<PAGE>
EARTHLINK NETWORK, INC.
3100 NEW YORK DRIVE
PASADENA, CALIFORNIA 91107
MAY 14, 1998
Dear Stockholders:
On behalf of the entire Board of Directors of EarthLink Network, Inc. (the
"Company"), I am pleased to present this Proxy Statement/Prospectus, which
relates to a Special Meeting of Stockholders at which the Company will seek the
stockholder approvals necessary to consummate its pending transaction with
Sprint Corporation.
This transaction, which was first announced on February 10, 1998, represents
a long-term strategic alliance creating what we believe will be one of the
industry's most powerful Internet access services. The Special Meeting will be
held in the Company's Executive Conference Room at 9:00 a.m. on June 5, 1998.
You are very cordially invited to attend.
The Board of Directors unanimously approved the transaction and recommends
that you vote FOR approval of each of the enclosed proposals, ALL of which must
be adopted for the transaction to be closed and implemented. The Board's reasons
for unanimously approving the transaction are described in more detail below
under the section entitled "Recommendation of the Board of Directors." I
encourage you to read the enclosed materials carefully and call us if you have
any questions. We enthusiastically support the transaction and would be happy to
help facilitate your understanding of it as well.
Again, on behalf of the entire Board, I urge you to vote FOR approval of
each of the stockholder proposals. We appreciate your support and look forward
to continuing to serve you.
Sincerely,
/s/ Sky D. Dayton
Sky D. Dayton
Chairman of the Board of Directors
<PAGE>
EARTHLINK NETWORK, INC.
3100 NEW YORK DR.
PASADENA, CALIFORNIA 91107
(626) 296-2400
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AT 9:00 A.M. ON JUNE 5, 1998
To the Stockholders of EarthLink Network, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders (the
"Special Meeting") of EarthLink Network, Inc. (the "Company") will be held at
the Executive Conference Room of the Company, on Friday June 5, 1998, at 9:00
a.m., local time, to consider and vote upon the following four proposals (the
"Company Stockholder Vote Matters") contemplated by the Investment Agreement,
dated as of February 10, 1998, among the Company, Sprint Corporation ("Sprint"),
Sprint Communications Company L.P. ("Sprint L.P."), Dolphin, Inc. ("Newco") and
Dolphin Sub, Inc. ("Newco Sub, Inc.") as such agreement may be amended (the
"Investment Agreement," a copy of which is attached as Appendix A to the
accompanying Proxy Statement/Prospectus and is incorporated by reference
herein):
1. To approve and adopt an Agreement and Plan of Merger, dated as of
February 10, 1998, by and among the Company, Newco and Newco Sub, as such
agreement may be amended (the "Merger Agreement," a copy of which is attached to
the accompanying Proxy Statement/Prospectus as Appendix B and incorporated by
reference herein), pursuant to which (a) Newco Sub will merge with and into the
Company, with the Company as the surviving corporation (the "Merger"), and (b)
each outstanding share of common stock, par value $.01 per share of the Company
("Company Common Stock") outstanding at the effective time of the Merger will be
converted into the right to receive one share of common stock, par value $.01
per share of Newco ("Newco Common Stock") ("Proposal No. 1").
2. To approve the issuance by Newco of 4,102,941 shares of Series A
Convertible Preferred Stock (the "Convertible Preferred Stock"), the terms of
which are set forth in the proposed form of Certificate of Designation,
Preferences and Rights of Series A Preferred Stock (the "Certificate of
Designation") attached to the accompanying Proxy Statement/Prospectus as
Appendix C and incorporated herein by reference to Sprint L.P. and the issuance
of Newco Common Stock upon conversion thereof pursuant to the Investment
Agreement ("Proposal No. 2").
3. To approve the issuance by Newco of Convertible Senior Promissory Notes
(the "Convertible Notes") to Sprint and the issuance of Newco Common Stock upon
conversion thereof pursuant to the Credit Agreement, dated as of February 10,
1998, among the Company, Newco and Sprint, as such agreement may be amended (the
"Credit Agreement," a copy of which is attached as Appendix D to the
accompanying Proxy Statement/Prospectus and incorporated by reference herein),
("Proposal No. 3").
4. To approve and adopt amendments to the agreements governing outstanding
options, warrants and other rights to acquire Company Common Stock which
thereafter will only permit the issuance of Newco Common Stock rather than
Company Common Stock upon exercise thereof ("Proposal No. 4").
THE APPROVAL OF EACH OF THE COMPANY STOCKHOLDER VOTE MATTERS IS CONTINGENT
ON THE APPROVAL OF ALL FOUR OF THE COMPANY STOCKHOLDER VOTE MATTERS. UNLESS ALL
FOUR OF THE COMPANY STOCKHOLDER VOTE MATTERS ARE APPROVED BY COMPANY
STOCKHOLDERS AT THE SPECIAL MEETING, NONE WILL BE EFFECTED BY THE COMPANY.
The close of business on May 1, 1998, has been designated as the record date
(the "Record Date") for the determination of stockholders of the Company
entitled to notice of and to vote at the Special Meeting, or any adjournment or
postponement thereof on, the Company Stockholder Vote Matters. A complete list
of stockholders entitled to vote at the Special Meeting will be maintained at
the Company's headquarters at 3100 New York Drive, Pasadena, California, for a
period of 10 days prior to the Special Meeting.
<PAGE>
Approval of Proposal No. 1 requires the affirmative vote of a majority of
the Company's Common Stock outstanding on the Record Date. Approval of the other
Company Stockholder Vote Matters requires the affirmative vote of the Shares
present in person or represented by proxy at the Special Meeting and entitled to
vote thereon. The shares of Newco Common Stock to be issued in connection with
the Merger will be qualified for trading on the Nasdaq National Market.
Consequently, holders of Company Common Stock will not have appraisal rights
with respect to the Merger under the Delaware General Corporation Law, but may
have dissenters' rights under the California General Corporation Law (the
"CGCL") because EarthLink may be considered a "quasi-California corporation"
under Section 2115 of the CGCL. See Appendix G, "Dissenters' Rights Under the
California General Corporation Law."
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
APPROVAL OF EACH OF THE COMPANY STOCKHOLDER VOTE MATTERS.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Sky D. Dayton
SKY D. DAYTON
CHAIRMAN OF THE BOARD OF DIRECTORS
Pasadena, California
May 14, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
DATE, AND SIGN THE ENCLOSED FORM OF PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE PAID RETURN ENVELOPE IN ORDER TO ENSURE THAT YOUR SHARES WILL BE
REPRESENTED AT THE SPECIAL MEETING.
<PAGE>
PROXY STATEMENT
FOR SPECIAL MEETING OF STOCKHOLDERS OF
EARTHLINK NETWORK, INC.
------------------------
PROSPECTUS
SHARES OF COMMON STOCK OF
DOLPHIN, INC.
This Proxy Statement/Prospectus constitutes the Proxy Statement of EarthLink
Network, Inc., a Delaware corporation (the "Company" or "EarthLink") in
connection with a special meeting of stockholders of the Company. This Proxy
Statement/Prospectus is being furnished to the stockholders of the Company in
connection with the solicitation of proxies by the Board of Directors of the
Company for use at its special meeting of stockholders (including any
adjournment or postponement thereof, the "Special Meeting"), to be held at 9:00
a.m., local time, on Friday, June 5, 1998, to consider and vote upon the merger
involving the Company described herein, certain issuances of securities by
Dolphin, Inc., a Delaware corporation ("Newco"), and certain related matters.
This Proxy Statement/Prospectus also constitutes the Prospectus of Newco in
respect of the shares common stock, par value $.01 per share of Newco ("Newco
Common Stock") to be issued to the stockholders of the Company in connection
with a proposed merger of Dolphin Sub, Inc., a Delaware corporation created by
the Company ("Newco Sub"), with and into the Company, with the Company as the
surviving entity (the "Merger"), pursuant to the terms of the Agreement and Plan
of Merger, dated as of February 10, 1998, as such agreement may be amended (the
"Merger Agreement"), by and among EarthLink, Newco and Newco Sub. The shares of
Newco Common Stock to be issued in connection with the Merger will be qualified
for trading on the Nasdaq National Market. Consequently, the holders of Common
Stock, $.01 par value per share, of EarthLink ("Shares," "Common Stock" or
"Company Common Stock"), will not have appraisal rights with respect to the
Merger under the Delaware General Corporation Law ("DGCL"), but may have
dissenters' rights under the California General Corporation Law (the "CGCL"),
because EarthLink may be considered a "quasi-California corporation" under
Section 2115 of the CGCL. See "Company Stockholder Vote Matters--Proposal No.
1--Approval of the Merger-- Dissenters' Rights of Appraisal." A copy of the
Merger Agreement is attached as Appendix B hereto.
The Merger is expected to close as soon as practicable after the Company's
stockholders approve the Merger and the other Company Stockholder Vote Matters
(as defined below). This Proxy Statement/ Prospectus and related materials
enclosed herewith are being mailed to stockholders of the Company on or about
May 14, 1998.
THE SECURITIES TO WHICH THIS PROXY STATEMENT/PROSPECTUS RELATES 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
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Proxy Statement/Prospectus is May 14, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, is required to file reports, proxy and information statements, and
other information with the Securities and Exchange Commission (the "SEC").
Copies of such reports, proxy and information statements, and other information
can be obtained, at prescribed rates, from the SEC by addressing written
requests for such copies to the Public Reference Section at the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, such reports, proxy and
information statements, and other information can be inspected at the public
reference facilities referred to above and at the regional offices of the SEC at
7 World Trade Center, Suite 1300, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
SEC maintains a World Wide Web site on the Internet at "http://www.sec.gov" that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC, including the
Company. The Company's Common Stock is included for quotation on the Nasdaq
National Market and reports, proxy and information statements, and other
information concerning the Company also may be inspected at the offices of
Nasdaq at 1735 K Street, N.W., Washington, D.C. 20006.
This Proxy Statement/Prospectus constitutes part of the Registration
Statement on Form S-4 of Newco (including any exhibits and amendments thereto,
the "Registration Statement") filed with the SEC under the Securities Act of
1933, as amended (the "Securities Act"), relating to the shares of Newco Common
Stock to be issued pursuant to the Merger Agreement. This Proxy
Statement/Prospectus does not include all of the information in the Registration
Statement, certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. For further information about Newco, the Company and
Newco Common Stock, reference is made to the Registration Statement. The
Registration Statement may be inspected and copied, at prescribed rates, at the
SEC's public reference facilities at the addresses set forth above.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY OR AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY
THIS PROXY STATEMENT/PROSPECTUS IN ANY JURISDICTION TO OR FROM ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION
OF THE SECURITIES BEING OFFERED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THE INFORMATION SET FORTH OR
INCORPORATED BY REFERENCE HEREIN SINCE THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS.
THIS PROXY STATEMENT/PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF
THE COMPANY FOLLOWING THE CONSUMMATION OF THE TRANSACTIONS DESCRIBED HEREIN,
INCLUDING STATEMENTS RELATING TO THE REVENUE INCREASES THAT ARE EXPECTED TO BE
REALIZED FROM SUCH TRANSACTIONS (SEE "PRO FORMA CONDENSED FINANCIAL
INFORMATION"). THESE FORWARD-LOOKING STATEMENTS (i) ARE OTHER THAN HISTORICAL
INFORMATION, (ii) ARE IDENTIFIED BY SUCH WORDS AS "BELIEVE," "EXPECT,"
"ANTICIPATE," "MAY," OR OTHER SIMILAR TERMINOLOGY, AND (iii) INVOLVE CERTAIN
RISKS AND UNCERTAINTIES. FACTORS THAT
i
<PAGE>
MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES:
(1) EXPECTED REVENUE INCREASES FROM THE TRANSACTIONS CANNOT BE OR ARE NOT FULLY
REALIZED; (2) SUBSCRIBER LOSS AND ATTRITION IS GREATER THAN EXPECTED; (3)
COMPETITIVE PRESSURE IN THE INTERNET SERVICES INDUSTRY INCREASES SIGNIFICANTLY;
(4) COSTS OR DIFFICULTIES RELATED TO THE INTEGRATION OF THE INTERNET BUSINESS OF
SPRINT AND THE COMPANY ARE GREATER THAN EXPECTED; AND (5) GENERAL ECONOMIC
CONDITIONS, EITHER NATIONALLY OR REGIONALLY, ARE LESS FAVORABLE THAN EXPECTED.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
AVAILABLE INFORMATION..................................................................................... i
SUMMARY................................................................................................... 1
SUMMARY HISTORICAL FINANCIAL INFORMATION.................................................................. 9
SPECIAL MEETING OF STOCKHOLDERS........................................................................... 10
DESCRIPTION OF THE OFFER.................................................................................. 13
DESCRIPTION OF THE INVESTMENT AGREEMENT................................................................... 14
DESCRIPTION OF THE GOVERNANCE AGREEMENT................................................................... 18
DESCRIPTION OF CERTAIN ANCILLARY AGREEMENTS............................................................... 26
RECOMMENDATION OF THE BOARD OF DIRECTORS.................................................................. 31
COMPANY STOCKHOLDER VOTE MATTERS.......................................................................... 38
THE BUSINESS OF EARTHLINK................................................................................. 51
EARTHLINK--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 60
OTHER INFORMATION ABOUT EARTHLINK......................................................................... 68
SELECTED HISTORICAL FINANCIAL INFORMATION................................................................. 72
PRO FORMA FINANCIAL INFORMATION........................................................................... 73
INFORMATION ABOUT SPRINT.................................................................................. 78
DESCRIPTION OF THE CAPITAL STOCK OF NEWCO................................................................. 79
OTHER MATTERS............................................................................................. 80
EXPERTS................................................................................................... 80
LEGAL MATTERS............................................................................................. 80
INDEX TO FINANCIAL STATEMENTS............................................................................. F-1
APPENDICES
APPENDIX A ....................................................................................... Investment Agreement
APPENDIX B ............................................................................... Agreement and Plan of Merger
APPENDIX C ..................................... Form of Certificate of Designation, Preferences and Rights of Series A
Convertible Preferred Stock
APPENDIX D ........................................................................................... Credit Agreement
APPENDIX E ........................................................................................... Fairness Opinion
APPENDIX F ....................................................................................... Governance Agreement
APPENDIX G ............................................ Dissenters' Rights Under the California General Corporation Law
</TABLE>
iii
<PAGE>
SUMMARY
FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS AND THE DOCUMENTS ATTACHED AS APPENDICES HERETO. THIS
SUMMARY IS NOT INTENDED TO BE A COMPLETE DESCRIPTION OF THE MATTERS COVERED IN
THIS PROXY STATEMENT/PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS
PROXY STATEMENT/PROSPECTUS. STOCKHOLDERS ARE URGED TO READ CAREFULLY THE ENTIRE
PROXY STATEMENT/PROSPECTUS, INCLUDING THE APPENDICES.
OVERVIEW
On February 10, 1998, the Company established a broad strategic relationship
with Sprint and its affiliate, Sprint L.P. (the "Strategic Alliance") pursuant
to an Investment Agreement (as defined herein) and several other related
agreements and documents. As a result, certain elements of this Strategic
Alliance require approval by the Company's stockholders at the Special Meeting.
Consequently, this Proxy Statement/Prospectus constitutes a Proxy Statement by
which the Board of Directors of the Company is soliciting the proxy of the
Company's stockholders (i.e., the right to vote their shares of Company stock on
their behalf) at the upcoming Special Meeting of the Company's stockholders. At
the Special Meeting, the Company's stockholders will be asked to consider and
vote on several proposals which are elements of the Strategic Alliance,
including: (a) the Merger and a resulting conversion of each share of Company
Common Stock into one share of Newco Common Stock, (b) the issuance by Newco of
Series A Convertible Preferred Stock, $.01 par value per share (the "Convertible
Preferred Stock") to Sprint L.P. and the issuance of Newco Common Stock upon
conversion thereof, (c) the issuance of Convertible Notes (as defined herein) to
Sprint and the issuance of Newco Common Stock upon conversion thereof, and (d)
amendments to agreements governing options, warrants and rights to acquire
Company Common Stock which thereafter permit only the issuance of Newco Common
Stock upon exercise thereof.
This Proxy Statement/Prospectus also constitutes the Prospectus to be
utilized by Newco for the issuance of Newco Common Stock to stockholders of the
Company in connection with the Merger and the Newco Common Stock into which
certain outstanding options, warrants and other rights to acquire Newco Common
Stock are excercisable.
THE PARTIES
THE COMPANY. The Company is a Delaware corporation with its principal
executive offices at 3100 New York Drive, Pasadena, California 91107, and its
telephone number is (626) 296-2400. The Company's principal line of business is
to serve as an Internet service provider that provides its customers access to
the Internet and information, assistance and services designed to introduce
customers to the Internet and ensure that they have a satisfying Internet
experience. See "Available Information" and "The Business of EarthLink."
NEWCO AND NEWCO SUB. Newco and Newco Sub are nominally capitalized Delaware
corporations created as vehicles for effectuating the transactions contemplated
by the Investment Agreement (as defined herein). The principal executive offices
and phone number of each of Newco and Newco Sub are that of the Company. Neither
Newco nor Newco Sub has conducted any business prior to the date of this Proxy
Statement, and neither Newco nor Newco Sub will conduct any business prior to
consummation of the Merger. Prior to consummation of the Merger, Newco and Newco
Sub are controlled by the Company, and Sprint has no interest in either company.
Following the consummation of the Merger, Newco will become a public company
subject to the reporting requirements of the Exchange Act, and the Company will
be its subsidiary. It is expected that the Shares, after they are converted into
shares of Newco Common Stock, will continue to trade under the ticker symbol
"ELNK" on the Nasdaq National Market. Upon consummation of the Merger, Sprint
and its affiliates will own approximately 26.6% of the total number of issued
and outstanding shares of Newco
<PAGE>
Common Stock on a fully-diluted basis (that is, assuming that all warrants,
options and convertible notes representing rights to purchase Common Stock or
Newco Common Stock, including the Convertible Preferred Stock of Newco issued to
Sprint L.P., are exercised or converted into Newco Common Stock). See
"Summary--The Issuance of Convertible Preferred Stock," "Description of the
Offer" and "Description of the Investment Agreement--The Investment Agreement."
SPRINT AND SPRINT L.P. Sprint is a Kansas corporation with its principal
executive offices at 2330 Shawnee Mission Parkway, Westwood, Kansas 66205.
Sprint is a diversified telecommunications holding company providing domestic
and international voice, video and data communications through its subsidiaries.
Sprint has two major business divisions: local telephone operations and
long-distance operations. Complimentary businesses include distribution of
telecommunications equipment and telephone directory publishing. Sprint
affiliates operate local exchange telephone systems serving more than seven
million access lines in 19 states. Sprint L.P. operates the long-distance
communications services division of Sprint and is a Delaware limited partnership
owned by affiliates of Sprint. See "Available Information" and "Information
About Sprint."
SPECIAL MEETING OF STOCKHOLDERS
This Proxy Statement/Prospectus is being furnished to the holders of Common
Stock in connection with the solicitation by the Company's Board of Directors of
proxies for use at the Special Meeting at which the stockholders of the Company
will be asked to vote upon (i) the Merger Agreement and the Merger, including
issuance of Newco Common Stock in exchange for Company Common Stock, (ii) the
issuance of Convertible Preferred Stock, the Newco Common Stock issuable upon
conversion thereof, (iii) the issuance of Convertible Notes and the Newco Common
Stock issuable upon conversion thereof, and (iv) amendments to option warrants
and other rights to acquire Company Common Stock to permit exercise of such
rights only into Newco Common Stock (the matters referred to in (i), (ii), (iii)
and (iv) are referred to collectively herein as the "Company Stockholder Vote
Matters"). The Special Meeting will be held at the Executive Conference Room of
the Company at 9:00 a.m. local time, on June 5, 1998. See "Special Meeting of
Stockholders--Date, Place, and Time" and "Company Stockholder Vote Matters."
The Company's Board of Directors has fixed the close of business on May 1,
1998, as the record date (the "Record Date") for the determination of
stockholders entitled to notice of and to vote at the Special Meeting. Only
holders of record of shares of Common Stock on the Record Date are entitled to
notice of and to vote at the Special Meeting. Each share of Common Stock is
entitled to one vote. Stockholders who execute proxies retain the right to
revoke them at any time prior to being voted at the Special Meeting. On the
Record Date, there were 12,059,784 shares of Common Stock issued and
outstanding. See "Special Meeting of Stockholders--Record Date, Voting Rights,
Required Votes and Revocability of Proxies."
Approval of the Merger requires the affirmative vote of a majority of the
Shares outstanding as of the Record Date. Approval of each of the other Company
Stockholder Vote Matters requires the affirmative vote of a majority of the
Shares represented in person or by proxy at the Special Meeting, entitled to
vote thereon, assuming a quorum is present. See "Special Meeting of
Stockholders--Record Date, Voting Rights, Required Votes and Revocability of
Proxies."
THE APPROVAL OF EACH OF THE COMPANY STOCKHOLDER VOTE MATTERS IS CONTINGENT
ON THE APPROVAL OF ALL OF THE COMPANY STOCKHOLDER VOTE MATTERS. UNLESS ALL FOUR
OF THE COMPANY STOCKHOLDER MATTERS ARE APPROVED BY COMPANY STOCKHOLDERS AT THE
SPECIAL MEETING, NONE WILL BE EFFECTED BY THE COMPANY.
2
<PAGE>
As of the Record Date, officers and directors of the Company owned 4,643,427
Shares, representing 38.5% of the Common Stock outstanding. In order to induce
Sprint and Sprint L.P. to enter into the Investment Agreement and perform the
transactions contemplated thereby, certain members of management and other
stockholders (the "Granting Stockholders") have entered into an Agreement to
Vote and Tender Stock dated February 10, 1998 ("Agreement to Vote and Tender
Stock"). That agreement obligates the Granting Stockholders to tender all of the
3,989,114 Shares (representing 35.3% of the outstanding Shares) which they own
into the tender offer by Sprint described below, and to vote those Shares in
favor of each of the Company Stockholder Vote Matters. In order to ensure that
the agreement to vote set forth in the Agreement to Vote and Tender Stock will
be fulfilled, each of the Granting Stockholders granted to Sprint an Irrevocable
Proxy, coupled with an interest, to vote in favor of the Company Stockholder
Vote Matters (the "Irrevocable Proxies"). The Granting Stockholders are Sky
Dayton, Chairman of the Board of the Company, 1,500,000 Shares; Kevin M.
O'Donnell, a Director of the Company, 944,614 Shares; Storie Partners, L.P.,
521,892 Shares; Gregory Abbott, 427,212 Shares; Robert S. London, 392,032
Shares; and George Abbott, 203,364 Shares.
In addition, certain other stockholders (the "Voting Stockholders") have
entered into an Agreement to Vote Stock dated February 10, 1998 ("Agreement to
Vote Stock") which obligates them to vote all of their 2,950,382 Shares
(representing 26.1% of the outstanding Shares) in favor of the Company
Stockholder Vote Matters, but did not grant any irrevocable proxies thereunder.
The Voting Stockholders are Quantum Industrial Partners LDC, 1,456,480 Shares;
Reed Slatkin, a Director of the Company (through Reed Slatkin & Associates),
1,042,473 Shares; Sidney Azeez, a Director of the Company, 236,884 Shares; and
George Soros, 214,545 Shares.
Based on the foregoing, the Company believes that at least 6,939,496 Shares
(representing 61.4% of the outstanding Shares as of February 10, 1998) will be
voted in favor of the Company Stockholder Vote Matters. The number of Shares
obligated to be tendered and/or voted pursuant to these agreements will ensure
approval of (i) the Company Stockholder Vote Matters, (ii) satisfaction of the
Minimum Tender Condition (as defined herein), and (iii) consummation of the
transactions contemplated by the Investment Agreement, unless the Investment
Agreement Conditions (as defined herein) have not been satisfied or waived on or
prior to the time the Offer is consummated. Sprint did not own of record any
Shares as of the Record Date, and therefore is not entitled to vote at the
Special Meeting except insofar as it exercises the Irrevocable Proxies provided
by the Granting Stockholders.
THE OFFER
By means of an Offer to Purchase (the "Offer to Purchase") and a related
Letter of Transmittal (the "Letter of Transmittal"), each dated February 18,
1998, Sprint has offered to purchase 1,250,000 shares of Common Stock of the
Company at $45.00 per Share (the "Offer Price"), net to each seller in cash,
upon the terms and subject to the conditions set forth in the Offer to Purchase
and in the Letter of Transmittal (which, together with any amendments or
supplements thereto, collectively constitute the "Offer"). The Offer is made
pursuant to the Investment Agreement and certain related agreements described
herein. Upon consummation of the Offer, Sprint will own approximately 11.1% of
the total number of issued and outstanding shares (determined as of February 10,
1998), which will be converted into the same number of shares of Newco Common
Stock in the Merger.
Consummation of the Offer is conditioned upon (i) there being validly
tendered and not withdrawn prior to the "Expiration Date" (as defined herein)
1,250,000 Shares (the "Minimum Tender Condition"), and (ii) the other conditions
to the obligations of Sprint, Sprint L.P., Newco, Newco Sub and the Company to
consummate the transactions contemplated by the Investment Agreement (other than
the acceptance for payment of Shares pursuant to the Offer) having been
satisfied or waived (collectively, the "Investment Agreement Conditions"),
including the expiration or termination of all waiting periods imposed upon
consummation of the Offer and the other transactions contemplated by the
Investment Agreement by the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the regulations thereunder (the
3
<PAGE>
"HSR Act"), and the absence of any action taken or instituted by the Department
of Justice, the Federal Trade Commission or by any other governmental entity to
delay or otherwise enjoin the transactions contemplated by the Investment
Agreement (the "HSR Condition"). The applicable waiting period under the HSR Act
has expired such that the HSR Condition may now be considered satisfied. See
"Description of the Offer."
