by whatever name, on
any Office Space.
(e) Indemnification. The Company shall indemnify and hold the Manager, its
---------------
employees, agents, officers, and partners or stockholders, as the case may be,
harmless from and against any and all demands, claims, judgments, losses and
damages, and any related costs or expenses (including reasonable attorneys'
fees) arising from any injury or damage to person or property caused by the
negligence or the misconduct of the Company, its agents, servants or employees,
or of any other person entering upon or using the Office Space under the express
or implied invitation of the Company, or resulting from the violation of laws or
regulations, or violation of the terms of this Agreement by any of the
foregoing.
(f) Assignment/Pledge/Encumbrance. The Company may not, without the
-----------------------------
Manager's prior written consent, assign, sell, pledge, mortgage, encumber or in
any manner transfer any interest in nor sublet the Office Space or any part or
item thereof, nor permit occupancy or use of the Office Space or any item
thereof by any other person or entity other than in the ordinary course of the
Company's business.
(g) Subordination. The Company agrees that this Agreement shall be and is
-------------
subordinate to the lien of any and all conditional sale agreements, financing
arrangements, mortgages, deeds of trust, and ground leases that may now or
hereafter be placed upon the Office Space, and to any and all advances to be
made thereunder, and to the interests thereon and all renewals, consolidations,
modifications, replacements and extensions thereof.
2. OPERATIONAL DUTIES OF THE MANAGER. The Company hereby appoints the Manager
---------------------------------
as its manager, agent and administrator for, and the Manager, for the benefit
and on behalf of the Company, agrees to use its commercially reasonable efforts
to perform, each of the following management and support functions:
(a) provide competent administrative, accounting and other staff for
supervision and performance of the business and administrative functions of the
Company ("General and Administrative Services");
-----------------------------------
(b) (i) provide any Office Space in a condition appropriate for the
Company's use in the Service Business, (ii) maintain the Office Space in
reasonably good order and repair, subject to ordinary wear and tear, (iii) pay
before delinquency all real estate and property taxes imposed upon the Office
Space and (iv) maintain commercially reasonable insurance with respect to the
Office Space, including fire insurance with extended coverage on the Office
Space and general liability insurance (the "Facility Services"); and
-----------------
(c) in its sole discretion, utilize certain of its sales personnel to sell
certain of the Company's computer-related inventory and utilize certain of its
print
2
<PAGE>
advertising space for promotion of the Service Business (the "Sales and
---------
Marketing Services")
- ------------------
3. MANAGEMENT FEE. In consideration of the General and Administrative
--------------
Services, Facility Services and Sales and Marketing Services provided by the
Manager to the Company pursuant to this Agreement, the Company hereby agrees to
pay to the Manager a quarterly management fee which shall equal the summation of
the "Sales Service Fees", the "Office Space Fees", the "General and
------------------ ----------------- -----------
Administrative Fees", the "Print Advertising Fees", and the "Carrying Charge" as
- ------------------- ----------------------- ---------------
defined below ("Management Fee"):
--------------
(a) The General and Administrative Fees. The "General and Administrative
------------------------------------ --------------------------
Fees" shall consist of (i) the "Shared Executive Expense" and (ii) the "G&A
- ---- ------------------------ ---
Allocation" (together, the "General and Administrative Fees"). The Shared
- ---------- -------------------------------
Executive Expense shall equal the ratio of the total number of hours spent by
the Manager's "Executive Level Employees" in performing services for the Company
-------------------------
to the total number of hours spent by such employees in performing services for
both the Manager and the Company multiplied by the amount of all compensation
and other benefits, including salary, bonus, pension, profit and other benefits,
insurance and customary business expenses accrued by the Manager during any
quarter in which such executives perform services for the Company. The term
"Executive Level Employees" shall mean those employees of the Manager for whom
- --------------------------
the Manager accounts for their salaries and benefits in the division of its
general ledger designated now and from time to time as "executive department."
The G&A Allocation shall equal the amount determined by multiplying initially
twenty five percent (25%) (the "G&A Percentage") by total of all the expenses
--------------
accrued by the Manager during each quarter for each of the expense categories
listed in Schedule 3(a). The G&A Percentage shall be subject to annual
-------------
adjustment as set forth below.
(b) The Office Space Fees. The "Office Space Fees" shall be equal to the
--------------------- -----------------
amount determined by multiplying all expenses accrued by the Manager during each
quarter for each of the expense categories listed in Schedule 3(b) by a
-------------
fraction, the numerator of which is the average number of square feet of any
Office Space utilized by the Company during each quarter and the denominator of
which is the average number of square feet of any Office Space owned or leased
by the Manager during such quarter.
(c) The Sales Service Fees. The "Sales Service Fees" shall equal the
---------------------- ------------------
amount determined by multiplying all costs accrued by the Manager during each
quarter with respect to salaries, commissions or other compensation, including
bonuses, employee or personnel benefits, employee insurance costs, payroll taxes
and all premiums and charges for workmen's compensation, of all persons
employed, contracted or otherwise retained by the Manager who sell any items of
the Company's inventory of computers and computer related equipment and supplies
to customers of either the Manager or of the Company during such quarter by a
fraction, the numerator of which is the gross sale proceeds from the sale of any
of the Company's inventory of computer products and related products and
supplies sold by such employees during such quarter, and the denominator of
3
<PAGE>
which is the gross sale proceeds from all products and services sold by such
employees during such quarter.
(d) Print Advertising Fees. The "Print Advertising Fees" shall be equal to
---------------------- ----------------------
the amount determined by multiplying all expenses accrued by the Manager with
respect to any print advertising which mentions or refers to the Service
Business initially by fifteen percent (15%) (the "Advertising Percentage"). The
----------------------
Advertising Percentage shall be subject to annual adjustment as set forth below.
(e) Carrying Fee. Included in the Management Fee shall be a carrying
-------------
charge (the "Carrying Charge") equal to the product obtained by multiplying the
---------------
Management Fee (exclusive of the Carrying Charge) by one percent (1%).
The Manager shall provide a reasonable estimate of the quarterly Management
Fee to the Company within fifteen days following the end of the quarter for
which payment is due. The Company shall pay the quarterly Management Fee to the
Manager on or before the fifteenth day following the receipt of the estimated
Management Fee from the Manager.
The Manager shall cause the Manager's independent certified public
accountants (the "Manager's Accountants"), as part of their audit of the
---------------------
Manager's annual financial statements (the "Financial Statements"), to review
the Manager's determination of each quarterly Management Fee (the "Management
----------
Fee Review") and calculate the proper annual Management Fee (the "Adjusted
- ---------- --------
Management Fee"), which amount shall include the effect of any year end
- --------------
accounting adjustments included in the Financial Statements. The Manager shall
provide to the Company a copy of the results of the Management Fee Review within
fifteen (15) days of the end of the first quarter of each calendar year in which
this Agreement is in effect and shall increase or reduce the amount of the
estimated quarterly Management Fee to the extent that the sum of each quarterly
Management Fee exceeds or is exceeded by the Adjusted Management Fee. The cost
of the Manager's Accountant in performing the above described procedure shall be
borne by the parties in accordance with the G&A Percentage, as adjusted from
time to time. Any disputes concerning the amount of the Management Fee or the
Adjusted Management Fee shall be submitted to the Manager's Accountant within
thirty (30) days of the receipt of the Adjusted Management Fee by the Company.
The Manager's Accountant shall resolve any such disputes in its sole discretion
and any costs associated with the resolution of such disputes shall be borne by
the party, as determined by the Manager's Accountant, that does not prevail on a
majority of the disputed items.
The parties acknowledge that the initial G&A Percentage and the initial
Advertising Percentage were derived by the Manager based upon an informal review
of the general ledger accounts for the categories of expenses set forth in
Schedule 3(a) and a review of the Manager's print advertising during the three
- -------------
(3) month period prior to the date of the Agreement. Within 90 days after each
year end, the Manager shall review the G&A Percentage and the Advertising
Percentage and, because of the expansion or
4
<PAGE>
contraction of either the Internet Business or the Service business or any other
reason, determine whether the G&A Percentage and the Advertising Percentage were
materially accurate with respect to the general and administrative costs and
advertising costs attributable to the Service Business during the prior year.
Then, if required, the Manager shall adjust the G&A Percentage and the
Advertising Percentage (the "Adjusted Percentages") for the subsequent year so
--------------------
as to accurately reflect such actual costs attributable to the Service Business
for the prior year and provide the Company with written notice thereof. The
Adjusted Percentages will be effective for the quarter in which the Manager
determines any Adjusted Percentages until such Adjusted Percentages are adjusted
in accordance with the procedures of this Section.
4. TERM AND TERMINATION.
--------------------
(a) Term. This agreement shall commence as of the date first above
----
written, and shall continue in force until December 31, 2001, unless sooner
modified or terminated as provided herein.
(b) Termination. This Agreement may be terminated by the non-defaulting
-----------
party upon the occurrence of any of the following events of default:
(i) The commencement of any voluntary or involuntary case under the
Federal bankruptcy laws or any state insolvency or similar laws seeking the
liquidation or reorganization either party hereto, or the appointment of a
receiver, liquidator, assignee, custodian, trustee or similar official for
either party or the property of either party or the making by either party of an
assignment for the benefit of its creditors (except that in the case of any
involuntary action against either party, such party shall have sixty (60) days
to have such case dismissed), or the failure by either party generally to pay
its debts as they mature.
(ii) Any issuance or transfer of an equity interest (or any beneficial
interest in any equity interest) in the Manager or the Company, or transfer of
assets of any person, or any merger, consolidation or other transaction, or any
other event or occurrence, after which the current shareholders of Manager or
the Company as of the date of this Agreement own not more than 51% of the
aggregate direct and indirect beneficial ownership interest in the Manager or
the Company, as appropriate, or the current shareholders of the Manager or the
Company do not have the sole power to direct or cause the direction of
management or policies of the Manager or the Company, as appropriate.
(iii) The failure of any of the parties to this Agreement to perform
any of their material obligations hereunder after failing to cure such lack of
performic within 30 days after receiving written notice from the other party
setting forth the failures in reasonable detail.
(iv) The failure of either party to make any payment required under
this agreement when due (a "Late Payment") after failing to make any such
payment
5
<PAGE>
to the other party within thirty (30) after receiving written notice from the
other party advising the defaulting party of their failure to make such payment.
Any Late Payment shall bear interest at a per annum rate of fifteen percent
(15%) form the initial date on which such payment was due until the date on
which payment is made.
(c) Effect of Termination. Upon the occurrence of an above listed event of
---------------------
default by the Company which shall remain uncured for a period of thirty (30)
days after receipt of notice from the Manager of such event of default, the
Manager shall have the right (i) without further notice to cancel this Agreement
and continue to allow the Company to utilize any Office Space occupied by the
Company at the time of any such event of default on commercially reasonable
terms or (ii) after thirty (30) days written notice by the Manager to the
Company to cancel this Agreement and to reenter and take possession of the
Office Space, or any part thereof, and to repossess the same as the Manager's
former estate, and expel the Company and those claiming a right to occupy such
Office Space through or under the Company, and remove the effects of either or
both without being deemed guilty of any manner of trespass and without prejudice
to any remedies for arrears of fees due or preceding breaches of this Agreement.
Upon the occurrence of an event of default by the Manager which shall remain
uncured for a period of thirty (30) days after receipt of notice from the
Company of such event of default, the Company shall have the right to cancel
this Agreement and to continue to occupy any Office Space occupied by the
Company at the time such event of default for a period of six (6) months on
commercially reasonable terms.
5. MISCELLANEOUS.
-------------
(a) Authorizing Actions. Each party agrees promptly to do all things and
-------------------
take all actions necessary to authorize and facilitate the performance of this
Agreement, and all obligations hereunder and thereunder, including, but not
limited to, the execution of any necessary documents, and the filing of any
forms, deeds or memoranda of leases with applicable governmental agencies or
offices.
(b) No Performance Guarantees. The Company acknowledges that the Manager
-------------------------
has made no warranties or representations other than those contained herein and
that no financial projection shall be construed as a guarantee of the
profitability or success of the Company's operations.
(c) Governing Law. The validity of this Agreement, its interpretation and
-------------
construction shall be governed by the laws of the State of Delaware, without
regard to principles of conflict of laws. The parties irrevocably consent and
agree to the exclusive jurisdiction of the Circuit Court for Fairfax County or
the United States District Court for the Eastern District of Virginia and to
service of process for it and on its behalf by certified mail, for resolution of
all matters involving this Agreement or the transactions contemplated hereby.
Each party waives all rights to a trial by jury in any suit, action or
proceeding hereunder.
6
<PAGE>
(d) Waiver. A waiver by either party of a breach or failure to perform any
------
provision of this Agreement shall not constitute a waiver of any subsequent
breach of the same or a different provision hereof.
(e) Severability. If any provision of this Agreement is found to be void
------------
or unenforceable, then such provision shall be treated as severable, leaving
valid and enforceable the remainder of this Agreement.
(f) Binding Effect and Assignment. Neither party may assign this Agreement
-----------------------------
without the prior written consent of the other party hereto.
(g) Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which together shall constitute one Agreement.
(h) Independent Relationship. The Company and the Manager intend to act and
------------------------
perform as independent contractors. Each party shall be solely responsible for
and shall comply with all state and federal laws pertaining to employment taxes,
income withholding, unemployment compensation contributions and other employment
related statutes applicable to that party.
(i) Exchange of Information. Each party shall cooperate in sharing with
-----------------------
and providing to the other party all information reasonably required or
desirable pursuant to the terms of this Agreement.
(j) Entire Agreement. This Agreement constitutes the complete
----------------
understanding of the parties and supersede any and all other agreements, written
or oral, between the parties with respect to the subject matter hereof and
thereon. No other agreement, statement or promise not contained herein or
therein shall be valid or binding.
(k) Notices. All notices required hereunder shall be in writing, delivered
-------
personally, by overnight delivery service or by registered or certified mail,
postage prepaid and return receipt requested, and shall be deemed made when
delivered and shall be properly addressed to the parties as follows or as
otherwise designated from time to time:
To the Company:
Erol's Computer & TV/VCR Service, Inc.
Attention: Orhan Onaran
7921 Woodruff Court
Springfield, VA 22151
To the Manager:
Erol's Internet, Inc.
Attention: Dennis Spina
7
<PAGE>
7921 Woodruff Court
Springfield, VA 22151
or to such other address as the Company or the Manager may designate by
written notice.
(l) Amendment. This Agreement may be modified or amended at any time by a
---------
written amendment, signed by both parties hereto.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their authorized
representatives to execute this Agreement effective as of the day and date first
above written.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
EROL'S INTERNET, INC.
Attest:
/s/ Margaret A. Chittal By: /s/ Dennis J. Spina
- ---------------------------- -----------------------------
Secretary Dennis J. Spina, President
Attest: EROL'S COMPUTER & TV/VCR SERVICE, INC
/s/ Margaret A. Chittal By: /s/ Orhan Onaran
- ---------------------------- -----------------------------
Secretary Orhan Onaran, President
9
<PAGE>
Schedule 3(a)
General and Administrative Expense Categories
Expense categories included in the general and administrative expense fees are
expected to include:
1. Accounting labor
2. Human resource labor
3. Executive management labor
4. Management information services
5. Office supplies
6. Operating supplies
<PAGE>
Schedule 3(b)
Office Space Expense Categories
Expense categories included in the office space fees are expected to include:
1. Facility rent
2. Building maintenance
3. Cleaning services
4. Heat and electricity
5. Security systems
6. Fuel
7. Local telephone service
8. Long distance service
9. Trash removal
10. Water and sewage
<PAGE>
Exhibit 10.2
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") dated as of this 28th day
---------
of December, 1996, by and between Erol's Internet, Inc., a Delaware corporation
(the "Company") and Erol Onaran ( the "Stockholder") (collectively, "Sellers")
-------
and Erol's Computer & TV/VCR Service, Inc., a Virginia corporation
("Purchaser").
---------
RECITALS
WHEREAS, the Company operates two separate business divisions that
include a division which provides internet access services to the public (the
"Internet Division") and a division which sells and repairs electronic devices
-----------------
including, but not limited to, televisions, video cassette recorders and
computers (the "Service Division"). The business of the Internet Division is
----------------
referred to in this Agreement as the "Internet Business" and the business of the
-----------------
Service Division is referred to in this Agreement as the "Service Business";
----------------
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to sell to Purchaser, and Purchaser desires to
purchase from the Company, all of the Company's rights, title and interest in
and to certain assets and properties owned, licensed and/or otherwise used by
the Company in connection with the operation of its Service Division (the "Asset
-----
Sale");
- ----
WHEREAS, subsequent to the Asset Sale, Purchaser shall operate the
Service Division on property owned or leased by the Company and shall utilize
the services of certain services provided by the Company pursuant to the terms
of a management agreement (the "Management Agreement") attached hereto as
--------------------
Exhibit A;
WHEREAS, immediately following the execution of this Agreement, the
Company shall sell shares of its voting common stock for certain consideration
(the "Stock Proceeds") as set forth in the stock purchase agreement (the "Stock
-------------- -----
Purchase Agreement") attached hereto as Exhibit G; and
- ------------------
WHEREAS, the Parties desire to provide for the terms and conditions
governing the Asset Sale.
NOW THEREFORE, in consideration of the mutual covenants in this
Agreement, the parties hereto agree as follows:
1. THE PURCHASE ASSETS.
-------------------
1.1 Transfer and Delivery of Assets. On the terms and subject
-------------------------------
to the conditions hereinafter set forth, the Company shall sell, convey, assign,
transfer and deliver and Purchaser shall purchase from the Company on the
"Closing Date" (as hereinafter defined), all of
------------
<PAGE>
the Company's rights, title and interests in and to certain of its assets and
properties, subject to any adjustments as contemplated under Section 2.2 and
Section 8.1 hereof, wherever located (collectively, the "Included Assets"),
---------------
including, without limitation, the following:
(a) all fixed and movable equipment, machinery, furniture, fixtures,
tools, accessories, parts, leasehold and other tangible personal property owned
by the Company (the "Included Equipment"), excepting the "Excluded Equipment",
------------------ ------------------
as set forth in Section 1.2(a), below;
(b) all inventory, raw materials, finished products, work in process,
parts, supplies and accessories owned by the Company (the "Included Inventory"),
------------------
excepting the "Excluded Inventory", as set forth in Section 1.2(b), below;
------------------
(c) all rights of the Company in, to and under all leases of tangible
personal property and motor vehicles the costs of which have been accounted for
by the Company prior to the Closing Date as expenses of the Service Division, as
more fully set forth on Schedule 1.1(c) attached hereto and made a part hereof
---------------
(the "Equipment Leases");
----------------
(d) all rights of the Company in, to and under all distributor
agreements, franchise agreements, service contracts, maintenance agreements, all
contracts for the sale of inventory and all outstanding purchase orders, sales
orders and written sales offers (whether accepted or unaccepted), service
agreements and other contracts, agreements and commitments to which the Company
is a party, individually or otherwise, to the extent that any revenue or cost
thereof has been accounted for by the Company prior to the Closing Date as an
item of either income or expense of Service Division, as more fully set forth on
Schedule 1.1(d) attached hereto and made a part hereof (collectively, the
- ---------------
"Acquired Contracts");
------------------
(e) all accounts receivable and security agreements relating to
accounts receivable the revenue from which has been accounted for by the Company
prior to the Closing Date as income of the Service Division, the aggregate
amount of which on the "Balance Sheet Date" (as defined below) is included on
------------------
Schedule 1.1(e) attached hereto and made a part hereof (collectively, the
"Included Receivables"), but not including any intercompany receivables between
--------------------
the Service Division and the Internet Division or any of its affiliates;
(f) all deposits, prepaid expenses, reimbursements from any person,
claims against any person, and any notes receivable, relating, directly or
indirectly, to the Service Business that are set forth on Schedule 1.1(f)
---------------
attached hereto and made a part hereof, including a listing of the aggregate
amounts thereof without reduction for any type or reserve thereto, and cash in
the amount of One Thousand Dollars ($1,000.00) (collectively, the "Included
--------
Deposits and Prepaid Expenses") (the sum of the amounts set forth on Schedules
- -----------------------------
1.1(e) and 1.1(f) shall be referred to herein as the "Deposits and Receivables
------------------------
Balance");
- -------
(g) a fully paid up, perpetual license to use the name "Erol's Computer
& TV/VCR Service, Inc."; and
2
<PAGE>
(h) all files, bank accounts, books and records necessary to, and used
in the conduct of, the Service Business (whether written, on magnetic tapes, on
disks or other media), all business information wherever located, all patents,
copyrights, inventions, trade secrets, trademarks, intellectual property
licenses, all rights, licenses, permits and approvals from any governmental
authority, all computer software, including, without limitation, all source code
necessary to, and used in connection with, in any respect, the conduct of the
Service Business, all technical know-how, drawings, plans, specifications,
catalogs, price lists, advertising and promotional materials, and all other
information and rights, intangible or otherwise (collectively, "Information and
---------------
Rights"), necessary to, and used in the conduct of, the Service Business and in
- ------
the sale, manufacture, marketing and distribution of the products of the Service
Division, as such Information and Rights are more fully described on Schedule
--------
1.1(h) but not including any Information and Rights of the Company in connection
- ------
with the Internet Business. The Information and Rights described on Schedule
--------
1.1(h) are hereinafter sometimes referred to collectively as the "Service
- ------ -------
Business Information and Rights."
- -------------------------------
Purchaser acknowledges that the Schedules referred to in subsections (c),
(d), (e), (f), and (h) of this Section 1.1 are a listing of the respective
categories of Included Assets described therein as of December 1, 1996 (the
"Balance Sheet Date"), and that such Schedules will be revised as of the Closing
------------------
Date in accordance with the procedures set forth in Section 2.2, below. Further,
Purchaser and the Company acknowledge that subsequent to the Closing Date,
Purchaser or the Company may determine that the Included Assets may
inadvertently include or exclude assets not contemplated by the parties to this
Agreement to be included in the Included Assets and Purchaser and the Company
agree that any inadvertent inclusion or exclusion shall be resolved in
accordance with the procedures described in Section 2.2.
1.2 Excluded Assets. Notwithstanding anything contained herein to the
---------------
contrary, the following assets are expressly excluded from the Included Assets
being acquired by Purchaser hereunder:
(a) all fixed and movable equipment, machinery, furniture, fixtures,
tools, accessories, parts, leasehold and other tangible personal property owned
by the Company and relating directly or indirectly to the Internet Business (the
"Excluded Equipment") either (i) as listed on Schedule 1.2(a), or (ii) as
------------------ ---------------
described, designated or otherwise identified by an officer of the Company in
the "Photographic Record" (described below), as equipment, machinery, furniture,
-------------------
fixtures, tools, accessories, parts, leasehold and other tangible personal
property to be retained by the Company;
(b) all inventory, raw materials, finished products, work in process,
parts, supplies and accessories owned by the Company and relating directly or
indirectly to the Internet Business (the "Excluded Inventory") either (i) as
------------------
listed on Schedule 1.2(b), or (ii) as described, designated or otherwise
---------------
identified by an officer of the Company in the Photographic Record as inventory,
raw materials, finished products, work in process, parts, supplies and
accessories to be retained by the Company;
(c) all rights in, to and under all leases of tangible personal
property and motor vehicles excepting those leases of tangible personal property
and motor vehicles the
3
<PAGE>
costs of which have been accounted for by the Company prior to the Closing Date
as expenses of the Service Division and are set forth on Schedule 1.1(c);
---------------
(d) all rights in, to and under all distributor agreements, franchise
agreements, service contracts, maintenance agreements, all contracts for the
sale of inventory and all outstanding purchase orders, sales orders and written
sales offers (whether accepted or unaccepted), service agreements and other
contracts, agreements and commitments to which the Company is a party,
individually or otherwise, excluding those agreements and contracts set forth in
Schedule 1.1(d), and including any and all claims, causes of action,
- ---------------
counterclaims and other rights arising under the Stock Purchase Agreement;
(e) all accounts receivable and security agreements relating to
accounts receivable excepting those accounts receivable the revenue from which
has been accounted for by the Company prior to the Closing Date as income of the
Service Division and are included in the aggregate amount set forth on Schedule
--------
1.1(e);
- ------
(f) all deposits, prepaid expenses, reimbursements from any person,
claims against any person, and any notes receivable other than as set forth on
Schedule 1.1(f) and any cash or cash equivalents in excess of One Thousand
- ---------------
Dollars ($1,000) including, but not limited to, the Stock Proceeds;
(g) all right, title and interest in the name "Erol's Computer & TV/VCR
Service, Inc.", excepting the fully-paid, perpetual license granted in favor of
Purchaser as described in Section 1.1(g); and
(h) all files, bank accounts, books and records (whether written, on
magnetic tapes, on disks or other media), all business information wherever
located, all patents, copyrights, inventions, trade secrets, trademarks,
intellectual property licenses, all rights, licenses, permits and approvals from
any governmental authority, all computer software, including, without
limitation, all source code, all technical know-how, drawings, plans,
specifications, catalogs, price lists, advertising and promotional materials,
and all other information and rights, intangible or otherwise other than as
described on Schedule 1.1(h); and
---------------
(i) any other items of tangible and intangible personal property which
is used by the Company in the conduct of the Internet Business. The assets,
properties and rights which are not to be sold, transferred, conveyed and
assigned to Purchaser hereunder are hereinafter sometimes collectively referred
to as the "Excluded Assets".
---------------
The Photographic Record (attached hereto as Exhibit B) shall be prepared by
the Company within two (2) weeks prior to the Closing Date and shall consist of
a record of photographic, digital photographic, or video images of any of the
Excluded Equipment or any of the Excluded Inventory not included in either
Schedule 1.2(a) or Schedule 1.2(b). An officer of each of the Company and
Purchaser shall certify on or before the Closing Date that subject to any
adjustments contemplated in Section 2.2, to the best of their knowledge the
Photographic Record includes and accurately identifies any of the Excluded
Equipment and any of the
4
<PAGE>
Excluded Inventory not included on Schedule 1.2(a) and Schedule 1.2(b). The
Company and Purchaser hereby agree that the aggregate fair market value of the
Excluded Equipment and the Excluded Inventory included in the Photographic
Record, but not listed on Schedule 1.2(a) or Schedule 1.2(b) shall equal Fifty
Thousand Dollars ($50,000).
Purchaser and the Company acknowledge that subsequent to the Closing Date,
Purchaser or the Company may determine that the Excluded Assets may
inadvertently include or exclude assets not contemplated by the parties to this
Agreement to be included in the Excluded Assets and Purchase and the Company
agree that any inadvertent inclusion or exclusion shall be resolved in
accordance with the procedures described in Section 2.2.
1.3 Instruments of Conveyance. At the Closing, as hereinafter defined,
-------------------------
the Company (to the extent necessary) shall execute and deliver to Purchaser a
bill of sale in the form of Exhibit C attached hereto and made a part hereof
(the "Bill of Sale").
------------
1.4 Assumption of Liabilities. In consideration for the sale and the
-------------------------
transfer of the Included Assets to Purchaser, subject to the terms and
conditions hereof, Purchaser shall assume, as of the Closing Date, and agrees to
timely perform and pay in accordance with the respective terms thereof, certain
liabilities of the Company relating to the Service Business, including, but not
limited to:
(a) all accounts payable for which the Company has accounted for the
item of expense associated therewith as an expense of the Service Division prior
to the Closing Date the Aggregate amount of which on the Balance Sheet Date is
set forth on Schedule 1.4(a) attached hereto and made a part hereof
---------------
(collectively, the "Assumed Accounts Payable"), but not including any
------------------------
intercompany payables between the Service Division and the Internet Division or
any of its affiliates;
(b) all other payment obligations, relating, directly or indirectly,
to the Service Business that are set forth on Schedule 1.4(b) attached hereto
---------------
and made a part hereof, including a listing of the aggregate amounts thereof
without reduction for any type or reserve thereto, (collectively, the "Assumed
-------
Other Payables") (the sum of the amounts set forth on Schedules 1.4(a) and
- --------------
1.4(b) shall be referred to herein as the "Payables Balance");
----------------
The liabilities assumed by Purchaser pursuant to this Section 1.4 are
sometimes referred to herein as the "Assumed Liabilities", and the net amount of
-------------------
the Deposits and Receivables Balance and the Payables Balance is sometimes
referred to herein as the "Receivables/Payables Balance".
----------------------------
At the Closing, Purchaser shall execute and deliver to the Company an
Assumption Agreement in the form of Exhibit D attached hereto and made a part
hereof (the "Assumption Agreement") to evidence its assumption of the Assumed
--------------------
Liabilities. In the event that the Company pays prior to the Closing Date any
personal property taxes incurred in the ordinary course of business for a tax
payment period ending subsequent to the Closing Date, the pro rata portion of
such taxes allocable to the portion of such tax payment period following the
Closing Date shall be deemed a prepaid expense and included among the Included
Assets.
5
<PAGE>
Except for the Assumed Liabilities specified above, Purchaser will not
assume or be deemed to assume, and will not pay, discharge, perform or otherwise
be liable for, any liabilities, indebtedness or obligations of the Company of
any nature whatsoever, whether fixed, contingent or otherwise and whether known
or unknown, no matter how or when they may have arisen or arise, excepting,
however, any liability, indebtedness, or obligation of the Company, whether
fixed, contingent, or otherwise, whether known or unknown, (i) the amount of
which as of September 30, 1996, is not included in of the amount of any
liability category included on Schedule 2.22, and (ii) that is determined to be
-------------
an Assumed Liability in accordance with the procedures set forth in Section
2.22, herein.
1.5 Delivery of Included Assets. Commencing on the Closing, and in no
---------------------------
event later than February 28, 1997, the Company shall deliver to Purchaser any
of the Included Assets not presently located at the Service Division's business
premises at 7921 Woodruff Court, Springfield, VA 22151, at the Company's' sole
cost and expense.
1.6 Employee Payroll. The Company and Purchaser agree that the
----------------
salaries, vacation pay and other compensation of the Service Division's
employees with respect to the operations of the Service Division shall be the
responsibility of the Company until the Closing Date and any such amount which
is accrued and which is unpaid as of the Closing Date shall be paid by the
Company to Purchaser at the Closing.
2. PURCHASE PRICE.
--------------
2.1 Consideration. The total consideration for the Included Assets
-------------
shall include (a) the sum of Three Hundred Fifty Thousand Dollars ($350,000)
payable by Purchaser to the Company in accordance with the terms of promissory
note (the "Promissory Note") attached hereto as Exhibit F on which the Company
---------------
and the stockholder are jointly and severally liable, and (b) the assumption by
Purchaser of certain of the Company's liabilities in accordance with Section 1.4
hereof (the "Consideration").
-------------
2.2 Closing Adjustments. Within ninety (90) days subsequent to the
-------------------
Closing Date, the Company shall deliver to Purchaser (a) a balance sheet of the
Internet Division and a supporting schedule of the Excluded Equipment the
Excluded Inventory (the "Audited Excluded Equipment and Inventory") prepared in
----------------------------------------
reasonable detail and in accordance with generally accepted accounting
principles ("GAAP") and audited and certified by an independent certified public
----
accountant (the "Auditor") selected by the Company, but subject to the
-------
reasonable satisfaction of Purchaser and (b) a schedule setting forth in
reasonable detail the balance on the Closing Date of the Included Receivables,
the Included Deposits and Prepaid Expenses, and the Assumed Payables, and the
net amount of such accounts (the "Final Receivables/Payables Balance") such
----------------------------------
amount being certified by the Company's chief financial officer as materially
accurate as of the Closing Date (collectively, the "Financial Information").
---------------------
If any items of personal property exist that are included only in
either (i) the Excluded Equipment or the Excluded Inventory or (ii) the Audited
Excluded Equipment and
6
<PAGE>
Inventory, and the aggregate net fair market value of such items of personal
property (as determined by the Auditor) exceed the sum of Ten Thousand Dollars
($10,000) in favor of either the Company or Purchaser, then the aggregate net
fair market value of such items of personal property in favor of Purchaser or
the Company shall be referred to herein as the "Equipment and Inventory
-----------------------
Difference".
- ----------
Any difference between the Receivables/Payables Balance and the Final
Receivables/Payables Balance shall be referred to herein as the
"Receivables/Payables Difference".
-------------------------------
If the aggregate of the Equipment and Inventory Difference and the
Receivables/Payables Difference exceeds the sum of Fifty Thousand Dollars
($50,000) (the "Payment Amount") in favor of either Purchaser or the Company
--------------
(the "Recipient"), then, within ninety (90) days of Purchaser's receipt of the
---------
Financial Information, the other party (the "Payor") shall pay the Recipient the
-----
Payment Amount either in cash or, in the discretion of the Payor, by
transferring of any item of personal property the fair market value of which is
included in the Inventory and Equipment Difference to the Recipient. The Payor's
transfer of such item of personal property shall be treated as a payment of cash
to the Recipient to the extent of the fair market value thereof as determined by
the Auditor for purposes of computing the Equipment and Inventory Difference. In
lieu of receiving the Payment Amount, the Recipient may elect to offset, to the
extent of the Payment Amount, any obligation in whole or in part that it may
have to the Payor either under this Agreement or any other agreement (the
"Offset Right"). The Recipient may exercise its Offset Right by providing the
------------
Payor written notice of its election thereof prior to the date on which the
Recipient receives full payment of the Payment Amount.
If, within one hundred eighty (180) days subsequent to the Closing
Date, either the Company or Purchaser discover that any asset or liability
(other than the categories of assets and liabilities addressed in the procedures
set forth above in this Section 2.2) was inadvertently included in or excluded
from the Included Assets or Assumed liabilities, then such party shall promptly
notify the other party of such discovery and the Company shall promptly request
that the Auditor determine from its examination of the records of the Service
Division whether such asset or liability in question shall be included or
excluded from the Included Assets or the Assumed Liabilities because the Company
predominantly accounted for either such item or any income or expense associated
with such item produced by such item on the books and records of the Service
Division prior to the Closing Date. If the Auditor determines that any of such
assets or liabilities were inadvertently included in or excluded from the
Included Assets or the Assumed Liabilities, then, in accordance with Section
10.1 hereof, the Company and Purchaser shall take all actions necessary to
secure the transfer or assumption of any such asset or liability. The
determination of the Auditor shall be binding on both the Company and Purchaser
and shall not be subject to a right of appeal.
2.3 Allocation of Purchase Price. The total amount of the
----------------------------
Consideration shall be allocated among the Included Assets as set forth on
Exhibit E attached hereto and made a part hereof. The Company and Purchaser
agree to report the sale and purchase of the Included Assets in accordance with
the allocations set forth on Exhibit E for all Federal, state and local tax
7
<PAGE>
purposes. The Company and Purchaser further agree to cooperate with each other
and to report consistently in the filing of any information returns which may be
required to be filed with any Federal, State or local taxing authority in
connection with the transactions contemplated by this Agreement.
3. CLOSING.
-------
3.1 The Closing. The Closing of the transactions contemplated by this
-----------
Agreement (the "Closing") shall take place, subject to the satisfaction of and
-------
waiver of all conditions set forth in Sections 6 and 7 hereof, at the offices of
Purchaser at 7921 Woodruff Court, Springfield, VA 22151, at 9 a.m. on December
28, 1996 (the "Closing Date"), or at such other time or place as the parties may
------------
agree in writing.
3.2 Closing Deliveries. At the Closing, the Company shall deliver to
------------------
Purchaser the Bill of Sale and such other title documents and other instruments
of conveyance, in form and substance reasonably satisfactory to Purchaser and
its counsel, as may be necessary or appropriate to effectively convey, transfer
and assign the Included Assets to Purchaser. Purchaser shall execute the
Assumption Agreement with respect to the Assumed Liabilities and such other
documents in form and substance reasonably satisfactory to the Company and its
counsel as may be necessary and appropriate for Purchaser to effectively assume
the Assumed Liabilities. the Company and Purchaser further agree that they will,
from time to time following the Closing, upon the reasonable request of the
other, execute such additional instruments of conveyance, transfer, assignment
and assumption and take such other actions as Purchaser and the Company, as the
case may be, may reasonable request to render effective the conveyance, transfer
and assignment of the Included Assets to Purchaser and the assumption of the
Assumed Liabilities by Purchaser.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
-------------------------------------------
Purchaser represents and warrants to the Company that as of the date
hereof:
4.1 Organization and Powers of Purchaser. Purchaser is a corporation
------------------------------------
duly organized, validly existing, and in good standing under the laws of its
state of incorporation and has all requisite corporate power and authority to
enter into this Agreement and perform its obligations hereunder.
4.2 Validity and Enforceability. This Agreement constitutes a valid
---------------------------
and legally binding obligation of Purchaser, enforceable against Purchaser in
accordance with its terms (except as the enforceability thereof may be limited
by bankruptcy, insolvency, bank moratorium or similar laws affecting creditors'
rights generally and laws restricting the availability of equitable remedies and
may be subject to general principles of equity whether or not such
enforceability is considered in a proceeding at law or in equity). All corporate
actions necessary to the consummation of the transactions contemplated herein
have been taken by Purchaser and no further corporate or other action is
necessary by Purchaser or any of its affiliates to empower Purchaser to carry
out and perform its obligations hereunder.
8
<PAGE>
5. REPRESENTATIONS AND WARRANTIES OF SELLERS.
-----------------------------------------
The Company and the Stockholder represent and warrant to Purchaser that
as of the date hereof that:
5.1 Organization and Powers of the Company. The Company is a
--------------------------------------
corporation duly organized, validly existing, and in good standing under the
laws of the state of its incorporation, is duly qualified to do business in all
states in which any of the Included Assets are located where the failure to so
qualify would have a material adverse effect on the Company's ability to own,
possess or enjoy the use of the Included Assets, and has all requisite corporate
power and authority to conduct the Service Business as presently conducted and
to own, possess or enjoy the use of the Included Assets.
5.2 Agreements and Consents. The execution, delivery, and performance
-----------------------
of this Agreement by the Company will not violate, effect acceleration of, or
result in termination, cancellation, or modification of any material agreement,
indenture, instrument, lease, contract, or other undertaking to which the
Company or any of its affiliates is a party or by which any of them or their
Included Assets are bound or require the consent, authorization or approval of
any third party.
5.3 Compliance with Law. No consent, approval, permit, license, or
-------------------
authorization of any governmental body is required in connection with the
execution, delivery, and performance of this Agreement by the Company. No
litigation, claims, administrative proceedings or other proceedings or
governmental investigations are pending, or to the best of the Company's
knowledge threatened, which would prevent or delay the execution, delivery or
performance of this Agreement by the Company.
5.4 Books and Records. The Company has made and will make available
-----------------
for inspection by Purchaser all the books of account, relating to the Service
Business.
5.5 Included Assets and Assumed Liabilities. Schedules 1.1(c) - (h)
--------------------------------------- ----------------------
set forth all material Included Assets, excluding Included Equipment and
Included Inventory.
(a) The Company has good and valid title to all of the Included
Assets and, except as noted on Schedules 1.1(c) - (h) and Schedules 1.4(a) and
---------------------- --------------------
1.4(b), such assets are free and clear of all encumbrances of any type
- ------
whatsoever. The Company owns, has valid leasehold interests in, valid licenses
for or valid contractual rights pursuant to contracts to use, all of the assets,
tangible and intangible, used by, or necessary for the conduct of the Service
Business.
(b) All of the Included Assets are in good working order, normal
wear and tear excepted, are being used for or are useful in the Service Business
at its present level of activity, are in an operating condition sufficient to
conduct the Service Business as it is now being conducted.
9
<PAGE>
(c) Schedule 1.4(a) and Schedule 1.4(b) set forth the Assumed
-----------------------------------
Liabilities that Purchaser shall assume at the Closing. The Company and
Purchaser will take all reasonable actions necessary to insure the transfer of
such assumed obligations to Purchaser.
5.6 No Obligations. Schedule 1.1(c) - (h) and Schedules 1.4(a) and
-------------- --------------------- --------------------
1.4(b) set forth all liabilities and obligations to which the Included Assets
- ------
are subject at the Closing, the Company shall convey all of the Included Assets
to Purchaser in a manner that in form and substance is satisfactory to
Purchaser, conveying good and marketable title, except as listed on Schedules
---------
1.1(a) - (h), 1.4(a) and 1.4(b), free and clear of all pledges, liens, charges,
- -------------------- ------
encumbrances, easements, defects, security interests, claims, options and
restrictions of every kind. The Company shall pay all fees, costs and expenses
relating to the conveyance of the Included Assets to Purchaser, including but
not limited to the execution, delivery and recording thereof, any documentary
stamps, and any real property gains, transfer and conveyance taxes and fees. The
Company and Purchaser shall cooperate to prepare and file all required documents
and filings with the applicable authorities.
5.7 Insurance. All insurance policies insuring the Service Division
---------
are in full force and effect, all premiums with respect thereto covering all
periods up to and including the date of the Closing have been paid, and no
notice of cancellation or termination has been received with respect to any such
policy. Such policies are sufficient for compliance with all requirements of law
and all agreements relating to the Service Business to which the Company is a
party; are valid, outstanding and enforceable policies; provide adequate
insurance coverage for the assets and operations of the Service Business; will
remain in full force and effect through the Closing Date without the payment of
additional premiums; and will not in any way be affected by, or terminate or
lapse by reason of, the transactions contemplated by this Agreement.
5.8 Validity and Enforceability. This Agreement constitutes a valid
---------------------------
and legally binding obligation of the Company, enforceable against the Company
in accordance with its terms (except as the enforceability thereof may be
limited by bankruptcy, insolvency, bank moratorium or similar laws affecting
creditors' rights generally and laws restricting the availability of equitable
remedies and may be subject to general principles of equity whether or not such
enforceability is considered in a proceeding at law or in equity). All corporate
actions necessary to the consummation of the transactions contemplated herein
have been taken by the Company and no further corporate or other action is
necessary by the Company or any of its affiliates to empower the Company to
carry out and perform its obligations hereunder.
5.9 No Brokers. Neither the Company nor any of its affiliates has
----------
employed any investment banker, broker or finder in connection with the
transactions contemplated by this Agreement, nor has any of them taken any
action which would give rise to a valid claim against any party for a brokerage
commission, finder's fee, or other like payment.
10
<PAGE>
6. CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS.
-----------------------------------------------
Purchaser need not consummate the transactions contemplated by this
Agreement unless the following conditions shall be fulfilled:
6.1 Conditions Precedent to Payment of Purchase Price by Purchaser.
--------------------------------------------------------------
The obligation of Purchaser to deliver the Promissory Note to the Company or to
assume any liability hereunder shall be subject to the delivery by the Company,
on or prior to the date any such payment is due, of the following in form and
substance reasonably satisfactory to Purchaser as shall be effective to vest in
Purchaser all of the Company's rights in and under the Included Assets as
provided for in this Agreement:
(a) the Bill of Sale transferring the Included Assets to
Purchaser, and such other similar instruments of conveyance, transfer and
assignment as may be necessary to convey to Purchaser good and marketable title
to all personal property included in the Included Assets;
(b) certified copies of resolutions duly adopted by the Board of
Directors of the Company authorizing the execution and delivery of this
Agreement and the sale and transfer of the Included Assets to Purchaser; and
(c) such assignments, transfers, consents and other documents as
Purchaser may reasonably request to vest in Purchaser all right, title and
interest in the Included Assets intended to be assigned and transferred to
Purchaser pursuant to this Agreement.
6.2 Representations and Warranties. Except as otherwise contemplated
------------------------------
or permitted by this Agreement, (a) the representations and warranties of the
Sellers contained in this Agreement or in any certificate or document delivered
to Purchaser pursuant hereto shall be deemed to have been made again at and as
of the Closing Date and shall then be true in all respects and (b) the Company
shall have performed and complied with all agreements and conditions required by
this Agreement to be performed or complied with by the Company prior to or on
the Closing Date.
6.3 No Actions. No action, suit, or proceeding before any court of
----------
governmental or regulatory authority shall be pending, no investigation by any
governmental or regulatory authority shall have been commenced, and no action,
suit or proceeding by any governmental or regulatory authority shall have been
threatened, against Purchaser, the Company or any of the principals, officers or
directors of any of them, seeking to restrain, prevent or change the
transactions contemplated hereby or questioning the legality or validity of any
such transactions or seeking damages in connection with any such transactions.
6.4 Consents. All consents of third parties, including, without
--------
limitation, governmental authorities and non-governmental self-regulatory
agencies, and all filings with and notifications of governmental authorities,
regulatory agencies (including non-governmental self-regulatory agencies) or
other entities which regulate the Service Business, to the execution and
11
<PAGE>
delivery of this Agreement and the consummation of the transactions contemplated
hereby and to permit the continued operation of the Service Business by
Purchaser in substantially the same manner after the Closing Date as theretofore
conducted, other than routine post-closing notifications or filings, shall have
been obtained or effected.
6.5 Satisfactory Investigation. Purchaser shall have satisfactorily
--------------------------
completed its investigation of the business, assets and financial condition of
the Service Business in connection with the transactions contemplated hereby and
shall have been satisfied with such results. Purchaser shall have satisfactorily
completed its investigation of any event or condition arising or discovered
after the date of this Agreement that could reasonably be expected to result in
a failure of any of Purchaser's conditions hereunder to be fulfilled.
7. CONDITIONS PRECEDENT TO SELLERS' OBLIGATIONS.
--------------------------------------------
The obligation of the Sellers to close this transaction and all of the
obligations of the Company to be discharged prior to the Closing Date and at the
Closing shall be subject to the fulfillment (or waiver by the Sellers), prior to
or at the Closing, of each of the following conditions:
7.1 Purchaser Compliance. Purchaser shall have complied with and
--------------------
performed in all material respects all the terms, covenants, and conditions of
this Agreement to be complied with and performed by it by the time of the
Closing, and all of the representations and warranties made by Purchaser under
this Agreement shall be true and correct in all material respects on and as of
the Closing Date.
7.2 Assumption Agreement. Purchaser shall have executed and delivered
--------------------
to the Company an Assumption Agreement in the form of Exhibit D attached hereto
and made a part hereof to evidence its assumption of the Assumed Liabilities.
7.3 No Suits or Actions. No suit, action or other proceeding shall
-------------------
have been instituted (which shall not have been resolved or dismissed) to
restrain, enjoin, or otherwise prevent the consummation of this Agreement or the
transactions contemplated by this Agreement.
7.4 Management Agreement. Purchaser shall have executed a Management
--------------------
Agreement in the form of Exhibit A attached hereto and made a part hereof.
7.5 Promissory Note. The Stockholder and Purchaser shall have
---------------
executed and delivered to the Company the Promissory Note in favor of the
Company and in the principal amount of Three Hundred Fifty Thousand Dollars
($350,000) in the form of Exhibit F attached hereto and made a part hereof.
12
<PAGE>
8. CERTAIN COVENANTS AND AGREEMENTS BETWEEN SELLER AND PURCHASER.
-------------------------------------------------------------
8.1 Conduct of the Company's Business Before Closing. During the
------------------------------------------------
period from the date of this Agreement to the Closing, the Company covenants
with respect to the Service Business (a) to carry on the Service Business in the
ordinary and usual course, subject to changes consistent with this Agreement,
(b) to continue its normal policies and procedures regarding suppliers of goods
and services to the business and sales to customers, to maintain all equipment
in as good working order and condition as it was on the date of this Agreement,
normal wear and tear excepted, (c) to perform all obligations of the Service
Business under all contracts to which it is a party or by which it is bound,
maintain all insurance policies, and (d) to use reasonable efforts to preserve
the goodwill of all of the Service Business customers and suppliers, provided
that the Company's obligations hereunder shall only apply to the extent it would
otherwise adversely affect Purchaser's title to the Included Assets or
Purchaser's ability to conduct business after Closing. Other than in the
ordinary course of business, during the period from the date of this Agreement
to the Closing, the Company shall not with respect to the Service division make
any purchases, sell any assets, enter into any agreements, or create or assume
any additional liabilities.
8.2 Access to Records. After Purchaser has entered into this
-----------------
Agreement, the Company shall permit Purchaser and Purchaser's agents access to
the Company's premises during normal business hours, and shall permit Purchaser
and Purchaser's agents to review the records of the Service Division and to
inspect any assets included in the Included Assets at reasonable times upon
request, upon reasonable advance notice, and to copy such records at Purchaser's
expense.
8.3 Certain Post Closing Matters. Sellers and Purchaser agree that
----------------------------
the Shareholder shall be solely responsible for any and all claims or causes of
action ("Claims") arising under this Agreement in favor of Purchaser excluding
(i) any and all adjustments to the Purchase Price pursuant to Section 2.2, (ii)
the resolution of the inadvertent exclusion or inclusion of either any assets as
Included Assets or any liabilities as Assumed Liabilities pursuant to Section
2.2, or any post closing adjustments pursuant to Section 10.3, and that
Purchaser shall look solely to the Shareholder for satisfaction of such claims
and causes of action. The Shareholder agrees to hold harmless and indemnify the
Company for any of the Claims, together with any associated costs, expenses, and
attorney's fees.
9. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
------------------------------------------
With the exception of the maintenance of records pursuant to Section
11.1 hereof, all covenants, agreements, representations, warranties and
conditions of closing contained in this Agreement and intended to be made or
performed at or prior to Closing shall terminate as of the Closing Date,
excepting that Purchaser's representations and warranties shall survive for a
period of two (2) years subsequent to closing.
13
<PAGE>
10. POST-CLOSING MATTERS.
--------------------
10.1 Further Assurances. From time to time after the Closing, upon
------------------
request, the Company and Purchaser shall without further consideration execute,
deliver, and acknowledge all such further instruments of transfer, conveyance
and assumption as Purchaser or the Company may reasonably require more
effectively to evidence the transfer of all the Company's right, title and
interest in and to the Included Assets in Purchaser and Purchaser's assumption
of liabilities and obligations in accordance with this Agreement. The Company
shall use its best efforts to obtain all consents, authorizations, and approvals
of third parties required to consummate the transactions contemplated by this
Agreement. If the consent of a third party is material to the transfer or
assignment of the Company's right, title, or interest in or to any lease,
contract, agreement or other instrument, and such consent has not been obtained
prior to Closing, the parties agree that although such transfers or assignments
shall be effective as of the Closing Date, they shall be conditional upon
obtaining such third-party consents.
10.2 Expenses. Except as specifically provided elsewhere in this
--------
Agreement, each party shall bear costs incurred by it in connection with the
analysis, negotiation, completion, and performance of this Agreement, including,
but not limited to, fees of attorneys, consultants, accountants, actuaries, or
other agents.
10.3 Adjustments. All expenses relating to the ownership, operation,
-----------
and enjoyment of the Included Assets shall be prorated by the Company and
Purchaser as of 9:00 a.m., Washington, D.C. local time, on the Closing Date,
except as otherwise specifically provided in this Agreement, as follows:
Adjustments shall be made in Purchaser's favor for: (a) proceeds
received by the Company prior to or after the Closing Date attributable to the
Service Division that are, in accordance with GAAP, attributable to the period
after the Closing Date and that are not otherwise delivered by the Company to
Purchaser; and (b) an amount equal to all accounts receivable relating to the
Service Division arising or accruing with respect to Purchaser's ownership, use
and enjoyment of the Included Assets after 9:00 a.m. on the Closing Date, which
are paid to the Company.
Adjustments shall be made in the Company's favor for: (a) proceeds
received by Purchaser prior to or after the Closing Date attributable to the
Service Division and that are, in accordance with GAAP, attributable to the
period before the Closing Date and that are not otherwise paid to the Company by
Purchaser; and (b) an amount equal to all accounts receivable relating to the
Included Assets arising or accruing with respect to the Company's ownership, use
and enjoyment of the Included Assets before 9:00 a.m. on the Closing Date, which
are paid to Purchaser .
10.4 Time of Payment. Any amount due to the Company or Purchaser
---------------
pursuant to Section 10.3 shall be paid within ninety (90) days of the Closing
Date, in which case such amounts shall be paid promptly upon determination or
calculation.
14
<PAGE>
11. MISCELLANEOUS MATTERS.
---------------------
11.1 Records. Purchaser agrees to maintain the files and records of
-------
the Company which are acquired pursuant to this Agreement until the fourth
anniversary of the Closing Date (or for such longer period of time as the
Company shall advise Purchaser is necessary in order to have records available
with respect to open years for tax audit purposes), or, if any of such records
pertain to any claim or dispute pending at such fourth anniversary date,
Purchaser shall maintain any of such records designated by the Company until
such claim or dispute is finally resolved and the time for all appeals has been
exhausted.
11.2 Succession. Purchaser may assign all or any part of its interest
----------
in this Agreement to any of its affiliates, provided, however, that Purchaser
shall continue to be bound by the terms and conditions of this Agreement unless
the Company otherwise agrees. Otherwise, neither party shall have the right to
assign all or any part of its interest in this Agreement without the prior
written consent of the other party. This Agreement shall be binding upon and
shall inure to the benefit of the parties and their successors and permitted
assigns.
11.3 Amendment. This Agreement may only be amended by an instrument in
---------
writing executed by Purchaser and the Company.
11.4 Section Headings. Section headings contained in this Agreement
----------------
are for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
11.5 Governing Law. This Agreement shall be interpreted and construed
-------------
under and in accordance with the law of Delaware applicable to contracts made
and to be performed in the State of Delaware, without giving effect to its
conflicts of laws provisions, and without regard to its place of execution or
its place of performance. The parties irrevocably consent and agree to the
exclusive jurisdiction of the Circuit Court for Fairfax County or the United
States District Court for the Eastern District of Virginia and to service of
process for it and on its behalf by certified mail, for resolution of all
matters involving this Agreement or the transactions contemplated hereby. Each
party waives all rights to a trial by jury in any suit, action or proceeding
hereunder.
11.6 Waiver. Any of the terms or conditions of this Agreement may be
------
waived at any time and from time to time, in writing, by such parties as are
entitled to the benefit of such terms or conditions; provided, however, that
except as otherwise specifically provided in this Agreement, no failure or delay
on the part of either party in exercising any of their respective rights
hereunder upon any failure by the other party to perform or observe any
condition, covenant, or provision herein contained shall operate as a waiver
thereof, nor shall any single or partial exercise of any of such rights preclude
any other or further exercise thereof or the exercise of any other right
hereunder. No waiver or release of any of the terms, conditions, or provisions
of this Agreement shall be valid or asserted or relied upon by either party
hereto or offered in any judicial proceeding or otherwise, unless the same is in
writing, duly executed by both parties.
15
<PAGE>
11.7 Notices. All notices, requests, demands, and other communications
-------
given by Purchaser or the Company shall be in writing and shall be deemed to
have been duly given when received at the following addresses:
If to Purchaser, to:
Erol's Computer & TV/VCR Service, Inc.
Attention: Orhan Onaran
7921 Woodruff Court
Springfield, VA 22151
If to the Company, to:
Erol's Internet, Inc.
Attention: Dennis J. Spina
7921 Woodruff Court
Springfield, VA 22151
If to the Stockholder, to:
Erol Onaran
7921 Woodruff Court
Springfield, VA 22151
or to such other address as Purchaser, the Stockholder, or the Company may
designate by written notice.
11.8 Attorneys' Fees. If suit or action is filed by either party to
---------------
enforce this Agreement or otherwise with respect to the subject matter of this
Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees incurred in investigation of related matters and in preparation
for and prosecution of such suit or action as fixed by the trial court, and, if
any appeal is taken from the decision of the trial court, reasonable attorneys'
fees as fixed by the appellate court.
11.9 Counterparts. This Agreement may be (but shall not be required to
------------
be) executed in counterparts notwithstanding that all parties are not
signatories to the same counterpart. Copies containing the signature of all
parties, whether or not in counterparts, shall be delivered to both Purchaser
and the Company.
11.10 Severability. In the event that any one or more of the
------------
provisions contained in this Agreement shall be invalid, illegal, or
unenforceable in any respect for any reason, the validity, legality, and
enforceability of any such provision in every other respect and of the remaining
provisions of this Agreement shall not be in any way impaired.
16
<PAGE>
11.11 Conditions and Documents. All parties shall use their best
------------------------
efforts to satisfy the conditions to Closing and otherwise consummate the
transactions contemplated by this Agreement, including the execution of such
documents as may be reasonably necessary or desirable to effectuate the purposes
of this Agreement.
11.12 Entire Agreement. This Agreement and the Schedules and Exhibits
----------------
hereto constitute the entire agreement between the parties hereto, and there are
no agreements, understandings, restrictions, warranties, or representations
between the parties other than those set forth herein or herein provided for.
11.13 Affiliates. As used in this Agreement, the term "affiliate"
----------
shall have the same meaning ascribed to it in the Securities Exchange Act of
1934 and the rules and regulations thereunder.
11.14 Termination. In the event that the Closing shall not have
-----------
occurred on or prior to December 31, 1996, this Agreement shall automatically
terminate unless extended by the parties hereto in writing; provided, however,
-----------------
that in the event Closing shall not have occurred on or prior to such date due
to either party's failure to satisfy a condition of Closing (other than
assumption of the Assumed Liabilities by Purchaser), and such party shall have
given the other party hereto reasonable assurances that all such conditions will
be satisfied within a reasonable period of time thereafter, not to exceed 30
days, then the termination date of this Agreement shall be automatically
extended for such 30 days.
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
EROL'S INTERNET, INC.
Attest:
/s/ Margaret A. Chittal By: /s/ Dennis J. Spina
- ------------------------------- ---------------------------------
Secretary Dennis J. Spina, President
Attest: EROL'S COMPUTER & TV/VCR SERVICE, INC.
/s/ Margaret A. Chittal By: /s/ Orhan Onaran
- ------------------------------- ---------------------------------
Secretary Orhan Onaran, President
/s/ Erol Onaran
---------------------------------
EROL ONARAN
18
<PAGE>
Exhibit A
---------
Management Agreement
See Exhibit 10.1
<PAGE>
Exhibit C
---------
BILL OF SALE
------------
THIS BILL OF SALE ("Bill of Sale") is dated as of this 28th day of
December, 1996 by and among Erol's Internet, Inc., a Delaware corporation and
Erol Onaran, ("Sellers")and Erol's Computer & TV/VCR Service, Inc., a Virginia
corporation ("Purchaser").
1. Capitalized Terms. Capitalized terms not otherwise defined herein
-----------------
shall have the respective meanings ascribed to such terms in that certain Asset
Purchase Agreement dated as of the 28th day of December, 1996 by and among
Sellers and Purchaser (the "Asset Purchase Agreement").
2. Sale of Assets. Pursuant to the provisions of the Asset Purchase
--------------
Agreement, Sellers hereby sell, assign, transfer, grant, and convey to the
Purchaser all their right, title and interest in the Included Assets.
3. Further Assurances. From time to time after this date, at the
------------------
Purchaser's reasonable request and at no expense to the Sellers, the Sellers
agree to execute and deliver such other instruments of conveyance and transfer
and take such other actions as may be reasonably required to more effectively
transfer and assign to the Purchaser any of the Included Assets, including the
delivery to the Purchaser of any consents to assignments or governmental or
other approvals which have not been obtained as of this date pursuant to the
Asset Purchase Agreement.
4. Applicable Law. The validity of this Agreement, its interpretation
--------------
and construction shall be governed by the laws of the State of Delaware, without
regard to principles of conflict of laws. The parties irrevocably consent and
agree to the exclusive jurisdiction of the Circuit Court for Fairfax County or
the United States District Court for the Eastern District of Virginia and to
service of process for it and on its behalf by certified mail, for resolution of
all matters involving this Agreement or the transactions contemplated hereby.
Each party waives all rights to a trial by jury in any suit, action or
proceeding hereunder.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Bill of Sale on the
date first above written.
WITNESS/ATTEST: EROL'S COMPUTER & TV/VCR SERVICE, INC.
By: (SEAL)
------------------------------
Orhan Onaran, President
WITNESS/ATTEST: EROL'S INTERNET, INC.
By: (SEAL)
------------------------------
Dennis J. Spina, President
2
<PAGE>
Exhibit D
---------
ASSUMPTION AGREEMENT
--------------------
THIS ASSUMPTION AGREEMENT ("Assumption") is dated as of this 28th day
of December, 1996 by Erol's Computer & TV/VCR Service, Inc., a Virginia
corporation ("Purchaser") and Erol's Internet, Inc., a Delaware Corporation and
Erol Onaran ("Sellers").
1. Capitalized Terms. Capitalized terms not otherwise defined herein
-----------------
shall have the respective meanings ascribed to such terms in that certain Asset
Purchase Agreement dated as of the 28th day of December, 1996 by and among
Sellers and Purchaser (the "Asset Purchase Agreement").
2. Assumption of Assumed Liabilities.
---------------------------------
(i) Pursuant to the provisions of the Asset Purchase Agreement,
Purchaser hereby assumes and agrees to timely perform and discharge the Assumed
Liabilities in accordance with the respective terms thereof.
(ii) Except for the Assumed Liabilities, Purchaser does not
assume and shall not be deemed to assume, and shall not pay, discharge, perform
or otherwise be liable for, any liabilities, indebtedness or obligations of
Seller of any nature whatsoever, whether fixed, contingent or otherwise, whether
known or unknown, no matter how or when they may have arisen or arise. Seller
shall remain liable for and shall perform, pay, discharge and satisfy in
accordance with their respective terms all of its liabilities, indebtedness and
obligations of any nature whatsoever relating to the Service Division or the
conduct of the Service Business, other than the Assumed Liabilities.
(iii) Purchaser agrees to indemnify and hold harmless Sellers
from and against any liabilities and expenses (including attorneys' fees and
expenses) relating to the Assumed Liabilities.
3. Asset Purchase Agreement. This Assumption does not, nor shall it
------------------------
be deemed to, supersede, supplant, extinguish or merge any of the
representations, warranties, covenants, agreements and indemnities contained in
the Asset Purchase Agreement.
4. Binding Agreement. This Assumption shall be binding upon
-----------------
Purchaser, and shall inure to the benefit of Seller, and their respective
successors and assigns.
5. Applicable Law. The validity of this Agreement, its interpretation
--------------
and construction shall be governed by the laws of the State of Delaware, without
regard to principles of conflict of laws. The parties irrevocably consent and
agree to the exclusive jurisdiction of the Circuit Court for Fairfax County or
the United States District Court for the Eastern District of Virginia and to
service of process for it and on its behalf by certified mail, for resolution of
all matters involving this Agreement or the transactions contemplated hereby.
Each party waives all rights to a trial by jury in any suit, action or
proceeding hereunder.
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Assumption to be
executed as of the day and year first above written.
WITNESS/ATTEST: EROL'S COMPUTER & TV/VCR SERVICE, INC.
By: (SEAL)
- ---------------------------- ------------------------------
Orhan Onaran, President
WITNESS/ATTEST: EROL'S INTERNET, INC.
By: (SEAL)
- ---------------------------- ------------------------------
Dennis Spina, President
WITNESS:
(SEAL)
- ---------------------------- ------------------------------
Erol Onaran
2
<PAGE>
Exhibit F
---------
Promissory Note
See Exhibit 10.3
<PAGE>
Exhibit G
---------
Stock Purchase Agreement by and among Erol's Internet, Inc., Erol Onaran, Dennis
J. Spina, and Gold & Appel Transfer, S.A., dated December 28, 1996
See Exhibit 10.4
<PAGE>
Exhibit 10.3
PROMISSORY NOTE
---------------
$350,000 Springfield, Virginia
Effective as of December 28, 1996
FOR VALUE RECEIVED, Erol Onaran, an individual residing in the Commonwealth
of Virginia ("Onaran"), and Erol's Computer & TV/VCR Service, Inc., a Virginia
corporation ("ECS") (Onaran and ECS hereinafter collectively referred to as
"Makers") jointly and severally promise to pay to the order of Erol's Internet,
Inc., a Delaware corporation, or its successors and assigns ("Payee") the
principal sum of Three Hundred Fifty Thousand Dollars ($350,000).
1. This Note will mature and the entire unpaid balance of principal hereof
together with all accrued and unpaid interest hereon, shall become due and
payable to Payee three (3) weeks after the date on which Makers have received
written notice from an officer of Payee that Loan Number 1600598566, in the
principal amount of Seven Hundred Thousand Dollars ($700,000) from Horizon Bank
of Virginia to OEO, Inc., has been fully satisfied, and that Onaran has been
released as guarantor of Loan Number 1600598566.
2. All payments of this Note shall be applied first to the payment of
accrued but unpaid interest, and any remainder shall be applied to reduction of
the principal balance hereof. Interest shall accrue on the unpaid principal sum
from the date hereof at rate of interest equal to the Applicable Federal Rate
as defined in Section 1274(d) of the Internal Revenue Code of 1986, as amended,
as such rate may be from time to time adjusted. The rate of interest hereon
shall be calculated on the basis of a 360-day year factor applied to actual days
elapsed. All payments hereunder shall be payable in lawful money of the United
States of America and shall be made to the Payee at 7921 Woodruff Court,
Springfield, VA 22151 or at such other address as Payee may from time to time
designate in writing to Makers.
3. Makers waive presentment and demand for payment, notice of intent to
accelerate maturity, notice of acceleration of maturity, protest or notice of
protest and nonpayment, bringing of suit and diligence in taking any action to
collect any sums owing hereunder or in proceeding against any of the rights and
properties securing payment hereof.
4. Makers shall have the right in their discretion to set off against any
amount of accrued and unpaid interest and principal payable by Makers to Payee
hereunder a like amount of any obligation of Payee to Makers under any binding
written agreement.
<PAGE>
5. For purposes of this Note the occurrence of each of the following
events shall constitute a "Default": (i) with respect to any payment required
under this Note, Makers fail to make payment of the full amount thereof within
five (5) days of the date such payment is required; (ii) a Maker admits in
writing that it or he is unable to meet its or his obligations as and when such
obligations become due; (iii) a Maker makes an assignment for the benefit of its
or his creditors or file a petition in bankruptcy; (iv) a Maker is adjudged
insolvent; or (v) an involuntary petition in bankruptcy (or other similar
statute) is filed against a Maker and is not dismissed within 60 days after the
filing thereof. Upon the occurrence of a Default, Payee may (A) declare all or
any portion of the entire unpaid principal amount of this Note, and all interest
accrued thereon (collectively the "Outstanding Balance"), immediately due and
payable or (B) set off all or any portion of the entire Outstanding Balance
against any amount owed by Payee to Makers, which rights shall continue until
the Default is cured.
6. This Note shall be governed by and construed according to the laws of
the Commonwealth of Virginia, without regard to principles of conflict of laws.
2
<PAGE>
IN WITNESS THEREOF, this Note is executed in Springfield, Virginia as of
the date and year above written.
EROL ONARAN
/s/ Erol Onaran
---------------------------------
Erol Onaran
EROL's COMPUTER & TV/VCR SERVICE, INC.
By: /s/ Orhan Onaran
------------------------------
It's: President
----------------------------
3
<PAGE>
Exhibit 10.4
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT is made as of December 28, 1996 by and among
Erol's Internet, Inc., a Delaware corporation (the "Company"), Erol Onaran (the
"Stockholder"), Dennis Spina ("Spina") and Gold & Appel Transfer, S.A., a
British Virgin Islands corporation (the "Investor").
R E C I T A L S
A. Prior to December 11, 1996, OEO, Inc., a Virginia corporation wholly
owned by the Stockholder (the "Predecessor"), operated two unincorporated
divisions, the Erol's Internet Division and the Erol's Service Division.
B. On December 11, 1996, pursuant to an Agreement of Merger and Plan of
Reorganization dated as of December 2, 1996 by and between the Predecessor and
the Company, the Predecessor was merged with and into the Company which was the
surviving corporation (the "Merger").
C. On December 28, 1996, but prior to the execution and consummation of
this Agreement, pursuant to an Asset Purchase Agreement (the "Asset Purchase
Agreement") between the Company and Erol's Computer & TV/VCR Service, Inc., a
Virginia corporation wholly owned by the Stockholder ("ECS"), all of the
Company's assets, other than the assets necessary for, or otherwise used or held
for use in, the operation of the Erol's Internet Division, together with
associated liabilities, were transferred to ECS (the "Reorganization"). As a
result of the Reorganization, the Company is wholly owned by the Stockholder and
owns and operates only the former business of the Erol's Internet Division.
D. For purposes of this Agreement, the term "Division" shall mean (i) the
Predecessor and the Company with respect to its Erol's Internet Division prior
to the effective time of the Reorganization and (ii) the Company from and after
such effective time.
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Shares. Subject to the terms and conditions of
---------------------------
this Agreement, the Investor agrees to purchase at the Closing and the Company
agrees to sell and issue to the Investor at the Closing, 2,680,000 shares (the
"Shares") of the Company's Voting Common Stock, par value $.001 per share,
which equals twenty percent (20%) of the sum of (a) the currently outstanding
Voting Common Stock and (b) the Voting Common Stock and Non-Voting Common Stock
reserved for issuance under the Company's option, bonus or other stock plans,
pursuant to the exercise of any outstanding warrants, option agreements or
similar rights,
<PAGE>
and pursuant to the conversion of any convertible securities, for a purchase
price equal to Three Million Dollars ($3,000,000.00).
1.2 Closing. The purchase and sale of the Shares shall take place at
-------
the Company's offices at 7921 Woodruff Court, Springfield, Virginia 22151 at
10:00 A.M., on December 28, 1996, or at such other time and place as the
Company, the Stockholder and the Investor mutually agree upon orally or in
writing (which time and place are designated as the "Closing"). At the Closing
the Company shall deliver to the Investor a certificate representing the Shares
against payment of the purchase price therefor by check, wire transfer or any
combination thereof.
1.3 Use of Proceeds. The Company will use the proceeds from the sale of
---------------
the Shares for the purposes specified by the Company's board of directors (the
"Board").
2. Representations and Warranties of the Company and the Stockholder. The
-----------------------------------------------------------------
Company and the Stockholder, jointly and severally, hereby represent and warrant
to the Investor as of the date hereof and as of the Closing, that, except as set
forth on a Schedule of Exceptions (the "Schedule of Exceptions") furnished the
Investor, specifically identifying the relevant subparagraph hereof, which
exceptions shall be deemed to be representations and warranties as if made
hereunder:
2.1 Organization, Good Standing and Qualification; Reorganization. The
-------------------------------------------------------------
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has all requisite corporate power
and authority to carry on its business as now conducted and as proposed to be
conducted in its Confidential Discussion Memorandum dated December 28, 1996,
heretofore furnished to the Investor ("Business Plan"). The Company is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure to so qualify would have a material adverse effect on its
assets, operations or financial condition or the Company's ability to perform
its obligations under this Agreement or under any Ancillary Agreement (as
defined below) to which it is a party ("Material Adverse Effect"). The Company
has provided the Investor with complete copies of all documents related to the
Reorganization. Each of the Merger and the Reorganization was consummated in
accordance with its terms effective as of December 11, 1996, and December 28,
1996, respectively, and, except as set forth in Section 2.12 of the Schedule of
Exceptions, all consents and other approvals required in connection therewith
have been obtained. Each of the representations and warranties of the Company
and ECS in the Asset Purchase Agreement are true as of the date of this
Agreement.
2.2 Capitalization and Voting Rights. The Company's authorized capital
--------------------------------
consists of:
(a) Voting Common Stock. 50,000,000 shares of Voting Common Stock,
-------------------
par value $.001 per share, of which 10,075,000 shares are issued and
outstanding. All of such issued and outstanding shares are owned by the
Stockholder.
(b) Non-Voting Common Stock. 10,000,000 shares of Non-Voting Common
-----------------------
Stock, par value $.001 per share, none of which are issued or outstanding. The
Voting Common
2
<PAGE>
Stock and the Non-Voting Common Stock are together referred to herein as the
"Common Stock."
(c) Preferred Stock. 10,000,000 shares of a single class of preferred
---------------
stock, par value $.001 per share, none of which are issued or outstanding.
(d) The outstanding shares of Voting Common Stock are all duly and
validly authorized and issued, fully paid and nonassessable, and were issued in
accordance with the registration or qualification provisions of the Securities
Act of 1933, as amended (the "Act") and any relevant state securities laws or
pursuant to valid exemptions therefrom.
(e) Except as set forth in Section 2.2(e) of the Schedule of
Exceptions, there are not outstanding any options, warrants, rights (including
conversion or preemptive rights) or agreements for the purchase or acquisition
from the Company of any of its capital stock. The Company has reserved 1,150,000
shares of its Voting Common Stock and 1,000,000 shares of its Non-Voting Common
Stock for purchase upon exercise of options to be granted in the future under
the Company's 1996 Stock Plan (the "Plan"). The Company is not a party or
subject to any agreement or understanding, and, to the best knowledge of the
Company and the Stockholder, there is no agreement or understanding between any
persons and/or entities, which affects or relates to the voting or giving of
written consents with respect to any security or by a director of the Company.
2.3 Subsidiaries. The Company does not currently own or control,
------------
directly or indirectly, any interest in any other corporation, association, or
other business entity. The Company is not a participant in any joint venture,
partnership or similar arrangement.
2.4 Authorization. All corporate action on the part of the Company, its
-------------
officers, directors and the Stockholder necessary for the authorization,
execution and delivery of this Agreement and all other agreements required to be
executed by the Company on or before the Closing pursuant to Section 4 (the
"Ancillary Agreements"), the performance of all obligations of the Company
hereunder and thereunder, and the authorization, issuance, sale and delivery of
the Shares has been taken or will be taken prior to the Closing, and this
Agreement and the Ancillary Agreements constitute valid and legally binding
obligations of the Company, enforceable in accordance with their respective
terms.
2.5 Valid Issuance of Shares. The Shares, when issued, sold and
------------------------
delivered in accordance with the terms of this Agreement for the consideration
expressed herein, will be duly and validly issued, fully paid, and
nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and under applicable state and
federal securities laws.
2.6 Governmental Consents. No consent, approval, order or authorization
---------------------
of, or registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority on the part of the Company is
required in connection with the consummation of the transactions contemplated by
this Agreement.
3
<PAGE>
2.7 Offering. Subject in part to the truth and accuracy of the
--------
Investor's representations set forth in Section 3, the offer, sale and issuance
of the Shares as contemplated by this Agreement are exempt from the registration
requirements of the Act, and neither the Stockholder, the Company nor any
authorized agent acting on its behalf will take any action hereafter that would
cause the loss of such exemption.
2.8 Returns and Complaints. The Division has received no customer
----------------------
complaints concerning its products and/or services, nor has it had its products
returned by a purchase thereof, that taken together would constitute a Material
Adverse Effect.
2.9 Litigation. These is no action, suit, proceeding or investigation
----------
pending or currently threatened against the Company or the Stockholder that
questions the validity of this Agreement or the Ancillary Agreements, or the
right of the Company or the Stockholder to enter into such agreements, or to
consummate the transactions contemplated hereby or thereby (collectively the
"Transactions"), or that might constitute, either individually or in the
aggregate, a Material Adverse Effect, or any change in the current equity
ownership of the Company, nor is the Company aware that there is any basis for
the foregoing. The foregoing includes actions, suits, proceedings or
investigations pending or threatened (or any basis therefor known to the Company
or the Stockholder) involving the prior employment of any of the Company's
employees, their use in connection with the Company's business of any
information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers. The
Company is not a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or that the Company intends to initiate.
2.10 Proprietary Information. Each employee, officer and consultant of
-----------------------
the Company listed in Schedule A has executed a proprietary information and
inventions agreement in the form provided to the Investor ("Proprietary
Information and Inventions Agreement"). The Company, after reasonable
investigation, is not aware that any of such employees, officers or consultants
are in violation thereof, and the Company will use its best efforts to prevent
any such violation.
2.11 Patents and Trademarks. The Company has sufficient title and
----------------------
ownership of all patents, trademarks, services marks, trade names, copyrights,
trade secrets, information, proprietary rights and processes necessary for its
business as currently conducted and as proposed to be conducted as described in
the Business Plan without any conflict with or infringement of the rights of
others. The Schedule of Exceptions contains a complete list of patents and
pending patent applications of the Company. [Except for advertisements on Erol's
Web Site, "off-the-shelf" or other standard products,] there are no outstanding
options, licenses, or agreements of any kind relating to the foregoing, nor is
the Company bound by or a party to any options, licenses or agreements of any
kind with respect to the patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information, proprietary rights and
processes of any other person or entity. Neither the Company nor the
Stockholder has received any communications alleging that the Company has
violated or, by conducting its business as
4
<PAGE>
proposed, would violate any of the patents, trademarks, services marks, trade
names, copyrights or trade secrets or any other proprietary rights of any other
person or entity. None of the Company's employees is obligated under any
contract (including licenses, covenants or commitments of any nature) or other
agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of his or her best
efforts to promote the Company's interests or that would conflict with the
Company's business as proposed to be conducted. Neither the execution nor
delivery of this Agreement, nor the carrying on of the Company's business by the
employees of the Company, nor the conduct of the Company's business as proposed,
will conflict with or result in a breach of the terms, conditions or provisions
of, or under which any of such employees is now obligated. It is not and, to the
best knowledge of the Company and the Stockholder, will not be necessary to
utilize any inventions of any of the Company's employees (or people the Company
currently intends to hire) made prior their employment by the Company.
2.12 Compliance with Other Instruments.
---------------------------------
(a) The Company is not in violation or default in any material
respect of any provision of its Certificate of Incorporation or Bylaws
(collectively "Charter Documents"), or in any material respect of any
instrument, judgment, order, write, decree or contract to which it is a party or
by which it is bound, or of any provision of any federal or state statute, rule
or regulation applicable to the Company. The execution, delivery and performance
of this Agreement and the Ancillary Agreements, and the consummation of the
Transactions will not result in any such violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, either a
default under any such provision, instrument, judgment, order, writ, decree or
contract or an event that results in the creation of any lien, charge or
encumbrance upon any assets or the Company or the suspension, revocation,
impairment, forfeiture or nonrenewal of any material permit, license,
authorization or approval applicable to the Company, its business or operations
or any of its assets or properties.
2.13 Agreements; Action.
------------------
(a) Except for agreements explicitly contemplated hereby, there are
no agreements, understandings or proposed transactions between the Company and
any of its officers, directors, affiliates or any affiliate thereof, including
the Stockholder.
(b) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which the Company
is a party or by which it is bound that may involve (i) obligations (contingent
or otherwise) of, or payments to the Company in excess of, $5,000, or (ii) the
license of any patent, copyright, trade secret or other proprietary right to or
from the Company, or (iii) provisions restricting or affecting the development,
manufacture or distribution of the Company's products or services, or (iv)
indemnification by the Company with respect to infringement of proprietary
rights.
(c) The Company has not (i) declared or paid any dividends or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred
5
<PAGE>
any indebtedness for money borrowed or any other liabilities individually in
excess of $5,000 or, in the case of indebtedness and/or liabilities individually
less than $5,000, in excess of $25,000 in the aggregate, (iii) made any loans or
advances to any person, other than ordinary advances for travel expenses, or
(iv) sold, exchanged or otherwise disposed of any of its assets or rights, other
than the sale of its inventory in the ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purposes of meeting the individual minimum dollar amounts of
such subsections.
(e) The Company is not a party to and is not bound by any contract,
agreement or instrument, or subject to any restriction under its Certificate of
Incorporation or Bylaws that has or will have a Material Adverse Effect.
(f) Except with respect to the Reorganization, the Company has not
engaged in the past three months in any discussion (i) with any representatives
of any corporation or corporations regarding the consolidation or merger of the
Company with or into any such corporation or corporations, (ii) any corporation,
partnership, association or other business entity or any individual regarding
the sale, conveyance or disposition of all or substantially all of the assets of
the Company or a transaction or series of related transactions in which more
than fifty percent (50%) of the voting power of the Company is disposed of, or
(iii) regarding any other form of acquisition, liquidation, dissolution or
winding up of the Company.
2.14 Related-Party Transactions. Neither the Stockholder nor any
--------------------------
employee, officer or director of the Company or member of his or her immediate
family is indebted to the Company, nor is the Company indebted (or committed to
make loans or extend or guarantee credit) to any of them. To the best knowledge
of the Company and the Stockholder, none of such persons has any direct or
indirect ownership interest in any firm or corporation that competes with the
Company, except that employees, officers or directors of the Company and members
of their immediate families may own less than one percent of the outstanding
stock of publicly traded companies that may compete with the Company. No member
of the immediate family of any officer or director of the Company is directly or
indirectly interested in any material contract with the Company.
2.15 Permits. The Company has all franchises, permits, licenses and any
-------
similar authority necessary for the conduct of its business as currently being
conducted by it, the lack of which could constitute a Material Adverse Effect,
and the Company believes it can obtain, without undue burden or expense, any
similar authority for the conduct of its business as planned to be conducted.
The Company is not in default in any material respect under any of such
franchises, permits, licenses or other similar authority.
2.16 Environmental and Safety Laws. The Company is not in violation of
-----------------------------
any applicable statute, law or regulation relating to environmental or
occupational health and safety,
6
<PAGE>
and no material expenditures are or will be required to comply with any such
existing statute, law or regulation.
2.17 Manufacturing and Marketing Rights. The Company has not granted
----------------------------------
rights to manufacture, produce, assemble, license, market or sell its products
or services to any other person and is not bound by any agreement that affects
the Company's exclusive right to develop, manufacture, assemble, distribute,
market or sell its products or services.
2.18 Business Plan. The Business Plan has been prepared in good faith
-------------
by the Company and, except to the extent modified by information set forth in
the Schedule of Exceptions, does not contain any untrue statement of a material
fact nor does it omit to state a material fact necessary to make the statements
made therein not misleading, except that with respect to projections contained
in the Business Plan, the Company represents only that such projections were
prepared in good faith and that the Company reasonably believes there is a
reasonable basis for such projections.
2.19 Registration Rights. Other than as contemplated by the terms of
-------------------
this Agreement, the Company has not granted or agreed to grant any registration
rights, including piggyback rights, to any person or entity.
2.20 Corporate Documents. Except for amendments necessary to satisfy
-------------------
representations and warranties or conditions contained herein (the form of which
amendments has been approved by the Investor), the Charter Documents are in the
form previously provided to the Investor.
2.21 Title to Property and Assets. The Company owns its property and
----------------------------
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens that arise in the ordinary course of business and do
not materially impair the Company's ownership or use of such property or assets.
With respect to the property and assets it leases, the Company is in compliance
with such leases and, to the best knowledge of the Company and the Stockholders,
holds a valid leasehold interest free of any liens, claims or encumbrances.
2.22 Financial Statements. The Company has delivered to the Investor
--------------------
financial statements (balance sheet and income statement, including notes
thereto) for the Division as of and for the nine-month period ended September
30, 1996 (the "Financial Statements") and attached hereto as Schedule 2.22. The
Financial Statements have been prepared in accordance with the procedures
described in the accompanying notes, as applied on a materially consistent basis
as of the date and for the period indicated therein. The amounts set forth in
the Financial Statements for total assets, total liabilities, total equity, and
net income, as well as the individual line items comprising such amounts as set
forth in the Financial Statements and any amounts set forth in the notes
accompanying the Financial Statements, are materially correct and accurate as
determined in accordance with the procedures set forth in the notes attached
thereto, subject to normal year end adjustments. Except as set forth in the
Financial Statements, the Division has no material liabilities, contingent or
otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to September 30, 1996, (ii) obligations under contracts and
7
<PAGE>
commitments incurred in the ordinary course of business and not reflected in
the Financial Statements as prepared in accordance with the procedures described
in the accompanying notes, which, in both cases, individually or in the
aggregate, are not material to the financial condition or operating results of
the Division. Commencing on January 1, 1997, the Company will maintain a
standard system of accounting established and administered in accordance with
generally accepted accounting principles ("gaap"). Except as disclosed in the
Financial Statements, the Division is not a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation.
2.23 Changes. Except as disclosed in Section 2.23 of the Schedule of
-------
Exceptions, since September 30, 1996 there has not been:
(a) any change in the assets, liabilities, financial condition or
operating results of the Division from that reflected in the Financial
Statements, except changes in the ordinary course of business that do not, in
the aggregate, constitute a Material Adverse Effect;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results, prospects or business of the Division (as such
business is currently conducted and as it is proposed to be conducted);
(c) any waiver by the Division of a valuable right or of a material
debt owned to it;
(d) any satisfaction or discharge of any lien, claim or encumbrance
or payment of any obligation by the Division, except in the ordinary course of
business and that is not material to the assets, properties, financial
condition, operating results or business of the Division (as such business is
currently conducted and as it is proposed to be conducted);
(e) any material change or amendment to a material contract or
arrangement by which the Division or any of its assets or properties is bound or
subject;
(f) any material change in any compensation arrangement or agreement
with any employee;
(g) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any key officer
of the Division; and the Company, to the best of its knowledge, does not know of
the impending resignation or termination of employment of any such officer;
(i) receipt of notice that there has been a loss of, or material
order cancellation by, any major customer of the Division;
8
<PAGE>
(j) any mortgage, pledge, transfer of a security interest in, or
lien, created by the Division, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(k) any loans or guarantees made by the Division to or for the
benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(l) any declaration, setting aside or payment or other distribution
in respect of any of the Company's capital stock, or any direct or indirect
redemption, purchase or other acquisition of any of such stock by the Company;
(m) any other event or condition of any character that might
constitute a Material Adverse Effect; or
(n) any agreement or commitment by the Division to do any of the
things described in this Section 2.23.
2.24 Employee Benefit Plans. Except as set forth in Section 2.24 of the
----------------------
Schedule of Exceptions, the Company does not have any Employee Benefit Plans as
defined in the Employee Retirement Income Security Act of 1974.
2.25 Tax Returns, Payments and Elections. The Division has filed all
-----------------------------------
tax returns and reports as required by law. These returns and reports are true
and correct in all material respects. The Division has paid all taxes and other
assessments due, except those contested by it in good faith that are listed in
the Schedule of Exceptions. The provision for taxes of the Division as shown in
the Financial Statements is adequate for taxes due or accrued as of the date
thereof. The Predecessor is a Subchapter S corporation. The Company has not
elected pursuant to the Internal Revenue Code of 1986, as amended (the "Code"),
to be treated as a Subchapter S corporation or a collapsible corporation
pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it or the
Predecessor made any other elections pursuant to the Code (other than elections
that relate solely to methods of accounting, depreciation or amortization) that
would have a Material Adverse Effect on the Division. The Division has never had
any tax deficiency proposed or assessed against it and has not executed any
waiver of any statute of limitations on the assessment or collection of any tax
or governmental charge. None of the Division's federal income tax returns and
none of its state income or franchise tax or sales or use tax returns has ever
been audited by governmental authorities. Since the date of the Financial
Statements, the Division has made adequate provisions on its books of account
for all taxes, assessments and governmental charges with respect to its
business, properties and operations for such period. The Division has withheld
or collected from each payment made to each of its employees, the amount of all
taxes (including, but not limited to, federal income taxes, Federal Insurance
Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositories.
9
<PAGE>
2.26 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed. The Company has in full force and effect
term life insurance, payable to the Company, on the lives of the persons and in
the amounts as set forth in Section 6.5. The Company has in full force and
effect products liability and errors and omissions insurance in amounts
customary for companies similarly situated.
2.27 Minute Books. The minute books of the Company and the Predecessor
------------
provided to the Investor contain a complete summary of all meetings of directors
and stockholders since their respective times of incorporation and reflect all
transactions referred to in such minutes accurately in all material respects.
2.28 Labor Agreements and Actions. The Company is not bound by or
----------------------------
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the best knowledge of
the Company and the Stockholder, has sought to represent any of the employees,
representatives or agents of the Company. There is no strike or other labor
dispute involving the Company pending, or to the best knowledge of the Company
and the Stockholder, threatened, that could constitute a Material Adverse
Effect, nor is the Company or the Stockholder aware of any labor organization
activity involving its employees. Neither the Company nor the Stockholder is
aware that any officer or key employee, or that any group of key employees,
intends to terminate their employment with the Company, nor does the Company
have a present intention to terminate the employment of any of the foregoing.
Except as provided in Section 4.10, the employment of each officer and employee
of the Company is terminable at the will of the Company. The Company has
complied in all material respects with all applicable state and federal equal
employment opportunity and other laws related to employment.
2.29 Real Property Holding Company. The Company is not a real property
-----------------------------
holding company within the meaning of Section 897 of the Code.
2.30 Disclosure. The Company has fully provided the Investor with all
----------
the information that the Investor has requested for deciding whether to purchase
the Shares. Neither this Agreement, nor any other statements or certificates
made or delivered in connection herewith or therewith contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements herein or therein not misleading.
3. Representations and Warranties of the Investor. The Investor hereby
----------------------------------------------
represents and warrants to the Company and the Stockholder that:
3.1 Authorization. The Investor has full power and authority to enter
-------------
into this Agreement and, to the extent applicable, the Ancillary Agreements and
such agreements constitute its valid and legally binding obligations,
enforceable in accordance with its terms.
10
<PAGE>
3.2 Purchase Entirely for Own Account. This Agreement is made with the
---------------------------------
Investor in reliance upon the Investor's representation to the Company, which by
the Investor's execution of this Agreement the Investor hereby confirms, that
the Shares will be acquired for investment for the Investor's own account, not
as a nominee or agent, and not with a view to the resale or distribution of any
part thereof, and that the Investor has no current intention of selling,
granting any participation in, or otherwise distributing the same. The Investor
does not have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participations to such person or to any third
person, with respect to the Shares.
3.3 Disclosure of Information. The Investor believes it has received
-------------------------
all the information it considers necessary or appropriate for deciding whether
to purchase the Shares. The Investor further represents that it has had an
opportunity to ask questions and receive answers from the Company regarding the
terms and conditions of the offering of the Shares and the business, properties,
prospects and financial condition of the Company. The foregoing, however, does
not limit or modify the representations and warranties of the Company and the
Stockholder in Section 2 or the right of the Investor to rely thereon.
3.4 Investment Experience. The Investor acknowledges that it is able to
---------------------
fend for itself, can bear the economic risk of its investment, and has knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Shares. The Investor also
represents it has not been organized for the purpose of acquiring the Shares.
3.5 Accredited Investor. The Investor is an "accredited investor"
-------------------
within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as currently in effect under the Securities Act of 1933, as
amended (the "Securities Act").
3.6 Restricted Securities. The Investor understands that the Shares are
---------------------
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act,
only in certain limited circumstances. In this connection, the Investor
represents that it is familiar with Rule 144 promulgated under the Securities
Act, as currently in effect, and understands the resale limitation imposed
thereby and by the Securities Act.
3.7 Legends. It is understood that the certificate evidencing the Shares
-------
may bear one or all of the following legends:
"The transfer of the stock represented by this certificate is
restricted under, and subject to the terms of, a Stockholders'
Agreement dated December 28, 1996, to which the Company is a party
and a copy of which is on file at the Company's office.
The shares of stock represented by this Certificate are also subject
to and may be transferred only in compliance with a right of co-sale
made by and among the
11
<PAGE>
holder hereof, the Company issuing this certificate and the other
stockholders to whom such right has been granted.
These securities have not been registered under the Securities Act of
1933, as amended. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with
respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or
unless sold pursuant to Rule 144 of such Act. "
3.8 Compliance With Laws. Investor has made all filings and obtained all
--------------------
corporate approvals as may be required by the laws of the British Virgin Islands
with respect to the consummation of the transactions contemplated by this
Agreement. [No notice filing is required by law with the Committee of Foreign
Investment in the United States pursuant to the Exon-Florio Amendment (50 USCA
App. Sec. 2170), with respect to the consummation of the transactions
contemplated by this Agreement.]
3.9 Involvement in Certain Legal Proceedings. Investor, its shareholders
----------------------------------------
(and to the best knowledge of Investor, the natural person shareholders of its
shareholders) have not during the past five (5) years been involved in the
events listed in paragraph (f)(1) through (f)(6) of Item 401, Regulations S-K
promulgated by the Securities and Exchange Commission.
4. Conditions of Investor's Obligations at Closing. The obligations of the
-----------------------------------------------
Investor under Section 1.1(b) are subject to the fulfillment on or before the
Closing of each of the following conditions, any of which may be waived by the
Investor:
4.1 Representations and Warranties. The representations and warranties
------------------------------
of the Company and the Stockholder contained in Section 2 shall be true on and
as of the Closing with the same effect as though such representations and
warranties had been made on and as of the date of such Closing.
4.2 Performance. The Company and the Stockholder shall have performed
-----------
and complied with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it or him on or
before the Closing.
4.3 Compliance Certificate. The Company's President and the Stockholder
----------------------
shall deliver to the Investor at the Closing a certificate stating that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled and stating
that there shall have been no adverse change in the business, affairs,
prospects, operations, properties, assets or condition of the Company since the
date of the Financial Statements.
4.4 Qualifications. All authorizations, approvals, or permits, if any, of
--------------
any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Shares pursuant to this Agreement shall be duly obtained and effective as of the
Closing.
12
<PAGE>
4.5 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Investor, and it shall have received all such counterpart original and certified
or other copies of such documents as it may reasonably request.
4.6 Proprietary Information and Inventions Agreement. Each employee of
------------------------------------------------
and consultant to the Company listed on Schedule A shall have entered into a
Proprietary Information and Inventions Agreement in the form previously provided
to the Investor.
4.7 Bylaws. The Company's Bylaws shall provide that the Board shall
------
consist of up to seven persons, as determined by a majority of the Board, which
number shall not be increased above seven, by an amendment to the Company's
Certificate of Incorporation or the Bylaws or otherwise, without the Investor's
consent.
4.8 The Board. The number of the Company's directors shall be
---------
initially set at five, consisting of Dennis Spina, Orhan Onaran and Margaret A.
Chittal and two vacancies.
4.9 Opinion of Company Counsel. The Investor shall have received from
---------------------------
Venable, Baetjer, Howard & Civiletti, L.L.P., counsel for the Company, an
opinion, dated as of the Closing, in the form attached hereto as Exhibit A.
----------
4.10 Employment Agreements. The individuals listed in Schedule A shall
---------------------
each have entered into employment agreements with the Company on customary terms
reasonably satisfactory to the Investor.
4.11 Key-Man Insurance. The Company shall have in place key man insurance
-----------------
in accordance with the terms of Section 6.5.
4.12 Liability Insurance. The Company shall have in place insurance
-------------------
policies in accordance with the terms of Section 6.8(c).
4.13 Security Systems and Equipment. The Company shall have security
------------------------------
systems and equipment sufficient in the Investor's reasonable judgment to
protect its critical assets.
4.14 Stockholders' Agreement. Each of the Company, the Stockholder and
-----------------------
the Investor shall have executed the form of Stockholders' Agreement attached as
Exhibit B to this Agreement (the "Stockholders' Agreement").
4.15 Registration Rights Agreement. Each of the Company and the Investor
-----------------------------
shall have executed the form of Registration Rights Agreement attached as
Exhibit C to this Agreement.
4.16 Assignment. The Stockholder shall have executed an Assignment of
----------
Rights ("Assignment of Rights") in favor of the Company in the form attached
hereto as Exhibit D.
13
<PAGE>
4.17 Promissory Note. Each of the Stockholder and ECS, jointly and
---------------
severally, shall have executed and delivered to the Company a Promissory Note in
the principal amount of $350,000, in the form attached hereto as Exhibit E.
4.18 Asset Purchase Agreement. The Asset Purchase Agreement and the other
------------------------
agreements contemplated thereby shall have been executed and delivered by the
Company and ECS and shall have become effective.
4.19 Due Diligence. The results of the Investor's ongoing due diligence
-------------
investigation shall be satisfactory to the Investor in its sole discretion.
5. Conditions of the Obligations of the Company and the Stockholder at
-------------------------------------------------------------------
Closing. The obligations and warranties of the Company and the Stockholder under
- -------
this Agreement are subject to the fulfillment on or before the Closing of each
of the following conditions by the Investor:
5.1 Representations and Warranties. The representations and warranties
------------------------------
of the Investor contained in Section 3 shall be true on and as of the Closing
with the same effect as though such representations and warranties had been made
on and as of the Closing.
5.2 Payment of Purchase Price. The Investor shall have delivered the
-------------------------
purchase price specified in Section 1.2.
5.3 Qualifications. All authorizations, approvals, or permits, if any, of
--------------
a governmental authority or regulatory body of the United States or of any state
that are required in connection with the lawful issuance and sale of the Shares
pursuant to this Agreement shall be duly obtained and effective as of the
Closing.
6. Covenants of the Company.
------------------------
6.1 Delivery of Financial Statements. The Company shall deliver to the
--------------------------------
Investor:
(a) as soon as practicable, but in any event within 90 days after the
end of each fiscal year of the Company, commencing with the fiscal year ending
December 31, 1996 an income statement for such fiscal year, a balance sheet of
the Company and statement of stockholder's equity as of the end of such year,
and a schedule as to the sources and applications of funds for such year, such
year-end financial reports to be in reasonable detail, prepared in accordance
with gaap, and audited and certified by independent public accountants selected
by the Company but subject to the reasonable satisfaction of the Investor;
(b) as soon as practicable, but in any event within 45 days after the
end of each of the first three quarters of each fiscal year of the Company, an
unaudited profit or loss statement, schedule as to the sources and application
of funds for such fiscal quarter and an unaudited balance sheet and a statement
of stockholders' equity as of the end of such fiscal quarter and a statement
showing the number of shares of each class and series of capital stock and
securities convertible into or exercisable for shares of capital stock
outstanding at the end of
14
<PAGE>
the period, the number of shares of Common Stock issuable upon conversion or
exercise of any outstanding securities convertible or exercisable for shares of
Common Stock and the exchange ratio or exercise price applicable thereto, all in
sufficient detail as to permit the Investor to calculate its percentage equity
ownership in the Company.
(c) within 30 days of the end of each month, an unaudited income
statement and schedule as to the sources and application of funds and balance
sheet for and as of the end of such month, in reasonable detail;
(d) as soon as practicable, but in any event 30 days prior to the end
of each fiscal year, an operating budget and business plan for the next fiscal
year, prepared on a monthly basis, including balance sheets and sources and
applications of funds statements for such months and, as soon as prepared, any
other budgets or revised budgets prepared by the Company;
(e) with respect to the financial statements called for in subsections
(b) and (c) of this Section 6.1, an instrument executed by the Company's chief
financial officer or president certifying that such financials were prepared in
accordance with gaap consistently applied and with prior practice for earlier
periods (with the exception of footnotes that may be required by gaap) and
fairly present the Company's financial condition and its results of operation
for the period specified, subject to year-end audit adjustments; and
(f) such other information relating to the financial condition,
business, prospects or corporate affairs of the Company as the Investor or any
assignee of the Investor may from time to time request, provided, however, that
the Company shall not be obligated under this subsection (f) or any other
subsection of Section 6.1 to provide information which it deems in good faith to
be a trade secret or similar confidential information.
6.2 Inspection. The Company shall permit the Investor, at the Investor's
----------
expense, to visit and inspect the Company's properties, to examine its books of
account and records and to discuss the Company's affairs, finances and accounts
with its officers, all at such reasonable times as may be requested by the
Investor; provided, however, that the Company shall not be obligated pursuant to
this Section 6.2 to provide access to any information which it reasonably
considers to be a trade secret or similar confidential information.
6.3 Termination of Information and Inspection Covenants. The covenants
---------------------------------------------------
set forth in Sections 6.1(c), (d) and (f) and Section 6.2 shall terminate as to
the Investor and be of no further force or effect as of the first date on which
either (i) the Investor does not own a least eight percent (8%) of the Company's
outstanding voting capital stock or (ii) the Company first becomes subject to
the periodic reporting requirements of Sections 12(g) or 15(d) of the Securities
and Exchange Act of 1934, as amended.
6.4 Right of First Offer. Subject to the terms and conditions specified
--------------------
in this Section 6.4, the Company hereby grants to each of the Stockholder, Spina
and the Investor a right of first offer with respect to future sales by the
Company of New Securities (as hereinafter defined). Each of the Stockholder,
Spina and the Investor shall be entitled to apportion the right of first
15
<PAGE>
offer hereby granted among himself or itself and his or its affiliates in such
proportions as he or it deems appropriate.
Each time the Company proposes to offer any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock ("New Securities"), the Company shall first make an offering of such New
Securities to each of the Stockholder, Spina and the Investor in accordance with
the following provisions:
(a) The Company shall deliver a notice by certified mail ("Company
Notice") to each of the Stockholder, Spina and the Investor stating (i) its bona
fide intention to offer such New Securities, (ii) the number of such New
Securities to be offered, and (iii) the price and terms, if any, upon which it
proposes to offer such New Securities.
(b) By notification received by the Company, within 20 calendar days
after receipt of the Company Notice, each of the Stockholder, Spina and the
Investor may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such New Securities which equals
the proportion that the number of shares of Common Stock held by each of the
Stockholder, Spina or the Investor, as applicable, bears to the total number of
shares of Common Stock outstanding as of the date of this Agreement (assuming
full conversion and exercise of all convertible or exercisable securities as of
such date).
(c) If all New Securities which the Stockholder, Spina and the
Investor are entitled to obtain pursuant to Section 6.4(b) are not elected to be
obtained as provided in Section 6.4(b), the Company may, during the 30-day
period following the expiration of the period provided in Section 6.4(b), offer
the remaining unsubscribed portion of such New Securities to any person or
persons at a price not less than, and upon terms no more favorable to the
offeree than those specified in the Company Notice. If the Company does not
enter into an agreement for the sale of the New Securities within such period,
or if such agreement is not consummated within 30 days of the execution thereof,
the right provided hereunder shall be deemed to be revived and such New
Securities shall not be offered unless first reoffered to the Stockholder, Spina
and the Investor in accordance herewith.
(d) The right of first offer in this Section 6.4 shall not be
applicable (i) to the issuance or sale of not to exceed (A) pursuant to the
Plan, 1,550,000 shares of Voting Common Stock (or options therefor) and
1,000,000 shares of Non-Voting Common Stock (or options therefor) to employees
for the primary purpose of soliciting or retaining their employment or (B) the
issuance or sale of not to exceed 775,000 shares of Voting Common Stock (or
options therefor) pursuant to the Stock Option Grant Agreement dated December
28, 1996 between the Company and Spina, (ii) to consummation of a bona fide,
firmly underwritten public offering of Common Stock, registered under the
Securities Act pursuant to a registration statement on Form S-1 or SB-2, at an
offering price of at least $5.00 per share (appropriately adjusted for any stock
split, dividend, combination or other recapitalization) and $10 million in the
aggregate (an "Underwritten Offering"), (iii) the issuance of securities
pursuant to the conversion or exercise of convertible or exercisable securities
or (iv) the issuance of securities in connection with a bona
16
<PAGE>
fide business acquisition of or by the Company, whether by merger,
consolidation, sale of assets, sale or exchange of stock or otherwise.
(e) The right of first offer set forth in this Section 6.4 may not be
assigned or transferred, except that (i) such right is assignable by the
Stockholder, Spina and the Investor to any wholly owned subsidiary or parent of,
or to any corporation or entity that is, within the meaning of the Securities
Act, controlling, controlled by or under common control with, the Stockholder,
Spina or the Investor, as applicable.
(f) Notwithstanding anything in this Agreement or in the Stockholders'
Agreement to the contrary, without the Stockholder's prior written consent, the
Investor shall not acquire, prior to the closing of the Company's first
Underwritten Offering, in excess of 40% of the sum of (i) the Common Stock
outstanding at the time of any contemplated acquisition, (ii) all shares of
Common Stock then reserved for issuance under the Company's option, bonus or
other stock plans, (iii) Common Stock issuable pursuant to the exercise of any
outstanding warrants, option agreements or similar rights (excluding shares
covered under clause (ii)), and (iv) Common Stock issuable pursuant to the
conversion of any convertible securities.
(g) The right of first offer set forth in this Section 6.4 shall
terminate upon the closing of the Company's first Underwritten Offering.
6.5 Key-Man Insurance. For a period ending on the earlier of termination
-----------------
of employment with the Company or five years after the Closing, the Company
shall maintain from financially sound and reputable insurers term life insurance
on the lives of the following persons in the following amounts: Gebran Krikor
($100,000), Robert Enger ($100,000), Charles Money ($100,000) and Dennis Spina
($800,000). Such policies shall name the Company as loss payee and shall not be
cancelable by the Company without prior approval of the Board.
6.6 Board Representation. Immediately after the Investor purchases the
--------------------
Shares pursuant to this Agreement, one of the two vacancies on the Board shall
be filled by Walt Anderson. As long as the Investor owns not less than eight
percent (8%) of the Shares it is purchasing hereunder, the Company shall use its
best efforts to cause and maintain, and the Stockholder shall vote all of his
shares of Common Stock for, the election to the Board of up to two
representatives of the Investor (individually, an "Investor Director" and
collectively the "Investor Directors") and the appointment of an Investor
Director as a member of the committee, if any, of the Board which administers
the Plan.
6.7 Observer Rights. As long as the Investor owns not less than eight
---------------
percent (8%) of the Shares it is purchasing on the date hereof, the Company
shall invite a representative of the Investor to attend all meetings of the
Board in a nonvoting observer capacity and, in this respect, shall give such
representative copies of all notices, minutes, consents, and other materials
that it provides to its directors; provided, however, that such representative
shall agree to hold in confidence and trust and to act in a fiduciary manner
with respect to all information so provided, and, provided further, that the
Company reserves the right to withhold any information and to exclude such
representative from any meeting or portion thereof if access to such information
or
17
<PAGE>
attendance at such meeting could adversely affect the attorney-client privilege
between the Company and its counsel or would result in disclosure of trade
secrets to such representative.
6.8 Positive Covenants. As long as the Investor owns not less than eight
------------------
percent (8%) of the Shares it is purchasing on the date hereof, the Company
agrees as follows:
(a) The Company will promptly pay and discharge, or cause to be paid
and discharged, when due and payable, all lawful taxes, assessments, and
governmental charges or levies imposed upon the income, profits, property, or
business of the Company or any subsidiary; provided, however, that any such tax,
assessment, charge, or levy need not be paid if the validity thereof shall
currently be contested in good faith by appropriate proceedings and if the
Company shall have set aside on its books adequate reserves with respect
thereto, and provided further, that the Company will pay all such taxes,
assessments, charges, or levies forthwith upon the commencement of proceedings
to foreclose any lien that may have attached as security therefor. The Company
will promptly pay or cause to be paid when due, or in conformance with customary
trade terms, all other indebtedness incident to the Company's operations;
(b) The Company will keep its properties and those of its subsidiaries
in good repair, working order, and condition, reasonable wear and tear excepted,
and from time to time make all necessary and proper repairs, renewals,
replacements, additions, and improvements thereto; and the Company and its
subsidiaries will at all times comply with the provisions of all material leases
to which any of them is a party or under which any of them occupies property so
as to prevent any loss or forfeiture thereof or thereunder;
(c) The Company will keep its assets and those of its subsidiaries
that are of an insurable character insured by financially sound and reputable
insurers against loss or damage by fire, extended coverage, and explosion
insurance in amounts customary for companies in similar businesses similarly
situated; and the Company will maintain, with financially sound and reputable
insurers, insurance against other hazards, risks, and liabilities to persons and
property to the extent and in the manner customary for companies in similar
businesses similarly situated;
(d) The Company will keep true records and books of account in which
full, true, and correct entries will be made of all dealings or transactions in
relation to its business and affairs in accordance with gaap applied on a
consistent basis;
(e) The Company and all its subsidiaries shall duly observe and
conform to all valid requirements of governmental authorities relating to the
conduct of their businesses or to their property or assets;
(f) The Company shall maintain in full force and effect its corporate
existence, rights, and franchises and all licenses and other rights to use
patents, processes, licenses, trademarks, trade names, or copyrights owned or
possessed by it or any subsidiary and deemed by the Company to be necessary to
the conduct of its business;
18
<PAGE>
(g) The Company will retain independent public accountants of
recognized national standing which shall audit the Company's financial
statements at the end of each fiscal year. In the event the services of the
independent public accountants so selected, or any firm of independent public
accountants hereafter employed by the Company are terminated, the Company will
promptly thereafter notify the Investor and will request the firm of independent
public accountants whose services are terminated to deliver to the Investor a
letter from such firm setting forth the reasons for the termination of their
services. In the event of such termination, the Company will promptly thereafter
engage another firm of independent public accountants of recognized national
standing. In its notice to the Investor the Company shall state whether the
change of accountants was recommended or approved by the Board or any committee
thereof;
(h) The Company will cause each person hereafter employed or retained
as a consultant by it or any subsidiary with access to confidential information
to enter into a Proprietary Information and Inventions Agreement in the form
previously provided to the Investor and shall otherwise take all steps
reasonably necessary to protect its proprietary rights and assets; and
(i) Sixty (60) days prior to the beginning of each fiscal year, the
Company's management will present to the Board for approval an operating budget
and business plan for such upcoming fiscal year and projections (including
underlying assumptions) with respect to the next following fiscal year;
provided, however, that any item included in such operating budget or business
plan which falls within the scope of clause (a) through (l) of Section 6.9 shall
require the approval of the Investor Director or Directors then serving on the
Board.
6.9 Negative Covenants. As long as the Investor owns not less than eight
------------------
percent (8%) of the Shares it is purchasing on the date hereof, the Company
shall not, without the prior consent of the Investor Director or Directors then
serving on the Board:
(a) authorize or implement any new financing, whether through the
incurrence or issuance of indebtedness or the sale of equity interests in the
Company or any of its subsidiaries, provided, however, that this covenant shall
not apply to (i) any offerings of debt or equity by means of a public offering
of securities registered under the Securities Act pursuant to a registration
statement on Form S-1 or SB-2 filed with the SEC at an aggregate offering price
of at least $10 million, or (ii) the issuance or sale of not to exceed (A)
pursuant to the Plan, 1,550,000 shares of Voting Common Stock (or options
therefor) and 1,000,000 shares of Non-Voting Common Stock (or options therefor)
to employees for the primary purpose of soliciting or retaining their employment
or (B) the issuance or sale of not to exceed 775,000 shares of Voting Common
Stock (or options therefor) pursuant to the Stock Option Grant Agreement dated
December 28, between the Company and Spina;
(b) directly or indirectly, by operation of law or otherwise, merge or
consolidate with, or agree to merge or consolidate with, nor purchase or agree
to purchase all or substantially all of the assets of, nor otherwise acquire,
any corporation, partnership, limited liability company, or other business
organization or division thereof;
19
<PAGE>
(c) hire or terminate management employees, whether for cause or not,
or increase or decrease the compensation of officers, directors or managers of
the Company or its subsidiaries;
(d) authorize or issue any additional shares of any class or series of
capital stock;
(e) declare or pay any dividend on capital stock;
(f) make, or permit any subsidiary to make, any loan or advance to, or
own any stock or other securities of, any subsidiary or other corporation,
partnership, or other entity unless it is wholly owned by the Company;
(g) make, or permit any subsidiary to make, any loan or advance to any
person, including, without limitation, any employee or director of the Company
or any subsidiary, except advances and similar expenditure in the ordinary
course of business or under the terms of an employee stock or option plan
approved by the Board;
(h) guarantee, directly or indirectly, or permit any subsidiary to
guarantee, directly or indirectly, any indebtedness except for trade accounts of
the Company or any subsidiary arising in the ordinary course of business;
(i) incur any indebtedness in excess of $50,000, other than items
specified in the Business Plan or in the operating budget approved by the Board
pursuant to Section 6.8(i);
(j) amend its Charter Documents;
(k) increase the number of its authorized directors above seven; or
(l) redeem or repurchase any of its outstanding capital stock other
than in compliance with outstanding obligations.
6.10 Proprietary Information. The Company shall cause all Company
-----------------------
employees (a) hired after the Closing to sign a Proprietary Information and
Inventions Agreement on or before the commencement of employment and (b) as of
the Closing to sign a Proprietary Information and Inventions Agreement on or
before June 1, 1997. The Company will use its best efforts to prevent any
violations of such agreements.
6.11 Stockholders' Agreement. The Company shall require, as a condition
-----------------------
to the issuance of any Common Stock or Preferred Stock to any person or entity,
that such person or entity become a party to the Stockholders' Agreement.
6.12 Assignment. No later than January 7, 1997, the Company shall file
-----------
the Assignment of Rights with the United States Patent and Trademark Office.
20
<PAGE>
7. Covenants of the Company, the Investor, the Stockholder and Spina --
--------------------------------------------------------------------
Co-Sale Rights.
- --------------
(a) Subject to any prior exercise of the right of first refusal set
forth in Section 2 of the Stockholders' Agreement, (i) the Investor shall have
the right, as hereinafter set forth, to participate in any sale of capital stock
of the Company, whether now owned or hereafter acquired ("Stock") by the
Stockholder or Spina (or their transferees under subsection (d) hereof) and (ii)
the Stockholder and Spina shall have the right, as hereinafter set forth, to
participate in any sale of capital stock of the Company, whether now owned or
hereafter acquired ("Stock") by the Investor. Not less than 30 days prior to any
proposed sale by the Stockholder or Spina, on the one hand, or by the Investor,
on the other hand (in either case, a "Selling Stockholder"), the Selling
Stockholder shall give the Investor, on the one hand, or the Stockholder and
Spina, on the other hand (in either case, a "Rightsholder"), notice of the
proposed sale (the "Notice"), including the name and address of the proposed
purchaser, the number of shares of Stock which are to be sold, the purchase
price and the payment terms. If the Rightsholder proposes to participate in such
sale, it shall give the Selling Stockholder written notice of its election not
later than 15 days prior to the proposed sale, specifying the number of Shares
which it desires to sell. The maximum number of Shares which the Rightsholder
shall be entitled to sell hereunder shall be a pro rata share of the total
securities to be sold (that is, pro rated on the basis of the Selling
Stockholder's and the Rightsholder's respective holdings in the Stock);
whereupon the Selling Stockholder shall assign so much of his interest in the
agreement of sale as the Rightsholder shall be entitled to and shall request
hereunder or shall otherwise cause or permit the Rightsholder to sell such
Shares.
(b) If the Rightsholder elects to participate in the proposed sale,
the Selling Stockholder shall not sell any Stock in such transaction unless the
purchaser thereof at the same time purchases from the Rightsholder at least the
number of Shares required pursuant to subsection (a) hereof and the purchase is
on the same terms and conditions as the proposed sale of Stock by the Selling
Stockholder.
(c) After complying with the provisions of this Section 7, the Selling
Stockholder shall be free for a period of 60 days after the date of the Notice
to sell to the purchaser named in the Notice the Stock proposed to be sold, on
the same terms and conditions described in the Notice, and any shares so sold
shall be sold free of the terms of this Section 7. If such sale is not
consummated within such 60 day period, the Selling Stockholder shall not be free
to sell any Stock without again complying with the provisions of this Section 7.
(d) The provisions of subsections (a) and (b) above shall not apply to
transfers of Stock by the Stockholder or Spina to any of the following described
persons or entities, provided the transferee shall agree in writing to be bound
by all of the terms hereof: (i) any spouse, child, grandchild, parent or sibling
of the Stockholder: (ii) the Stockholder's guardian, conservator, executor or
administrator; or (iii) the trustee of any trust for the benefit of the
Stockholder and/or the persons enumerated in clause (i) above. The provisions of
subsection (a) and (b) above shall not apply to transfers of Stock by the
Investor to any wholly owned subsidiary or parent of, or any corporation or
entity that is, within the meaning of the Securities
21
<PAGE>
Act, controlling, controlled by or under common control with, the Investor
provided the Transferee shall agree in writing to be bound by all of the terms
hereof.
(e) All certificates representing Company capital stock now owned or
in the future acquired by the Investor, the Stockholder or Spina shall be
endorsed as follows:
The shares of stock represented by this certificate are subject to and
may be transferred only in compliance with a right of co-sale made by
and among the holder hereof, the Company issuing this certificate and
the other stockholders to whom such right has been granted.
(f) The Company agrees that, before issuing to any person other than
the Investor, the Stockholder or Spina shares of capital stock which equal or
exceed three percent of the outstanding capital stock on an as-if-converted
basis, it shall require such person to agree to grant to the Investor, the
Stockholder and Spina a right of co-sale consistent with the provisions of this
Section 7.
(g) The co-sale rights set forth in this Section 7 shall terminate
upon the closing of the Company's first Underwritten Offering.
8. Miscellaneous.
-------------
8.1 Survival of Warranties. The warranties, representations and covenants
----------------------
of the Company, the Stockholder and the Investor contained in or made pursuant
to this Agreement shall survive the execution and delivery of this Agreement and
the Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investor or the Company.
8.2 Successors and Assigns. Except as otherwise provided herein, the
----------------------
terms and conditions of this Agreement shall ensure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Shares). Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
8.3 Governing Law. This agreement shall be governed by and construed
-------------
under the laws of the State of Delaware as applied to agreements among Delaware
residents entered into and to be performed entirely within Delaware. Each party
irrevocably consents and agrees to the exclusive jurisdiction of the Circuit
Court for Fairfax County or the United States District Court for the Eastern
District of Virginia and to service of process for it or him and on its or his
behalf by certified mail, for resolution of all matters involving this Agreement
or the transactions contemplated hereby.
22
<PAGE>
8.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.5 Titles and Subtitles. The titles and subtitles used in this Agreement
--------------------
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
8.6 Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be deemed given if delivered personally
(including by courier or nationally recognized overnight courier which tracks
receipts and deliveries), telecopied (which is confirmed) or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses or to such other addresses as may be furnished in writing by
one party to the others:
(a) if to the Company, Spina or the Stockholder:
Erol's Internet, Inc.
7921 Woodruff Court
Springfield, Virginia 22151
Attention: Dennis Spina
Telecopy: (703) 321-9400
with a copy to:
Venable, Baetjer, Howard Civiletti, L.L.P.
2010 Corporate Ridge
McLean, Virginia 22102
Attention: John L. Sullivan, III, Esq.
Telecopy: (703) 821-8949
and
(b) if to the Investor:
Gold & Appel Transfer S.A.
c/o Esprit Telecom
2000 L Street, N.W., Suite 200
Washington, D.C. 20036
Attention: Mr. Walt Anderson
Telecopy: 202/736-5065
with a copy to:
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
23
<PAGE>
Washington, D.C. 20036
Attention: Carter Strong, Esq.
Telecopy: (202) 857-6395
Any such notice or communication shall be presumed to have been received (i) in
the case of personal delivery or facsimile transmission, on the date of such
delivery, (ii) in the case of nationally recognized overnight courier, on the
next business day after the date sent and (iii) in the case of mailing, on the
third business day following the date of deposit in the United States mail.
8.7 Finder's Fee. Other than the fee payable by the Company to Ferris
------------
Baker Watts in the amount of $150,000, each party represents that it neither is
nor will be obligated for any finders' fee or commission in connection with this
transaction. The Investor agrees to indemnify and to hold harmless the Company
and the Stockholder from any liability for any commission or compensation in the
nature of a finders' fee (and the costs and expenses of defending against such
liability or asserted liability) for which the Investor or any of its officers,
partners, employees, or representatives is responsible.
The Company and the Stockholder agree jointly and severally to indemnify
and hold harmless the Investor from any liability for any commission or
compensation in the nature of a finders' fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Company or
any of its officers, employees or representatives or the Stockholder is
responsible.
8.8 Expenses. Irrespective of whether the Closing is effected, each party
--------
shall pay all costs and expenses that it incurs with respect to the negotiation,
execution, delivery and performance of this Agreement. If any action at law or
in equity is necessary to enforce or interpret the terms of this Agreement or
any Ancillary Agreement or the Charter Documents, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
8.9 Amendments and Waivers. Any term of this Agreement may be amended
----------------------
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company, the Stockholder and the Investor. Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon each holder of any shares purchased under this Agreement at the time
outstanding, each future holder of all such shares, and the Company.
8.10 Severability. If one or more provisions of the Agreement are held
------------
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of this Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
8.11 Entire Agreement. This Agreement and the documents referred to herein
----------------
constitute the entire agreement among the parties and no party shall be liable
or bound to any
24
<PAGE>
other party in any manner by any warranties, representations, or covenants
except as specifically set forth herein on therein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EROL'S INTERNET, INC.
By: /s/ Dennis J. Spina
-------------------------------
Dennis Spina, President
INVESTOR:
GOLD & APPEL TRANSFER, S.A.
By: /s/ Walt Anderson
-------------------------------
Walt Anderson, Attorney-in-Fact
STOCKHOLDER:
/s/ Erol Onaran
-----------------------------------
EROL ONARAN
SPINA
/s/ Dennis J. Spina
-----------------------------------
DENNIS SPINA
25
<PAGE>
AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS AMENDMENT TO STOCK PURCHASE AGREEMENT ("Amendment") is made as of
December 28, 1996 by and among Erol's Internet, Inc., a Delaware corporation
(the "Company"), Erol Onaran (the "Stockholder"), Dennis Spina ("Spina") and
Gold & Appel Transfer, S.A., a British Virgin Islands corporation (the
"Investor") and amends the Stock Purchase Agreement dated the date hereof (the
"Stock Purchase Agreement") by and among the Company, the Stockholder, Spina and
the Investor. Capitalized terms used but not defined herein shall have the
meanings ascribed to them in the Stock Purchase Agreement.
R E C I T A L S
A. The purpose of this Amendment is to increase the number of Shares to be
issued to the Investor at the Closing from 2,680,000 to 3,100,000 to reflect the
intention of the parties.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Amendment. Section 1.1 of the Stock Purchase Agreement is hereby
---------
replaced and amended in its entirety as follows:
Sale and Issuance of Shares. Subject to the terms and conditions of this
---------------------------
Agreement, the Investor agrees to purchase at the Closing and the Company agrees
to sell and issue to the Investor at the Closing, 3,100,000 shares (the
"Shares") of the Company's Voting Common Stock, par value $.001 per share, which
equals twenty percent (20%) of the sum of (a) the post-Closing outstanding
Voting Common Stock (including the Shares being purchased by the Investor
pursuant hereto) and (b) the Voting Common Stock and Non-Voting Common Stock
reserved for issuance under the Company's option, bonus or other stock plans,
pursuant to the exercise of any outstanding warrants, option agreements or
similar rights, and pursuant to the conversion of any convertible securities,
for a purchase price equal to Three Million Dollars ($3,000,000.00).
2. Actions. The parties agree to take promptly all actions necessary to
-------
effectuate the terms of this Amendment.
3. No Further Changes. Except as amended hereby, the terms of the Stock
------------------
Purchase Agreement shall remain unchanged.
4. Counterparts. This Amendment may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment to Stock
Purchase Agreement as of the date first above written.
EROL'S INTERNET, INC.
By: /s/ Dennis Spina
------------------------------------
Dennis Spina, President
INVESTOR:
GOLD & APPEL TRANSFER, S.A.
By: /s/ Walt Anderson
------------------------------------
Walt Anderson, Attorney-in-Fact
STOCKHOLDER:
/s/ Erol Onaran
----------------------------------------
EROL ONARAN
/s/ Dennis Spina
----------------------------------------
DENNIS SPINA
2
<PAGE>
Exhibit A
---------
December 28, 1996
Gold & Appel Transfer, S.A.
Box 985
Road Town, Tortula
British Virgin Islands
Ladies and Gentlemen:
We have acted as counsel for Erol's Internet, Inc., a Delaware corporation
(the "Company"), in connection with a Stock Purchase Agreement dated December
28, 1996 (the "Agreement"), by and among the Company, Erol Onaran (the
"Stockholder"), Dennis Spina ("Spina") and Gold & Appel Transfer, S.A. (the
"Investor"), relating to the sale by the Company to the Investor of 2,680,000
shares of the Company's voting common stock, as further specified in the
Agreement, for a purchase price of $3,000,000. This opinion is furnished to you
pursuant to Section 4.9 of the Agreement. Terms used in this letter, unless
otherwise defined herein, shall have the meanings ascribed thereto in the
Agreement.
We have acted as counsel to the Company only since July 1996 in specific
matters on a regular basis, but not as to all matters. Accordingly, we may be
unaware of certain of the Company's business dealings.