THE INVESTMENT AGREEMENT
The Investment Agreement provides, among other things, that subject to the
terms and conditions set forth therein, immediately following the consummation
of the Offer, (i) the Merger will be effected and the issued and outstanding
Shares will be converted into shares of Newco Common Stock; (ii) Sprint L.P.
will acquire 4,102,941 shares of Convertible Preferred Stock, in exchange for
(A) an aggregate cash consideration of $23,750,000, (B) the assignment to Newco
of one hundred percent of the Sprint Internet Passport(SM) Subscribers ("SIP
Subscribers"), of which there were approximately 130,000 as of the date of
execution of the Investment Agreement, and (C) Sprint L.P. having entered into a
network agreement whereby Newco and the Company will utilize Sprint L.P.'s
long-distance network under specified terms and conditions (the issuance of such
Convertible Preferred Stock, the "Convertible Preferred Stock Issuance," and the
consideration described in (A), (B) and (C), collectively, the "Convertible
Preferred Stock Consideration"); and (iii) Sprint will provide Newco and the
Company, as co-borrowers, with up to $25 million of convertible senior debt
financing on or after the Closing (as defined below), with such amount to
increase by $25 million on each of the first, second and third anniversaries of
the Closing Date (as defined below) for a total of up to $100 million of such
financing at the end of such period (the "Convertible Debt Financing"), such
indebtedness to be evidenced by one or more Convertible Senior Promissory
Note(s) (the "Convertible Notes") and to be subject to the terms and conditions
of a Credit Agreement dated as of February 10, 1998 among Sprint, Newco and the
Company, as such agreement may be amended (the "Credit Agreement"). The Closing
of the Merger, the Convertible Preferred Stock Issuance and the other
transactions described in the Investment Agreement which will occur concurrently
with the Merger is referred to as the "Closing" and the date on which the
Closing occurs is referred to as the "Closing Date." See "Description of the
Investment Agreement."
THE GOVERNANCE AGREEMENT
In connection with the Investment Agreement, Sprint, Sprint L.P., Newco and
the Company entered into the Governance Agreement, dated February 10, 1998, as
such agreement may be amended (the "Governance Agreement"), which will take
effect upon the Closing. The Governance Agreement establishes certain terms and
conditions concerning the corporate governance of Newco, the acquisition and
disposition of equity securities of Newco ("Equity Securities") by Sprint,
Sprint L.P. and any of their respective affiliates (collectively, "Affiliated
Equity Holders"), the rights of Sprint to make offers to purchase all of the
outstanding securities of Newco not owned by Affiliated Equity Holders and the
rights of the Board of Directors of Newco to receive and entertain offers to
effect Business Combinations (as defined below), all as more particularly
described in the Governance Agreement.
CERTAIN ANCILLARY AGREEMENTS
Simultaneously with the execution of the Investment Agreement, the following
agreements were executed and delivered by the parties thereto: (i) the Merger
Agreement, (ii) the Agreement to Vote and Tender Stock, (iii) the Agreement to
Vote Stock, (iv) the Credit Agreement, (v) the Governance Agreement, (vi) a
Marketing and Distribution Agreement dated as of February 10, 1998 among Sprint,
Sprint L.P., Newco and the Company, as such agreement may be amended, whereby
Sprint, Sprint L.P., Newco and the Company agree to provide certain cooperation
and support to each other in specified marketing matters and Sprint L.P. grants
Newco the right to utilize certain distribution channels of Sprint L.P. and a
license to use Sprint L.P.'s brand in the business of the Company and the
Company agrees to sell
4
<PAGE>
certain products of Sprint L.P. (the "Marketing Agreement"), (vii) a Network
Services Agreement dated as of February 10, 1998, as such agreement may be
amended, between Sprint L.P., Newco and the Company, which grants Newco and the
Company the right to use a minimum and maximum number of ports on Sprint L.P.'s
long-distance network, along with pricing and other terms set forth therein (the
"Network Agreement"), (viii) a Registration Rights Agreement dated as of
February 10, 1998, as such agreement may be amended, between Sprint, Sprint L.P.
and Newco establishing the rights of Sprint and its affiliates with respect to
public offerings and sales of equity securities of Newco and to obtain
registration thereof under federal and state securities laws (the "Registration
Rights Agreement"), and (ix) a Stockholders Agreement dated as of February 10,
1998, as such agreement may be amended, between Sprint and certain stockholders
of the Company which provides for certain rights and obligations with respect to
such stockholders' voting and disposition of equity securities of Newco in
connection with an offer by Sprint to acquire the remaining equity securities of
Newco (the "Stockholders Agreement"). The agreements referred to in (i), (iv),
(v), (vi), (vii), (viii) and (ix) will not become effective until the Closing
and then only if the Offer is consummated and the Investment Agreement
Conditions are satisfied or waived on or prior to the Closing. The Agreement and
Plan of Merger, the Agreement to Vote and Tender Stock, the Agreement to Vote
Stock, the Credit Agreement, the Governance Agreement, the Marketing Agreement,
the Network Agreement, the Registration Rights Agreement and the Stockholders
Agreement are referred to as the "Ancillary Agreements." See "Description of
Certain Ancillary Agreements."
THE MERGER
Immediately following the consummation of the Offer, the Company, Newco and
Newco Sub will effect the Merger whereby Newco Sub, a wholly-owned subsidiary of
Newco, will merge with and into the Company. All of the then issued and
outstanding Shares of Common Stock, including the Shares acquired by Sprint in
the Offer, will be converted into an equal number of shares of Newco Common
Stock in the Merger. Upon consummation of Merger, the Company will be a
subsidiary of Newco. Pursuant to the Merger, the Certificate of Incorporation
and Bylaws of Newco Sub will become the Certificate of Incorporation and Bylaws
of the surviving corporation and the Certificate of Incorporation and Bylaws of
Newco will take effect as the constituent documents of the corporation whose
stock is registered pursuant to the Exchange Act. The Certificate of
Incorporation and Bylaws of Newco are substantially similar to the Certificate
of Incorporation and Bylaws of the Company, except that the number of authorized
shares of Preferred Stock was increased from 10 million to 25 million, the scope
of indemnification of officers and directors was increased consistent with the
DGCL, and the provision providing for cumulative voting was deleted. Also, the
directors and officers of the Company will become the directors and officers of
Newco until their successors have been duly elected or appointed and qualified
or until their earlier death, resignation or removal in accordance with Newco's
Certificate of Incorporation and Bylaws, except that the two directors elected
by the holders of the Convertible Preferred Stock will be elected immediately
following the Closing. Sprint's initial designees to such directorships are
William T. Esrey, the Chairman and Chief Executive Officer of Sprint and Patti
S. Manuel, President and Chief Operating Officer--Long-Distance Division of
Sprint. See "Company Stockholder Vote Matters-Approval of the Merger."
While the Merger is subject to the approval of the stockholders of the
Company, the votes to be cast pursuant to the Agreement to Vote and Tender Stock
and the Agreement to Vote Stock will ensure approval of the Merger. The Merger
will create a holding company structure which may provide certain advantages if
the scope of the Company's business expands in the future as well as
facilitating the economic efficiency of the strategic relationship with Sprint.
See "Company Stockholder Vote Matters-Approval of the Merger."
THE ISSUANCE OF CONVERTIBLE PREFERRED STOCK
Concurrently with the Merger, Sprint L.P. will receive 4,102,941 shares of
Convertible Preferred Stock in exchange for the Convertible Preferred Stock
Consideration. Such consideration consists of (i)
5
<PAGE>
$23,750,000 of cash, (ii) Sprint L.P. contributing the SIP Subscribers to Newco,
and (iii) Sprint L.P., the Company and Newco entering into the Network
Agreement.
The Convertible Preferred Stock will be initially convertible into 3,533,411
Shares of Newco Common Stock at the time of the Closing. Based on these figures,
immediately after consummation of the Offer, the Merger and the other
transactions contemplated by the Investment Agreement, Sprint would own
approximately 26.6% of the total number of issued and outstanding shares of
Newco Common Stock on a fully diluted basis (that is, assuming that all
warrants, options and convertible notes representing rights to purchase Common
Stock or Newco Common Stock, including the Convertible Preferred Stock, are
exercised or converted into Newco Common Stock). However, the Convertible
Preferred Stock will pay dividends thereon ("Liquidation Accretion Dividends")
for the first five years in the form of increases in its "Liquidation Value" (as
hereinafter defined), at a per annum rate of 3% of the Liquidation Value, which
will accrue and compound quarterly in arrears, but which will accelerate in the
event of a business combination or an optional redemption of the Convertible
Preferred Stock by Newco. At the Closing, the Liquidation Value will be the
average of the closing price per share of Newco Common Stock for the 30 trading
days prior to the Closing Date. Increases in the Liquidation Value will have the
effect of increasing the number of shares of Newco Common Stock that Sprint will
receive upon conversion of the Convertible Preferred Stock. Assuming that the
Convertible Preferred Stock is held by Sprint for the initial five year period
following the Closing or that certain "Liquidation Accretion Dividends" are
accelerated, Sprint L.P. will be entitled to receive 4,102,941 shares of Newco
Common Stock upon conversion thereof. If the fully diluted number of Shares, as
calculated above, were the same at that time, Sprint would then own
approximately 28.8% of the total number of issued and outstanding shares of
Newco Common Stock on that basis. Such percentage amount does not take into
account the extent to which, if any, Sprint's fully-diluted ownership interest
would increase in the event that advances are made under the Credit Agreement.
See "Description of Certain Ancillary Agreements--The Credit Agreement."
Cash dividends at such rate are payable after five years from the Closing
Date when declared by the Board of Directors of Newco out of funds legally
available therefor and such dividends accumulate if not declared and paid. After
the twentieth anniversary of the Closing Date, such cumulative cash dividends
accrue at the rate per annum of 8% of the Liquidation Value, which rate
increases annually by 200 basis points up to a maximum rate of 12% per annum.
Holders of Convertible Preferred Stock are entitled to a liquidation preference
upon any voluntary or involuntary liquidation, dissolution or winding up of
Newco ("Liquidation Event") in an amount per share equal to the sum of (i) the
average closing price per share of Common Stock for the 30 trading days
preceding the Closing Date, (ii) the amount of all Liquidation Accretion
Dividends that have been paid (including an amount equal to a prorated dividend
for the period from the latest "Dividend Accrual Date" through the date of the
Liquidation Event), and (iii) all accumulations of accrued by unpaid cash
dividends (the sum of (i) (ii) and (iii) is referred to as the Liquidation
Value). Each share of Convertible Preferred Stock initially converts into less
than one share of Newco Common Stock but increases to a one-for-one conversion
(subject, in each case, to customary antidilution adjustments) over a five-year
period or upon acceleration in the event of a business combination or an
optional redemption by Newco. See "Company Stockholder Vote Matters--Proposal
No. 2-- Approval for the Issuance of Convertible Preferred Stock." The terms of
the Convertible Preferred Stock are set forth in the Certificate of Designation
attached hereto as Appendix C.
CONVERTIBLE DEBT FINANCING
In connection with the Investment Agreement, the Company and Sprint entered
into the Credit Agreement, which will become effective concurrently with the
Merger. Under the Credit Agreement, Sprint will initially provide up to $25
million in debt financing to be evidenced by the Convertible Notes. Each year
after the Closing Date, the aggregate amount that Sprint is obligated to advance
will be increased by $25 million to a maximum of $100 million on a cumulative
basis. The Convertible Notes are convertible into shares of Newco Common Stock
at a conversion price of 130% of the average fair market
6
<PAGE>
price (i.e., the closing sales price over a 30 trading day period) at the time a
particular Convertible Note is issued to evidence an advance under the Credit
Agreement. Each Convertible Note will mature five years from the date of
issuance and will bear interest at a rate equal to 6% per annum. The Company has
no present intention to incur indebtedness under the Credit Agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS; FAIRNESS OPINION
The Board of Directors of the Company has, by unanimous vote of all
Directors, approved the Offer, the Merger and the other transactions
contemplated by the Investment Agreement, and determined that the terms of all
such transactions, taken together, are fair to, and in the best interests of,
the stockholders of the Company. The Board has recommended that all stockholders
of the Company accept the Offer and tender their shares of Common Stock pursuant
to the Offer. The Board of Directors of the Company is also recommending that
all Company stockholders vote "FOR" approval and adoption of the Merger
Agreement and each of the other Company Stockholder Vote Matters. Although the
Board of Directors did not assign relative weights to the specific factors
considered in reaching its decision, the Board of Directors did consider the
overall strategic value of the relationship with Sprint to be of paramount
importance. The Company has retained Deutsche Morgan Grenfell Inc. ("DMG") as
its financial advisor for these matters. DMG has rendered an opinion to the
Board of Directors that, as of the date of such opinion, the Offer, the sale of
Convertible Preferred Stock and the Merger, when taken together, are fair from a
financial point of view to the holders of the Common Stock. See "Recommendation
of the Board of Directors" and the fairness opinion of DMG attached as Appendix
E hereto.
DISSENTERS' RIGHTS OF APPRAISAL
Because the Common Stock was included on the Nasdaq National Market on the
Record Date and because the Common Stock will be converted in the Merger solely
into the right to receive Newco Common Stock, which will be included on the
Nasdaq National Market at the effective time of the Merger, pursuant to Section
262 of the DGCL, the holders of Common Stock will not have appraisal rights with
respect to the Merger under the DGCL. However, EarthLink, which was originally
incorporated as a California corporation (prior to being reincorporated as a
Delaware corporation in 1996), may be considered a "quasi-California
corporation" pursuant to Section 2115 of the CGCL. If so, the Company's
stockholders who have not approved the Merger may be entitled to dissenters'
rights under Chapter 13 of the CGCL in connection with the Merger if demands for
such rights are made with respect to (i) five percent or more of the outstanding
shares of Common Stock or (ii) "restricted shares" of Common Stock (i.e., those
shares with respect to which there exists any restriction or transfer imposed by
the Company or any law or regulation).
The failure of dissenting stockholders to follow the appropriate procedures
to perfect his or her dissenters' rights under the CGCL will result in the
termination or waiver of such rights. In the event a stockholder fails to make a
proper demand for payment or otherwise loses his or her status as a dissenting
stockholder, such stockholder will be entitled to receive Newco Common Stock as
consideration under the Merger. See "Company Stockholder Vote Matters--Proposal
No. 1--Approval of the Merger--Dissenters' Rights of Appraisal."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
It is intended that the Merger will be treated as a reorganization within
the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code"). If the Merger qualifies as a tax-free reorganization, (a) no gain or
loss will be recognized by a holder of Common Stock upon the exchange of such
Common Stock solely for shares of Newco Common Stock, (b) the basis of the Newco
Common Stock received by stockholders in the Merger will be the same as the
basis such stockholders had in their Company Common Stock, and (c) the holding
period of the Newco Common Stock received by stockholders in the Merger
generally will include the holding period such stockholders had in their Company
7
<PAGE>
Common Stock. See "Company Stockholder Vote Matters--Proposal No. 1--Approval of
the Merger-- Certain Federal Income Tax Consequences."
EFFECTIVE TIME
Subject to the conditions to the obligations of the parties to effect the
Merger being satisfied or waived, the Merger will become effective on the date
and at the time that the Certificate of Merger become effective with the
Delaware Secretary of State (the "Effective Time"). The Effective Time is
expected to occur as soon as practicable after approval of the Merger by the
Company's stockholders and the effective date (including expiration of all
applicable waiting periods) of all required consents of any regulatory authority
having jurisdiction over the Merger. See "Company Stockholder Vote Matters--
Proposal No. 1--Approval of the Merger--Effective Time of the Merger,"
"--Conditions" and "-- Termination."
No assurance can be provided that the necessary stockholder and regulatory
approvals can be obtained or that the other conditions precedent to the Merger
can or will be satisfied. The Company anticipates that all conditions to the
consummation of the Merger will be satisfied so that the Merger can be
consummated during the second quarter of 1998. Delays in the consummation of the
Merger could occur, however.
MARKET PRICE DATA
The Common Stock is traded on the Nasdaq National Market under the symbol
"ELNK." The following table sets forth the high and low sale prices per share of
the Common Stock on February 10, 1998, the last full day of trading before
public announcement of the execution of the Investment Agreement, February 17,
1998, the last full day of trading before the commencement of the Offer, and May
11, 1998.
<TABLE>
<CAPTION>
DATE HIGH LOW
- ------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
February 10, 1998........................................................ $ 38.875 $ 34.50
February 17, 1998........................................................ $ 46.25 $ 43.50
May 11, 1998............................................................. $ 67.63 $ 62.00
</TABLE>
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<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following summary historical financial information has been derived from
historical financial statements of the Company and should be read in conjunction
with such historical financial statements and the notes thereto, which balance
sheets at December 31, 1996 and 1997 and the related statements of operations
and of cash flows for the three years ended December 31, 1997 and notes thereto
of the Company appear elsewhere in this Proxy Statement/Prospectus. See
"Available Information."
<TABLE>
<CAPTION>
INCEPTION
(MAY 26, 1994)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ---------------------------------
1994 1995 1996 1997
--------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUES:
Recurring revenues......................................... $ 53 $ 2,422 $ 26,879 $ 72,943
Other revenues............................................. 58 606 5,624 6,231
------ --------- ---------- ----------
Total revenues........................................... 111 3,028 32,503 79,174
OPERATING COSTS AND EXPENSES:
Cost of recurring revenues................................. 4 1,055 18,462 37,974
Cost of other revenues..................................... 12 349 2,699 3,401
Sales and marketing........................................ 37 3,711 15,258 21,020
General and administrative................................. 168 2,062 10,534 14,333
Operations and member support.............................. 38 1,869 15,808 30,900
------ --------- ---------- ----------
259 9,046 62,761 107,628
------ --------- ---------- ----------
Loss from operations......................................... (148) (6,018) (30,258) (28,454)
Interest expense............................................. -- (136) (1,041) (2,099)
Interest income.............................................. -- 34 150 637
------ --------- ---------- ----------
Net loss................................................. $ (148) $ (6,120) $ (31,149) $ (29,916)
------ --------- ---------- ----------
------ --------- ---------- ----------
Basic and diluted net loss per share....................... $ (0.10) $ (1.59) $ (5.13) $ (2.99)
------ --------- ---------- ----------
------ --------- ---------- ----------
Weighted average shares outstanding........................ 1,550 3,837 6,069 10,001
OTHER OPERATING DATA:
EBITDA (1)................................................. $ (141) $ (5,713) $ (26,105) $ (19,077)
Cash flows from:
Operating activities..................................... $ (146) $ (3,643) $ (16,222) $ (21,290)
Investing activities..................................... $ (97) $ (4,266) $ (18,361) $ (16,095)
Financing activities..................................... $ 243 $ 8,199 $ 38,286 $ 49,842
Subscriber count........................................... 3,000 29,000 227,000 420,000
Number of employees........................................ 9 175 593 785
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
<S> <C> <C> <C> <C>
1994 1995 1996 1997
------------- --------- ---------- ----------
BALANCE SHEET DATA
Cash and cash equivalents................................... $ -- $ 290 $ 3,993 $ 16,450
Total assets................................................ 186 4,874 27,119 46,887
Long-term debt.............................................. -- 355 6,088 8,218
Total liabilities........................................... 89 4,584 34,367 40,812
Accumulated (deficit)....................................... (148) (5,007) (36,156) (66,072)
Stockholders' equity (deficit).............................. 97 290 (21,261) 6,075
Book value per share........................................ 0.06 0.08 (3.50) 0.61
</TABLE>
- ------------------------
(1) Represents earnings (loss) before depreciation and amortization, interest
income and expense and income tax expense. EBITDA is not determined in
accordance with generally accepted accounting principles, is not indicative
of cash used by operating activities and should not be considered in
isolation or as an alternative to, or more meaningful than measures of
performance determined in accordance with generally accepted accounting
principles.
9
<PAGE>
SPECIAL MEETING OF STOCKHOLDERS
GENERAL; PURPOSE
This Proxy Statement/Prospectus is being furnished to the holders of Common
Stock in connection with the solicitation by the Company's Board of Directors of
proxies for use at the Special Meeting at which Company stockholders will be
asked to vote upon proposals to approve the Company Stockholder Vote Matters.
Each of the Company Stockholder Vote Matters is described in detail in this
Proxy Statement/Prospectus, and include the following proposals:
1. To approve and adopt an Agreement and Plan of Merger, dated as of
February 10, 1998, by and among the Company, Newco and Newco Sub, as such
agreement may be amended (the "Merger Agreement," a copy of which is attached
hereto as Appendix B to this Proxy Statement/Prospectus and incorporated by
reference herein), pursuant to which (a) Newco Sub will merge with and into the
Company, with the Company as the surviving corporation, and (b) each outstanding
share of Company Common Stock outstanding at the effective time of the Merger
will be converted into the right to receive one share of Newco Common Stock
("Proposal No. 1").
2. To approve the issuance by Newco of 4,102,941 shares of Convertible
Preferred Stock to Sprint L.P. and the issuance of Newco Common Stock upon
conversion thereof pursuant to the Investment Agreement ("Proposal No. 2").
3. To approve the issuance by Newco of Convertible Notes to Sprint and the
issuance of Newco Common Stock upon conversion thereof pursuant to the Credit
Agreement, a copy of which is attached as Appendix D to the accompanying Proxy
Statement/Prospectus and incorporated by reference herein), ("Proposal No. 3").
4. To approve and adopt amendments to the agreements governing outstanding
options, warrants and other rights to acquire Company Common Stock which
thereafter will only permit the issuance of Newco Common Stock rather than
Company Common Stock upon exercise thereof ("Proposal No. 4").
The transactions underlying the Company Stockholder Vote Matters arise in
connection with the Investment Agreement and all the transactions contemplated
therein between the Company, Newco, Newco Sub, Sprint and Sprint L.P., which is
described in detail below.
DATE, PLACE, TIME
The Special Meeting will be held at the Executive Conference Room of the
Company at 9.00 a.m., local time, on Friday, June 5, 1998.
RECORD DATE, VOTING RIGHTS, REQUIRED VOTES, AND REVOCABILITY OF PROXIES
The close of business on May 1, 1998, has been fixed as the Record Date for
determining holders of outstanding shares of Common Stock entitled to notice of
and to vote at the Special Meeting. Only holders of Common Stock of record on
the books of the Company at the close of business on the Record Date are
entitled to notice of and to vote at the Special Meeting. As of the Record Date,
12,059,784 shares of Common Stock were issued and outstanding and held by 176
holders of record.
Holders of Common Stock are entitled to one vote on each matter considered
and voted upon at the Special Meeting for each share of Common Stock held of
record as of the Record Date. To hold a vote on any proposal, a quorum must be
assembled, which is a majority of the shares of Common Stock issued and
outstanding and entitled to vote, present in person or represented by proxy. In
determining whether a quorum exists at the Special Meeting for purposes of all
matters to be voted on, all votes "for" or "against," as well as all
abstentions, with respect to the proposal receiving the most such votes, will be
counted. The affirmative vote by the holders of a majority of the outstanding
shares of Common Stock on the Record Date is required to approve the Merger. The
vote required for the approval of the remaining
10
<PAGE>
Company Stockholder Vote Matters is the affirmative vote by the holders of a
majority of the Shares present in person or represented by proxy at the Special
Meeting and entitled to vote thereon. Shares represented by proxies that reflect
abstentions or "broker non-votes" (i.e., shares held by a broker or nominee that
are represented at the Special Meeting, but with respect to which such broker or
nominee is not empowered to vote on a particular proposal) will be counted as
Shares that are present and entitled to vote for purposes of determining the
presence of a quorum. Accordingly, with respect to the approval of the Company
Stockholder Vote Matters, abstentions and broker non-votes will be counted as
part of the number of votes to be used in determining if the proposal has
received the requisite number of votes for approval. Thus, an abstention and a
broker non-vote will have the same effect as a vote against the proposal.
Shares of Common Stock represented by properly executed proxies, if such
proxies are received in time and not revoked, will be voted in accordance with
the instructions indicated on the proxies.
IF NO INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR APPROVAL OF
THE COMPANY STOCKHOLDER VOTE MATTERS AND, IN THE DISCRETION OF THE PROXY HOLDER,
AS TO ANY OTHER MATTER WHICH MAY COME PROPERLY BEFORE THE SPECIAL MEETING. IF
NECESSARY, THE PROXY HOLDER MAY VOTE IN FAVOR OF A PROPOSAL TO ADJOURN THE
SPECIAL MEETING IN ORDER TO PERMIT FURTHER SOLICITATION OF PROXIES IN THE EVENT
THERE ARE NOT SUFFICIENT VOTES TO APPROVE THE FOREGOING PROPOSALS AT THE TIME OF
THE SPECIAL MEETING.
FAILURE BOTH TO RETURN THE PROXY CARD AND TO VOTE IN PERSON AT THE SPECIAL
MEETING WILL HAVE THE EFFECT OF A VOTE CAST AGAINST APPROVAL OF THE MERGER.
A stockholder, other than a Granting Stockholder, who has given a proxy may
revoke it at any time prior to its exercise at the Special Meeting by (i) giving
written notice of revocation to the Secretary of the Company, (ii) properly
submitting to the Company a duly executed proxy bearing a later date or (iii)
attending the Special Meeting and voting in person. All written notices of
revocation and other communications with respect to revocation of proxies should
be addressed as follows: EarthLink Network, Inc., 3100 New York Dr., Pasadena,
California 91107; Attention: Kirsten Hansen, Secretary.
As of the Record Date, the directors and executive officers of the Company
and their affiliates were entitled to vote 4,643,427 shares of Common Stock,
excluding options and warrants, or approximately 38.5% of the issued and
outstanding shares of Common Stock. Sprint did not own of record any shares of
Common Stock as of the Record Date, and therefore is not entitled to vote at the
Special Meeting except insofar as it exercises the Irrevocable Proxies provided
by the Granting Stockholders.
In connection with the Investment Agreement, certain members of management
and certain stockholders have entered into the Agreement to Vote and Tender
Stock and/or the Agreement to Vote, each of which obligates such parties, among
other things, to vote their respective shares in favor of the Company
Stockholder Vote Matters. The number of shares of Common Stock obligated to be
voted thereunder will ensure approval of the Company Stockholder Vote Matters.