In basing the opinions and other matters set forth herein upon our
knowledge or awareness, the words "knowledge" and "awareness" (and any
variations thereof) signify that, in the course of our representation as counsel
to the Company, no information has come to our attention that would give us
actual knowledge or actual notice (that is, conscious awareness) that any such
opinions or other matters are not accurate or that any of the documents,
certificates, reports and information upon which we have relied are not accurate
and complete. We have not undertaken to communicate the substance or details of
the transactions contemplated by the Agreement to all members and employees of
this Firm. The words "knowledge" and "awareness" and similar language used
herein are intended to be limited to the current, actual knowledge of the
lawyers within our Firm who have been actively involved on specific matters for
the Company, insofar as such knowledge pertains to the area(s) of their
involvement. The words "reasonable inquiry," "reasonable investigation" and
words of similar import signify that we have made inquiry of the matter or
matters in question of members of management to the Company and have engaged in
follow-up inquiry with members of management or others in any case in which, in
our judgment, management's response to our initial inquiry warranted such
action.
As counsel in the capacity indicated above, we have examined, among other
things, the Agreement and all Exhibits and the Schedule attached thereto (the
"Ancillary Agreements"), the originals or certified, conformed or photostatic
copies of the Charter and Bylaws of the
<PAGE>
Company, each as amended to date (the "Charter Documents"), records of the
corporate proceedings relating to the Agreement, documents made available to us
by the Company and the Stockholder after specific inquiry by us, certificates of
public officials and such other documents and records as we have deemed
necessary or relevant for purposes of the opinions hereinafter expressed. With
respect to documents, agreements and records of the Company and certain matters
relating to the Stockholder, we have relied upon the representations of the
Company's officers and the Stockholder in the Certificate of Officers and
Stockholder in Support of Opinion of Counsel and the Secretary's Certificate in
Support of Opinion of Counsel, each of which is attached hereto and pursuant to
Section 2 of the Agreement (to the extent that the representations pursuant to
such Section 2 relate to matters of fact and not conclusions of law). Based upon
the foregoing, we have made such an investigation of the Company's files and
records as presented to us by the Company as we have deemed necessary for the
proposes of the opinions hereinafter expressed. We have relied upon a lien
search performed by Federal Research Corporation as of December 4, 1996 and
opinions given in reliance on such lien search are rendered as of such date.
Opinions rendered in reliance on certificates of the Company, its officers, the
Stockholder or any public official are rendered as of the dates of such
certificates. We have assumed without independent investigation, and relied
upon, the accuracy and completeness of all information contained in the
materials reviewed by us, the genuineness of all signatures, the authenticity of
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as certified, facsimile, conformed, photostatic or
reproduced copies, and the legal capacity of all natural persons executing such
documents, whether on behalf of themselves or other persons.
In giving our opinions set forth below, we have assumed (i) the due
existence of each party, other than the Company and the Stockholder, to the
Agreement; (ii) the power and full legal right of each party, other than the
Company and the Stockholder, under all applicable laws, rules and regulations,
without approvals, authorizations, consents or other orders of any public body
or board, to execute, deliver and perform the Agreement; (iii) the due
authorization, execution and delivery of the Agreement by each party, other than
the Company and the Stockholder; (iv) the truth and correctness of your
representations in Section 3 of the Agreement; and (v) that the Agreement
constitutes the legal, valid and binding obligations of you.
We express no opinion as to compliance with any applicable state securities
laws, or with respect to the laws of any jurisdiction other than the Delaware
General Corporation Law, state laws of Virginia and Maryland and the federal
laws of the United States. We do not purport to be experts in any other laws.
Additional limitations are set forth below and in the text of the opinion.
Based upon our examination described above and relying upon statements of
facts contained in the documents we have examined, and subject to the
assumptions, qualifications and exceptions set forth herein, we are of the
opinion that:
1. The Company is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Delaware.
2
<PAGE>
2. The Company has the requisite corporate power to own its properties
and carry on its business as it is now conducted and is proposed to be conducted
pursuant to the Business Plan and to execute, deliver, and perform its
obligations under the Stock Purchase Agreement and the Ancillary Agreements (the
"Documents").
3. The Company has made application to qualify or as a foreign
corporation in the States of Connecticut, Maryland, New Jersey and New York and
in the Commonwealths of Massachusetts, Pennsylvania and Virginia (the "Foreign
Jurisdictions) and which, to our knowledge, are the only jurisdictions other
than Delaware, in which the conduct of the Division's business or the Company's
ownership, leasing or use of assets used in the operation of the Division
require such qualification.
4. The Company's authorized and issued capital stock conforms to the
description thereof in the Agreement. To our knowledge, except as disclosed in
the Agreement, there are no outstanding options, warrants, subscriptions, calls,
rights, convertible securities or other agreements, commitments or other
obligations of the Company to issue, transfer or sell any shares of its capital
stock.
5. The Shares being purchased by the Investor pursuant to the Agreement
have been duly authorized and, upon payment therefor in accordance with the
terms of the Agreement, will be validly issued, fully paid and nonassessable and
will not be subject to preemptive rights. Subject to the truth and accuracy of
your representations and warranties contained in Section 3 of the Agreement, the
offer and sale of the Shares to you in the manner and on the terms contemplated
by the Agreement are exempt from the registration requirements of the Securities
Act of 1933, as amended.
6. The execution and delivery of the Documents by the Company, and the
performance of the Company's obligations thereunder, have been duly authorized
by all necessary corporate action of the Company.
7. The Documents have been duly executed and delivered by the Company and
the Stockholder. Each of the Documents constitutes the legal and valid
obligation of the Company and the Stockholder, to the extent that each is a
party thereto and is binding on and enforceable against the Company and the
Stockholder, to the extent that each is a party thereto, in accordance with its
terms.
8. No consent, approval, or other authorization of or by any court,
administrative agency, or other governmental authority is required to permit the
Company or the Stockholder to execute and deliver any of the Documents or to
perform its or his respective obligations thereunder.
9. To our knowledge, the execution and delivery of the Documents by the
Company and the Stockholder, as applicable, and the performance of their
respective obligations thereunder, will not violate any applicable law.
3
<PAGE>
10. The execution and delivery by the Company of the Documents and the
performance of its obligations thereunder will not violate any provision of the
Company's Certificate of Incorporation or Bylaws.
11. To our knowledge, there are no Pending Proceedings which, if
determined adversely, would have a material adverse effect on the Company's
assets, operations, or financial condition, or the ability of the Company or the
Stockholder to execute, deliver, or perform its or his obligations under the
Agreement. For purposes of this letter, a "Pending Proceeding" means a
proceeding pending before any court or other governmental body that is, to our
knowledge, specifically applicable to the Company, the Predecessor or the
Stockholder as a named party.
12. To our knowledge, the execution and delivery of the Documents by the
Company and the Stockholder and the performance of their respective obligations
thereunder will not violate any Court Decree or Order. For purposes of this
letter, a "Court Decree or Order" means a decree, order, or other official
action of any court or other governmental body that is, to our knowledge,
specifically applicable to the Company, the Predecessor or the Stockholder as a
named party.
13. No facts have come to our attention which lead us to believe that, as
of the date of its execution, the Agreement contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, except that we
express no view as to (i) the financial statements attached thereto (including
the notes to the financial statements) or (ii) the other financial or
statistical information attached thereto or omitted therefrom. We do not,
however, assume any responsibility for the accuracy, completeness or fairness of
the Documents in general or of the representations made in the Agreement and we
make no representation that we have independently verified the accuracy,
completeness or fairness thereof.
Each of the opinions set forth above is subject to the following
qualifications:
(a) The validity, binding nature and enforceability of the Documents
may be limited by applicable bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium or other laws now or
hereafter in effect relating to or affecting creditors' or other
obligee's rights generally, and we express no opinion as to the
effect, if any, of such laws on the Documents.
(b) The validity, binding nature, and enforceability of the Documents
may be limited by applicable principles of equity, relating to
the availability of remedies including, without limitation,
remedies in the nature of specific enforcement, whether such
principles are applied by a court of equity or a court of law,
and we express no opinion as to whether a court would grant
specific performance, injunctive relief or any other equitable
remedy.
(c) We express no opinion with respect to any of the following
provisions if they are contained in the Documents: (i) any
provisions under which the
4
<PAGE>
Company or the Stockholder waives any of its legal or equitable
rights except to the extent the waived rights are expressly
waivable pursuant to a statute or constitutional provision; (ii)
any severability provision; (iii) any provision to the effect
that rights or remedies are not exclusive, that every right or
remedy is cumulative and may be exercised in addition to or with
any other right or remedy or that the election of a particular
remedy does not preclude recourse to one or more other remedies;
(iv) any provision which purports to affect jurisdiction or venue
of any specified court or courts; (v) choice of law provisions;
and (vi) any provision by which any party agrees to take action
if that party's ability to take the action in question is subject
to conditions within the control of another person.
(d) This letter is strictly limited to the matters expressly set
forth herein and no statements or opinions should be inferred
beyond such matters
As noted above, this opinion is furnished to you pursuant to Section 4.9 of
the Agreement and, without our prior written consent, may not be used, or relied
upon, by any other person or entity, other than you and your counsel, for any
other purpose, nor reproduced or distributed, in part or in its entirety, to any
person.
Very truly yours,
----------------------------------------
5
<PAGE>
Exhibit B
---------
Stockholders' Agreement
See Exhibit 10.5
<PAGE>
Exhibit C
---------
Registration Rights Agreement
See Exhibit 10.6
<PAGE>
Exhibit D
---------
ASSIGNMENT OF TRADEMARKS AND TRADE NAMES
WHEREAS, Erol Onaran, an individual acting on behalf of himself and Erol's
Computer & TV/VCR Service, Inc., a Virginia corporation, having its principal
place of business at 7921 Woodruff Court, Springfield, Virginia 22151 (the
"Assignor"), is the owner of certain trade names and trademarks described more
fully below; and
WHEREAS, Assignor has adopted, used, or is using such trade names and
trademarks; and
WHEREAS, Assignor has intended to use the marks "WWW.EROLS.COM EROL'S",
"EROL'S INTERNET", "EROL'S", "EROLS.COM", and "WEB WHILE YOU WAIT", in commerce
and has filed applications with the United States Patent and Trademark Office,
now assigned the serial numbers listed below, indicating that intention, but has
not yet filed an allegation of use under (S)(S)1(c) or 1(d) of The Trademark
Act; and
WHEREAS, Assignor is assigning such marks in the applications listed below
as part of the entire business or portion thereof to which the marks pertain as
required by 15 U.S.C. (S)1060; and
WHEREAS, Erol's Internet, Inc., a Delaware corporation, having its
principal place of business at 7921 Woodruff Court, Springfield, Virginia 22151
(the "Assignee"), the successor of the ongoing and existing business or portion
thereof of Erol's Computer & TV/VCR Service, Inc., to which the marks pertain,
is desirous of acquiring said trade names and trademarks, and the pending
intent-to-use applications therefor;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Assignor hereby sells, assigns,
and transfers to the entire right, title, and interest, in and to the trade
names "EROL'S", "EROL'S COMPUTER", and "EROL'S INTERNET" and to the following
trademarks, together with the goodwill of the business symbolized by said
trademarks: "WWW.EROLS.COM EROL'S", "EROL'S INTERNET", "EROL'S", "EROLS.COM",
and "WEB WHILE YOU WAIT", including but not limited to the following intent-to-
use applications filed with the United States Patent and Trademark Office:
Serial Number: 75/121,078 Date of Filing: June 18, 1996
Mark: WWW.EROLS.COM EROL'S
Mark Type(s): Service Mark
Drawing Type: Words, Letters, or Numbers and Design
Serial Number: 75/121,079 Date of Filing: June 18, 1996
Mark: EROL'S INTERNET
Mark Type(s): Trademark
Drawing Type: Words, Letters, or Numbers in Typed Form
<PAGE>
Serial Number: 75/121,080 Date of Filing: June 18, 1996
Mark: WWW.EROLS.COM EROL'S
Mark Type(s): Trademark
Drawing Type: Words, Letters, or Numbers and Design
Serial Number: 75/121,081 Date of Filing: June 18, 1996
Mark: EROL'S
Mark Type(s): Trademark
Drawing Type: Stylized Words, Letters, or Numbers
Serial Number: 75/121,082 Date of Filing: June 18, 1996
Mark: EROL'S
Mark Type(s): Service Mark
Drawing Type: Stylized Words, Letters, or Numbers
Serial Number: 75/121,083 Date of Filing: June 18, 1996
Mark: EROLS.COM
Mark Type(s): Service Mark
Drawing Type: Words, Letters, or Numbers in Typed Form
Serial Number: 75/137,814 Date of Filing: July 18, 1996
Mark: WEB WHILE YOU WAIT
Mark Type(s): Service Mark
Drawing Type: Words, Letters, or Numbers in Typed Form
Assignor, on behalf of himself and Erol's Computer & TV/VCR Service, Inc.,
warrants and covenants that no assignment, grant, mortgage, license, or other
agreement affecting the rights and property herein conveyed, has been or will be
made to others by the Assignor or any predecessor in title thereto and that the
full right to convey the same as herein expressed is possessed thereby;
To be binding on the successors and assigns of the Assignor and to extend
to the successors, assigns, and nominees of the Assignee.
EROL'S COMPUTER & TV/VCR SERVICE, INC.
EROL ONARAN
By:
-----------------------------------
Date:
---------------------------------
2
<PAGE>
Exhibit E
---------
Promissory Note
See Exhibit 10.3
<PAGE>
Exhibit 10.5
STOCKHOLDERS' AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into as of this 28th day of
December, 1996 by and among (i) EROL'S INTERNET, INC., a Delaware corporation
(the "Company"), (ii) Erol Onaran (the "Founder") and (iii) Gold & Appel
Transfer, S.A. (the "Investor") (the Founder and the Investor are referred to
collectively herein, along with each shareholder subsequently identified on
Appendix A hereto as a party to this Agreement, as the "Shareholders" and
individually as a "Shareholder").
W I T N E S S E T H:
WHEREAS, the Company's authorized capital stock consists of (i) 50,000,000
shares of Voting Common Stock, par value $.001 per share (the "Voting Common
Stock"), of which 12,755,000 shares will be issued and outstanding as of the
date this Agreement is executed and delivered; (ii) 10,000,000 shares of Non-
Voting Common Stock, par value $.001 per share (the "Non-Voting Common Stock"
and, together with the Voting Common Stock, the "Common Stock"); and (iii)
10,000,000 shares of a single class of undesignated Preferred Stock, par value
$.001 per share (the "Preferred Stock" and, together with the Common Stock, the
"Stock");
WHEREAS, the Company and the Shareholders desire to provide for the
disposition of the Stock owned or to be acquired by them; and
WHEREAS, the Company and the Shareholders desire to enter into this
Agreement knowing that it is in their collective best interests.
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises
herein set forth, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, agree as follows:
Section 1. Restrictions on Transfer of Shares. No Shareholder may,
----------------------------------
directly or indirectly, sell, assign, transfer, convey, give, bequeath, pledge,
hypothecate or grant a security interest in or otherwise encumber, whether
voluntarily or involuntarily, any Stock owned by such Shareholder unless in full
compliance with all of the provisions of this Agreement. Any purported transfer
in violation of any provision of this Agreement shall be void and ineffectual
and shall not operate to transfer any interest in or title to such Stock to the
transferee.
<PAGE>
Section 2. Right of First Refusal.
----------------------
2.1 Notice of Sale. If any Shareholder wishes to dispose of all
--------------
or any portion of the Stock now owned or hereafter acquired by such Shareholder
through a voluntary sale or other disposition, such person shall give written
notice to the Company of his intention to make such sale. The notice shall
contain information regarding the identity of the proposed seller (the "Selling
Shareholder") and purchaser or purchasers (the "Initial Purchaser(s)"), the
number of shares of Stock subject to the proposed transaction, the proposed
price and terms of sale and the proposed closing date of such sale.
2.2 Exercise of Right of First Refusal.
----------------------------------
(a) For a period of twenty (20) days after the receipt by the
Company of the notice specified in Section 2.1, the Company shall have a right
of first refusal to purchase the Stock subject to the proposed disposition at
the price and on the terms offered by the Initial Purchaser(s). The Company must
exercise its right to purchase by giving written notice to the Selling
Shareholder and to the Initial Purchaser(s) within fifteen (15) days following
receipt of the notice, which notice shall specify the number of shares of Stock
the Company intends to purchase.
(b) The closing of the purchase and sale pursuant to Section 2
shall be held at the Company's principal office on the date determined by the
Company but not more than twenty (20) days following the Company's election to
purchase the Stock. At the closing, certificates representing the shares to be
sold shall be delivered to the Company, duly endorsed for transfer in blank or
with assignments separate from certificates duly endorsed, with all necessary
transfer tax stamps, if any, affixed or provided for against delivery of the
purchase price.
(c) If the Company does not exercise its right to purchase within
the time period provided herein with respect to all or any portion of the Stock
covered by the notice, any Shareholder (other than the Selling Shareholder)
shall have the right, for a period of twenty (20) days following expiration of
the Company's purchase right, to elect to purchase that number of shares equal
to the number of shares of Stock proposed to be sold multiplied by a fraction
the numerator of which is the number of shares then owned by such Shareholder
and the denominator of which is the aggregate number of shares owned by all
Shareholders who are listed on Appendix A and who are electing to purchase such
Shares. Any unsold shares shall be offered proportionately to the purchasing
shareholders for a period of five (5) days following expiration of the foregoing
twenty (20)-day period. The purchase of such Stock by such Shareholders shall be
in accordance with the procedures set forth in Section 2(b).
(d) If neither the Company nor any of its Shareholders eligible to
purchase shares offered pursuant to this Section 2 exercises their purchase
right within the time period provided herein with respect to all of the offered
Stock, the Selling Shareholder shall be free for a period of fifteen (15) days
thereafter to sell such shares to the Initial Purchaser(s), at the same price
and on the same terms and conditions as set forth in the notice, subject to all
of the provisions of this Agreement. If the Selling Shareholder shall not,
within such fifteen (15)-day period, consum-
2
<PAGE>
mate the sale with the Initial Purchaser(s) in accordance with the terms of this
Agreement, any subsequent sale by the Selling Shareholder to the Initial
Purchaser(s) or to any other purchaser on the same or other terms and conditions
must comply again with the provisions of this Section 2.
(e) After giving any notice of intended sale of any Stock pursuant
to this Section 2, the Selling Shareholder shall refrain, unless otherwise
requested by the Company, from participating as a director, officer or
shareholder of the Company in the Company's decision on whether or not to
purchase such Stock; and, if so requested to participate, the Shareholder shall
cooperate with the Company in every reasonable way to effect the purposes of
this Agreement.
(f) Except as provided herein, the Selling Shareholder shall be
bound by the restrictions and limitations imposed by this Agreement after any
notice of a desire to sell is given and whether or not any such sale actually
occurs.
2.3 Agreement Binding on Successors. As a condition precedent to
-------------------------------
the effectiveness of any transfer of Stock to any person or entity that is not a
party to this Agreement, such transferee shall agree in writing to be bound by
all of the terms and conditions of this Agreement and to be included as a
"shareholder" pursuant to the terms hereof.
2.4 Exception. Notwithstanding anything to the contrary in this
---------
Section 2, the provisions of (a) Sections 2.1 through 2.3 shall not apply to the
disposition of Stock pursuant to the exercise by a Shareholder of registration
rights granted to it by the Company and approved by the Investor and (b) the
provisions of Sections 2.1 and 2.2 shall not apply to the disposition by the
Founder of an aggregate of 1,007,500 shares of Voting Common Stock to a maximum
of four (4) persons.
Section 3. Transfer Upon Death of a Shareholder. Notwithstanding any
------------------------------------
provision in Section 2 to the contrary, but subject to all other Sections of
this Agreement, Stock owned by a Shareholder who dies shall be transferred
pursuant to any laws of intestacy or in accordance with the terms of any will
without the prior written consent of the Company and without first offering such
Stock to the Company and/or to the other Shareholders.
Section 4. Arbitration. Except to the extent that the disputants agree in
-----------
writing to any other method of resolution of a given dispute and except to the
extent the resolution of any question is final, binding and conclusive upon the
parties hereto under the terms hereof, any dispute arising among the parties
hereto, or any of them, or their successors-in-interest, or the estate of a
deceased Shareholder, concerning the meaning or interpretation of this
Agreement, or the rights, duties or obligations of the Shareholders or the
Company including the successors-in-interest and estate of a deceased
Shareholder, shall, with reasonable promptness, be submitted to, and determined
by arbitration by the American Arbitration Association in accordance with its
rules then in force and effect, except that the parties to such arbitration
shall be entitled to engage in pre-trial discovery, to the extent permitted by
and according to the provisions of the Federal Rules of Civil Procedure. The
arbitration decision shall be final and binding on all parties hereto and
judgment upon any award rendered may be entered in any court having jurisdiction
thereof, and any such party may, if such party so elects, institute proceedings
in any court having
3
<PAGE>
jurisdiction for the specific performance by any party of any such award.
Reasonable costs of any proceedings under this Agreement shall be assessed
against the losing party or parties at the discretion of the arbitrator.
Section 5. Counterparts. This Agreement may be executed in one or more
------------
counterparts, but all such counterparts shall constitute but one and the same
instrument.
Section 6. Successors and Assigns. All covenants and agreements made by
----------------------
the Company and the Shareholders in this Agreement and in certificates or other
documents delivered pursuant to this Agreement, if any, shall be binding upon
any successors and assigns of the parties hereto.
Section 7. Communications and Notices. All notices, requests, consents
--------------------------
and other communications hereunder shall be in writing and shall be deemed given
if delivered personally (including by courier or nationally recognized overnight
courier which tracks receipts and deliveries), telecopied (which is confirmed)
or mailed by registered or certified mail (return receipt requested) to the
parties at the following addresses or to such other addresses as may be
furnished in writing by one party to the others:
(a) if to the Company or the Founder:
Erol's Internet, Inc.
7921 Woodruff Court
Springfield, Virginia 22151
Attention: Mr. Dennis Spina
Telecopy: (703) 321-9400
with a copy to:
Venable, Baetjer, Howard Civiletti, L.L.P.
2010 Corporate Ridge
McLean, Virginia 22102
Attention: John L. Sullivan, III, Esq.
Telecopy: (703) 821-8949
and
(b) if to the Investor:
Gold & Appel Transfer, S.A.
c/o Espirt Telecom
2000 L Street, N.W., Suite 200
Washington, D.C. 20036
Attention: Mr. Walt Anderson
Telecopy: (202) 736-5065
4
<PAGE>
with a copy to:
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036
Attention: Carter Strong, Esq.
Telecopy: (202) 857-6395
Any such notice or communication shall be presumed to have been received (i) in
the case of personal delivery or facsimile transmission, on the date of such
delivery, (ii) in the case of nationally recognized overnight courier, on the
next business day after the date sent and (iii) in the case of mailing, on the
third business day following the date of deposit in the United States mail.
Section 8. Law Governing. This Agreement is, and shall be deemed to be, a
-------------
contract entered into pursuant to the laws of the State of Delaware and for all
purposes shall be in all respects governed, construed, applied and enforced in
accordance with the laws of such state without regard to principles of conflicts
of laws thereof. Each party irrevocably consents and agrees to the exclusive
jurisdiction of the Circuit Court for Fairfax County or the United States
District Court for the Eastern District of Virginia and to service of process
for it or him and on its or his behalf by certified mail, for resolution of all
matters involving this Agreement or the transactions contemplated hereby.
Section 9. Integration and Severability. This Agreement, and the other
----------------------------
written agreements referred to herein, embodies the entire agreements and
understandings between the parties hereto with respect to the transactions
contemplated hereby and supersedes all prior agreements and understandings
relating to the subject matter hereof. If any one or more of the provisions
contained in this Agreement or in any instrument contemplated hereby, or any
application thereof, shall be invalid, illegal or unenforceable in any respect,
under the laws of any jurisdiction, the validity, legality and enforceability of
the remaining provisions contained herein and therein, and any other application
thereof, shall not in any way be affected or impaired thereby or under the laws
of any other jurisdiction.
Section 10. Headings. The headings of the sections and subsections of
--------
this Agreement are inserted for convenience only and shall not be deemed to
constitute a part of this Agreement.
Section 11. Legend on Certificates. Each certificate representing the
----------------------
Stock shall conspicuously bear legends in substantially the following form:
"The transfer of the stock represented by this certificate is
restricted under, and subject to the terms of, a Stockholders'
Agreement dated December 20, 1996, to which the Company is a party
and a copy of which is on file at the Company's office.
5
<PAGE>
These securities have not been registered under the Securities Act
of 1933, as amended. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration statement
in effect with respect to the securities under such Act or an
opinion of counsel satisfactory to the Company that such
registration is not required or unless sold pursuant to Rule 144 of
such Act."
Section 12. Company. The term "Company" for the purpose of this Agreement
-------
and all of the rights of this Agreement, shall be taken to mean, in addition to
EROL'S INTERNET, INC., any corporation or other entity successor to it, and in
the event of such succession, the securities of the successor corporation or
entity shall be subject to the terms and conditions of this Agreement.
Section 13. Termination and Survival. This Agreement shall remain in full
------------------------
force and effect until the closing of a firmly underwritten public offering of
Common Stock raising in the aggregate at least $10 million.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
"THE COMPANY"
EROL'S INTERNET, INC.,
a Delaware corporation
By: /s/ Dennis J. Spina
-------------------------------------
Dennis Spina, President
"THE FOUNDER"
/s/ Erol Onaran
----------------------------------------
Erol Onaran
"THE INVESTOR"
GOLD & APPEL TRANSFER, S.A.
By: /s/ Walt Anderson
-------------------------------------
7
<PAGE>
AMENDMENT TO STOCKHOLDERS' AGREEMENT
THIS AMENDMENT TO STOCKHOLDERS' AGREEMENT ("Amendment") is made as of
December 28, 1996 by and among Erol's Internet, Inc., a Delaware corporation
(the "Company"), Erol Onaran (the "Founder"), and Gold & Appel Transfer, S.A., a
British Virgin Islands corporation (the "Investor") and amends the Stockholders'
Agreement dated the date hereof (the "Stockholders' Agreement") by and among the
Company, the Founder and the Investor. Capitalized terms used but not defined
herein shall have the meanings ascribed to them in the Stockholders' Agreement.
RECITALS
A. The purpose of this Amendment is to correct the first WHEREAS paragraph
in the Stockholders' Agreement to increase the number of Shares issued and
outstanding as of the date of the Stockholders' Agreement from 12,775,000 to
13,175,000.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Amendment. The first WHEREAS paragraph of the Stockholders' Agreement
---------
is hereby replaced and amended in its entirety as follows:
WHEREAS, the Company's authorized capital stock consists of (i) 50,000,000
shares of Voting Common Stock, par value $.001 per share (the "Voting Common
Stock"), of which 13,175,000 shares will be issued and outstanding as of the
date this Agreement is executed and delivered; (ii) 10,000,000 shares of Non-
Voting Common Stock, par value $.001 per share (the "Non-Voting Common Stock"
and, together with the Voting Common Stock, the "Common Stock"); and (iii)
10,000,000 shares of a single class of undesignated Preferred Stock, par value
$.001 per share (the "Preferred Stock" and, together with the Common Stock, the
"Stock").
2. No Further Changes. Except as amended hereby, the terms of the
------------------
Stockholders' Agreement shall remain unchanged.
3. Counterparts. This Amendment may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment to the
Stockholders' Agreement as of the date first above written.
EROL'S INTERNET, INC.
By: /s/ Dennis Spina
---------------------------------------
Dennis Spina, President
THE FOUNDER
/s/ Erol Onaran
-----------------------------------------
Erol Onaran
THE INVESTOR:
GOLD & APPEL TRANSFER, S.A.
By: /s/ Walt Anderson
--------------------------------------
Walt Anderson, Attorney-in-Fact
2
<PAGE>
SECOND AMENDMENT TO STOCKHOLDERS' AGREEMENT
THIS SECOND AMENDMENT TO STOCKHOLDERS' AGREEMENT (the "Second Amendment")
is made as of May 9, 1997 by and among Erol's Internet, Inc., a Delaware
corporation (the "Company"), Erol Onaran (the "Founder"), and Gold & Appel
Transfer, S.A., a British Virgin Islands corporation (the "Investor") and amends
the Stockholders' Agreement dated December 28, 1996 (the "Stockholders'
Agreement) by and among the Company, the Founder and the Investor. Capitalized
Terms used but not defined herein shall have the meanings ascribed to them in
the Stockholders' Agreement.
RECITALS
The purpose of this Second Amendment is to modify the terms on which the
Founder may sell certain shares of his Voting Common Stock.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Amendment. Section 2.4 of the Stockholders' Agreement is hereby
---------
replaced and amended in its entirety as follows:
Exception. Notwithstanding anything to the contrary in this Section 2, the
---------
provisions of (a) Sections 2.1 through 2.3 shall not apply to the disposition of
Stock pursuant to the exercise by a Shareholder of registration rights granted
to it by the Company and approved by the Investor and (b) the provisions of
Sections 2.1 and 2.2 shall not apply to the disposition by the Founder of an
aggregate of 1,007,500 shares of Voting Common Stock to a maximum of four (4)
persons. For the purposes of Section 2.4(b), any sales of Voting Common Stock
by the Founder to the Investor shall not be included in calculating the
aggregate of 1,007,500 shares of Voting Common Stock, and the Investor shall not
be included in calculating the maximum of four (4) persons to whom the Founder
may make sales of Voting Common Stock.
2. Actions. The parties agree to take promptly all actions necessary to
-------
effectuate the terms of this Second Amendment.
3. No Further Changes. Except as amended hereby, the terms of the
------------------
Stockholders' Agreement shall remain unchanged.
4. Counterparts. This Second Amendment may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Second Amendment to
Stockholders' Agreement as of the date first written above.
EROL'S INTERNET, INC.
By: /s/ Dennis Spina
-----------------------------------
Dennis Spina, President
THE FOUNDER:
/s/ Erol Onaran
-------------------------------------
Erol Onaran
THE INVESTOR:
GOLD & APPEL TRANSFER, S.A.
By: /s/ Walt Anderson
----------------------------------
Walt Anderson, Attorney-in-Fact
2
<PAGE>
Exhibit 10.6
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered
into as of December 28, 1996 by and between Erol's Internet Inc., a Delaware
corporation (the "Company"), and Gold & Appel Transfer, S.A., a British Virgin
Islands corporation (the "Investor").
WHEREAS, as a condition to closing under the Stock Purchase Agreement dated
December 28, 1996 by and among the Company, its sole stockholder and the
Investor (the "Purchase Agreement"), the Company has agreed to provide certain
registration rights to holders of the Registrable Securities as set forth in
this Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
intending to be legally bound hereby, the parties hereto agree as follows:
Section 1. Definitions. As used in this Agreement, the following terms
-----------
shall have the following meanings:
"Agreement" is defined in the Preamble to this Agreement.
"Common Stock" means either or both of the Company's Class A Voting
Common Stock, par value $.001 per share, and its Class B Nonvoting
Common Stock, par value $.001 per share.
"Company" is defined in the Preamble to this Agreement.
"Demand Period" is defined in section 3.2 hereof.
"Demand Registration" is defined in section 3.2 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar law then in force.
"Form S-1 Demand Registration" is defined in section 3.2 hereof.
"Form S-3 Demand Registration" is defined in section 3.2 hereof
"Holder" or "Holders" means any person who owns or has the right to
acquire Registrable Securities, provided that any subsequent holder
shall be subject to the requirements of section 2.2 hereof.
"Investor" is defined in the Preamble to this Agreement.
<PAGE>
"Material Transaction"means any merger or consolidation involving
the Company or a material subsidiary thereof, or sale of all or
substantially all of the assets of the Company or a material
subsidiary thereof, or financing or securities offering by the
Company, or any material subsidiary thereof, or any material
acquisition or disposition of assets by the Company or any
subsidiary thereof, or any material transaction similar to any of
the foregoing mentioned transactions involving the Company or any
material subsidiary.
"Other Holders" is defined in section 4.4 hereof.
"Person" means an individual, a partnership, an association, a
joint venture, a corporation, a trust, an unincorporated
organization and a government or any department, agency or
principal subdivision thereof.
"Piggyback Notice" is defined in section 4.1 hereof.
"Piggyback Registration" is defined in section 4.1 hereof.
"Prospectus" is the prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement,
with respect to the terms of the offering of any portion of the
Registrable Securities covered by such Registration Statement and
by all other amendments and supplements to the prospectus,
including post-effective amendments and material incorporated by
reference in such prospectus.
"Purchase Agreement" is defined in the Recitals to this Agreement.
"Registrable Securities" means (i) Common Stock issued to the
Investor pursuant to the Purchase Agreement, (ii) any Common Stock
issued to the Investor's transferees pursuant to a transfer
permitted pursuant to section 2.2 hereof, and (iii) any Common
Stock issued or issuable with respect to the Common Stock referred
to in clauses (i) or (ii) by way of replacement, share dividend,
share split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As
to any particular Registrable Securities, such securities will
cease to be Registrable Securities when they have been (a) sold to
the public pursuant to an offering registered under the Securities
Act and (b) sold to the public in compliance with Rule 144 under
the Securities Act (or any similar rule then in force).
"Registration Statement" means any registration statement of the
Company which covers any of the Registrable Securities pursuant to
the provisions of this Agreement, including the Prospectus,
amendments and supplements to such Registration Statement,
including post-effective amendments, all exhibits and all materials
incorporated by reference in such Registration Statement.
2
<PAGE>
"Registration Expenses" is defined in section 6.1 hereof.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, or
any similar federal law then in force.
Section 2. Registrable Securities.
----------------------
2.1 Registrable Securities. The securities entitled to the
----------------------
benefits of this Agreement are the Registrable Securities.
2.2 Rights of Subsequent Holder. Subject to the restrictions on
---------------------------
transfer set forth on the certificates representing the Registrable Securities,
any subsequent holder of Registrable Securities shall be entitled to all
benefits hereunder as a Holder of such Registrable Securities.
Section 3. Demands for Registration.
------------------------
3.1 Demanding Shareholders. Any record holder or record holders
----------------------
of a majority of the Registrable Securities may make a request to the Company
for registration under the Securities Act of all or part of their Registrable
Securities ("Demanding Shareholders" or individually a "Demanding Shareholder").
3.2 Demand Period. Demanding Shareholders, in addition to other
-------------
rights enumerated in this Agreement, will have (a) two opportunities to request
registration under the Securities Act on a Form S-1 or SB-2 of all or part of
their Registrable Securities (a "Form S-1 Demand Registration") and (b) an
unlimited number of opportunities to request registration under the Securities
Act on a Form S-3, if available, of all or part (but no less than an aggregate
of 300,000 shares) of their Registrable Securities (a "Form S-3 Demand
Registration"), from the period commencing upon the earlier of 180 days after
(i) the closing of the Company's first underwritten public offering of its
securities pursuant to a Registration Statement or (ii) the effective date of
the first non-underwritten Registration Statement for a public offering of the
Company's securities (other than a Registration Statement relating either to the
sale of securities to the Company's employees pursuant to a stock option, stock
purchase or similar plan or a transaction pursuant to Rule 145 of the Securities
Act), until termination of this Agreement pursuant to section 10.3 hereof (the
"Demand Period").
3.3 Demand Procedure.
----------------
3.3.1 Subject to subsection 3.3.2 hereof, during the Demand
Period any Demanding Shareholder or combination of Demanding Shareholders may
deliver to the Company a written request (a "Demand Registration Request") that
the Company register any or all of such Demanding Shareholders' Registrable
Securities.
3
<PAGE>
3.3.2 Demanding Shareholders may only make one Demand Registration
Request in any six-month period during the Demand Period (the "Interim Demand
Period") and except as provided in subsections 3.3.4 and 3.3.8, in the aggregate
may only make two Demand Registration Requests for a Form S-1 Demand
Registration. The Company shall only be required to file one registration
statement (as distinguished from supplements or pre-effective or post-effective
amendments thereto) in response to each Demand Registration Request.
3.3.3 A Demand Registration Request from Demanding Shareholders shall
(i) set forth the number of Registrable Securities intended to be sold pursuant
to the Demand Registration Request, (ii) disclose whether all or any portion of
a distribution pursuant to such registration will be sought by means of an
underwriting, and (iii) identify any underwriter or underwriters proposed for
the underwritten portion, if any, of such registration.
3.3.4 If during any Interim Demand Period, the Company receives a
Demand Registration Request from Demanding Shareholders satisfying the
requirements of section 3.1 hereof, the Company shall, subject to the
limitations in subsection 3.3.5 and section 5 hereof, promptly prepare and file
a Registration Statement on the appropriate form to register for sale all of the
Registrable Securities that the Demanding Shareholders requested to be
registered in the Demand Registration Request and in any Supplemental Demand
Registration Request received by the Company in accordance with section 3.3.6
hereof with the SEC. The Company shall use its best efforts to prepare and file
the Registration Statement within 90 days of the receipt of the Demand
Registration Request. The Company shall use its best efforts (a) to cause such
Registration Statement to become effective, and (b) thereafter to keep it
continuously effective and to prevent the happening of an event of the kind
described in section 5.1.3(f) hereof that requires the Company to give notice
pursuant to section 5.2 hereof, until the earlier of such time as the Demanding
Shareholders shall have sold or otherwise disposed of all of their Registrable
Securities included in the Registration Statement or 180 days from the date of
effectiveness of such Registration Statement. If prior to the earlier of such
dates, the Company shall fail to keep such registration statement continuously
effective or fail to prevent the happening of an event of the kind described in
section 5.1.3(f) hereof that requires the Company to give notice pursuant to
section 5.2 hereof, and such failure shall materially interfere with the
completion of the distribution contemplated by such Registration Statement, such
Registration Statement shall not be considered to be one of the two required
Form S-1 Demand Registrations. Further, if any such failure by the Company
results in Registrable Securities failing to be sold pursuant to what would
otherwise constitute the last Form S-1 Demand Registration that the Company is
required to provide pursuant to section 3.3.2 (and provided a Form S-3 Demand
Registration is not available), then the Company shall, at its option, either
(i) grant the Holders of such Registrable Securities not sold, one additional
Demand Registration hereunder with respect to such Registrable Securities not
sold in the offering, on the same terms and conditions as would have
applied to such Holders had such earlier Demand Registration not been made or
(ii) within 20 business days of the date demand is made for such additional
Demand Registration, purchase such Registrable Securities not sold in the
offering at the average per share closing price for such securities, as reported
on the principal securities exchange or inter-dealer quotation system on which
such securities are then listed, for the last five trading days preceding the
date of demand
4
<PAGE>
(as reported by the Wall Street Journal or, if not reported thereby, any
authoritative source reasonably acceptable to the Holders of such securities).
3.3.5 The Company will use its best efforts to use Form S-3 or, if
not available for any reason, Form S-2 (or any comparable successor form) for
any Registration Statement prepared and filed in connection with a Demand
Registration Statement hereunder. It is anticipated that the Registration
Statement filed with the SEC will allow for different means of distribution,
including sales by means of an underwriting as well as sales into the open
market. If the Demanding Shareholders desire to distribute all or part of the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company in writing in their initial Demand Registration
Request as described in section 3.3.3 hereof. A determination of whether all or
part of the distribution will be by means of an underwriting shall be made by
Demanding Shareholders holding a majority of the Registrable Securities to be
included in the registration. If all or part of the distribution is to be by
means of an underwriting, all subsequent decisions concerning the underwriting
which are to be made by the Demanding Shareholders pursuant to this Agreement,
which shall include the selection of the underwriter or underwriters to be
engaged and the representative, if any, of the underwriters so engaged, shall be
made by the Demanding Shareholders who hold a majority of the Registrable
Securities to be included in the underwriting, subject to approval by the
Company's Board of Directors (the "Board") which approval shall not be
unreasonably withheld. The Company agrees to provide the Holders with notice of
filing of the Registration Statement pursuant to this section 3 and the filing
of any amendments or supplements thereto.
3.3.6 Upon the receipt by the Company of a Demand Registration
Request in accordance with subsection 3.3.3 hereof, the Company shall, within 10
days following receipt of such Demand Registration Request, give written notice
of such request to all Holders. The Company shall include in such notice
information concerning whether all, part or none of the distribution is expected
to be made by means of an underwriting, and, if more than one means of
distribution is contemplated, may require Holders to notify the Company of the
means of distribution of their Registrable Securities to be included in the
registration. If any Holder who is not a Demanding Shareholder desires to sell
any Registrable Securities owned by such Holder, such Holder may elect to have
all or any portion of their Registrable Securities included in the registration
statement by notifying the Company in writing (a "Supplemental Demand
Registration Request") within twenty (20) days of receiving notice of the Demand
Registration Request from the Company. The right of any Holder to include all
or any portion of its Registrable Securities in an underwriting shall be
conditioned upon the Company's having received a timely written request for such
inclusion by way of a Demand Registration Request or Supplemental Demand
Registration Request (which right shall be further conditioned to the extent
provided in this Agreement). All Holders proposing to distribute their
Registrable Securities through an underwriting shall enter into an underwriting
agreement in customary form with the underwriter or underwriters selected for
such underwriting.
3.3.7 In any registered offering pursuant to this section 3 that
becomes effective in which a Holder participates, the Company shall use its best
efforts to keep available to the Holder a Prospectus meeting the requirements of
Section 10(a)(3) of the Securities Act and shall
5
<PAGE>
file all amendments and supplements under the Securities Act required for those
purposes during the period specified in section 3.3.4. The Company agrees to
supplement or amend such Registration Statement, if required by the rules and
regulations or instructions applicable to the registration form utilized by the
Company, or the rules and regulations thereunder for shelf registrations
pursuant to Rule 415 promulgated under the Securities Act, or as reasonably
requested by the Holders of the Registrable Securities covered by the
Registration Statement, or any underwriter of the Registrable Securities.
Subject to Section 5.1.8, in any offering pursuant to this section 3 the Company
will promptly use its best efforts to effect such qualification and compliance
as may be requested and as would permit or facilitate the distribution of the
Registrable Securities, including, without limitation, appropriate
qualifications under applicable blue sky or other state securities laws,
appropriate compliance with any other governmental requirements and listing on a
national securities exchange or inter-dealer quotation system on which the
Registrable Securities are then listed.
3.3.8 Notwithstanding any other provision of this section 3, if the
managing underwriter advises the Company in writing that in their opinion
marketing factors require a limitation on the number of shares to be
underwritten, then the number of shares of Registrable Securities that may be
included in the underwriting shall be allocated among the Holders in proportion
(as nearly as practicable) to the respective amounts of Registrable Securities
each Holder otherwise sought to have registered pursuant to its Demand
Registration Request or Supplemental Demand Registration Request (or in such
other proportion as they shall mutually agree). Registrable Securities excluded
or withdrawn from the underwriting in accordance with this section 3.3.8 shall
be withdrawn from the registration. If any such limitation results in
Registrable Securities being excluded or withdrawn from what would otherwise
constitute the last Form S-1 Demand Registration the Company is required to
provide pursuant to section 3.3.2 (and provided a Form S-3 Demand Registration
is not available), then the Company shall, at its option, either (i) grant the
Holders of such Registrable Securities excluded or withdrawn from such
registration one additional Demand Registration hereunder with respect to such
Registrable Securities not included in the offering, on the same terms and
conditions as would have applied to such Holders had such earlier Demand
Registration not been made or (ii) within 20 business days of the date demand
is made for such additional Demand Registration, purchase such excluded or
withdrawn Registrable Securities at the average per share closing price for such
securities, as reported on the principal securities exchange or inter-dealer
quotation system on which such securities are then listed, for the last five
trading days preceding the date of demand (as reported by the Wall Street
Journal or, if not reported thereby, any authoritative source reasonably
acceptable to the Holders of such securities).
3.4 Priority on Demand Registration.
-------------------------------
3.4.1. The Company will not include in any Demand Registration any
securities which are not Registrable Securities without the prior written
consent of the Holders of a majority of the shares of Registrable Securities
included in such registration. If the Holders of a majority of the shares of
Registrable Securities so request, the Company may, in its reasonable
discretion, include in any Demand Registration securities owned by holders of
securities which are not Registrable Securities. If the Company permits the
inclusion of such securities, the
6
<PAGE>
Holders owning such securities, in addition to the costs set forth in section
6.2., shall pay all incremental costs associated with the inclusion of such
securities in the Registration Statement, including, but not limited to, all
increments in registration, filing fees and fees payable to the National
Association of Securities Dealers ("NASD").
3.4.2. If a Demand Registration is an underwritten offering and the
managing underwriter advises the Company in writing that in their opinion the
number of Registrable Securities and, if permitted hereunder, other securities
requested to be included in such offering exceeds the number of securities that
can be sold in such offering without a material adverse effect on the number of
Registrable Securities or the price of the Registrable Securities in such
offering, then the Company will include in such Demand Registration prior to the
inclusion of any securities which are not Registrable Securities the number of
shares of Registrable Securities requested to be included that in the opinion of
such underwriters can be sold in such offering without a material adverse effect
on the price of the Registrable Securities in such offering, pro rata among the
respective Holders thereof on the basis of the number of shares of Registrable
Securities owned by each such Holder.
Section 4. Piggyback Registrations.
-----------------------
4.1 Right to Piggyback. If the Company proposes to undertake an
------------------
offering of Common Stock for its account or for the account of Other Holders
(other than on Form S-4, Form S-8 or any comparable successor form) (a
"Piggyback Registration"), then each such time the Company will give written
notice of a proposed offering (a "Piggyback Notice") to all Holders of
Registrable Securities of its intention to effect such a registration at least
25 days prior to the anticipated filing date of such registration. The
Piggyback Notice shall offer the Holders the opportunity to include in such
Registration Statement such amount of Registrable Securities as they may request
("Piggyback Registration"). The Company will use its best efforts to cause to
be included in such Registration Statement (and related qualifications under
blue sky laws) and the underwriting involved therein, all Registrable Securities
with respect to which the Company has received written requests for inclusion
therein within 15 business days of sending the Piggyback Notice.
Notwithstanding the above, the Company may determine, at any time, not to
proceed with such Registration Statement. Such determination, however, will be
without prejudice to the rights of Demanding Shareholders to demand the
continuation of such Registration Statement under section 3 hereof.
4.2 Underwriting Agreement. To the extent that Holders request
----------------------
Piggyback Registration of their Registrable Securities, the Holders shall
(together with the Company) enter into an underwriting agreement in customary
form with the managing underwriter selected by the Company for such
underwriting.
4.3 Priority on Primary Registrations. Notwithstanding any other
---------------------------------
provisions of this Agreement, if the managing underwriter of the proposed
offering delivers a written opinion to the Holders that the total amount or kind
of securities which the Holders and any other Persons entitled to be included in
the offering would have a material adverse effect on the number of Registrable
Securities or the price of the Registrable Securities in such offering, then the
7
<PAGE>
managing underwriter may limit some or all of the Registrable Securities that
may be included in the registration and underwriting as follows: (a) first, the
securities the Company proposes to sell, (b) second, the Registrable Securities
requested to be included in such registration and any other securities requested
to be included by Erol Onaran in such registration, if he has such registration
right, pro rata between the Holders, on the one hand, and Mr. Onaran, on the
other hand, on the basis of the number of shares of such securities held by the
Holders and one-half of the number of such securities held by Mr. Onaran, and
(c) third, any other securities requested to be included in such registration
that are held by Persons other than Mr. Onaran receiving registration rights on
or after the date of this Agreement.
4.4 Priority on Secondary Registrations. If a Piggyback
-----------------------------------
Registration is an underwritten secondary registration on behalf of holders of
the Company's securities other than the Holders of Registrable Securities (the
"Other Holders"), and the managing underwriters advise the Company in writing
that in their opinion the number of securities requested to be included in such
registration exceeds the number that can be sold in an orderly manner in such
offering within a price range acceptable to the Other Holders requesting such
registration, the Company will include in such registration (a) first, the
securities requested to be included therein by the Other Holders requesting such
registration and (b) second, the Registrable Securities requested to be included
in such registration hereunder, pro rata among the Holders of Registrable
Securities requesting such registration on the basis of the number of shares of
such securities owned by each such Holder.
4.5 No Demand Registration. No registration of the Registrable
----------------------
Securities under this section 4 of the Agreement shall be deemed to be a Demand
Registration.
Section 5. Registration Procedures. Whenever the Holders of Registrable
-----------------------
Securities have requested that any Registrable Securities be sold pursuant to
this Agreement, the Company will use its reasonable best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto the Company will as
expeditiously as possible:
5.1.1 Registration Statement. (a) Prepare and file with the SEC, as
----------------------
soon as practicable, a Registration Statement or Registration Statements
relating to the applicable Registration on any appropriate form (subject to the
requirements of section 3.3.5 hereof) under the Securities Act, which form shall
be available for the sale of the Registrable Securities in accordance with the
intended method or methods of distribution thereof and shall include all
financial statements required by the SEC to be filed therewith; (b) cooperate
and assist in any filings required to be made with the NASD; and (c) use its
best efforts to cause such Registration Statement to become effective; provided,
--------
however, that before filing a Registration Statement or Prospectus or any
- -------
amendments or supplements thereto, the Company will furnish to the Holders whose
Registrable Securities are covered by such Registration Statement and the
underwriters, if any, copies of all such documents proposed to be filed, which
documents will be subject to the reasonable review of such Holders and
underwriters and the Company will not file any Registration Statement, or any
amendment or supplement thereto (except a Piggyback Registration or any
amendment or supplement thereto), to which the Holders of a majority of the
8
<PAGE>
Registrable Securities covered by such Registration Statement, or the
underwriters, if any, shall reasonably object;
5.1.2 Amendments and Supplements. (a) Prepare and file with the SEC
--------------------------
such amendments and post-effective amendments to the Registration Statement as
may be necessary to keep the Registration Statement continuously effective for
the applicable period, or such shorter period which will terminate when all the
Registrable Securities covered by such Registration Statement have been sold;
(b) cause the Prospectus to be supplemented by any required Prospectus
supplement, and as so supplemented to be filed pursuant to Rule 424 under the
Securities Act; and (c) comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such Registration
Statement during the applicable period in accordance with the intended method or
methods of distribution by the sellers thereof set forth in such Registration
Statement or supplement to the Prospectus;
5.1.3 Notifications. Notify the Holders of the Registrable
-------------
Securities covered thereby and the managing underwriters, if any, promptly, and
(if requested by any such person) confirm such advice in writing, (a) when the
Prospectus or any Prospectus supplement or post-effective amendment has been
filed, and, with respect to the Registration Statement or any post-effective
amendment, when the same has become effective; (b) of any request by the SEC for
amendments or supplements to the Registration Statement or the Prospectus or for
additional information; (c) of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose; (d) if at any time to the representations and
warranties of the Company contemplated by section 5.1.14 below cease to be true
and correct; (e) of the receipt by the Company of any notification with respect
to the suspension of the qualification of the Registrable Securities for sale in
any jurisdiction or the initiation or threatening of any proceeding for such
purpose; or (f) of the happening of any event which makes any statement made in
the Registration Statement, the Prospectus or any document incorporated therein
by reference untrue or which requires the making of any changes in the
Registration Statement, the Prospectus or any document incorporated therein by
reference in order to make the statements therein not misleading;
5.1.4 Stop-Orders and Suspensions. In the event of the issuance of a
---------------------------
stop-order or a suspension in the sale of the Common Stock, make every
reasonable effort to obtain the withdrawal of any order suspending the
effectiveness of the Registration Statement or otherwise prohibiting the offer
or sale of the Registrable Securities, including those issued by state
governmental authorities, at the earliest possible moment;
5.1.5 Distribution Disclosures. If requested by the managing
------------------------
underwriter or underwriters or a Holder of Registrable Securities being sold in
connection with an underwritten offering, promptly incorporate in a Prospectus
supplement or post-effective amendment such information as the managing
underwriters and the Holders of a majority of the Registrable Securities being
sold reasonably agree should be included therein relating to the plan of
distribution with respect to such Registrable Securities, including, without
limitation, information with respect to the amount of Registrable Securities
being sold to such underwriters, the purchase price being paid therefor by such
underwriters and with respect to any other terms of
9
<PAGE>
the underwritten (or best efforts underwritten) offering of the Registrable
Securities to be sold in such offering; and make all required filings of such
Prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment. The Company may require each of such Holders to furnish to the
Company such information regarding the distribution of such Registrable
Securities as the Company may from time to time reasonably request in writing;
5.1.6 Copies of Registration Statement. Furnish to each Holder of
--------------------------------
Registrable Securities and each managing underwriter, without charge, at least
one copy of the Registration Statement and any post-effective amendment
thereto, including financial statements and schedules, all documents
incorporated therein by reference and all exhibits (including those incorporated
by reference);
5.1.7 Copies of the Prospectus. Deliver to each Holder of such
------------------------
Registrable Securities and the underwriters, if any, without charge, as many
copies of the Prospectus (including each preliminary prospectus) and any
amendment or supplement thereto as such persons may reasonably request; the
Company hereby consents to the use of the Prospectus or any amendment or
supplement thereto by each of such Holders and the underwriters, if any, in
connection with the offering and sale of the Registrable Securities covered by
the Prospectus or any amendment or supplement thereto;
5.1.8 Blue Sky Laws. Prior to any public offering of the Registrable
-------------
Securities, register or qualify or cooperate with the Holders of such
Registrable Securities, the underwriters, if any, and their respective counsel
in connection with the registration or qualification of such Registrable
Securities for offer and sale under the securities or blue sky laws of such
jurisdictions as any such Holder or underwriter reasonably requests in writing
and do any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Registrable Securities covered by the
Registration Statement; provided, however, that the Company will not be required
to qualify generally to do business in any jurisdiction where it is not then so
qualified or to take any action which would subject it to general service of
process in any jurisdiction where it is not then so subject or subject the
Company to any income or sale tax in any such jurisdiction where it is not then
so subject;
5.1.9 Removal of Legends. Cooperate with the Holders of such
------------------
Registrable Securities and the managing underwriters, if any, to facilitate the
timely preparation and delivery of certificates representing Registrable
Securities to be sold and not bearing any restrictive legends; and enable such
to be in such denominations and registered in such names as the managing
underwriters may request at least two business days prior to any sale of
Registrable Securities to the underwriters;
5.1.10 Other Governmental Filings. Use its best efforts to cause the
--------------------------
Registrable Securities covered by the applicable Registration Statement to be
registered with or approved by such other governmental agencies or authorities
as may be necessary to enable the Holders thereof or the underwriters, if any,
to consummate the disposition of such Registrable Securities;
10
<PAGE>
5.1.11 Prospectus Amendments and Supplements. Upon the occurrence of
-------------------------------------
any event contemplated by section 5.1.3(f) above, prepare a supplement or post-
effective amendment to the Registration Statement or the related Prospectus or
any document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of the Registrable
Securities, the Prospectus will not contain an untrue statement of a material
fact or omit to state any material fact necessary to make the statements therein
not misleading;
5.1.12 Securities Exchange Listings. Use its best efforts to cause
----------------------------
all Registrable Securities covered by the Registration Statement to be listed on
each securities exchange or inter-dealer quotation system on which similar
securities issued by the Company are then listed, if any; and to the extent that
the Company is unable to obtain such listing, then the Company in any event
shall cause such Registrable Securities covered by the Registration Statement to
be listed on a securities exchange or inter-dealer quotation system if any
securities issued by the Company are then listed;
5.1.13 Delivery of Certificates. Not later than the effective date
------------------------
of the applicable Registration Statement, provide a CUSIP number for the
Registrable Securities and provide the transfer agent with blank printed
certificates for the Registrable Securities which are in a form eligible for
deposit with Depository Trust Company;
5.1.14 Agreements and Further Actions. Enter into such customary
------------------------------
agreements (including an underwriting agreement) and take all such other
reasonable actions in connection therewith in order to facilitate the
disposition of such Registrable Securities and in such connection, whether or
not an underwriting agreement is entered into and whether or not the
Registration is an underwritten registration (a) make such representations and
warranties to the Holders of such Registrable Securities and the underwriters,
if any, in form, substance and scope as are customarily made by issuers to
underwriters in similar underwritten offerings and covering matters including,
without limitation, those set forth in an underwriting agreement; (b) obtain
opinions of counsel to the Company and updates thereof (which opinions (in form,
scope and substance) shall be reasonably satisfactory to the managing
underwriters, if any, and not objected to by the Holders of a majority of the
Registrable Securities being sold), addressed to each Holder selling Registrable
Securities and the underwriters, if any, covering the matters customarily
covered in opinions requested in underwritten offerings and such other matters
as may be reasonably requested by a majority of the Holders selling such
Registrable Securities and the underwriters, if any; (c) obtain "cold comfort"
letters and updates thereof from the Company's independent certified public
accountants addressed to the Holders of such Registrable Securities and the
underwriters, if any, such letters to be in customary form and covering matters
of the type customarily covered in "cold comfort" letters by accountants in
connection with primary underwritten offerings; (d) if an underwriting agreement
is entered into, the same shall set forth in full the indemnification provisions
and procedures of section 7 hereof with respect to all parties to be indemnified
pursuant to such section; and (e) the Company shall deliver such documents and
certificates as may be requested by the Holders of a majority of the Registrable
Securities being sold and the managing underwriters, if any, to evidence
compliance with section 5.1.11 above and with any customary conditions contained
in the underwriting agreement or
11
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other agreement entered into by the Company. The above shall be done at each
closing under such underwriting or similar agreement or as and to the extent
required thereunder;
5.1.15 Due Diligence Examination. Make available for inspection by a
-------------------------
representative of the Holders of a majority of the Registrable Securities being
sold and any underwriter participating in any disposition pursuant to such
Registration Statement and any attorney or accountant retained by such
underwriters, all financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such
representative, underwriter, attorney or accountant in connection with such
Registration Statement;
5.1.16 Earning Statements. Otherwise use its best efforts to comply
------------------
with all applicable rules and regulations of the SEC, and make generally
available to its security holders, earnings statements satisfying the provision
of Section 11(a) of the Securities Act, no later than 45 days after the end of
each 12-month period (or 90 days after the end of each 12-month period, if such
period is a fiscal year) (a) commencing at the end of any fiscal quarter in
which Registrable Securities are sold to underwriters in a firm or best efforts
underwritten offering; or (b) if not sold to underwriters in such an offering,
beginning with the first month of the Company's first fiscal quarter commencing
after the effective date of the Registration Statement, which statements shall
cover each of such 12-month periods;
5.1.17 Incorporated Documents. Promptly prior to the filing of any
----------------------
document which is to be incorporated by reference into the Registration
Statement or the Prospectus (after initial filing of the Registration
Statement), provide copies of such document to counsel to the Holders of
Registrable Securities included in such Registration Statement and to the
managing underwriters, if any; and make the Company's representatives available
for discussion of such document, and make such changes in such document (other
than exhibits thereto) prior to the filing thereof as counsel for such Holders
or underwriters may reasonably request.
5.2. Discontinuation of Distribution by Holders. Each Holder agrees,
------------------------------------------
by acquisition of such Registrable Securities, that, upon receipt of any notice
from the Company of the happening of any event of the kind described in section
5.1.11 hereof, such Holder will forthwith discontinue disposition of Registrable
Securities until such Holder's receipt of the copies of the supplemented or
amended Prospectus contemplated by section 5.1.11 hereof, or until it is advised
in writing (the "Advice") by the Company that the use of the Prospectus may be
resumed, and has received copies of any additional or supplemental filings which
are incorporated by reference in the Prospectus, and, if so directed by the
Company, such Holder will deliver to the Company (at the Company's expense) all
copies, other than permanent file copies then in such Holder's possession, of
the Prospectus covering such Registrable Securities current at the time of
receipt of such notice. In the event the Company shall give any such notice, the
time periods regarding the maintenance of the effectiveness of any Registration
Statement in section 3.3.4 hereof and the term of this Agreement in section 9.3
shall be extended by the number of days during the period from and including the
date of the giving of such notice pursuant to section 5.1.3(f) hereof to and
including the date when each seller of Registrable
12
<PAGE>
Securities covered by such Registration Statement shall have received the copies
of the supplemented or amended prospectus contemplated by section 5.1.11 hereof
or the Advice.
5.3 Company's Ability to Postpone. Notwithstanding anything to the
-----------------------------
contrary contained herein, the Company shall have the right once in any twelve-
month period to postpone the filing of any registration statement under sections
3 or 4 hereof if the Company furnishes the Holders of Registrable Securities a
certificate signed by the Chairman of the Board or the Company's President
stating that, in its good faith judgment, the Board (or the executive committee
thereof) has determined that effecting the registration at such time would
require the Company to make public disclosure of information the public
disclosure of which would have a material adverse effect upon the Company or
would interfere with a Material Transaction, and in the case of a Material
Transaction that constitutes a securities offering by the Company or any
material subsidiary thereof (an "Offering"), the managing underwriter, if any,
requests that the Holders not effect a public sale or distribution of
Registrable Securities. Such right may be exercised not more than three times
in the aggregate during the term of this Agreement subject to the following
further limitations: (a) such right may not be exercised more than once during
the term of this Agreement with respect to an Offering and the period of such
postponement may not exceed the 10 day period prior to the commencement of such
Offering, and the 90 day period after the completion of such Offering and (b)
the period of postponement with respect to Material Transactions other than an
Offering shall not exceed 90 days.
Section 6. Registration Expenses.
---------------------
6.1 Expenses Borne by Company. Except as specifically otherwise
-------------------------
provided in subsections 3.3 and 6.2 hereof, the Company will be responsible for
payment of all expenses incident to the Company's performance of or compliance
with this Agreement and any registration hereunder, including, without
limitation, all registration and filing fees, fees and expenses of compliance
with securities or blue sky laws (including reasonable fees and disbursements of
one counsel for the underwriters in connection with the blue sky qualifications
of the Registrable Securities as the managing underwriter or Holders of a
majority of the Registrable Securities being sold may designate), fees and
expenses associated with filings required to be made with the NASD, printing
expenses (including expenses of printing certificates for the Registrable
Securities in a form eligible for deposit with Depository Trust Company and of
prospectuses), messenger and delivery expenses, and fees and disbursements of
counsel for the Company and of one counsel for the selling Holders (designated
by the selling Holders holding a majority of the Registrable Securities) and all
independent certified public accountants (including the expenses of any special
audit and "cold comfort" letters required by or incident to such performance),
underwriters (excluding discounts, commissions or fees of underwriters, selling
brokers, dealer managers or similar securities industry professionals relating
to the distribution of the Registrable Securities), Securities Act liability
insurance if the Company so desires and other Persons retained by the Company in
connection with such registration (all such expenses borne by the Company being
herein called the "Registration Expenses").
13
<PAGE>
6.2 Expenses Borne by Selling Securityholders. The selling
-----------------------------------------
securityholders will be responsible for payment of brokerage discounts,
commissions and other sales expenses incident to the registration of any
Registrable Shares registered hereunder. The selling securityholders shall be
responsible for payment of their out-of-pocket expenses and the out-of-pocket
expenses of any agents who manage their accounts. The selling securityholders
shall also be responsible for payment of any underwriting fees if the selling
securityholders have requested participation of an underwriter with respect to
an offering subject to a Demand Registration or have elected to participate in a
Piggyback Registration using their own underwriter. Any such expenses which are
common to the selling securityholders shall be divided among such
securityholders (including the Company and holders of the Company's securities
other than Registrable Securities, to the extent that securities are being
registered on behalf of such Persons) pro rata on the basis of the number of
shares being registered on behalf of each such securityholder, or as such
securityholders may otherwise agree. In addition to the foregoing expenses, the
selling security holders will be responsible for the expenses set forth in
Section 6.1 with respect to any Form S-3 Demand Registration in excess of two in
any one calendar year.
Section 7. Indemnification.
---------------
7.1 Indemnification by Company. The Company agrees to indemnify, to
--------------------------
the fullest extent permitted by law, and hold harmless each Holder of
Registrable Securities and each officer, director and employee of, and each
Person who controls (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act and the rules and regulations promulgated
thereunder) such Holder and each other Person who participates as an underwriter
in the offering or sale of such Registrable Securities, against all losses,
claims, damages, liabilities and expenses (including attorneys fees) in
connection with defending against any such losses, claims, damages and
liabilities or in connection with any investigation or inquiry, in each case
caused by or based on any untrue or alleged untrue statement of material fact
contained in any Registration Statement, Prospectus or preliminary prospectus or
any amendment thereof or supplement thereto, or any omission or alleged omission
of a material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Company will reimburse each such
indemnified person for any legal or any other expenses reasonably incurred by
them or any of them in connection with investigating or defending any such claim
(or action or proceeding in respect thereof); provided that the Company shall
not be liable in any such case to the extent that (a) same arises out of or is
based on an untrue statement or alleged untrue statement or omission or alleged
omission made in such Registration Statement, any such Prospectus or preliminary
prospectus, or in any amendment or supplement thereof in reliance on and in
conformity with written information furnished to the Company by a Holder
specifically stating that it is for use in the preparation thereof, (ii) such
Holder failed to deliver a copy of the Prospectus or any amendments or
supplements thereto to the Person asserting such loss, claim, damage, liability,
or expense if the Company had furnished such Holder with a reasonably sufficient
number of copies of the same, or (iii) such Holder failed to discontinue
disposition of shares after receiving notice from the Company pursuant to
section 5.2 hereof. In connection with an underwritten offering, the Company
will indemnify such underwriters, their officers and directors and each Person
who controls (within the meaning of the Securities Act) such underwriters at
least to the same extent as provided above with respect to the indemnification
of
14
<PAGE>
the Holders of Registrable Securities. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of a Holder or
any such underwriter and shall survive the transfer of the Registrable
Securities by a Holder.
7.2 Indemnification by Holder. In connection with any Registration
-------------------------
Statement in which a Holder of Registrable Securities is participating, each
such Holder will furnish to the Company in writing such information as the
Company reasonably requests for use in connection with any such Registration
Statement or Prospectus and, to the extent permitted by law, each Holder
severally, and not jointly, will indemnify the Company, its directors and
officers, and each Person who controls (within the meaning of the Securities
Act) the Company against any losses, claims, damages, liabilities and expenses
resulting from any untrue or alleged untrue statement of material fact contained
in the Registration Statement, Prospectus or preliminary prospectus or any
amendment thereof or supplement thereto or any omission or alleged omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only to the extent that such untrue statement or
omission is contained in any information so furnished in writing by such Holder
expressly for use in connection with such Registration Statement; provided that
--------
the obligation to indemnify will be individual to each Holder (and not joint)
and will be limited to the net amount of proceeds received by such Holder from
the sale of Registrable Securities pursuant to such Registration Statement. In
connection with an underwritten offering, each such Holder will indemnify such
underwriters, their officers and directors and each Person who controls (within
the meaning of the Securities Act) such underwriters at least to the same extent
as provided above with respect to the indemnification of the Company.
7.3 Assumption of Defense by Indemnifying Party. Any Person
-------------------------------------------
entitled to indemnification hereunder will (a) give prompt written notice to the
indemnifying party of any claim with respect to which it seeks indemnification
and (b) permit such indemnifying party to assume the defense of such claim with
counsel reasonably satisfactory to the indemnified party; provided, however,
-------- --------
that any Person entitled to indemnification hereunder shall have the right to
employ separate counsel and to participate in the defense of such claim, but the
fees and expenses of such counsel shall be at the expense of such Person unless
(i) the indemnifying party has agreed to pay such fees or expenses, or (ii) the
indemnifying party shall have failed to assume the defense of such claim and
employ counsel reasonably satisfactory to such Person or (iii) in the reasonable
judgment of any such Person, based upon written advice of its counsel, a
conflict of interest may exist between such Person and the indemnifying party
with respect to such claims (in which case, if the Person notifies the
indemnifying party in writing that such Person elects to employ separate counsel
at the expense of the indemnifying party, the indemnifying party shall not have
the right to assume the defense of such claims on behalf of such Person). If
such defense is not assumed, the indemnifying party will not be subject to any
liability for any settlement made without its consent (but such consent will not
be unreasonably withheld). An indemnifying party who is not entitled to, or
elects not to, assume the defense of a claim will not be obligated to pay the
fees and expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim, in which case the indemnifying party shall pay the fees and
15
<PAGE>
expenses of such additional counsel or counsels. The failure of any indemnified
party to provide the notice required by section 7.3(a) above shall not relieve
the indemnifying party under this section 7, except to the extent that the
indemnifying party is actually prejudiced by such failure to give notice.
7.4 Contribution. If for any reason the indemnification provided for
------------
in sections 7.1 and 7.2 is unavailable to an indemnified party or insufficient
to hold it harmless as contemplated by sections 7.1 and 7.2, then the
indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such loss, claim, damage or liability in such
proportion as is appropriate to reflect not only the relative benefits received
by the indemnified party and the indemnifying party, but also the relative fault
of the indemnified party and the indemnifying party, as well as any other
relevant equitable considerations; provided that no Holder shall be required to
contribute in an amount greater than the dollar amount of the net amount of
proceeds received by such Holder with respect to the sale of any of the
Registrable Securities. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
7.5 Binding Effect. The indemnification provided for under this
--------------
Agreement will remain in full force and effect regardless of any investigation
made by or on behalf of the indemnified party or any officer, director or
controlling Person of such indemnified party and will survive the transfer of
securities.
Section 8. Participation in Underwritten Registrations. No Person may
-------------------------------------------
participate in any Registration Statement hereunder which is underwritten unless
such Person (a) agrees to sell such Person's securities on the basis provided in
any underwriting arrangements approved by the Person or Persons entitled
hereunder to approve such arrangements and (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under such underwriting arrangements.
Section 9. "Market Stand-Off" Agreement. Each Holder hereby agrees that,
----------------------------
to the extent requested by the Company, during the period of no more than 180
days following the effective date of the first Registration Statement of the
Company covering Common Stock to be sold on the Company's behalf to the public
in an underwritten offering, such Holder shall not sell or otherwise transfer or
dispose of (other than to transferees who agree to be similarly bound) any
Common Stock held thereby except for Common Stock included in such registration
or another Registration Statement pursuant to this Agreement; provided that all
stockholders holding not less than the number of shares of Common Stock held by
such Holder (including Common Stock issuable upon the conversion of convertible
securities or upon the exercise of options, warrants or rights) and all officers
and directors of the Company enter into similar agreements. The Company may
impose stock transfer instructions with respect to the Common Stock of each
Holder until the end of the stand-off period.
16
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Section 10. Miscellaneous.
-------------
10.1 No Inconsistent Agreements. The Company will not on or after
--------------------------
the date hereof enter into any agreement with any holder or prospective holder
of the Company's securities which would (a) allow such holder or prospective
holder to include such securities as Registrable Securities under this Agreement
or which would provide such holder or prospective holder with registration
rights under another agreement without the written consent of the Holders of a
majority of the Registrable Securities then outstanding or (b) be inconsistent
with the rights granted to the Holders of Registrable Securities in this
Agreement or otherwise conflict with the provisions hereof. The rights granted
to the Holders hereunder do not in any way conflict with any other agreement to
which the Company is a party.
10.2 Remedies. All remedies under this Agreement, or by law or
--------
otherwise afforded to any party hereto, shall be cumulative and not alternative.
Any Person having rights under any provision of this Agreement will be entitled
to enforce such rights specifically to recover damages caused by reason of any
breach of any provision of this Agreement and to exercise all other rights
granted by law. The parties hereto agree and acknowledge that money damages may
not be an adequate remedy for any breach of the provisions of this Agreement and
that any party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or other security) for specific
performance and for other injunctive relief in order to enforce or prevent
violation of the provisions of this Agreement.
10.3 Term. Except as specifically otherwise provided herein, the
----
provisions of this Agreement shall apply until such time as (a) all Registrable
Securities have ceased to be Registrable Securities hereunder, (b) all remaining
Registrable Securities that have not been resold to the public may be resold
pursuant to Rule 144 under the Securities Act within a three-month period or (c)
ten years from the date of this Agreement.
10.4 Rule 144 and Rule 144A. With a view to making available certain
----------------------
exemptions from the registration provisions of the Securities Act for the sale
of the Registrable Securities, the Company covenants that:
10.4.1 At all times that the Common Stock is registered under Section
12(b) or 12(g) of the Exchange Act, the Company will exercise its best efforts
to file timely the reports required to be filed by the Company under the
Securities Act and the Exchange Act (or, if the Company is not registered under
Section 12(b) or 12(g) of the Exchange Act and is not otherwise required to file
such reports under Sections 13 or 15(d) thereunder, it will, upon the request of
any holder of Registrable Securities, make publicly available such other
information required under Rule 144 for so long as necessary to permit sales
pursuant to Rule 144 under the Securities Act), and it will take such further
action as any Holder may reasonably request to the extent required from time to
time to enable such Holder to sell the Registrable Securities without
registration under the Securities Act within the limitations of the exemptions
provided by (a) Rule 144 under the Securities Act, as such Rule may be amended
from time to time or (b) any similar rule or regulation hereafter adopted by the
SEC. Upon the request of any Holder, the
17
<PAGE>
Company will deliver to such Holder a written statement as to whether it has
complied with such requirements.
10.4.2 So long as the Registrable Securities constitute restricted
securities, the Company will furnish each Holder a copy of the annual and
quarterly reports of the Company and such other public reports as any Holder may
reasonably request.
10.4.3 At all times the Company is not subject to Section 13 or 15(d)
of the Exchange Act, the Company will use its best efforts to provide Holders,
upon their request, the information regarding the Company required by section
(d)(4)(i) and (ii) of Rule 144A so as to enable the Holders to sell Registrable
Securities under Rule 144A.
10.5 Amendments and Waivers. Except as otherwise specifically
----------------------
provided herein, this Agreement may be amended or waived only upon the prior
written consent of the Company and of the Holders of a majority of the then
outstanding shares of Registrable Securities.
10.6 Successors and Assigns. All covenants and agreements in this
----------------------
Agreement by or on behalf of any of the parties hereto will bind and inure to
the benefit of the respective successors and assigns of the parties hereto
permitted in accordance with section 2.2 whether so expressed or not; provided
however, the Company may not assign its responsibilities hereunder without the
express written consent of the Holders. In addition, whether or not any express
assignment has been made, the provisions of this Agreement which are for the
benefit of Holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent Holder of such Registrable Securities permitted
in accordance with section 2.2 so long as such securities continue to be
Registrable Securities.
10.7 Severability. Whenever possible, each provision of this
------------
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
10.8 Counterparts. This Agreement may be executed in multiple
------------
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together will constitute one and the same
Agreement.
10.9 Descriptive Headings. The descriptive headings of this
--------------------
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
10.10 Governing Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement will be governed by and construed
in accordance with the domestic laws of the State of Delaware, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of Delaware or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Delaware. Each party
18
<PAGE>
irrevocably consents and agrees to the exclusive jurisdiction of the Circuit
Court for Fairfax County or the United States District Court for the Eastern
District of Virginia and to service of process for it or him and on its or his
behalf by certified mail, for resolution of all matters involving this Agreement
or the transactions contemplated hereby.
10.11 Entire Agreement. This Agreement is intended by the parties as
----------------
a final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto
with respect of the subject matter contained herein. This agreement supersedes
all prior agreements and understandings between the parties with respect to such
subject matter.
10.12 Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be delivered personally to the recipient, sent to the
recipient by reputable express courier service (charges prepaid), mailed to the
recipient by certified or registered mail, return receipt requested and postage
prepaid or by telecopy and shall be deemed to have been received at the time of
personal delivery, on the next business day if delivered by express courier,
three business days after deposit in the mail, or at the time of transmission,
if sent by telecopy during the recipient's business hours (or otherwise on the
next business day). Such notices, demands and other communications will be sent
to each Holder at the address indicated on the records of the Company and to the
Company at the address indicated below:
(a) If to the Company:
Erol's Internet, Inc.
7921 Woodruff Court
Springfield, Virginia 22151
Attention: Mr. Dennis Spina
Telecopy: (703) 321-9400
with a copy, which shall not constitute notice, to:
Venable Baetjer & Howard
2010 Corporate Ridge
McLean, Virginia 22102
Attention: John L. Sullivan, III, Esq.
Telecopy: (703) 821-8949
(b) If to the Investor:
Gold & Appel Transfer S.A.
c/o Esprit Telecom
2000 L Street, N.W., Suite 200
Washington, D.C. 20036
Attention: Mr. Walt Anderson
19
<PAGE>
Telecopy: (202) 736-5065
with a copy to:
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036
Attention: Carter Strong, Esq.
Telecopy: (202) 857-6395
To their respective addresses shown on the Company's records or to such other
address or to the attention of such other person as the recipient party has
specified by prior written notice to the sending party.
10.13 Delays or Omissions. No failure to exercise or delay in the
-------------------
exercise of any right, power or remedy accruing to a Holder on any breach or
default of the Company under this Agreement shall impair any such right, power
or remedy nor shall it be construed to be a waiver of any such breach.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
"THE COMPANY"
EROL'S INTERNET, INC.
By: /s/ Dennis J. Spina
---------------------------
Its: President
--------------------------
"THE INVESTOR"
GOLD & APPEL TRANSFER, S.A.
By: /s/ Walt Anderson
--------------------------
Its: Attorney in Fact
-------------------------
20
<PAGE>
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
THIS AMENDMENT TO REGISTRATION RIGHTS AGREEMENT ("Amendment") is made as of
May 8, 1997 by and among Erol's Internet, Inc., a Delaware corporation (the
"Company and Gold & Appel Transfer, S.A., a British Virgin Islands corporation
(the "Investor") and amends the Registration Rights Agreement dated December 28,
1996 (the "Registration Rights Agreement") by and among the Company and the
Investor. Capitalized Terms used but not defined herein shall have the meanings
ascribed to them in the Registration Right Agreement.
RECITALS
The purpose of this Amendment is to modify the securities which may be
registered under the Registration Rights Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Amendment. Only the item "Registrable Securities" contained in Section
---------
1 of the Registration Right Agreement is hereby replaced and amended in its
entirety as follows:
"Registrable Securities" means (i) Common Stock issued to the Investor pursuant
to the Purchase Agreement, (ii) Common Stock sold or issued to the Investor
pursuant to the Stock Purchase Agreement dated as of May 8, 1997 by and among
the Company, the Investor, and Erol Onaran, (iii) any Common Stock issued to the
Investor's transferees pursuant to a transfer permitted pursuant to section 2.2
hereof, and (iv) any Common Stock issued or issuable with respect to the Common
Stock referred to in clauses (i), (ii) or (iii) by way of replacement, share
dividend, share split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular Registrable Securities, such securities will cease to be Registrable
Securities when the have been (a) sold to the public pursuant to an offering
registered under the Securities Act and (b) sold to the public in compliance
with Rule 144 under the Securities Act (or any similar rule then in force).
2. Actions. The parties agree to take promptly all actions necessary to
-------
effectuate the terms of this Amendment.
3. No Further Changes. Except as amended hereby, the terms of the
------------------
Registration Rights Agreement shall remain unchanged.
4. Counterparts. This Amendment may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment to Registration
Rights Agreement as of the date first written above.
EROL'S INTERNET, INC.
By: /s/ Dennis Spina
-----------------
Dennis Spina, President
THE INVESTOR:
GOLD & APPEL TRANSFER, S.A.
By: /s/ Walt Anderson
------------------
Walt Anderson, Attorney-in-Fact
2
<PAGE>
SECOND AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
THIS SECOND AMENDMENT TO REGISTRATION RIGHTS AGREEMENT ("Amendment") is made
as of September 15, 1997 by and among Erol's Internet, Inc., a Delaware
corporation (the "Company") and Gold & Appel Transfer, S.A., a British Virgin
Islands corporation (the "Investor") and amends the Registration Rights
Agreement dated December 28, 1996 (the "Registration Rights Agreement"), and
amended as of May 8, 1997, by and among the Company and the Investor.
Capitalized Terms used but not defined herein shall have the meanings ascribed
to them in the Registration Rights Agreement.
RECITALS
The purpose of this Amendment is to modify the securities which may be
registered under the Registration Rights Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Amendment. Only the item "Registrable Securities" contained in Section
---------
1 of the Registration Rights Agreement is hereby replaced and amended in its
entirety as follows:
"Registrable Securities" means (i) Common Stock issued to the Investor pursuant
to the Purchase Agreement, (ii) Common Stock sold or issued to the Investor
pursuant to the Stock Purchase Agreement dated as of May 9, 1997 by and among
the Company, the Investor, and Erol Onaran, (iii) Common Stock sold or issued
to the Investor pursuant to the Stock Purchase Agreement dated as of September
15, 1997 by and among the Company, the Investor, and Erol Onaran, (iv) any
Common Stock issued to the Investor's transferees pursuant to a transfer
permitted pursuant to section 2.2 hereof, and (v) any Common Stock issued or
issuable with respect to the Common Stock referred to in clauses (i), (ii),
(iii), or (iv) by way of replacement, share dividend, share split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. As to any particular Registrable Securities, such
securities will cease to be Registrable Securities when they have been (a) sold
to the public pursuant to an offering registered under the Securities Act and
(b) sold to the public in compliance with Rule 144 under the Securities Act (or
any similar rule then in force).
2. Actions. The parties agree to take promptly all actions necessary to
-------
effectuate the terms of this Amendment.
3. No Further Changes. Except as amended hereby, the terms of the
------------------
Registration Rights Agreement shall remain unchanged.
4. Counterparts. This Amendment may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment to the
Registration Rights Agreement as of the date first written above.
EROL'S INTERNET, INC. (the "Company")
By: /s/ Dennis Spina
-----------------
Dennis Spina, President
GOLD & APPEL TRANSFER, S.A. (the "Investor")
By: /s/ Walt Anderson
------------------
Walt Anderson, Attorney-in-Fact
2
<PAGE>
Exhibit 10.7
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement, executed as of the 8th day of May, 1997
(this "Agreement") by and among Erol's Internet, Inc. a Delaware corporation
(the "Company"), Erol Onaran (the "Seller") and Gold & Appel Transfer, S.A., a
British Virgin Islands corporation (the "Buyer").
WHEREAS, the Company previously sold 3,100,000 shares of Common Stock to
Buyer pursuant to that certain Stock Purchase Agreement made as of December 28,
1996 (amended on or about January 17, 1997) and various Exhibits thereto
including a Stockholders Agreement and Registration Rights Agreement by and
among the Company, the Seller, the Buyer and Dennis Spina (the "Prior
Agreements");
WHEREAS, the Seller owns 10,075,000 Common Shares of the Company;
WHEREAS, the Company's Board of Directors has authorized the issuance of
310,000 additional shares of Common Stock to Buyer at a price of $1.6129 per
share the ("Company Shares") for a total price of $500,000;
WHEREAS, the Seller desires to sell 310,000 shares of Common Stock directly
to Buyer for the same consideration (the "Seller Shares"; together with the
Company Shares herein called the "Shares") for a total price of $500,000;
WHEREAS, this Agreement contemplates a transaction in which the Buyer will
purchase from the Seller and the Company, and the Company and the Seller will
sell to the Buyer the aforesaid Shares of the Company on the terms and
conditions contained in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants, representations
and agreements herein contained, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto, intending to be legally bound, covenant and
agree as follows:
1. (a) Purchase and Sale of the Company Shares. On and subject to the
---------------------------------------
terms and conditions of this Agreement, the Buyer agrees to purchase from the
Company, and the Company agrees to sell to the Buyer, 310,000 Common Shares of
the Company, $.001 par value per share (the "Company Shares"), for the
consideration specified below in Section 2 of this Agreement.
(b) Purchase and Sale of the Seller's Shares. On and subject to the
----------------------------------------
terms and conditions of this Agreement, the Buyer agrees to purchase from the
Seller, and the Seller agrees to sell to the Buyer, 310,000 Common Shares of the
Company, $.001 par value, for the consideration specified below in Section 2 of
this Agreement.
2. Purchase Price. The purchase price has been negotiated by and among
--------------
the Company, the Seller and the Buyer based upon a pre-money valuation of the
Company of $25 million as shown in Schedule 2. The purchase price for the
Company Shares and the Seller's
<PAGE>
Shares shall total One Million Dollars ($1,000,000) in the aggregate. Five
Hundred Thousand Dollars ($500,000) shall be paid each to the Company and the
Seller by separate wire transfer, cashiers check or by other immediately
available funds at the Closing.
3. Closing. The purchase and sale of all of the Company Shares shall be
-------
consummated at a closing (the "Closing") to be held at the offices of the
Company at 9:00 a.m. on May 8, 1997 (the "Closing Date"). At Closing, the Buyer
shall make payment of the Purchase Price, as described in Section 2 hereof, and
the Company and the Seller shall each deliver to the Buyer (i) the original
stock certificates representing the Company Shares and the Seller Shares,
properly endorsed for transfer to the Buyer, free and clear of all liens,
encumbrances, claims, rights of third parties and other restrictions and (ii)
such other agreements and documents as may be required by Section 6 hereof.
After Closing, at the Buyer's request, the Company and the Seller shall take all
such other actions and execute all such other documents as the Buyer may
reasonably require to evidence or perfect the sale or transfer of the Shares and
the satisfaction of all other conditions to the purchase of the Shares.
4. Representations and Warranties of the Company and the Seller. The
------------------------------------------------------------
Company and the Seller, jointly and severally, hereby represent and warrant to
the Buyer as of the date hereof and as of the Closing, that, except as disclosed
to Buyer's representative on the Board of Directors, Walt Anderson, or as set
forth on the Disclosure Schedule (the "Disclosure Schedule") furnished the
Buyer, specifically identifying the relevant subparagraph hereof, which
disclosures shall be deemed to be representations and warranties as if made
hereunder:
4.1 Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as presently proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on its assets, operations or financial condition or the
Company's ability to perform its obligations under this Agreement ("Material
Adverse Effect").
4.2 Capitalization and Voting Rights. The Company's authorized
--------------------------------
capital consists of:
(a) Voting Common Stock. 50,000,000 shares of Voting Common
-------------------
Stock, par value $.001 per share are authorized, of which 13,175,000 shares are
issued and outstanding. 10,075,000 of such issued and outstanding shares are
owned by the Seller, The Seller is the sole owner, beneficially and of record,
of these shares, free and clear of any liens, security interests, pledges,
options, claims or other encumbrances of any kind, except as set forth in the
Prior Agreements, in favor of Buyer, the Company and Spina. 3,100,000 of such
issued and outstanding shares are owned by the Buyer.
(b) Non-Voting Common Stock. 10,000,000 shares of Non-Voting
-----------------------
Common Stock, par value $.001 per share, none of which are issued or
outstanding. The Voting Common Stock and the Non-Voting Common Stock are
together referred to herein as the "Common Stock."
2
<PAGE>
(c) Preferred Stock. 10,000,000 shares of a single class of
---------------
preferred stock, par value $.001 per share, none of which are issued or
outstanding.
(d) The outstanding shares of Voting Common Stock are all duly and
validly authorized and issued, fully paid and nonassessable, and were issued in
accordance with the registration or qualification provisions of the Securities
Act of 1933, as amended (the "Act") and any relevant state securities laws or
pursuant to valid exemptions therefrom.
(e) Except as set forth in the Disclosure Schedule, there are not
outstanding any options, warrants, rights (including conversion or preemptive
rights) or agreements for the purchase or acquisition from the Company of any of
its capital stock. The Company has reserved 1,550,000 shares of its Voting
Common Stock for purchase upon exercise of options to be granted in the future
under the Company's 1996 Stock Plan (the "Plan") of which 1,256,875 have been
granted, and 775,000 additional options have been issued outside the Plan. The
Company is not a party or subject to any agreement or understanding, and, to the
best knowledge of the Company and the Seller, there is no agreement or
understanding between any persons and/or entities, which affects or relates to
the voting or giving of written consents with respect to any security or by a
director of the Company.
4.3 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and the Seller necessary for the authorization,
execution and delivery of this Agreement and all other agreements and waivers
required to be executed by the Company or the Seller on or before the Closing
pursuant to Sections 6.4 through 6.7 (the "Related Documents") and waivers, the
performance of all obligations of the Company hereunder and thereunder, and the
authorization, issuance, sale and delivery of the Shares has been taken or will
be taken prior to the Closing, and this Agreement and the Related Documents
constitute valid and legally binding obligations of the Company and the Seller,
enforceable in accordance with their respective terms.
4.4 Valid Issuance of Shares. The Shares, when issued, sold and
------------------------
delivered in accordance with the terms of this Agreement for the consideration
expressed herein, will be duly and validly issued, fully paid, and
nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and under applicable state and
federal securities laws.
4.5 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement.
4.6 Offering. Subject in part to the truth and accuracy of the
--------
Buyer's representations set forth in Section 5, the offer, sale and issuance of
the Shares as contemplated by this Agreement are exempt from the registration
requirements of the Act, and neither the
3
<PAGE>
Seller, the Company nor any authorized agent acting on its behalf will take any
action hereafter that would cause the loss of such exemption.
4.7 Compliance with Other Instruments.
---------------------------------
(a) The Company is not in violation or default in any material
respect of any provision of its Certificate of Incorporation or Bylaws
(collectively "Charter Documents"), or in any material respect of any
instrument, judgment, order, writ, decree or contract to which it is a party or
by which it is bound, or of any provision of any federal or state statute, rule
or regulation applicable to the Company. The execution, delivery and performance
of this Agreement and the Related Documents, and the consummation of the
Transactions will not result in any such violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, either a
default under any such provision, instrument, judgment, order, writ, decree or
contract or an event that results in the creation of any lien, charge or
encumbrance upon any assets or the Company or the suspension, revocation,
impairment, forfeiture or nonrenewal of any material permit, license,
authorization or approval applicable to the Company, its business or operations
or any of its assets or properties.
4.8 Draft Audited Financial Statements. The Company has delivered to
----------------------------------
the Buyer draft audited financial statements for the Company as of and for the
twelve-month period ended December 31, 1996 (the "Financial Statements") and
attached hereto as Schedule 4.8. The Company has also delivered to the Buyer
monthly "Executive Summaries" containing selected financial information
regarding the Company's results for the each of the months January, February and
March, 1997. While not yet final, the Company believes that the Financial
Statements have been prepared in accordance with the procedures described in the
accompanying notes, as applied on a materially consistent basis as of the date
and for the period indicated therein. The Financial Statements are materially
correct and accurate as determined in accordance with the procedures set forth
in the notes attached thereto and present fairly the results of operations and
the financial condition of the Company for such periods. As to the data
provided therein, the Executive Summaries are materially correct and accurate
and consistent with the books and records of the Company. Except as set forth
in the Financial Statements and the Executive Summaries, the Company has no
material liabilities, contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business subsequent to December 31, 1996,
(ii) obligations under contracts and commitments incurred in the ordinary course
of business subsequent to December 31, 1996. Except as disclosed in the
Financial Statements or the Executive Summaries, the Company is not a guarantor
or indemnitor of any indebtedness of any other person, form or corporation.
4.9 Changes. Except as disclosed at the Board Meetings of the
-------
Company, the Financial Statements, or in Section (a) and (m) of the attached
Disclosure Schedule, since December 31, 1996 there has not been:
(a) any change in the assets, liabilities, financial condition or
operating results of the Company from that reflected in the Financial Statements
or the Executive
4
<PAGE>
Summaries, except changes in the ordinary course of business that do not, in the
aggregate, constitute a Material Adverse Effect;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results, prospects or business of the Company (as such
business is currently conducted and as it is proposed to be conducted);
(c) any waiver by the Company of a valuable right or of a material
debt owned to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and that is not material to the assets, properties, financial
condition, operating results or business of the Company (as such business is
currently conducted and as it is proposed to be conducted);
(e) any material change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject;
(f) any material change in any compensation arrangement or
agreement with any executive officer;
(g) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any executive
officer of the Company; and the Company, to the best of its knowledge, does not
know of the impending resignation or termination of employment of any such
officer;
(i) receipt of notice that there has been a loss of, or material
order cancellation by, any major customer of the Company;
(j) any mortgage, pledge, transfer of a security interest in, or
lien, created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(k) any loans or guarantees made by the Company to or for the
benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(l) any declaration, setting aside or payment or other
distribution in respect of any of the Company's capital stock, or any direct or
indirect redemption, purchase or other acquisition of any of such stock by the
Company;
5
<PAGE>
(m) the written notice of claim, or threatened litigation, against
the Company or any other event or condition of any character that might
constitute a Material Adverse Effect; or
(n) any agreement or commitment by the Company to do any of the
things described in this Section 4.9.
4.10 Disclosure. The Company has fully provided the Buyer with all the
----------
information that the Buyer has requested for deciding whether to purchase the
Shares.
5. Representations and Warranties of the Buyer. The Buyer hereby
-------------------------------------------
represents and warrants to the Company and the Seller that:
5.1 Authorization. The Buyer has full power and authority to enter
-------------
into this Agreement and, to the extent applicable, the Related Documents and
such agreements constitute its valid and legally binding obligations,
enforceable in accordance with its terms.
5.2 Purchase Entirely for Own Account. This Agreement is made with the
---------------------------------
Buyer in reliance upon the Buyer's representation to the Company, which by the
Buyer's execution of this Agreement the Buyer hereby confirms, that the Shares
will be acquired for investment for the Buyer's own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof,
and that the Buyer has no current intention of selling, granting any
participation in, or otherwise distributing the same. The Buyer does not have
any contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person, with
respect to the Shares.
5.3 Disclosure of Information. The Buyer believes it has received all
-------------------------
the information it considers necessary or appropriate for deciding whether to
purchase the Shares. The Buyer further represents that its member of the
Company's Board of Directors has attended all meetings of the Board, had regular
discussions with the Company's Executive Officers and that, in addition, it has
had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Shares and the
business, properties, prospects and financial condition of the Company. The
foregoing, however, does not limit or modify the representations and warranties
of the Company and the Seller in Section 4 or the right of the Buyer to rely
thereon.
5.4 Investment Experience. The Buyer acknowledges that it is able to
---------------------
fend for itself, can bear the economic risk of its investment, and has knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Shares. The Buyer also represents
it has not been organized for the purpose of acquiring the Shares.
5.5 Accredited Buyer. The Buyer is an "accredited investor" within the
----------------
meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D,
as currently in effect under the Securities Act of 1933, as amended (the
"Securities Act").
6
<PAGE>
5.6 Restricted Securities. The Buyer understands that the Shares are
---------------------
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act,
only in certain limited circumstances. In this connection, the Buyer represents
that it is familiar with Rule 144 promulgated under the Securities Act, as
currently in effect, and understands the resale limitation imposed thereby and
by the Securities Act.
5.7 Legends. It is understood that the certificate evidencing the
-------
Shares may bear one or all of the following legends:
"The transfer of the stock represented by this certificate is restricted
under, and subject to the terms of, a Stockholders' Agreement dated
December 28, 1996, to which the Company is a party and a copy of which
is on file at the Company's office.
The shares of stock represented by this Certificate are also subject to
and may be transferred only in compliance with a right of co-sale made
by and among the holder hereof, the Company issuing this certificate and
the other stockholders to whom such right has been granted.
These securities have not been registered under the Securities Act of
1933, as amended. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with
respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or
unless sold pursuant to Rule 144 of such Act."
5.8 Compliance With Laws. Buyer has made all filings and obtained all
--------------------
corporate approvals as may be required by the laws of the British Virgin Islands
with respect to the consummation of the transactions contemplated by this
Agreement.
5.9 Involvement in Certain Legal Proceedings. Buyer, its shareholders
----------------------------------------
(and to the best knowledge of Buyer, the natural person shareholders of its
shareholders) have not during the past five (5) years been involved in the
events listed in paragraphs (f)(1) through (f)(6) of Item 401, Regulation S-K
promulgated by the Securities and Exchange Commission.
6. Conditions to Obligations of the Parties to Close. The obligations of
-------------------------------------------------
the Parties to consummate the transactions contemplated by this Agreement and to
perform their respective obligations hereunder shall be subject to the
fulfillment of the following conditions prior to Closing:
6.1 Company and Seller Representations and Warranties True as of
------------------------------------------------------------
Closing. The representations and warranties of the Company and Seller contained
- -------
in this
7
<PAGE>
Agreement shall be true and correct at Closing with the same force and effect as
if such representations and warranties had been made on and as of the date of
Closing and the Company and Seller shall have performed all covenants and
obligations of the Seller required to be performed prior to or at Closing.
6.2 Buyer Representations and Warranties True and Correct. The
-----------------------------------------------------
representations and warranties of the Buyer contained in this Agreement shall be
true and correct as of Closing with the same force and effect as if such
representations and warranties had been made on and as of the Closing Date.
6.3 All Agreements and Conditions Performed. The Seller shall have
---------------------------------------
complied with and duly performed all of the other agreements and conditions
required on their part to be performed pursuant to this Agreement on or before
Closing.
6.4 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Buyer, and it shall have received all such counterpart original and certified or
other copies of such documents as it may reasonably request.
6.5 Amendment to Stockholders' Agreement. Each of the parties to the
------------------------------------
Stockholders Agreement (part of the Prior Agreements) shall have executed the
form of Amendment No. 2 thereto, attached as Exhibit 6.5 to this Agreement.
6.6 Amendment to Registration Rights Agreement. Each of the parties to
------------------------------------------
the Registration Rights Agreement (part of the Prior Agreements) shall have
executed the form of Amendment No. 1 thereto attached as Exhibit 6.6 to this
Agreement.
6.7 Waivers of Rights. Each of the Company, the Seller, the Buyer and
-----------------
Dennis Spina shall have executed the waiver letters attached hereto as Exhibit
6.7 to this Agreement.
6.8 Payment of Purchase Price. The Buyer shall have delivered the
-------------------------
purchase price to the Company and the purchase price to the Seller as specified
in Section 2.
6.9 Inspection and Due Diligence. The Company shall have allowed the
----------------------------
Buyer and its representatives, at Buyer's expense, to visit and inspect the
Company's properties, to examine its books of account and records and to discuss
the Company's affairs, finances and accounts with its officers, all at such
reasonable times as may be requested by Buyer. The results of the Buyer's
ongoing due diligence investigation shall be satisfactory to Buyer in its sole
discretion.
8
<PAGE>
7. Miscellaneous.
-------------
7.1 Survival of Warranties. The warranties, representations and
----------------------
covenants of the Company, the Seller and the Buyer contained in or made pursuant
to this Agreement shall survive the execution and delivery of this Agreement and
the Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Buyer or the Company.
7.2 Successors and Assigns. Except as otherwise provided herein, the
----------------------
terms and conditions of this Agreement shall ensure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Shares). Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
7.3 Governing Law. This agreement shall be governed by and construed
-------------
under the laws of the State of Delaware as applied to agreements among Delaware
residents entered into and to be performed entirely within Delaware. Each party
irrevocably consents and agrees to the exclusive jurisdiction of the Circuit
Court for Fairfax County or the United States District Court for the Eastern
District of Virginia and to service of process for it or him and on its or his
behalf by certified mail, for resolution of all matters involving this Agreement
or the transactions contemplated hereby.
7.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
7.6 Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be deemed given if delivered personally
(including by courier or nationally recognized overnight courier which tracks
receipts and deliveries), telecopied (which is confirmed) or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses or to such other addresses as may be furnished in writing by
one party to the others:
(a) if to the Company, Spina or the Seller:
Erol's Internet, Inc.
7921 Woodruff Court
Springfield, Virginia 22151
Attention: Dennis Spina
Telecopy: 703/321-9400
9
<PAGE>
(b) if to the Buyer:
Gold & Appel Transfer S.A.
c/o Esprit Telecom
2000 L Street, N.W., Suite 200
Washington, D.C. 20036
Attention: Mr. Walt Anderson
Telecopy: 202/736-5065
Any such notice or communication shall be presumed to have been received (i) in
the case of personal delivery or facsimile transmission, on the date of such
delivery, (ii) in the case of nationally recognized overnight courier, on the
next business day after the date sent and (iii) in the case of mailing, on the
third business day following the date of deposit in the United States mail.
7.7 Finder's Fee. Other than the fee payable by the Company to Ferris
------------
Baker Watts in the amount of $50,000, each party represents that it neither is
nor will be obligated for any finders' fee or commission in connection with this
transaction. The Buyer agrees to indemnify and to hold harmless the Company and
the Seller from any liability for any commission or compensation in the nature
of a finders' fee (and the costs and expenses of defending against such
liability or asserted liability) for which the Buyer or any of its officers,
partners, employees, or representatives is responsible.
The Company and the Seller agree jointly and severally to indemnify and
hold harmless the Buyer from any liability for any commission or compensation in
the nature of a finders' fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or any of its
officers, employees or representatives or the Seller is responsible.
7.8 Expenses. Irrespective of whether the Closing is effected, each
--------
party shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement or any Exhibit hereto, the prevailing party shall be entitled to
reasonable attorney's fees, costs and necessary disbursements in addition to any
other relief to which such party may be entitled.
7.9 Amendments and Waivers. Any term of this Agreement may be amended
----------------------
and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company, the Seller and the
Buyer. Any amendment or waiver effected in accordance with this paragraph shall
be binding upon each holder of any shares purchased under this Agreement at the
time outstanding, each future holder of all such shares, and the Company.
7.10 Severability. If one or more provisions of the Agreement are held
------------
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of this Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
10
<PAGE>
7.11 Entire Agreement. This Agreement and the documents referred to
----------------
herein constitute the entire agreement among the parties with respect to the
sales of the Shares hereunder and no party shall be liable or bound to any other
party in any manner by any warranties, representations, or covenants except as
specifically set forth herein on therein. Except as the Prior Agreements may be
amended or provisions waived in writing as provided in this Agreement, such
Prior Agreements remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EROL'S INTERNET, INC.
By: /s/ Dennis Spina
----------------------------------
Dennis Spina, President
BUYER:
GOLD & APPEL TRANSFER, S.A.
By: /s/ Walt Anderson
----------------------------------
Walt Anderson, Attorney in Fact
SELLER:
/s/ Erol Onaran
---------------------------------------
EROL ONARAN
11
<PAGE>
Exhibit 6.5
-----------
Second Amendment to Stockholders' Agreement
See Exhibit 10.5
<PAGE>
Exhibit 6.6
-----------
Amendment to Registration Rights Agreement
See Exhibit 10.6
<PAGE>
Exhibit 6.7
-----------
WAIVER OF A RIGHT OF FIRST OFFER
THIS WAIVER OF A RIGHT OF FIRST OFFER, dated the 8th day of May, 1997, is
granted by Dennis Spina ("Spina"), and Erol Onaran ("Onaran") (Spina and Onaran
collectively referred to as the "Rights Holders").
1. Stock Purchase Agreement. This specific Waiver relates to a Right of
------------------------
First Offer granted in Section 6.4 of that certain Stock Purchase
Agreement, dated as of December 28, 1996 (the "Stock Purchase
Agreement"), by and among Erol's Internet, Inc. (the "Company"), Gold &
Appel Transfer, S.A. (the "Investor"), Spina and Onaran.
2. Right of First Offer. Pursuant to Section 6.4 of the Stock Purchase
--------------------
Agreement, at any time the Company proposes to offer any shares of, or
securities convertible into or exercisable for any shares of, any class
of its capital stock (the "New Securities"), the Company shall first
make an offering of such New Securities to each of Onaran, Spina and
the Investor.
3. Sale of Securities. It has been proposed that Onaran and the Company
------------------
each sell securities to the Investor pursuant to a new stock purchase
agreement dated as of May 8, 1997 (the "New Stock Purchase Agreement").
These securities, if offered by the Company, would constitute New
Securities, and would entitle Spina and Onaran to Rights of First
Offer.
4. Waiver of Right of First Offer. The undersigned Rights Holders hereby
------------------------------
irrevocably waive any and all notice due them and rights to participate
in the stock transactions pursuant to the New Stock Purchase Agreement.
Rights of First Offer under Section 6.4 of the Stock Purchase Agreement
will apply to any future transactions unless waived in writing.
IN WITNESS WHEREOF, the parties have caused this specif Waiver of a Right
of First Offer to be duly executed on the day and year first above written.
/s/ Dennis Spina
------------------------------
Dennis Spina
/s/ Erol Onaran
------------------------------
Erol Onaran
<PAGE>
Exhibit 6.7
-----------
WAIVER OF A RIGHT OF FIRST REFUSAL
THIS WAIVER OF A RIGHT OF FIRST REFUSAL, dated the 8th day of May, 1997, is
granted by Erol's Internet, Inc. (the "Company"), Erol Onaran ("Onaran") and
Gold & Appel Transfer, S.A. ("Investor").
1. Stockholders' Agreement. This specific Waiver relates to a Right of
-----------------------
First Refusal granted in Section 2 of that certain Stockholders'
Agreement, dated as of December 28, 1996 (the "Stockholders'
Agreement") by and among the Company, Onaran and the Investor.
2. Right of First Refusal. Pursuant to Section 2 of the Stockholders'
----------------------
Agreement, at any time Onaran or the Investor (collectively the
"Shareholders" and each of them a "Shareholder") proposes to dispose of
any of their stock in the Company, that Shareholder must provide the
Company with notice of their intended disposition, and the Company and
any Shareholder who is not offering his shares for sale will then have
Right of First Refusal to purchase the shares offered by the selling
Shareholder.
3. Sale of Securities. It has been proposed that Onaran and the Company
------------------
each sell securities to the Investor pursuant to a new stock purchase
agreement dated as of May 8, 1997 (the "New Stock Purchase Agreement").
These securities, if offered by Onaran would entitle the Company and
the Investor to Rights of First Refusal.
4. Waiver of Right of First Refusal. The Rights Holders hereby
--------------------------------
irrevocably waive any and all notice due them and rights to participate
in the stock transactions pursuant to the New Stock Purchase Agreement.
Rights of First Refusal under Section 2 of the Stockholders' Agreement
will apply to any future transactions unless waived in writing.
IN WITNESS WHEREOF, the parties have caused this Waiver of a Right of First
Refusal to be duly executed on the day and year first above written.
EROL'S INTERNET, INC. GOLD & APPEL TRANSFER, S.A.
By: /s/ Dennis Spina By: /s/ Walt Anderson
------------------------- ---------------------------
Dennis Spina Walt Anderson
/s/ Erol Onaran
------------------------------
Erol Onaran
<PAGE>
Exhibit 6.7
-----------
WAIVER OF A BREACH OF A COVENANT TO DELIVER FINANCIAL STATEMENTS
THIS WAIVER OF A BREACH OF A COVENANT TO DELIVER FINANCIAL STATEMENTS, dated the
8th day of May, 1997, is granted by Gold & Appel Transfer, S.A. (the
"Investor").
1. Stock Purchase Agreement. This specific Waiver of a Breach of a
------------------------
Covenant to Deliver Financial Statements is granted in connection with
that certain Stock Purchase Agreement, dated as of December 28, 1996
(the "Stock Purchase Agreement"), by and among Erol's Internet, Inc.
(the "Company"), the Investor, Dennis Spina and Erol Onaran.
2. Covenant to Deliver Financial Statements. Pursuant to Section 6.1 of
----------------------------------------
the Stock Purchase Agreement, the Company covenanted and agreed to
deliver certain financial statements at certain intervals to the
Investor. The Company has or may have breached this covenant by failing
to deliver financial statements in either the proper form or at the
proper times as prescribed by the Stock Purchase Agreement.
3. Waiver of Breach of Covenant to Deliver Financial Statements. The
------------------------------------------------------------
Investor hereby irrevocably waives any and all notice due it and rights
and remedies against the Company for any damages caused by any Breach
of the Covenant to Deliver Financial Statements by the Company
committed up to and including the date first above written.
IN WITNESS WHEREOF, the party named below has caused this Waiver of a Breach of
Covenant to Deliver Financial Statements to be duly executed on the day and
year first above written.
GOLD & APPEL TRANSFER, S.A.
By: /s/ Walt Anderson
---------------------------
Walt Anderson
<PAGE>
Exhibit 6.7
-----------
WAIVER OF A CO-SALE RIGHT
THIS WAIVER OF A CO-SALE RIGHT, dated the 8th day of May, 1997, is granted
by Dennis Spina ("Spina"), Gold & Appel Transfer, S.A. (the "Investor") and Erol
Onaran ("Onaran") (Spina and Onaran collectively referred to as the "Rights
Holders").
1. Stock Purchase Agreement. This specific Waiver relates to a Co-Sale
------------------------
Right granted in Section 7 of that certain Stock Purchase Agreement,
dated as of December 28, 1996 (the "Stock Purchase Agreement"), by and
among Erol's Internet, Inc. (the "Company"), the Investor, Spina and
Onaran.
2. Co-Sale Rights. Pursuant to Section 7 of the Stock Purchase Agreement,
--------------
any time Onaran, Spina or the Investor proposes to offer any shares of
their capital stock for sale, the selling party shall so notify Spina,
Onaran, and the Investor (collectively the "Rightsholders"), as
appropriate, and shall give the Rightsholders the opportunity to sell a
prescribed portion of their shares along with those sold by the selling
party.
3. Sale of Securities. It has been proposed that Onaran and the Company
------------------
each sell securities to the Investor pursuant to a new stock purchase
agreement dated as of May 8, 1997 (the "New Stock Purchase Agreement").
These securities, if offered by Onaran, would entitle Spina and the
Investor to Co-Sale Rights.
4. Waiver of Co-Sale Rights. The Rights Holders hereby irrevocably waive
------------------------
any and all notice due them and rights to participate in the stock
transactions contemplated pursuant to the New Stock Purchase Agreement.
Rights of Co-Sale under Section 7 of the Stock Purchase Agreement will
apply to any future transactions unless waived in writing.
IN WITNESS WHEREOF, the parties have caused this Waiver of Co-Sale Rights
to be duly executed on the day and year first above written.
GOLD & APPEL TRANSFER, S.A.
By: /s/ Walt Anderson
------------------------------
Walt Anderson
/s/ Dennis Spina
---------------------------------
Dennis Spina
/s/ Erol Onaran
---------------------------------
Erol Onaran
<PAGE>
Exhibit 10.8
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement, executed as of the 15th day of September,
1997 (this "Agreement") is by and among Erol's Internet, Inc. a Delaware
corporation (the "Company"), Erol Onaran (the "Seller") and Gold & Appel
Transfer, S.A., a British Virgin Islands corporation (the "Buyer").
WHEREAS, the Company previously sold 3,100,000 shares of Common Stock to
Buyer pursuant to that certain Stock Purchase Agreement made as of December 28,
1996 (amended on or about January 17, 1997) and various Exhibits thereto
including a Stockholders Agreement and Registration Rights Agreement by and
among the Company, the Seller, the Buyer and Dennis Spina (the "Prior
Agreements");
WHEREAS, the Company previously sold 310,000 shares of Common Stock to
Buyer pursuant to that certain Stock Purchase Agreement made as of May 9, 1997,
and various Exhibits thereto, and Seller previously sold 310,000 shares of
Common Stock to Buyer pursuant to that certain Stock purchase agreement made as
of May 9, 1997, and various exhibits thereto;
WHEREAS, the Seller owns 9,765,000 Common Shares of the Company;
WHEREAS, the Company's Board of Directors has authorized the issuance of
270,270 additional shares of Common Stock to Buyer at a price of $1.85 per share
(the "Company Shares") for a total price of $500,000;
WHEREAS, the Seller desires to sell 270,270 shares of Common Stock directly
to Buyer for the same consideration (the "Seller Shares"; together with the
Company Shares herein called the "Shares") for a total price of $500,000; and
WHEREAS, this Agreement contemplates a transaction in which the Buyer will
purchase from the Seller and the Company, and the Company and the Seller will
sell to the Buyer, the aforesaid Shares of the Company on the terms and
conditions contained in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants, representations
and agreements herein contained, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto, intending to be legally bound, covenant and
agree as follows:
1. (a) Purchase and Sale of the Company Shares. On and subject to the
---------------------------------------
terms and conditions of this Agreement, the Buyer agrees to purchase from the
Company, and the Company agrees to sell to the Buyer, 270,270 Common Shares of
the Company, $.001 par value per share, for the consideration specified below in
Section 2 of this Agreement.
(b) Purchase and Sale of the Seller's Shares. On and subject to the
----------------------------------------
terms and conditions of this Agreement, the Buyer agrees to purchase from the
Seller, and the Seller agrees to sell to the Buyer, 270,270 Common Shares of the
Company, $.001 par value, for the consideration specified below in Section 2 of
this Agreement.
<PAGE>
2. Purchase Price. The purchase price has been negotiated by and among
--------------
the Company, the Seller and the Buyer based upon a pre-money valuation of the
Company of $29,300,000 as shown in Schedule 2. The purchase price for the
Company Shares and the Seller's Shares shall total One Million Dollars
($1,000,000) in the aggregate. Five Hundred Thousand Dollars ($500,000) shall
be paid each to the Company and the Seller by separate wire transfer, cashiers
check or by other immediately available funds at the Closing.
3. Closing. The purchase and sale of all of the Company Shares shall be
-------
consummated at a closing (the "Closing") to be held at the offices of the
Company at 9:00 a.m. on September 15, 1997, or at such other time and location
as the parties may agree (the "Closing Date"). At Closing, the Buyer shall make
payment of the Purchase Price, as described in Section 2 hereof, and the Company
and the Seller shall each deliver to the Buyer (i) the original stock
certificates representing the Company Shares and the Seller Shares, properly
endorsed for transfer to the Buyer, free and clear of all liens, encumbrances,
claims, rights of third parties and other restrictions and (ii) such other
agreements and documents as may be required by Section 6 hereof. After Closing,
at the Buyer's request, the Company and the Seller shall take all such other
actions and execute all such other documents as the Buyer may reasonably require
to evidence or perfect the sale or transfer of the Shares and the satisfaction
of all other conditions to the purchase of the Shares.
4. Representations and Warranties of the Company and the Seller. The
------------------------------------------------------------
Company and the Seller, jointly and severally, hereby represent and warrant to
the Buyer as of the date hereof and as of the Closing, that, except as disclosed
to Buyer's representative on the Board of Directors, Walt Anderson, or as set
forth in the Disclosure Schedule (the "Disclosure Schedule") furnished the
Buyer, which is attached as Exhibit 4, specifically identifying the relevant
subparagraph hereof, which disclosures shall be deemed to be representations and
warranties as if made hereunder:
4.1 Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as presently proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on its assets, operations or financial condition or the
Company's ability to perform its obligations under this Agreement ("Material
Adverse Effect").
4.2 Capitalization and Voting Rights. The Company's authorized
--------------------------------
capital consists of:
(a) Voting Common Stock. 50,000,000 shares of Voting Common
-------------------
Stock, par value $.001 per share are authorized, of which 13,485,000 shares are
issued and outstanding. 9,765,000 of such issued and outstanding shares are
owned by the Seller. The Seller is the sole owner, beneficially and of record,
of these shares, free and clear of any liens, security interests, pledges,
options, claims or other encumbrances of any kind, except as set forth in the
2
<PAGE>
Prior Agreements, in favor of Buyer, the Company and Spina. 3,720,000 of such
issued and outstanding shares are owned by the Buyer.
(b) Non-Voting Common Stock. 10,000,000 shares of Non-Voting
-----------------------
Common Stock, par value $.001 per share, none of which are issued or
outstanding. The Voting Common Stock and the Non-Voting Common Stock are
together referred to herein as the "Common Stock."
(c) Preferred Stock. 10,000,000 shares of a single class of
---------------
preferred stock, par value $.001 per share, none of which are issued or
outstanding.
(d) The outstanding shares of Voting Common Stock are all duly
and validly authorized and issued, fully paid and nonassessable, and were issued
in accordance with the registration or qualification provisions of the
Securities Act of 1933, as amended (the "Act") and any relevant state securities
laws or pursuant to valid exemptions therefrom.
(e) Except as set forth in Section 4.2(e) of the Disclosure
Schedule, there are not outstanding any options, warrants, rights (including
conversion or preemptive rights) or agreements for the purchase or acquisition
from the Company of any of its capital stock. The Company has reserved 1,550,000
shares of its Voting Common Stock for purchase upon exercise of options to be
granted in the future under the Company's 1996 Stock Plan (the "Plan") of which
1,435,000 have been granted, and 775,000 additional options have been issued
outside the Plan. The Company is not a party or subject to any agreement or
understanding, and, to the best knowledge of the Company and the Seller, there
is no agreement or understanding between any persons and/or entities, which
affects or relates to the voting or giving of written consents with respect to
any security or by a director of the Company.
4.3 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and the Seller necessary for the authorization,
execution and delivery of this Agreement and all other agreements and waivers
required to be executed by the Company or the Seller on or before the Closing
pursuant to Sections 6.4 through 6.6 (the "Related Documents") and waivers, the
performance of all obligations of the Company hereunder and thereunder, and the
authorization, issuance, sale and delivery of the Shares has been taken or will
be taken prior to the Closing, and this Agreement and the Related Documents
constitute valid and legally binding obligations of the Company and the Seller,
enforceable in accordance with their respective terms.
4.4 Valid Issuance of Shares. The Shares, when issued, sold and
------------------------
delivered in accordance with the terms of this Agreement for the consideration
expressed herein, will be duly and validly issued, fully paid, and
nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and under applicable state and
federal securities laws.
4.5 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local
3
<PAGE>
governmental authority on the part of the Company is required in connection with
the consummation of the transactions contemplated by this Agreement.
4.6 Offering. Subject in part to the truth and accuracy of the
--------
Buyer's representations set forth in Section 5, the offer, sale and issuance of
the Shares as contemplated by this Agreement are exempt from the registration
requirements of the Act, and neither the Seller, the Company nor any authorized
agent acting on its behalf will take any action hereafter that would cause the
loss of such exemption.
4.7 Compliance with Other Instruments. The Company is not in
---------------------------------
violation or default in any material respect of any provision of its Certificate
of Incorporation or Bylaws (collectively "Charter Documents"), or in any
material respect of any instrument, judgment, order, writ, decree or contract to
which it is a party or by which it is bound, or of any provision of any federal
or state statute, rule or regulation applicable to the Company. The execution,
delivery and performance of this Agreement and the Related Documents, and the
consummation of the Transactions will not result in any such violation or be in
conflict with or constitute, with or without the passage of time and giving of
notice, either a default under any such provision, instrument, judgment, order,
writ, decree or contract or an event that results in the creation of any lien,
charge or encumbrance upon any assets or the Company or the suspension,
revocation, impairment, forfeiture or nonrenewal of any material permit,
license, authorization or approval applicable to the Company, its business or
operations or any of its assets or properties.
4.8 Draft Audited Financial Statements. The Company has delivered to
----------------------------------
the Buyer draft audited financial statements for the Company as of and for the
twelve-month period ended December 31, 1996 (the "Financial Statements") and
attached hereto as Schedule 4.8. The Company has also delivered to the Buyer
monthly "Executive Summaries" containing selected financial information
regarding the Company's results for the each of the months January 1997 through
July 1997. While not yet final, the Company believes that the Financial
Statements have been prepared in accordance with the procedures described in the
accompanying notes, as applied on a materially consistent basis as of the date
and for the period indicated therein. The Financial Statements are materially
correct and accurate as determined in accordance with the procedures set forth
in the notes attached thereto and present fairly the results of operations and
the financial condition of the Company for such periods. As to the data provided
therein, the Executive Summaries are materially correct and accurate and
consistent with the books and records of the Company. Except as set forth in the
Financial Statements and the Executive Summaries, the Company has no material
liabilities, contingent or otherwise, other than (i) liabilities incurred in the
ordinary course of business subsequent to December 31, 1996, (ii) obligations
under contracts and commitments incurred in the ordinary course of business and
not reflected in the Financial Statements as prepared in accordance with the
procedures described in the accompanying notes, which, in both cases,
individually or in the aggregate, are not material to the financial condition or
operating results of the Company. Except as disclosed in the Financial
Statements or the Executive Summaries, the Company is not a guarantor or
indemnitor of any indebtedness of any other person, form or corporation.
4
<PAGE>
4.9 Changes. Except as disclosed at the Board Meetings of the
-------
Company, the Financial Statements, or in Section 4.9 of the Disclosure Schedule,
since December 31, 1996 there has not been:
(a) any change in the assets, liabilities, financial condition
or operating results of the Company from that reflected in the Financial
Statements or the Executive Summaries, except changes in the ordinary course of
business that do not, in the aggregate, constitute a Material Adverse Effect;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results, prospects or business of the Company (as such
business is currently conducted and as it is proposed to be conducted);
(c) any waiver by the Company of a valuable right or of a
material debt owned to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and that is not material to the assets, properties, financial
condition, operating results or business of the Company (as such business is
currently conducted and as it is proposed to be conducted);
(e) any material change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject;
(f) any material change in any compensation arrangement or
agreement with any executive officer;
(g) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any
executive officer of the Company; and the Company, to the best of its knowledge,
does not know of the impending resignation or termination of employment of any
such officer;
(i) receipt of notice that there has been a loss of, or material
order cancellation by, any major customer of the Company;
(j) any mortgage, pledge, transfer of a security interest in, or
lien, created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(k) any loans or guarantees made by the Company to or for the
benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
5
<PAGE>
(l) any declaration, setting aside or payment or other
distribution in respect of any of the Company's capital stock, or any direct or
indirect redemption, purchase or other acquisition of any of such stock by the
Company;
(m) the written notice of claim, or threatened litigation,
against the Company or any other event or condition of any character that might
constitute a Material Adverse Effect; or
(n) any agreement or commitment by the Company to do any of the
things described in this Section 4.9.
4.10 Disclosure. The Company has fully provided the Buyer with all
----------
the information that the Buyer has requested for deciding whether to purchase
the Shares.
5. Representations and Warranties of the Buyer. The Buyer hereby
-------------------------------------------
represents and warrants to the Company and the Seller that:
5.1 Authorization. The Buyer has full power and authority to enter
-------------
into this Agreement and, to the extent applicable, the Related Documents and
such agreements constitute its valid and legally binding obligations,
enforceable in accordance with its terms.
5.2 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
the Buyer in reliance upon the Buyer's representation to the Company, which by
the Buyer's execution of this Agreement the Buyer hereby confirms, that the
Shares will be acquired for investment for the Buyer's own account, not as a
nominee or agent, and not with a view to the resale or distribution of any part
thereof, and that the Buyer has no current intention of selling, granting any
participation in, or otherwise distributing the same. The Buyer does not have
any contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person, with
respect to the Shares.
5.3 Disclosure of Information. The Buyer believes it has received
-------------------------
all the information it considers necessary or appropriate for deciding whether
to purchase the Shares. The Buyer further represents that its member of the
Company's Board of Directors has attended all meetings of the Board, had regular
discussions with the Company's Executive Officers and that, in addition, it has
had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Shares and the
business, properties, prospects and financial condition of the Company. The
foregoing, however, does not limit or modify the representations and warranties
of the Company and the Seller in Section 4 or the right of the Buyer to rely
thereon.
5.4 Investment Experience. The Buyer acknowledges that it is able to
---------------------
fend for itself, can bear the economic risk of its investment, and has knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment
6
<PAGE>
in the Shares. The Buyer also represents it has not been organized for the
purpose of acquiring the Shares.
5.5 Accredited Buyer. The Buyer is an "accredited investor" within
----------------
the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation
D, as currently in effect under the Securities Act of 1933, as amended (the
"Securities Act").
5.6 Restricted Securities. The Buyer understands that the Shares are
---------------------
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act,
only in certain limited circumstances. In this connection, the Buyer represents
that it is familiar with Rule 144 promulgated under the Securities Act, as
currently in effect, and understands the resale limitation imposed thereby and
by the Securities Act.
5.7 Legends. It is understood that the certificate evidencing the
-------
Shares may bear one or all of the following legends:
"The transfer of the stock represented by this certificate is
restricted under, and subject to the terms of, a Stockholders'
Agreement dated December 28, 1996, to which the Company is a party and
a copy of which is on file at the Company's office.
The shares of stock represented by this Certificate are also subject
to and may be transferred only in compliance with a right of co-sale
made by and among the holder hereof, the Company issuing this
certificate and the other stockholders to whom such right has been
granted.
These securities have not been registered under the Securities Act of
1933, as amended. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with
respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or
unless sold pursuant to Rule 144 of such Act."
5.8 Compliance With Laws. Buyer has made all filings and obtained
--------------------
all corporate approvals as may be required by the laws of the British Virgin
Islands with respect to the consummation of the transactions contemplated by
this Agreement.