See "Description of the Offer."
SOLICITATION OF PROXIES
Proxies may be solicited by the directors, officers and employees of the
Company by mail, in person, or by telephone or telegraph. Such persons will
receive no additional compensation for such services. The Company may also
retain the services of a private firm to solicit proxies on behalf of the
Company, for which the Company would pay a fee. Any such brokers, custodians,
nominees, and fiduciaries forwarding solicitation materials to the beneficial
owners of Common Stock held of record by such persons will be reimbursed for the
reasonable out-of-pocket expenses incurred by them for such services. All
expenses
11
<PAGE>
associated with the solicitation of proxies, other expenses associated with the
Special Meeting, and expenses related to the printing and mailing of this Proxy
Statement/Prospectus, will be paid by the Company, except that Sprint has agreed
in the Investment Agreement to pay one-half of the reasonable out-of-pocket
expenses incurred by the Company in preparing, printing and mailing the Proxy
Statement/ Prospectus, preparing the S-4 Registration Statement of which this
Proxy Statement is a part and holding the Special Meeting. See "Description of
the Investment Agreement--Expenses and Fees."
12
<PAGE>
DESCRIPTION OF THE OFFER
By means of the Offer to Purchase, the Letter of Transmittal and related
documentation sent to the stockholders of the Company on February 18, 1998,
Sprint has commenced a public tender offer to purchase 1,250,000 shares of
Common Stock of the Company at $45.00 per Share, net to each seller in cash,
upon the terms and subject to the conditions set forth in the Offer to Purchase
and in the Letter of Transmittal The Offer is made pursuant to the Investment
Agreement and certain related agreements described herein.
Consummation of the Offer is conditioned upon (i) there being validly
tendered and not withdrawn prior to the Expiration Date 1,250,000 Shares, (ii)
the amendment of the Dilutable Securities (as defined herein) so that not more
than 8% of the Company Common Stock outstanding immediately prior to the Closing
will be subject to Dilutable Securities after the Merger (the "Amendment
Condition") and (iii) the other conditions to the obligations of Sprint, Sprint
L.P., Newco, Newco Sub and the Company to consummate the transactions
contemplated by the Investment Agreement (other than the acceptance for payment
of Shares pursuant to the Offer) having been satisfied or waived, including the
expiration or termination of all waiting periods imposed upon consummation of
the Offer and the other transactions contemplated by the Investment Agreement by
the HSR Act, and the absence of any action taken or instituted by the Department
of Justice, the Federal Trade Commission or by any other governmental entity to
delay or otherwise enjoin the transactions contemplated by the Investment
Agreement (collectively, the "Investment Agreement Conditions"). See "Company
Stockholder Vote Matters--Proposal No. 1--Approval of the Merger--Conditions."
In order to induce Sprint and Sprint L.P. to enter into the Investment
Agreement and perform the transactions contemplated thereby, certain members of
management and other stockholders (the "Granting Stockholders") have entered
into an Agreement to Vote and Tender Stock dated February 10, 1998 ("Agreement
to Vote and Tender Stock"). That agreement obligates the Granting Stockholders
to tender all of the 3,989,114 Shares (representing 35.3% of the outstanding
Shares) which they own into the Offer, and to vote those Shares in favor of each
of the Company Stockholder Vote Matters. In order to ensure that the agreement
to vote set forth in the Agreement to Vote and Tender Stock will be fulfilled,
each of the Granting Stockholders granted to Sprint an Irrevocable Proxy,
coupled with an interest, to vote in favor of the Company Stockholder Vote
Matters (the "Irrevocable Proxies"). The Granting Stockholders are Sky Dayton,
Chairman of the Board of the Company, 1,500,000 Shares; Kevin M. O'Donnell, a
Director of the Company, 944,614 Shares; Storie Partners, L.P., 521,892 Shares;
Gregory Abbott, 427,212 Shares; Robert S. London, 392,032 Shares; and George
Abbott, 203,364 Shares.
In addition, certain other stockholders (the "Voting Stockholders") have
entered into an Agreement to Vote Stock dated February 10, 1998 ("Agreement to
Vote Stock") which obligates them to vote all of their 2,950,382 Shares
(representing 26.1% of the outstanding Shares) in favor of the Company
Stockholder Vote Matters, but did not grant any irrevocable proxies thereunder.
The Voting Stockholders are Quantum Industrial Partners LDC, 1,456,480 Shares;
Reed Slatkin, a Director of the Company (through Reed Slatkin & Associates),
1,042,473 Shares; Sidney Azeez, a Director of the Company, 236,884 Shares; and
George Soros, 214,545 Shares.
Based on the foregoing, the Company believes that at least 6,939,496 Shares
(representing 61.4% of the outstanding Shares) will be voted in favor of the
Company Stockholder Vote Matters. The number of Shares obligated to be tendered
and/or voted pursuant to these agreements will ensure approval of the Company
Stockholder Vote Matters, satisfaction of the Minimum Tender Condition, and
consummation of the transactions contemplated by the Investment Agreement,
unless the Investment Agreement Conditions have not been satisfied or waived on
or prior to the Offer Acceptance Time as defined therein. Sprint did not own of
record any Shares as of the Record Date, and therefore is not entitled to vote
at the Special Meeting except insofar as it exercises the Irrevocable Proxies
provided by the Granting Stockholders.
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DESCRIPTION OF THE INVESTMENT AGREEMENT
THE INVESTMENT AGREEMENT
The Investment Agreement provides, among other things, that subject to the
terms and conditions set forth therein, immediately following the consummation
of the Offer, (i) the Merger will be effected and the issued and outstanding
Shares will be converted into the same number of shares of Newco Common Stock;
(ii) Sprint L.P. will acquire 4,102,941 shares of Convertible Preferred Stock,
in exchange for (A) an aggregate cash consideration of $23,750,000, (B) the
assignment to Newco of 100% of the SIP Subscribers, of which there were
approximately 130,000 as of the date of execution of the Investment Agreement,
and (C) Sprint L.P. having entered into the Network Agreement (the issuance of
such Convertible Preferred Stock, "Convertible Preferred Stock Issuance", and
the consideration described in (A), (B) and (C), collectively, the "Convertible
Preferred Stock Consideration"); and (iii) Sprint will provide Newco and the
Company, as co-borrowers, with up to $25 million of convertible senior debt
financing on or after the Closing (as defined below), with such amount to
increase by $25 million on each of the first, second and third anniversaries of
the Closing Date (as defined below) for a total of up to $100 million of such
financing at the end of such period (the "Convertible Debt Financing"), such
indebtedness to be evidenced by one or more Convertible Notes and to be subject
to the terms and conditions of the Credit Agreement."
Consummation of the transactions (other than the Offer) contemplated by the
Investment Agreement is conditioned upon Sprint having accepted for payment the
Shares to be purchased pursuant to the Offer (the "Offer Condition") and the
satisfaction of the HSR Condition (which has now been satisfied), as well as the
other Investment Agreement Conditions. For purposes of the Offer, Sprint will be
deemed to have accepted for payment, and thereby purchased, Shares properly
tendered and not withdrawn as, if and when Sprint gives oral or written notice
to the Depositary of Sprint's acceptance of such shares (the time of giving such
notice is the "Offer Acceptance Time" and the date on which such notice is given
is the "Offer Acceptance Date"). If the Shares have been accepted for payment
pursuant to the Offer, the Offer Acceptance Time will immediately precede the
Closing and the Offer Acceptance Date will occur on the same date as the Closing
Date.
As of the Record Date, there were 12,059,784 Shares issued and outstanding.
Upon consummation of the Offer, Sprint will own approximately 11.1% of such
total number of issued and outstanding Shares (determined as of February 10,
1998), which will be converted into the same number of shares of Newco Common
Stock pursuant to the Merger. As of the Record Date, there were 1,876,860 Shares
reserved for issuance upon the exercise of outstanding employee stock options
("Stock Options") and 675,819 Shares reserved for issuance upon the exercise of
outstanding warrants ("Warrants"). Based upon the conversion price in effect on
the Closing Date, the Convertible Preferred Stock would be convertible into
3,533,411 shares of Newco Common Stock, provided that the Convertible Preferred
Stock may not be converted prior to the first anniversary of the Closing Date.
Based on these figures, immediately after consummation of the Offer, the Merger
and the other transactions contemplated by the Investment Agreement, Sprint
would own approximately 26.6% of the total number of issued and outstanding
shares of Newco Common Stock on a fully diluted basis (that is, assuming that
(i) the Convertible Preferred Stock is converted into Newco Common Stock, and
(ii) that all outstanding Warrants and Stock Options have been exercised.
However, the Convertible Preferred Stock will pay dividends thereon for the
first five years in the form of increases in its Liquidation Value ("Liquidation
Accretion Dividends"), at a per annum rate of 3% of the Liquidation Value, which
will accrue and compound quarterly in arrears, but which will accelerate in the
event of a Business Combination (as defined herein) or an optional redemption by
Newco. At the Closing, the Liquidation Value will be the average of the closing
price per share of Newco Common Stock for the 30 trading days prior to the
Closing Date. Increases in the Liquidation Value will have the effect of
increasing the number of shares of Newco Common Stock which Sprint will receive
upon conversion of the Convertible Preferred Stock. Assuming that the
Convertible Preferred Stock is held by Sprint for the initial five year period,
or the Liquidation Accretion Dividends are accelerated, Sprint will be entitled
to receive 4,102,941 shares of Newco Common Stock upon conversion thereof,
subject to applicable antidilution
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provisions. If the fully diluted number of Shares, as calculated above, were the
same at that time, Sprint would then own approximately 28.8% of the total number
of issued and outstanding shares of Newco Common Stock on that basis. Such
percentage amount does not take into account the extent to which, if any,
Sprint's fully diluted ownership interest would increase in the event that
advances are made under the Credit Agreement. See "Description of Certain
Ancillary Agreements--The Credit Agreement."
Advances of funds under the Credit Agreement will be evidenced by
Convertible Notes, which are convertible into Newco Common Stock. The Conversion
Price per share at which the Convertible Notes may be converted into Newco
Common Stock is 130% of the average of the closing prices for Newco Common Stock
for the 30 trading days immediately preceding the applicable advance of funds
under the Credit Agreement. Because the number of shares receivable upon
conversion of the Convertible Notes is dependent upon future trading prices for
Newco Common Stock, and because the amount of advances under the Credit
Agreement is within Newco's discretion (provided it is in compliance with
applicable Credit Agreement conditions), it is not possible to predict the
extent to which, if any, Sprint's fully diluted ownership would increase in the
event that advances are made under the Credit Agreement.
Simultaneously with the execution of the Investment Agreement, the following
ancillary Agreements were executed and delivered by the parties thereto: (i) the
Merger Agreement, (ii) the Agreement to Vote and Tender Stock, (iii) the
Agreement to Vote Stock, (iv) the Credit Agreement, (v) the Governance
Agreement, (iv) the Marketing Agreement, (vii) the Network Agreement, (viii) the
Registration Rights Agreement, and (ix) the Stockholders' Agreement. The
agreements referred to in (i), (iv), (v), (vi), (vii), (viii) and (ix) will not
become effective until the Closing and then only if the Offer is consummated and
the Investment Agreement Conditions are satisfied or waived on or prior to the
Closing.
THE MERGER
The Investment Agreement sets forth the parties' agreements with respect to
the Merger. See "Company Stockholder Vote Matters--Proposal No. 1--Approval of
the Merger" for details regarding the Merger.
THE ISSUANCE OF CONVERTIBLE PREFERRED STOCK
Concurrently with the Merger, Sprint L.P. will receive 4,102,941 shares of
Convertible Preferred Stock in exchange for the Convertible Preferred Stock
Consideration. Such consideration consists of (i) $23,750,000 of cash, (ii)
Sprint L.P. contributing the SIP Subscribers to Newco, and (iii) Sprint L.P.,
the Company and Newco entering into the Network Agreement.
The Convertible Preferred Stock will be initially convertible into 3,533,411
Shares of Newco Common Stock at the Closing. Based on these figures, immediately
after consummation of the Offer, the Merger and the other transactions
contemplated by the Investment Agreement, Sprint would own approximately 26.6%
of the total number of issued and outstanding shares of Newco Common Stock on a
fully diluted basis (assuming that all outstanding Warrants and Stock Options
have been exercised, and that the Convertible Preferred Stock has been
converted). However, the Convertible Preferred Stock will pay dividends thereon
for the first five years in the form of increases in its Liquidation Value, at a
per annum rate of 3% of the Liquidation Value), which will accrue and compound
quarterly in arrears, but which will accelerate in the event of a Business
Combination or an optional redemption of the Convertible Preferred Stock by
Newco. At the Closing, the Liquidation Value will be the average of the closing
price per share of Newco Common Stock for the 30 trading days prior to the
Closing Date. Increases in the Liquidation Value will have the effect of
increasing the number of shares of Newco Common Stock which Sprint will receive
upon conversion of the Convertible Preferred Stock. Assuming that the
Convertible Preferred Stock is held by Sprint for the initial five year period,
or the Liquidation Accretion Dividends are accelerated, Sprint will be entitled
to receive 4,102,941 shares of Newco Common Stock upon conversion thereof,
subject to customary antidilution provisions. If the fully diluted number of
Shares, as calculated
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above, were the same at that time, Sprint would then own approximately 28.8% of
the total number of issued and outstanding shares of Newco Common Stock on that
basis.
Cash dividends at 3% per annum are payable after five years from the Closing
Date when declared by the Board of Directors of Newco out of funds legally
available therefor and such dividends accumulate if not declared and paid. After
the twentieth anniversary of the Closing Date, such cumulative cash dividends
accrue at the rate per annum of 8% of the Liquidation Value, which rate
increases annually by 200 basis points up to an maximum rate of 12% per annum.
Holders of Convertible Preferred Stock are entitled to a liquidation preference
upon any voluntary or involuntary liquidation, dissolution or winding up of
Newco (" Liquidation Event") in an amount per share equal to the sum of (i) the
average closing price per share of Common Stock for the 30 trading days
preceding the Closing Date, (ii) the amount of all Liquidation Accretion
Dividends that have been paid (including an amount equal to a prorated dividend
for the period from the latest Dividend Accrued Date through the date of the
Liquidation Event), and (iii) all accumulations of accrued but unpaid cash
dividends (the sum of (i), (ii) and (iii) is referred to as the Liquidation
Value). Each share of Convertible Preferred Stock initially converts into less
than one share of Newco Common Stock but increases to a one-for-one conversion
(subject, in each case, to customary antidilution adjustments) over a five-year
period.
At Newco's option, the shares of Convertible Preferred Stock are redeemable
after the third anniversary of the Closing Date at a redemption price initially
of 103% of the Liquidation Value and decreasing to 100% of Liquidation Value by
Newco's 2004 fiscal year. The holders of Convertible Preferred Stock may elect
two directors to the Board of Directors of Newco for so long as they hold 20% or
more of Newco's fully diluted shares outstanding (subject to adjustment for
certain dilutive events) and one director for so long as they hold 10% of such
outstanding shares (subject to adjustment for certain dilutive events).
Otherwise, the Convertible Preferred Stock is non-voting except in the limited
circumstances when required under the DGCL.
Consistent with the rights granted in the Governance Agreement, the
Certificate of Designation permits one Investor Director to participate on any
Strategic Business Planning Committee, Finance Committee or other significant
committee of the Board of Directors of Newco, the Company or any other
significant subsidiary, to the extent those committees exist. If there is no
such committee, the holders of Convertible Preferred Stock will have a
reasonable opportunity to review and discuss Newco's strategic and business
plans and financing plans with the management of Newco prior to the submission
of any such plan to the applicable Board or Directors, and to receive advance
copies of information and materials to be provided to such Board of Directors
with respect to such matters. Notwithstanding the foregoing, no Investor
Director is entitled to receive such information or materials or to participate
on any committee of the Board of Directors of Newco, the Company or any
significant subsidiary of Newco created for the purpose of considering a
Business Combination or any matter related thereto (including an "Acquisition
Proposal," a "Sprint Offer" or a "Qualified Offer"), or to participate in the
Board's deliberation with respect to any of the foregoing. See "Description of
Governance Agreement--Corporate Covernance."
ISSUANCE OF CONVERTIBLE NOTES
Concurrent with the Merger, the Credit Agreement will become effective.
Pursuant to the Credit Agreement, Sprint will initially make available up to $25
million in debt financing to the Company and Newco to be evidenced by the
Convertible Notes. Each year after the Closing Date, the aggregate amount that
Sprint is obligated to advance to the borrowers is increased by $25 million to a
maximum of $100 million on a cumulative basis. The Convertible Notes are
convertible into shares of Newco Common Stock at a conversion price of 130% of
the average market price (I.E., the closing sale price over a 30-day trading
period) at the time a particular Convertible Note is issued to evidence an
advance under the Credit Agreement. The Convertible Notes will bear interest at
a rate equal to 6% per annum.
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SIP SUBSCRIBERS
Pursuant to the Investment Agreement, concurrently with the Merger, Sprint
L.P. will contribute to Newco all of its SIP Subscribers which at the time of
the execution of the Investment Agreement was approximately 130,000 SIP
Subscribers. Thereafter, the SIP Subscribers shall be subscribers of Newco,
together with all rights under customer contracts and relationships related
thereto. The Investment Agreement provides that if the final number of paid SIP
Subscribers at Closing is less than 130,000, then Sprint L.P. will forfeit to
Newco a number of shares of Convertible Preferred Stock equal to the product of
(i) five, multiplied by (ii) 130,000 less the final number of paid SIP
Subscribers. The contribution of SIP Subscribers is expected to significantly
increase the subscriber base served by Newco.
ACQUISITION PROPOSALS
The Investment Agreement provides that prior to the Closing the Company will
not, nor will it authorize or permit any officer, director or employee, or any
investment banker, attorney or other advisor or representative, of the Company
or any of its subsidiaries to (i) solicit or initiate, or encourage the
submission of, any Acquisition Proposal (as defined herein) or (ii) participate
in any discussions or negotiations regarding, or furnish to any person any
information with respect to, or take any other action to expedite any inquiries
or the making of any proposal that constitutes, or may reasonably be expected to
lead to, any Acquisition Proposal. However, to the extent required by the
fiduciary obligations of the Board of Directors of the Company, as determined in
good faith by the Board of Directors based on the advice of outside counsel, the
Company may, (A) in response to an unsolicited request therefor, furnish
information with respect to the Company to any person pursuant to a customary
confidentiality agreement and discuss such information with such person, (B)
upon receipt by the Company of an Acquisition Proposal, following delivery to
Sprint of the required notice, participate in negotiations regarding such
Acquisition Proposal and (C) modify or withdraw its recommendation that the
stockholders of the Company accept the Offer or its recommendation to such
stockholders that they vote in favor of the transactions contemplated by the
Investment Agreement. Neither the Company nor its Board of Directors may, under
any circumstances, (A) terminate the Investment Agreement or any of the
Ancillary Agreements or withdraw its approval of such agreements, or (B) approve
or authorize the solicitation, initiation or encouragement of additional
Acquisition Proposals. An "Acquisition Proposal" means generally any proposal
for a tender, exchange, merger, recapitalization, liquidation or similar
transaction or any offer or proposal to acquire a material equity interest in or
material amount of voting securities (15% being deemed material for these
purposes) or assets of a party to the Investment Agreement (other than the
transactions contemplated by the Investment Agreement and Ancillary Agreement).
In addition to the obligations of the Company set forth in the preceding
paragraph, the Investment Agreement provides that the Company shall promptly
advise Sprint of the existence of any request for information or of any takeover
proposal, or any inquiry with respect to, or which could lead to, any
Acquisition Proposal.
The Investment Agreement further provides that the Company shall not take
any action that would enhance the ability of any other person proposing a
takeover proposal to obtain the approval of the Company's stockholders or
otherwise consummate such Acquisition Proposal without also taking a comparable
action that would similarly enhance the ability of Sprint to obtain any
necessary approval of the Company's stockholders of, and otherwise to
consummate, the transactions contemplated in the Investment Agreement and the
Ancillary Agreements or an alternative transaction initiated by Sprint and
concurrently withdrawing any impediments thereto that do not similarly impede
such other person.
The Investment Agreement provides that nothing contained therein shall
prohibit the Company from taking and disclosing to its stockholders a position
contemplated by Rule 14e-2 promulgated under the Exchange Act.
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TRANSACTION COSTS
The Investment Agreement provides that all fees and expenses incurred in
connection with the Offer, the Investment Agreement and the transactions
contemplated thereby and the Ancillary Agreements shall be paid by the party
incurring such fees or expenses, whether or not the Offer or other transactions
contemplated by the Investment Agreement are consummated. However, one-half of
the reasonable out-of-pocket expenses incurred by the Company in preparing the
Proxy Statement/Prospectus and the S-4 Registration Statement, printing and
mailing the Proxy Statement/Prospectus, the Commission filing fees for the S-4
Registration Statement and in holding the Special Meeting shall be paid by
Sprint.
CONDUCT OF BUSINESS BY THE COMPANY
The Investment Agreement provides that during the period from the date of
the Investment Agreement to the Closing Date, the Company shall carry on its
business in the usual, regular and ordinary course in substantially the same
manner as theretofore conducted and, to the extent consistent therewith, use all
reasonable efforts to preserve intact its current business organizations, keep
available the services of its current officers and other employees and preserve
its relationships with customers, suppliers, licensers, licensees, distributors,
joint ventures and others having business dealings with it except to the extent
that the failure to do so would not have a material adverse effect on the
Company. In addition, during the period from the date of the Investment
Agreement to the Closing Date, the Company shall not, without first consulting
with Sprint take certain material actions relating to, among other matters,
dividends, acquisitions, dispositions, capital issuances or changes in capital
structure, research and development agreements, incurrence of indebtedness,
capital expenditures and satisfaction of claims.
TERMINATION OF THE INVESTMENT AGREEMENT
The Investment Agreement may be terminated at any time prior to the Closing
Date (i) by mutual written consent of the parties thereto, (ii) by any of the
parties if the Offer has not been consummated on or before June 15, 1998, (iii)
by Sprint and Sprint L.P. if any of the conditions to the obligations of Sprint
and Sprint L.P. with respect to Offering shall have become incapable of
fulfillment, and shall not have been waived by Sprint, or (iv) by the Company,
Newco and Newco Sub if any of the conditions precedent to Sprint's right to
consummate the Offer shall have become incapable of fulfillment and shall not
have been waived by the Company, Newco and Newco Sub.
REPRESENTATIONS AND WARRANTIES
The Investment Agreement contains various customary representations and
warranties made by the parties thereto which will not survive the Closing except
for survival thereof for 24 months in the case of fraud or willful material
breaches of such representations and warranties.
DESCRIPTION OF THE GOVERNANCE AGREEMENT
GENERAL
In connection with the Investment Agreement, Sprint, Sprint L.P., Newco and
the Company entered into the Governance Agreement, which will take effect upon
the Closing. The Governance Agreement establishes certain terms and conditions
concerning the corporate governance of Newco, the acquisition and disposition of
Equity Securities of Newco by Sprint, Sprint L.P. and any of their respective
affiliates (collectively, the "Affiliated Equity Holders"), the rights of Sprint
to make offers to purchase all of the outstanding securities of Newco not owned
by Affiliated Equity Holders and the rights of the Board of Directors of Newco
to receive and entertain offers to effect Business Combinations, all as more
particularly described in the Governance Agreement. The following is a summary
of the Governance Agreement, which is attached hereto as Appendix F and
incorporated by reference herein.
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CORPORATE GOVERNANCE
The Governance Agreement establishes that the fundamental policies and
strategic direction of Newco, the Company and any significant subsidiary of
Newco will be determined by their respective Boards of Directors. Consistent
with the voting rights granted to the holders of Convertible Preferred Stock,
the Governance Agreement provides for two individuals to be designated as
"Investor Directors." Similarly, following conversion or redemption of the
Convertible Preferred Stock into Newco Common Stock, Newco and the Company are
obliged to elect the individuals designated as "Investor Directors" to their
respective Boards of Directors. In addition, at such time, the Governance
Agreement permits one Investor Director to participate on any Strategic Business
Planning Committee, Finance Committee or other significant committee of the
Board of Directors of Newco, the Company or any significant subsidiary, to the
extent those committees exist. If there is no such committee, the Governance
Agreement allows Sprint a reasonable opportunity to review and discuss Newco's
strategic and business plans and financing plans with the management of Newco
prior to the submission of any such plan to the Board of Directors, and to
receive advance copies of information and materials to be provided to the Board
of Directors with respect to such matters. Notwithstanding the foregoing, no
Investor Director is entitled to participate on any committee of the Board of
Directors of Newco, the Company or any significant subsidiary created for the
purpose of considering a Business Combination or any matter related thereto
(including an "Acquisition Proposal," a "Sprint Offer" or a "Qualified Offer,"
as described in more detail below), or to participate in the Board's
deliberations with respect to any of the foregoing. Consistent with the terms of
the Convertible Preferred Stock, Sprint is entitled to two Investor Directors
for so long as it holds 20% or more of Newco's fully diluted shares outstanding
(subject to adjustment for certain dilutive events, the "Higher Threshold"), and
one Investor Director for so long as it holds 10% or more of Newco's fully
diluted shares outstanding (subject to adjustment for certain dilutive events,
the "Lower Threshold"). Rights equivalent to those described in this paragraph
are granted to the Investor Directors and the holders of Convertible Preferred
Stock pursuant to the Certificate of Designation. See "Description of the
Investment Agreement--The Investment Agreement--The Issuance of Convertible
Preferred Stock."
At such time as the Convertible Preferred Stock has been converted into
Newco Common Stock, the Governance Agreement obligates Newco to use its best
efforts to solicit from its stockholders proxies in favor of Sprint's Investor
Director nominees. The Governance Agreement also obligates the Affiliated Equity
Holders to vote in favor of any other nominee or director selected by the Board
of Newco in accordance with the agreement. The voting obligations of Affiliated
Equity Holders under the Governance Agreement are supported by an "Irrevocable
Proxy" granted by Sprint and Sprint L.P. to Newco and the Company. See
"--Solicitation of Offers--Stockholders' Agreement; Irrevocable Proxies."