5.9 Involvement in Certain Legal Proceedings. Buyer, its
----------------------------------------
shareholders (and to the best knowledge of Buyer, the natural person
shareholders of its shareholders) have not during the past five (5) years been
involved in the events listed in paragraphs (f)(1) through (f)(6) of Item 401,
Regulation S-K promulgated by the Securities and Exchange Commission.
7
<PAGE>
6. Conditions to Obligations of the Parties to Close. The obligations of
-------------------------------------------------
the Parties to consummate the transactions contemplated by this Agreement and to
perform their respective obligations hereunder shall be subject to the
fulfillment of the following conditions prior to Closing:
6.1 Company and Seller Representations and Warranties True as of
------------------------------------------------------------
Closing. The representations and warranties of the Company and Seller contained
- -------
in this Agreement shall be true and correct at Closing with the same force and
effect as if such representations and warranties had been made on and as of the
date of Closing and the Company and Seller shall have performed all covenants
and obligations of the Seller required to be performed prior to or at Closing.
6.2 Buyer Representations and Warranties True and Correct. The
-----------------------------------------------------
representations and warranties of the Buyer contained in this Agreement shall be
true and correct as of Closing with the same force and effect as if such
representations and warranties had been made on and as of the Closing Date.
6.3 All Agreements and Conditions Performed. The Seller shall have
---------------------------------------
complied with and duly performed all of the other agreements and conditions
required on their part to be performed pursuant to this Agreement on or before
Closing.
6.4 Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the Buyer, and it shall have received all such counterpart original
and certified or other copies of such documents as it may reasonably request.
6.5 Amendment to Registration Rights Agreement. Each of the parties
------------------------------------------
to the Registration Rights Agreement (part of the Prior Agreements) shall have
executed the form of Amendment No. 2 thereto attached as Exhibit 6.5 to this
Agreement.
6.6 Waivers of Rights. Each of the Company, the Seller, the Buyer
-----------------
and Dennis Spina shall have executed the waiver letters attached hereto as
Exhibit 6.6 to this Agreement.
6.7 Payment of Purchase Price. The Buyer shall have delivered the
-------------------------
purchase price to the Company and the purchase price to the Seller as specified
in Section 2.
6.8 Inspection and Due Diligence. The Company shall have allowed the
----------------------------
Buyer and its representatives, at Buyer's expense, to visit and inspect the
Company's properties, to examine its books of account and records and to discuss
the Company's affairs, finances and accounts with its officers, all at such
reasonable times as may be requested by Buyer. The results of the Buyer's
ongoing due diligence investigation shall be satisfactory to Buyer in its sole
discretion.
8
<PAGE>
7. Miscellaneous.
-------------
7.1 Survival of Warranties. The warranties, representations and
----------------------
covenants of the Company, the Seller and the Buyer contained in or made pursuant
to this Agreement shall survive the execution and delivery of this Agreement and
the Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Buyer or the Company.
7.2 Successors and Assigns. Except as otherwise provided herein, the
----------------------
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Shares). Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
7.3 Governing Law. This agreement shall be governed by and construed
-------------
under the laws of the State of Delaware as applied to agreements among Delaware
residents entered into and to be performed entirely within Delaware. Each party
irrevocably consents and agrees to the exclusive jurisdiction of the Circuit
Court for Fairfax County or the United States District Court for the Eastern
District of Virginia and to service of process for it or him and on its or his
behalf by certified mail, for resolution of all matters involving this Agreement
or the transactions contemplated hereby.
7.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
7.6 Notices. All notices, requests, consents and other
-------
communications hereunder shall be in writing and shall be deemed given if
delivered personally (including by courier or nationally recognized overnight
courier which tracks receipts and deliveries), telecopied (which is confirmed)
or mailed by registered or certified mail (return receipt requested) to the
parties at the following addresses or to such other addresses as may be
furnished in writing by one party to the others:
(a) if to the Company, Spina or the Seller:
Erol's Internet, Inc.
7921 Woodruff Court
Springfield, Virginia 22151
Attention: Dennis Spina
Telecopy: 703/321-9400
9
<PAGE>
(b) if to the Buyer:
Gold & Appel Transfer S.A.
c/o Esprit Telecom
2000 L Street, N.W., Suite 200
Washington, D.C. 20036
Attention: Mr. Walt Anderson
Telecopy: 202/736-5065
Any such notice or communication shall be presumed to have been received (i) in
the case of personal delivery or facsimile transmission, on the date of such
delivery, (ii) in the case of nationally recognized overnight courier, on the
next business day after the date sent and (iii) in the case of mailing, on the
third business day following the date of deposit in the United States mail.
7.7 Finder's Fee. Other than the fee payable by the Company to
------------
Ferris Baker Watts in the amount of $50,000, each party represents that it
neither is nor will be obligated for any finders' fee or commission in
connection with this transaction. The Buyer agrees to indemnify and to hold
harmless the Company and the Seller from any liability for any commission or
compensation in the nature of a finders' fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Buyer or
any of its officers, partners, employees, or representatives is responsible.
The Company and the Seller agree jointly and severally to indemnify and
hold harmless the Buyer from any liability for any commission or compensation in
the nature of a finders' fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or any of its
officers, employees or representatives or the Seller is responsible.
7.8 Expenses. Irrespective of whether the Closing is effected, each
--------
party shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement or any Exhibit hereto, the prevailing party shall be entitled to
reasonable attorney's fees, costs and necessary disbursements in addition to any
other relief to which such party may be entitled.
7.9 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company, the Seller and the
Buyer. Any amendment or waiver effected in accordance with this paragraph shall
be binding upon each holder of any shares purchased under this Agreement at the
time outstanding, each future holder of all such shares, and the Company.
7.10 Severability. If one or more provisions of the Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of this Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
10
<PAGE>
7.11 Entire Agreement. This Agreement and the documents referred to
----------------
herein constitute the entire agreement among the parties with respect to the
sales of the Shares hereunder and no party shall be liable or bound to any other
party in any manner by any warranties, representations, or covenants except as
specifically set forth herein or therein. Except as the Prior Agreements may be
amended or provisions waived in writing as provided in this Agreement, such
Prior Agreements remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EROL'S INTERNET, INC. (the "Company")
By: /s/ Dennis Spina
--------------------------------
Dennis Spina, President
GOLD & APPEL TRANSFER, S.A. (the "Buyer")
By: /s/ Walt Anderson
--------------------------------
Walt Anderson, Attorney-in-Fact
The "SELLER"
/s/ Erol Onaran
-------------------------------------
Erol Onaran
11
<PAGE>
Exhibit 4
---------
Disclosure Statement
Section 4.2(e): None
Section 4.9: None
<PAGE>
Exhibit 6.5
-----------
Second Amendment to Registration Rights Agreement
See Exhibit 10.6
<PAGE>
Exhibit 6.6
-----------
WAIVER OF A RIGHT OF FIRST REFUSAL
THIS WAIVER OF A RIGHT OF FIRST REFUSAL, dated the 15th day of September,
1997, is granted by Erol's Internet, Inc. (the "Company"), Erol Onaran
("Onaran") and Gold & Appel Transfer, S.A. ("Investor").
1. Stockholders' Agreement. This specific Waiver relates to a Right of
-----------------------
First Refusal granted in Section 2 of that certain Stockholders'
Agreement, dated as of December 28, 1996 (the "Stockholders'
Agreement") by and among the Company, Onaran and the Investor.
2. Right of First Refusal. Pursuant to Section 2 of the Stockholders'
----------------------
Agreement, at any time Onaran or the Investor (collectively the
"Shareholders" and each of them a "Shareholder") proposes to dispose of
any of their stock in the Company, that Shareholder must provide the
Company with notice of their intended disposition, and the Company and
any Shareholder who is not offering his shares for sale will then have
Right of First Refusal to purchase the shares offered by the selling
Shareholder.
3. Sale of Securities. It has been proposed that Onaran and the Company
------------------
each sell securities to the Investor pursuant to a new stock purchase
agreement dated as of September 15, 1997 (the "Third Stock Purchase
Agreement"). These securities, if offered by Onaran would entitle the
Company and the Investor to Rights of First Refusal.
4. Waiver of Right of First Refusal. The Rights Holders hereby
--------------------------------
irrevocably waive any and all notice due them and rights to participate
in the stock transactions pursuant to the Third Stock Purchase
Agreement. Rights of First Refusal under Section 2 of the Stockholders'
Agreement will apply to any future transactions unless waived in
writing.
IN WITNESS WHEREOF, the parties have caused this Waiver of a Right of First
Refusal to be duly executed on the day and year first above written.
EROL'S INTERNET, INC. GOLD & APPEL TRANSFER, S.A.
By: /s/ Dennis Spina By: /s/ Walt Anderson
------------------------------ --------------------------------
Dennis Spina Walt Anderson, Attorney-in-Fact
/s/ Erol Onaran
-----------------------------------
Erol Onaran
<PAGE>
Exhibit 6.6
-----------
WAIVER OF A RIGHT OF FIRST OFFER
THIS WAIVER OF A RIGHT OF FIRST OFFER, dated the 15th day of September,
1997, is granted by Dennis Spina ("Spina"), and Erol Onaran ("Onaran") (Spina
and Onaran collectively referred to as the "Rights Holders").
1. Stock Purchase Agreement. This specific Waiver relates to a Right of
------------------------
First Offer granted in Section 6.4 of that certain Stock Purchase
Agreement, dated as of December 28, 1996 (the "Stock Purchase
Agreement"), by and among Erol's Internet, Inc. (the "Company"), Gold &
Appel Transfer, S.A. (the "Investor"), Spina and Onaran.
2. Right of First Offer. Pursuant to Section 6.4 of the Stock Purchase
--------------------
Agreement, at any time the Company proposes to offer any shares of, or
securities convertible into or exercisable for any shares of, any class
of its capital stock (the "New Securities"), the Company shall first
make an offering of such New Securities to each of Onaran, Spina and
the Investor.
3. Sale of Securities. It has been proposed that Onaran and the Company
------------------
each sell securities to the Investor pursuant to a new stock purchase
agreement dated as of September 15, 1997 (the "Third Stock Purchase
Agreement"). These securities, if offered by the Company, would
constitute New Securities, and would entitle Spina and Onaran to Rights
of First Offer.
4. Waiver of Right of First Offer. The undersigned Rights Holders hereby
------------------------------
irrevocably waive any and all notice due them and rights to participate
in the stock transactions pursuant to the Third Stock Purchase
Agreement. Rights of First Offer under Section 6.4 of the Stock
Purchase Agreement will apply to any future transactions unless waived
in writing.
IN WITNESS WHEREOF, the parties have caused this specific Waiver of a Right
of First Offer to be duly executed on the day and year first above written.
/s/ Dennis Spina
-------------------------------------
Dennis Spina
/s/ Erol Onaran
-------------------------------------
Erol Onaran
<PAGE>
Exhibit 6.6
-----------
WAIVER OF A CO-SALE RIGHT
THIS WAIVER OF A CO-SALE RIGHT, dated the 15th day of September, 1997, is
granted by Dennis Spina ("Spina"), Gold & Appel Transfer, S.A. (the "Investor")
and Erol Onaran ("Onaran") (Spina , the Investor and Onaran collectively
referred to as the "Rights Holders").
1. Stock Purchase Agreement. This specific Waiver relates to a Co-Sale
------------------------
Right granted in Section 7 of that certain Stock Purchase Agreement,
dated as of December 28, 1996 (the "Stock Purchase Agreement"), by and
among Erol's Internet, Inc. (the "Company"), the Investor, Spina and
Onaran.
2. Co-Sale Rights. Pursuant to Section 7 of the Stock Purchase Agreement,
--------------
any time Onaran, Spina or the Investor proposes to offer any shares of
their capital stock for sale, the selling party shall so notify Spina,
Onaran, and the Investor (collectively the "Rights Holders"), as
appropriate, and shall give the Rights Holders the opportunity to sell
a prescribed portion of their shares along with those sold by the
selling party.
3. Sale of Securities. It has been proposed that Onaran and the Company
------------------
each sell securities to the Investor pursuant to a new stock purchase
agreement dated as of September 15, 1997 (the "Third Stock Purchase
Agreement"). These securities, if offered by Onaran, would entitle
Spina and the Investor to Co-Sale Rights.
4. Waiver of Co-Sale Rights. The Rights Holders hereby irrevocably waive
------------------------
any and all notice due them and rights to participate in the stock
transactions contemplated pursuant to the Third Stock Purchase
Agreement. Rights of Co-Sale under Section 7 of the Stock Purchase
Agreement will apply to any future transactions unless waived in
writing.
IN WITNESS WHEREOF, the parties have caused this Waiver of Co-Sale Rights
to be duly executed on the day and year first above written.
GOLD & APPEL TRANSFER, S.A.
By: /s/ Walt Anderson
-----------------------------------
Walt Anderson, Attorney-in-Fact
/s/ Dennis Spina
--------------------------------------
Dennis Spina
/s/ Erol Onaran
--------------------------------------
Erol Onaran
<PAGE>
Exhibit 10.9
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT, dated as of August 12, 1996, is between OEO,
INC., a Virginia corporation (the "Company"), and DENNIS J. SPINA (the
-------
"Executive"). In consideration of the mutual covenants and representations
- ----------
herein contained and the mutual benefits derived herefrom, the parties,
intending to be legally bound, covenant and agree as follows:
1. Purpose. The Company is engaged in providing internet access services
-------
and related products and services to both individuals and business entities (the
"Business"). The Company wishes to employ the Executive, and the Executive has
--------
agreed to be employed by the Company, on the terms and conditions herein
provided.
2. Full-Time Employment of Executive - Duties and Status.
-----------------------------------------------------
(a) The Company hereby engages the Executive as a full-time executive
employee to hold the office of Chief Executive Officer and President for the
period (the "Employment Period") specified in Section 4(a) hereof, and the
-----------------
Executive accepts such employment, on the terms and conditions set forth in this
Agreement. Throughout the Employment Period, the Executive shall faithfully
exercise such authority and perform such executive duties as are commensurate
with the authority and duties of Chief Executive Officer and President of the
Company and such other reasonable duties as may otherwise be assigned to him
from time to time by the Company.
(b) Throughout the Employment Period, the Executive shall (i) devote
his full time and efforts to the business of the Company and will not engage in
consulting work or any trade or business for his own account or for or on behalf
of any other person, firm or corporation which competes, conflicts or interferes
with the performance of his duties hereunder in any way, excepting that the
Executive shall be entitled, with the prior written approval of the Company, to
serve on the board of directors of no more than two (2) corporations provided
that such corporations are not engaged in and do not become engaged in any
aspect of the Business and (ii) accept such additional office or offices to
which he may be appointed by the Company, provided that the performance of the
duties of such office or offices shall generally be consistent with the scope of
the duties provided for in Section 2(a) hereof.
(c) The Executive agrees to execute the Employee Proprietary Information
and Inventions (the "Proprietary Rights Agreement"), attached hereto as Exhibit
----------------------------
A, and to comply with the provisions thereof. The Executive understand that
both entering into and complying with the terms of the Proprietary Rights
Agreement is a condition to the Executive's continued employment with the
Company and that failure to comply with the terms of the Proprietary Rights
Agreement will constitute "cause" for
<PAGE>
purposes of this Agreement. The Executive further represents and warrants that
his employment by the Company, and the performance by the Executive of his
duties hereunder, will not violate any of the terms and conditions of any
agreement with any previous employer.
3. Compensation and General Benefits. As full compensation for his
---------------------------------
services to the Company, the Executive shall, during the Employment Period, be
compensated as follows:
(a) The Company shall pay to the Executive a salary (the "Salary")
------
based upon a per annum rate of Three Hundred and Sixty Thousand Dollars
($360,000). The Salary shall be payable in periodic equal installments not less
frequently than monthly, less such sums as may be required to be deducted or
withheld under applicable provisions of federal, state and local law, plus
increases and minus decreases in the Salary, if any, as may be approved from
time to time by the Compensation Committee.
(b) Throughout the Employment Period and to the extent determined by
the Compensation Committee in its discretion to be commensurate with the
Executive's level of responsibility within the Company, the Executive shall be
entitled to participate in such pension, profit sharing, bonus or incentive
compensation, incentive, group and individual disability, group and individual
life, survivor income, sickness, accident, dental, medical and health benefits
and other plans of the Company or additional benefit programs, which may be
established by the Company for its executive officers, as and to the extent any
such benefit programs, plans and arrangements are or may from time to time be in
effect, as determined by the Company in its discretion and pursuant to the terms
hereof and as and to the extent that the Executive is eligible to participate in
such plans under the terms of such plans. Notwithstanding the above the
Executive shall be entitled to participate in any stock option plan that may be
adopted by the Company in its discretion and in which any of the Company's
executive employees participate, and the Company shall purchase a life insurance
policy on the life of the Executive, the death benefit of which shall equal two
(2) times the Executive's annual salary and shall be payable to any beneficiary
as designated by the Executive.
(c) The Company shall reimburse the Executive from time to time for all
reasonable and customary business expenses incurred by him in the performance of
his duties hereunder, provided that the Executive shall submit vouchers and
other supporting data to substantiate the amount of said expenses in accordance
with Company policy from time to time in effect.
(d) Throughout the Employment Period, the Executive shall be entitled
to four (4) weeks of annual vacation, leave of absence, and leave for illness or
temporary disability in accordance with the policies of the Company in effect
from time to time for its executive officers. Vacation leave and leave of
absence, if taken by the Executive, shall be taken at such times as are
reasonably acceptable to the Company.
2
<PAGE>
Any leave on account of illness or temporary disability which is short of Total
Disability (as defined in Section 4(d)(ii) hereof) shall not constitute a breach
by the Executive of his agreements hereunder even though leave on account of a
Total Disability may be deemed to result in a termination of the Employment
Period under the applicable provisions of this Agreement.
(e) If the Company purchases and maintains at any time during the term
of this Agreement one or more life insurance policies on the life of the
Executive, in addition to any policies purchased pursuant to Section 3(b)
hereof, in whatever amount or amounts which the Company deems desirable, the
Company shall be the beneficiary of such policy or policies and the Executive
shall cooperate with the Company and submit to such reasonable medical
examinations as are necessary to enable the Company to purchase and maintain in
full force and effect such additional insurance policy or policies.
(f) The Company and the Executive have entered into an Option Agreement
dated the date hereof (the "Option Agreement") attached hereto as Exhibit B,
----------------
pursuant to which the Executive is entitled to purchase the aggregate of Seven
Hundred and Seventy-Five Thousand (775,000) shares of Common Stock of the
Company vesting over a period of three years, subject to certain other terms,
conditions and provisions, all as more particularly set forth in the Option
Agreement. The Executive hereby agrees that immediately upon the acquisition of
any shares of Common Stock of the Company, the Executive shall enter into a
shareholder's agreement substantially in the form attached hereto as Exhibit C.
4. Employment Period.
-----------------
(a) Duration. The Employment Period shall commence on the date of this
--------
Agreement and shall continue until the earlier of (i) the close of business on
the day immediately preceding the three (3) year anniversary of this Agreement,
or the anniversary date of any extension of this Agreement as provided in
Section 4(b) hereof, whichever later occurs (the "Expiration Date"), or (ii)
---------------
termination of this Agreement by the Company with "cause" (as defined in Section
4(d)(i) hereof), or (iii) termination of this Agreement by the Company for any
reason other than cause, or (iv) the Executive's resignation for "good reason"
(as defined in Section 4(d)(iii), or (v) the Executive's resignation without
"good reason", or (vi) the death or Total Disability of the Executive.
(b) Extension of Employment Period. On the three (3) year anniversary
------------------------------
of the date of this Agreement, and on each one (1) year anniversary thereafter,
the Employment Period shall be extended for an additional year, at the rate of
compensation then in effect as determined pursuant to the provisions of Section
3(a), unless the Company or the Executive notifies the other in writing at least
ninety (90) days prior to such anniversary of its or his election not to renew
this Agreement.
(c) Payments Upon Termination.
-------------------------
3
<PAGE>
(i) Except as otherwise provided herein, if the Executive's
employment is terminated by the Company for any reason other than "cause" (as
defined in Section 4(d)(i) hereof), or by the Executive for "good reason" (as
defined in Section 4(d)(iii) hereof), at any time during the Employment Period
or any extension thereof, the Company shall pay to, or provide for, as the case
may be, the Executive, for the remainder of the Employment Period, at the times
otherwise provided in this Agreement as if the Executive had not been
terminated:
(A) his Salary as accrued through the date of termination and
the remainder of the Employment Period, which Salary shall be payable in equal
semi-annual installments during such period in accordance with existing payroll
policies; and
(B) to the extent applicable, the sickness and health
insurance programs to which he would have been entitled under this Agreement if
he had remained in the employ of the Company for such period.
(ii) If the Executive's employment is terminated (A) by the
Company for "cause", or (B) by the Executive by resignation without "good
reason", or (C) upon the death or due to the "total disability" (as defined in
Section 4(d)(ii) hereof) of the Executive, then the Company shall have no
further liability to the Executive, except (1) for the Salary which has accrued
through the date of termination, which amounts shall be paid by the Company
within thirty (30) days of such termination; (2) if the Executive's employment
with the Company is terminated due to the Executive's death, then, as
compensation for the Executive's services, the Executive's estate shall receive
an amount equal to one half (1/2) of the annual Salary in effect, such amount
being payable in six (6) equal monthly installments commencing on the last day
of the month that includes the date of the Executive's death, and (3) for such
other benefits as may be required to be provided by the Company under the
provisions of applicable law.
(iii) If the Executive's employment with the Company is
terminated by the Company without cause within one (1) year of a Change in
Control (as defined below) or the Executive resigns with good reason within one
(1) year of a Change in Control, then the Company shall pay to the Executive, in
lieu of any amounts otherwise payable to the Executive by the Company pursuant
to the provisions of Sections 4(c)(i)(A) and 4(c)(ii), as the case may be, the
sum of One Million Eighty Thousand Dollars ($1,080,000), which amount shall be
paid ratably by the Company in three equal annual installments beginning on the
date thirty (30) days after such Change in Control is consummated (or date of
resignation, if applicable) and on each one (1) year anniversary of such date
thereafter.
(iv) Notwithstanding any other provision of this Section 4(c), if
the Executive violates any covenant, term or condition of this Agreement or the
Proprietary Rights Agreement, the Company shall be entitled, in addition to any
other
4
<PAGE>
remedies it may have hereunder or at law or in equity, to offset the amount of
any payment otherwise due to the Executive pursuant to this Section 4(c) against
any loss or damage incurred by the Company as a result of the Executive's
violation of said covenant, term or condition.
(v) Any and all payments or provisions for the payment of salary,
benefits, perquisites and rights to Executive described in this Section 4(c)
shall, notwithstanding any other provisions of this Agreement be construed in
accordance with the applicable provisions of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), as such Section may from time to
----
time be amended and interpreted by regulation or judicial decision, in such
manner as is possible to preclude the application under such Section of any
disallowance, forfeiture, penalty, assessment or loss of tax benefit ("Tax
---
Loss") to either the Executive or the Company.
- ----
(A) The Executive and the Company agree that, should
the whole or any part or portion of the Executive's Salary, benefits,
perquisites and rights upon termination under Section 4(c) (the "Gross
-----
Benefits") be determined or construed to be excessive under Code Section 280G so
- --------
as to prompt any Tax Loss to the Executive (the Gross Benefits less the
Executive's Tax Loss shall be referred to as the "Net Benefits"), then, to the
------------
extent it is possible to increase the amount of the Net Benefits by reducing the
Gross Benefits because a reduction in Gross Benefits reduces the amount of the
Executive's Tax Loss, then the Gross Benefits shall be reduced in such amount
that maximizes the Net Benefits. To the extent that the Gross Benefits are
reduced in accordance with this Section 4(c)(v)(A), the Executive's rights and
benefits will be reduced in the following order of priority, or in such other
order as determined by Executive:
(i) incentive bonus payments, if any;
(ii) welfare benefit plan payments;
(iii) stock option purchase payments under any
qualified stock option plan;
(iv) retirement benefits;
(v) Incentive compensation payments; and
(vi) base salary payments.
(B) If the parties within sixty (60) days cannot agree
as to whether a payment to the Executive is excessive under the Code, then, in
5
<PAGE>
order to facilitate this Agreement, the following procedures shall be followed
to determine whether a payment results in a Tax Loss to the Executive under
Section 280G:
(i) Immediately upon termination after a Change in
Control and pursuant to written notice by the Executive or the Company, the
Company's independent auditors shall choose Tax Counsel who is acceptable to the
Executive. Tax Counsel shall be a person unaffiliated with both the Executive
and the Company and who is either a certified public accountant who is a member
of a "Big 6" accounting firm, or any attorney at law who is a member of a major
law firm, and who is experienced in matters concerning Section 280G. Tax
Counsel's fees and other costs shall be paid by the Company.
(ii) All or part of a payment or benefit due under
this Agreement shall be treated as resulting in a Tax Loss to the Executive
under Section 280G if, in the written opinion of Tax Counsel, it is more likely
than not that such payment or benefit will result in a Tax Loss to the Executive
under Section 280G. In making this determination, Tax Counsel shall take into
account all relevant facts and circumstances and may take into account such
authorities as he deems relevant (and shall not be limited to those items that
constitute "substantial authority" under Code Section 6661).
(iii) All opinions of Tax Counsel shall be binding
upon the Company and the Executive and, to the extent possible, shall be
provided within 60 days of the Executive's termination of employment.
(iv) Immediately after Tax Counsel provides his
opinion and after any waiver by the Executive pursuant to paragraph (B) of this
section, the Company shall pay or provide benefits to the Executive required by
this Agreement.
(d) Definitions. When used in this Agreement, the words "cause",
-----------
"Total Disability" and "good reason" shall have the respective meanings set
forth below:
(i) The term "cause" means: (A) the Executive's failure to
perform his employment duties hereunder after reasonable notice to the Executive
by the Board specifying such failure and providing the Executive with a
reasonable opportunity to cure such failure given the context of the
circumstances, as determined by the Board in the exercise of its reasonable
discretion, (B) the Executive's breach of the covenants or agreements contained
in this Agreement, the Proprietary Rights Agreement, or of any other material
agreement or undertaking of the Executive, (C) the Executive's commission of a
felony or any crime involving moral turpitude, fraud or misrepresentation,
whether or not related to the business or property of the Company, (D) any act
of the Executive against the Company intended to enrich the Executive in
derogation of his duties to the Company, or (E) any willful or purposeful act or
omission
6
<PAGE>
(or any act or omission taken in bad faith) of the Executive having the effect
of injuring the business or business relationships of the Company.
(ii) To the extent permitted by applicable law, the term "Total
Disability" means total disability as defined in the Company's group and
individual disability plans, if any. If the Company does not have in existence
such plans, then Total Disability shall mean:
(y) The inability to perform the duties required hereunder for a
continuous period of six (6) months during the Employment Period due to "mental
incompetence" or "physical disability" as hereinafter defined. The Executive
shall be considered to be mentally incompetent and/or physically disabled: (A)
if he is under a legal decree of incompetency (the date of such decree being
deemed the date on which such mental incompetence occurred for purposes of this
Section 4(d)); or (B) because of a "Medical Determination of Mental and/or
Physical Disability." A Medical Determination of Mental and/or Physical
Disability shall mean the written determination by: (1) the physician regularly
attending the Executive, and (2) a physician selected by the Company, that
because of a medically determinable mental and/or physical disability the
Executive is unable to perform each of the essential functions of the Executive,
and such mental and/or physical disability is determined or reasonably expected
to last twelve (12) months or longer after the date of determination, based on
medically available information. If the two physicians do not agree, they shall
jointly choose a third consulting physician and the written opinion of the
majority of these three (3) physicians shall be conclusive as to such mental
and/or physical disability and shall be binding on the parties. The date of any
written opinion which is conclusive as to the mental and/or physical disability
shall be deemed the date on which such mental and/or physical disability
commenced for purposes of this Section 4(d), if the written opinion concludes
that the Executive is mentally and/or physically disabled. In conjunction with
determining mental and/or physical disability for purposes of this Agreement,
the Executive consents to any such examinations which are relevant to a
determination of whether he is mentally and/or physically disabled, and which is
required by any two (2) of the aforesaid physicians, and to furnish such medical
information as may be reasonably requested, and to waive any applicable
physician patient privilege that may arise because of such examination. All
physicians selected hereunder shall be Board-certified in the specialty most
closely related to the nature of the mental and/or physical disability alleged
to exist.
(z) For purposes of determining whether the Executive is
mentally incompetent or physically disabled for the continuous six (6) month
period specified in this Section 4(d), such disability shall be deemed to
continue from the date of any legal decree of incompetency, or written opinion
which is conclusive as to the mental and/or physical disability, through the
date the legal decree expires or is otherwise revoked or removed, or the date on
which the mental and/or physical disability has ceased, as the case may be, as
set forth in a written opinion prepared by the physicians described in this
Section 4(d) pursuant to the procedures provided herein.
7
<PAGE>
(iii) The term "resignation for good reason" or "good
reason" means the following:
(A) the failure of the Company within ten (10) days
written notice by the Executive to the Board to make any payment due to the
Executive hereunder;
(B) without the express written consent of the
Executive, any change by the Company in the Executive's function, duties, or
responsibilities not generally consistent with those contemplated in Section 2
hereof, which is not rescinded within thirty (30) days after the Executive has
given the Board written notice of such change which notice specifies in detail
the change;
(C) any decrease in the Executive's base salary, life
or disability insurance coverage or benefits payable to the Executive or to
which he is entitled other than a decrease in benefits which is part of a
general decrease in benefits provided or payable to officers and other salaried
employees of the Company;
(D) any material failure (other than a failure to
make payments) by the Company to comply with any of the provisions of this
Agreement, which change or failure, as the case may be, continues unremedied for
thirty (30) days after Executive has given the Board written notice of such
change or failure which notice specifies in detail the change or failure, as the
case may be;
(E) any failure by the Company to obtain the
assumption of this Agreement by any successor or assign of the Company.
(iv) The term "Change in Control" shall mean that subsequent
to the effectiveness of a registration statement under the Securities Act of
1933 (the "Securities Act") filed on behalf of the Company:
--------------
(A) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")), is
------------
or becomes the beneficial owner, directly or indirectly, of securities of the
Company representing thirty percent (30%) or more of the combined voting power
of the then outstanding securities of the Company; or
(B) a change of control of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of the
Regulation 14A promulgated under the Exchange Act as in effect on the date of
this Agreement; or
(C) there shall be consummated:
8
<PAGE>
(I) any consolidation or merger or share exchange
of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's common stock would be
converted into cash, securities or other property, other than a merger of the
Company in which the holders of the Company's common stock immediately prior to
the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, or
(II) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all, or a
substantial portion, of the assets of the Company; or
(D) the stockholders of the Company approve a plan or
proposal for the complete or partial liquidation, dissolution or divisive
reorganization of the Company.
For purposes of this subparagraph (iv), the term "person" shall not be
deemed to include any officer or director of the Company as of the date hereof
or any such person's transferee if such transferee is related to such person by
blood or marriage, or is affiliated with or controlled by such person.
(e) Disparaging Remarks. Throughout the Employment Period
-------------------
and during any period subsequent to the termination of the Employment Period
during which the Executive receives any form of compensation from the Company,
the Executive covenants to not make any disparaging remarks concerning the
Company, its operations, or its employees, officers or directors to any persons
either publicly or in private whether or not such disparaging remarks may be
found to adversely affect the Company, its employees, officers, or directors.
5. Agreement Not to Compete.
------------------------
(a) The Executive agrees with the Company that the services that
the Executive shall render during the Employment Period are unique, special and
of extraordinary character and that the Company shall be substantially dependent
upon such services to develop and market its products and to earn a profit.
Accordingly, in consideration for employment by the Company and compensation and
other benefits, during the Employment Period, during any period subsequent to
the termination of the Employment Period during which the Executive receives any
form of compensation from the Company, and for a period of one (1) year after
the Executive's employment is terminated, the Executive shall not directly or
indirectly compete or interfere with the Company (or any division, subsidiary or
other affiliate of the Company) in the research, development, manufacture,
licensing, patenting or marketing of any direct or indirect internet access
service, or any other service, equipment or devices functionally similar to or
which may compete with a product, service or with technology of the Company.
9
<PAGE>
(b) The term "compete" as used herein means to engage directly or
-------
indirectly either as a proprietor, partner, employee, agent, consultant,
director, officer, stockholder or in any other capacity or manner whatsoever.
The phrase "interfere with" includes, but is not limited to, soliciting or
--------------
selling services or products which provide similar functions to any of the
Company's services or products to any current or potential customer of the
Company. The provisions of this Section shall not prevent the Executive from
investing any assets in securities of any corporation provided that such
investments do not, directly or indirectly, result in the Executive, family
members and other affiliates, collectively (i) owning beneficially at any time
five percent (5%) or more of the equity securities of any corporation engaged in
a business competitive with the Company, or (ii) otherwise being able to control
or actively participate in the business decisions of such competing business.
(c) The provisions of this Section 5 shall be enforced to the fullest
extent permissible under the laws and public policies applied to each
jurisdiction which enforcement is sought. If any particular provision or
portion of this Section shall be adjudicated to be invalid or unenforceable,
this Section shall be deemed amended to interpret such provision or portion
thereof so adjudicated to be invalid or unenforceable to extend only over the
maximum period of time, range of activities or geographic area as to which it
may be enforceable, such amendment to apply only with respect to the operation
of this Section in the particular jurisdiction in which such adjudication is
made.
6. Notices. Any notices, requests, demands and other communications
-------
provided for by this Agreement shall be sufficient if in writing and if sent by
registered or certified mail to the Executive at the last address he has filed
in writing with the Company.
7. Binding Agreement; Assignment. This Agreement shall be effective
-----------------------------
as of the date hereof and shall be binding upon and inure to the benefit of, the
parties and their respective heirs, successors, assigns, and personal
representatives, as the case may be. The Executive may not assign any rights or
duties under this Agreement. As used herein, the successors of the Company
shall include, but not be limited to, any successor by way of merger,
consolidation, sale of all or substantially all of the assets, or similar
reorganization or change in control.
8. Entire Agreement. This Agreement and the Option Agreement
----------------
constitute the entire understanding of the Executive and the Company with
respect to the subject matter hereof and supersede any and all prior
understandings written or oral. This Agreement may not be changed, modified or
discharged orally, but only by an instrument in writing signed by the parties.
9. Enforceability. This Agreement has been duly authorized, executed
--------------
and delivered and constitutes the valid and binding obligations of the parties
hereto, enforceable in accordance with its terms. The undertakings herein shall
not be
10
<PAGE>
construed as any limitation upon the remedies Company might, in the absence of
this Agreement, have at law or in equity for any wrongs of the Executive.
10. Governing Law. The validity and construction of this Agreement
-------------
or any of its provisions shall be determined under the internal laws of the
State of Delaware, without giving effect to its conflicts of laws provisions,
and without regard to its place of execution or its place of performance. The
parties irrevocably consent and agree to the exclusive jurisdiction of the
Circuit Court of Fairfax County or the Federal courts for the Eastern District
of Virginia, except for matters subject to Section 11 hereof. Each party waives
all rights to a trial by jury in any suit, action or proceeding hereunder.
11. Arbitration. The Company and the Executive mutually covenant and
-----------
agree that if any controversy or dispute relating to this Agreement arises
between them that cannot be resolved by negotiation, either party may, after
providing written notice to the other party, submit such dispute to arbitration
in Fairfax County, Virginia in accordance with the rules of the American
Arbitration Association then in effect unless the rules of another association
are mutually agreeable to the parties. The arbitrator appointed must be an
attorney or retired judge who has experience with the principal issues to be
arbitrated. Any reward or finding made pursuant to such arbitration shall in
all respects be well and fairly kept and observed and may be imposed by judgment
of the appropriate court in the Commonwealth of Virginia pursuant to the
applicable laws relating thereto. Each party shall bear his or its own costs in
connection with the arbitration, except that the cost of the arbitrator shall be
borne by the party that the arbitrator, in his sole discretion, determines has
not prevailed on a majority of the issues submitted to arbitration.
12. Severability. If any one or more of the terms or provisions of
------------
this Agreement shall for any reason be held to be invalid, illegal or
unenforceable, in whole or in part, or in any respect or in the event that any
one or more of the provisions of this Agreement operated or would prospectively
operate to invalidate this Agreement, then and in either of those events, such
provision or provisions only shall be deemed null and void and shall not affect
any other provision of this Agreement and the remaining provisions of this
Agreement shall remain operative and in full force and effect and shall in no
way be affected, prejudiced or disturbed thereby.
13. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one Agreement
14. Amendments and Waivers. This Agreement may, to the maximum
----------------------
extent permitted by applicable law, be amended by the parties, which amendment
shall be set forth in an instrument executed by all of the parties. Any term,
provision or condition of this Agreement (other than as prohibited by applicable
law) may be waived in writing at any time by the party which is entitled to the
benefits thereof.
11
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement on the date first above written.
EROL'S INTERNET, INC.
By: /s/ Margaret A. Chittal
-----------------------
Title: Corporate Secretary
-------------------
/s/ Dennis J. Spina
-------------------
Dennis J. Spina
12
<PAGE>
Exhibit A
---------
EROL'S INTERNET, INC.
EMPLOYEE PROPRIETARY INFORMATION AND
INVENTIONS AGREEMENT
THIS EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT dated
as of December 28, 1996, by and between EROL'S INTERNET, INC., a Delaware
corporation (the "Company") and Dennis J. Spina (the "Employee"). In
------- --------
consideration of the mutual covenants and representations herein contained and
the mutual benefits derived herefrom, the parties, intending to be legally
bound, agree as follows:
1. Nondisclosure.
-------------
(a) At all times during employment and thereafter, the Employee
shall hold in strictest confidence and shall not disclose, use, lecture upon or
publish any of the Company's Proprietary Information (defined below), except as
such disclosure, use or publication may be required in connection with work for
the Company, or unless an officer of the Company expressly authorizes such in
writing. The Employee shall obtain Company's written approval before publishing
or submitting for publication any material (written, verbal, or otherwise) that
relates to his work at the Company and/or incorporates any Proprietary
Information. The Employee hereby assigns to the Company any rights the Employee
may have or acquire in such Proprietary Information and recognizes that all
Proprietary Information shall be the sole property of the Company and its
assigns.
(b) The term "Proprietary Information" shall mean any and all
-----------------------
confidential and/or proprietary knowledge, data or information of the Company.
By way of illustration but not limitation, Proprietary Information includes (a)
trade secrets, inventions, mask works, ideas, processes, formulas, source and
object codes, data, programs, other works of authorship, know-how, improvements,
discoveries, developments, designs and techniques (hereinafter collectively
referred to as "Inventions"); and (b) information regarding plans for research,
----------
development, new products, marketing and selling, business plans, budgets and
unpublished financial statements, licenses, prices and costs, suppliers and
customers; and (c) information regarding the skills and compensation of other
employees of the Company. Notwithstanding the foregoing, it is understood that,
at all such times, the Employee is free to use information that is generally
known in the trade or industry, which is not gained as result of a breach of
this Agreement, and his own, skill, knowledge, know-how and experience to
whatever extent and in whichever manner the Employee wishes.
<PAGE>
(c) The Employee understands, in addition, that the Company has
received and in the future shall receive from third parties confidential or
proprietary information ("Third Party Information") subject to a duty on the
-----------------------
Company's part to maintain the confidentiality of such information and to use it
only for certain limited purposes. During the term of employment and thereafter,
the Employee shall hold Third Party Information in the strictest confidence and
shall not disclose to anyone (other than Company personnel who need to know such
information in connection with their work for the Company) or use, except in
connection with his work for the Company, Third Party Information unless
expressly authorized by an officer of the Company in writing.
(d) During his employment by the Company, the Employee shall not
improperly use or disclose any confidential information or trade secrets, if
any, of any former employer or any other person to whom the Employee has an
obligation of confidentiality, and the Employee shall not bring onto the
premises of the Company any unpublished documents or any property belonging to
any former employer or any other person to whom the Employee has an obligation
of confidentiality unless consented to in writing by that former employer or
person. The Employee shall use in the performance of his duties only information
which is generally known and used by persons with training and experience
comparable to the Employee's own, which is common knowledge in the industry or
is otherwise provided or developed by the Company.
2. Assignment of Inventions.
------------------------
(a) The term "Property Rights" shall mean all trade secret, trademark,
---------------
patent, copyright, mask work and other intellectual property rights throughout
the world.
(b) Inventions, if any, patented or unpatented, which the Employee
made prior to the commencement of employment with the Company are excluded from
the scope of this Agreement.
(c) Subject to Sections 2(d), and 2(f), the Employee hereby assigns
and agrees to assign in the future (when any such Inventions or Proprietary
Rights are first reduced to practice or first fixed in a tangible medium, as
applicable) to the Company all right, title and interest in and to any and all
Inventions (and all Proprietary Rights with respect thereto) whether or not
patentable or registrable under copyright or similar statutes, made or conceived
or reduced to practice or learned by the Employee, either alone or jointly with
others, during the period of employment with the Company to the extent that such
Inventions are made or conceived or reduced to practice or learned by the
Employee (i) during the any time that the Employee either is physically present
on the Company's premises or is utilizing any property owned or leased by the
Company, or (ii) based on any information or knowledge gained by the Employee
through his employment with the Company. Inventions assigned to the Company, or
to a third party as directed by the Company pursuant to this Section 2, are
hereinafter referred to as "Company Inventions."
------------------
2
<PAGE>
(d) The Employee recognizes that, in the event of a specially
applicable state law, regulation, rule, or public policy ("Specific Inventions
-------------------
Law"), this Agreement shall not be deemed to require assignment of any invention
- ---
which qualifies fully for protection under a Specific Inventions Law by virtue
of the fact that any such invention was, for example, developed entirely on the
Employee's own time without using the Company's equipment, supplies, facilities,
or trade secrets and neither related to the Company's actual or anticipated
business, research or development, nor resulted from work performed by the
Employee for the Company. In the absence of a Specific Inventions Law, the
preceding sentence shall not apply.
(e) During the period of employment and for one (1) year after
termination of employment with the Company, the Employee shall promptly disclose
to the Company fully and in writing all Inventions authored, conceived or
reduced to practice by the Employee, either alone or jointly with others. In
addition, the Employee shall promptly disclose to the Company all patent
applications filed by the Employee or on behalf within one (1) year after
termination of employment. At the time of each such disclosure, the Employee
shall advise the Company in writing of any Inventions that the Employee believes
fully qualify for protection under the provisions of a Specific Inventions Law;
and the Employee shall at that time provide to the Company in writing all
evidence necessary to substantiate that belief. The Employee shall preserve the
confidentiality of any Invention that does not fully qualify for protection
under a Specific Inventions Law.
(f) The Employee also agrees to assign all right, title and interest
in and to any particular Company Invention to a third party, including without
limitation the United States, as directed by the Company.
(g) The Employee acknowledges that all original works of authorship
which are made by the Employee (solely or jointly with others) within the scope
of employment and which may be protected by copyright are "works made for hire,"
pursuant to United States Copyright Act (17 U.S.C., Section 101).
(h) The Employee shall assist the Company in every proper way to
obtain, and from time to time enforce, United States and foreign Proprietary
Rights relating to Company Inventions in any and all countries. To that end the
Employee shall execute, verify and deliver such documents and perform such other
acts (including appearances as a witness) as the Company may reasonably request
for use in applying for, obtaining, perfecting, evidencing, sustaining and
enforcing such Proprietary Rights and the assignment thereof. In addition, the
Employee shall execute, verify and deliver assignments of such Proprietary
Rights to the Company or its designee. The Employee's obligation to assist the
Company with respect to Proprietary Rights relating to such Company Inventions
in any and all countries shall continue beyond the termination of employment and
the Company shall compensate the Employee at a
3
<PAGE>
reasonable rate after termination for the time actually spent by the Employee at
the Company's request on such assistance.
(i) In the event the Company is unable for any reason, after
reasonable effort, to secure the Employee's signature on any document needed in
connection with the actions specified in the preceding paragraph, the Employee
hereby irrevocably appoints the Company and its duly authorized officers and
agents as the Employee's agent and attorney in fact to act for and in the
Employee's behalf to sign, execute, verify and file any and all documents and to
do all other lawfully permitted acts to further the purposes of the preceding
paragraph with the same legal force and effect as if executed by the Employee.
The Employee hereby waives and quitclaims to the Company any and all claims, of
any nature whatsoever, which the Employee now or may hereafter have for
infringement of any proprietary rights assigned to the Company.
3. Agreement not to Compete.
------------------------
(a) The Employee agrees with the Company that the services which the
Employee shall render during the term of employment are unique, special and of
extraordinary character and that the Company shall be substantially dependent
upon such services to develop and market its products and to earn a profit.
Accordingly, in consideration for employment by the Company and compensation and
other benefits, during the period of employment the Employee shall not directly
or indirectly compete with the Company (or any division, subsidiary or other
affiliate of the Company) in the research, development, manufacture, licensing,
patenting or marketing of any direct or indirect internet access service, or any
other service, equipment or devices functionally similar to or which may compete
or interfere with a product, service, or technology of the Company unless the
Employee has disclosed all material aspects of any activity that may compete or
interfere with a product, service, or technology of the Company to an officer of
the Company and such officer has approved the Employee's conduct of such
activity in writing.
(b) The term "compete" as used herein means to engage directly or
-------
indirectly either as a proprietor, partner, employee, agent, consultant,
director, officer, stockholder or in any other capacity or manner whatsoever.
The phrase "interfere with" includes, but is not limited to, soliciting or
--------------
selling services or products which provide similar functions to any of the
Company's services or products to any current or potential customer of the
Company. The provisions of this Section shall not prevent the Employee from
investing any assets in securities of any corporation provided that such
investments do not, directly or indirectly, result in the Employee, his spouse
or his children collectively (i) owning beneficially at any time five percent
(5%) or more of the equity securities of any corporation engaged in a business
competitive with the Company, or (ii) otherwise being able to control or
actively participate in the business decisions of such competing business.
4
<PAGE>
(c) The provisions of this Section 3 shall be enforced to the fullest
extent permissible under the laws and public policies applied to each
jurisdiction which enforcement is sought. If any particular provision or portion
of this Section 3 shall be adjudicated to be invalid or unenforceable, this
Section shall be deemed amended to interpret such provision or portion thereof
so adjudicated to be invalid or unenforceable to extend only over the maximum
period of time, range of activities or geographic area as to which it may be
enforceable, such amendment to apply only with respect to the operation of this
Section in the particular jurisdiction in which such adjudication is made.
4. No Conflicting Employment; No Inducement of other Employees or
--------------------------------------------------------------
Solicitation of Customers.
-------------------------
The Employee agrees that during the period of employment by the Company the
Employee shall not, without the Company's express written consent, engage in any
other employment or business activity directly related to the business in which
the Company is now involved or becomes involved, nor shall the Employee engage
in any other activities which conflict with the Employee's obligations to the
Company. For the period of employment by the Company and for one (1) year after
the date of termination of employment by the Company the Employee shall not (a)
induce any employee of the Company to leave the employ of the Company or (b)
solicit the business of any client or customer of the Company (other than on
behalf of the Company).
If any restriction set forth in this Section 4 is found by any court of
competent jurisdiction to be unenforceable because it extends for too long a
period of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend only over the maximum period
of time, range of activities or geographic area as to which it may be
enforceable.
The Employee hereby covenants that he shall not represent in any manner
whatsoever to any party that any of the activities in which he engages pursuant
to this Section 4 or Section 3(a) are being conducted either on behalf or for
the benefit of the Company, or that the Company has any knowledge of such
activities other than as set forth in the written approval provided by the
Company to the Employee to engage in such activities. The Employee hereby agrees
to indemnify and hold harmless the Company for the amount of any claim,
liability, obligation, or indebtedness of any nature whatsoever arising from any
activity in which the Employee engages pursuant to this Section 4 and Section
3(a).
5. No Conflicting Obligations.
--------------------------
The Employee represents that performing of all the terms of this Agreement
and as an employee of the Company does not and shall not breach any agreement to
keep in confidence information acquired by the Employee in confidence or in
trust prior to employment by the Company. The Employee has not entered into, and
5
<PAGE>
the Employee agrees not to enter into, any agreement either written or oral in
conflict herewith.
6. Return of Company Documents.
---------------------------
When the Employee leaves the employ of the Company, the Employee shall
deliver to the Company (and shall not keep in his possession, recreate or
deliver to anyone else) any and all devices, records, data, notes, reports,
proposals, lists, correspondence, specifications, drawings, blueprints,
sketches, materials, equipment, other documents or property, together with all
copies thereof (in whatever medium recorded) belonging to the Company, its
successors or assigns. The Employee further agrees that any property situated on
the Company's premises and owned by the Company, including disks and other
storage media, filing cabinets or other work areas, is subject to inspection by
Company personnel at any time with or without notice. Prior to leaving, the
Employee shall cooperate with the Company in completing and signing the
Company's termination statement for technical and management personnel.
7. Notification of New Employee.
----------------------------
In the event that the Employee leaves the employ of the Company, the
Employee hereby consents to the notification of the new employer of the
Employee's rights and obligations under this Agreement.
8. Legal and Equitable Remedies.
----------------------------
Because the Employee's services are personal and unique and because the
Employee may have access to and become acquainted with the proprietary
information of the Company, the Company shall have the right to enforce this
Agreement and any of its provisions by injunction, specific performance or other
equitable relief, without bond, and without prejudice to any other rights and
remedies that the Company may have for a breach of this Agreement.
9. General Provisions.
------------------
(a) The Employee agrees and understands that nothing in this Agreement
shall confer any right with respect to continuation of employment by the
Company, nor shall it interfere in any way with the Employee's right or the
Company's right to terminate the Employee's employment at any time, with or
without cause as more fully set forth in the Employment Agreement between the
Employee and the Company to which this Agreement is attached as Exhibit A.
(b) The validity and construction of this Agreement or any of its
provisions shall be determined under the laws of the State of Delaware, without
giving effect to its conflicts of laws provisions, and without regard to its
place of execution or its place of performance. The parties irrevocably consent
and agree to the exclusive
6
<PAGE>
jurisdiction of the Circuit Court for Fairfax County or the United States
District Court for the Eastern District of Virginia and to service of process
for it and on its behalf by certified mail, for resolution of all matters
involving this Agreement or the transactions contemplated hereby. Each party
waives all rights to a trial by jury in any suit, action or proceeding
hereunder.
(c) This Agreement sets forth the final, complete and exclusive
agreement and understanding between the Company and the Employee relating to the
subject matter hereof and supersedes all prior and contemporaneous
understandings and agreements relating to its subject matter. No modification of
or amendment to this Agreement, nor any waiver of any rights under this
Agreement, shall be effective unless in writing signed by the party to be
charged. Any subsequent change or changes in duties, salary or compensation
shall not affect the validity or scope of this Agreement.
(d) If one or more of the provisions in this Agreement are deemed
unenforceable by law, then the remaining provisions shall continue in full force
and effect.
(e) This Agreement shall be binding upon the Employee's heirs,
executors, administrators and other legal representatives and shall be for the
benefit of the Company, its successors and its assigns.
(f) The provisions of this Agreement shall survive the termination of
the Employee's employment and the assignment of this Agreement by the Company to
any successor in interest or other assignee.
(g) No waiver by the Company of any breach of this Agreement shall be
a waiver of any preceding or succeeding breach. No waiver by the Company of any
right under this Agreement shall be construed as a waiver of any other right.
The Company shall not be required to give notice to enforce strict adherence to
all terms of this Agreement.
THE EMPLOYEE UNDERSTANDS THAT THIS AGREEMENT AFFECTS HIS RIGHTS TO
INVENTIONS THAT HE MAKES DURING HIS EMPLOYMENT, AND RESTRICTS HIS RIGHTS TO
DISCLOSE OR USE THE COMPANY'S PROPRIETARY INFORMATION DURING OR SUBSEQUENT TO
HIS EMPLOYMENT.
THE EMPLOYEE HAS READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
on the date first above written.
EROL'S INTERNET, INC.
By: /s/ Orhan Onaran
----------------
Its: Senior Vice President
---------------------
/s/ Dennis J. Spina
-------------------
Dennis J. Spina
8
<PAGE>
Exhibit B
---------
Non-Qualified Stock Option Agreement
See Exhibit 10.13
<PAGE>
Exhibit C
---------
Stockholders' Agreement
See Exhibit 10.5
<PAGE>
Exhibit 10.10
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT, (this "Agreement") dated as of December 27,
---------
1996, is between Erol's Internet, Inc., a Delaware corporation (the "Company"),
-------
and Orhan Onaran (the "Executive"). In consideration of the mutual covenants
---------
and representations herein contained and the mutual benefits derived herefrom,
the parties, intending to be legally bound, covenant and agree as follows:
1. Purpose. The Company is engaged in providing internet services
-------
to the public (the "Business"). The Company wishes to employ the Executive, and
--------
the Executive has agreed to be employed by the Company, on the terms and
conditions herein provided.
2. Full-Time Employment of Executive - Duties and Status.
-----------------------------------------------------
(a) The Company hereby engages the Executive as a full-time
executive employee in the position of President -- Sales, Marketing and Business
Development, reporting directly to the CEO, for the period (the "Employment
----------
Period") specified in Section 4(a) hereof, and the Executive accepts such
- ------
employment, on the terms and conditions set forth in this Agreement. Throughout
the Employment Period, the Executive shall faithfully and competently exercise
such authority and perform such executive duties as are commensurate with the
authority and duties of a Senior Executive of the Company and such other
reasonable duties as may otherwise be assigned to him from time to time by the
Company.
(b) Throughout the Employment Period, the Executive shall (i)
devote ninety-five percent (95%) of his full time and efforts to the business of
the Company and shall not engage in consulting work or any trade or business for
his own account or for or on behalf of any other person, firm or corporation
which competes, conflicts or interferes with the performance of his duties
hereunder in any way, and (ii) accept such additional position or positions to
which the Executive may be appointed by the Company, provided that the
performance of the duties of such office or offices shall generally be
consistent with the scope of the duties provided for in Section 2(a) hereof.
(c) The Executive agrees to execute the Employee Proprietary
Information and Inventions Agreement (the "Proprietary Rights Agreement"),
----------------------------
attached hereto as Exhibit A, and to comply with the provisions thereof. The
Executive understands that both entering into and complying with the terms of
the Proprietary Rights Agreement is a condition to the Executive's continued
employment with the Company and that failure to comply with the terms of the
Proprietary Rights Agreement will constitute "cause" for purposes of this
Agreement. The Executive further represents
<PAGE>
and warrants that his employment by the Company, and the performance by the
Executive of his duties hereunder, will not violate any of the terms and
conditions of any agreement with a previous employer or any legal right of any
previous employer.
3. Compensation and General Benefits. As full compensation for
---------------------------------
services provided to the Company, the Executive shall, during the Employment
Period, be compensated as follows:
(a) The Company shall pay to the Executive a salary (the
"Salary") based upon a per annum rate of $142,500. The Salary shall be payable
------
in periodic equal installments not less frequently than monthly, less such sums
as may be required to be deducted or withheld under applicable provisions of
federal, state and local law, plus increases in the Salary, if any, as may be
approved from time to time by the Compensation Committee in its discretion.
(b) At least annually, the Executive's Performance shall be
evaluated in an annual performance review (the "Performance Review"). The
------------------
results of the Performance Review shall be provided to both the Executive and to
the Compensation Committee or its designees.
(c) Throughout the Employment Period, the Executive shall be
entitled to participate in such benefits plans of the Company or additional
benefit programs established by the Company as determined in the discretion of
the Compensation Committee commensurate with the Executive's level of
responsibility within the Company.
(d) Throughout the Employment Period, the Executive shall be
entitled to (i) two weeks of annual vacation, (ii) leaves of absence, and (iii)
leaves for illness or temporary disability in accordance with the policies of
the Company in effect from time to time for its executive officers. Vacation
leaves and leaves of absence, if taken by the Executive, shall be taken at such
times as are reasonably acceptable to the Company. Any leaves on account of
illness or temporary disability which is short of Total Disability (as defined
in Section 4(d)(ii) hereof) shall not constitute a breach by the Executive of
his agreements hereunder even though leaves on account of a Total Disability may
be deemed to result in a termination of the Employment Period under the
applicable provisions of this Agreement.
(e) The Executive shall perform his services at the corporate
headquarters office of the Company located in Springfield, Virginia, or at such
other office established by the Company within 100 miles of said corporate
headquarters.
(f) The Company shall reimburse the Executive from time to time
for all reasonable and customary business expenses incurred by him in the
performance of his duties hereunder, provided that the Executive shall submit
vouchers
2
<PAGE>
and other supporting data to substantiate the amount of said expenses in
accordance with Company policy from time to time in effect.
(g) If the Company purchases and maintains at any time during
the term of this Agreement one or more life insurance policies on the life of
the Executive, in addition to any policies purchased pursuant to Section 3(c)
hereof, in whatever amount or amounts which the Company, in its discretion,
deems desirable, the Company shall be the beneficiary of said policy or policies
and the Executive shall cooperate with the Company and submit to such reasonable
medical examinations as are necessary to enable the Company to purchase and
maintain in full force and effect such additional insurance policy or policies.
4. Employment Period.
-----------------
(a) Duration. The Employment Period shall commence on the date
--------
of this Agreement and shall continue until the earlier of (i) the close of
business on the day immediately preceding the one year anniversary of this
Agreement, or the anniversary date of any extension of this Agreement as
provided in Section 4(b) hereof, whichever later occurs (the "Expiration Date"),
---------------
or (ii) termination of this Agreement by the Company with "cause" (as defined in
Section 4(d)(i) hereof), or (iii) termination of this Agreement by the Company
for any reason other than cause, or (iv) the Executive's resignation for "good
reason" (as defined in Section 4(d)(iii), or (v) the Executive's resignation
without "good reason", or (vi) the death or Total Disability of the Executive.
(b) Extension of Employment Period. On the one year anniversary
------------------------------
of the date of this Agreement, and on each anniversary thereafter, the
Employment Period shall be extended for an additional year, at the rate of
compensation then in effect as determined pursuant to the provisions of Section
3(a) hereof, unless the Company or the Executive notifies the other in writing
at least ninety (90) days prior to such anniversary of its or his election not
to renew this Agreement.
(c) Payments Upon Termination.
-------------------------
(i) If the Executive's employment is terminated by the
Company for any reason other than "cause" (as defined in Section 4(d)(i) hereof)
or by the Executive for "good reason" (as defined in Section 4(d)(iii) hereof)
at any time during the Employment Period or any extension thereof, the Company
shall pay to, or provide for, as the case may be, the Executive, for the
remainder of the Employment Period, at the times otherwise provided in this
Agreement as if the Executive had not been terminated:
(A) his Salary then in effect as accrued through the
date of termination and the longer of either (1) the remainder of the Employment
Period or (2) a period of three (3) months, which Salary shall be payable in
equal monthly installments during such period in accordance with existing
payroll policies; and
3
<PAGE>
(B) to the extent applicable, the sickness and health
insurance programs to which he would have been entitled under this Agreement if
he had remained in the employ of the Company for such period
(ii) The Executive shall use his best efforts to discharge
his legal obligation to mitigate the amount of payments provided for in this
Section 4(c) by actively seeking employment, and the amount of any payment
provided for in this Section 4(c) shall be reduced by any compensation or
remuneration earned or which should have been earned as the result of employment
by another employer after the date of termination and during such severance
period.
(iii) If the Executive's employment is terminated (A) by the
Company for "cause", or (B) by the Executive by resignation without "good
reason", or (C) upon the death or Total Disability of the Executive, then the
Company shall have no further liability to the Executive, except for the Salary
which has accrued through the date of termination, which amounts shall be paid
by the Company within thirty (30) days of such termination, or in accordance
with applicable law. If the Executive's employment is terminated due to his
death or his Total Disability, then, in addition to the Salary which has accrued
through the date of termination, the Executive or his estate shall receive the
Salary then in effect for a period of three (3) months after the date of
termination in equal monthly installments.
(iv) Notwithstanding any other provision of this Section
4(c), if the Executive violates any covenant, term or condition of this
Agreement or the Proprietary Rights Agreement, the Company shall be entitled, in
addition to any other remedies it may have hereunder or at law or in equity, to
offset the amount of any payment otherwise due to the Executive pursuant to this
Section 4(c) against any loss or damage incurred by the Company as a result of
the Executive's violation of said covenant, term or condition.
(d) Definitions. When used in this Agreement, the words
-----------
"cause", "Total Disability" and "good reason" shall have the respective meanings
set forth below:
(i) The term "cause" means: (A) the Executive's failure to
perform his employment duties hereunder to the reasonable satisfaction of the
Company after reasonable notice to the Executive by the Company specifying such
failure and providing the Executive with a minimum of thirty (30) days to cure
such failure; (B) the Executive's breach of the covenants or agreements
contained in this Agreement, the Proprietary Rights Agreement, or any other
material agreement or undertaking of the Executive; (C) the Executive's
commission of a felony or any crime involving moral turpitude, fraud or
misrepresentation, whether or not related to the business or property of the
Company; (D) any act of the Executive against the Company intended to enrich the
Executive in derogation of his duties (including, but not limited to his duty of
loyalty) to the Company; (E) any willful or purposeful act or omission (or any
act or omission done
4
<PAGE>
in bad faith) or gross negligence of the Executive having the effect of injuring
the business or business relationships of the Company; or (F) the Executive's
discrimination, harassment, or retaliation in violation of applicable federal
state or local equal opportunity laws.