For so long as "Sprint's Percentage Interest" (a term that measures Sprint's
equity stake in Newco, including its ownership of both Newco Common Stock and
Convertible Preferred Stock, as a percentage of Newco's fully-diluted stock
outstanding) is greater than the Lower Threshold, Newco is prohibited by the
Governance Agreement and the Certificate of Designation from taking or
authorizing certain actions without the concurrence of all Investor Directors
serving in such capacity at that time. These actions include (i) the execution
or performance of any "Discriminatory Transaction" (as defined below); (ii) the
issuance of any class or series of stock of Newco that provides for voting
rights in excess of one vote per share; (iii) certain events involving the
dissolution or liquidation of Newco or any subsidiary thereof, or the
commencement by or with respect to Newco or any subsidiary thereof of certain
bankruptcy or bankruptcy-related events or proceedings; (iv) the conduct by
Newco or any significant subsidiary of business substantially outside its
current general field of enterprise; or (v) the issuance by Newco of
"Transaction Securities" (Equity Securities of Newco issued in connection with
joint ventures, strategic alliances, acquisitions, mergers and other business
combination transactions) representing (A) in any twelve-month period, in one or
more transactions, 50% or more of the number of shares of Newco Common Stock
outstanding prior to giving effect to such issuances, or (B) in any one
transaction, 35% or more of the number of shares of Newco Common Stock
outstanding prior to giving effect to such issuance.
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The term "Discriminatory Transaction" is defined in the Governance Agreement
as any transaction or corporate action that would (i) impose limitations on the
legal rights of any Affiliated Equity Holder as a stockholder of Newco, (ii)
deny any benefit to any Affiliated Equity Holder, proportionately as a holder of
any class of voting Equity Securities, that is made available to other holders,
or (iii) otherwise materially adversely discriminate against any Affiliated
Equity Holders as stockholders of Newco. However, excepted from the definition
of Discriminatory Transactions are various transactions, including (A) the
adoption and implementation by Newco of a Stockholders' Rights Plan, (B) the
adoption and implementation by Newco of a classified Board of Directors, (C) a
Business Combination if in that transaction (x) neither the Liquidation Value
nor the Conversion Price of the Convertible Preferred Stock is changed, and (y)
upon consummation of such transaction, the holders of Convertible Preferred
Stock are offered the right to receive consideration at the same times, in the
same amount and the same form per share as all other holders of Newco Common
Stock, (D) any transaction having a discriminatory effect against any Affiliated
Equity Holder that occurs as a result of a material breach or violation by any
such holder of the Governance Agreement, and (E) the execution by Newco, the
Company or any significant subsidiary of a definitive agreement with respect to
a Business Combination, if such agreement meets certain requirements set forth
in the Governance Agreement. See "--Purchases of Additional Equity Securities;
Business Combinations."
EQUITY PURCHASES FROM THE COMPANY; SUBSCRIPTION RIGHTS
So long as Sprint's Percentage Interest is greater than an amount defined as
the "Top-Up Threshold" (20%, subject to adjustment for certain dilutive events
and for Newco's incurrence of indebtedness under the Convertible Debt
Financing), the Affiliated Equity Holders have certain anti-dilution and
subscription rights set forth in Article III of the Governance Agreement. In
addition to their rights to subscribe for stock of Newco directly from Newco,
Sprint may effect its rights under Article III by making purchases of Equity
Securities at any time from any person other than Newco as long as, after giving
effect to such purchases, Sprint's Percentage Interest is less than or equal to
the "Pro Rata Share," a formula that limits the maximum equity stake in Newco
that the Affiliated Equity Holders may have. The Pro Rata Share, which adjusts
only upon the incurrence of indebtedness by Newco under the Convertible Debt
Financing, has been established, as of the date of the Governance Agreement, at
an amount equal to .278.
Upon proposing to issue "New Securities" (other than New Securities that are
"Transaction Securities"), if Sprint's Percentage Interest is greater than the
Top-Up Threshold, Newco must provide Sprint written notice of its intent to
effect such issuance at least five business days prior to the date on which the
meeting of the Board is to be held to authorize such issuance. For a period of
ten business days after Sprint's receipt of such notice, Sprint has the right to
purchase the Pro Rata Share of such issuance and, if it does so, the Equity
Securities offered pursuant to such notice shall be issued and sold to Sprint by
Newco at the same times and on the same terms and conditions as the New
Securities are issued and sold to third parties. If for any reason the issuance
of such New Securities to third parties is not consummated, Sprint's right to
purchase its Pro Rata Share of such issuance shall lapse.
As noted above, Sprint's general subscription rights do not apply to the
issuance of Transaction Securities. However, if Newco determines that Sprint's
Percentage Interest has decreased by .05 or more as a result of issuances of
Transaction Securities, Newco must notify Sprint of such event. In addition, not
later than the second anniversary of Sprint's receipt of that notice (the
"Window Period"), Newco is obligated to make written offers (each, a "Primary
Share Offer") to Sprint to purchase, in the aggregate, a number of shares
sufficient to enable Sprint to bring Sprint's Percentage Interest up to the
amount in effect prior to the issuances of Transaction Securities. The number of
shares Newco is obligated to offer pursuant to such provision is defined in the
Governance Agreement as the "Available Top-Up Shares" and the aggregate number
of Available Top-Up Shares resulting from all issuances of Transaction
Securities is defined as the "Aggregate Number of Top-Up Shares." Sprint may
accept a Primary Share Offer within five business days of its receipt thereof,
and the offer is to be made at a purchase price equal to an average stock price
for Newco Common Stock for the ten trading days prior to the date of such
issuance, less the underwriting discount applied in the most recent underwritten
offering of Newco Common Stock.
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If Newco determines that Sprint's Percentage Interest has decreased by .10
or more solely as a result of the issuance of Transaction Securities (after
giving effect to any and all Primary Share Offers), the Window Period shall be
accelerated such that Newco shall be obligated to make one or more Primary Share
Offers with respect to not less than the Aggregate Number of Top-Up Shares, as
then calculated, at the earlier of (i) the expiration of the Window Period, as
determined above, or (ii) six months after the date Sprint receives notice to
that effect from Newco. Notwithstanding anything else in the Governance
Agreement to the contrary, in no event is Newco obligated to make Sprint a
Primary Share Offer that, after giving effect to such transaction, would cause
Sprint's Percentage Interest to exceed the Pro Rata Share.
In addition, with respect to a purchase of New Securities pursuant to
Article III of the Governance Agreement, Sprint may, at its option, purchase New
Securities in the form of "Alternative Securities" convertible into the
applicable number of shares of Newco Common Stock. "Alternative Security" is
defined as a new series of Preferred Stock having terms that are structured and
priced in the same manner as the Convertible Preferred Stock. Such terms are
determined, if applicable, by reference to the average stock price for a share
of Newco Common Stock for the 30 trading days prior to the date of issuance of
such Alternative Securities. Sprint's purchase of New Securities in the form of
Alternative Securities are limited (i) to not more than 75% of any issuance of
New Securities from the Closing to the second anniversary thereof, (ii) to not
more than 66.67% of any issuance of New Securities after the second anniversary
of the Closing until the third anniversary thereof and (iii) after the third
anniversary, Newco is not obligated to issue any New Securities in the form of
Alternative Securities.
STANDSTILL PROVISIONS
The Governance Agreement sets forth certain "Standstill Provisions"
applicable to Affiliated Equity Holders. These Standstill Provisions are
summarized below. See "--Solicitation of Offers--Effectiveness; Termination;
Survival" for additional information concerning the survival of the Standstill
Provisions following termination of the Governance Agreement.
Except for purchases of shares and related activities by Sprint otherwise
permitted under the Governance Agreement, the Affiliated Equity Holders may not,
directly or indirectly, (i) acquire, offer to acquire or agree to acquire any
Equity Securities, or any equity securities of any subsidiary of Newco, or
material assets of Newco or any subsidiary or division of Newco; (ii) make or
participate in any "solicitation" of proxies or otherwise seek to influence any
person with respect to the voting of any voting Equity Securities of Newco;
(iii) make any public announcement with respect to, or submit a proposal for, or
offer to effect any purchase of any significant portion of the assets of Newco
or any subsidiary or division of Newco, any tender or exchange offer for any
Equity Securities of Newco, or a merger, consolidation or other extraordinary
transaction involving Newco or any of its Equity Securities; (iv) form, join or
in any way participate in a "group" as defined in Rule 13d-5(b) under the
Exchange Act; or (v) request Newco or any of its representatives to amend or
waive any provision of the foregoing.
In addition, the Affiliated Equity Holders may not, directly or indirectly,
sell, transfer or otherwise dispose of any Equity Securities except (i) pursuant
to a registered underwritten public offering in accordance with the Registration
Rights Agreement, (ii) in accordance with Rule 144 under the Securities Act,
(iii) to any direct or indirect subsidiary of Sprint and (iv) in a transaction
effected in accordance with the so-called "Section 4(1 1/2)" exemption under the
Securities Act. In addition, notwithstanding the foregoing, none of the
Affiliated Equity Holders may sell, transfer or otherwise dispose of any equity
interest in any Equity Securities to any purchaser or group of purchasers if,
after giving effect to such sale, such purchaser or group of purchasers would,
to Sprint's knowledge, own, or have the right to acquire, 5% or more of the
Equity Securities then outstanding, except to any person that is not obligated
(or would not, by virtue of such purchase, reasonably be anticipated to be
obligated) to file a Schedule 13D with the Commission pursuant to each of
paragraphs (b) and (e) of Rule 13d-1 under the Exchange Act.
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PURCHASES OF ADDITIONAL EQUITY SECURITIES; BUSINESS COMBINATIONS
Following the 39-month anniversary of Closing and prior to the 63-month
anniversary of Closing (the "Right to Offer Period"), Sprint shall have the
right to make a "Sprint Offer," by offering to purchase all (but not less than
all) of the outstanding Equity Securities that it does not already own at a
price per share equal to the per share price determined by dividing the "Fair
Private Market Value" by the total number of shares of Newco Common Stock
outstanding on a fully-diluted basis. The "Fair Private Market Value" is defined
as the aggregate private market equity value (including control premium) that an
unrelated third party would pay if it were to acquire all of Newco's outstanding
Equity Securities (including Equity Securities held by Affiliated Equity
Holders) in an arm's length transaction, assuming (i) that all credible buyers
are given an equal opportunity by Newco to make and effectuate an Acquisition
Proposal with respect to Newco, (ii) the absence of any commercial relations
between Newco and the Company, on the one hand, and Sprint and its affiliates,
on the other hand, and (iii) the absence of any ownership stake in Newco by
Affiliated Equity Holders. The Fair Private Market Value is to be determined as
follows.
The respective Boards of Newco and Sprint shall negotiate the amount of the
Fair Private Market Value to be paid pursuant to the Sprint Offer. In the event
the two parties are unable to agree on this amount, within 30 days after
submission of the Sprint Offer to the Board, the parties shall agree to be bound
to the valuation arrived at pursuant to the following formula: (i) two
appraisals shall be made by recognized investment banks, one selected by each of
Sprint and Newco (the "Initial Values"), (ii) if the lower of the Initial Values
is more than 10% less than the higher, a third independent valuation will be
made by an investment bank jointly selected by Newco and Sprint (the
"Independent Valuation"); otherwise, the Fair Private Market Value shall be the
average of the Initial Values; and (iii) if the Independent Valuation is greater
or less than the average of the Initial Values by more than 5%, the Fair Private
Market Value shall be deemed to equal the average of the two closest valuations.
If the Independent Valuation does not differ by such amount, it shall be the
Fair Private Market Value.
A Sprint Offer shall not be subject to any financing contingency, and shall
be reflected in a form of definitive agreement that Sprint is prepared to
execute. The conditions to consummation of the Sprint Offer and the
representations and warranties set forth therein shall be reasonable and
customary for transactions in which a similarly situated stockholder offers to
purchase all of the Equity Security not held by such stockholder or its
affiliates.
The Board of Directors of Newco shall have a one-time right, exercisable
within 14 days after receipt of the Sprint Offer, to postpone the making of that
offer for nine months. Upon exercise of such right, Sprint is obligated to
withdraw the Sprint Offer for a period of nine months, provided that (i) the
Right to Offer Period shall be extended to the 72-month anniversary of Closing
and (ii) the exercise by Newco of its postponement right shall not limit
Sprint's right to respond to a "Third-Party Offer" as set forth below.
In addition, upon the determination of the amount of the Fair Private Market
Value, Sprint shall be obligated to commence and effectuate the Sprint Offer,
provided that Sprint shall have a one-time right, exercisable within 14 days
after receipt of the determination of Fair Private Market Value, to determine
not to proceed to make such Sprint Offer. There are, however, certain
limitations on Sprint's exercise of this "Walk-Away Right." If Sprint does not
exercise such right, the Board of Directors of Newco shall, unless an
"Intervening Offer" (as defined below) is then outstanding, (i) support the
Sprint Offer by approving and recommending it to Newco's stockholders and (ii)
cause Newco to take all steps reasonable and necessary to facilitate
consummation of such Sprint Offer. However, at such time as a "Third-Party
Offer" shall constitute an Intervening Offer, Sprint shall be released from its
obligation to commence and effectuate the Sprint Offer, and Newco shall be
released from its obligation to support and facilitate consummation of the
Sprint Offer. If the Intervening Offer is undertaken in the form of a tender
offer, at the consummation of such tender offer, the offeror shall have an
option to purchase from all Affiliated Equity Holders, at the tender offer
price, in the aggregate, a "Specified Number of Equity Securities" (a number of
Equity Securities owned by Affiliated Equity Holders equal to the proportion of
Equity
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Securities held by unaffiliated equity holders and tendered into or voted for a
competing Business Combination), less the number of Equity Securities that have
already been tendered to such offeror. In addition, if the Intervening Offer (or
a related matter) must be approved by the stockholders of Newco in order for
such offer to be effectuated, the Affiliated Equity Holders are obligated to
cast in favor of the Intervening Offer (and such related matters) such number of
votes as is equal to the Specified Number of Equity Securities, provided that
the Business Combination does not constitute a Discriminatory Transaction.
Affiliated Equity Holders are not entitled to exercise rights of appraisal with
respect to any Business Combination effected in connection with an Intervening
Offer.
The Governance Agreement defines an Intervening Offer as an offer for
aggregate consideration reasonably determined in good faith by the Board of
Newco to be in excess of the aggregate consideration proposed to be paid by
Sprint in a Sprint Offer or a "Qualified Offer" by Sprint (as defined below), as
applicable. The conditions to consummation of an Intervening Offer and the
representations, warranties and covenants set forth in the Intervening Offer
shall be customary for a transaction of that type.
THIRD-PARTY OFFERS
Newco is obligated to provide Sprint with prompt written notice of its
receipt of a bona fide, written offer to effect a Business Combination from a
third party ("Offer"). Upon receipt of such Offer, the Board is to determine
whether it intends to recommend that offer to the stockholders (a "Recommended
Third-Party Offer") or that such offer is not in the best interests of Newco's
stockholders, in which event it intends not to recommend such offer to the
stockholders (a "Non-Recommended Third-Party Offer" and, together with a
Recommended Third-Party Offer, a "Third-Party Offer").
For a period of ten days following the giving of notice of receipt of an
Offer, Newco may not enter into a definitive Agreement with respect to that
Offer. Sprint has an option to make a "Qualified Offer" with respect to either
(i) an Offer that is a Recommended Third-Party Offer or (ii) an Offer that is a
Non-Recommended Third-Party Offer if the Board of Sprint reasonably determines
that the conditions to the Non-Recommended Third-Party Offer are reasonably
likely to be satisfied and the Offer consummated. A "Qualified Offer" is defined
as an offer made by an Affiliated Equity Holder to acquire all of the Equity
Securities not already owned by the Affiliated Equity Holders at a price per
share in excess of the equivalent per share price set forth in a Third-Party
Offer or an Intervening Offer, as the case may be. A Qualified Offer shall be
reflected in a form of definitive agreement that Sprint is prepared to execute,
and the conditions to consummation of such offer and the representations,
warranties and covenants set forth in it shall be customary for transactions in
which a similarly situated stockholder offers to purchase all of the Equity
Securities not held by such stockholder and may not, in any event, be more
onerous in any material respect than those set forth in the Third-Party Offer or
the Intervening Offer, as the case may be.
Newco may not adopt any takeover defenses, enter into any agreement or take
any other action in connection with a Recommended Third-Party Offer that would
materially impair Sprint's ability to make and consummate a Qualified Offer or
materially increase Sprint's cost of consummating a Qualified Offer. However,
notwithstanding the foregoing, Newco is permitted to enter into a definitive
agreement with respect to a Recommended Third-Party Offer that provides for a
termination fee not to exceed 3% of the consideration to be received per share
of Newco Common Stock multiplied by the number of shares of Newco Common Stock
outstanding on a fully diluted basis (less the number of shares beneficially
owned by the offering party), plus customary fees and expenses. Nevertheless,
the definitive agreement with respect to such Recommended Third-Party Offer must
provide that such fees and expenses shall not be payable if Sprint makes a
Qualified Offer within 72 hours of the first public announcement of such
Recommended Third-Party Offer.
If Sprint has the option to make a Qualified Offer and does so more than
five days prior to the date of a stockholders' meeting held to consider a
Third-Party Offer or an Intervening Offer, the Board of Directors shall, unless
an Intervening Offer is then outstanding, support the Qualified Offer by
approving
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and recommending it to Newco's stockholders and cause Newco to take all steps
reasonable and necessary to facilitate consummation of the Qualified Offer.
However, at such time as a Third-Party Offer made subsequent to a Qualified
Offer shall constitute an Intervening Offer, Newco's obligations to support and
facilitate a Qualified Offer shall terminate and Newco shall be free to consider
and act upon such Intervening Offer. Sprint is nonetheless entitled, at any time
prior to consummation of the Intervening Offer, to make another Qualified Offer,
and in such event, the most recent Third-Party Offer shall cease to constitute
an Intervening Offer.
If a Recommended Third-Party Offer or an Intervening Offer is undertaken in
the form of a tender offer, at the consummation of such tender offer, the
offeror shall have an option, to purchase from all Affiliated Equity Holders, at
the tender offer price, in the aggregate, a Specified Number of Equity
Securities, less the number of Equity Securities that have already been tendered
to such offeror. In addition, if a Recommended Third-Party Offer or an
Intervening Offer, as the case may be (or a related matter) must be approved by
the stockholders of Newco in order for such offer to be effectuated, the
Affiliated Equity Holders are obligated to cast in favor of such offer (and such
related matter) such number of votes as is equal to the Specified Number of
Equity Securities, provided that the Business Combination does not constitute a
Discriminatory Transaction. Affiliated Equity Holders are not entitled to
exercise rights of appraisal with respect to any Business Combination effected
in connection with a Recommended Third-Party Offer or Intervening Offer.
The Governance Agreement defines "Business Combination" to mean a
transaction, undertaken in any form whatsoever, involving (i) the purchase or
acquisition of Equity Securities if the consummation of such transaction would
result in the purchaser beneficially owning 35% or more of the Equity Securities
outstanding, or (ii) a merger, consolidation, combination or other extraordinary
transaction with respect to Newco in which, upon consummation thereof, the
shareholders or owners of the other entity that is a party thereto, or the
controlling persons thereof, would acquire beneficial ownership of 50% or more
of the Equity Securities outstanding. The term Business Combination includes a
"Significant Sale," which means the sale of assets of Newco or any subsidiary or
the sale of capital stock of any subsidiary by Newco, in any such case, for
which the consideration proposed to be paid in such transaction represents 35%
or more of the market capitalization of Newco on the date that Newco agrees to
such sale.
SOLICITATION OF OFFERS
From the Closing Date until the earlier of the 27-month anniversary of such
date or the termination of the Governance Agreement in accordance with its
terms, Newco may not, directly or indirectly, (i) solicit or initiate, or
encourage the submission of, any "Acquisition Proposal" (as defined below), or
(ii) participate in any discussions or negotiations regarding, or take any
action that may reasonably be expected to lead to any Acquisition Proposal.
However, to the extent required by the fiduciary obligations of the Board of
Directors, as determined in good faith by the Board based on the advice of
outside counsel, Newco may (A) furnish information in response to any
unsolicited requests therefor and discuss such information, (B) upon receipt by
Newco of an Acquisition Proposal, following delivery to Sprint of notice
thereof, participate in negotiations regarding such Acquisition Proposal and (C)
enter into an agreement respecting such Acquisition Proposal or any related
agreements or take any other action ancillary thereto.
After the 27-month anniversary of the Closing Date until the 39-month
anniversary thereof or the termination of the Governance Agreement in accordance
with its terms, Newco may not, directly or indirectly, take any of the actions
identified in the prior paragraph except through an investment banking firm
formally engaged by Newco for such purpose; provided, that, 30 days prior to so
engaging such investment banking firm for that purpose, Newco shall notify
Sprint of its intention to effect such engagement, and Sprint shall be permitted
to prepare and make a Sprint Offer for so long as such investment banking firm
remains engaged by Newco for that specific purpose. Subject to the terms and
conditions of the Sprint Offer and unless an Intervening Offer is then
outstanding, Sprint is entitled to pursue any such Sprint Offer for so long as
necessary to permit it to be consummated. Newco is obligated
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to furnish Sprint with copies of all information provided by Newco to such
investment banking firm at the time such information is provided to such firm,
subject to Sprint entering into a customary confidentiality agreement with
respect to that information.
The Board of Directors of Newco is obligated to (i) promptly notify Sprint
in writing of (A) its receipt of an Acquisition Proposal, (B) any inquiries or
discussions that may reasonably be expected to lead to an Acquisition Proposal,
(C) the execution by Newco of a confidentiality agreement with respect to an
Acquisition Proposal or (D) the furnishing of any confidential information in
contemplation of an Acquisition Proposal, whether or not pursuant to a
confidentiality agreement; (ii) describe the terms and conditions of any
Acquisition Proposal in reasonable detail; (iii) provide to Sprint copies of any
definitive agreements with respect to any Acquisition Proposal and any
confidentiality agreements with respect thereto; and (iv) subject to Sprint's
obligation to hold such information in strict confidence, make available to
Sprint all information made available to the party making the Acquisition
Proposal at the same time it is provided to such party.
An "Acquisition Proposal" means any proposal for a tender or exchange offer,
a merger, consolidation, share exchange or other business combination, in which
Newco is a constituent party to such transaction, or a sale of securities (other
than Transaction Securities), recapitalization, liquidation, dissolution or
similar transaction involving Newco, or any proposal or offer to acquire in any
manner, directly or indirectly, a material equity interest in, or a material
amount of voting securities (with the acquisition of beneficial ownership of 20%
or more of the voting Equity Securities being deemed to be material for this
purpose) or assets of, Newco. In addition, a "Material Sale," defined as any
proposal involving the sale of assets of Newco or any subsidiary or the sale of
capital stock of any subsidiary, in any such case, for which the consideration
proposed to be paid in such transaction represents 20% or more of the market
capitalization on the date that Newco receives such proposal, is also defined as
an Acquisition Proposal.
Subject to certain exceptions, Newco is obligated under the Governance
Agreement not to take any action or omit to take any action that would result in
(i) any Affiliated Equity Holder being deemed an "Acquiring Person" or similar
designation under any Stockholders' Rights Plan, (ii) any Affiliated Equity
Holder being prejudiced under any applicable state takeover statute, including
Section 203 of the DGCL, or (iii) otherwise causing any takeover defense to
materially impair or obstruct, or prevent (either legally or financially) the
exercise by any Affiliated Equity Holder of rights granted under Article IV of
the Governance Agreement.
STOCKHOLDERS' AGREEMENT; IRREVOCABLE PROXIES
In order to provide for enforcement of certain aspects of the Governance
Agreement, Sprint and certain principal stockholders of the Company entered into
the Stockholders' Agreement. Further, in order to provide for enforcement of the
Stockholders' Agreement and certain other provisions of the Governance Agreement
requiring the Affiliated Equity Holders to vote their voting Equity Securities
in a certain manner, Sprint and Sprint L.P. have provided an Irrevocable Proxy
to the Company and Newco. See "Description of Certain Ancillary
Agreements--Stockholders' Agreement."
EFFECTIVENESS; TERMINATION; SURVIVAL
The Governance Agreement becomes effective at the Closing. Thereafter, the
Governance Agreement terminates at the earliest of the following to occur: (i)
the termination of the Investment Agreement in accordance with its terms; (ii)
such time as Sprint's percentage interest is greater than 90% or less than the
Lower Threshold; (iii) the expiration of the Right to Offer Period; (iv) the
first date on which any Person or group as defined in Rule 13d-5(b) of the
Exchange Act is determined (A) to beneficially own or control more than 35% of
the Equity Securities outstanding by virtue of the acquisition of such
securities pursuant to a Third-Party Offer if the rights granted and process
contemplated by Article IV of the
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Governance Agreement have been effected in accordance with the terms thereof or
(B) to beneficially own or control 50% or more of the voting Equity Securities
outstanding; (v) upon the termination of the Marketing Agreement in accordance
with certain of its provisions; or (vi) upon the exercise of registration rights
(demand or incidental) by any "Holder" of "Registrable Securities" under the
Registration Rights Agreement.
Notwithstanding the termination of the Governance Agreement, until the sixth
anniversary of the Closing Date and thereafter for as long as Sprint's
percentage interest is greater than the Lower Threshold, Sprint shall still be
subject to the Standstill Provisions. In addition, for so long as Sprint's
Percentage Interest remains greater than the Lower Threshold, Sprint shall still
have certain governance and anti-dilution rights under the Governance Agreement.