(ii) To the extent permitted by applicable law, the term
"Total Disability" means total disability as defined in the Company's group and
individual disability plans, if any. If the Company does not have in existence
such plans, then Total Disability shall mean:
(y) The inability to perform the duties required hereunder
for a continuous period of thirteen (13) weeks during the Employment Period due
to "mental incompetence" or "physical disability" as hereinafter defined. The
Executive shall be considered to be mentally incompetent and/or physically
disabled: (A) if the Executive is under a legal decree of incompetency (the date
of such decree being deemed the date on which such mental incompetence occurred
for purposes of this Section 4(d)); or (B) because of a "Medical Determination
of Mental and/or Physical Disability." A Medical Determination of Mental and/or
Physical Disability shall mean the written determination by: (1) the physician
regularly attending the Executive, and (2) a physician selected by the Company,
that because of a medically determinable mental and/or physical disability the
Executive is unable to perform any essential functions of the Executive, and
such mental and/or physical disability is determined or reasonably expected to
last thirteen (13) weeks or longer after the date of determination, based on
medically available information. If the two physicians do not agree, they shall
jointly choose a third consulting physician and the written opinion of the
majority of these three (3) physicians shall be conclusive as to such mental
and/or physical disability and shall be binding on the parties. The date of any
written opinion which is conclusive as to the mental and/or physical disability
shall be deemed the date on which such mental and/or physical disability
commenced for purposes of this Section 4(d), if the written opinion concludes
that the Executive is mentally and/or physically disabled. In conjunction with
determining mental and/or physical disability for purposes of this Agreement,
the Executive consents to any such examinations which are relevant to a
determination of whether the Executive is mentally and/or physically disabled,
and which is required by any two (2) of the aforesaid physicians, and to furnish
such medical information as may be reasonably requested, and to waive any
applicable physician patient privilege that may arise because of such
examination. All physicians selected hereunder shall be Board-certified in the
specialty most closely related to the nature of the mental and/or physical
disability alleged to exist.
(z) For purposes of determining whether the Executive is
mentally incompetent or physically disabled for the continuous thirteen (13)
week period specified in this Section 4(d), such disability shall be deemed to
continue from the date of any legal decree of incompetency, or written opinion
which is conclusive as to the mental and/or physical disability, through the
date the legal decree expires or is otherwise revoked or removed, or the date on
which the mental and/or physical disability has
5
<PAGE>
ceased, as the case may be, as set forth in a written opinion prepared by the
physicians described in this Section 4(d) pursuant to the procedures provided
herein.
(iii) The term "resignation for good reason" or "good
reason" means the following actions taken by the Company without the express
written consent of the Executive:
(A) the failure of the Company within ten (10) days
written notice by the Executive to the Chief Executive Officer (with a copy to
the Chairman of the Compensation Committee, if any), to make any payment due to
Executive hereunder;
(B) making any material change in the Executive's
duties not generally consistent with the Executive's scope of duties as set
forth in Section 2 hereof, which is not rescinded within thirty (30) days after
the Executive has given the Chief Executive Officer written notice of such
change;
(C) decreasing the Executive's salary, or causing a
material decrease in life or disability insurance coverage or benefits payable
to the Executive or to which the Executive is entitled other than as part of a
general decrease in benefits provided or payable to officers and other salaried
employees of the Company;
(D) requiring the Executive to be based at any office
or location more than fifty (50) miles from the office at which the Executive is
based on the date hereof, except for travel reasonably required in the
performance of the Executive's responsibilities;
(E) failing to comply (other than a failure to make
payments) with any of the material provisions of this Agreement, which change or
failure, as the case may be, continues unremedied for thirty (30) days after
Executive has given the Chief Executive Officer written notice of such change or
failure which notice specifies in detail the change or failure, as the case may
be.
5. Notices. Any notices, requests, demands and other communications
-------
provided for by this Agreement shall be sufficient if in writing and if sent by
registered or certified mail to the Executive at the last address the Executive
has filed in writing with the Company and if to the Company at:
Erol's Internet, Inc.
Attention: CEO
7921 Woodruff Ct.
Springfield, VA 22151
6. Binding Agreement; Assignment. This Agreement shall be effective
-----------------------------
as of the date hereof and shall be binding upon and inure to the benefit of, the
6
<PAGE>
parties and their respective heirs, successors, assigns, and personal
representatives, as the case may be. The Executive may not assign any rights or
delegate any duties under this Agreement. As used herein, the successors of the
Company shall include, but not be limited to, any successor by way of merger,
consolidation, sale of all or substantially all of the assets, or similar
reorganization or change in control.
7. Entire Agreement. This Agreement shall constitute the entire
----------------
understanding of the Executive and the Company with respect to the subject
matter hereof and supersedes any and all prior understandings, representations
or promises written or oral concerning said subject matter. This Agreement may
not be changed, modified or discharged orally, but only by an instrument in
writing signed by the parties.
8. Enforceability. This Agreement has been duly authorized,
--------------
executed and delivered and constitutes the valid and binding obligations of the
parties hereto, enforceable in accordance with its terms. The undertakings
herein shall not be construed as any limitation upon the remedies the Company
might, in the absence of this Agreement, have at law or in equity for any wrongs
of the Executive.
9. Governing Law. The validity and construction of this Agreement
-------------
or any of its provisions shall be determined under the laws of the State of
Delaware, without giving effect to its conflicts of laws provisions, and without
regard to its place of execution or its place of performance. The parties
irrevocably consent and agree to the exclusive jurisdiction of the Circuit Court
for Fairfax County or the United States District Court for the Eastern District
of Virginia, except for matters arbitrated subject to section 10 hereof.
10. Arbitration. The Company and the Executive mutually covenant and
-----------
agree that if any controversy or dispute relating to this Agreement arises
between them that cannot be resolved by negotiation, either party may, after
providing written notice to the other party, submit such dispute to arbitration
in Fairfax County, Virginia in accordance with the rules of the American
Arbitration Association then in effect unless the rules of another association
are mutually agreeable to the parties. The arbitrator appointed must be an
attorney or retired judge who has experience with the principle issues to be
arbitrated. Any reward or finding made pursuant to such arbitration shall in
all respects be well and fairly kept and observed and may be imposed by judgment
of the appropriate court in the Commonwealth of Virginia pursuant to the
applicable laws relating thereto. Each party shall bear his or its own costs in
connection with the arbitration, except that the cost of the arbitrator shall be
borne by the party that the arbitrator, in his sole discretion, determines has
not prevailed on a majority of the issues submitted to arbitration.
11. Severability. Except as provided in Section 4(e) hereof, if any
------------
one or more of the terms or provisions of this Agreement shall for any reason be
held to be invalid, illegal or unenforceable, in whole or in part, or in any
respect or in the event that any one or more of the provisions of this Agreement
operated or would prospectively
7
<PAGE>
operate to invalidate this Agreement, then and in either of those events, such
provision or provisions only shall be deemed null and void to the extent such
term or provision is held to be invalid, illegal or unenforceable and shall not
affect any other provision of this Agreement and the remaining provisions of
this Agreement shall remain operative and in full force and effect and shall in
no way be affected, prejudiced or disturbed thereby.
12. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one Agreement.
13. Amendments and Waivers. This Agreement may, to the maximum
----------------------
extent permitted by applicable law, be amended by the parties, which amendment
shall be set forth in an instrument executed by all of the parties. Any term,
provision or condition of this Agreement (other than as prohibited by applicable
law) may be waived in writing at any time by the party which is entitled to the
benefits thereof.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement on the date first above written.
EROL'S INTERNET, INC.
By: /s/ Dennis J. Spina
-------------------
Its: President and CEO
-----------------
/s/ Orhan Onaran
----------------
Orhan Onaran
8
<PAGE>
Exhibit A
---------
EROL'S INTERNET, INC.
EMPLOYEE PROPRIETARY INFORMATION AND
INVENTIONS AGREEMENT
THIS EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT dated
as of December, 1996, by and between EROL'S INTERNET INC., a Delaware
corporation (the "Company") and Orhan Onaran, (the "Employee"). In consideration
------- --------
of the mutual covenants and representations herein contained and the mutual
benefits derived herefrom, the parties, intending to be legally bound, agree as
follows:
1. Nondisclosure.
-------------
(a) At all times during employment and thereafter, the Employee
shall hold in strictest confidence and shall not disclose, use, lecture upon or
publish any of the Company's Proprietary Information (defined below), except as
such disclosure, use or publication may be required in connection with work for
the Company, or unless an officer of the Company expressly authorizes such in
writing. The Employee shall obtain Company's written approval before publishing
or submitting for publication any material (written, verbal, or otherwise) that
relates to his work at the Company and/or incorporates any Proprietary
Information. The Employee hereby assigns to the Company any rights the Employee
may have or acquire in such Proprietary Information and recognizes that all
Proprietary Information shall be the sole property of the Company and its
assigns.
(b) The term "Proprietary Information" shall mean any and all
-----------------------
confidential and/or proprietary knowledge, data or information of the Company.
By way of illustration but not limitation, Proprietary Information includes (a)
trade secrets, inventions, mask works, ideas, processes, formulas, source and
object codes, data, programs, other works of authorship, know-how, improvements,
discoveries, developments, designs and techniques (hereinafter collectively
referred to as "Inventions"); and (b) information regarding plans for research,
development, new products, marketing and selling, business plans, budgets and
unpublished financial statements, licenses, prices and costs, suppliers and
customers; and (c) information regarding the skills and compensation of other
employees of the Company. Notwithstanding the foregoing, it is understood that,
at all such times, the Employee is free to use information that is generally
known in the trade or industry, which is not gained as result of a breach of
this Agreement, and his own, skill, knowledge, know-how and experience to
whatever extent and in whichever manner the Employee wishes.
<PAGE>
(c) The Employee understand, in addition, that the Company has
received and in the future shall receive from third parties confidential or
proprietary information ("Third Party Information") subject to a duty on the
-----------------------
Company's part to maintain the confidentiality of such information and to use it
only for certain limited purposes. During the term of employment and thereafter,
the Employee shall hold Third Party Information in the strictest confidence and
shall not disclose to anyone (other than Company personnel who need to know such
information in connection with their work for the Company) or use, except in
connection with his work for the Company, Third Party Information unless
expressly authorized by an officer of the Company in writing.
(d) During his employment by the Company the Employee shall not
improperly use or disclose any confidential information or trade secrets, if
any, of any former employer or any other person to whom the Employee has an
obligation of confidentiality, and the Employee shall not bring onto the
premises of the Company any unpublished documents or any property belonging to
any former employer or any other person to whom the Employee has an obligation
of confidentiality unless consented to in writing by that former employer or
person. The Employee shall use in the performance of his duties only information
which is generally known and used by persons with training and experience
comparable to the Employee's own, which is common knowledge in the industry or
is otherwise provided or developed by the Company.
2. Assignment of Inventions.
------------------------
(a) The term "Property Rights" shall mean all trade secret,
---------------
trademark, patent, copyright, mask work and other intellectual property rights
throughout the world.
(b) Inventions, if any, patented or unpatented, which the
Employee made prior to the commencement of employment with the Company are
excluded from the scope of this Agreement. To preclude any possible uncertainty,
the Employee has set forth on Exhibit A (Previous Inventions) attached hereto a
complete list of all Inventions that the Employee has, alone or jointly with
others, conceived, developed or reduced to practice or caused to be conceived,
developed or reduced to practice prior to the commencement of employment with
the Company, that the Employee considers to be his property or the property of
third parties and that the Employee wishes to have excluded from the scope of
this Agreement (collectively referred to as "Prior Inventions"). If disclosure
----------------
of any such Prior Invention would cause the Employee to violate any prior
confidentiality agreement, the Employee understand that the Employee is not to
list such Prior Invention in Exhibit A but am only to disclose a cursory name
for each such invention, a listing of the party(ies) to whom it belongs and the
fact that full disclosure as to such inventions has not been made for that
reason. A space is provided on Exhibit A for such purpose. If no such disclosure
is attached, the Employee represents that there are no Prior Inventions. If, in
the course of employment with the Company, the Employee incorporates a Prior
Invention into a Company product, process or machine, the Company is hereby
granted and shall have a nonexclusive,
2
<PAGE>
royalty-free, irrevocable, perpetual, worldwide license (with rights to
sublicense through multiple tiers of sublicensees) to make, have made, modify,
use and sell such Prior Invention. Notwithstanding the foregoing, the Employee
agrees that the Employee shall not incorporate, or permit to be incorporated,
Prior Inventions in any Company Inventions without the Company's prior written
consent.
(c) Subject to Sections 2(d), and 2(f), the Employee hereby
assigns and agrees to assign in the future (when any such Inventions or
Proprietary Rights are first reduced to practice or first fixed in a tangible
medium, as applicable) to the Company all right, title and interest in and to
any and all Inventions (and all Proprietary Rights with respect thereto) whether
or not patentable or registrable under copyright or similar statutes, made or
conceived or reduced to practice or learned by the Employee, either alone or
jointly with others, during the period of employment with the Company.
Inventions assigned to the Company, or to a third party as directed by the
Company pursuant to this Section 2, are hereinafter referred to as "Company
-------
Inventions."
- ----------
(d) The Employee recognizes that, in the event of a specially
applicable state law, regulation, rule, or public policy ("Specific Inventions
-------------------
Law"), this Agreement shall not be deemed to require assignment of any invention
- ---
which qualifies fully for protection under a Specific Inventions Law by virtue
of the fact that any such invention was, for example, developed entirely on the
Employee's own time without using the Company's equipment, supplies, facilities,
or trade secrets and neither related to the Company's actual or anticipated
business, research or development, nor resulted from work performed by the
Employee for the Company. In the absence of a Specific Inventions Law, the
preceding sentence shall not apply.
(e) During the period of employment and for two (2) years after
termination of employment with the Company, the Employee shall promptly disclose
to the Company fully and in writing all Inventions authored, conceived or
reduced to practice by the Employee, either alone or jointly with others. In
addition, the Employee shall promptly disclose to the Company all patent
applications filed by the Employee or on behalf within two (2) years after
termination of employment. At the time of each such disclosure, the Employee
shall advise the Company in writing of any Inventions that the Employee believe
fully qualify for protection under the provisions of a Specific Inventions Law;
and the Employee shall at that time provide to the Company in writing all
evidence necessary to substantiate that belief. The Company shall keep in
confidence and shall not use for any purpose or disclose to third parties
without consent any confidential information disclosed in writing to the Company
pursuant to this Agreement relating to Inventions that qualify fully for
protection under a Specific Inventions Law. The Employee shall preserve the
confidentiality of any Invention that does not fully qualify for protection
under a Specific Inventions Law.
(f) The Employee also agree to assign all right, title and
interest in and to any particular Company Invention to a third party, including
without limitation the United States, as directed by the Company.
3
<PAGE>
(g) The Employee acknowledges that all original works of
authorship which are made by the Employee (solely or jointly with others) within
the scope of employment and which may be protected by copyright are "works made
for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101).
(h) The Employee shall assist the Company in every proper way to
obtain, and from time to time enforce, United States and foreign Proprietary
Rights relating to Company Inventions in any and all countries. To that end the
Employee shall execute, verify and deliver such documents and perform such other
acts (including appearances as a witness) as the Company may reasonably request
for use in applying for, obtaining, perfecting, evidencing, sustaining and
enforcing such Proprietary Rights and the assignment thereof. In addition, the
Employee shall execute, verify and deliver assignments of such Proprietary
Rights to the Company or its designee. The Employee's obligation to assist the
Company with respect to Proprietary Rights relating to such Company Inventions
in any and all countries shall continue beyond the termination of employment and
the Company shall compensate the Employee at a reasonable rate after termination
for the time actually spent by the Employee at the Company's request on such
assistance.
(i) In the event the Company is unable for any reason, after
reasonable effort, to secure the Employee's signature on any document needed in
connection with the actions specified in the preceding paragraph, the Employee
hereby irrevocably appoint the Company and its duly authorized officers and
agents as the Employee's agent and attorney in fact to act for and in the
Employee's behalf to sign, execute, verify and file any and all documents and to
do all other lawfully permitted acts to further the purposes of the preceding
paragraph with the same legal force and effect as if executed by the Employee.
The Employee hereby waive and quitclaim to the Company any and all claims, of
any nature whatsoever, which the Employee now or may hereafter have for
infringement of any proprietary rights assigned to the Company.
3. Agreement not to Compete.
------------------------
(a) The Employee agrees with the Company that the services which
the Employee shall render during the term of employment are unique, special and
of extraordinary character and that the Company shall be substantially dependent
upon such services to develop and market its products and to earn a profit.
Accordingly, in consideration for employment by the Company and compensation and
other benefits, during the period of employment the Employee shall not directly
or indirectly compete with the Company (or any division, subsidiary or other
affiliate of the Company) in the research, development, manufacture, licensing,
patenting or marketing of any direct or indirect internet access service, or any
other service, equipment or devices functionally similar to or which may compete
with a product or with technology of the Company.
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(b) The term "compete" as used herein means to engage directly
-------
or indirectly either as a proprietor, partner, employee, agent, consultant,
director, officer, stockholder or in any other capacity or manner whatsoever.
The phrase "interfere with" includes, but is not limited to, soliciting or
--------------
selling services or products which provide similar functions to any of the
Company's services or products to any current or potential customer of the
Company. The provisions of this Section shall not prevent the Employee from
investing any assets in securities of any corporation provided that such
investments do not, directly or indirectly, result in the Employee, family
members and other affiliates, collectively (i) owning beneficially at any time
five percent (5%) or more of the equity securities of any corporation engaged in
a business competitive with the Company, or (ii) otherwise being able to control
or actively participate in the business decisions of such competing business.
(c) The provisions of this Section 3 shall be enforced to the
fullest extent permissible under the laws and public policies applied to each
jurisdiction which enforcement is sought. If any particular provision or portion
of this Section shall be adjudicated to be invalid or unenforceable, this
Section shall be deemed amended to interpret such provision or portion thereof
so adjudicated to be invalid or unenforceable to extend only over the maximum
period of time, range of activities or geographic area as to which it may be
enforceable, such amendment to apply only with respect to the operation of this
Section in the particular jurisdiction in which such adjudication is made.
4. No Conflicting Employment; No Inducement of other Employees or
--------------------------------------------------------------
Solicitation of Customers.
-------------------------
The Employee agrees that during the period of employment by the
Company the Employee shall not, without the Company's express written consent,
engage in any other employment or business activity directly related to the
business in which the Company is now involved or becomes involved, nor shall the
Employee engage in any other activities which conflict with the Employee's
obligations to the Company. For the period of employment by the Company and for
two (2) years after the date of termination of employment by the Company the
Employee shall not (a) induce any employee of the Company to leave the employ of
the Company or (b) solicit the business of any client or customer of the Company
(other than on behalf of the Company).
If any restriction set forth in this Section is found by any court of
competent jurisdiction to be unenforceable because it extends for too long a
period of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend only over the maximum period
of time, range of activities or geographic area as to which it may be
enforceable.
5. No Conflicting Obligations.
--------------------------
The Employee represents that performing of all the terms of this
Agreement and as an employee of the Company does not and shall not breach any
5
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agreement to keep in confidence information acquired by the Employee in
confidence or in trust prior to employment by the Company. The Employee has not
entered into, and the Employee agrees not to enter into, any agreement either
written or oral in conflict herewith.
6. Return of Company Documents.
---------------------------
When the Employee leaves the employ of the Company, the Employee shall
deliver to the Company (and shall not keep in his possession, recreate or
deliver to anyone else) any and all devices, records, data, notes, reports,
proposals, lists, correspondence, specifications, drawings, blueprints,
sketches, materials, equipment, other documents or property, together with all
copies thereof (in whatever medium recorded) belonging to the Company, its
successors or assigns. The Employee further agrees that any property situated on
the Company's premises and owned by the Company, including disks and other
storage media, filing cabinets or other work areas, is subject to inspection by
Company personnel at any time with or without notice. Prior to leaving, the
Employee shall cooperate with the Company in completing and signing the
Company's termination statement for technical and management personnel.
7. Notification of New Employee.
----------------------------
In the event that the Employee leaves the employ of the Company, the
Employee hereby consent to the notification of the new employer of the
Employee's rights and obligations under this Agreement.
8. Legal and Equitable Remedies.
----------------------------
Because the Employee's services are personal and unique and because
the Employee may have access to and become acquainted with the proprietary
information of the Company, the Company shall have the right to enforce this
Agreement and any of its provisions by injunction, specific performance or other
equitable relief, without bond, and without prejudice to any other rights and
remedies that the Company may have for a breach of this Agreement.
9. General Provisions.
-------------------
(a) The Employee agrees and understands that nothing in this
Agreement shall confer any right with respect to continuation of employment by
the Company, nor shall it interfere in any way with the Employee's right or the
Company's right to terminate the Employee's employment at any time, with or
without cause as more fully set forth in the Employment Agreement between the
Employee and the Company to which this Agreement is attached as Exhibit A.
(b) The validity and construction of this Agreement or any of
its provisions shall be determined under the laws of the State of Delaware,
without giving
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effect to its conflicts of laws provisions, and without regard to its place of
execution or its place of performance. The parties irrevocably consent and agree
to the exclusive jurisdiction of the Circuit Court for Fairfax County or the
United States District Court for the Eastern District of Virginia and to service
of process for it and on its behalf by certified mail, for resolution of all
matters involving this Agreement or the transactions contemplated hereby. Each
party waives all rights to a trial by jury in any suit, action or proceeding
hereunder.
(c) This Agreement, and Exhibit A attached hereto and hereby
incorporated herein, sets forth the final, complete and exclusive agreement and
understanding between the Company and the Employee relating to the subject
matter hereof and supersedes all prior and contemporaneous understandings and
agreements relating to its subject matter. No modification of or amendment to
this Agreement, nor any waiver of any rights under this Agreement, shall be
effective unless in writing signed by the party to be charged. Any subsequent
change or changes in duties, salary or compensation shall not affect the
validity or scope of this Agreement.
(d) If one or more of the provisions in this Agreement are
deemed unenforceable by law, then the remaining provisions shall continue in
full force and effect.
(e) This Agreement shall be binding upon the Employee's heirs,
executors, administrators and other legal representatives and shall be for the
benefit of the Company, its successors and its assigns.
(f) The provisions of this Agreement shall survive the
termination of the Employee's employment and the assignment of this Agreement by
the Company to any successor in interest or other assignee.
(g) No waiver by the Company of any breach of this Agreement
shall be a waiver of any preceding or succeeding breach. No waiver by the
Company of any right under this Agreement shall be construed as a waiver of any
other right. The Company shall not be required to give notice to enforce strict
adherence to all terms of this Agreement.
THE EMPLOYEE UNDERSTANDS THAT THIS AGREEMENT AFFECTS HIS RIGHTS TO
INVENTIONS THAT HE MAKES DURING HIS EMPLOYMENT, AND RESTRICTS HIS RIGHTS TO
DISCLOSE OR USE THE COMPANY'S PROPRIETARY INFORMATION DURING OR SUBSEQUENT TO
HIS EMPLOYMENT.
THE EMPLOYEE HAS READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS
TERMS. THE EMPLOYEE HAS COMPLETELY FILLED OUT EXHIBIT A TO THIS AGREEMENT.
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement on the date first above written.
EROL'S INTERNET, INC.
By: /s/ Dennis J. Spina
-------------------
Its: President and CEO
-------------------
/s/ Orhan Onaran
----------------
Orhan Onaran
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Exhibit 10.11
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT, (this "Agreement") dated as of September 2,
---------
1997, is between Erol's Internet, Inc., a Delaware corporation (the "Company"),
-------
and Sal Quadrino (the "Executive"). In consideration of the mutual covenants
---------
and representations herein contained and the mutual benefits derived herefrom,
the parties, intending to be legally bound, covenant and agree as follows:
1. Purpose. The Company is engaged in providing internet services to the
-------
public (the "Business"). The Company wishes to employ the Executive, and the
--------
Executive has agreed to be employed by the Company, on the terms and conditions
herein provided.
2. Full-Time Employment of Executive - Duties and Status.
-----------------------------------------------------
(a) The Company hereby engages the Executive as a full-time executive
employee in the position of Vice President, Treasurer and Chief Financial
Officer, reporting directly to the Chief Executive Officer, for the period (the
"Employment Period") specified in Section 4(a) hereof, and the Executive accepts
-----------------
such employment, on the terms and conditions set forth in this Agreement.
Throughout the Employment Period, the Executive shall faithfully and competently
exercise such authority and perform such executive duties as are commensurate
with the authority and duties of a Chief Executive Officer of the Company and
such other reasonable duties as may otherwise be assigned to him from time to
time by the Company.
(b) Throughout the Employment Period, the Executive shall (i) devote
his full time and efforts to the business of the Company and shall not engage in
consulting work or any trade or business for his own account or for or on behalf
of any other person, firm or corporation which competes, conflicts or interferes
with the performance of his duties hereunder in any way, and (ii) accept such
additional position or positions to which the Executive may be appointed by the
Company, provided that the performance of the duties of such office or offices
shall generally be consistent with the scope of the duties provided for in
Section 2(a) hereof.
(c) The Executive agrees to execute the Employee Proprietary
Information and Inventions Agreement (the "Proprietary Rights Agreement"),
----------------------------
attached hereto as Exhibit A, and to comply with the provisions thereof. The
Executive understands that both entering into and complying with the terms of
the Proprietary Rights Agreement is a condition to the Executive's continued
employment with the Company and that failure to comply with the terms of the
Proprietary Rights Agreement will constitute "cause" for purposes of this
Agreement. The Executive further represents
<PAGE>
and warrants that his employment by the Company, and the performance by the
Executive of his duties hereunder, will not violate any of the terms and
conditions of any agreement with a previous employer or any legal right of any
previous employer.
3. Compensation and General Benefits. As full compensation for services
---------------------------------
provided to the Company, the Executive shall, during the Employment Period, be
compensated as follows:
(a) The Company shall pay to the Executive a salary (the "Salary")
------
based upon a per annum rate of One Hundred Seventy-Five Thousand Dollars
($175,000). The Salary shall be payable in periodic equal installments not less
frequently than monthly, less such sums as may be required to be deducted or
withheld under applicable provisions of federal, state and local law, plus
increases in the Salary, if any, as may be approved from time to time by the
Compensation Committee in its discretion.
(b) At least annually, the Executive's Performance shall be evaluated
in an annual performance review (the "Performance Review"). The results of the
------------------
Performance Review shall be provided to both the Executive and to the
Compensation Committee or its designees.
(c) Throughout the Employment Period, the Executive shall be entitled
to participate in such benefits plans of the Company or additional benefit
programs established by the Company as determined in the discretion of the
Compensation Committee commensurate with the Executive's level of responsibility
within the Company. For the period commencing on the date of this Agreement
through March 4, 1999, the Company will reimburse the Executive for (i) the
excess of any health insurance premium costs paid by the Executive to the
Company over the costs the Executive would have paid to Suburban Propane
Partners and (ii) any payments of the deductible amount with respect to health
insurance made by the Executive to the extent that such payments would not have
been required if the Executive was insured by the health insurance plan offered
by Suburban Propane Partners.
(d) Throughout the Employment Period, the Executive shall be entitled
to (i) three (3) weeks of annual vacation, (ii) leaves of absence, and (iii)
leaves for illness or temporary disability in accordance with the policies of
the Company in effect from time to time for its executive officers. Vacation
leaves and leaves of absence, if taken by the Executive, shall be taken at such
times as are reasonably acceptable to the Company. Any leaves on account of
illness or temporary disability which is short of Total Disability (as defined
in Section 4(d)(ii) hereof) shall not constitute a breach by the Executive of
his agreements hereunder even though leaves on account of a Total Disability may
be deemed to result in a termination of the Employment Period under the
applicable provisions of this Agreement.
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(e) The Executive shall perform his services at the corporate
headquarters office of the Company located in Springfield, Virginia, or at such
other office established by the Company within 50 miles of said corporate
headquarters, or at other locations as may be agreed to by the Executive and the
Chief Executive Officer.
(f) The Company shall reimburse the Executive from time to time for
all reasonable and customary business expenses incurred by him in the
performance of his duties hereunder, provided that the Executive shall submit
vouchers and other supporting data to substantiate the amount of said expenses
in accordance with Company policy from time to time in effect.
(g) If the Company purchases and maintains at any time during the term
of this Agreement one or more life insurance policies on the life of the
Executive, in addition to any policies purchased pursuant to Section 3(c)
hereof, in whatever amount or amounts which the Company, in its discretion,
deems desirable, the Company shall be the beneficiary of said policy or policies
and the Executive shall cooperate with the Company and submit to such reasonable
medical examinations as are necessary to enable the Company to purchase and
maintain in full force and effect such additional insurance policy or policies.
(h) If, after the date hereof, the Executive relocates to Springfield,
Virginia, then the Company will reimburse the Executive for all reasonable
relocation costs, plus any additional amount necessary to reimburse the
Executive for federal and state income taxes imposed on the amount of such
reimbursement.
4. Employment Period.
-----------------
(a) Duration. The Employment Period shall commence on the date of this
--------
Agreement and shall continue until the earlier of (i) the close of business on
the day immediately preceding the one year anniversary of this Agreement, or the
anniversary date of any extension of this Agreement as provided in Section 4(b)
hereof, whichever later occurs (the "Expiration Date"), or (ii) termination of
---------------
this Agreement by the Company with "cause" (as defined in Section 4(d)(i)
hereof), or (iii) termination of this Agreement by the Company for any reason
other than cause, or (iv) the Executive's resignation for "good reason" (as
defined in Section 4(d)(iii), or (v) the Executive's resignation without "good
reason", or (vi) the death or Total Disability of the Executive.
(b) Extension of Employment Period. On the one year anniversary of the
------------------------------
date of this Agreement, and on each anniversary thereafter, the Employment
Period shall be extended for an additional year, at the rate of compensation
then in effect as determined pursuant to the provisions of Section 3(a) hereof,
unless the Company or the Executive notifies the other in writing at least
ninety (90) days prior to such anniversary of its or his election not to renew
this Agreement.
3
<PAGE>
(c) Payments Upon Termination.
-------------------------
(i) If the Executive's employment is terminated by the Company
for any reason other than "cause" (as defined in Section 4(d)(i) hereof) or by
the Executive for "good reason" (as defined in Section 4(d)(iii) hereof) at any
time during the Employment Period or any extension thereof, the Company shall
pay to, or provide for, as the case may be, the Executive, for the remainder of
the Employment Period, at the times otherwise provided in this Agreement as if
the Executive had not been terminated:
(A) his Salary then in effect as accrued through the date
of termination and twelve (12) months Salary, which Salary shall be payable in
equal monthly installments during such period in accordance with existing
payroll policies as well as any annual bonus to which the Executive would have
been entitled during such period under Company bonus policies in effect as of
the time of the termination of the executive;
(B) to the extent applicable, the sickness and health
insurance and other benefit programs to which he would have been entitled under
this Agreement if he had remained in the employ of the Company for such period.
(ii) If the Executive's employment is terminated (A) by the
Company for "cause", or (B) by the Executive by resignation without "good
reason", or (C) upon the death or Total Disability of the Executive, then the
Company shall have no further liability to the Executive, except for the Salary
which has accrued through the date of termination, which amounts shall be paid
by the Company within thirty (30) days of such termination, or in accordance
with applicable law. If the Executive's employment is terminated due to his
death or his Total Disability, then, in addition to the Salary which has accrued
through the date of termination, the Executive or his estate shall receive the
Salary then in effect for a period of three (3) months after the date of
termination in equal monthly installments.
(iii) If the Executive's employment with the Company is
terminated by the Company without cause within six (6) months of a Change in
Control (as defined below) or the Executive resigns within six (6) months of a
Change in Control, then the Company shall pay to the Executive, his Salary then
in effect as accrued through the date of termination and twelve (12) months
Salary, which Salary shall be payable in equal monthly installments during such
period in accordance with existing payroll policies as well as any annual bonus
to which the Executive would have been entitled during such period under Company
bonus policies in effect as of the time of the termination of the executive.
(iv) Notwithstanding any other provision of this Section 4(c),
if the Executive violates any covenant, term or condition of this Agreement or
the Proprietary Rights Agreement, the Company shall be entitled, in addition to
any other
4
<PAGE>
remedies it may have hereunder or at law or in equity, to offset the amount of
any payment otherwise due to the Executive pursuant to this Section 4(c) against
any loss or damage incurred by the Company as a result of the Executive's
violation of said covenant, term or condition.
(v) Any and all payments or provisions for the payment of
salary, benefits, perquisites and rights to Executive described in this Section
4(c) shall, notwithstanding any other provisions of this Agreement be construed
in accordance with the applicable provisions of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), as such Section may from time to
----
time be amended and interpreted by regulation or judicial decision, in such
manner as is possible to preclude the application under such Section of any
disallowance, forfeiture, penalty, assessment or loss of tax benefit ("Tax
---
Loss") to either the Executive or the Company.
- ----
(A) The Executive and the Company agree that, should the
whole or any part or portion of the Executive's Salary, benefits, perquisites
and rights upon termination under Section 4(c) (the "Gross Benefits") be
--------------
determined or construed to be excessive under Code Section 280G so as to prompt
any Tax Loss to the Executive (the Gross Benefits less the Executive's Tax Loss
shall be referred to as the "Net Benefits"), then, to the extent it is possible
------------
to increase the amount of the Net Benefits by reducing the Gross Benefits
because a reduction in Gross Benefits reduces the amount of the Executive's Tax
Loss, then the Gross Benefits shall be reduced in such amount that maximizes the
Net Benefits. To the extent that the Gross Benefits are reduced in accordance
with this Section 4(c)(v)(A), the Executive's rights and benefits will be
reduced in the following order of priority, or in such other order as determined
by Executive:
(i) incentive bonus payments, if any;
(ii) welfare benefit plan payments;
(iii) stock option purchase payments under any
qualified stock option plan;
(iv) retirement benefits;
(v) Incentive compensation payments; and
(vi) base salary payments.
(B) If the parties within sixty (60) days cannot agree as
to whether a payment to the Executive is excessive under the Code, then, in
5
<PAGE>
order to facilitate this Agreement, the following procedures shall be followed
to determine whether a payment results in a Tax Loss to the Executive under
Section 280G:
(i) Immediately upon termination after a Change in
Control and pursuant to written notice by the Executive or the Company, the
Company's independent auditors shall choose Tax Counsel who is acceptable to the
Executive. Tax Counsel shall be a person unaffiliated with both the Executive
and the Company and who is either a certified public accountant who is a member
of a "Big 6" accounting firm, or any attorney at law who is a member of a major
law firm, and who is experienced in matters concerning Section 280G. Tax
Counsel's fees and other costs shall be paid by the Company.
(ii) All or part of a payment or benefit due under
this Agreement shall be treated as resulting in a Tax Loss to the Executive
under Section 280G if, in the written opinion of Tax Counsel, it is more likely
than not that such payment or benefit will result in a Tax Loss to the Executive
under Section 280G. In making this determination, Tax Counsel shall take into
account all relevant facts and circumstances and may take into account such
authorities as he deems relevant (and shall not be limited to those items that
constitute "substantial authority" under Code Section 6661).
(iii) All opinions of Tax Counsel shall be binding upon
the Company and the Executive and, to the extent possible, shall be provided
within 60 days of the Executive's termination of employment.
(iv) Immediately after Tax Counsel provides his
opinion and after any waiver by the Executive pursuant to paragraph (B) of this
section, the Company shall pay or provide benefits to the Executive required by
this Agreement.
(d) Definitions. When used in this Agreement, the words "cause",
-----------
"Total Disability" and "good reason" shall have the respective meanings set
forth below:
(i) The term "cause" means: (A) the Executive's failure to
perform his employment duties hereunder to the reasonable satisfaction of the
Company after reasonable notice to the Executive by the Company specifying such
failure and providing the Executive with a minimum of thirty (30) days to cure
such failure; (B) the Executive's breach of the covenants or agreements
contained in this Agreement, the Proprietary Rights Agreement, or any other
material agreement or undertaking of the Executive; (C) the Executive's
commission of a felony or any crime involving moral turpitude, fraud or
misrepresentation, whether or not related to the business or property of the
Company; (D) any act of the Executive against the Company intended to enrich the
Executive in derogation of his duties (including, but not limited to his duty of
loyalty) to
6
<PAGE>
the Company; (E) any willful or purposeful act or omission (or any act or
omission done in bad faith) or gross negligence of the Executive having the
effect of injuring the business or business relationships of the Company; or (F)
the Executive's discrimination, harassment, or retaliation in violation of
applicable federal state or local equal opportunity laws.
(ii) To the extent permitted by applicable law, the
term "Total Disability" means total disability as defined in the Company's group
and individual disability plans, if any. If the Company does not have in
existence such plans, then Total Disability shall mean:
(y) The inability to perform the duties required
hereunder for a continuous period of thirteen (13) weeks during the Employment
Period due to "mental incompetence" or "physical disability" as hereinafter
defined. The Executive shall be considered to be mentally incompetent and/or
physically disabled: (A) if the Executive is under a legal decree of
incompetency (the date of such decree being deemed the date on which such mental
incompetence occurred for purposes of this Section 4(d)); or (B) because of a
"Medical Determination of Mental and/or Physical Disability." A Medical
Determination of Mental and/or Physical Disability shall mean the written
determination by: (1) the physician regularly attending the Executive, and (2) a
physician selected by the Company, that because of a medically determinable
mental and/or physical disability the Executive is unable to perform any
essential functions of the Executive, and such mental and/or physical disability
is determined or reasonably expected to last thirteen (13) weeks or longer after
the date of determination, based on medically available information. If the two
physicians do not agree, they shall jointly choose a third consulting physician
and the written opinion of the majority of these three (3) physicians shall be
conclusive as to such mental and/or physical disability and shall be binding on
the parties. The date of any written opinion which is conclusive as to the
mental and/or physical disability shall be deemed the date on which such mental
and/or physical disability commenced for purposes of this Section 4(d), if the
written opinion concludes that the Executive is mentally and/or physically
disabled. In conjunction with determining mental and/or physical disability for
purposes of this Agreement, the Executive consents to any such examinations
which are relevant to a determination of whether the Executive is mentally
and/or physically disabled, and which is required by any two (2) of the
aforesaid physicians, and to furnish such medical information as may be
reasonably requested, and to waive any applicable physician patient privilege
that may arise because of such examination. All physicians selected hereunder
shall be Board-certified in the specialty most closely related to the nature of
the mental and/or physical disability alleged to exist.
(z) For purposes of determining whether the Executive
is mentally incompetent or physically disabled for the continuous thirteen (13)
week period specified in this Section 4(d), such disability shall be deemed to
continue from the date of any legal decree of incompetency, or written opinion
which is conclusive as to the
7
<PAGE>
mental and/or physical disability, through the date the legal decree expires or
is otherwise revoked or removed, or the date on which the mental and/or physical
disability has ceased, as the case may be, as set forth in a written opinion
prepared by the physicians described in this Section 4(d) pursuant to the
procedures provided herein.
(iii) The term "resignation for good reason" or "good reason"
means the following actions taken by the Company without the express written
consent of the Executive:
(A) the failure of the Company within ten (10) days
written notice by the Executive to the Chief Executive Officer (with a copy to
the Chairman of the Compensation Committee, if any), to make any payment due to
Executive hereunder;
(B) making any material change in the Executive's duties
not generally consistent with the Executive's scope of duties as set forth in
Section 2 hereof, which is not rescinded within thirty (30) days after the
Executive has given the Chief Executive Officer written notice of such change;
(C) decreasing the Executive's salary, or causing a
material decrease in life or disability insurance coverage or benefits payable
to the Executive or to which the Executive is entitled other than as part of a
general decrease in benefits provided or payable to officers and other salaried
employees of the Company;
(D) requiring the Executive to be based at any office or
location more than fifty (50) miles from the office at which the Executive is
based on the date hereof (except for any location to which the Executive and the
Chief Executive Officer agree), except for travel reasonably required in the
performance of the Executive's responsibilities;
(E) failing to comply (other than a failure to make
payments) with any of the material provisions of this Agreement, which change or
failure, as the case may be, continues unremedied for thirty (30) days after
Executive has given the Chief Executive Officer written notice of such change or
failure which notice specifies in detail the change or failure, as the case may
be.
(iv) The term "Change in Control" shall mean that subsequent to
the effectiveness of a registration statement under the Securities Act of 1933
(the "Securities Act") filed on behalf of the Company:
--------------
(A) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")), is or
------------
becomes the beneficial owner, directly or indirectly, of securities of the
Company
8
<PAGE>
representing thirty percent (30%) or more of the combined voting power of the
then outstanding securities of the Company; or
(B) a change of control of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of the
Regulation 14A promulgated under the Exchange Act as in effect on the date of
this Agreement; or
(C) there shall be consummated:
(I) any consolidation or merger or share exchange of
the Company in which the Company is not the continuing or surviving corporation
or pursuant to which shares of the Company's common stock would be converted
into cash, securities or other property, other than a merger of the Company in
which the holders of the Company's common stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, or
(II) any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all, or a substantial
portion, of the assets of the Company; or
(D) the stockholders of the Company approve a plan or
proposal for the complete or partial liquidation, dissolution or divisive
reorganization of the Company.
For purposes of this subparagraph (iv), the term "person" shall not be
deemed to include any officer or director of the Company as of the date hereof
or any such person's transferee if such transferee is related to such person by
blood or marriage, or is affiliated with or controlled by such person.
5. Notices. Any notices, requests, demands and other communications
-------
provided for by this Agreement shall be sufficient if in writing and if sent by
registered or certified mail to the Executive at the last address the Executive
has filed in writing with the Company and if to the Company at:
Erol's Internet, Inc.
Attention: CEO
7921 Woodruff Ct.
Springfield, VA 22151
6. Binding Agreement; Assignment. This Agreement shall be effective
-----------------------------
as of the date hereof and shall be binding upon and inure to the benefit of, the
parties and their respective heirs, successors, assigns, and personal
representatives, as the case may be. The Executive may not assign any rights or
delegate any duties under this
9
<PAGE>
Agreement. As used herein, the successors of the Company shall include, but not
be limited to, any successor by way of merger, consolidation, sale of all or
substantially all of the assets, or similar reorganization or change in control.
7. Entire Agreement. This Agreement shall constitute the entire
----------------
understanding of the Executive and the Company with respect to the subject
matter hereof and supersedes any and all prior understandings, representations
or promises written or oral concerning said subject matter. This Agreement may
not be changed, modified or discharged orally, but only by an instrument in
writing signed by the parties.
8. Enforceability. This Agreement has been duly authorized,
--------------
executed and delivered and constitutes the valid and binding obligations of the
parties hereto, enforceable in accordance with its terms. The undertakings
herein shall not be construed as any limitation upon the remedies the Company
might, in the absence of this Agreement, have at law or in equity for any wrongs
of the Executive.
9. Governing Law. The validity and construction of this Agreement
-------------
or any of its provisions shall be determined under the laws of the State of
Delaware, without giving effect to its conflicts of laws provisions, and without
regard to its place of execution or its place of performance. The parties
irrevocably consent and agree to the exclusive jurisdiction of the Circuit Court
for Fairfax County or the United States District Court for the Eastern District
of Virginia, except for matters arbitrated subject to section 10 hereof.
10. Arbitration. The Company and the Executive mutually covenant and
-----------
agree that if any controversy or dispute relating to this Agreement arises
between them that cannot be resolved by negotiation, either party may, after
providing written notice to the other party, submit such dispute to arbitration
in Fairfax County, Virginia in accordance with the rules of the American
Arbitration Association then in effect unless the rules of another association
are mutually agreeable to the parties. The arbitrator appointed must be an
attorney or retired judge who has experience with the principle issues to be
arbitrated. Any reward or finding made pursuant to such arbitration shall in all
respects be well and fairly kept and observed and may be imposed by judgment of
the appropriate court in the Commonwealth of Virginia pursuant to the applicable
laws relating thereto. Each party shall bear his or its own costs in connection
with the arbitration, except that the cost of the arbitrator shall be borne by
the party that the arbitrator, in his sole discretion, determines has not
prevailed on a majority of the issues submitted to arbitration.
11. Severability. Except as provided in Section 4(e) hereof, if any
------------
one or more of the terms or provisions of this Agreement shall for any reason be
held to be invalid, illegal or unenforceable, in whole or in part, or in any
respect or in the event that any one or more of the provisions of this Agreement
operated or would prospectively operate to invalidate this Agreement, then and
in either of those events, such provision or
10
<PAGE>
provisions only shall be deemed null and void to the extent such term or
provision is held to be invalid, illegal or unenforceable and shall not affect
any other provision of this Agreement and the remaining provisions of this
Agreement shall remain operative and in full force and effect and shall in no
way be affected, prejudiced or disturbed thereby.
12. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one Agreement.
13. Amendments and Waivers. This Agreement may, to the maximum
----------------------
extent permitted by applicable law, be amended by the parties, which amendment
shall be set forth in an instrument executed by all of the parties. Any term,
provision or condition of this Agreement (other than as prohibited by applicable
law) may be waived in writing at any time by the party which is entitled to the
benefits thereof.
11
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement on the date first above written.
ATTEST: EROL'S INTERNET, INC.
/s/ Patricia L. Perkins By: /s/ Dennis Spina
- ----------------------- ----------------
Its: CEO
----------------
WITNESS: EXECUTIVE
/s/ Keith Poulsen /s/ Sal Quadrino
- ----------------- ----------------
Sal Quadrino
12
<PAGE>
EROL'S INTERNET, INC.
EMPLOYEE PROPRIETARY INFORMATION AND
INVENTIONS AGREEMENT
THIS EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT dated as
of December 28, 1996, by and between EROL'S INTERNET, INC., a Delaware
corporation (the "Company") and Sal Quadrino (the "Employee"). In consideration
------- --------
of the mutual covenants and representations herein contained and the mutual
benefits derived herefrom, the parties, intending to be legally bound, agree as
follows:
1. Nondisclosure.
(a) At all times during employment and thereafter, the Employee
shall hold in strictest confidence and shall not disclose, use, lecture upon or
publish any of the Company's Proprietary Information (defined below), except as
such disclosure, use or publication may be required in connection with work for
the Company, or unless an officer of the Company expressly authorizes such in
writing. The Employee shall obtain Company's written approval before publishing
or submitting for publication any material (written, verbal, or otherwise) that
relates to his work at the Company and/or incorporates any Proprietary
Information. The Employee hereby assigns to the Company any rights the Employee
may have or acquire in such Proprietary Information and recognizes that all
Proprietary Information shall be the sole property of the Company and its
assigns.
(b) The term "Proprietary Information" shall mean any and all
-----------------------
confidential and/or proprietary knowledge, data or information of the Company.
By way of illustration but not limitation, Proprietary Information includes (a)
trade secrets, inventions, mask works, ideas, processes, formulas, source and
object codes, data, programs, other works of authorship, know-how, improvements,
discoveries, developments, designs and techniques (hereinafter collectively
referred to as "Inventions"); and (b) information regarding plans for research,
----------
development, new products, marketing and selling, business plans, budgets and
unpublished financial statements, licenses, prices and costs, suppliers and
customers; and (c) information regarding the skills and compensation of other
employees of the Company. Notwithstanding the foregoing, it is understood that,
at all such times, the Employee is free to use information that is generally
known in the trade or industry, which is not gained as result of a breach of
this Agreement, and his own, skill, knowledge, know-how and experience to
whatever extent and in whichever manner the Employee wishes.
(c) The Employee understands, in addition, that the Company has
received and in the future shall receive from third parties confidential or
proprietary information ("Third Party Information") subject to a duty on the
-----------------------
Company's part to maintain the
<PAGE>
confidentiality of such information and to use it only for certain limited
purposes. During the term of employment and thereafter, the Employee shall hold
Third Party Information in the strictest confidence and shall not disclose to
anyone (other than Company personnel who need to know such information in
connection with their work for the Company) or use, except in connection with
his work for the Company, Third Party Information unless expressly authorized by
an officer of the Company in writing.
(d) During his employment by the Company, the Employee shall not
improperly use or disclose any confidential information or trade secrets, if
any, of any former employer or any other person to whom the Employee has an
obligation of confidentiality, and the Employee shall not bring onto the
premises of the Company any unpublished documents or any property belonging to
any former employer or any other person to whom the Employee has an obligation
of confidentiality unless consented to in writing by that former employer or
person. The Employee shall use in the performance of his duties only information
which is generally known and used by persons with training and experience
comparable to the Employee's own, which is common knowledge in the industry or
is otherwise provided or developed by the Company.
2. Assignment of Inventions.
------------------------
(a) The term "Property Rights" shall mean all trade secret,
---------------
trademark, patent, copyright, mask work and other intellectual property rights
throughout the world.
(b) Inventions, if any, patented or unpatented, which the
Employee made prior to the commencement of employment with the Company are
excluded from the scope of this Agreement.
(c) Subject to Sections 2(d), and 2(f), the Employee hereby
assigns and agrees to assign in the future (when any such Inventions or
Proprietary Rights are first reduced to practice or first fixed in a tangible
medium, as applicable) to the Company all right, title and interest in and to
any and all Inventions (and all Proprietary Rights with respect thereto) whether
or not patentable or registrable under copyright or similar statutes, made or
conceived or reduced to practice or learned by the Employee, either alone or
jointly with others, during the period of employment with the Company to the
extent that such Inventions are made or conceived or reduced to practice or
learned by the Employee (i) during the any time that the Employee either is
physically present on the Company's premises or is utilizing any property owned
or leased by the Company, or (ii) based on any information or knowledge gained
by the Employee through his employment with the Company. Inventions assigned to
the Company, or to a third party as directed by the Company pursuant to this
Section 2, are hereinafter referred to as "Company Inventions."
------------------
(d) The Employee recognizes that, in the event of a specially
applicable state law, regulation, rule, or public policy ("Specific Inventions
-------------------
Law"), this Agreement shall not be deemed to require assignment of any invention
- ---
which qualifies fully for protection under a Specific Inventions Law by virtue
of the fact that any such invention was, for
2
<PAGE>
example, developed entirely on the Employee's own time without using the
Company's equipment, supplies, facilities, or trade secrets and neither related
to the Company's actual or anticipated business, research or development, nor
resulted from work performed by the Employee for the Company. In the absence of
a Specific Inventions Law, the preceding sentence shall not apply.
(e) During the period of employment and for one (1) year after
termination of employment with the Company, the Employee shall promptly disclose
to the Company fully and in writing all Inventions authored, conceived or
reduced to practice by the Employee, either alone or jointly with others. In
addition, the Employee shall promptly disclose to the Company all patent
applications filed by the Employee or on behalf within one (1) year after
termination of employment. At the time of each such disclosure, the Employee
shall advise the Company in writing of any Inventions that the Employee believes
fully qualify for protection under the provisions of a Specific Inventions Law;
and the Employee shall at that time provide to the Company in writing all
evidence necessary to substantiate that belief. The Employee shall preserve the
confidentiality of any Invention that does not fully qualify for protection
under a Specific Inventions Law.
(f) The Employee also agrees to assign all right, title and
interest in and to any particular Company Invention to a third party, including
without limitation the United States, as directed by the Company.
(g) The Employee acknowledges that all original works of
authorship which are made by the Employee (solely or jointly with others) within
the scope of employment and which may be protected by copyright are "works made
for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101).
(h) The Employee shall assist the Company in every proper way to
obtain, and from time to time enforce, United States and foreign Proprietary
Rights relating to Company Inventions in any and all countries. To that end the
Employee shall execute, verify and deliver such documents and perform such other
acts (including appearances as a witness) as the Company may reasonably request
for use in applying for, obtaining, perfecting, evidencing, sustaining and
enforcing such Proprietary Rights and the assignment thereof. In addition, the
Employee shall execute, verify and deliver assignments of such Proprietary
Rights to the Company or its designee. The Employee's obligation to assist the
Company with respect to Proprietary Rights relating to such Company Inventions
in any and all countries shall continue beyond the termination of employment and
the Company shall compensate the Employee at a reasonable rate after termination
for the time actually spent by the Employee at the Company's request on such
assistance.
(i) In the event the Company is unable for any reason, after
reasonable effort, to secure the Employee's signature on any document needed in
connection with the actions specified in the preceding paragraph, the Employee
hereby irrevocably appoints the Company and its duly authorized officers and
agents as the Employee's agent and attorney in fact to act for and in the
Employee's behalf to sign, execute, verify and file any and all documents and
3
<PAGE>
to do all other lawfully permitted acts to further the purposes of the preceding
paragraph with the same legal force and effect as if executed by the Employee.
The Employee hereby waives and quitclaims to the Company any and all claims, of
any nature whatsoever, which the Employee now or may hereafter have for
infringement of any proprietary rights assigned to the Company.
3. Agreement not to Compete.
------------------------
(a) The Employee agrees with the Company that the services which
the Employee shall render during the term of employment are unique, special and
of extraordinary character and that the Company shall be substantially dependent
upon such services to develop and market its products and to earn a profit.
Accordingly, in consideration for employment by the Company and compensation and
other benefits, during the period of employment the Employee shall not directly
or indirectly compete with the Company (or any division, subsidiary or other
affiliate of the Company) in the research, development, manufacture, licensing,
patenting or marketing of any direct or indirect internet access service, or any
other service, equipment or devices functionally similar to or which may compete
or interfere with a product, service, or technology of the Company unless the
Employee has disclosed all material aspects of any activity that may compete or
interfere with a product, service, or technology of the Company to an officer of
the Company and such officer has approved the Employee's conduct of such
activity in writing.
(b) The term "compete" as used herein means to engage directly
-------
or indirectly either as a proprietor, partner, employee, agent, consultant,
director, officer, stockholder or in any other capacity or manner whatsoever.
The phrase "interfere with" includes, but is not limited to, soliciting or
--------------
selling services or products which provide similar functions to any of the
Company's services or products to any current or potential customer of the
Company. The provisions of this Section shall not prevent the Employee from
investing any assets in securities of any corporation provided that such
investments do not, directly or indirectly, result in the Employee, his spouse
or his children collectively (i) owning beneficially at any time five percent
(5%) or more of the equity securities of any corporation engaged in a business
competitive with the Company, or (ii) otherwise being able to control or
actively participate in the business decisions of such competing business.
(c) The provisions of this Section 3 shall be enforced to the
fullest extent permissible under the laws and public policies applied to each
jurisdiction which enforcement is sought. If any particular provision or portion
of this Section 3 shall be adjudicated to be invalid or unenforceable, this
Section shall be deemed amended to interpret such provision or portion thereof
so adjudicated to be invalid or unenforceable to extend only over the maximum
period of time, range of activities or geographic area as to which it may be
enforceable, such amendment to apply only with respect to the operation of this
Section in the particular jurisdiction in which such adjudication is made.
4. No Conflicting Employment; No Inducement of other Employees or
--------------------------------------------------------------
Solicitation of Customers.
-------------------------
4
<PAGE>
The Employee agrees that during the period of employment by the Company
the Employee shall not, without the Company's express written consent, engage in
any other employment or business activity directly related to the business in
which the Company is now involved or becomes involved, nor shall the Employee
engage in any other activities which conflict with the Employee's obligations to
the Company. For the period of employment by the Company and for one (1) year
after the date of termination of employment by the Company the Employee shall
not (a) induce any employee of the Company to leave the employ of the Company or
(b) solicit the business of any client or customer of the Company (other than on
behalf of the Company).
If any restriction set forth in this Section 4 is found by any court of
competent jurisdiction to be unenforceable because it extends for too long a
period of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend only over the maximum period
of time, range of activities or geographic area as to which it may be
enforceable.
The Employee hereby covenants that he shall not represent in any manner
whatsoever to any party that any of the activities in which he engages pursuant
to this Section 4 or Section 3(a) are being conducted either on behalf or for
the benefit of the Company, or that the Company has any knowledge of such
activities other than as set forth in the written approval provided by the
Company to the Employee to engage in such activities. The Employee hereby agrees
to indemnify and hold harmless the Company for the amount of any claim,
liability, obligation, or indebtedness of any nature whatsoever arising from any
activity in which the Employee engages pursuant to this Section 4 and Section
3(a).
5. No Conflicting Obligations.
--------------------------
The Employee represents that performing of all the terms of this
Agreement and as an employee of the Company does not and shall not breach any
agreement to keep in confidence information acquired by the Employee in
confidence or in trust prior to employment by the Company. The Employee has not
entered into, and the Employee agrees not to enter into, any agreement either
written or oral in conflict herewith.
6. Return of Company Documents.
---------------------------
When the Employee leaves the employ of the Company, the Employee shall
deliver to the Company (and shall not keep in his possession, recreate or
deliver to anyone else) any and all devices, records, data, notes, reports,
proposals, lists, correspondence, specifications, drawings, blueprints,
sketches, materials, equipment, other documents or property, together with all
copies thereof (in whatever medium recorded) belonging to the Company, its
successors or assigns. The Employee further agrees that any property situated on
the Company's premises and owned by the Company, including disks and other
storage media, filing cabinets or other work areas, is subject to inspection by
Company personnel at any time with or without notice. Prior to leaving, the
Employee shall cooperate with the Company in completing and signing the
Company's termination statement for technical and management personnel.
5
<PAGE>
7. Notification of New Employee.
----------------------------
In the event that the Employee leaves the employ of the Company, the
Employee hereby consents to the notification of the new employer of the
Employee's rights and obligations under this Agreement.
8. Legal and Equitable Remedies.
----------------------------
Because the Employee's services are personal and unique and because the
Employee may have access to and become acquainted with the proprietary
information of the Company, the Company shall have the right to enforce this
Agreement and any of its provisions by injunction, specific performance or other
equitable relief, without bond, and without prejudice to any other rights and
remedies that the Company may have for a breach of this Agreement.
9. General Provisions.
------------------
(a) The Employee agrees and understands that nothing in this
Agreement shall confer any right with respect to continuation of employment by
the Company, nor shall it interfere in any way with the Employee's right or the
Company's right to terminate the Employee's employment at any time, with or
without cause as more fully set forth in the Employment Agreement between the
Employee and the Company to which this Agreement is attached as Exhibit A.
(b) The validity and construction of this Agreement or any of
its provisions shall be determined under the laws of the State of Delaware,
without giving effect to its conflicts of laws provisions, and without regard to
its place of execution or its place of performance. The parties irrevocably
consent and agree to the exclusive jurisdiction of the Circuit Court for Fairfax
County or the United States District Court for the Eastern District of Virginia
and to service of process for it and on its behalf by certified mail, for
resolution of all matters involving this Agreement or the transactions
contemplated hereby. Each party waives all rights to a trial by jury in any
suit, action or proceeding hereunder.
(c) This Agreement sets forth the final, complete and exclusive
agreement and understanding between the Company and the Employee relating to the
subject matter hereof and supersedes all prior and contemporaneous
understandings and agreements relating to its subject matter. No modification of
or amendment to this Agreement, nor any waiver of any rights under this
Agreement, shall be effective unless in writing signed by the party to be
charged. Any subsequent change or changes in duties, salary or compensation
shall not affect the validity or scope of this Agreement.
(d) If one or more of the provisions in this Agreement are
deemed unenforceable by law, then the remaining provisions shall continue in
full force and effect.
6
<PAGE>
(e) This Agreement shall be binding upon the Employee's heirs,
executors, administrators and other legal representatives and shall be for the
benefit of the Company, its successors and its assigns.
(f) The provisions of this Agreement shall survive the
termination of the Employee's employment and the assignment of this Agreement by
the Company to any successor in interest or other assignee.
(g) No waiver by the Company of any breach of this Agreement
shall be a waiver of any preceding or succeeding breach. No waiver by the
Company of any right under this Agreement shall be construed as a waiver of any
other right. The Company shall not be required to give notice to enforce strict
adherence to all terms of this Agreement.
THE EMPLOYEE UNDERSTANDS THAT THIS AGREEMENT AFFECTS HIS RIGHTS TO
INVENTIONS THAT HE MAKES DURING HIS EMPLOYMENT, AND RESTRICTS HIS RIGHTS TO
DISCLOSE OR USE THE COMPANY'S PROPRIETARY INFORMATION DURING OR SUBSEQUENT TO
HIS EMPLOYMENT.
THE EMPLOYEE HAS READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS
TERMS.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement on the date first above written.
ATTEST: EROL'S INTERNET, INC.
/s/ Patricia L. Perkins By: /s/ Dennis Spina
- ----------------------- ----------------
Its: CEO
---------------
WITNESS: EMPLOYEE
/s/ Keith Poulsen /s/ Sal Quadrino
- ----------------- ----------------
Sal Quadrino
8
<PAGE>
Exhibit 10.12
EROL'S INTERNET, INC.
- ------------------------------------------------------------------------
EROL'S INTERNET, INC.
STOCK PLAN
- ------------------------------------------------------------------------
<PAGE>
EROL'S INTERNET, INC.
STOCK PLAN
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Article I. Purpose of the Plan and Definitions..................... 4
1.1 Purpose..................................................... 4
1.2 Definitions and Usage....................................... 4
Article II. Administration of the Plan............................. 8
2.1 Administration of the Plan.................................. 8
2.2 Authority of the Committee.................................. 8
2.3 Finality of Decisions by the Committee...................... 10
2.4 Limitations on Liability of Members of the Committee........ 10
Article III. Stock Subject to the Plan............................. 11
3.1 Stock Subject to the Plan................................... 11
Article IV. Awards and Grants...................................... 12
4.1 Eligibility................................................. 12
4.2 Awards Under the Plan....................................... 12
4.3 Stockholders' Agreement..................................... 12
4.4 Company's Right of First Refusal............................ 12
Article V. Stock Options........................................... 14
5.1 Stock Options............................................... 14
Article VI. Stock Appreciation Rights.............................. 20
6.1 Stock Appreciation Rights................................... 20
Article VII. Restricted Stock...................................... 22
7.1 Restricted Stock............................................ 22
Article VIII. Change in Control.................................... 25
8.1 Impact of Change in Control................................. 25
8.2 Definition of "Change in Control"........................... 25
Article IX. Amendments and Termination............................. 26
9.1 Amendments and Termination of the Plan...................... 26
9.2 Amendments of Awards........................................ 26
9.3 Term of the Plan............................................ 26
9.4 Severability................................................ 26
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Article X. Unfunded Status of the Plan............................. 27
10.1 Unfunded Status of the Plan................................. 27
Article XI. General Provisions..................................... 28
11.1 General Provisions.......................................... 28
Article XII. Approval by Shareholders.............................. 30
12.1 Approval by Shareholders.................................... 30
</TABLE>
3
<PAGE>
ARTICLE I
Purpose of the Plan and Definitions
Section 1.1. Purpose. The purpose of the Erol's Internet, Inc. Stock Plan
-------
("Plan") is to enable employees and officers, as well as Eligible Independent
Contractors (as hereinafter defined), of Erol's Internet, Inc. (the "Company")
and its Affiliates (as hereinafter defined) to (i) own shares of Stock in the
Company, (ii) participate in the shareholder value of the Company, (iii) have a
mutuality of interest with other shareholders of the Company, and (iv) enable
the Company to attract, retain and motivate employees, officers, and independent
contractors of particular merit.