In such event, the Standstill Provisions and such other provisions (as well as
any definitional provisions with respect to the foregoing) shall remain in full
force and effect until such time as Sprint's Percentage Interest is lower than
the Lower Threshold; provided, however, that during any period in which the
Standstill Provisions survive, Sprint and its affiliates may directly approach
the Board of Newco in order to make an offer to effect a Business Combination.
DESCRIPTION OF CERTAIN ANCILLARY AGREEMENTS
The following are descriptions of certain Ancillary Agreements entered into
by the Company and/or Newco in connection with the transactions contemplated by
the Investment Agreement.
CREDIT AGREEMENT
In connection with the Investment Agreement, the Company and Sprint entered
into the Credit Agreement, which will become effective concurrently with the
Merger. Under the Credit Agreement, Sprint will initially provide up to $25
million in debt financing to be evidenced by the Convertible Notes. Each year
after the Closing Date, the aggregate amount that Sprint is obligated to advance
will be increased by $25 million to a maximum of $100 million on a cumulative
basis. The Convertible Notes are convertible into shares of Newco Common Stock
at a conversion price of 130% of the average fair market price (i.e., the
closing sales price over a 30 trading day period) at the time a particular
Convertible Note is issued to evidence an advance under the Credit Agreement.
Each Convertible Note will mature five years from the date of issuance and will
bear interest at a rate equal to 6% per annum. The Company presently does not
intend to incur indebtedness under the Credit Agreement.
Sprint's obligations to make advance under the Credit Agreement terminates
upon the earlier of (i) the fifth anniversary of the Closing Date, (ii)
acceleration of the indebtedness evidenced by the Convertible Notes upon an
Event of Default (as defined below), (iii) consummation of a Business
Combination (as defined below), or (iv) termination of the Marketing Agreement
pursuant to certain provisions thereof. An Event of Default shall occur if (i)
there is a breach or there are breaches of any of the representations or
warranties unless such breach or breaches would not in the aggregate have a
Material Adverse Effect on Newco, the Company and their subsidiaries, taken as a
whole, (ii) nonpayment of principal or interest within 14 days after the same
becomes due, (iii) a breach of certain financial and other convenants, and in
certain cases, a failure to cure such breach within the applicable cure period,
(iv) a default by Newco or the Company in any agreement or agreements under
which indebtedness in excess of $5 million was created, or the occurrence of any
other event or existence of any condition, the effect of any of which causes, or
permits the holder of such indebtedness to cause, such indebtedness to become
due prior to its stated maturity, or any such indebtedness shall be declared due
and payable prior to the stated maturity thereof, (v) Newco or the Company files
for relief under bankruptcy, receivership or similar laws, or fails to contest
any involuntary petition in bankruptcy filed with regard to Newco or the
Company, (vi) any condemnation of a substantial portion of the property of Newco
or the Company, or (vii) Newco or the Company fails within 30 days to pay, bond
or otherwise discharge any judgments or orders for the payment of money in
excess of $1 million, which are not stayed on appeal or otherwise contested in
good faith. "Material Adverse Effect" is defined to mean any change or effect
having a
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material adverse effect (or any development as to which there is a substantial
likelihood, insofar as can be foreseen, that would have such an effect) on the
business, properties, assets, condition (financial or otherwise) or results of
operations of the Company, Newco, Newco Sub, Sprint, Sprint L.P. and Sprint's
subsidiaries, as the case may be.
REGISTRATION RIGHTS AGREEMENT
Newco and Sprint have entered into the Registration Rights Agreement with
respect to Newco Common Stock held by Sprint. Under the Registration Rights
Agreement, Sprint has the right (the "Demand Registration Right") to at any time
require Newco to file up to four registration statements under the Securities
Act to effect the registration of Newco Common Stock held by Sprint. This right
may be exercised after 27 months following the Closing Date, but only once every
nine months. Expenses relating to the exercise of the Demand Registration Right
will generally be payable by Newco.
Under the Registration Rights Agreement, Sprint also has the right (the
"Incidental Registration Right"), with respect to any underwritten offerings,
including registered offerings, of Newco Common Stock for cash proposed by
Newco, to require Newco to include Newco Common Stock of Sprint in such offering
and registration, if applicable after 27 months following the Closing Date.
Incremental expenses relating to exercises of the Incidental Registration Right
will generally be payable by Newco. In other respects, the Registration Rights
Agreement contains terms that are customary to registration rights agreements of
its type.
MARKETING AGREEMENT
Concurrently with the Merger, the Marketing Agreement among Sprint, Sprint
L.P., Newco and the Company will become effective, whereby certain cooperation
and support will be provided to each other in specified marketing matters and
Sprint L.P. will grant to Newco and the Company the right to utilize certain
distribution channels of Sprint. Sprint will also license the use of its brand
to Newco and the Company, and Newco and the Company will agree to use such brand
in conjunction with the Company's brand in the business of the Company, subject
to specified terms and conditions. The Marketing Agreement applies only to the
parties' activities in the 48 contiguous states of the United States (the
"Territory").
Pursuant to the Marketing Agreement, Sprint has appointed Newco and its
controlled affiliates as agents to sell Sprint's long distance services and
certain other telecommunications services as are agreed to by the parties. In
addition, Newco has appointed Sprint and its subsidiaries as agents to sell
Internet-related services offered by Newco and its controlled affiliates. The
Marketing Agreement provides for a joint marketing committee.
The Marketing Agreement also contains certain exclusivity arrangements. The
Marketing Agreement restricts Sprint and its controlled affiliates from
promoting, advertising, marketing, co-branding, packaging, bundling, developing,
offering or selling, or entering into any express or tacit agreement to permit
its name to be used in connection with, a set of Internet-related products and
services (whether as a series of individual products and services or as an
integrated grouping or package of products and services) that is the same as or
substantially similar to the Company's core Internet service package (the "Core
Internet Application Set"), as in effect from time to time, other than as
offered by Newco and its controlled affiliates. Sprint and its controlled
affiliates further agree that they will not bid on, acquire or directly or
indirectly own, manage, operate, join, control or finance, or participate in the
management, operation, control or financing of, any provider of any set of
Internet-related products and services that is the same as or substantially
similar to the Core Internet Application Set (as in effect from time to time).
The Marketing Agreement specifies that these exclusivity restrictions do not
restrict Sprint and its controlled affiliates from (i) appointing one or more
other Internet service providers ("ISP's") as Sprint's agents for the sale of
its branded long distance services and telecommunications services so long as
the Internet-
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related services provided by such ISP are not billed on an integrated basis with
any services provided by Sprint, (ii) providing Internet service packages that
are designed primarily for large corporate accounts and offering enhanced
features that are not included in the Core Internet Application Set and (iii)
offering or selling individual components that are included in the Core Internet
Application Set so long as the Company has a first right of refusal to provide
Sprint with such elements or components.
Newco and its controlled affiliates are restricted from promoting,
advertising, marketing, co-branding, bundling, developing, offering or selling
any long distance services or telecommunications services that are the same as
or substantially similar to the long distance services or telecommunications
services offered by Sprint and its controlled affiliates, other than as offered
by Sprint and its controlled affiliates. Newco and its controlled affiliates are
further prohibited from bidding on, acquiring or directly or indirectly owning,
managing, operating, joining, controlling or financing, or participating in the
management, operation, control or financing of, or acting as an agent or
representative for, or entering into any express or tacit agreement to permit
its name to be used in connection with, or permit its Internet services to be
marketed, sold or distributed by, any "Material Provider" of long distance
services or telecommunication services other than Sprint and its controlled
affiliates. A business or entity is deemed to be a "Material Provider" of long
distance services or telecommunications services if such business or entity
(together with its affiliates) derives from the sale of long distance services
and certain telecommunications services (i) more than 5% of its gross revenues
in any fiscal year or (ii) more than $25 million of gross revenues in any fiscal
year. The exclusivity restrictions will restrict Newco and its controlled
affiliates with respect to PCS and cellular services only if Sprint PCS enters
into sales agency relationships with Newco and its controlled affiliates on the
terms set forth in the Marketing Agreement. Newco and its controlled affiliates
are not prohibited from (i) continuing to offer a co-branded Core Internet
Application Set under currently existing agreements (subject to certain
restrictions), (ii) offering Internet telephony services under certain
circumstances, provided that Sprint has the first right to provide that service
at such time as it has developed an Internet telephony product and (iii) selling
ATM and frame relay telecommunications services of a third party for the sole
purpose of providing access to the public Internet.
Sprint and its controlled affiliates will seek to generate customers for the
Company's Core Internet Application Set through Sprint's customer base and its
third party marketing channels. The Company will pay Sprint varying amounts for
each customer generated by Sprint. In addition, Sprint is obligated to pay
varying shortfall amounts if Sprint fails to generate a minimum of 150,000 new
subscribers per year for the Core Internet Application Set in any year during
the five-year period commencing September 1, 1998. Newco and its controlled
affiliates will seek to generate customers for Sprint's long distance and other
telecommunications services from the users of its Core Internet Application Set.
Newco and its controlled affiliates will be entitled to payment from Sprint of a
market rate commission based on the monthly revenue generated from such
customers.
The Company and Sprint have agreed to negotiate a billing and collection
agreement for integrated billing services for Sprint's long distance and
telecommunications services and the Company's Internet services. The Company
will also cooperate with Sprint in developing Internet-related developments and
enhancements that are requested by Sprint.
Sprint and the Company have agreed to use the "EarthLink-Sprint" co-brand in
all of Sprint's marketing, advertising and other similar material relating to or
referencing any of the Company's Internet services and in all of the Company's
marketing, advertising and other similar material used to promote and offer for
sale or otherwise relating to its Internet services and/or Sprint's long
distance services and telecommunications services. Each party has extended to
the other a non-exclusive, royalty-free, non-transferable license to use its
brand in the Territory to the extent described above.
The Marketing Agreement has a 10-year term and may be extended by either
party for an additional five years. The Agreement is subject to early
termination upon the occurrence of certain events, including (i) a change of
control of Sprint or Newco, (ii) a business combination between Sprint and an
entity
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engaged in a business that is competitive with the Company's Core Internet
Application Set, (iii) the termination of the Governance Agreement under certain
circumstances and (iv) a material breach by either party that is not cured after
notice. Upon termination of the Marketing Agreement under the circumstances
described in clause (ii) above, Sprint will be required to pay a termination fee
to the Company, which will equal $60 million if such termination occurs during
the first two years following the Merger, dropping to $36 million on the day
following the second anniversary of the Merger and thereafter declining on a
daily pro rata basis to zero on and after the fifth anniversary of the Merger.
In case of such termination, Sprint must also pay an additional fee (up to a
maximum of $17.5 million, but declining to zero after five years) to compensate
the Company for the loss of customers that would have been generated for the
Company through Sprint's marketing channels. The termination fee described above
represents the sole amount that will be payable by either party upon a
termination of the Marketing Agreement, except for payment obligations accrued
prior to termination and damages from the party's breach of the Marketing
Agreement.
NETWORK AGREEMENT
Concurrently with the Merger, the Network Agreement between and among Sprint
L.P., Newco and the Company will become effective, whereby Sprint L.P. agrees to
provide, and Newco and the Company agree to utilize, certain dial-up Internet
access ports ("Ports") for use by the Company's Internet dial-up access
customers. The Network Agreement provides for the provision of a minimum number
of Ports together with the option for the Company to order an additional
quantity of Ports over the initial minimum term of four years.
The Network Agreement sets forth the schedule for implementation of service
in locations and in such quantities as agreed to by the parties. The Network
Agreement also specifies the rates and charges for the use of the Ports during
the initial term and a process for negotiating continued use of the Ports beyond
the initial term. The Network Agreement describes the performance parameters
associated with the Ports and allocates responsibilities for network and
customer support activities between the parties. In addition, the Network
Agreement specifies other commercial terms customarily found in network service
agreements, such as payment terms, FORCE MAJEURE and governing law.
AGREEMENT TO VOTE AND TENDER STOCK; AGREEMENT TO VOTE STOCK
In order to induce Sprint and Sprint L.P. to enter into the Investment
Agreement and perform the transactions contemplated thereby, the Granting
Stockholders (certain members of management and other stockholders) have entered
into the Agreement to Vote and Tender Stock. That agreement obligates the
Granting Stockholders to tender all of the 3,989,114 Shares (representing 35.3%
of the outstanding Shares) which they own into the Offer, and to vote those
Shares in favor of each of the Company Stockholder Vote Matters. In order to
ensure that the agreement to vote set forth in the Agreement to Vote and Tender
Stock will be fulfilled, each of the Granting Stockholders granted to Sprint an
Irrevocable Proxy, coupled with an interest, to vote in favor of the Company
Stockholder Vote Matters. The Granting Stockholders are Sky Dayton, Chairman of
the Board of the Company--1,500,000 Shares; Kevin M. O'Donnell, a Director of
the Company--944,614 Shares; Storie Partners, L.P.--521,892 Shares; Gregory
Abbott--427,212 Shares; Robert S. London--392,032 Shares; and George
Abbott--203,364 Shares.
In addition, the Voting Stockholders have entered into the Agreement to Vote
Stock which obligates them to vote all of their 2,950,382 Shares (representing
26.1% of the outstanding Shares) in favor of the Company Stockholder Vote
Matters, but did not grant any irrevocable proxies thereunder. The Voting
Stockholders are Quantum Industrial Partners LDC--1,456,480 Shares; Reed
Slatkin, a Director of the Company (through Reed Slatkin & Associates)--
1,042,473 Shares; Sidney Azeez, a Director of the Company--236,884 Shares; and
George Soros--214,545 Shares.
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Based on the foregoing, the Company believes that at least 6,939,496 Shares
(representing 61.4% of the outstanding Shares as of February 10, 1998) will be
voted in favor of the Company Stockholder Vote Matters. The number of Shares
obligated to be tendered and/or voted pursuant to these agreements will ensure
approval of the Company Stockholder Vote Matters, satisfaction of the Minimum
Tender Condition, and consummation of the transactions contemplated by the
Investment Agreement, unless the Investment Agreement Conditions have not been
satisfied or waived on or prior to the Offer Acceptance Time, as described
therein and herein. Sprint did not own of record any Shares as of the Record
Date, and therefore is not entitled to vote at the Special Meeting except
insofar as it exercises the Irrevocable Proxies provided by the Granting
Stockholders.
STOCKHOLDERS' AGREEMENT
In connection with the Investment Agreement, Sprint and certain principal
stockholders of the Company (the "Covered Stockholders") entered into the
Stockholders' Agreement, which will become effective at Closing. The
Stockholders' Agreement obligates the Covered Stockholders to support the
obligations of Newco under the Governance Agreement by (i) voting all of the
"Covered Shares" (as defined in the Stockholders' Agreement) in favor of a
Sprint Offer or a Qualified Offer and (ii) tendering all of the Covered Shares
into a tender offer initiated by Sprint to effect a Sprint Offer or a Qualified
Offer, unless, in each case, an Intervening Offer is then outstanding. The term
"Covered Shares" includes Shares, shares of Newco Common Stock received in the
Merger and other Equity Securities. However, it does not include shares of Newco
Common Stock or other Equity Securities subsequently sold by the Covered
Stockholders in accordance with the terms of the Stockholders Agreement. The
name and number of Covered Shares held by each Covered Stockholder is as
follows: Sky Dayton, Chairman of the Board of Directors of the Company--
1,500,000 Shares; Quantum Industrial Partners LDC--1,456,480 Shares; Reed
Slatkin, a Director of the Company (through Reed Slatkin &
Associates)--1,042,473 Shares; Kevin M. O'Donnell, a Director of the
Company--944,614 Shares; Sidney Azeez, a Director of the Company--236,884
Shares; and George Soros--214,545 Shares.
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RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has, by unanimous vote of all
Directors, approved the Offer, the Merger and all the other transactions
contemplated by the Investment Agreement, including without limitation the
Company Stockholder Vote Matters, and determined that the terms of such
transactions, when taken together, are fair to, and in the best interests of,
the stockholders of the Company. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS OF THE COMPANY TENDER THEIR SHARES OF COMMON STOCK
IN THE OFFER AND VOTE FOR EACH OF THE COMPANY STOCKHOLDER VOTE MATTERS.
BACKGROUND OF RECOMMENDATION
During August, September and October of 1997, the Company's senior
management analyzed the Company's strategic position in the Internet industry
and its prospects for continuing and accelerating the growth of its business and
achieving critical mass in its subscriber base and greater scale in its
operations. In light of this analysis, management discussed with the Company's
Board of Directors (on both a formal and an informal basis) an array of
strategic alternatives designed to enhance the Company's strategic, operational,
financial, marketing and distribution capabilities.
At a regular meeting of the Board of Directors of the Company held on
October 29, 1997, the Board conducted an open-ended discussion of these
alternatives, which included (i) a proposed strategic alliance with Sprint; (ii)
an underwritten equity offering or other financing transactions; (iii) a
significant infusion of equity capital by a financial investor, the proceeds of
which would be used by the Company to make strategic acquisitions; (iv) a
significant equity investment in the Company by, and/or a joint venture
involving the Company with, one or more Regional Bell Operating Companies; and
(v) either alone or in combination with certain of the foregoing, the making of
a business combination proposal to one or more other providers of Internet
services. At the conclusion of this discussion, the Board did not recommend that
any particular alternative be pursued to the exclusion of others, but rather
directed that management take further steps to explore the availability of
various options (without committing the Company to any alternative without
further action of the Board) and periodically report to the Board on the results
of such initiatives. The Board also authorized senior management and the
Company's financial advisor, DMG, to make selective inquiries to determine
whether certain firms in the telecommunications industry would have any interest
in a potential joint venture, strategic alliance or minority investment
relationship with the Company. The Board also instructed management and DMG not
to foreclose the possibility of a business combination involving the Company,
although it believed that the better approach, in terms of enhancing the
Company's long-term value, was to solicit a strategic alliance or minority
investment. Ultimately, no proposals to effect a business combination emerged.
As a result of management's exploratory initiatives, based on the strategic,
operational and financial considerations described below and Sprint's dynamic
and prompt expression of interest in pursuing a strategic alliance with the
Company, the Board determined that focusing primarily on the Sprint alternative
was most likely to produce the best transaction reasonably available.
During early October 1997, with the permission of Garry Betty, President and
Chief Executive Officer of the Company, Sidney Azeez, one of the Company's
directors, contacted Carl Peterson, General Manager, President and CEO of the
Kansas City Chiefs, inquiring whether he was acquainted with William T. Esrey,
Chairman and Chief Executive Officer of Sprint Corporation. After learning that
Mr. Peterson and Mr. Esrey were acquaintances, Mr. Betty requested that Mr.
Peterson arrange an introduction so the Company could explore whether Sprint
would have any interest in discussing the possibility of a strategic alliance or
other relationship. Mr. Peterson contacted Sprint and suggested a meeting during
which the companies could discuss their respective businesses and the possible
benefits of a strategic or other relationship.
Theodore H. Schell, Senior Vice President Strategic Planning & Corporate
Development, phoned Mr. Betty on October 8, 1997 to express Sprint's interest in
exploratory discussions and to arrange for a
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visit by a Sprint representative to the Company's headquarters in Pasadena,
California. On October 10, 1997, Chuck Chakravarty, Manager Corporate
Development, visited the Company's headquarters in Pasadena, California and had
discussions with Mr. Betty and other members of the Company's management. The
discussions focused on the operational and financial aspects of the Company.
On October 29, 1997, Sprint and the Company executed a reciprocal
confidentiality agreement in which they agreed to maintain the confidentiality
of nonpublic information concerning their businesses. On October 31, 1997, Mr.
Schell, Timothy S. Sutton, Vice President Strategic Planning--Corporate
Development and James Dodd, Vice President Internet Access Services met with Mr.
Peterson, Sky Dayton, Chairman of the Board of the Company, and Mr. Betty in
Kansas City to obtain a strategic overview of the Company's business. Following
that discussion, the participants concluded that there were several areas of
shared perspective with regard to the importance of expanded scale in the
Internet access business, the technological evolution of the Internet, and
business philosophies regarding quality of customer service and operations.
In early November 1997, Mr. Sutton and Mr. Betty had phone conversations
confirming the desire of both parties to engage in further exploration of a
strategic or other relationship. On November 19, 1997, Mr. Sutton, Mr. Dodd and
certain other officers and employees of Sprint met in Pasadena with Mr. Dayton,
Mr. Betty and certain other officers and employees of the Company, and
representatives of DMG. The Company's representatives presented a high-level
overview of the Company's business from an operational, financial and strategic
perspective. The participants then engaged in a high-level discussion of
possible alternatives for a strategic or other relationship between Sprint and
the Company. Sprint's representatives discussed the factors of importance to
Sprint in assessing a potential relationship with the Company. These factors
included continued reliance on the Sprint brand (either alone or co-branded with
the Company's brand); marketing rights to the Internet product; utilization of
Sprint's network services; and the financial implications of the nature and
amount of the investment requisite to scaling up to achieve critical mass and
profitability. Each party expressed the desire to consider commercial alliances
as opposed to a business combination or similar type of transaction with the
other party at the time. However, each party expressed an interest in Sprint
acquiring a minority equity interest in the Company if a structure could be
developed that would be acceptable from a strategic, operational and financial
point of view.
Additional meetings were held in Pasadena on November 21 and 22, 1997 among
officers and employees of Sprint and the Company to continue discussions of the
strategic, financial and operational characteristics of a strategic relationship
between Sprint and the Company with respect to their Internet businesses. The
possible marketing opportunities and synergies of such an alliance were also
explored. These meetings were followed by several telephone calls between
officers of Sprint and the Company with regard to these matters.
A meeting was held in Pasadena on December 4, 1997 which was attended by
Messrs. Esrey, Schell, Sutton, Dodd, Dayton, Betty and certain other officers
and employees of the Company at which the possible components of a strategic
relationship were discussed. These discussions focused on strategic and
operational matters, including co-branding the Internet access service,
accessing Sprint's marketing and distribution channels, the nature of any
minority investment capital Sprint might make available to the Company and the
mechanism by which Sprint might acquire the equity securities of the Company not
already owned by Sprint and its affiliates at some point in the future.
Further meetings were held in Pasadena on December 11 and 12, 1997 among
Messrs. Sutton, Betty and Dayton, internal Sprint counsel, outside counsel to
the Company, and the financial advisers of Sprint and the Company. These
discussions focused on the valuation of Sprint's in-kind contributions,
including Sprint Internet Passport subscribers, the Sprint brand, access to the
Sprint network and access to the Sprint marketing channels. The discussions also
focused on the terms and structure for a minority investment by Sprint in the
Company, the terms of any credit arrangements Sprint might provide, governance
rights, and
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the timing and possible approaches under which Sprint would be permitted in the
future to seek to acquire the remaining equity securities of the Company.
Further meetings were held in Pasadena on December 19 and 20, 1997 to
discuss a proposed preliminary term sheet prepared by Sprint. The term sheet
contemplated that Sprint would acquire a minority interest in the Company
through a cash tender offer. It also contemplated that in exchange for the
contribution of the Sprint Internet Passport subscribers and favorable terms for
access to the Sprint L.P. network, Sprint L.P. would receive a newly created
series of convertible preferred stock from the Company. The parties also
discussed a marketing agreement whereby the parties would jointly brand their
Internet products and Sprint would make its marketing channels available to the
Company with certain exclusivity and sales commitments.
Also covered in the negotiations were terms of a standstill arrangement
which would preclude further acquisitions of the Company's equity securities by
Sprint, except in limited situations designed to ensure the receipt of fair
value by all stockholders in the event Sprint acquired additional equity
securities above agreed upon thresholds. The parties also discussed convertible
debt financing of up to $100,000,000. There were also discussions of limited
governance rights, stock registration rights, limitations on the Company
soliciting acquisition proposals (subject to the Board's fiduciary obligations)
and other customary rights of a financial investor. Throughout these and
subsequent meetings, considerable negotiations took place regarding all
strategic, operational, financial and governance aspects of the proposed
transactions.
These proposals, counter proposals and revisions were reflected in numerous
further discussion drafts of possible terms which were circulated among Sprint
and the Company and their respective financial and legal advisers. Conference
and telephone calls were held in the latter part of December 1997 and in early
January 1998 among various members of management and the financial and legal
advisers to Sprint and the Company to discuss and refine these proposals.
Various members of management and employees of Sprint and the Company visited
Sprint's facilities in Reston, Virginia on December 30, 1997 in an attempt to
reach a common view on applicable network economics, network technologies and
engineering set ups.
Meetings among various members of management and the financial and legal
advisers to Sprint and the Company were held during the evening of January 12,
1998 in Kansas City and during the following day to continue negotiation of the
terms of the transactions. Based on these negotiations, the parties agreed to
proceed immediately with the preparation of drafts of definitive agreements to
cover the matters encompassed by the Investment Agreement and Ancillary
Agreements. Numerous conference calls took place after January 12, 1998 to
divide drafting responsibilities, establish schedules and address issues arising
as part of the documentation effort. Prior to January 27, 1998, initial drafts
of most of the documents (and comments on most initial drafts) were exchanged.
Negotiating sessions were held in Kansas City from January 27 through
February 1, 1998. Negotiations continued thereafter via numerous conference
calls and exchanges of drafts and comments through February 10, 1998, in an
effort to reach agreement on the matters encompassed by the Investment Agreement
and the Ancillary Agreements. Some of the negotiations between legal counsel for
Sprint and the Company occurred in person between February 6 and February 10,
1998.
An overview of the possible transaction with the Company and related issues
were discussed at Sprint's Board of Directors meeting on December 9, 1997. A
meeting of Sprint's Board of Directors was held on February 10, 1998 and the
execution, delivery and performance of the Investment Agreement, the Ancillary
Agreements and the transactions contemplated thereby were approved.
An overview of the possible transaction and related issues were discussed at
the Company's Board of Directors meeting on January 11, 1998. At a special
meeting held on January 20, 1998, senior management provided the Board with a
report on the status of the negotiations with Sprint and developments with
respect to other potential strategic alternatives. Draft agreements were first
presented to the Company's Board of Directors at a regular meeting held on
February 2, 1998. A special meeting of the Company's
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Board of Directors was held on February 10, 1998 and the execution, delivery and
performance of the Investment Agreement, the Ancillary Agreements and the
transactions contemplated thereby were approved.