The Plan is a compensatory benefit plan within the meaning of Rule 701
under the Securities Act of 1933 (the "Securities Act"). Except to the extent
any other exemption from the Securities Act is expressly relied upon in
connection with any agreement entered into pursuant to the Plan or the
securities issuable hereunder are registered under the Securities Act, the
issuance of Stock pursuant to the Plan is intended to qualify for the exemption
from registration under the Securities Act provided by Rule 701. To the extent
that an exemption from registration under the Securities Act provided by Rule
701 is unavailable, all unregistered offers and sales of awards and shares of
Stock issuable upon exercise of an award are intended to be exempt from
registration under the Securities Act in reliance upon the private offering
exemption contained in Section 4(2) of the Securities Act, or other available
exemption, and the Plan shall be so administered.
Section 1.2. Definitions and Usage. For the purposes of the Plan, the
---------------------
following terms, when used with capital initial letters, shall have the meanings
set forth below:
"Affiliate" means a corporation which, for purposes of Section 422 of
---------
the Code, is a parent or subsidiary of the Company.
"Board" means the Board of Directors of the Company.
-----
"Cause" means the termination of a Participant's service with the
-----
Company because of (i) a felony conviction of the Participant; (ii) the
commission by such Participant of an act of fraud or embezzlement
against the Company; (iii) willful misconduct materially detrimental to
the Company; (iv) the Participant's continued failure to implement
reasonable requests or directions arising from actions of the Board
after thirty (30) days written notice to the Participant; (v) the
wrongful dissemination of confidential or proprietary information; (vi)
the engagement in Competitive Activities; or (vii) the intentional and
habitual neglect by the Participant of his or her duties to the Company.
"Change in Control" has the meaning set forth in Section 8.2 of the
-----------------
Plan.
4
<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended from time to
----
time, and any regulations issued thereunder.
"Committee" means the Board or committee of Board members appointed
---------
pursuant to Section 2.1 of the Plan to administer the Plan.
"Competitive Activities" means a Participant who during the term of
----------------------
employment with the Company or an Affiliate directly or indirectly
competes or interferes with the Company or an Affiliate in the research,
development, manufacture, licensing, patenting or marketing of any
direct or indirect internet access service, or any other service,
equipment or devices functionally similar to or which may compete with a
product or with technology of the Company or an Affiliate. The term
"compete" as used herein means to engage directly or indirectly either
as a proprietor, partner, employee, agent, consultant, director,
officer, shareholder or in any other capacity or manner whatsoever. The
phrase "interfere with" includes, but is not limited to, soliciting or
selling services or products which provide similar functions to any of
the Company's or an Affiliate's services or products to any current or
potential customer of the Company or an Affiliate.
The provisions of this Section shall not prevent a Participant from
investing any assets in securities of any corporation provided that such
investments do not, directly or indirectly, result in the Participant,
family members and other affiliates, collectively (i) owning
beneficially at any time five percent (5%) or more of the equity
securities of any corporation engaged in a business competitive with the
Company or an Affiliate, or (ii) otherwise being able to control or
actively participate in the business decisions of such competing
business.
The provisions of this Section shall be enforced to the fullest extent
permissible under the laws and public policies applied to each
jurisdiction in which enforcement is sought. If any particular provision
or portion of this Section shall be adjudicated to be invalid or
unenforceable, this Section shall be deemed amended to interpret such
provision or portion thereof so adjudicated to be invalid or
unenforceable to extend only over the maximum period of time, range of
activities or geographic area as to which it may be enforceable, such
amendment to apply only with respect to the operation of this Section in
the particular jurisdiction in which such adjudication is made.
"Company" means Erol's Internet, Inc., or any successor organization,
-------
and its Affiliates.
"Disability" means the total and permanent disability of a Participant
----------
(incurred while in the active service of the Company or its Affiliates)
based on proof satisfactory to the Committee. Total and permanent
disability shall mean the inability of the Participant to engage in any
substantial gainful activity for the Company or its Affiliates by reason
of any medically determinable physical or
5
<PAGE>
mental impairment which can be expected to result in death or to be of
long, continued and indefinite duration, as determined by a physician or
physicians selected by the Committee or other medical evidence
satisfactory to the Committee.
"Effective Date" shall be December 27, 1996.
--------------
"Eligible Independent Contractor" means an independent contractor hired
-------------------------------
by the Company to provide consulting, technical, business, or other
professional services for the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Fair Market Value" of a share of Stock for any purpose on a particular
-----------------
date shall be determined in a manner such as the Committee shall in good
faith determine to be appropriate; provided, however, that if the Stock
is publicly traded, then Fair Market Value shall mean the last reported
sale price per share of Stock, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities
listed or admitted to trading on a national securities exchange or
included for quotation on the Nasdaq-National Market, or if the Stock is
not so listed or admitted to trading or included for quotation, the last
quoted price, or if the Stock is not so quoted, the average of the high
bid and low asked prices, regular way, in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc.
Automated Quotation System or, if such system is no longer in use, the
principal other automated quotations system that may then be in use or,
if the Stock is not quoted by any such organization, the average of the
closing bid and asked prices, regular way, as furnished by a
professional market maker making a market in the Stock as selected in
good faith by the Committee or by such other source or sources as shall
be selected in good faith by the Committee; and provided further, that
in the case of Incentive Stock Options, the determination of Fair Market
Value shall be made by the Committee in good faith in conformance with
the Treasury Regulations under Section 422 of the Code. If, as the case
may be, the relevant date is not a trading day, the determination shall
be made as of the next preceding trading day. As used herein, the term
"trading day" shall mean a day on which public trading of securities
occurs and is reported in the principal consolidated reporting system
referred to above, or if the Stock is not listed or admitted to trading
on a national securities exchange or included for quotation on the
Nasdaq-National Market, any day other than a Saturday, a Sunday or a day
in which banking institutions in the State of New York are closed.
"Incentive Stock Option" means any Stock Option intended to be an
----------------------
"incentive stock option" within the meaning of Section 422 of the Code.
6
<PAGE>
"Non-Qualified Stock Option" means any Stock Option that is not an
--------------------------
Incentive Stock Option.
"Optionee" means an individual who receives an Option under the Plan.
--------
"Participant" means an individual to whom an award is granted pursuant
-----------
to the Plan.
"Plan" means the Erol's Internet, Inc. Stock Plan, as hereinafter
----
amended from time to time.
"Restricted Stock" means an award of shares of Stock that is subject to
----------------
restrictions pursuant to Article VII of the Plan.
"Retirement" means retirement from active employment or other service
----------
with the Company pursuant to the normal or early retirement policy and
procedures of the Company.
"Rule 16b-3" means Rule 16b-3 as in effect under the Exchange Act on the
----------
effective date of the Plan, or any successor provision prescribing
conditions necessary to exempt the issuance of securities under the Plan
(and further transactions in such securities) from Section 16(b) of the
Exchange Act.
"Stock" means the voting and nonvoting common stock of Erol's Internet,
-----
Inc.
"Stock Appreciation Right" means the right, pursuant to an award granted
------------------------
under Article VI of the Plan, to surrender to the Company all (or a
portion) of a Stock Option in exchange for an amount in cash and/or
shares of Stock equal in value to the excess of (i) the Fair Market
Value, as of the date such right is exercised and the related Stock
Option (or such portion thereof) is surrendered, of the shares of Stock
covered by such Stock Option (or such portion thereof), over (ii) the
aggregate exercise price of such Stock Appreciation Right (or such
portion thereof).
"Stock Option" or "Option" means any option to purchase shares of Stock
------------ ------
(including Restricted Stock, if the Committee so determines) granted
pursuant to Article V of the Plan.
Except where otherwise indicated by the context, any masculine
terminology used herein also shall include the feminine and vice versa,
and the definition of any term herein in the singular shall also include
the plural and vice versa.
7
<PAGE>
ARTICLE II
Administration of the Plan
Section 2.1. Administration of the Plan.
--------------------------
(a) Procedure. The Plan shall be administered by the Board. In the
---------
alternative, the Board may appoint a Committee consisting of not less than two
(2) members of the Board to administer the Plan on behalf of the Board, subject
to such terms and conditions as the Board may prescribe. Once appointed, the
Committee shall continue to serve until otherwise directed by the Board. From
time to time, the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies, however caused, and remove
all members of the Committee and, thereafter, directly administer the Plan. In
the event that the Board is the administrator of the Plan in lieu of a
Committee, the term "Committee" as used herein shall be deemed to mean the
Board.
Members of the Board or Committee who are either eligible for
awards or have been granted awards may vote on any matters affecting the
administration of the Plan or the grant of awards pursuant to the Plan, except
that no such member shall act upon the granting of an award to himself or
herself, but any such member may be counted in determining the existence of a
quorum at any meeting of the Board or the Committee during which action is taken
with respect to the granting of an award to him or her.
The Committee shall meet at such times and places and upon such
notice as it may determine. A majority of the Committee shall constitute a
quorum. Any acts by the Committee may be taken at any meeting at which a quorum
is present and shall be by majority vote of those members entitled to vote.
Additionally, any acts reduced to writing or approved in writing by all of the
members of the Committee shall be valid acts of the Committee.
(b) Procedure After Registration of the Stock. Notwithstanding the
-----------------------------------------
provisions of Section 2.1(a) of the Plan, in the event that the Stock or any
other capital stock of the Company becomes registered under Section 12 of the
Exchange Act, the members of the Committee shall be both "Non-Employee
Directors" within the meaning of Rule 16b-3, and "outside directors" within the
meaning of Section 162(m) of the Code. Upon and after the point in time that
the Stock or any other capital stock of the Company becomes registered under
Section 12 of the Exchange Act, the Board shall take all action necessary to
cause the Plan to be administered in accordance with the then effective
provisions of Rule 16b-3, provided that any amendment to the Plan required for
compliance with such provisions shall be made in accordance with Section 9.1 of
the Plan.
Section 2.2. Authority of the Committee. In particular, the Committee shall,
--------------------------
subject to the limitations and terms of the Plan, have the authority to:
8
<PAGE>
(a) select the officers and other employees of the Company, as well
as Eligible Independent Contractors to whom Stock Options, Stock Appreciation
Rights and/or Restricted Stock may from time to time be granted hereunder. In
selecting the officers, employees, and Eligible Independent Contractors to whom
awards shall be granted under the Plan, the Committee may, in its sole
discretion, act on any recommendation made by the Chief Executive Officer of the
Company;
(b) determine whether and to what extent Incentive Stock Options,
Non-Qualified Stock Options, Stock Appreciation Rights, and/or Restricted Stock,
or any combination thereof, are to be granted hereunder;
(c) determine the number of shares to be covered by each such award
granted hereunder;
(d) determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder, including, but not limited
to, the option or exercise price and any restriction or limitation, based upon
such factors as the Committee shall determine, in its sole discretion;
(e) determine whether and under what circumstances a Stock Option may
be exercised and settled in cash or Stock or without a payment of cash;
(f) determine whether, to what extent and under what circumstances
Stock and other amounts payable with respect to an award under this Plan shall
be deferred either automatically or at the election of the Participant;
(g) amend the terms of any outstanding award (with the consent of the
Participant) to reflect terms not otherwise inconsistent with the Plan,
including amendments concerning vesting acceleration or forfeiture waiver
regarding any award or the extension of a Participant's right with respect to
awards granted under the Plan, as a result of termination of employment or
service or otherwise, based on such factors as the Committee shall determine, in
its sole discretion;
(h) adopt, alter and repeal such administrative rules, guidelines and
practices governing the Plan as it shall, from time to time, deem advisable;
(i) interpret the terms and provisions of the Plan and any award
issued under the Plan (and any agreements relating thereto); and otherwise
settle all claims and disputes arising under the Plan;
(j) employ attorneys, consultants, accountants, or other persons and
the Committee, the Company and its officers and directors shall be entitled to
rely upon the advice, opinions or valuations of any such persons; and
9
<PAGE>
(k) otherwise supervise the administration of the Plan.
Section 2.3. Finality of Decisions by the Committee. The Committee shall have
--------------------------------------
the broad discretionary authority to adopt, alter and repeal such administrative
rules, guidelines and practices governing the Plan as it shall, from time to
time, deem advisable to interpret the terms and provisions of the Plan and any
award granted under the Plan (and any agreements relating thereto and to
otherwise supervise the administration of the Plan). All decisions made by the
Committee pursuant to the provisions of the Plan and all interpretations and
determinations made by the Committee in good faith shall be final and binding on
all persons, including the Company and the Participants.
Section 2.4. Limitations on Liability of Members of the Committee. No member
----------------------------------------------------
of the Committee shall be personally liable for any action, determination, or
interpretation made in good faith with respect to the Plan or awards made
hereunder, and all members of the Committee shall be fully protected by the
Company in respect of any such action, determination or interpretation.
10
<PAGE>
ARTICLE III
Stock Subject to the Plan
Section 3.1. Stock Subject to the Plan.
-------------------------
(a) Subject to adjustments as provided below in this Section 3.1 of
the Plan, the shares of Stock that may be delivered or purchased or used for
reference purposes (with respect to Stock Appreciation Rights) with respect to
awards granted under the Plan, including with respect to Incentive Stock Options
intended to qualify under Section 422 of the Code, shall not exceed an aggregate
of 1,550,000 shares of voting common stock of the Company and 1,000,000 shares
of the nonvoting common stock of the Company. The Company shall reserve said
number of shares for awards under the Plan, subject to adjustments as provided
below in this Section 3.1 of the Plan. If any award, or portion of an award,
under the Plan expires or terminates unexercised, becomes unexercisable or is
forfeited or otherwise terminated, surrendered or canceled as to any shares
without the delivery of shares of Stock or other consideration, the shares
subject to such award shall thereafter be available for further awards under the
Plan.
(b) The maximum number of shares of Stock which may be awarded or for
which options may be granted under the Plan during any one calendar year to any
one Participant shall be limited to 775,000 shares of Stock. For purposes of
applying this limitation, if an award or option is terminated, surrendered or
canceled, the shares or underlying shares shall continue to be counted against
the maximum number of shares that may be awarded or for which options may be
granted during any one calendar year to any one Participant.
(c) In the event of a reclassification, recapitalization, stock split,
stock dividend, combination of shares, or other similar event, the maximum
number and kind of shares reserved for issuance or with respect to which awards
may be granted under the Plan as provided in Section 3.1(a) of the Plan shall be
adjusted to reflect such event, and the Committee shall make such adjustments as
it deems appropriate and equitable in the number, kind and price of shares
covered by outstanding awards made under the Plan, and in any other matters
which relate to awards and which are affected by the changes in the Stock
referred to above.
(d) If the company is a party to a consolidation or a merger in which
the Company is not the surviving corporation, a transaction that results in the
acquisition of substantially all of the Company's outstanding Stock by a single
person or entity, or a sale or transfer of substantially all of the Company's
assets (unless the terms of the transaction provide that all Options granted
hereunder shall pertain to and apply with appropriate adjustment as determined
by the Board to securities of the resulting corporation to which a holder of the
number of shares of Company Stock would be entitled), the Board may take such
actions with respect to outstanding Options as the Board deems appropriate.
11
<PAGE>
ARTICLE IV
Awards and Grants
Section 4.1. Eligibility. Officers, employees and Eligible Independent
-----------
Contractors of the Company who are responsible for or contribute to the
management, growth and/or profitability of the Company are eligible to be
granted awards under the Plan. Notwithstanding the foregoing, participation in
the Plan with respect to awards of Incentive Stock Options shall be limited to
employees of the Company or any Affiliate.
Section 4.2. Awards Under the Plan. The Committee shall have the sole authority
---------------------
to grant pursuant to the terms of the Plan: (i) Stock Options, (ii) Stock
Appreciation Rights and/or (iii) Restricted Stock to employees and officers of
the Company, as well as Eligible Independent Contractors. In making awards
under the Plan, the Committee may, in its sole discretion, act on or alter any
recommendation made by the Chief Executive Officer of the Company.
Section 4.3. Stockholders' Agreement. Until the closing of a firmly
-----------------------
underwritten public offering of Stock raising in the aggregate at least ten
million dollars ($10,000,000), all Stock issued pursuant to the exercise of a
Stock Option and all grants of Restricted Stock under the Plan shall be
contingent on the recipient becoming a party to the Stockholders' Agreement
attached hereto as Exhibit A (the "Stockholders' Agreement").
Section 4.4 Company's Right of First Refusal.
--------------------------------
(a) Until the closing of a firmly underwritten public offering of
Stock raising in the aggregate at least ten million dollars ($10,000,000), the
Stock issued pursuant to the exercise of a Stock Option and grants of Restricted
Stock shall be subject to a right of first refusal pursuant to which a
Participant shall be required to provide written notice to the Company of the
Participant's intention to dispose of all or any portion of such Stock. The
written notice shall contain information regarding the identity of the proposed
purchaser or purchasers (the "Proposed Purchaser(s)"), the number of shares of
Stock subject to the proposed transaction, the proposed price and terms of sale
and the proposed closing date of such sale.
(b) For a period of twenty (20) days after the receipt by the Company
of the written notice specified above, the Company shall have a right of first
refusal to purchase the Stock subject to the proposed disposition at the price
and on the terms offered by the Proposed Purchaser(s). The Company must
exercise its right to purchase by giving written notice to the Participant and
to the Proposed Purchaser(s) within fifteen (15) days following receipt of the
notice, which notice shall specify the number of shares of Stock the Company
intends to purchase.
12
<PAGE>
(c) The closing of the purchase and sale pursuant to this Section 4.4
of the Plan shall be held at the Company's principal office on the date
determined by the Company but not more than twenty (20) days following the
Company's election to purchase the Stock. At the closing, certificates
representing the shares to be sold shall be delivered to the Company, duly
endorsed for transfer in blank or with assignments separate from certificates
duly endorsed, with all necessary transfer tax stamps, if any, affixed or
provided for against delivery of the purchase price.
(d) If the Company does not exercise its right to purchase within the
time period provided herein with respect to all or any portion of the Stock
covered by the notice, any shareholder who is a party to the Stockholders'
Agreement as of the date of the notice shall have the right, for a period of
twenty (20) days following expiration of the Company's purchase right, to elect
to purchase that number of shares equal to the number of shares of Stock
proposed to be sold multiplied by a fraction the numerator of which is the
number of shares then owned by such shareholder and the denominator of which is
the aggregate number of shares owned by all shareholders who are parties to the
Stockholders' Agreement as of the date of the notice and who are electing to
purchase such shares. Any unsold shares shall be offered proportionately to the
purchasing shareholders for a period of five (5) days following expiration of
the foregoing twenty (20)-day period. The purchase of such Stock by such
shareholders shall be in accordance with the procedures set forth in Section
4.4(c) of the Plan.
(e) If neither the Company nor any of its shareholders eligible to
purchase shares offered pursuant to this Section 4.4 of the Plan exercises their
purchase right within the time period provided herein with respect to all of the
offered Stock, the Participant shall be free for a period of fifteen (15) days
thereafter to sell such shares to the Proposed Purchaser(s), at the same price
and on the same terms and conditions as set forth in the notice, subject to all
of the provisions of this Section 4.4 of the Plan. If the Participant shall
not, within such fifteen (15) day period, consummate the sale with the Proposed
Purchaser(s) in accordance with the terms of this Section 4.4 of the Plan, any
subsequent sale by the Participant to the Proposed Purchaser(s) or to any other
purchaser on the same or other terms and conditions must comply again with the
provisions of this Section 4.4 of the Plan.
13
<PAGE>
ARTICLE V
Stock Options
Section 5.1. Stock Options. Stock Options may be granted alone, in addition
-------------
to, or in tandem with other awards granted under the Plan, subject to the
limitations of Section 3.1 of the Plan. Any Stock Option granted under the Plan
shall be in such form as the Committee may from time to time approve. Stock
Options granted under the Plan may be of two types: (i) Incentive Stock Options
and (ii) Non-Qualified Stock Options.
The Committee shall have the authority to grant Incentive Stock
Options, Non-Qualified Stock Options or both types of Stock Options (in each
case with or without Stock Appreciation Rights). To the extent that any Stock
Option does not qualify as an Incentive Stock Option, it shall constitute a Non-
Qualified Stock Option.
Anything in the Plan to the contrary notwithstanding, no term of this
Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be so
exercised, so as to disqualify the Plan under Section 422 of the Code, or,
without the consent of the Optionee(s) affected, to disqualify any Incentive
Stock Option under Section 422 of the Code.
Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem
appropriate:
(a) Option Price. The Option price per share of Stock purchasable
------------
under a Stock Option shall be determined by the Committee at the time of grant.
With respect to Incentive Stock Options, the price per share shall be not less
than one hundred percent (100%) of the Fair Market Value of the Stock at the
time of grant.
Any Incentive Stock Option granted to an Optionee who, at the time the
Option is granted, owns more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or an Affiliate, shall have an
exercise price of no less than one hundred and ten percent (110%) of the Fair
Market Value of the Stock at the time of grant.
(b) Option Term. The term of each Stock Option shall be fixed by the
-----------
Committee, but no Stock Option shall be exercisable more than ten (10) years
after the date the Stock Option is granted. However, any Incentive Stock Option
granted to an Optionee who, at the time the Option is granted, owns more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company or an Affiliate may not have a term of more than five (5) years. No
Option may be exercised by any person after expiration of the term of the
Option.
14
<PAGE>
(c) Exercisability. Stock Options shall be exercisable at such time
--------------
or times and subject to such terms and conditions as shall be determined by the
Committee at or after grant, except as provided in Article VIII of the Plan. If
the Committee provides, in its discretion, that any Stock Option is exercisable
only in installments, the Committee may waive such installment exercise
provisions at any time at or after grant in whole or in part, based on such
factors as the Committee shall determine, in its sole discretion. In the event
the Committee does not establish a specific period with respect to the award of
a Stock Option under the Plan, the Stock Option shall vest in accordance with
the following schedule:
<TABLE>
<CAPTION>
Anniversary of Date of Grant Percentage Vested
---------------------------- -----------------
<S> <C>
First 33 1/3%
Second 66 2/3%
Third 100%
</TABLE>
(d) Method of Exercise. Subject to the applicable installment
------------------
exercise provisions under Section 5.1(c) of the Plan, Stock Options may be
exercised in whole or in part at any time and from time to time during the
Option period, by giving written notice of exercise to the Company specifying
the number of shares to be purchased. Such notice shall be accompanied by
payment in full of the exercise price, either by certified or bank check, or
such other instrument as the Committee may accept. As determined by the
Committee, in its sole discretion, at or after grant, payment in full or in part
may also be made in the form of unrestricted Stock already owned by the Optionee
(based on the Fair Market Value of the Stock so tendered as of the date the
Option is exercised, as determined by the Committee); provided, however, that,
in the case of an Incentive Stock Option, the right to make a payment in the
form of unrestricted Stock already owned by the Optionee may be authorized only
at the time the Option is granted.
If payment of the Option exercise price of a Stock Option is made in
whole or in part in the form of unrestricted Stock already owned by the
Optionee, the Company may require that the Stock has been owned by the
Participant for a minimum period of time specified by the Committee.
The Company may make or guarantee loans to Optionees to assist
Optionees in exercising Stock Options and satisfying any related withholding tax
obligations.
No shares of Stock shall be issued until full payment therefor has
been made. An Optionee shall not have any rights to dividends or other rights
of a shareholder with respect to shares subject to the Option until such time as
Stock is issued in the name of the Optionee following exercise of the Option in
accordance with the Plan.
(e) Reload Options. The terms of a Stock Option may provide for the
--------------
automatic grant of a new Stock Option award when the exercise price of the Stock
Option
15
<PAGE>
and/or any related tax withholding obligation is paid by tendering shares of
Stock, provided that such automatic replenishment feature shall be limited to
any extent required by rules, regulations, or interpretations under the Exchange
Act with respect to any particular grant of an award in the case of an Optionee
who is or becomes subject to Section 16 of the Exchange Act. Any Stock Option
award which would automatically be granted pursuant to this Section 5.1(e) of
the Plan without any further Committee action may be exercisable for not more
than the number of shares tendered to exercise the initial Stock Option and/or
to pay any tax withholding obligation related to such exercise, shall have an
exercise price set at the then Fair Market Value of such shares, and shall have
a term that does not extend beyond the term of the initial Stock Option. The
Committee may include such a reload feature in a Stock Option award at the time
of the initial grant of the award or may add such a reload feature to an
outstanding Stock Option award as the Committee deems desirable; provided,
however, that a reload feature shall not be added to any outstanding Incentive
Stock Option award without the consent of the Optionee.
(f) Non-Transferability of Options. Except as otherwise provided by
------------------------------
the Committee at or after grant, each Option shall not be assignable or
transferable other than by will or the laws of descent and distribution, and an
Option may be exercised during the lifetime of the Optionee only by the Optionee
or, during the period the Optionee is under a legal disability, by the
Optionee's guardian or legal representative.
(g) Termination by Reason of Death. Unless otherwise determined by
------------------------------
the Committee at or after grant, if an Optionee's employment by the Company, or
other service provider relationship with the Company, terminates by reason of
death, any Stock Option held by such Optionee may thereafter be exercised, to
the extent then exercisable or on such accelerated basis as the Committee may
determine at or after grant, by the legal representative of the estate or by the
legatee of the Optionee under the will of the Optionee, for a period of two (2)
years following the date of death of the Optionee or until the expiration of the
stated term of such Stock Option, whichever period is shorter.
(h) Termination by Reason of Disability. Unless otherwise determined
-----------------------------------
by the Committee at or after grant, if an Optionee's employment by the Company,
or other service provider relationship with the Company, terminates by reason of
Disability, the Company shall pay to such Optionee a single lump sum payment
equal to the difference between the Option price per share and the Fair Market
Value of one share of Stock, measured as of the date of Disability, multiplied
by the number of shares of Stock to which all Options relate that were
exercisable by such Optionee as of the date of Disability. All other rights of
such Optionee pursuant to all outstanding Options shall expire immediately upon
the Disability of the Optionee.
(i) Termination by Reason of Retirement. Unless otherwise determined
-----------------------------------
by the Committee at or after grant, if an Optionee's employment by the Company,
or other service provider relationship with the Company, terminates by reason of
Retirement, any Stock Option held by such Optionee may thereafter be exercised
by the Optionee, to the
16
<PAGE>
extent it was exercisable at the time of such Retirement or on such accelerated
basis as the Committee may determine at or after grant, for a period of six (6)
months following the date of Retirement or until the expiration of the stated
term of such Stock Option, whichever period is shorter. In the event of the
termination of the Participant's relationship with the Company by reason of
Retirement, if an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422 of the Code, such
Option will thereafter be treated as a Non-Qualified Stock Option.
(j) Termination by Reason of Involuntary Separation from Service
------------------------------------------------------------
Without Cause. Unless otherwise determined by the Committee at or after grant,
- --------------
if an Optionee's employment by the Company, or other service provider
relationship with the Company, terminates involuntarily and not for Cause, any
Stock Option held by such Optionee may thereafter be exercised by the Optionee,
whether or not it was exercisable at the time of such termination, for a period
of ninety (90) days from the date of such termination or the expiration of the
stated term of such Stock Option, whichever period is shorter.
(k) Termination by Reason of Separation from Service for Cause. Unless
----------------------------------------------------------
otherwise determined by the Committee at or after grant, if an Optionee's
employment by the Company, or other service provider relationship with the
Company, terminates involuntarily for Cause, any Stock Option held by such
Optionee, whether or not vested, shall be immediately forfeited by such Optionee
and all rights under such Option shall immediately expire.
(l) Other Termination. Unless otherwise determined by the Committee
-----------------
at or after grant, if an Optionee's employment by the Company, or other service
provider relationship with the Company, terminates for any reason other than
death, Disability, Retirement, or involuntary separation from service with or
without Cause, any Stock Option held by such Optionee may thereafter be
exercised by the Optionee, to the extent it was exercisable at the time of such
termination or on such accelerated basis as the Committee may determine at or
after grant, for a period of ninety (90) days from the date of such termination
or the expiration of the stated term of such Stock Option, whichever period is
shorter.
(m) Incentive Stock Option Limitation. The aggregate Fair Market
---------------------------------
Value (determined as of the time of grant) of the Stock with respect to which
Incentive Stock Options are exercisable for the first time by the Optionee
during any calendar year under the Plan and/or any other stock option plan of
the Company shall not exceed $100,000. To the extent that such aggregate Fair
Market Value shall exceed $100,000, or other applicable amount, such Stock
Options shall be treated as Non-Qualified Stock Options. In such case, the
Company may designate the shares of Stock that are to be treated as Stock
acquired pursuant to the exercise of an Incentive Stock Option by issuing a
separate certificate for such shares and identifying the certificate as
Incentive Stock Option shares in the stock transfer records of the Company.
17
<PAGE>
(n) Cashless Exercise. If the Stock is registered under Section
-----------------
12(b) or 12(g) of the Exchange Act, the Committee, subject to such limitations
as it may determine, may authorize payment of the exercise price, in whole or in
part, by delivery of a properly executed exercise notice, together with
irrevocable instructions, to: (i) a brokerage firm designated by the Company to
deliver promptly to the Company the aggregate amount of sale or loan proceeds to
pay the exercise price and any withholding tax obligations that may arise in
connection with the exercise, and (ii) the Company to deliver the certificates
for such purchased shares directly to such brokerage firm.
(o) Put Rights of Optionee. Except as otherwise provided by the
----------------------
Committee at or after grant, in the event of Optionee's death, Disability,
Retirement, or involuntary termination without Cause, and so long as the Stock
is not publicly traded, Optionee or, in the event of Optionee's death,
Optionee's executor, personal representative or the person to whom the Option or
shares of Stock shall have been transferred by will or the laws of descent and
distribution, as the case may be, shall have the right to tender and to require
the Company, upon delivery of written notice to the Company, to purchase shares
of Stock acquired by Optionee through exercise of the Option.
The purchase price for shares of Stock tendered and purchased pursuant
to this Section 6.1(o) of the Plan shall be the Fair Market Value of the
tendered shares of Stock as of the date the Company receives written notice of
such tender and shall become payable in cash as soon as practicable after
delivery of notice requesting such purchase and delivery of share certificates
and executed stock powers to the Company. At the discretion of the Committee,
payments made to a Participant upon the disposition of shares of Stock may be
made by the Company in the form of a single lump sum or installments. Payments
must be made in full no later than two (2) years from the date of disposition
and will, if not paid in full immediately, be credited annually with interest
using an interest rate equal to the annual rate of interest on 30-year Treasury
securities as of the beginning of each such annual crediting period (as
determined by the Committee).
(p) Call Rights of Company. Except as otherwise provided by the
----------------------
Committee at or after grant, so long as the Stock is not publicly traded, the
Company shall have the right to purchase, and the Optionee shall have the
corresponding obligation to sell, upon delivery of written notice to Optionee,
any or all of Optionee's vested Options and any or all of the shares of Stock
then owned by Optionee, ownership of which shares was acquired through exercise
of an Option pursuant to an agreement. The purchase price of shares of Stock
pursuant to this Section 6.1(p) of the Plan shall be the Fair Market Value of
such shares of Stock as of the date the Company mails or otherwise delivers such
written notice to the Optionee. The purchase price of any vested Option
pursuant to this Section 6.1(p) of the Plan shall be the difference between the
Option price per share and the Fair Market Value of one share of Stock, measured
as of the date the Company mails or otherwise delivers such written notice to
the Optionee, multiplied by the number of shares to which the Option relates
that are being purchased. At the discretion of the Committee, payments made to a
Participant under this Section 6.1(p) of the Plan may be made by the Company in
the form of a single lump sum or installments. Payments must
18
<PAGE>
be made in full no later than two (2) years from the date of disposition and
will, if not paid in full immediately, be credited annually with interest using
an interest rate equal to the annual rate of interest on 30-year Treasury
securities as of the beginning of each such annual crediting period (as
determined by the Committee).
The provisions of this Section 6.1(p) of the Plan shall apply in the
event of an Optionee's death, to the Optionee's executor, personal
representative or the person to whom the Option and/or shares of Stock shall
have been transferred by will or the laws of descent and distribution, as though
such person is the Optionee.
19
<PAGE>
Article VI
Stock Appreciation Rights
Section 6.1 Stock Appreciation Rights.
-------------------------
(a) Grant and Exercise. Stock Appreciation Rights may be granted in
------------------
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of the grant of such Stock Option. In the case of an Incentive
Stock Option, such rights may be granted only at the time of the grant of such
Stock Option. The exercise price of each Stock Appreciation Right shall be
equal to (i) the exercise price or option price of the related Stock Option, or
(ii) the Fair Market Value of a share of Stock as of the date of grant of such
Stock Appreciation Right, but only in such circumstances where the Stock
Appreciation Right is granted subsequent to the date of grant of the related
Stock Option and an exercise price established in accordance with clause (i)
above would result in the disallowance of the Company's expense deduction
pursuant to Section 162(m) of the Code.
A Stock Appreciation Right or applicable portion thereof granted
with respect to a given Stock Option shall terminate and no longer be
exercisable upon the termination or exercise of the related Stock Option, except
that, unless otherwise determined by the Committee, in its sole discretion, at
the time of grant, a Stock Appreciation Right granted with respect to less than
the full number of shares covered by a related Stock Option shall not be reduced
until the number of shares covered by an exercise or termination of the related
Stock Option exceeds the number of shares not covered by the Stock Appreciation
Right.
A Stock Appreciation Right may be exercised by a Participant, in
accordance with this Section 6.1 of the Plan, by surrendering the applicable
portion of the related Stock Option. Upon such exercise and surrender, the
Participant shall be entitled to receive an amount determined in the manner
prescribed in Section 6.1(b) of the Plan. Stock Options which have been so
surrendered, in whole or in part, shall no longer be exercisable to the extent
the related Stock Appreciation Rights have been exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be subject
--------------------
to such terms and conditions, not inconsistent with the provisions of the Plan,
as shall be determined from time to time by the Committee, including the
following:
(i) Stock Appreciation Rights shall be exercisable only at such
time or times and to the extent that the Stock Options to
which they relate, if any, shall be exercisable in accordance
with the provisions of Section 5.1 of the Plan.
(ii) Upon the exercise of a Stock Appreciation Right, a
Participant shall be entitled to receive up to, but not more
than, an amount in
20
<PAGE>
cash and/or shares of Stock equal in value to the excess of the
Fair Market Value of one share of Stock (as of the date the Stock
Appreciation Right is exercised and the related Stock Option is
surrendered) over the exercise price of the Stock Appreciation
Right, multiplied by the number of shares of Stock in respect of
which the Stock Appreciation Right shall have been exercised,
with the Committee having the right to determine the form of
payment.
(iii) A Stock Appreciation Right shall be transferable only when and
to the extent that the underlying Stock Option would be
transferable under Section 5.1(f) of the Plan.
(iv) A Stock Appreciation Right granted in connection with an
Incentive Stock Option may be exercised only if and when the Fair
Market Value of the Stock subject to the Incentive Stock Option
exceeds the exercise price of such Stock Option.
(v) In its sole discretion, the Committee may provide, at the time of
grant of a Stock Appreciation Right under Section 6.1 of the
Plan, that such Stock Appreciation Right may be exercised only in
the event of a Change in Control, subject to such terms and
conditions as the Committee may specify at grant.
21
<PAGE>
Article VII
Restricted Stock
Section 7.1 Restricted Stock.
----------------
(a) Administration. Shares of Restricted Stock may be issued either
--------------
alone or in addition to other awards granted under the Plan. The Committee
shall determine the officers, employees and Eligible Independent Contractors of
the Company to whom, and the time or times at which, grants of Restricted Stock
will be made, the number of shares to be awarded, the price (if any) to be paid
by the recipient of Restricted Stock (subject to Section 7.1(b) of the Plan),
the time or times when such awards may be subject to forfeiture, and all other
conditions of the awards. The Committee may condition the grant of Restricted
Stock upon the attainment of specified performance goals or such other factors
as the Committee may determine, in its sole discretion. The provisions of
Restricted Stock awards need not be the same with respect to each recipient.
(b) Awards and Certificates. The prospective recipient of a
-----------------------
Restricted Stock award shall not have any rights with respect to such award,
unless and until such recipient has executed an agreement evidencing the award
and has delivered a fully executed copy thereof to the Company, and has
otherwise complied with the applicable terms and conditions of such award.
(i) The purchase price for shares of Restricted Stock shall be
established by the Committee and may be zero.
(ii) Awards of Restricted Stock must be accepted within a
period of sixty (60) days (or such shorter period as the
Committee may specify at grant) after the grant date, by
executing a Restricted Stock award agreement and paying
whatever price (if any) is required under Section
7.1(b)(i) of the Plan.
(iii) Each Participant receiving a Restricted Stock award shall
be issued a certificate in respect of such shares of
Restricted Stock. Such certificate shall be registered in
the name of such Participant, and shall bear, in addition
to other required legends, an appropriate legend referring
to the terms, conditions, and restrictions applicable to
such award, substantially in the following form:
The transferability of this certificate and the shares of stock represented
hereby are subject to the terms and conditions (including forfeiture) of the
Erol's Internet, Inc. Stock Plan and an Agreement entered into between the
registered owner and Erol's Internet, Inc. Copies of such Plan and Agreement
are on file at the offices of Erol's Internet, Inc., 7921 Woodruff Court,
Springfield, VA 22151.
22
<PAGE>
(iv) The Committee shall require that the certificates evidencing
such Restricted Stock be held in custody by the Company until
the restrictions thereon shall have lapsed, and that, as a
condition of any Restricted Stock award, the Participant shall
have delivered a stock power, endorsed in blank, relating to
the Stock covered by such award.
(c) Restrictions and Conditions. The shares of Restricted Stock awarded
---------------------------
pursuant to Section 7.1 of the Plan shall be subject to the following
restrictions and conditions:
(i) Subject to the provisions of this Plan and the Restricted Stock
award agreement, during a period set by the Committee
commencing with the date of such award (the "Restriction
Period"), the Participant shall not be permitted to sell,
transfer, pledge, assign or otherwise encumber shares of
Restricted Stock awarded under the Plan. Within these limits,
the Committee, in its sole discretion, may provide for the
lapse of such restrictions in installments and may accelerate
or waive such restrictions in whole or in part, based on
service, performance and/or such other factors or criteria as
the Committee may determine, in its sole discretion. In the
event the Committee does not establish a specific Restriction
Period with respect to the award of Restricted Stock under the
Plan, the restrictions imposed upon such award of Restricted
Stock shall lapse in accordance with the following schedule:
<TABLE>
<CAPTION>
Anniversary of Date of Grant Percentage Vested
---------------------------- -----------------
<S> <C>
First 33 1/3%
Second 66 2/3%
Third 100%
</TABLE>
(ii) Except as provided in this paragraph (ii) and Section 7.1(c)(i)
of the Plan, the Participant shall have, with respect to the
shares of restricted Stock, all of the rights of a shareholder
of the Company, including the right to vote the shares, and the
right to receive any cash dividends. The Committee, in its sole
discretion, as determined at the time of award, may permit or
require the payment of cash dividends to be deferred and, if
the Committee so determines, reinvested in additional
Restricted Stock to the extent shares are available under
Article III of the Plan.
(iii) Subject to the applicable provisions of the Restricted Stock
award agreement and Section 7.1 of the Plan, upon termination
of a Participant's employment or other service provider
relationship
23
<PAGE>
with the Company for any reason other than death, Disability,
Retirement, and involuntary termination without Cause, all shares
still subject to restriction shall be forfeited by the
Participant. In the event of death, Disability, Retirement, and
involuntary termination without Cause, all shares still subject
to restriction shall be immediately nonforfeitable.
(iv) In the event of hardship or other special circumstances of a
Participant whose employment or other service provider
relationship with the Company is involuntarily terminated, the
Committee may, in its sole discretion, waive in whole or in part
any or all remaining restrictions with respect to such
participant's shares of Restricted Stock, based on such factors
as the Committee may deem appropriate.
(v) If and when the Restriction Period expires without a prior
forfeiture of the Restricted Stock subject to such Restriction
Period, the certificates for such shares shall be delivered to
the Participant promptly.
24
<PAGE>
Article VIII
Change in Control
Section 8.1 Impact of Change in Control. In the event of a "Change in Control"
---------------------------
as defined in Section 8.2 of the Plan, or as otherwise determined by the
Committee or the Board at or after grant, but prior to the occurrence of such
Change in Control, but only if and to the extent so determined by the Committee
or Board at or after grant (subject to any right of approval expressly reserved
by the Committee or the Board at the time of such determination), the following
acceleration and valuation provisions shall apply:
(a) Any Stock Appreciation Rights and any Stock Options awarded under
the Plan not previously exercisable and vested shall become fully
vested and exercisable. All Stock Appreciation Rights and all Stock
Options shall thereafter be exercisable for a period of sixty (60)
days immediately following written notification of a Change in
Control in accordance with Section 8.2 of the Plan. Except as
otherwise determined by the Committee or the Board, all Stock
Appreciation Rights and Stock Options shall terminate at the
expiration of this sixty (60) day period.
(b) The restrictions applicable to any Restricted Stock awards under
the Plan shall lapse and such shares and awards shall be deemed
fully vested.
Section 8.2 Definition of "Change in Control". For purposes of Section 8.1 of
----------------------------------
the Plan, a "Change in Control" occurs when (i) following an initial public
offering or following a merger with or acquisition by a public company, (ii) any
"person" or "group," as such terms are defined in Sections 13(d) and 14(d) of
the Exchange Act and the rules promulgated thereunder, becomes the "beneficial
owner," as defined under the Exchange Act, directly or indirectly, whether by
purchase or acquisition or agreement to act in concert or otherwise, in the
aggregate of securities of the Company representing more than fifty percent
(50%) of the total combined voting power of all classes of the Company's then
outstanding securities, and (iii) a majority of the Board, as the Board exists
prior to the acquisition by the person or group, as the case may be, of the
securities sufficient to cause a change in control, opposes such acquisition.
For this purpose, an "initial public offering" shall mean the first date that
the Stock is offered for sale to the public on a public market and the Stock is
registered under the Securities Act. The Committee shall notify all
Participants in writing if the Company experiences a Change in Control in
accordance with this Section 8.2 of the Plan.
25
<PAGE>
Article IX
Amendments and Termination
Section 9.1 Amendments and Termination of the Plan. The Board, without
--------------------------------------
further approval of the shareholders, may modify or terminate the Plan or any
portion thereof at any time, except that no modification shall become effective
without prior approval of the shareholders of the Company if shareholder
approval is necessary to comply with any tax or regulatory requirement or rule
of any exchange or Nasdaq System upon which the Stock is listed or quoted;
including for this purpose shareholder approval that is required to enable the
Committee to grant Incentive Stock Options pursuant to the Plan.
The Committee shall be authorized to make minor or administrative
modifications to the Plan as well as modifications to the Plan that may be
dictated by requirements of federal or state laws applicable to the Company or
that may be authorized or made desirable by such laws.
Section 9.2 Amendments of Awards. The Committee may amend or modify the grant
--------------------
of any outstanding award in any manner to the extent that the Committee would
have had the authority to make such award as so modified or amended, but no such
amendment or modification shall impair the rights of any Participant without the
Participant's consent.
Section 9.3 Term of the Plan. No award under the Plan shall be granted
----------------
pursuant to the Plan on or after the tenth (10th) anniversary of the Effective
Date of the Plan, but awards granted prior to such tenth (10th) anniversary may
extend beyond that date.
Section 9.4 Severability. If any provision of this Plan shall be held illegal
------------
or invalid for any reason, such illegality or invalidity shall not affect the
remaining provisions of this Plan, but this Plan shall be construed and enforced
as if such illegal or invalid provision had never been included herein.
26
<PAGE>
Article X
Unfunded Status of the Plan
Section 10.1 Unfunded Status of the Plan. The Plan is intended to constitute
---------------------------
an "unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant or Optionee by the Company, nothing
contained herein shall give any such Participant or Optionee any rights that are
greater than those of a general creditor of the Company. In its sole
discretion, the Committee may authorize the creation of trusts or other
arrangements to meet the obligations created under the Plan to deliver Stock or
payments in lieu of or with respect to awards hereunder, provided, however,
that, unless the Committee otherwise determines with the consent of the affected
Participant, the existence of such trusts or other arrangements is consistent
with the unfunded status of the Plan.
27
<PAGE>
Article XI
General Provisions
Section 11.1 General Provisions.
------------------
(a) The Company may require that a Participant, as a condition to
exercise of an award, and as a condition to the delivery of any share
certificate, provide to the Company, at the time of each such exercise and each
such delivery, a written representation that the shares of Stock being acquired
shall be acquired by the Participant solely for investment and will not be sold
or transferred without registration or the availability of an exemption from
registration under the Securities Act and applicable state securities laws. The
Company may also require that a grantee submit other written representations
which will permit the Company to comply with federal and applicable state
securities laws in connection with the issuance of the Stock, including
representations as to the knowledge and experience in financial and business
matters of the Participant and the Participant's ability to bear the economic
risk of the Participant's investment. The Company may require that the
Participant obtain a "purchaser representative" as that term is defined in
applicable federal and state securities laws.
The stock certificates for any shares of Stock issued pursuant to
this Plan may bear a legend restricting transferability of the shares of Stock
unless such shares are registered or an exemption from registration is available
under the Securities Act and applicable state securities laws. The Company may
notify its transfer agent to stop any transfer of shares of Stock not made in
compliance with these restrictions.
Stock shall not be issued with respect to an award granted under
the Plan unless the exercise of such award and the issuance and delivery of
share certificates for such Stock pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act,
the Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any national securities exchange or Nasdaq System upon which the
Stock may then be listed or quoted, and shall be further subject to the approval
of counsel for the Company with respect to such compliance to the extent such
approval is sought by the Committee.
(b) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements subject to shareholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.
(c) The adoption of the Plan shall not confer upon any Participant any
right to continued employment or other relationship with the Company nor shall
it interfere in any way with the right of the Company to terminate its
relationship with any of its employees or independent contractors at any time.
28
<PAGE>
(d) No later than the date as of which an amount first becomes
includible in the gross income of the Participant for federal income tax
purposes with respect to any award under the Plan, a Participant who is an
officer or employee of the Company shall pay to the Company or make arrangements
satisfactory to the Committee regarding the payment of any federal, state or
local taxes of any kind required by law to be withheld with respect to such
amount. Unless otherwise determined by the Committee, the minimum required
withholding obligations may be settled with Stock including Stock that is part
of the award that gives rise to the withholding requirement. The Company, to the
extent permitted or required by law, shall have the right to deduct from any
payment of any kind (including salary or bonus) otherwise due to a Participant
any federal, state or local taxes of any kind required by law to be withheld
with respect to any taxable event under the Plan, or to retain or sell without
notice a sufficient number of the shares to be issued to such Participant to
cover any such taxes.
(e) The Committee shall establish such procedures as it deems
appropriate for a Participant to designate a beneficiary to whom any amounts
payable in the event of the Participant's death are to be paid.
(f) The validity, construction and effect of the Plan, of agreements
entered into pursuant to the Plan, and of any rules, regulations, determinations
or decisions made by the Board or Committee relating to the Plan or such
agreements, and the rights of any and all persons having or claiming to have any
interest therein or thereunder, shall be determined exclusively in accordance
with applicable federal laws and the laws of the State of Delaware, without
regard to its conflict of laws rules and principles.
29
<PAGE>
Article XII
Approval by Shareholders
Section 12.1 Approval by Shareholders.
------------------------
The Plan is subject to the approval of the shareholders of the
Company, and no Stock Options or Stock Appreciation Rights shall be exercisable
and no Restriction Period shall lapse with respect to any Restricted Stock until
such shareholder approval is obtained.
The undersigned, pursuant to the approval of the Board on December 27,
1996, does herewith execute the Erol's Internet, Inc. Stock Plan.
/s/ Erol Onaran
---------------------------
Chairman of the Board of Directors
30
<PAGE>
AMENDMENT TO
EROL'S INTERNET, INC.
STOCK PLAN
This amendment ("Amendment") to Erol's Internet, Inc.'s Stock Plan ("Stock
Plan") is made as of December 28, 1996 by Erol's Internet, Inc., a Delaware
corporation (the "Company"). Capitalized terms used but not defined herein
shall have the meanings ascribed to them in the Stock Plan.
1. Purpose. The purpose of this Amendment is to eliminate in its entirety the
-------
currently reserved nonvoting common stock from the Stock Plan.
2. Amendment. The following amendments shall be made to the Stock Plan:
---------
a) The definition of "Stock" appearing in Article I, Section 1.2, is
-----
hereby replaced and amended in its entirety as follows:
"Stock" means the voting common stock of Erol's Internet, Inc.
-----
b) Article III, Section 3.1(a) is hereby replaced and amended in its
entirety as follows:
Subject to adjustments as provided below in this Section 3.1 of the
Plan, the shares of Stock that may be delivered or purchased or used
for reference purposes (with respect to Stock Appreciation Rights)
with respect to awards granted under the Plan, including with respect
to Incentive Stock Options intended to qualify under Section 422 of
the Code, shall not exceed an aggregate of 1,550,000 shares of voting
common stock of the Company. The Company shall reserve said number of
shares for awards under the Plan, subject to adjustments as provided
below in this Section 3.1 of the Plan. If any award, or portion of an
award, under the Plan expires or terminates unexercised, becomes
unexercisable or is forfeited or otherwise terminated, surrendered or
canceled as to any shares without the delivery of shares of Stock or
other consideration, the shares subject to such award shall thereafter
be available for further awards under the Plan.
3. No Further Changes. Except as amended hereby, the terms of the
------------------
Stockholders' Agreement shall remain unchanged.
4. Required Approval. The Amendment is subject to the approval of the
-----------------
shareholder of the Company, and the Board of Directors of the Company.
<PAGE>
The undersigned, subject to the approval of the Board of Directors and the
Company's Shareholder, as of December 28, 1996, does herewith execute this
amendment to Erol's Internet, Inc. Stock Plan.
/s/ Erol Onaran
-------------------------
Chairman of the Board of Directors
2
<PAGE>
EROL'S INTERNET, INC. STOCK PLAN
SECOND AMENDMENT
Pursuant to the rights reserved in Section 9.1 of the Erol's Internet, Inc.
Stock Plan (the "Plan"), heretofore adopted effective December 27, 1996, the
Plan is hereby amended effective June 30, 1997, to provide as follows:
In order to add outside Directors to the group of eligible participants,
the definition of "Eligible Independent Contractor" in Section 1.2 of the Plan
is amended in its entirety to read as follows:
"Eligibile Independent Contractor" means an independent contractor hired by
--------------------------------
the Company to provide consulting, technical, business, or other
professional services for the Company and an outside Director of the
Company (i.e., a Director who is not also an officer or employee of the
Company).
WITNESS, the following signature this 13th day of August, 1997.
WITNESS: EROL'S INTERNET, INC.
/s/ Margaret Chittal /s/ Erol Onaran
- ------------------------- ----------------------------
Secretary of the Chairman of the
Board of Directors Board of Directors
<PAGE>
EROL'S INTERNET, INC. STOCK PLAN
STOCK OPTION GRANT AGREEMENT
This Grant Agreement (the "Agreement") is entered into this ____ day of
______________, 199___, to be effective _____________, 19___ (the "Grant Date"),
by and between Erol's Internet, Inc., a Delaware Company (the "Company"), and
____________________________________ ("Grantee").
Grantee and the Company agree that the grant of options hereunder and the
purchase and sale of Stock upon exercise thereof are intended to comply with the
exemption from registration provided by Rule 701 of the Securities Act of 1933
and each shall use his or its best efforts to comply with such Rule 701.
ARTICLE 1
GRANT OF OPTION
Section 1.1 Grant of Options. Subject to the provisions of the Agreement
-----------------------------
and pursuant to the provisions of the Plan, the Company hereby grants to Grantee
as of the Grant Date an Incentive Stock Option (the "Option") to purchase all or
any part of _______ shares of voting common stock of the Company (the "Stock")
at an exercise price of $______ per share (the "Exercise Price"), which is equal
to the Fair Market Value of the Stock on the Grant Date.
To the extent the aggregate Fair Market Value (determined at the time of
grant) of the Stock with respect to which Incentive Stock Options are
exercisable for the first time by Grantee during any calendar year under all
plans of the Company and Affiliates exceeds one hundred thousand dollars
($100,000), the Option or portion thereof which exceeds such limit (according to
the order in which the options are granted) shall be treated as a Non-Qualified
Stock Option.
Section 1.2 Term of Options. Unless the Option granted pursuant to
----------------------------
Section 1.1 hereof terminates earlier pursuant to other provisions of the
Agreement, the Option shall expire at 5:00 p.m. Eastern Time on the day prior to
the tenth (10th) anniversary of its Grant Date.
ARTICLE 2
VESTING
Section 2.1 Vesting Schedule. Unless the Option has earlier terminated
-----------------------------
pursuant to the provisions of the Agreement, Grantee shall become vested in the
underlying shares of Stock exercisable under the Option in accordance with the
schedule below, provided, however, that Grantee shall have been in the
continuous employ of or affiliation with the Company from the date Grantee first
performed an hour of service with the Company (the "Hire Date") through the
specified anniversary of such Hire Date:
<PAGE>
<TABLE>
<CAPTION>
Anniversary of Hire Date Percentage Vested
------------------------ -----------------
<S> <C>
First 33 1/3%
Second 66 2/3%
Third 100%
</TABLE>
Section 2.2 Acceleration of Vesting. Unless the Option has earlier
------------------------------------
terminated pursuant to the provisions of the Agreement, vesting of the Option
granted to Grantee hereunder shall be accelerated so that the unvested portion
of the Option shall become one hundred percent (100%) vested in Grantee upon the
earlier to occur of: (i) Grantee's involuntary termination of employment with
the Company without Cause (the term "Cause" is defined in Section 4.1 hereof),
or (ii) a Change in Control, as defined hereinafter.
For purposes of this Section 2.2, the Company shall experience a "Change in
Control" when (i) following an initial public offering or following a merger
with or acquisition by a public company, (ii) any "person" or "group," as such
terms are defined in Sections 13(d) and 14(d) of the Exchange Act and the rules
promulgated thereunder, becomes the "beneficial owner," as defined under the
Exchange Act, directly or indirectly, whether by purchase or acquisition or
agreement to act in concert or otherwise, in the aggregate of securities of the
Company representing more than fifty percent (50%) of the total combined voting
power of all classes of the Company's then outstanding securities, and (iii) a
majority of the Board, as the Board exists prior to the acquisition by the
person or group, as the case may be, of the securities sufficient to cause a
change in control, opposes such acquisition. For this purpose, an "initial
public offering" shall mean the first date that the Stock is offered for sale to
the public on a public market and the Stock is registered under the Securities
Act of 1933. The Committee shall notify Grantee in writing if the Company
experiences a Change in Control.
ARTICLE 3
EXERCISE OF OPTION
Section 3.1 Exercisability of Option. No portion of the Option granted to
-------------------------------------
Grantee shall be exercisable by Grantee prior to the time such portion of the
Option has vested. In addition, until the closing of a firmly underwritten
public offering of Stock raising in the aggregate at least ten million dollars
($10,000,000), the exercise of the Option under the Plan shall be contingent on
the Grantee becoming (or being) a party to the Stockholders' Agreement attached
hereto as Exhibit A (the "Stockholders' Agreement").
Section 3.2 Manner of Exercise. The vested portion of the Option may be
-------------------------------
exercised, in whole or in part, by delivering written notice to the Committee in
accordance with Section 6.9 hereof in such form as the Committee may require
from time to time; provided, however, that the Option may not be exercised at
any one time as to fewer than one thousand (1,000) shares (or such number of
shares as to which the Option is then exercisable if such number of shares then
exercisable is less than one thousand
2
<PAGE>
(1,000). Such notice shall specify the number of shares of Stock subject to the
Option as to which the Option is being exercised, and shall be accompanied by
full payment of the Exercise Price of the shares of Stock as to which the Option
is being exercised. Payment of the Exercise Price shall be made in cash (or cash
equivalents acceptable to the Committee in the Committee's discretion). In the
Committee's sole and absolute discretion, the Committee may authorize payment of
the Exercise Price to be made, in whole or in part, by such other means as the
Committee may prescribe. The Option may be exercised only in multiples of whole
shares and no partial shares shall be issued.
If the Stock is registered under Section 12(b) or 12(g) of the Exchange
Act, the Committee, subject to such limitations as it may determine, may
authorize payment of the exercise price, in whole or in part, by delivery of a
properly executed exercise notice, together with irrevocable instructions: (i)
to a brokerage firm approved by the Company to deliver promptly to the Company
the aggregate amount of sale or loan proceeds to pay the exercise price and any
withholding tax obligations that may arise in connection with the exercise, and
(ii) to the Company to deliver the certificates for such purchased shares
directly to such brokerage firm.
Section 3.3 Issuance of Shares and Payment of Cash upon Exercise. Upon
-----------------------------------------------------------------
exercise of the Option, in whole or in part, in accordance with the terms of the
Agreement and upon payment of the Exercise Price for the shares of Stock as to
which the Option is exercised, the Company shall issue to Grantee or Grantee's
permitted transferee, as the case may be, the number of shares of Stock so paid
for, in the form of fully paid and nonassessable Stock. The stock certificates
for any shares of Stock issued hereunder shall, unless such shares are
registered or an exemption from registration is available under applicable
federal and state law, bear a legend restricting transferability of such shares.
ARTICLE 4
TERMINATION OF OPTION
Section 4.1 Termination of Employment or Affiliation for Reason Other Than
---------------------------------------------------------------------------
Death, Disability or Retirement. Unless the Option has earlier terminated
- -------------------------------
pursuant to the provisions of the Agreement, the Option granted to Grantee shall
terminate in its entirety, regardless of whether the Option is vested in whole
or in part, three (3) months after the date Grantee is no longer employed by,
nor affiliated with, the Company and its affiliates for any reason other than
Grantee's death, Disability or Retirement.
Notwithstanding the foregoing, the Option granted to Grantee shall
terminate in its entirety, regardless of whether the Option is vested in whole
or in part, upon termination of the employment of Grantee by the Company or an
Affiliate for "Cause", as defined hereinafter. For purposes of this Section 4.1,
"Cause" means the termination of Grantee's service with the Company because of
(i) a felony conviction of Grantee; (ii) the commission by Grantee of an act of
fraud or embezzlement against the Company; (iii) willful misconduct by Grantee
which is materially detrimental to the Company; (iv)
3
<PAGE>
Grantee's continued failure to implement reasonable requests or directions
arising from actions of the Board after thirty (30) days written notice to
Grantee; (v) Grantee's wrongful dissemination of confidential or proprietary
information; (vi) Grantee's engagement in Competitive Activities (as hereinafter
defined); or (vii) the intentional and habitual neglect by Grantee of his or her
duties to the Company. The good faith determination by the Committee of whether
Grantee's employment was terminated by the Company for "Cause" shall be final
and binding for all purposes hereunder.
For purposes of this Section 4.1, "Competitive Activities" mean during the
term of employment with the Company or an Affiliate, Grantee directly or
indirectly competing or interfering with the Company or an Affiliate in the
research, development, manufacture, licensing, patenting or marketing of any
direct or indirect internet access service, or any other service, equipment or
devices functionally similar to or which may compete with a product or with
technology of the Company or an Affiliate. The term "compete" as used herein
means to engage directly or indirectly either as a proprietor, partner,
employee, agent, consultant, director, officer, shareholder or in any other
capacity or manner whatsoever. The phrase "interfere with" includes, but is not
limited to, soliciting or selling services or products which provide similar
functions to any of the Company's or an Affiliate's services or products to any
current or potential customer of the Company or an Affiliate.
These provisions shall not prevent Grantee from investing any assets in
securities of any corporation provided that such investments do not, directly or
indirectly, result in Grantee, Grantee's family members and other affiliates,
collectively (i) owning beneficially at any time five percent (5%) or more of
the equity securities of any corporation engaged in a business competitive with
the Company or an Affiliate, or (ii) otherwise being able to control or actively
participate in the business decisions of such competing business.
These provisions shall be enforced to the fullest extent permissible under
the laws and public policies applied to each jurisdiction in which enforcement
is sought. If any particular provision or portion of this Section 4.1 shall be
adjudicated to be invalid or unenforceable, this section shall be deemed amended
to interpret such provision or portion thereof so adjudicated to be invalid or
unenforceable to extend only over the maximum period of time, range of
activities or geographic area as to which it may be enforceable, such amendment
to apply only with respect to the operation of this section in the particular
jurisdiction in which such adjudication is made.
Section 4.2 Upon Grantee's Death. Unless the Option has earlier
---------------------------------
terminated pursuant to the provisions of the Agreement, upon Grantee's death
Grantee's executor, personal representative, the person to whom the Option shall
have been transferred by will or the laws of descent and distribution, or such
other permitted transferee, as the case may be, may exercise all or any part of
the outstanding Option with respect to shares of Stock as to which the Option is
vested as of the Grantee's date of death, provided such exercise occurs within
two (2) years after the date of Grantee's death, but not later than the end of
the stated term of the Option.
4
<PAGE>
Section 4.3 Termination of Employment or Affiliation by Reason of
------------------------------------------------------------------
Retirement. Unless the Option has earlier terminated pursuant to the provisions
- ----------
of the Agreement, in the event Grantee ceases, by reason of Retirement, to be an
employee of or affiliated with the Company or an Affiliate, the vested portion
of the outstanding Option may be exercised in whole or in part at any time
within six (6) months after the date of Retirement, but not later than the
stated term of the Option. For purposes of this Agreement, Retirement shall mean
retirement from active employment or other service with Company pursuant to the
normal or early retirement policies and procedures of Company. To the extent the
Option is exercised after the expiration of the exercise periods that apply for
purposes of Section 422 of the Code, the Option shall thereafter be treated as a
Non-Qualified Stock Option.