Following approval by the Board of Directors of Sprint and the Company, the
Investment Agreement and the Ancillary Agreements were executed and delivered
after the close of financial markets in the United States on February 10, 1998.
The Offer and the other transactions contemplated by these agreements were
publicly announced before the financial markets in the United States opened on
February 11, 1998. The Offer was announced by Sprint in a summary advertisement
in the national edition of the Wall Street Journal on February 18, 1998, and
Sprint's Offer to Purchase, Letter of Transmittal (and related documents) and a
letter from Mr. Betty were mailed to all stockholders of the Company Common
Stock and made available to beneficial owners of the shares.
REASONS FOR THE RECOMMENDATION
At a meeting held on February 10, 1998, the Board of Directors of the
Company, by unanimous vote of all Directors, (a) approved the transactions
contemplated by the Investment Agreement, (b) determined that such transactions
are fair to, and in the best interests of, the stockholders of the Company, and
(c) resolved to recommend that stockholders approve the transactions
contemplated by the Investment Agreement, including without limitation the
Company Stockholder Vote Matters. In arriving at its decision to approve such
transactions contemplated by the Investment Agreement and to recommend approval
of the Company Stockholder Vote Matters, the Board of Directors gave careful
consideration to the following factors:
(i) The opportunity for each stockholder of the Company to receive cash
for approximately 11% of the total number of shares of Common Stock held by
each such stockholder pursuant to the Offer;
(ii) The fact that the $45 per share price of the Offer represented a
premium of approximately 32.4% over the last reported sales price of $34.00
per share on February 9, 1998 (the last full trading date prior to the date
of the Board's approval of the Offer) and a premium of approximately 53.7%
over the average of the last reported sales prices for the 30 trading days
preceding February 10, 1998 (as reported, in each case, on the Nasdaq
National Market);
(iii) The Board's thorough evaluation of a variety of other potential
strategic alternatives and its analysis of the viability of and risks
associated with such alternatives. In particular, the Board placed great
value on the overall strategic importance of a potential relationship with
Sprint, including (A) the value of creating an EarthLink-Sprint brand for
Internet access and related services, (B) the potential commercial impact of
having access to Sprint's nationwide marketing channels, with a commitment
from Sprint to deliver not less than 150,000 net subscribers per year, (C)
the addition to the Company's business of approximately 130,000 subscribers
from Sprint L.P. immediately upon consummation of the transactions
contemplated by the Investment Agreement, which would result in the Company
having more than 600,000 subscribers in the aggregate at Closing, (D)
favorable terms for access to Sprint's network pursuant to a network
agreement, which diversifies the Company's operational risk by giving it
another credible provider of Internet backbone services, and (E) the
availability of additional capital through $100 million of Convertible Debt
Financing from Sprint and Sprint L.P.'s purchase of Convertible Preferred
Stock in exchange for $23.75 million in cash (in addition to the
contribution by Sprint of SIP Subscribers and access to its network on
favorable terms);
(iv) The terms of the Governance Agreement, which allow Newco to remain
an independent public company and which provide Newco and its stockholders
with the ability to realize a control premium in a subsequent business
combination transaction with Sprint or a third party, including (A) the
right of Sprint to make a Sprint Offer at the "Fair Private Market Value" of
Newco (a term
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that, by definition, contemplates an appropriate control premium in the
contest of a competitive environment for that premium) and (B) Newco's right
to receive and, in certain instances, pursue and solicit, third-party offers
to effect business combinations;
(v) The competitive environment in the Internet industry and the
perceived beneficial effect of the strategic alliance on the Company's
relationships with its employees and customers;
(vi) The probability that the Offer and the other transactions
contemplated by the Investment Agreement will be consummated, given the
achievable nature of the conditions to consummation of the Offer; and
(vii) The opinion of DMG that the Offer, the sale of the Convertible
Preferred Stock and the Merger, when taken together, are fair, from a
financial point of view, to the holders of Common Stock. The opinion of DMG
contains a description of the factors considered, the assumptions made and
the scope of review undertaken by DMG in rendering its opinion. A MORE
DETAILED DESCRIPTION OF THE FAIRNESS OPINION IS PROVIDED BELOW UNDER THE
CAPTION "OPINION OF FINANCIAL ADVISOR" AND THE FULL TEXT OF THE FAIRNESS
OPINION RECEIVED BY THE BOARD OF DIRECTORS FROM DMG IS INCLUDED AS APPENDIX
E HERETO.
In light of all of the factors set forth above, the Board of Directors
unanimously approved the transactions contemplated by the Investment
Agreement. In view of the variety of factors considered in connection with
its evaluation of these transactions, the Board of Directors did not assign
relative weights to the specific factors considered in reaching its
decision, although the overall strategic value of the relationship with
Sprint, as reflected in paragraph (iii) above, were of paramount importance
to the Board's decision. In evaluating the Offer and the other transactions
contemplated by the Investment Agreement, the Board concluded that the
Company's prospects for growth would be substantially improved by entering
into this strategic relationship with Sprint, while the Company could, at
the same time, significantly reduce its operational risk.
OPINION OF FINANCIAL ADVISOR
The Company retained DMG to render financial advisory services in connection
with potential equity investments by and commercial arrangements with other
entities. Pursuant to such engagement, DMG provided to the Company's Board of
Directors an opinion (the "Fairness Opinion") with respect to the fairness to
the Company's stockholders of the Offer, the sale of the Convertible Preferred
Stock and the Merger (the "Opinion Transactions"). DMG has delivered the
Fairness Opinion to the Company's Board, which states that based upon and
subject to the various considerations set forth therein, as of February 10,
1998, the Opinion Transactions were fair to the holders of Common Stock from a
financial point of view.
THE FULL TEXT OF THE FAIRNESS OPINION, WHICH SETS FORTH, AMONG OTHER THINGS,
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED, AND LIMITATIONS ON
THE SCOPE OF THE REVIEW UNDERTAKEN BY FAIRNESS IN RENDERING THE FAIRNESS
OPINION, IS ATTACHED AS APPENDIX E TO THIS PROXY STATEMENT/PROSPECTUS. THE
COMPANY'S STOCKHOLDERS ARE URGED TO READ THE FAIRNESS OPINION CAREFULLY AND IN
ITS ENTIRETY. THE FAIRNESS OPINION ADDRESSES ONLY THE FAIRNESS OF THE OPINION
TRANSACTIONS FROM A FINANCIAL POINT OF VIEW TO THE HOLDERS OF COMMON STOCK AS OF
THE DATE OF THE FAIRNESS OPINION, AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING.
THE SUMMARY OF THE FAIRNESS OPINION SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE FAIRNESS
OPINION.
In arriving at the Fairness Opinion, DMG did not ascribe a specific range of
fair value with respect to the Company's Common Stock, but made its
determination as to the fairness of the consideration based on the financial and
comparative analysis described below. The Fairness Opinion does not constitute a
recommendation of opinion to any stockholders as to whether or not to tender
shares of Common Stock pursuant to the Offer or as to how to vote at the Special
Meeting. In addition, DMG was not asked to
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opine as to, and its opinion does not address, the underlying business decision
of the Company's Board to proceed with or to consummate the Merger.
In connection with rendering the Fairness Opinion, DMG, among other things:
(i) analyzed certain publicly available financial statements and other
information concerning Sprint and the Company, respectively;
(ii) analyzed certain internal financial statements and other financial
and operating data concerning the Company prepared by the management of the
Company;
(iii) analyzed certain financial projections relating to the Company
prepared by the management of the Company;
(iv) discussed the past and current operations and financial condition
and the prospects of the Company with senior executives of the Company;
(v) discussed the financial value of the Convertible Preferred Stock
Consideration with the management of the Company and the nature of the
Convertible Preferred Stock Consideration with the management of Sprint;
(vi) analyzed the pro forma impact of the Opinion Transactions on the
revenue, operating cash flow, consolidated capitalization and other
financial ratios of the Company;
(vii) reviewed the reported prices and trading activity for the Common
Stock;
(viii) compared the financial performance of the Common Stock and the
prices and trading activity of the Common Stock with that of certain other
comparable publicly-traded companies and their securities;
(ix) compared the results of operations of the Company with that of
certain companies which DMG deemed to be reasonably similar to the Company;
(x) reviewed the financial terms, to the extent publicly available, of
certain comparable transactions;
(xi) discussed, with the management of the Company, the strategic
rationale and certain other benefits to the Company of the Opinion
Transactions;
(xii) participated in discussions and negotiations among representatives
of the Company and Sprint and their financial and legal advisors;
(xiii) reviewed the Investment Agreement and the Ancillary Agreements; and
(xiv) performed such other analyses as DMG deemed appropriate.
In rendering the Fairness Opinion, DMG assumed and relied on, without
independent verification, the accuracy and completeness of all the information
reviewed by DMG for purposes of the Fairness Opinion. DMG has also relied upon,
without independent verification, the assessment by the Company's management of
the strategic and other benefits expected to be derived from the Opinion
Transactions. DMG did not make any independent valuation or appraisal of the
assets, liabilities or technology of the Company, or of the Contribution Assets,
nor was DMG furnished with any such appraisals. DMG's opinion is necessarily
based on the economic, market and other conditions as in effect on, and the
information made available to DMG as of, the date hereof. DMG took into account
that because the Tendering Stockholders, who collectively own more than
1,250,000 shares of the outstanding Common Stock, agreed to facilitate the
transaction by tendering their shares to Sprint in connection with the Offer,
the Offer will be consummated regardless of whether any other stockholders of
the Company elect to tender their shares into the Offer.
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The following is a summary of the material factors considered and the
principal financial analyses performed by DMG to arrive at the Fairness Opinion
delivered to the Company's Board in connection with its consideration of the
various transactions contemplated by the Investment Agreement. In arriving at
the Fairness Opinion, DMG did not quantify or attempt to assign relative weights
to the specific factors considered and financial analyses performed.
The following is a summary of the analysis performed by DMG that was
reviewed with the Board of Directors of the Company at a meeting held on
February 2, 1998.
COMPARATIVE STOCK PRICE PERFORMANCE: As part of its analysis, DMG reviewed
the recent stock price performance of the Company and compared such performance
with that of America Online, Inc. ("AOL"), Mindspring Enterprises, Inc.
("Mindspring") and an index consisting of Cnet, Inc., Excite, Inc. and Yahoo!
Inc. (the "Index"). DMG observed that during the period from January 22, 1997
(the "IPO Date") to January 30, 1998, the stock price of the Company increased
139.4%, compared with an increase of 378.6% for Mindspring, 139.8% for AOL and
125.7% for the Index. DMG observed that during the period from December 1, 1997
to January 30, 1998, the market price of the the Company increased 59.1%,
compared with increases of 38.7%, 24.2% and 10.3% for the Index, AOL and
Mindspring, respectively. However, the companies constituting the Index do not
provide the same services as the Company, and therefore may not provide an
accurate comparative model of stock price performance.
HISTORICAL VALUATION PER SUBSCRIBER: DMG reviewed the ratio (computed on
the last trading day of each month) of EarthLink's aggregate value (equity value
plus debt less cash) to its number of subscribers (the "Subscriber Multiple") on
a monthly basis from January 1997 through January 1998. DMG observed that the
Company's Subscriber Multiple varied from $671 in January 1997 to a low of $247
in April 1997 to a high of $856 in January 1998. DMG also observed that the
average Subscriber Multiple for the Company since the IPO date was $508,
implying a valuation of $18.24 per share. DMG observed that the $45 per share
price of the Offer (the "Tender Price") implied a Subscriber Multiple of $1,447,
implying a premium of 184.8% to the average Subscriber Multiple since the IPO
Date and a premium of 69.0% to the Subscriber Multiple on January 30, 1998.
PREMIUM ANALYSIS: DMG observed that the Tender Price represented a premium
of 44.6% to the closing price of the Company's common stock on January 30, 1998.
DMG also observed that the Tender Price represented a premium of 62.9%, 92.8%,
107.8% and 160.8%, respectively, to the average closing stock price for the
Company in the 30, 60, 90 and 180 consecutive trading day periods ending on
January 30, 1998.
SELECTED PRECEDENT TRANSACTIONS: DMG reviewed the publicly available
financial terms of 38 precedent transactions involving the acquisition by one
party (the "acquiror") of between 5% and 40% of the equity of the target company
for more than $50 million in consideration. Based on the cash component of the
consideration in each of such precedent transactions, DMG observed average
premia of approximately 17.6%, 20.2% and 22.6% over the average of the closing
share prices of the target companies involved in such transactions over the one
day, one week and four week periods ending the day preceding the public
announcement of these transactions, respectively. DMG also observed that the
Tender Price represented average premia of approximately 44.6%, 36.4% and 57.5%
over the average the Company's share prices of the respective comparable periods
ending January 30, 1998.
ILLUSTRATIVE FUTURE FINANCIAL PERFORMANCE: DMG analyzed the implied range
of EBITDA, net income and total subscribers required in the year 2002 to support
the then current Company share price assuming a 25% to 30% return to investors
and assuming a range of EBITDA multiples, earnings multiples, and subscriber
multiples of 10.0x to 14.0x, 20.0x to 30.0x and $450 to $650, respectively. DMG
observed the required range of EBITDA, net income and total subscribers in the
year 2002 to be $143 million to $243 million, $66 million to $125 million and
3.1 million to 5.4 million subscribers, respectively.
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TERMINAL VALUE ANALYSIS: DMG calculated the present value of the Company's
future share price based on multiples of EBITDA and subscribers, in each case in
year 2002. DMG used a range of EBITDA multiples of 10.0x to 14.0x, Subscriber
Multiples of $450 to $650 and discount rates of 25% to 30%. DMG observed that
the present value of the Company's future share price ranged from $14.28 to
$26.73, $14.88 to $33.59 and $20.44 to $61.45 based on three estimates using
differing variables.
In connection with the review of the Transactions by the Company's Board of
Directors, DMG performed a variety of financial and comparative analyses for
purposes of the Fairness Opinion. While the foregoing summary describes all
material analyses and factors reviewed by DMG with the Company's Board of
Directors, it does not purport to be a complete description of the presentations
by DMG to the Board of Directors or the analyses performed by DMG in arriving at
the Fairness Opinion. The preparation of a fairness opinion is a complex process
and is not necessarily susceptible to partial analysis or summary description.
DMG believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create a misleading view of the
processes underlying the Fairness Opinion. In addition, DMG may have given
various analyses more or less weight than other analyses, and may have deemed
various assumptions more or less probable than other assumptions. In performing
its analyses, DMG made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters. Any
estimates contained therein are not necessarily indicative of future results or
actual values, which may be significantly more or less favorable than those
suggested by such estimates. Furthermore, the analyses performed by DMG are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses or assets do not purport
to be appraisals or to necessarily reflect the prices at which businesses or
assets may actually be sold. The analyses performed were prepared solely as part
of DMG's analysis of the fairness of the Transactions, from a financial point of
view, to the holders of Common Stock and were provided to the Company's Board of
Directors in connection with the delivery of the Fairness Opinion.
In the course of DMG's assignment, DMG had discussions (and was aware that
management of the Company had discussions) with several parties concerning a
possible transaction, business combination, or strategic alliance including all
or any part of the Company.
In the ordinary course of its business, DMG may actively trade the
securities and loans of both the Company and Sprint for its own account and for
the accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities and loans.
The Company has agreed to pay DMG a fee for its financial advisory services
in connection with the Merger, including, among other things, rendering the
Fairness Opinion and making the presentation referred to above. Pursuant to a
letter agreement between the Company and DMG dated December 27, 1997, the
Company has agreed to pay DMG a transaction fee of approximately $7.4 million in
the event that the Opinion Transactions are consummated. In addition, the
Company has agreed to reimburse DMG for its reasonable out-of-pocket expenses
incurred in connection with its engagement, and to indemnify DMG and certain
related persons against certain liabilities and expenses arising out of or in
conjunction with its rendering of services under its engagement, including
certain liabilities under the federal securities laws.
COMPANY STOCKHOLDER VOTE MATTERS
The following is a description of each of the Company Stockholder Vote
Matters, each of which is a proposal by the Company's Board of Directors
requiring a vote of the stockholders of the Company. THE MATTERS TO BE
CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE TO THE STOCKHOLDERS OF
THE COMPANY. ACCORDINGLY, STOCKHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER
THE INFORMATION PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS, AND TO COMPLETE,
DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
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THE FOLLOWING INFORMATION SUMMARIZES CERTAIN ASPECTS OF THE COMPANY
STOCKHOLDER VOTE MATTERS. THESE DESCRIPTIONS DO NOT PURPORT TO BE COMPLETE AND
EACH IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE APPENDICIES HERETO WHICH
ARE INCORPORATED HEREIN BY REFERENCE. ALL STOCKHOLDERS ARE URGED TO READ THE
APPENDICES IN THEIR ENTIRETY.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
APPROVAL OF EACH OF THE COMPANY STOCKHOLDER VOTE MATTERS.
PROPOSAL NO. 1--APPROVAL OF THE MERGER
PROPOSAL
The Board of Directors requests the stockholders' approval of the Merger,
the Merger Agreement and all transactions contemplated in the Merger Agreement.
The Merger Agreement is attached hereto as Appendix B and is incorporated by
reference herein.
GENERAL
Pursuant to the Merger Agreement, as soon as practicable following
stockholder approval of the Company Stockholder Vote Matters at the Special
Meeting, the Company, Newco and Newco Sub will effect the Merger whereby Newco
Sub, a wholly-owned subsidiary of Newco, will merge with and into the Company,
with the Company as the surviving entity. All of the then issued and outstanding
Shares of Common Stock will be converted into an equal number of shares of Newco
Common Stock in the Merger. Upon consummation of Merger, the Company will be a
subsidiary of Newco.
Pursuant to the proposed Merger, upon the Effective Time of the Merger, the
separate existence of Newco Sub shall cease and the Company (i) shall continue
to possess all of its assets, rights, powers and property as constituted
immediately prior to the Effective Time of the Merger, (ii) shall be subject to
all actions previously taken by its and Newco Sub's Board of Directors, (iii)
shall succeed, without other transfer, to all of the assets, rights, powers and
property of Newco Sub in the manner more fully set forth in Section 259 of the
DGCL; (iv) shall continue to be subject to all of the debts, liabilities and
obligations of Newco Sub in the same manner as if the Company had itself
incurred them, all as more fully provided under the applicable provisions of the
DGCL.
VOTE REQUIRED
Approval of the Merger requires the affirmative vote of a majority of the
shares of Common Stock outstanding on the Record Date. Such shares may be voted
in person or be represented by proxy. Abstentions will have the effect of a vote
against the proposal. Pursuant to Section 251 of the DGCL and Rule 4460 of the
Marketplace Rules of The Nasdaq Stock Market, the Company is required to get
approval of its stockholders prior to the issuance of the Newco Common Stock in
exchange for the Common Stock in connection with the Merger.
While the Merger is subject to the approval of the stockholders of the
Company, the votes to be cast pursuant to the Agreement to Vote and Tender Stock
and the Agreement to Vote Stock will ensure approval of the Merger. The Merger
will create a holding company structure which may provide certain advantages if
the scope of the Company's business expands in the future as well as
facilitating the economic efficiency of the strategic relationship with Sprint.
EFFECTIVE TIME OF THE MERGER
Subject to the conditions to the obligations of the parties to effect the
Merger being satisfied or waived, the Effective Time will occur on the date and
at the time that the Certificate of Merger relating to the Merger becomes
effective under the DGCL with the Delaware Secretary of State. Unless otherwise
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agreed upon by the parties to the Merger Agreement, the Effective Time is
expected to occur as soon as practicable after approval of the Merger by the
respective stockholders of the Company, Newco and Newco Sub and the effective
date (including expiration of all applicable waiting periods) of all required
consents of any regulatory authority having jurisdiction over the Merger.
While the Agreement to Vote and Tender Stock and Agreement to Vote Stock
will ensure stockholder approval of the Merger, no assurance can be provided
that other conditions precedent to the Merger can or will be satisfied See
"--Conditions." The Company, Newco and Newco Sub anticipate that all conditions
to consummation of the Merger will be satisfied so that the Merger can be
consummated during the second quarter of 1998. Delays in the consummation of the
Merger could occur, however.
MERGER CONSIDERATION
Pursuant to the Merger Agreement, as a result of the Merger each share of
Common Stock issued and outstanding immediately prior thereto shall, by virtue
of the Merger and without any action by any person, be converted into and
exchanged for one fully-paid and nonassessable share of Newco Common Stock.
CERTIFICATE OF INCORPORATION AND BYLAWS
Pursuant to the Merger, the Certificate of Incorporation and Bylaws of Newco
Sub will become the Certificate of Incorporation and Bylaws of the surviving
corporation, and the Certificate of Incorporation and Bylaws of Newco will take
effect as the constitutive documents of the corporation whose stock is
registered pursuant to the Exchange Act. The Certificate of Incorporation and
Bylaws of Newco are substantially similar to the Certificate of Incorporation
and Bylaws of the Company, except that (a) the number of authorized shares of
Preferred Stock was increased from 10 million to 25 million, (b) the scope of
indemnification of officers and directors was increased to the maximum extent
allowed by the DGCL, and (c) the cumulative voting provision was deleted. The
deleted cumulative voting provision had allowed each stockholder to aggregate
its available votes for all open board positions and distribute the total number
of votes for one or more director nominees.
DIRECTORS AND OFFICERS
The directors and officers of the Company will become the directors and
officers of Newco until their successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with Newco's Certificate of Incorporation and Bylaws, except that the two
directors elected by the holders of the Convertible Preferred Stock of Newco
will be elected immediately following the Closing. Sprint's initial designees
are: (a) Willliam T. Esrey, Chairman and Chief Executive Officer of Sprint, and
(b) Patti S. Manuel, President and Chief Operating Officer--Long-Distance
Division of Sprint. See "Other Information about EarthLink--Board of Directors;
Sprint Designees."
DISSENTERS' RIGHTS OF APPRAISAL
Because the Common Stock was included on the Nasdaq National Market on the
Record Date and because the Common Stock will be converted in the Merger solely
into the right to receive Newco Common Stock, which will be included on the
Nasdaq National Market at the Effective Time, the holders of Common Stock will
not have dissenters' rights of appraisal with respect to the Merger pursuant to
Section 262 of the DGCL. However, EarthLink, which was originally incorporated
as a California corporation (prior to being reincorporated as a Delaware
corporation in 1996), may be considered a "quasi-California corporation"
pursuant to Section 2115 of the CGCL. If so, the Company's stockholders who have
not approved the Merger may be entitled to dissenters' rights under Chapter 13
of the CGCL in connection with the Merger if demands for such rights are made
with respect to (i) five percent or more of the outstanding shares of Common
Stock or (ii) "restricted shares" of Common Stock (i.e., those shares
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with respect to which there exists any restriction or transfer imposed by the
Company or any law or regulation).
THE FOLLOWING SUMMARY OF DISSENTERS' RIGHTS UNDER CALIFORNIA LAW IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO CHAPTER 13 OF THE CALIFORNIA GENERAL
CORPORATION LAW, THE COMPLETE TEXT OF WHICH IS ATTACHED HERETO AS APPENDIX G --
CHAPTER 13 OF THE GENERAL CORPORATION LAW OF THE STATE OF CALIFORNIA. FAILURE TO
STRICTLY FOLLOW THE PROCEDURES SET FORTH IN CHAPTER 13 OF THE CALIFORNIA GENERAL
CORPORATION LAW MAY RESULT IN THE LOSS, TERMINATION OR WAIVER OF DISSENTERS'
RIGHTS. A STOCKHOLDER OF THE COMPANY WHO VOTES IN FAVOR OF PROPOSAL NO. 1 WILL
NOT BE ABLE TO EXERCISE DISSENTERS' RIGHTS, AS DESCRIBED HEREIN.
Because the Common Stock is traded on the Nasdaq National Market,
dissenters' rights will be available to stockholders of the Company under the
CGCL only if the holders of five percent or more of the Common Stock or holders
of restricted shares make a written demand upon the Company for the purchase of
dissenting shares in accordance with Chapter 13 of the CGCL. If either of these
conditions is satisfied and the Merger is consummated, stockholders of the
Company who dissent from the Merger by complying with the procedures set forth
in Chapter 13 would be entitled to receive an amount equal to the fair market
value of their shares as of February 10, 1998, the day before the public
announcement of the Merger. The closing sales price on February 10, 1998 was
$38.625. A copy of Chapter 13 of the CGCL is attached hereto as Appendix G and
should be read for more complete information concerning dissenters' rights. THE
REQUIRED PROCEDURE SET FORTH IN CHAPTER 13 OF THE CGCL MUST BE FOLLOWED EXACTLY
OR ANY DISSENTERS' RIGHTS MAY BE LOST. The information set forth below is a
general summary of dissenters' rights as they apply to the Company's
stockholders and is qualified in its entirety by reference to Appendix G.
In order to be entitled to exercise dissenters' rights, a shareholder of the
Company must vote "AGAINST" the Merger. Thus, any stockholder who wishes to
dissent and executes and returns a proxy in the accompanying form must specify
that his or her shares are to be voted "AGAINST" Proposal No. 1. If the
stockholder returns a proxy without voting instructions or with instructions to
vote "FOR" Proposal No. 1, his or her shares will automatically be voted in
favor of the Merger and the stockholder will lose any dissenters' rights. In
addition, if the stockholder abstains from voting his or her shares, the
stockholder will lose his or her dissenters' rights. Only a holder of record of
shares of the Common Stock on the Record Date (or his or her duly appointed
representative) is entitled to assert a purchase demand for the shares
registered in that holder's name.
Furthermore, in order to preserve his or her dissenters' rights, a
stockholder must make a written demand upon the Company for the purchase of
dissenting shares and payment to such stockholder of their fair market value,
specifying the number of shares held of record by such stockholder and a
statement of what the stockholder claims to be the fair market value of those
shares as of February 10, 1998. Such demand must be addressed to: Kirsten L.
Hansen, Secretary, 3100 New York Drive, Pasadena, CA 91107, and must be received
by the Company not later than the date of the Special Meeting. A vote "AGAINST"
the Merger does not constitute such written demand.
If the holders of five percent or more of the outstanding shares of the
Common Stock have submitted a written demand for the Company to purchase their
shares or if such a demand is submitted by holders of restricted shares, and
these demands are received by the Company on or before the date of the Special
Meeting and the Merger is approved, the Company will have 10 days after such
approval to send to those stockholders who have voted against the approval of
the Merger written notice of such approval accompanied by a copy of Chapter 13
of the CGCL, a statement of the price determined by the Company to represent the
fair market value of the dissenting shares as of February 10, 1998, and a brief
description of the procedures to be followed if a stockholder desires to
exercise dissenters' rights. Within 30 days after
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the date on which the notice of the approval of the Merger is mailed, the
dissenting stockholder must surrender to the Company, at the office designated
in the notice of approval, the certificate representing the dissenting shares to
be stamped or endorsed with a statement that they are dissenting shares or to be
exchanged for certificates of appropriate denomination to stamped or endorsed.
Any shares of the Company's Common Stock that are transferred prior to their
submission for endorsement lose their status as dissenting shares.
If the Company and the dissenting stockholder agree that the surrendered
shares are dissenting shares and agree upon the price of the shares, the
dissenting stockholder will be entitled to the agreed price with interest
thereon at the legal rate on judgments from the date of the agreement. Payment
of the fair market value of the dissenting shares shall be made within 30 days
after the amount thereof has been agreed upon or 30 days after any statutory or
contractual conditions to the Merger have been satisfied, whichever is later,
subject to the surrender of the certificates therefor, unless provided otherwise
by agreement.
If the Company denies that the shares surrendered are dissenting shares, or
the Company and the dissenting stockholder fail to agree on a fair market value
of such shares, then the dissenting stockholder of the Company must, within six
months after the notice of approval is mailed, file a complain at the Superior
Court of the proper county of the State of California requesting the court to
make such determinations or intervene in pending action brought by any other
dissenting stockholder. If the complaint is not filed or intervention in a
pending action is not made within the specified six-month period, the
dissenters' rights are lost. If the fair market value of the dissenting shares
is at issue, the court will determine, or will appoint one or more impartial
appraisers to determine, such fair market value. A dissenting stockholder may
not withdraw his or her dissent or demand for payment unless the Company
consents to such withdrawal. Notwithstanding the offer of dissenters' rights
pursuant to the CGCL as described herein, the Company does not necessarily
acknowledge or agree that it is a "quasi-California corporation" or otherwise
legally subject to the CGCL, and the offer of such rights as described herein
shall not be deemed to be such an admission.
CONDITIONS
As set forth in the Investment Agreement, consummation of the transactions
contemplated by the Investment Agreement other than the Offer, including without
limitation the Merger, is conditioned upon Sprint having accepted for payment
the shares of Company Common Stock pursuant to the Offer. Consummation of the
Offer, in turn, is subject to several conditions as summarized below.
MUTUAL CONDITIONS. The following conditions, which must be satisfied before
Sprint is obligated or permitted to consummate the Offer, may be waived only by
the Agreement of the Company, Newco, Newco Sub, Sprint and Sprint L.P.:(a)
tender (and no withdrawal) of at least 1,250,000 shares in the Offer; (b) the
HSR Condition (which has now been satisfied); (c) all necessary consents, orders
or approvals of appropriate governmental authorities, subject to certain
limitations, shall have been obtained; (d) an S-4 Registration Statement
registering the Newco Common Stock to be issued in the Merger shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order; (e) there shall not be any threatened
or pending action, proceeding or investigation by a governmental authority or
other person, which has a reasonable likelihood of success, generally seeking to
restrain, prohibit or limit the transactions contemplated by the Investment
Agreement; (f) no law, regulation or order of any governmental authority that
generally prevents the transactions contemplated by the Investment Agreement to
occur by the Closing shall be in effect; (g) the Company stockholders shall have
approved the Company Stockholder Vote Matters; and (h) the Investment Agreement
shall not have terminated in accordance with its terms prior to the Expiration
Date (as defined therein).
CONDITIONS BENEFITING SPRINT AND SPRINT L.P. The following conditions,
which must be satisfied before Sprint is obligated to consummate the Offer, may
be waived only by Sprint and Sprint L.P.: (a) (i) the
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Board of Directors of the Company or Newco shall not have withdrawn or modified
(in a manner adverse to Sprint or Sprint L.P.) its approval of the Offer or
other transactions contemplated by the Investment Agreement or Ancillary
Agreements or approved any Acquisition Proposal, (ii) the Company shall not have
entered into any agreement with respect to an Acquisition Proposal, (iii) the
Board of Directors of the Company or Newco shall not have resolved to take any
of the foregoing actions in (i) or (ii) above; (b) each appropriate party shall
have executed and delivered to Sprint each of the Ancillary Agreements, and each
Ancillary Agreement shall be in full force and effect; (c) each of the
respective representations and warranties of the Company, Newco and Newco Sub in
the Investment Agreement shall be true and correct as of the Closing Date
(unless specified otherwise therein), subject to certain limitations and
qualifications; (d) each of the Company, Newco and Newco Sub shall have
performed in all material respects its respective obligations and covenants
under the Investment Agreement and each of the Ancillary Agreements at or prior
to the time of Closing; (e) Sprint shall have received a legal opinion from
counsel to the Company, Newco and Newco Sub; and (f) there shall not be any
warrants to purchase Company Common Stock or other Dilutable Securities of the
Company outstanding on the Closing Date which could be exercised, on the Closing
Date, into 8% or more of the Company Common Stock outstanding immediately prior
to the Closing.
CONDITIONS BENEFITING THE COMPANY, NEWCO AND NEWCO SUB The following
conditions, which must be satisfied before Sprint may consummate the Offer
(subject to certain limitations), may be waived only by the Agreement of the
Company, Newco and Newco Sub: (a) the Board of Directors of Sprint and the Board
of Directors of the General Partner of Sprint L.P. shall not have withdrawn or
modified (in a manner adverse to the Company, Newco or Newco Sub) its approval
of the Offer or other transactions contemplated by the Investment Agreement or
Ancillary Agreements or approved any Acquisition Proposal, (ii) Sprint shall not
have entered into any agreement with respect to an Acquisition Proposal, (iii)
the Board of Directors of Sprint or the Board of Director of the General Partner
of Sprint L.P. shall not have resolved to take any of the foregoing actions in
(i) or (ii) above; (b) each appropriate party shall have executed and delivered
to the Company, Newco and Newco Sub each of the Ancillary Agreements, and each
Ancillary Agreement shall be in full force and effect; (c) each of the
respective representations and warranties of Sprint and Sprint L.P. in the
Investment Agreement shall be true and correct as of the Closing Date (unless
specified otherwise therein), subject to certain limitations and qualifications;
(d) Sprint shall have performed in all material respects its obligations and
covenants under the Investment Agreement and each of the Ancillary Agreements at
or prior to the time of Closing; (e) the Company, Newco and Newco Sub shall have
received a legal opinion from counsel to Sprint and Sprint L.P.; and (f) Sprint
shall not have entered into or consummated an agreement for an Acquisition
Proposal, nor shall Sprint have received any Acquisition Proposal recommended by
Sprint's Board of Directors, or which is reasonably likely to be consummated.
REGULATORY APPROVALS
Certain transactions contemplated in the Investment Agreement are subject to
review and approval by the Federal Trade Commission and Department of Justice
under the HSR Act, as described in "Summary--the Offer." Such transactions may
not be consummated in the absence of receipt of such regulatory approval.
However, the applicable waiting period under the HSR Act has expired, such that
the transactions may now be consummated and the HSR Condition deemed satisfied.
The Company is not aware of any other material governmental approvals or
actions that are required for consummation of the Merger, except as described
above. Should any other approval or action be required, it presently is
contemplated that such approval or action would be sought.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
GENERAL. Certain members of the Company's management and of the Company's
Board of Directors have interests in the Merger that are in addition to any
interests they may have as stockholders of the
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Company generally. These interests include, among other things, the presence of
expanded protections from liability for the Company's directors and officers in
Newco's Certificate of Incorporation, and director and officer insurance
coverage for the Company's directors and officers, and certain severance and
other employee benefits, as described below. As of the Record Date, directors
and executive officers of the Company own 4,643,427 shares of Common Stock for
which they will receive the same consideration as the other holders of Common
Stock.
INSURANCE. The Company expects that Newco will maintain director and
officer liability insurance of at least the same coverage and amounts as
provided by the Company's current director and officer liability insurance, with
respect to claims arising from events that occur prior to the Effective Time and
covering persons who currently are covered by such insurance.
EXECUTIVE ARRANGEMENTS. Charles G. Betty serves as President and Chief
Executive Officer of EarthLink under an Employment Agreement dated January 15,
1996 (as amended, the "Employment Agreement"). Mr. Betty's Employment Agreement
has a two-year term and provides for (i) a salary of $225,000 per year plus an
annual bonus of $75,000 upon attainment of certain performance goals, (ii) a
$24,000 per year travel allowance and (iii) severance compensation of 100% of
his then-current salary. Pursuant to the operation of the Merger Agreement, Mr.
Betty will be the President and Chief Executive Officer of Newco, with the
Employment Agreement continuing its effectiveness after the Merger. The
Employment Agreement provides, among other things, that all of Mr. Betty's
unvested options to buy Common Stock will immediately vest upon a "Change of
Control" (as defined therein) of the Company or a termination of employment
other than for "Cause" (as defined therein) or as a result of the Company's
breach of the Employment Agreement. Under the Employment Agreement, a "Change of
Control" generally is a sale of all or a material portion of the Company's
assets, a merger or recapitalization whereby the Company is not the surviving
entity, acquisition of beneficial ownership of 25% or more of the outstanding
voting stock of the Company by any person or entity, failure of the then-current
members of the Board of Directors to constitute a majority of the Board, and as
determined by the Board of Directors in its sole discretion. The Employment
Agreement was amended February 10, 1998 to exclude the transactions contemplated
by the Investment Agreement and the Ancillary Agreements from the definition of
"Change of Control" (including the issuance of the Convertible Preferred Stock,
the Convertible Notes and the Common Stock issuable upon conversion thereof),
subject to certain exceptions. The Board of Directors of the Company approved
such amendment on February 10, 1998.
The Company anticipates that it will further amend Mr. Betty's Employment
Agreement to, among other things, (i) employ Mr. Betty as President and Chief
Executive Office of Newco, Inc. after consummation of the transactions
contemplated by the Investment Agreement, (ii) extend the term of the Employment
Agreement for three years from April 1, 1998 with automatic extensions from year
to year after 2001 and (iii) increase Mr. Betty's Base salary to $300,000 per
year. These anticipated amendments are pending review and approval by the
Compensation Committee of the Board of Directors.
See also "Other Information about EarthLink--Beneficial Ownership of Common
Stock" for a description of the ownership of Common Stock by the Company's
directors, executive officers and certain other stockholders. See "Description
of Certain Ancillary Agreements--Agreement to Vote Stock; Agreement to Vote and
Tender Stock" and "--Stockholders' Agreement" for a description of certain
agreements to which certain members of the Company's Board of Directors and
executive officers are parties.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger will be treated as a reorganization within
the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code"). If the Merger qualifies as a tax-free reorganization under such Code
section, (a) no gain or loss will be recognized by a holder of Common Stock upon
the exchange of such Common Stock solely for shares of Newco Common Stock, (b)
the basis of the shares of Newco Common Stock received by each holder of Company
Common Stock in the Merger
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will be the same as the basis of the shares of Company Common Stock exchanged
therefor, (c) the holding period for the shares of Newco Common Stock received
by the EarthLink stockholders in the Merger will include the holding period
applicable to the shares of the EarthLink Common Stock exchanged therefor, if
such shares of Company Common Stock are held as a capital asset at the effective
time of the Merger, and (d) neither the Company, Newco nor Newco Sub will
recognize gain or loss on the Merger. Hunton & Williams, Atlanta, Georgia,
counsel to the Company, will provide an opinion regarding the above and other
related tax consequences, which opinions are subject to certain qualifications
and assumptions as set forth therein.
THE FOREGOING SUMMARY OF CERTAIN ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES
OF THE MERGER TO THE COMPANY'S STOCKHOLDERS DOES NOT PURPORT TO ADDRESS ALL
ASPECTS OF THE POSSIBLE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND IS NOT
INTENDED AS TAX ADVICE TO ANY PERSON. IN PARTICULAR, AND WITHOUT LIMITING THE
FOREGOING, THIS SUMMARY DOES NOT ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER TO THE COMPANY'S STOCKHOLDERS IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES OR STATUS. NOR DOES THIS SUMMARY ADDRESS ANY CONSEQUENCES OF THE
MERGER UNDER ANY STATE, LOCAL, ESTATE, OR FOREIGN TAX LAWS. COMPANY
STOCKHOLDERS, THEREFORE, ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER.
ACCOUNTING TREATMENT
There will be no new basis or step-up in basis in the assets of the Company
as a result of the Merger. The acquisition of the SIP Subscribers from Sprint is
considered an acquisition of a business and will be accounted for using the
purchase method.
EXPENSES AND FEES
The Investment Agreement provides that all fees and expenses incurred in
connection with the Investment Agreement and the transactions contemplated
thereby (including without limitation the Company Stockholder Vote Matters) and
the Ancillary Agreements shall be paid by the party incurring such fees or
expenses, whether or not such transactions are consummated. Such expenses
include filing, registration and application fees, printing and distribution
fees, and fees and expenses of financial or other consultants, investment
bankers, accountants, and legal counsel. However, one-half of the reasonable
out-of-pocket expenses incurred by the Company in preparing this Proxy
Statement/Prospectus and the S-4 Registration Statement, printing and mailing
the Proxy Statement/Prospectus, the SEC filing fees for the S-4 Registration
Statement and in holding the Special Meeting of Company stockholders to approve
the Merger shall be paid by Sprint.
RESALES OF NEWCO COMMON STOCK
Newco Common Stock to be issued to stockholders of the Company in connection
with the Merger will be registered under the Securities Act and included for
trading on the Nasdaq National Market. All shares of Newco Common Stock received
by holders of Common Stock and all shares of Newco Common Stock issued and
outstanding immediately prior to the Effective Time, will have been registered
under the Securities Act and will be freely transferable upon consummation of
the Merger by those stockholders of the Company not deemed to be "affiliates" of
the Company or Newco. "Affiliates" generally are defined as persons or entities
who control, are controlled by, or are under common control with the Company or
Newco at the time of the Special Meeting (generally, executive officers and
directors).
Rule 145 promulgated under the Securities Act restricts the sale of Newco
Common Stock received in the Merger by Affiliates and certain of their family
members and related interests. Generally, during the
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year following the Effective Time, Affiliates of the Company or Newco may resell
publicly the Newco Common Stock received by them in the Merger within certain
limitations as to the amount of Newco Common Stock sold in any three-month
period and as to the manner of sale. After the one-year period, such Affiliates
may resell their shares without restriction because affiliates of the Company
will become affiliates of Newco upon the Merger, the same restrictions will
generally apply to them under Rule 144. The ability of Affiliates to resell
shares of Newco Common Stock received in the Merger under Rule 144 or 145 as
summarized herein generally will be subject to satisfaction by the Company (and
Newco as the Company's successor registrant) of its Exchange Act reporting
requirements for specified periods prior to the time of sale. Affiliates will
receive additional information regarding the effect of Rules 144 and 145 on
their ability to resell Newco Common Stock received in the Merger. Affiliates
also would be permitted to resell Newco Common Stock received in the Merger
pursuant to an effective registration statement under the Securities Act or
another available exemption from the Securities Act registration requirements.
This Proxy Statement/Prospectus does not cover any resales of Newco Common Stock
received by persons who may be deemed to be Affiliates of the Company or Newco.
TERMINATION
At any time prior to the Effective Date, the Merger Agreement may be
terminated and the Merger abandoned for any reason whatsoever by the Board of
Directors of any of the Company, Newco or Newco Sub, notwithstanding the
approval of the Merger by the stockholders of the Company at the Special Meeting
or by the sole stockholder of Newco or Newco Sub.
PROPOSAL NO. 2--APPROVAL FOR THE ISSUANCE OF CONVERTIBLE PREFERRED STOCK
PROPOSAL
The Board of Directors requests the stockholders' approval of the proposed
issuance of the Convertible Preferred Stock and the Newco Common Stock into
which such securities are convertible, as described herein. The terms of the
Convertible Preferred Stock are set forth in the proposed form of the
Certificate of Designation, of such stock which is attached hereto as Appendix C
and incorporated by reference herein.
GENERAL
In connection with the Investment Agreement as described above, the Company
proposes to issue to Sprint 4,102,941 shares of Convertible Preferred Stock.
THE CONVERTIBLE PREFERRED STOCK
Pursuant to the terms of the Investment Agreement, the Company proposes to
issue 4,102,941 shares of Convertible Preferred Stock to Sprint in exchange for
the Convertible Preferred Stock Consideration. Such shares of Convertible
Preferred Stock are initially convertible into 3,533,411 Shares of Newco Common
Stock at the Closing. However, the Convertible Preferred Stock may not be
converted into Newco Common Stock for one year after the Merger, except such
limitation shall not apply in the event of a Business Combination (as defined
therein). Immediately after consummation of the Offer, the Merger and the other
transactions contemplated by the Investment Agreement, Sprint would own
approximately 26.6% of the total number of issued and outstanding shares of
Newco Common Stock on a fully diluted basis (that is, assuming that all
warrants, options and convertible notes representing rights to purchase Common
Stock or Newco Common Stock, including the Convertible Preferred Stock, are
exercised or converted into Newco Common Stock). However, the Convertible
Preferred Stock will pay dividends thereon for the first five years in the form
of increases in its Liquidation Value ("Liquidation Accretion Dividends"), at a
per annum rate of 3% of the Liquidation Value, which will accrue and compound
quarterly in arrears, but which will accelerate in the event of a business
combination or an optional
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redemption of the Convertible Preferred Stock by Newco. At the Closing, the
Liquidation Value will be the average of the closing price per share of Newco
Common Stock for the 30 trading days prior to the Closing Date. Increases in the
Liquidation Value will have the effect of increasing the number of shares of
Newco Common stock that Sprint will receive upon conversion of the Convertible
Preferred Stock. Assuming that the Convertible Preferred Stock is held by Sprint
for the initial five year period following the Closing or that certain
Liquidation Accretion Dividends are accelerated upon the consummation of a
Business Combination or optional redemption, Sprint L.P. will be entitled to
receive 4,102,941 shares of Newco Common Stock upon conversion thereof. If the
fully diluted number of Shares, as calculated above, were the same at that time,
Sprint would then own approximately 28.8% of the total number of issued and
outstanding shares of Newco Common Stock on that basis. The Conversion Price is
also subject to customary anti-dilution adjustments.
Cash dividends at such rate are payable after five years from the Closing
Date when declared by the Board of Directors of Newco out of funds legally
available therefor and such dividends accumulate if not declared and paid. After
the twentieth anniversary of the Closing Date, such cumulative cash dividends
accrue at the rate per annum of 8% of the Liquidation Value, which rate
increases annually by 200 basis points up to a maximum rate of 12% per annum.
Holders of Convertible Preferred Stock are entitled to a liquidation preference
upon any voluntary or involuntary liquidation, dissolution or winding up of
Newco (Liquidation Event) in an amount per share equal to the sum of (i) the
average closing price per share of Common Stock for the 30 trading days
preceding the Closing Date, (ii) the amount of all Liquidation Accretion
Dividends that have been paid (including an amount equal to a prorated dividend
for the period from the latest "Dividend Accrual Date" (as hereinafter defined)
through the date of the Liquidation Event), and (iii) all accumulations of
accrued by unpaid cash dividends (the sum of (i), (ii) and (iii) is referred to
as the Liquidation Value). Each share of Convertible Preferred Stock initially
converts into less than one share of Newco Common Stock, but increases to a
one-for-one conversion (subject, in each case, to customary antidilution
adjustments) over a five-year period (but may be accelerated upon a Business
Combination or optional redemption). Pursuant to the Governance Agreement and
the Certificate of Designation, after the Closing the holders of the Convertible
Preferred Stock are entitled to elect two directors to the Board of Directors of
the Company (the Investor Directors) and to certain committees of the Board of
Directors, which rights may be reduced to the election of one director or no
directors, based generally upon the percentage of the outstanding Common Stock
owned by Sprint and Sprint L.P. Also, pursuant to the Governance Agreement and
the Certificate of Designation, the approval of all the Investor Directors is
required for certain actions proposed by the Company. See "Description of The
Investment Agreement--The Investment Agreement--The Issuance of Convertible
Preferred Stock" and "Description of the Governance Agreement--Corporate
Governance."
Similarly, the Convertible Preferred Stock has the right to prior approval,
by the vote of at least 66 2/3% of the then-outstanding Convertible Preferred
Stock voting as a class, of the following proposed actions by the Company: (a)
alteration of the rights, preferences and privileges of the Convertible
Preferred Stock that would adversely affect such class of stock, (b) increase in
the authorized number of shares of Convertible Preferred Stock, create any new
series of stock or other securities convertible into equity securities of the
Company having a preference over or being on parity with the Convertible
Preferred Stock with respect to voting, dividends, distribution of assets upon
liquidation or conversion rights, (c) amendment to the Company's Certificate of
Incorporation, Bylaws or other organizational documents or take any action or
enter into any other agreement which prohibit or materially conflict with the
Company's obligations under the Certificate of Designation, or (d) engage in any
event of liquidation, dissolution or bankruptcy. See the Certificate of
Designation attached hereto as Appendix C.
VOTE REQUIRED
Approval of this proposal by the stockholders of the Company requires the
affirmative vote by the holders of a majority of the Shares present in person or
represented by proxy at the Special Meeting and
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entitled to vote thereon. Shares represented by proxies that reflect abstentions
or "broker non-votes" (i.e., shares held by a broker or nominee which are
represented at the Special Meeting, but with respect to which such broker or
nominee is not empowered to vote on a particular proposal) will be counted as
Shares that are present and entitled to vote for purposes of determining the
presence of a quorum. Accordingly, with respect to the approval of this
proposal, abstentions and broker non-votes will be counted as part of the number
of votes to be used in determining if the proposal has received the requisite
number of votes for approval. Thus, an abstention and a broker non-vote will
have the same effect as a vote against the proposal. Pursuant to Rule 4460 of
the Marketplace Rules of The Nasdaq Stock Market applicable to Nasdaq National
Market-listed companies, the Company is required to obtain approval of its
stockholders prior to the issuance of the Convertible Preferred Stock.
PROPOSAL NO. 3--APPROVAL FOR THE ISSUANCE OF CONVERTIBLE NOTES
PROPOSAL
The Board of Directors requests the stockholders' approval of the issuance
of the Convertible Notes and the Newco Common Stock into which such securities
are convertible.
CONVERTIBLE NOTES ISSUED PURSUANT TO THE CREDIT AGREEMENT
Concurrently with the Merger, the Credit Agreement will become effective.
The Credit Agreement (which includes a form of Convertible Note as Exhibit A
thereto) is attached as Appendix D hereto and incorporated by reference herein.
Under the Investment Agreement and Credit Agreement, Sprint will initially make
available up to $25 million in debt financing. Each year after the Closing Date,
the aggregate amount that Sprint is obligated to advance is increased by $25
million to a maximum of $100 million on a cumulative basis. Advances of funds to
the Company under the Credit Agreement will be evidenced by Convertible Notes,
which are convertible into Newco Common Stock. Each Convertible Note will mature
five years from the dated issuance and will bear interest at a rate equal to 6%
per annum. The Company has no present intention to incur indebtedness under the
Credit Agreement.
The Convertible Notes are convertible into shares of Newco Common Stock at a
conversion price of 130% of the average market price (i.e., the closing sale
price over a 30 trading day period) at the time a particular Convertible Note is
issued to evidence an advance under the Credit Agreement. The Conversion Price
is subject to customary anti-dilution adjustments.
Because the number of shares of Newco Common Stock receivable upon
conversion of the Convertible Notes is dependent upon future trading prices for
Newco Common Stock, and because the amount of advances under the Credit
Agreement is within Newco's discretion (provided it is in compliance with
applicable Credit Agreement conditions), it is not possible to predict the
extent to which, if any, Sprint's fully diluted ownership would increase in the
event that advances are made under the Credit Agreement.
Sprint's obligation to make advances under the Credit Agreement terminates
upon the earlier of (i) the fifth anniversary of the Closing Date, (ii)
acceleration of the indebtedness evidenced by the Convertible Notes upon an
Event of Default (as defined below), (iii) consummation of a Business
Combination, or (iv) termination of the Marketing Agreement pursuant to certain
provisions thereof. An Event of Default shall occur if (i) there is a breach or
there are breaches of any of the representations or warranties set forth in the
Credit Agreement unless such breach or breaches would not in the aggregate have
a Material Adverse Effect on Newco, the Company and their subsidiaries, taken as
a whole, (ii) nonpayment of principal or interest within fourteen (14) days
after the same becomes due, (iii) a breach of certain financial and other
covenants, and in certain cases, a failure to cure such breach within the
applicable cure period, (iv) a default by Newco or the Company in any agreement
or agreements under which indebtedness in excess of $5 million was created, or
the occurrence of any other event or existence of any condition, the effect of
any of which causes, or permits the holder of such indebtedness to cause, such
indebtedness to become due prior to its stated maturity, or any such
indebtedness shall be declared due
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and payable prior to the stated maturity thereof, (v) Newco or the Company files
for relief under bankruptcy, receivership, or similar laws, or fails to contest
any involuntary petition in bankruptcy filed with regard to Newco or the
Company, (vi) any condemnation of a substantial portion of the property of Newco
or the Company, or (vii) Newco or the Company fails within thirty (30) days to
pay, bond or otherwise discharge any judgments or orders for the payment of
money in excess of $1 million; which are not stayed on appeal or otherwise
contested in good faith. "Material Adverse Effect" is defined to mean any change
or effect having a material adverse effect (or any development as to which there
is a substantial likelihood, insofar as can be foreseen, that would have such an
effect) on the business, properties, assets, condition (financial or otherwise),
or results of operations of the Company, Newco, Newco Sub, Sprint, Sprint L.P.
and Sprint's subsidiaries, as the case may be.