Section 4.4 Termination of Employment or Affiliation by Reason of
------------------------------------------------------------------
Disability. Unless the Option has earlier terminated pursuant to the provisions
- ----------
of the Agreement, in the event that Grantee ceases, by reason of Disability, as
defined hereinafter, to be an employee of or affiliated with the Company or an
Affiliate, the Company shall pay to Grantee a single lump sum payment equal to
the difference between the Exercise Price and the Fair Market Value of one share
of Stock, measured as of the date of Disability, multiplied by the number of
shares of Stock under the Option that were exercisable by Grantee as of the date
of Disability. All other rights of Grantee under the Option shall expire
immediately upon Grantee's Disability. For purposes of this Agreement,
"Disability" shall mean the total and permanent disability of Grantee (incurred
while in the active service of the Company or its Affiliates) based on proof
satisfactory to the Committee. Total and permanent disability shall mean the
inability of Grantee to engage in any substantial gainful activity for the
Company or its Affiliates by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of long,
continued and indefinite duration, as determined by a physician or physicians
selected by the Committee or other medical evidence satisfactory to the
Committee. The Committee may require such proof of Disability as the Committee
in its sole discretion deems appropriate and the Committee's determination as to
whether Grantee is Disabled shall be final and binding on all parties concerned.
ARTICLE 5
PUT AND CALL RIGHTS, AND RIGHT OF FIRST REFUSAL
Section 5.1 Put Rights of Optionee. In the event of Grantee's death,
-----------------------------------
Disability, Retirement, or involuntary termination without Cause, so long as the
Stock of the Company is not publicly traded, Grantee or, in the event of
Grantee's death, Grantee's executor, personal representative or the person to
whom the Option or shares of Stock shall have been transferred by will or the
laws of descent and distribution, as the case may be, shall have the right to
tender and to require the Company, upon delivery of written notice to the
Company, to purchase shares of Stock acquired by Grantee through exercise of the
Option.
5
<PAGE>
The purchase price for shares of Stock tendered and purchased pursuant to
this Section 5.1 shall be the Fair Market Value of the tendered shares of Stock
as of the date the Company receives written notice of such tender and shall
become payable in cash as soon as practicable after delivery of notice
requesting such purchase and delivery of share certificates and executed stock
powers to the Company. At the discretion of the Committee, payments made to
Grantee upon the disposition of shares of Stock may be made by the Company in
the form of a single lump sum or installments. Payments must be made in full no
later than two (2) years from the date of disposition and shall, if not paid in
full immediately, be credited annually with interest using an interest rate
equal to the annual rate of interest on 30-year Treasury securities as of the
beginning of each such annual crediting period (as determined by the Committee).
Section 5.2 Call Rights of Company. So long as the Stock is not publicly
-----------------------------------
traded, the Company shall have the right to purchase, and Grantee shall have the
corresponding obligation to sell, upon delivery of written notice to Grantee,
any or all of Grantee's vested Options and any or all of the shares of Stock
then owned by Grantee, ownership of which shares was acquired through exercise
of the Option. The purchase price of shares of Stock pursuant to this Section
5.2 shall be the Fair Market Value of such shares of Stock as of the date the
Company mails or otherwise delivers such written notice to Grantee. The
purchase price of any vested Option pursuant to this Section 5.2 shall be the
difference between the Exercise Price per share and the Fair Market Value of one
share of Stock, measured as of the date the Company mails or otherwise delivers
such written notice to Grantee, multiplied by the number of shares to which the
Option relates that are being purchased. At the discretion of the Committee,
payments made to Grantee under this Section 5.2 may be made by the Company in
the form of a single lump sum or installments. Payments must be made in full no
later than two (2) years from the date of disposition and shall, if not paid in
full immediately, be credited annually with interest using an interest rate
equal to the annual rate of interest on 30-year Treasury securities as of the
beginning of each such annual crediting period (as determined by the Committee).
The provisions of this Section 5.2 shall apply in the event of Grantee's
death, to Grantee's executor, personal representative or the person to whom the
Option and/or shares of Stock shall have been transferred by will or the laws of
descent and distribution, as though such person is Grantee.
Section 5.3 Company's Right of First Refusal. Until the closing of a
---------------------------------------------
firmly underwritten public offering of Stock raising in the aggregate at least
ten million dollars ($10,000,000), the Stock issued upon exercise of the Option
shall be subject to a right of first refusal pursuant to which Grantee shall be
required to provide written notice to the Company of Grantee's intention to
dispose of all or any portion of such Stock. The written notice shall contain
information regarding the identity of the proposed purchaser or purchasers (the
"Proposed Purchaser(s)"), the number of shares of Stock subject to the proposed
transaction, the proposed price and terms of sale and the proposed closing date
of such sale.
6
<PAGE>
For a period of twenty (20) days after the receipt by the Company of the
written notice specified above, the Company shall have a right of first refusal
to purchase the Stock subject to the proposed disposition at the price and on
the terms offered by the Proposed Purchaser(s). The Company must exercise its
right to purchase by giving written notice to the Grantee and to the Proposed
Purchaser(s) within fifteen (15) days following receipt of the notice, which
notice shall specify the number of shares of Stock the Company intends to
purchase.
The closing of the purchase and sale pursuant to this Section 5.3 shall be
held at the Company's principal office on the date determined by the Company but
not more than twenty (20) days following the Company's election to purchase the
Stock. At the closing, certificates representing the shares to be sold shall be
delivered to the Company, duly endorsed for transfer in blank or with
assignments separate from certificates duly endorsed, with all necessary
transfer tax stamps, if any, affixed or provided for against delivery of the
purchase price.
If the Company does not exercise its right to purchase within the time
period provided herein with respect to all or any portion of the Stock covered
by the notice, any shareholder who is a party to the Stockholders' Agreement as
of the date of the notice shall have the right, for a period of twenty (20) days
following expiration of the Company's purchase right, to elect to purchase that
number of shares equal to the number of shares of Stock proposed to be sold
multiplied by a fraction the numerator of which is the number of shares then
owned by such shareholder and the denominator of which is the aggregate number
of shares owned by all shareholders who are parties to the Stockholders'
Agreement as of the date of the notice and who are electing to purchase such
shares. Any unsold shares shall be offered proportionately to the purchasing
shareholders for a period of five (5) days following expiration of the foregoing
twenty (20)-day period. The purchase of such Stock by such shareholders shall be
in accordance with the procedures set forth above.
If neither the Company nor any of its shareholders eligible to purchase
shares offered pursuant to this Section 5.3 exercises their purchase right
within the time period provided herein with respect to all of the offered Stock,
grantee shall be free for a period of fifteen (15) days thereafter to sell such
shares to the Proposed Purchaser(s), at the same price and on the same terms and
conditions as set forth in the notice, subject to all of the provisions of this
Section 5.3. If Grantee shall not, within such fifteen (15) day period,
consummate the sale with the Proposed Purchaser(s) in accordance with the terms
of this Section 5.3, any subsequent sale by Grantee to the Proposed Purchaser(s)
or to any other purchaser on the same or other terms and conditions must comply
again with the provisions of this Section 5.3.
7
<PAGE>
ARTICLE 6
MISCELLANEOUS
Section 6.1 Non-Guarantee of Employment. Nothing in the Plan or the
----------------------------------------
Agreement shall be construed as a contract of employment between the Company (or
an Affiliate) and Grantee, or as a contractual right of Grantee to continue in
the employ of the Company or an Affiliate, or as a limitation of the right of
the Company or an Affiliate to discharge Grantee at any time.
Section 6.2 No Rights of Stockholder. Grantee shall not have any of the
-------------------------------------
rights of a stockholder with respect to the shares of Stock that may be issued
upon the exercise of the Option until such shares of Stock have been issued to
him upon the due exercise of the Option.
Section 6.3 Notice of Disqualifying Disposition. If Grantee makes a
------------------------------------------------
disposition (as that term is defined in Section 424(c) of the Code) of any
shares of Stock acquired pursuant to the exercise of an Incentive Stock Option
within two (2) years of the Grant Date or within one (1) year after the shares
of Stock are transferred to Grantee, Grantee shall notify the Committee of such
disposition in writing.
Section 6.4 Withholding of Taxes. The Company or any Affiliate shall have
---------------------------------
the right to deduct from any compensation or any other payment of any kind
(including withholding the issuance of shares of Stock) due Grantee the amount
of any federal, state or local taxes required by law to be withheld as the
result of the exercise of the Option or the disposition (as that term is defined
in Section 424(c) of the Code) of shares of Stock acquired pursuant to the
exercise of the Option; provided, however, that the value of the shares of Stock
withheld may not exceed the statutory minimum withholding amount required by
law. In lieu of such deduction, the Committee may require Grantee to make a
cash payment to the Company or an Affiliate equal to the amount required to be
withheld. If Grantee does not make such payment when requested, the Company may
refuse to issue any Stock certificate under the Plan until arrangements
satisfactory to the Committee for such payment have been made.
Section 6.5 Nontransferability of Option. The Option shall be
-----------------------------------------
nontransferable otherwise than by will or the laws of descent and distribution,
and during the lifetime of Grantee, the Option may be exercised only by Grantee
or, during the period Grantee is under a legal disability, by Grantee's guardian
or legal representative.
Section 6.6 Agreement Subject to Charter, By-Laws and Governing Laws. This
---------------------------------------------------------------------
Agreement is subject to the Charter and By-Laws of the Company, and any
applicable Federal or state laws, rules or regulations, including without
limitation, the laws, rules, and regulations of the State of Delaware, other
than the conflict of laws principles thereof.
Section 6.7 Gender. As used herein the masculine shall include the
-------------------
feminine as the circumstances may require.
8
<PAGE>
Section 6.8 Headings. The headings in the Agreement are for reference
---------------------
purposes only and shall not affect the meaning or interpretation of the
Agreement.
Section 6.9 Notices. All notices and other communications made or given
--------------------
pursuant to the Agreement shall be in writing and shall be sufficiently made or
given if hand delivered or mailed by certified mail, addressed to Grantee at the
address contained in the records of the Company, or addressed to the Committee,
care of the Company for the attention of its Secretary at its principal office
or, if the receiving party consents in advance, transmitted and received via
telecopy or via such other electronic transmission mechanism as may be available
to the parties.
Section 6.10 Entire Agreement; Modification. The Agreement contains the
--------------------------------------------
entire agreement between the parties with respect to the subject matter
contained herein and may not be modified, except as provided in the Plan or in a
written document signed by each of the parties hereto.
Section 6.11 Conformity with Plan. This Agreement is intended to conform
----------------------------------
in all respects with, and is subject to all applicable provisions of, the Plan,
which is incorporated herein by reference. Unless stated otherwise herein,
capitalized terms in this Agreement shall have the same meaning as defined in
the Plan. Inconsistencies between this Agreement and the Plan shall be resolved
in accordance with the terms of the Plan. In the event of any ambiguity in the
Agreement or any matters as to which the Agreement is silent, the Plan shall
govern.
IN WITNESS WHEREOF, the parties have executed the Agreement as of the date
first above written.
ATTEST: EROL'S INTERNET, INC.
By:
- ------------------------------ ---------------------------------
WITNESS: GRANTEE
- ------------------------------
-------------------------------------
9
<PAGE>
EROL'S INTERNET, INC. STOCK PLAN
NON-QUALIFIED STOCK OPTION GRANT AGREEMENT
This Grant Agreement (the "Agreement") is entered into this ____ day of
______________, 199___, to be effective _____________, 19___ (the "Grant Date"),
by and between Erol's Internet, Inc., a Delaware Company (the "Company"), and
____________________________________ ("Grantee").
Grantee and the Company agree that the grant of options hereunder and the
purchase and sale of Stock upon exercise thereof are intended to comply with the
exemption from registration provided by Rule 701 of the Securities Act of 1933
and each shall use his or its best efforts to comply with such Rule 701.
ARTICLE 1
GRANT OF OPTION
Section 1.1 Grant of Options. Subject to the provisions of the Agreement
-----------------------------
and pursuant to the provisions of the Plan, the Company hereby grants to Grantee
as of the Grant Date a Non-Qualified Stock Option (the "Option") to purchase all
or any part of _______ shares of voting common stock of the Company (the
"Stock") at an exercise price of $______ per share (the "Exercise Price").
Section 1.2 Term of Options. Unless the Option granted pursuant to
----------------------------
Section 1.1 hereof terminates earlier pursuant to other provisions of the
Agreement, the Option shall expire at 5:00 p.m. Eastern Time on the day prior to
the tenth (10th) anniversary of its Grant Date.
ARTICLE 2
VESTING
Section 2.1 Vesting Schedule. Unless the Option has earlier terminated
-----------------------------
pursuant to the provisions of the Agreement, Grantee shall become vested in the
underlying shares of Stock exercisable under the Option in accordance with the
schedule below, provided, however, that Grantee shall have been in the
continuous employ of or affiliation with the Company from the Grant Date through
the specified anniversary of the Grant Date:
<TABLE>
<CAPTION>
Anniversary of Grant Date Percentage Vested
------------------------- -----------------
<S> <C>
First 33 1/3%
Second 66 2/3%
Third 100%
</TABLE>
Section 2.2 Acceleration of Vesting. Unless the Option has earlier
------------------------------------
terminated pursuant to the provisions of the Agreement, vesting of the Option
granted to Grantee
<PAGE>
hereunder shall be accelerated so that the unvested portion of the Option shall
become one hundred percent (100%) vested in Grantee upon the earlier to occur
of: (i) a Change in Control (as defined hereinafter), or (ii) an involuntary
termination of the employment or affiliation of Grantee with the Company and its
Affiliates without Cause (as defined in Section 4.1) within 6 months following a
Friendly Acquisition (as defined hereinafter). No other circumstance will
result in acceleration of vesting.
For purposes of this Section 2.2, the Company shall experience a "Change in
Control" when, following an initial public offering or following a merger with
or acquisition by a public company, both of the following occur: (i) any
"person" or "group," as such terms are defined in Sections 13(d) and 14(d) of
the Exchange Act and the rules promulgated thereunder, becomes the "beneficial
owner," as defined under the Exchange Act, directly or indirectly, whether by
purchase or acquisition or agreement to act in concert or otherwise, in the
aggregate of securities of the Company representing more than fifty percent
(50%) of the total combined voting power of all classes of the Company's then
outstanding securities, and (ii) a majority of the Board, as the Board exists
---
prior to the acquisition by the person or group, as the case may be, of the
securities sufficient to cause a change in control, opposes such acquisition.
For this purpose, an "initial public offering" shall mean the first date that
the Stock is offered for sale to the public on a public market and the Stock is
registered under the Securities Act of 1933. The Committee shall notify Grantee
in writing if the Company experiences a Change in Control.
For purposes of this Section 2.2, a "Friendly Acquisition" shall mean a
Change in Control, as defined above, without regard to subsection (ii) thereof.
-------
ARTICLE 3
EXERCISE OF OPTION
Section 3.1 Exercisability of Option. No portion of the Option granted to
-------------------------------------
Grantee shall be exercisable by Grantee prior to the time such portion of the
Option has vested. In addition, until the closing of a firmly underwritten
public offering of Stock raising in the aggregate at least ten million dollars
($10,000,000), at the sole discretion of the Committee, the exercise of the
Option under the Plan shall be contingent on the Grantee becoming (or being) a
party to a stockholders' agreement which provides such rights of first refusal
to the Company and/or other shareholders as the Committee shall prescribe (the
"Stockholders' Agreement").
Section 3.2 Manner of Exercise. The vested portion of the Option may be
-------------------------------
exercised, in whole or in part, by delivering written notice to the Committee in
accordance with Section 6.9 hereof in such form as the Committee may require
from time to time; provided, however, that the Option may not be exercised at
any one time as to fewer than one thousand (1,000) shares (or such number of
shares as to which the Option is then exercisable if such number of shares then
exercisable is less than one thousand (1,000). Such notice shall specify the
number of shares of Stock subject to the Option as
2
<PAGE>
to which the Option is being exercised, and shall be accompanied by full payment
of the Exercise Price of the shares of Stock as to which the Option is being
exercised. Payment of the Exercise Price shall be made in cash (or cash
equivalents acceptable to the Committee in the Committee's discretion). In the
Committee's sole and absolute discretion, the Committee may authorize payment of
the Exercise Price to be made, in whole or in part, by such other means as the
Committee may prescribe. The Option may be exercised only in multiples of whole
shares and no partial shares shall be issued.
If the Stock is registered under Section 12(b) or 12(g) of the
Exchange Act, the Committee, subject to such limitations as it may determine,
may authorize payment of the exercise price, in whole or in part, by delivery of
a properly executed exercise notice, together with irrevocable instructions:
(i) to a brokerage firm approved by the Company to deliver promptly to the
Company the aggregate amount of sale or loan proceeds to pay the exercise price
and any withholding tax obligations that may arise in connection with the
exercise, and (ii) to the Company to deliver the certificates for such purchased
shares directly to such brokerage firm.
Section 3.3 Issuance of Shares and Payment of Cash upon Exercise. Upon
-----------------------------------------------------------------
exercise of the Option, in whole or in part, in accordance with the terms of the
Agreement and upon payment of the Exercise Price for the shares of Stock as to
which the Option is exercised, the Company shall issue to Grantee or Grantee's
permitted transferee, as the case may be, the number of shares of Stock so paid
for, in the form of fully paid and nonassessable Stock. The stock certificates
for any shares of Stock issued hereunder shall, unless such shares are
registered or an exemption from registration is available under applicable
federal and state law, bear a legend restricting transferability of such shares.
ARTICLE 4
TERMINATION OF OPTION
Section 4.1 Termination of Employment or Affiliation for Reason Other Than
---------------------------------------------------------------------------
Death, Disability or Retirement. Unless the Option has earlier terminated
- -------------------------------
pursuant to the provisions of the Agreement, the Option granted to Grantee shall
terminate in its entirety, regardless of whether the Option is vested in whole
or in part, three (3) months after the date Grantee is no longer employed by,
nor affiliated with, the Company and its Affiliates for any reason other than
Grantee's death, Disability or Retirement.
Notwithstanding the foregoing, the Option granted to Grantee shall
terminate in its entirety, regardless of whether the Option is vested in whole
or in part, upon termination of the employment or the affiliation of Grantee by
the Company or an Affiliate for "Cause", as defined hereinafter. For purposes of
this Section 4.1, "Cause" means the termination of Grantee's service with the
Company because of (i) a felony conviction of Grantee; (ii) the commission by
Grantee of an act of fraud or embezzlement against the Company; (iii) willful
misconduct by Grantee which is materially detrimental
3
<PAGE>
to the Company; (iv) Grantee's continued failure to implement reasonable
requests or directions arising from actions of the Board after thirty (30) days
written notice to Grantee; (v) Grantee's wrongful dissemination of confidential
or proprietary information; (vi) Grantee's engagement in Competitive Activities
(as hereinafter defined); (vii) the intentional and habitual neglect by Grantee
of his or her duties to the Company; or (viii) Grantee's breach of any contract
or agreement with the Company. The good faith determination by the Committee of
whether Grantee's employment or affiliation was terminated by the Company for
"Cause" shall be final and binding for all purposes hereunder.
For purposes of this Section 4.1, "Competitive Activities" mean during the
term of employment or affiliation with the Company or an Affiliate, Grantee
directly or indirectly competing or interfering with the Company or an Affiliate
in the research, development, manufacture, licensing, patenting or marketing of
any direct or indirect internet access service, or any other service, equipment
or devices functionally similar to or which may compete with a product or with
technology of the Company or an Affiliate. The term "compete" as used herein
means to engage directly or indirectly either as a proprietor, partner,
employee, agent, consultant, director, officer, shareholder or in any other
capacity or manner whatsoever. The phrase "interfere with" includes, but is not
limited to, soliciting or selling services or products which provide similar
functions to any of the Company's or an Affiliate's services or products to any
current or potential customer of the Company or an Affiliate.
These provisions shall not prevent Grantee from investing any assets in
securities of any corporation provided that such investments do not, directly or
indirectly, result in Grantee, Grantee's family members and other affiliates,
collectively (i) owning beneficially at any time five percent (5%) or more of
the equity securities of any corporation engaged in a business competitive with
the Company or an Affiliate, or (ii) otherwise being able to control or actively
participate in the business decisions of such competing business.
These provisions shall be enforced to the fullest extent permissible under
the laws and public policies applied to each jurisdiction in which enforcement
is sought. If any particular provision or portion of this Section 4.1 shall be
adjudicated to be invalid or unenforceable, this section shall be deemed amended
to interpret such provision or portion thereof so adjudicated to be invalid or
unenforceable to extend only over the maximum period of time, range of
activities or geographic area as to which it may be enforceable, such amendment
to apply only with respect to the operation of this section in the particular
jurisdiction in which such adjudication is made.
Section 4.2 Upon Grantee's Death. Unless the Option has earlier
---------------------------------
terminated pursuant to the provisions of the Agreement, upon Grantee's death
Grantee's executor, personal representative, the person to whom the Option shall
have been transferred by will or the laws of descent and distribution, or such
other permitted transferee, as the case may be, may exercise all or any part of
the outstanding Option with respect to shares of
4
<PAGE>
Stock as to which the Option is vested as of the Grantee's date of death,
provided such exercise occurs within two (2) years after the date of Grantee's
death, but not later than the end of the stated term of the Option.
Section 4.3 Termination of Employment or Affiliation by Reason of
------------------------------------------------------------------
Retirement. Unless the Option has earlier terminated pursuant to the provisions
- ----------
of the Agreement, in the event Grantee ceases, by reason of Retirement, to be an
employee of or affiliated with the Company or an Affiliate, the vested portion
of the outstanding Option may be exercised in whole or in part at any time
within six (6) months after the date of Retirement, but not later than the
stated term of the Option. For purposes of this Agreement, Retirement shall
mean retirement from active employment or other service with Company pursuant to
the normal or early retirement policies and procedures of Company.
Section 4.4 Termination of Employment or Affiliation by Reason of
------------------------------------------------------------------
Disability. Unless the Option has earlier terminated pursuant to the provisions
- ----------
of the Agreement, in the event that Grantee ceases, by reason of Disability, as
defined hereinafter, to be an employee of or affiliated with the Company or an
Affiliate, the Company shall pay to Grantee a single lump sum payment equal to
the difference between the Exercise Price and the Fair Market Value of one share
of Stock, measured as of the date of Disability, multiplied by the number of
shares of Stock under the Option that were exercisable by Grantee as of the date
of Disability. All other rights of Grantee under the Option shall expire
immediately upon Grantee's Disability. For purposes of this Agreement,
"Disability" shall mean the total and permanent disability of Grantee (incurred
while in the active service of the Company or its Affiliates) based on proof
satisfactory to the Committee. Total and permanent disability shall mean the
inability of Grantee to engage in any substantial gainful activity for the
Company or its Affiliates by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of long,
continued and indefinite duration, as determined by a physician or physicians
selected by the Committee or other medical evidence satisfactory to the
Committee. The Committee may require such proof of Disability as the Committee
in its sole discretion deems appropriate and the Committee's determination as to
whether Grantee is Disabled shall be final and binding on all parties concerned.
ARTICLE 5
PUT AND CALL RIGHTS, AND RIGHT OF FIRST REFUSAL
Section 5.1 Put Rights of Optionee. In the event of Grantee's death,
-----------------------------------
Disability, Retirement, or involuntary termination without Cause, so long as the
Stock of the Company is not publicly traded, Grantee or, in the event of
Grantee's death, Grantee's executor, personal representative or the person to
whom the Option or shares of Stock shall have been transferred by will or the
laws of descent and distribution, as the case
5
<PAGE>
may be, shall have the right to tender and to require the Company, upon delivery
of written notice to the Company, to purchase shares of Stock acquired by
Grantee through exercise of the Option.
The purchase price for shares of Stock tendered and purchased pursuant
to this Section 5.1 shall be the Fair Market Value of the tendered shares of
Stock as of the date the Company receives written notice of such tender and
shall become payable in cash as soon as practicable after delivery of notice
requesting such purchase and delivery of share certificates and executed stock
powers to the Company. At the discretion of the Committee, payments made to
Grantee upon the disposition of shares of Stock may be made by the Company in
the form of a single lump sum or installments. Payments must be made in full no
later than two (2) years from the date of disposition and shall, if not paid in
full immediately, be credited annually with interest using an interest rate
equal to the annual rate of interest on 30-year Treasury securities as of the
beginning of each such annual crediting period (as determined by the Committee).
Section 5.2 Call Rights of Company. So long as the Stock is not publicly
----------------------------------
traded, the Company shall have the right to purchase, and Grantee shall have the
corresponding obligation to sell, upon delivery of written notice to Grantee,
any or all of Grantee's vested Options and any or all of the shares of Stock
then owned by Grantee, ownership of which shares was acquired through exercise
of the Option. The purchase price of shares of Stock pursuant to this Section
5.2 shall be the Fair Market Value of such shares of Stock as of the date the
Company mails or otherwise delivers such written notice to Grantee. The purchase
price of any vested Option pursuant to this Section 5.2 shall be the difference
between the Exercise Price per share and the Fair Market Value of one share of
Stock, measured as of the date the Company mails or otherwise delivers such
written notice to Grantee, multiplied by the number of shares to which the
Option relates that are being purchased. At the discretion of the Committee,
payments made to Grantee under this Section 5.2 may be made by the Company in
the form of a single lump sum or installments. Payments must be made in full no
later than two (2) years from the date of disposition and shall, if not paid in
full immediately, be credited annually with interest using an interest rate
equal to the annual rate of interest on 30-year Treasury securities as of the
beginning of each such annual crediting period (as determined by the Committee).
The provisions of this Section 5.2 shall apply in the event of
Grantee's death, to Grantee's executor, personal representative or the person to
whom the Option and/or shares of Stock shall have been transferred by will or
the laws of descent and distribution, as though such person is Grantee.
Section 5.3 Company's Right of First Refusal. Until the closing of a
---------------------------------------------
firmly underwritten public offering of Stock raising in the aggregate at least
ten million dollars ($10,000,000), the Stock issued upon exercise of the Option
shall be subject to a right of first refusal pursuant to which Grantee shall be
required to provide written notice to the Company of Grantee's intention to
dispose of all or any portion of such Stock. The written notice shall contain
information regarding the identity of the proposed purchaser
6
<PAGE>
or purchasers (the "Proposed Purchaser(s)"), the number of shares of Stock
subject to the proposed transaction, the proposed price and terms of sale and
the proposed closing date of such sale.
For a period of twenty (20) days after the receipt by the Company of
the written notice specified above, the Company shall have a right of first
refusal to purchase the Stock subject to the proposed disposition at the price
and on the terms offered by the Proposed Purchaser(s). The Company must
exercise its right to purchase by giving written notice to the Grantee and to
the Proposed Purchaser(s) within fifteen (15) days following receipt of the
notice, which notice shall specify the number of shares of Stock the Company
intends to purchase.
The closing of the purchase and sale pursuant to this Section 5.3
shall be held at the Company's principal office on the date determined by the
Company but not more than twenty (20) days following the Company's election to
purchase the Stock. At the closing, certificates representing the shares to be
sold shall be delivered to the Company, duly endorsed for transfer in blank or
with assignments separate from certificates duly endorsed, with all necessary
transfer tax stamps, if any, affixed or provided for against delivery of the
purchase price.
If the Company does not exercise its right to purchase within the time
period provided herein with respect to all or any portion of the Stock covered
by the notice, any shareholder who is a party to the Stockholders' Agreement as
of the date of the notice shall have the right, for a period of twenty (20) days
following expiration of the Company's purchase right, to elect to purchase that
number of shares equal to the number of shares of Stock proposed to be sold
multiplied by a fraction the numerator of which is the number of shares then
owned by such shareholder and the denominator of which is the aggregate number
of shares owned by all shareholders who are parties to the Stockholders'
Agreement as of the date of the notice and who are electing to purchase such
shares. Any unsold shares shall be offered proportionately to the purchasing
shareholders for a period of five (5) days following expiration of the foregoing
twenty (20)-day period. The purchase of such Stock by such shareholders shall
be in accordance with the procedures set forth above.
If neither the Company nor any of its shareholders eligible to
purchase shares offered pursuant to this Section 5.3 exercises their purchase
right within the time period provided herein with respect to all of the offered
Stock, grantee shall be free for a period of fifteen (15) days thereafter to
sell such shares to the Proposed Purchaser(s), at the same price and on the same
terms and conditions as set forth in the notice, subject to all of the
provisions of this Section 5.3. If Grantee shall not, within such fifteen (15)
day period, consummate the sale with the Proposed Purchaser(s) in accordance
with the terms of this Section 5.3, any subsequent sale by Grantee to the
Proposed Purchaser(s) or to any other purchaser on the same or other terms and
conditions must comply again with the provisions of this Section 5.3.
7
<PAGE>
ARTICLE 6
MISCELLANEOUS
Section 6.1 Non-Guarantee of Employment or Other Relationship. Nothing in
--------------------------------------------------------------
the Plan or the Agreement shall be construed as a contract of employment or for
services between the Company (or an Affiliate) and Grantee, or as a contractual
right of Grantee to continued employment or affiliation with the Company or an
Affiliate, or as a limitation of the right of the Company or an Affiliate to
terminate its relationship with Grantee at any time.
Section 6.2 No Rights of Stockholder. Grantee shall not have any of the
-------------------------------------
rights of a stockholder with respect to the shares of Stock that may be issued
upon the exercise of the Option until such shares of Stock have been issued to
him upon the due exercise of the Option.
Section 6.3 Withholding of Taxes. The Company or any Affiliate shall have
---------------------------------
the right to deduct from any compensation or any other payment of any kind
(including withholding the issuance of shares of Stock) due Grantee the amount
of any federal, state or local taxes required by law to be withheld as the
result of the exercise of the Option; provided, however, that the value of the
shares of Stock withheld may not exceed the statutory minimum withholding amount
required by law. In lieu of such deduction, the Committee may require Grantee
to make a cash payment to the Company or an Affiliate equal to the amount
required to be withheld. If Grantee does not make such payment when requested,
the Company may refuse to issue any Stock certificate under the Plan until
arrangements satisfactory to the Committee for such payment have been made.
Section 6.4 Nontransferability of Option. The Option shall be
-----------------------------------------
nontransferable otherwise than by will or the laws of descent and distribution,
and during the lifetime of Grantee, the Option may be exercised only by Grantee
or, during the period Grantee is under a legal disability, by Grantee's guardian
or legal representative.
Section 6.5 Agreement Subject to Charter, By-Laws and Governing Laws.
---------------------------------------------------------------------
This Agreement is subject to the Charter and By-Laws of the Company, and any
applicable Federal or state laws, rules or regulations, including without
limitation, the laws, rules, and regulations of the State of Delaware, other
than the conflict of laws principles thereof.
Section 6.6 Gender. As used herein the masculine shall include the
-------------------
feminine as the circumstances may require.
Section 6.7 Headings. The headings in the Agreement are for reference
---------------------
purposes only and shall not affect the meaning or interpretation of the
Agreement.
Section 6.8 Notices. All notices and other communications made or given
--------------------
pursuant to the Agreement shall be in writing and shall be sufficiently made or
given if hand delivered or mailed by certified mail, addressed to Grantee at the
address contained
8
<PAGE>
in the records of the Company, or addressed to the Committee, care of the
Company for the attention of its Secretary at its principal office or, if the
receiving party consents in advance, transmitted and received via telecopy or
via such other electronic transmission mechanism as may be available to the
parties.
Section 6.9 Entire Agreement; Modification. The Agreement contains the
-------------------------------------------
entire agreement between the parties with respect to the subject matter
contained herein and may not be modified, except as provided in the Plan or in a
written document signed by each of the parties hereto.
Section 6.10 Conformity with Plan. This Agreement is intended to conform
----------------------------------
in all respects with, and is subject to all applicable provisions of, the Plan,
which is incorporated herein by reference. Unless stated otherwise herein,
capitalized terms in this Agreement shall have the same meaning as defined in
the Plan. Inconsistencies between this Agreement and the Plan shall be resolved
in accordance with the terms of the Plan. In the event of any ambiguity in the
Agreement or any matters as to which the Agreement is silent, the Plan shall
govern.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed the Agreement as of the date
first above written.
ATTEST: EROL'S INTERNET, INC.
By:
- ---------------------------- ----------------------------------
WITNESS: GRANTEE
- ----------------------------
-----------------------------------
10
<PAGE>
Exhibit 10.13
EROL'S INTERNET, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into December 28, 1996, by and among EROL'S
INTERNET, INC., a Delaware corporation, (the "Company"), EROL ONARAN (the
-------
"Majority Shareholder"),and DENNIS J. SPINA (the "Holder").
-------------------- ------
WHEREAS, pursuant to the Employment Agreement of even date herewith
(the "Employment Agreement") and attached hereto as Exhibit B, the Holder has
--------------------
agreed to become the Chief Executive Officer and President of the Company; and
WHEREAS, pursuant to the Employment Agreement the Company has agreed
to grant to the Holder, in partial consideration for his agreement to enter into
the Employment Agreement and the Employee Proprietary Information and Inventions
Agreement (the "Proprietary Rights Agreement"), the right to purchase 775,000
----------------------------
shares of voting common stock of the Company, par value one mil ($.001) per
share (the "Shares").
------
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants set forth herein, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Recitals. The foregoing recitals are hereby made a part of this
--------
Agreement.
2. Grant. The Company hereby grants to the Holder, subject to
-----
the terms and conditions of this Option, the right (the "Purchase Rights") to
---------------
purchase from the Company in accordance with Section 2 hereof, up to Seven
Hundred Seventy-Five Thousand (775,000) Shares, as such Shares may be adjusted
in accordance with Section 7 hereof, at a per share price of Fifty Cents ($0.50)
(the "Exercise Price") (the "Options").
-------------- -------
3. Option Vesting.
--------------
(a) Subject to the termination provisions of this Section 3(a),
Options shall vest as follows. Options to acquire Shares shall vest in two (2)
equal installments of Two Hundred Fifty-Eight Thousand, Three Hundred Thirty-
Three (258,333) on the thirteenth day of August, 1997, and August, 1998, and a
third annual installment of Two Hundred Fifty-Eight Thousand, Three Hundred
Thirty-Four (258,334) on the thirteenth day of August, 1999; or, if earlier, all
non-vested Options shall vest (i) upon the occurrence of a Change in Control (as
defined herein) or (ii) upon the termination of the Holder's employment with the
Company either by the Company for any reason other than for "cause," as defined
herein or by the Holder by resignation with "good reason," as defined herein. If
the Holder's employment is terminated (i) by the
<PAGE>
Company for "cause," (ii) by the Holder by resignation without "good reason," or
(iii) upon the death or due to the "total disability," as defined herein, of the
Holder, then all Options that, as of the effective date of such termination,
have not vested shall terminate and be of no further force or effect, and only
the Options as vested immediately prior to such event shall be deemed to be
exerciseable hereunder. All vested Options shall terminate if not exercised
within 180 days after the date of termination of the Holder's employment with
the Company for any reason.
(b) For purposes of this Agreement the term "cause" means: (A) the
Holder's failure to perform his employment duties as determined by the Board of
Directors of the Company (the "Board") in the exercise of its sole discretion
after reasonable notice to the Holder by the Company specifying such failure and
providing the Holder with a reasonable opportunity, as determined by the Board
in the exercise of its sole discretion, to cure such failure given the context
of the circumstances; (B) the Holder's breach of the covenants or agreements
contained in the Employment Agreement, the Proprietary Rights Agreement, or of
any other material agreement or undertaking of the Holder; (C) the Holder's
commission of a felony or any crime involving moral turpitude, fraud or
misrepresentation, whether or not related to the business or property of the
Company; (D) any act of the Holder against the Company which enriches the Holder
in derogation of his duties to the Company; (E) any willful or purposeful act or
omission (or any act or omission taken in bad faith) of the Holder having the
effect of injuring the business or business relationships of the Company as
determined by the Board in the exercise of its sole discretion.
(c) For purposes of this Agreement, the term "Change in Control"
shall mean that subsequent to the effectiveness of a registration statement
under the Securities Act of 1933 (the "Securities Act") filed on behalf of the
--------------
Company:
(1) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") is or becomes
------------
the beneficial owner, directly or indirectly, of securities of the Company
representing thirty percent (30%) or more of the combined voting power of the
then outstanding securities of the Company; or
(2) a change of control of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of the Regulation 14A
promulgated under the Exchange Act as in effect on the date of this Agreement;
or
(3) there shall be consummated:
(A) any consolidation or merger or share exchange of the
Company in which the Company is not the continuing or surviving corporation or
pursuant to which shares of the Company's common stock would be converted into
cash, securities or other property, other than a merger of the Company in which
the holders of the Company's common stock immediately prior to the merger have
the same
2
<PAGE>
proportionate ownership of common stock of the surviving corporation immediately
after the merger, or
(B) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or a substantial
portion, of the assets of the Company; or
(4) the stockholders of the Company approve a plan or proposal
for the complete or partial liquidation, dissolution or divisive reorganization
of the Company.
For purposes of this Section 3(c), the term "person" shall not be deemed to
include any officer or director of the Company as of the date hereof or any such
person's transferee if such transferee is related to such person by blood or
marriage, or is affiliated with or controlled by such person.
(d) For purposes of this Agreement the term "total disability"
("Total Disability") means total disability as defined in the Company's group
----------------
and individual disability plans, if any. If the Company does not have in
existence such plans, then Total Disability shall mean:
(1) The inability to perform the duties required under the
Employment Agreement for a continuous period of six (6) months during the
Employment Period, as defined in the Employment Agreement, due to "mental
incompetence" or "physical disability" as hereinafter defined. The Holder shall
be considered to be mentally incompetent and/or physically disabled: (i) if he
is under a legal decree of incompetency (the date of such decree being deemed
the date on which such mental incompetence occurred for purposes of this Section
3(d)); or (ii) because of a "Medical Determination of Mental and/or Physical
Disability." A Medical Determination of Mental and/or Physical Disability shall
mean the written determination by: (i) the physician regularly attending the
Holder, and (ii) a physician selected by the Company, that because of a
medically determinable mental and/or physical disability the Holder is unable to
perform each of the material duties of the Holder, and such mental and/or
physical disability is determined or reasonably expected to last twelve (12)
months or longer after the date of determination, based on medically available
information. If the two physicians do not agree, they shall jointly choose a
third consulting physician and the written opinion of the majority of these
three (3) physicians shall be conclusive as to such mental and/or physical
disability and shall be binding on the parties. The date of any written opinion
which is conclusive as to the mental and/or physical disability shall be deemed
the date on which such mental and/or physical disability commenced for purposes
of this Section 3(d), if the written opinion concludes that the Holder is
mentally and/or physically disabled. In conjunction with determining mental
and/or physical disability for purposes of this Agreement, the Holder consents
to any such examinations which are relevant to a determination of whether he is
mentally and/or physically disabled, and which is required by any two (2) of the
aforesaid physicians, and to furnish
3
<PAGE>
such medical information as may be reasonably requested, and to waive any
applicable physician patient privilege that may arise because of such
examination. All physicians selected hereunder shall be board-certified in the
specialty most closely related to the nature of the mental and/or physical
disability alleged to exist.
(2) For purposes of determining whether the Holder is
mentally incompetent or physically disabled for the continuous six (6) month
period specified in this Section 3(d), such disability shall be deemed to
continue from the date of any legal decree of incompetency, or written opinion
which is conclusive as to the mental and/or physical disability, through the
date the legal decree expires or is otherwise revoked or removed, or the date on
which the mental and/or physical disability has ceased, as the case may be, as
set forth in a written opinion prepared by the physicians described in this
Section 3(d) pursuant to the procedures provided herein.
(e) For purposes of this Agreement the term "resignation for
good reason" or "good reason" means the following:
(1) the failure of the Company within ten (10) days written
notice by the Holder to the Board to make any payment due to the Holder
hereunder;
(2) without the express written consent of the Holder, any
change by the Company in the Holder's function, duties, or responsibilities not
generally consistent with those contemplated in Section 2 of the Employment
Agreement, which is not rescinded within thirty (30) days after the Holder has
given the Board written notice of such change which notice specifies in detail
the change;
(3) any decrease in the Holder's base salary, life or
disability insurance coverage or benefits payable to the Holder or to which he
is entitled other than a decrease in benefits which is part of a general
decrease in benefits payable to officers and other salaried employees of the
Company;
(4) any material failure (other than a failure to make
payments) by the Company to comply with any of the provisions of the Employment
Agreement, which change or failure, as the case may be, continues unremedied for
thirty (30) days after Holder has given the Board written notice of such change
or failure which notice specifies in detail the change or failure, as the case
may be;
(5) any failure by the Company to obtain the assumption of
the Employment Agreement by any successor or assign of the Company.
4. Exercise Period.
---------------
4
<PAGE>
(a) Options may be exercised in whole or in part, at any time or
from time to time, from the date upon which they vest until the termination of
such options. Except as otherwise provided in this Agreement, to the extent not
exercised, any Options which have become exerciseable under Section 3 shall
accumulate and be exerciseable by the Holder, in whole or in part, in any
subsequent period but not later than ten (10) years from the date such Options
are granted. After such date, such Options shall expire automatically and
without further action.
(b) The "Exercise Date" shall mean the date or dates during the
Exercise Period on which the Purchase Rights represented by the Option are
exercised by the Holder.
5. Covenants as to Common Stock. The Company has taken all action
----------------------------
necessary and appropriate to properly authorize to the Holder the Shares
pursuant to this Option, and to reflect such Option on its books and records.
The Company covenants and agrees that the Shares issuable on the exercise of the
Options shall, at delivery, be fully paid, validly issued and non-assessable,
free from taxes, liens and charges with respect to their purchase. The Company
shall at all times reserve and hold available sufficient shares of its Common
Stock to satisfy the Options outstanding hereunder.
6. Method of Exercise.
------------------
(a) All or any portion of vested Options are exerciseable at the
option of the Holder at any time during the Exercise Period, upon the delivery
of a notice of exercise, in the form attached as EXHIBIT A, to the Company, with
such notice duly executed and upon payment of the Exercise Price for the shares
purchased in accordance with this Section. Options shall be deemed to have been
exercised, and the Company agrees that the Holder shall be deemed to be a
stockholder of record of the Company for the purposes of receiving dividends and
for all other purposes whatsoever, as of the date of delivery of such notice
accompanied by payment in full of the Exercise Price.
(b) The Exercise Price may be paid (i) in cash (including
certified or cashier's check), (ii) with the consent of the Company, in Shares
(including Shares acquired upon exercise of the Option) or a combination of cash
and Shares, or (iii) by such other means as the Company may approve. The Fair
Market Value, as defined in Section 15, of Shares delivered on exercise of the
Option shall be determined as of the Exercise Date.
(c) The Holder shall also pay to the Company, as a condition to
the exercise of all or any portion of the Purchase Rights, all amounts which the
Company is required to withhold under federal, state or local law in connection
with the exercise of the Option.
5
<PAGE>
(d) Until the Shares become publicly traded, as a condition to
the exercise of all or any portion of the Purchase Rights, the Holder shall be,
or shall execute and become, a party to the Stockholders' Agreement attached
hereto as EXHIBIT B, unless such agreement has previously terminated.
7. Adjustment of Purchase Rights; Registration Rights.
--------------------------------------------------
(a) In case prior to the expiration of all of the Options by
exercise or by the terms of the Options, the Company shall undertake any
reclassification, stock split, reverse stock split, stock dividend or any
similar proportionately applied change (collectively, a "Reclassification") of
----------------
outstanding shares of Common Stock (other than a change in, of, or from par
value), the Holder shall thereafter be entitled, upon exercise of an Option, to
purchase the kind and amount of validly issued shares of stock and other
securities and property receivable upon such Reclassification by a holder of the
number of shares of Common Stock which the Options entitle the Holder to
purchase immediately prior to such Reclassification.
(b) In case prior to the expiration of the Options by exercise
or by the terms hereof, the Company shall consolidate or merge with any other
entity where the Company is not the surviving entity, or convey all, or
substantially all, of its property or assets to, any other entity then, at the
Company's sole option (i) it may automatically convert a nominal number of the
Options hereunder to the number of validly issued shares of Common Stock of the
Company theretofore purchasable upon exercise of the Options; (ii) as a
condition precedent to such consolidation, merger, or conveyance, undertake
lawful and adequate provision whereby the Holder shall thereafter have the right
to receive from the Company or the successor entity, as the case may be, upon
the basis and upon the terms and conditions specified in this Option, in lieu of
the Shares theretofore purchasable upon the exercise of the Option, such shares
of validly issued stock, securities, or assets as may be issued or payable with
respect to, or in exchange for, the number of Shares theretofore purchasable
upon the exercise of the Option had such consolidation, merger, or conveyance
not taken place, and in any such event the rights of the Holder to an adjustment
of the number of Shares purchasable upon the exercise of the Option as herein
provided, shall continue and be preserved in respect of any stock or securities
which the Holder becomes entitled to purchase, or (iii) it may make arrangements
with the Holder for the payment of appropriate consideration for the
cancellation and surrender of the Option.
(c) If at any time or from time to time, the Company shall
determine to register any of its securities through the filing of a registration
statement pursuant to the Securities Act (a "Registration"), then the Holder
------------
shall enjoy the same rights to include in any such registration any shares of
the Company's Common Stock as enjoyed by the Majority Shareholder, and the
Company promptly will give the Holder written notice thereof; and include in
such registration all Shares held by the Holder as specified in a written
request or requests made by the Holder within thirty (30) days after receipt of
such written notice from the Company. Notwithstanding the foregoing, if the
6
<PAGE>
Company imposes a limitation on the aggregate number of shares of the Company's
Common Stock held by the Majority Shareholder and the Holder that may be
included in such registration, then the number of shares of the Company's Common
Stock to be included in such registration by the Majority Shareholder and the
Holder, respectively, shall be allocated between the Majority Shareholder and
the Holder in proportion, as nearly as practicable, to the respective amounts of
shares of the Company's Common Stock held by the Holder and the Majority
Shareholder at the time filing of such registration statement.
(1) The Company shall have the right to terminate or
withdraw any Registration initiated by the Company under this Section 7(c) prior
to the effectiveness of such registration whether or not the Holder has elected
to include any of the Shares in such registration.
(d) Upon each determination of the number of Shares deliverable
upon the exercise of the Option, the number of Shares so deliverable shall be
only a round sum obtained by rounding up to the nearest whole number any
--
fractions resulting from the calculation of the number of shares to be
delivered. No fractional shares shall be issued upon the exercise of the Option.
8. No Transfers. The Holder, by acceptance of the benefits granted
------------
hereunder, covenants and agrees not to sell, gift, endorse, assign, transfer,
pledge, mortgage, hypothecate, grant a security interest in, lien, encumber or
otherwise absolutely or collaterally dispose of, voluntarily or involuntarily
(collectively, "Transfer"), this Option or the Shares issuable upon exercise
--------
hereof, except in strict accordance with the provisions of this Section. The
Option shall not, without the express prior written approval of the Company
(which may be withheld or granted in its sole discretion), be Transferred by the
Holder, and any attempted Transfer shall be void. Any Shares acquired by
exercise of this Option may only be Transferred in accordance with the terms of
the Stockholders Agreement unless such agreement has been previously terminated.
9. Exchange For Other Denominations. If the Company approves a
--------------------------------
Transfer of this Option pursuant to the provisions of Section 8, then this
Option shall be exchangeable for new instruments of like tenor and date
representing in the aggregate the right to exercise Shares hereunder in
denominations designated by the Holder at the time of surrender.
10. Stock Transfer Records. The Option shall be registered on the
----------------------
books of the Company, which shall be kept by it at its principal office for that
purpose. The Company agrees that while the Option shall remain valid and
outstanding, the Company's stock transfer books shall not be closed for any
purpose whatsoever except under arrangements which shall insure to the Holder
when exercising this Option all rights and privileges which it might have had or
received if the stock transfer books had not been closed and it had exercised
its Option at any time during which such transfer book shall have been closed.
7
<PAGE>
11. Charges, Taxes and Expenses. Issuance of certificates for Shares
---------------------------
issuable upon the exercise of the Option or any portion thereof shall be made
without charge to the Holder for any issue taxes or any other incidental
expenses in respect of the issuance of such certificates to and in the name of
the Holder, all of which taxes and expenses shall be paid by the Company, and
such certificates shall be issued in the name of the Holder. Certificates will
be issued in a name other than that of the Holder upon the request of a Holder
and payment by the Holder of any applicable transfer taxes and compliance with
all applicable securities laws and the terms of this Option. If required by
applicable law, the Company shall have the right to deduct from any payment or
compensation made to the Holder any federal, state or local income or other
taxes required by such law to be withheld with respect to the issuance of Shares
upon exercise of the Option. If required by applicable law, it shall be a
condition to the obligation of the Company to deliver Shares upon exercise of
the Option that the Holder pay to the Company such amount as may be requested by
the Company for the purpose of satisfying any liability for such withholding
taxes. The Holder may request, in accordance with any applicable regulations, to
pay a portion or all of the amount of such minimum required or additional
permitted withholding taxes in shares of Common Stock subject to the
exerciseable Option hereunder. If the Company, in its sole discretion, accepts
the Holder's request, the Holder shall exercise such Option, then immediately
surrender back to the Company Shares having a "fair market value", as defined
herein, equal to the amount of such required or permitted withholding taxes.
12. Loss, Theft, Destruction or Mutilation of Option. Upon receipt by
------------------------------------------------
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Option, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of this Option, if mutilated, the Company will
make and deliver a new option of like tenor and date, in lieu of this Option.
13. Remedies. The Company acknowledges and agrees that the remedies
--------
at law of the Holder in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this Option
are not and will not be adequate, and that such terms may be specifically
enforced by a decree for the specific performance of any agreement contained
herein or by an injunction against a violation of any of the terms hereof or
otherwise.
14. Compliance with Securities Laws. The Holder acknowledges that the
-------------------------------
stock issuable upon exercising this Option has not been registered with the
Securities and Exchange Commission for public sale and that, until so registered
and until all other federal and state laws regulating public sale have been
complied with, federal and state securities laws restrict the manner in which
such stock may be sold. As a result, such stock may not be readily transferable
or convertible into cash. To ensure that the stock issuable upon exercise of
this Option by the Holder is not purchased or sold in
8
<PAGE>
violation of such securities laws, the Company may impose the following
requirements in connection with exercise of this Option:
(a) The Company may require that the Holder deliver for the
benefit of the Company and any successor to the Company at the time of each
exercise of this Option and as a condition to exercise of this Option: (i) a
written representation and agreement that the shares of stock being acquired
upon exercise are being acquired by the Holder solely for investment; (ii) an
agreement that the stock will not be sold or transferred without registration or
the availability of an exemption from registration under the Securities Act of
1933 and applicable state securities laws; (iii) a representation as to the
knowledge and experience in financial and business matters of the Holder and its
ability to bear the economic risk of its investment; (iv) an agreement to
provide prior to any transfer of the stock (or any stock of the Company
subsequently acquired as a result of a stock dividend, stock split, merger
consolidation, or other similar action), at the Holder's expense, an opinion of
counsel acceptable to the Company to the effect that the transfer of such stock
will not violate the applicable requirements of the Securities Act of 1933 and
applicable state securities laws; and (v) such other representations and
agreements which the Company may deem necessary or desirable to ensure
compliance with applicable federal and state securities laws.
(b) The Company may also require that the Holder obtain a
"purchaser representative" as that term is defined in applicable federal and
state securities laws and/or provide, at Holder's expense, an opinion of counsel
acceptable to the Company to the effect that the exercise of this Option will
not violate the applicable requirements of the Securities Act of 1933 and
applicable state securities laws.
(c) The stock certificates for any shares of stock issued
pursuant to exercise of this Option may bear legends restricting transferability
of the shares unless the shares are registered or an exemption from registration
is available under the Securities Act of 1933 and applicable state securities
laws and unless the transfer complies with the terms of any applicable
Stockholder's Agreement. The Company may notify its transfer agent to stop any
transfer of the shares not made in compliance with the restrictions.
15. Call Rights. Upon the termination of the Holder's employment with
-----------
the Company with cause, or the resignation of the Holder's employment with the
Company (other than as the result of the expiration of the Employment Period, as
defined in the Employment Agreement), the Company shall have the option to
purchase, and the Holder shall be obligated to sell, the Shares issued upon all
previous exercises of the Options. The Company shall be entitled to exercise the
rights provided in this Section 15 by providing written notice by certified
mail, return receipt requested or delivered by hand with a written receipt to
the Holder of its election no later than 120 days after such termination or
resignation at the address of the Holder set forth in the stock records of the
Company (or if no such address is set forth in such stock records, in the
personnel records of the Company). The purchase price of the Shares shall be the
Fair Market Value of the
9
<PAGE>
Shares, as defined below, as of the date the Company mails or otherwise delivers
such written notice to the Holder. Closing with respect to such purchase by the
Company shall occur not later than ten (10) days after the date of such notice
at the principal offices of the Company or as the parties may otherwise mutually
agree. At such closing the Holder shall deliver the certificate or certificates
evidencing such Shares, appropriately endorsed in blank for transfer, and the
Company shall deliver in cash the purchase price for such Shares.
If the Shares are not publicly traded, "Fair Market Value" of a Share
shall be the price per share agreed upon between Company and the Holder. If such
agreement cannot be reached within thirty (30) days after a written request by
one party to the other party that a Fair Market Value be established, the Holder
and Company shall each select, within ten (10) days thereafter, one (1)
nationally recognized independent investment banking firm to determine the Fair
Market Value. If a party fails to select an independent investment banking firm,
the investment banking firm selected by the other party shall itself make the
determination contemplated herein. If within thirty (30) days after their
selection, such firms cannot agree as to the Fair Market Value, within ten (10)
days thereafter, they shall mutually select a third nationally recognized
independent investment banking firm which shall be engaged to make the
determination as to Fair Market Value. Such third (3rd) investment banking firm
shall make such determination within thirty (30) days of its engagement. The
determination of Fair Market Value under this Agreement shall be final and
binding upon the parties. Each party shall bear the fees and expenses of the
independent investment banking firm it selects, and the fees and expenses of the
third (3rd) independent investment banking firm shall be borne equally by the
parties. In determining Fair Market Value of a Share, the independent investment
banking firms or firm shall determine the fair market value of all of the
Company's common equity, including the common stock and any other classes of
common stock. The Fair Market Value of a Share shall be the amount determined by
dividing the aggregate fair market value of all of the Company's common equity
by the sum of (a) the number of then issued and outstanding shares of all
classes of common stock of the Company, and (b) the number of shares of Common
Stock which could be purchased upon exercise of all stock options and other
stock awards then granted. The independent investment banking firm or firms
shall take into account Company's financial leverage and its capital structure
and shall consider whatever factors it or they deem relevant, including the
price to earnings ratio, the debt to equity ratio, the market value to book
value ratio, and the market value to cash flow ratio of the common stock of
publicly traded companies in the same industry that are deemed reasonably
comparable for this purpose.
If the Shares are publicly traded, then "Fair Market Value" shall mean
the last reported sale price per Share, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
10
<PAGE>
trading on a national securities exchange or included for quotation on the
Nasdaq-National Market, or if the Shares are not so listed or admitted to
trading or included for quotation, the last quoted price, or if the Shares are
not so quoted, the average of the high bid and low asked prices, regular way, in
the over-the-counter market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotation System or, if such system is no
longer in use, the principal other automated quotations system that may then be
in use or, if the Shares are not quoted by any such organization, the average of
the closing bid and asked prices, regular way, as furnished by a professional
market maker making a market in the Shares as selected in good faith by the
Company or by such other source or sources as shall be selected in good faith by
the Company. If, as the case may be, the relevant date is not a trading day, the
determination shall be made as of the next preceding trading day. As used
herein, the term "trading day" shall mean a day on which public trading of
securities occurs and is reported in the principal consolidated reporting system
referred to above, or if the Shares are not listed or admitted to trading on a
national securities exchange or included for quotation on the Nasdaq-National
Market, any day other than a Saturday, a Sunday or a day in which banking
institutions in the State of New York are closed.
16. Miscellaneous.
-------------
(a) In case any provision of this Option shall be invalid,
illegal or unenforceable, or partially invalid, illegal or unenforceable, the
provision shall be enforced to the extent, if any, that it may legally be
enforced and the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
(b) This Option and any term hereof may be changed, waived,
discharged or terminated only by a statement in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
(c) The headings in this Option are for purposes of reference
only, and shall not limit or otherwise affect any of the terms hereof.
(d) Any covenants, representations, warranties and agreements
made by the parties shall be deemed to have been relied upon by the parties,
shall survive the exercise, expiration and other termination of this Option,
shall continue until the applicable statute of limitations bars any claim
thereon, and shall be effective regardless of any investigation which may have
been made at any time by or on behalf of a party.
(e) This Option shall be binding upon the heirs, personal
representatives, and permitted successors and assigns, as the case may be, of
the parties hereto.
(f) This Option is made, is entered into, and is to be performed
in, and shall be governed by the laws of the Commonwealth of Virginia, without
giving effect to its conflicts of laws provisions, and without regard to its
place of execution or its place of performance. The parties irrevocably consent
and agree to the exclusive
11
<PAGE>
jurisdiction of the Circuit Court for Fairfax County or the United States
District Court for the Eastern District of Virginia Each party waives all rights
to a trial by jury in any suit, action or proceeding hereunder.
(g) The Company and the Holder mutually covenant and agree that
if any controversy or dispute relating to this Agreement arises between them
that cannot be resolved by negotiation, either party may, after providing
written notice to the other party, submit such dispute to arbitration in Fairfax
County, Virginia in accordance with the rules of the American Arbitration
Association then in effect unless the rules of another association are mutually
agreeable to the parties. The arbitrator appointed must be an attorney or
retired judge who has experience with the principle issues to be arbitrated. Any
reward or finding made pursuant to such arbitration shall in all respects be
well and fairly kept and observed and may be imposed by judgment of the
appropriate court in the Commonwealth of Virginia pursuant to the applicable
laws relating thereto. Each party shall bear his or its own costs in connection
with the arbitration, except that the cost of the arbitrator shall be borne by
the party that the arbitrator, in his sole discretion, determines has not
prevailed on a majority of the issues submitted to arbitration.
(h) This Option shall constitute and contain the entire
agreement and understanding of the parties, and shall supersede any and all
prior negotiations, correspondence, understandings and agreements between the
parties respecting the subject matter hereof.
(i) The provisions of Section 15 hereof shall survive the
exercise of all or any portion of the Option hereunder and the expiration of the
exercise period pursuant to Section 2 hereof or other termination of this
Agreement.
12
<PAGE>
IN WITNESS WHEREOF, the Company has duly executed and delivered the
Option as of the twelfth day of August, 1996.
ATTEST/WITNESS: EROL'S INTERNET, INC.
/s/ Margaret A. Chittal By: /s/ Erol Onaran
- ----------------------- -------------------------
/s/ Margaret A. Chittal /s/ Dennis J. Spina
- ----------------------- ----------------------------
Dennis J. Spina
/s/ Margaret A. Chittal /s/ Erol Onaran
- ----------------------- ----------------------------
Erol Onaran
13
<PAGE>
Exhibit A
---------
EXERCISE OF OPTION TO PURCHASE PURSUANT TO ATTACHED OPTION
_________, 19__
To Erol's Internet, Inc.
The undersigned, the Holder of record of the attached Option granted
by Erol's Internet, Inc., a Delaware corporation (the "Company") of shares of
-------
Common Stock, hereby exercises the attached Option, upon the terms set forth in
such Option, to purchase ______ shares of Common Stock of the Company, and
hereby makes payment of the Exercise Price to the Company as determined by the
Option.
------------------------------
14
<PAGE>
Exhibit B
---------
Employment Agreement
See Exhibit 10.9
15
<PAGE>
EXHIBIT 11.1
Erols Internet, Inc.
STATEMENT RE: COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Period from
August 1, 1995
(inception) to Year ended Nine Months Ended
December 31, December 31, September 30,
1995 1996 1996 1997
-------------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Net loss per share:
Weighted average number of
shares outstanding -- 364,532 -- 5,644,855
Common equivalent shares from
options issued during the
twelve month period prior to
the filing of the S-1 (using
the treasury stock method) 832,292 832,292 832,292 832,292
Common stock issued during the
twelve month period prior to
the filing of the S-1 (using
the treasury stock method) 1,230,248 1,230,248 1,230,248 40,624
-------------------- --------------- -------------- -------------
Total 2,062,540 2,427,072 2,062,540 6,517,771
==================== =============== ============== =============
Net loss $(1,018,274) $(16,640,853) $(10,287,183) $(16,447,053)
-------------------- --------------- -------------- -------------
Net loss per share $(0.49) $(6.86) $(4.99) $(2.52)
==================== =============== ============== =============
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Selected Financial
Data" and under the caption "Experts" and to the use of our reports dated July
31, 1997 (except Note 9, as to which the date is December 4, 1997), in the
Registration Statement (Form S-1 No. 333-_______ ) and related Prospectus of
Erols Internet, Inc. for the registration of 2,917,000 shares of its common
stock.
Vienna, Virginia
December 4, 1997 /s/ Ernst & Young LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT OF OPERATIONS AND STATEMENT OF CASH FLOWS INCLUDED IN THE
COMPANY'S REGISTRATION STATEMENT ON FORM S-1 FOR THE YEAR ENDED DECEMBER 31,
1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 2,540,857 532,665
<SECURITIES> 0 0
<RECEIVABLES> 275,508 534,766
<ALLOWANCES> 42,000 42,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,146,180 1,765,908
<PP&E> 12,530,040 22,466,212
<DEPRECIATION> 2,030,708 6,390,866
<TOTAL-ASSETS> 14,558,999 18,813,339
<CURRENT-LIABILITIES> 24,832,947 40,477,624
<BONDS> 0 0
0 0
0 0
<COMMON> 5,586 5,835
<OTHER-SE> (14,896,138) 30,292,173
<TOTAL-LIABILITY-AND-EQUITY> 14,558,999 18,813,339
<SALES> 10,948,863 24,409,653
<TOTAL-REVENUES> 10,948,863 24,409,653
<CGS> 6,002,155 10,744,690
<TOTAL-COSTS> 6,002,155 10,744,690
<OTHER-EXPENSES> 1,628,201 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 150,376 164,145
<INCOME-PRETAX> (16,640,853) (16,447,053)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (16,640,853) (16,447,053)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (16,640,853) (16,447,053)
<EPS-PRIMARY> (6.86) (2.52)
<EPS-DILUTED> (6.86) (2.52)
</TABLE>