VOTE REQUIRED
Approval of this proposal by the stockholders of the Company requires the
affirmative vote by holders of a majority of the Shares present in person or
represented by proxy at the Special Meeting and entitled to vote thereon. Shares
represented by proxies that reflect abstentions or "broker non-votes" (i.e.,
shares held by a broker or nominee which are represented at the Special Meeting,
but with respect to which such broker or nominee is not empowered to vote on a
particular proposal) will be counted as Shares that are present and entitled to
vote for purposes of determining the presence of a quorum. Accordingly, with
respect to the approval of this proposal, abstentions and broker non-votes will
be counted as part of the number of votes to be used in determining if the
proposal has received the requisite number of votes for approval. Thus, an
abstention and a broker non-vote will have the same effect as a vote against the
proposal. Pursuant to Rule 4460 of the Marketplace Rules of The Nasdaq Stock
Market applicable to Nasdaq National Market-listed companies, the Company is
required to obtain approval of its stockholders prior to the issuance of the
Convertible Notes.
PROPOSAL NO. 4--APPROVAL FOR THE ISSUANCE OF CERTAIN SECURITIES UPON EXERCISE OF
OPTIONS AND WARRANTS
PROPOSAL
The Board of Directors requests the stockholders' approval of the issuance
of Newco Common Stock upon the exercise of certain options and warrants to
purchase Common Stock of the Company, as described herein.
THE ISSUANCE OF NEWCO COMMON STOCK UPON EXERCISE OF CERTAIN OPTIONS AND WARRANTS
Upon the Effective Time of the Merger, to the extent permitted by the terms
of such instruments as in effect at the Effective Time of the Merger, Newco
shall assume the obligations of the Company under any and all securities,
warrants, calls, rights to purchase, rights of first refusal, securities
convertible into or exchangeable for voting securities, commitments, agreements,
arrangements or undertakings of any kind to which the Company is a party or by
which it is bound obligating the Company to issue, deliver or sell or create, or
cause to be issued, delivered or sold or created, additional shares of the
capital stock of or other voting securities or phantom stock or other
contractual rights the value of which is determined in whole or in part by the
value of any capital stock of the Company, or obligating the Company to issue,
grant, extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement, or undertaking (collectively, the "Dilutable
Securities") on the same terms and conditions as were in effect immediately
prior to the Merger. After the Merger, each such Dilutable Security shall
become, subject to the provisions set forth below, an option, right to purchase
or a security convertible into Newco Common Stock on the basis of one share of
Newco Common Stock for each one share of the Company Common Stock issuable
pursuant to any such Dilutable Security, on the same terms and conditions and at
an exercise price equal to the exercise price applicable to any such Dilutable
Security at the Effective Time of the Merger.
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As of the Record Date, 2,552,679 shares of Common Stock were reserved for
issuance upon exercise of all such Dilutable Securities. A number of shares of
Newco Common Stock will be reserved for issuance upon the exercise of options,
stock purchase rights and convertible securities equal to the number of shares
of Company Common Stock so reserved immediately prior to the Effective Date of
the Merger.
The assumed Rights shall not entitle any holder thereof to a fractional
share upon exercise or conversion (unless the holder was entitled to a
fractional interest immediately prior to the Merger). In lieu thereof, any
fractional share interests to which a holder of an assumed Right (other than an
option issued pursuant to the Company's 1995 Stock Option Plan, as amended)
would otherwise be entitled upon exercise or conversion shall be aggregated (but
only with other similar Rights which have the same per share terms). To the
extent that after such aggregation the holder would still be entitled to a
fractional share with respect thereto upon exercise or conversion, the holder
shall be entitled, upon the exercise or conversion of all such assumed Rights
pursuant to their terms (as modified herein), to one full share of common stock
in lieu of such fractional share. With respect to each class of such similar
Rights, no holder will be entitled to more than one full share in lieu of a
fractional share upon exercise or conversion.
VOTE REQUIRED
Approval of this proposal by the stockholders of the Company requires the
affirmative vote by holders of a majority of the Shares present in person or
represented by proxy at the Special Meeting and entitled to vote thereon. Shares
represented by proxies that reflect abstentions or "broker non-votes" (i.e.,
shares held by a broker or nominee which are represented at the Special Meeting,
but with respect to which such broker or nominee is not empowered to vote on a
particular proposal) will be counted as Shares that are present and entitled to
vote for purposes of determining the presence of a quorum. Accordingly, with
respect to the approval of this proposal, abstentions and broker non-votes will
be counted as part of the number of votes to be used in determining if the
proposal has received the requisite number of votes for approval. Thus, an
abstention and a broker non-vote will have the same effect as a vote against the
proposal.
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THE BUSINESS OF EARTHLINK
OVERVIEW
The Company is an Internet service provider ("ISP") that was founded to help
its members derive meaningful benefits from the extensive resources of the
Internet. The Company focuses on providing access, information, assistance and
services to its members to encourage their introduction to the Internet and to
provide them with a satisfying user experience.
The Company provides its services through its EarthLink Network
TotalAccess-TM- software package, which is designed to simplify access to the
Internet through an online registration feature and a multimedia user interface.
This software permits members to browse the World Wide Web and the Internet
through the use of the latest Internet browsers from Netscape Communications
Corporation ("Netscape") and Microsoft Corporation ("Microsoft"), one or the
other of which is included in each copy of EarthLink Network TotalAccess, or
another third-party browser that a member may wish to use. Members connect to
the Company's network via telephone modem at speeds up to 56Kbps, cable modems,
ISDN lines or frame relay connections. The Company also provides useful
information and online resources to its members through its extensive World Wide
Web site. On this site, members can find technical assistance information, an
online newsletter, links to numerous categories of popular information and
entertainment and many other items and services designed to enhance members'
satisfaction with their Internet experience. In addition, the Company provides
members with six megabytes of free Web space, a free Personal Start Page-TM-,
24-hour customer and technical support, a bi-monthly printed newsletter and
other educational materials.
The Company currently markets its services through print and broadcast
advertisements, an affinity marketing program, a member referral program and
other marketing activities. Its affinity marketing program includes
relationships with, among others, prominent retailers, print publications and
software and hardware companies. Member referrals have also been an important
source of new members, and the Company provides economic incentives (such as one
month's free access) to its members to encourage referrals.
EarthLink also offers business services, including business Web site
hosting, high-speed ISDN communications capability and frame relay connectivity.
In addition, the Company offers promotional opportunities to members via
sponsorships through its Premier Partnership Program with advertising, marketing
and distribution partners.
STRATEGY
The principal components of EarthLink's growth strategy are as follows:
RAPIDLY EXPAND ITS MEMBER BASE THROUGH AGGRESSIVE MARKETING. EarthLink
believes that a key to success in the competitive ISP market is to rapidly
expand its member base to establish a significant revenue base and to take
advantage of economies of scale. The Company has historically acquired members
primarily through its affinity marketing programs, advertising and referrals
from existing members.
RETAIN EXISTING MEMBERS. The sales, marketing and other costs of acquiring
new members are substantial relative to the monthly fee collected from such
members. Accordingly, the Company believes that a part of if its long-term
success largely depends on member retention. To that end, EarthLink will
continue to devote significant resources to expanding its 24-hour customer and
technical support, enhancing its network operations capability and refining and
maintaining its World Wide Web site. In addition, the Company will continue to
minimize call times by implementing a new call center and providing the
training, hardware and software tools that can assist the staff in identifying
and solving member problems thereby increasing member satisfaction and
retention.
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CONCENTRATE ON CORE COMPETENCIES BY LEASING NETWORK SERVICES AND LICENSING
SOFTWARE FROM THIRD PARTIES. In order to maintain its focus on member needs,
the Company leverages the infrastructure and software development efforts of
others by leasing its dial-up point of presence ("POP") capacity from UUNET
Technologies, Inc. ("UUNET") and PSINet Inc. ("PSINet"), and licensing software
from companies such as Netscape and Microsoft. Upon closing of the transactions
contemplated by the Investment Agreement, the Company and its members will also
have access to Sprint points of presence and Sprint's related communications
network. The Company believes that this approach gives it flexibility to rapidly
expand its service coverage without the need for substantial capital
expenditures. The Company will continue to pursue this strategy so that, in
addition to its sales and marketing efforts, it can devote its principal
resources to improving its members' experience with the Internet.
EARTHLINK'S SERVICES
EarthLink provides a variety of competitively-priced Internet services to
consumer and business members. The Company enables the majority of these
services through use of its EarthLink Network TotalAccess software package. This
software incorporates a telephone dialer and email functionality with several
leading third-party Internet access tools, including the latest browsers from
Netscape and Microsoft, thereby providing a functional, easy-to-use Internet
access solution for Windows 3.1, Windows 95 and Macintosh platforms. EarthLink
Network TotalAccess installation software automatically installs these and other
software applications on the member's computer. The simple point-and-click
functionality of EarthLink Network TotalAccess, combined with its easy-to-use
multimedia registration system, permits online credit card registration,
allowing new EarthLink members to quickly access the Internet.
The prices quoted below are subject to change.
STANDARD EARTHLINK NETWORK INTERNET SERVICES. EarthLink provides its
members with a core set of features through its standard Internet service, which
allows unlimited access to the Internet, the World Wide Web as well as other
features and services, subject to EarthLink's acceptable use policy and other
member agreements and policies, for a flat monthly fee of $19.95 and a one-time
set-up fee of $25. The following features are included in EarthLink's standard
Internet service:
EMAIL. Each member is provided a mailbox, used to send and receive email.
Email allows members to exchange an unlimited number of multimedia text,
graphics, audio and video messages with other online and Internet users.
WEB BROWSER. EarthLink provides members a free Web browser. Currently,
EarthLink offers its members Netscape Communicator 4.0 and Microsoft Internet
Explorer 4.0. Members may also use any other browser of their choice.
FREE 6MB WEB SPACE. Each EarthLink member is provided six megabytes of
space on the Company's Web server to create the member's own Web home page, in
addition to tutorials and tools to help them develop their sites. This enables
each member to participate in the Internet community by personally adding
content to the World Wide Web.
PERSONAL START PAGE. The Company provides each member with a Personal Start
Page, an enhanced default home page for members. Members can customize their
home page to include content from CNET's SNAP! Online service and news headlines
from ClariNet. They also have the option to view stock quotes, sports scores and
weather reports and are provided a personal reminder system, as well as a place
to list their own personal Web links and links to EarthLink member and technical
support resources.
RELIABLE NATIONWIDE POPS. EarthLink members can access their accounts
nationwide from any of the Company's 1,115 POPs (as of December 31, 1997). More
than 400 of these allow 56Kbps access. Upon closing of the transactions
contemplated by the Investment Agreement with Sprint, the Company's members will
also have access to Sprint's system of POPs.
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PUBLICATIONS. EarthLink mails its bi-monthly printed newsletter, "bLink,"
to each of its members. BLINK provides members with useful information, such as
tips on how to search for certain categories of information on the Internet,
information regarding new EarthLink service offerings, new Internet sites and
other items of interest. This publication is also available on the EarthLink
home page. Additionally, the Company provides its new members with an
orientation booklet called "Getting the Most Out of EarthLink," written by the
Company's founder, Sky Dayton.
MEMBER AND TECHNICAL SUPPORT. The Company believes that reliable member and
technical support is critical to retaining existing and attracting new members.
The Company currently provides the following types of member and technical
support services: (i) toll-free, live telephone assistance available seven days
a week, 24 hours a day; (ii) email-based assistance available seven days a week,
24 hours a day; (iii) help sites and Internet guide files on the EarthLink Web
site; (iv) automated "fax back" and "fax on demand" assistance; and (v) printed
reference material. Additionally, the Company provides dedicated support for its
business members.
EARTHLINK WEB SITE. EarthLink has developed and maintains a Web site at
www.earthlink.net containing content and links to third-party content and
services. EarthLink's in-house staff actively seeks out interesting content from
across the World Wide Web and organizes it into areas of interest on the
EarthLink Web site under topics such as "What's Hot," "Hollywood," "News,"
"Finance" and "Games." The Company's Web site provides a road map to the
abundance of information and services available on the Internet. A user can
browse the site and click on topics of interest in order to link to desired
information. The site also contains Web pages dedicated to online member
assistance including technical support, account maintenance and service updates.
NEWSGROUPS. One of the most popular areas of the Internet is Usenet, a
collection of Internet discussion groups called "newsgroups." Usenet is a system
that is specifically designed to create and facilitate ongoing online
discussions of specific areas of interest. There are currently more than 25,000
of these newsgroups discussing different topics.
PREMIUM EARTHLINK NETWORK SERVICES. In addition to its standard service,
the Company offers a variety of premium services, including the following:
TOTALACCESS GOLD. EarthLink recently introduced an optional value-added
package, TotalAccess Gold. It includes an additional email box, priority
technical support with a guaranteed 5-minute maximum wait time, and a quarterly
CD-ROM containing of software tools and plug-ins. The package adds $9.95 to the
monthly price of a standard dial-up or ISDN account.
BUSINESS WEB SITES. The Company provides a Web hosting service for business
members. Monthly fees for business Web sites range from $89 to $455, plus
one-time set-up fees of $179 to $479, depending on the size of the site and
whether the site is a shared or unique address. A wide variety of options is
available for an extra fee. Additional traffic may apply for excess site
traffic. The Company also offers an introductory service for small businesses,
STARTERSITE, which is a ten megabyte, unique-domain Web site priced at $19.95
per month, plus a one-time set-up fee of $25.
NATIONAL ISDN CONNECTIONS. EarthLink offers nationwide high-speed ISDN
connections. ISDN provides significantly higher speeds than conventional analog
modems (up to 128 Kbps versus up to the current analog maximum of 56 Kbps). The
monthly charge for ISDN is $34.95 for the first 100 channel hours, plus a
one-time set-up fee of $50, and additional channel hours are $.99 each.
NATIONAL LAN ISDN SERVICE. Small to medium sized businesses can now connect
their entire existing local area network ("LAN") to the Internet at ISDN speed
with LAN ISDN. The nationwide service uses dynamic IP addresses and costs $99.95
per month for 160 channel hours and four email boxes. The set-up fee of $149 is
waived for current EarthLink members, and additional hours cost $.85 each.
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NATIONAL FRAME RELAY. Frame relay enables companies to connect their LANs
to the Internet via a direct, continuous connection at speeds ranging from 56
Kbps to 1,536 Kbps. Frame relay connections, available nationwide, range from
$335 to $2,350 per month depending on access speeds, data throughput and other
data transfer metrics. One-time set-up fees range from $495 to $1,995.
THE EARTHLINK ONLINE MALL. EarthLink's online shopping mall, the Mall-TM-,
provides users with a one-stop gateway to some of the top retailers on the Web,
using the familiar mall map interface. Retailers such as The Disney Store-TM-,
BarnesandNoble.com-TM- and 1-800-FLOWERS-TM- "lease" space in the Mall.
INTERNET ROOMS. Building on the concept of a person's real-life room, the
Internet Room is an easy to use communications tool enabling members to use
email, online chat and other advanced tools for communication. The Internet
Rooms provide members with a powerful and easy way to establish Web sites
without having to rely on complicated programming languages such as HTML or FTP.
There is an annual fee of $29.95 for each Internet Room.
PREMIER PARTNERSHIP PROGRAM. As part of its strategy to generate additional
incremental revenue and leverage its current properties, the Company developed
the premium partnership program. The program consists of the following three
options: the "Platinum Package," the "Gold Package" and the "Silver Package."
Each package includes advertising in three separate areas: the Personal Start
Page, the Mall and the member newsletter, "bLink." The client is promised a
certain number of impressions, calculated by multiplying the reach times the
frequency times the population. This program allows the partner to reach the
Internet user in three different locations. EarthLink does not offer this
program to every company; rather, it is focusing on market segments that should
enhance the Internet experience of its member base.
SUPPLEMENTAL SERVICES. To augment its standard and premium services, the
Company provides its members with the following supplemental service options:
ADDITIONAL MAILBOXES. The Company provides additional electronic mailboxes
for a per-mailbox fee of $4.95 per month and a $9.95 set-up fee. The service is
intended for those members who require more than one mailbox for colleagues,
employees or family members.
DOMAIN NAME SERVICE. EarthLink provides unique or vanity domain names for
those members who prefer an individualized address or plan to establish a
business Web site. These vanity domain names allow consumers and businesses to
customize their email and Web site addresses. EarthLink charges a one-time fee
of $75 to set up domain name service and assist members in establishing their
unique domain names. Members then pay an annual renewal fee to an Internet
domain registration agency.
STAR EMAIL ADDRESSING. EarthLink members desiring an unlimited choice of
email addresses (like "[email protected]" or "[email protected]") can purchase
star addressing. Within the star addressing scheme, all email goes into a
central mailbox, for easy processing to individual addresses at the same domain.
There is a one-time set-up fee of $125, but no monthly fee for maintaining the
service.
INTERNATIONAL ROAMING SERVICE EarthLink offers international roaming
services so that members who travel abroad can access their EarthLink accounts
and the Internet. The fee for roaming is a flat rate of 15 cents per minute plus
applicable fees, if any, charged by local and long distance carriers.
800 SERVICE. EarthLink provides 800 number dial-up service for members who
do not have access to a local POP. EarthLink charges members $24.95 per month
for five hours of 800 number service plus a one-time set-up fee of $25.00.
Additional hours are $4.95 per hour.
TECHNICAL DEVELOPMENT AND SERVICE ENHANCEMENT
EarthLink places significant emphasis on expanding and refining its services
to enhance its members' Internet experience. EarthLink's technical staff is
engaged in a variety of technical development and
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service enhancement activities and continuously reviews new third-party software
products and technology for potential incorporation into EarthLink's system and
services. A recent result of these efforts is a ground-up revision of EarthLink
Network TotalAccess, version 2.0, which was recently introduced. The new version
places a premium on ease of use, and incorporates a variety of powerful features
that reduce the number and types of challenges faced by new members using the
Internet for the first time. EarthLink also regularly updates and expands the
online services provided through the EarthLink Web site. These activities
include organizing Web content and the development of online guides, help
screens and other user services and resources.
SALES AND MARKETING
EarthLink's sales and marketing efforts consist of the following programs:
ADVERTISING. The Company advertises its services in print, electronic and
broadcast media. Included in most of these advertisements is a toll-free 800
number for contacting the Company's internal sales staff. When potential members
call a sales representative using this number, they are assigned a user name and
password, and are sent a copy of EarthLink Network TotalAccess software, which
they use to access their account and the Internet.
Another component of EarthLink's advertising strategy involves maintaining a
presence at national trade shows such as Internet World and MacWorld, as well as
numerous local and regional trade shows. Additionally, the Company markets
through computer, Internet and related publications, and bundles EarthLink
Network TotalAccess software with a few of these publications.
AFFINITY MARKETING PROGRAM. EarthLink's affinity marketing program promotes
the Company through the distribution of the EarthLink Network TotalAccess
software package by its affinity marketing partners. These partners typically
bundle EarthLink Network TotalAccess software with their own goods or services
to create a package that gives potential members an incentive to establish an
EarthLink account. EarthLink's marketing partners include, among numerous
others, Best Buy Co., CNET, CompUSA, CyberMedia, Hard Rock Cafe America, Iomega,
MacMillan Publishing USA, SAM'S Club, Sony Entertainment, United Airlines and
Warner Bros.
SPRINT ALLIANCE. EarthLink's alliance with Sprint includes a marketing
agreement and distribution arrangement, which upon close of the transactions
contemplated by the Investment Agreement with Sprint will provide EarthLink with
access to Sprint's branded marketing and distribution channels in the
continental United States and a five-year commitment from Sprint to deliver a
minimum of 150,000 new members annually.
MEMBER REFERRAL PROGRAM. The Company believes that one of its most
important marketing tools is its existing members. In order to encourage members
to refer other users, the Company currently waives one month of standard access
service fees per referred member. Approximately 25 percent of the Company's new
membership has been generated by referrals.
OTHER PROGRAMS
- ELITE PROGRAM. EarthLink recently launched the EarthLink Internet
Technology for Education ("ELITE") program, which is designed to provide a
cost-effective, flexible Internet access solution for colleges and
universities. The Company has already won contracts with two colleges in
Georgia and with the University of California, Los Angeles.
- PARTNER PROGRAM. This program enables vendors, such as value-added
resellers, retailers and other companies that target vertical markets, to
resell EarthLink's dial-up Internet service, along with high-end business
services, such as Web site hosting, ISDN, LAN ISDN and frame relay, to
their customers. Through this partnership, these companies can deliver a
complete Internet product and
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service offering to their customers by providing them with a full range of
turn-key, Internet business solutions.
MEMBERS, POPS AND NETWORK INFRASTRUCTURE
As of December 31, 1997, the Company had approximately 420,000 members. The
Company presently provides its members with Internet access primarily through
UUNET's and PSINet's nationwide system of Points of Presence ("POPs").
Substantially all of the Company's members access the EarthLink Network and the
Internet by dialing into local POPs. Of these, the Company owned 58 POP sites in
California and offered additional access through 841 UUNET POPs and 374 PSINet
POPs, to which it had access on a non-exclusive basis. The alliance with Sprint
includes a Network Service Agreement, which upon closing of such transaction
will provide EarthLink members access to POPs owned and operated by Sprint. The
inability or unwillingness of these third-party network providers to provide POP
access to EarthLink's members, or the Company's inability to secure alternative
POP arrangements, could have a material adverse effect on the Company.
For members located in a geographic area not presently serviced by a local
POP, the EarthLink Network can be accessed by a toll-free number for which the
Company bills members on an hourly usage basis. The Company's POP sites are
connected to the Internet primarily through its network hub in Pasadena. The
Company's network hub is in turn connected directly to the Internet via
redundant high-speed fiber optic data lines obtained from various vendors. The
Company, however, does not maintain fully redundant data center and network hub
facilities. Any accident, incident or system failure that causes interruptions
in the Company's operations could have a material adverse effect on the
Company's ability to provide Internet services to its members, and, in turn, on
the Company. However, the Company has invested in measures to minimize the
effects of communications line failures, loss of electrical service, fire,
earthquakes and other adverse occurrences.
MEMBER AND TECHNICAL SUPPORT
The Company believes that reliable member and technical support is critical
to retaining existing and attracting new members. The Company currently provides
the following types of member and technical support: (i) toll-free, live
telephone assistance available seven days a week, 24 hours a day; (ii)
email-based assistance available seven days a week, 24 hours a day; (iii) help
sites and Internet guide files on the EarthLink Web site; (iv) automated "fax
back" and "fax on demand" assistance; and (v) printed reference material.
Additionally, the Company provides dedicated support for its business members.
EarthLink's call center is served by a state-of-the-art Lucent Definity
telephone switch, which currently handles approximately 30,000 calls a day. The
system is easily scaleable to accommodate call volume growth. The Company
actively evaluates its call center facilities so as to deliver more effective
and efficient services to its members.
SUPPLIER RELATIONSHIPS
The Company is dependent on third-party software and hardware vendors to
provide the Company with much of its Internet software and hardware, including
the latest World Wide Web browser software that the Company licenses from
Netscape and Microsoft. Failure of the Company's suppliers to provide software
or hardware in the quantities, at the quality levels or at the times required by
the Company, or an inability by the Company to develop alternative sources of
supply if required, could have a material adverse effect on the Company.
COMPETITION
The Internet services market in which the Company operates is extremely
competitive, and the Company expects competition in this market to intensify in
the future. The Company's current and
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prospective competitors include many large companies that have substantially
greater market presence and financial, technical, marketing and other resources
than the Company. The Company competes (or in the future is expected to compete)
directly or indirectly with the following categories of companies: (i) national
and regional ISPs, such as BBN, MindSpring, PSINet and UUNET; (ii) established
online services such as America Online, Prodigy and the Microsoft Network; (iii)
nonprofit or educational ISPs; (iv) national telecommunications companies, such
as AT&T and MCI; (v) Regional Bell Operating companies; and (vi) cable
operators, such as Comcast, TCI and Time Warner.
The entry of new competitors would result in greater competition for the
Company. In addition, competitors in the telecommunications industry may be able
to provide members 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. There can be no
assurance that the Company will be able to offset the adverse effect on revenues
of any necessary price reductions resulting from competitive pricing pressures.
The Company believes that its ability to compete successfully in the
Internet services market depends on a number of factors, including market
presence; the adequacy of the Company's customer and technical support services;
the capacity, reliability and security of its network infrastructure; the ease
of access to and navigation of the Internet provided by the Company's services;
the pricing policies of the Company, its competitors and its suppliers; the
timing of introductions of new services by the Company and its competitors; the
Company's ability to support existing and emerging industry standards; and
industry and general economic trends. There can be no assurance that the Company
can maintain or develop the financial resources, technical expertise or
marketing and support capabilities to compete successfully.
PROPRIETARY RIGHTS
GENERAL. EarthLink relies on a combination of copyright, trademark, patent
and trade secret laws and contractual restrictions to establish and protect its
technology. It is EarthLink's policy to require employees and consultants and,
when possible, suppliers and distributors, 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.
From time to time, the Company has received communications from third
parties alleging that certain of the names or trademarks for the Company's
services infringe the trademarks of such third parties. To date, no such claims
have had an adverse effect on the Company's ability to market and sell its
services. However, there can be no assurance that those claims will not have an
adverse effect in the future or that other parties will not assert infringement
claims against the Company in the future with respect to current or future
services.
LICENSES. EarthLink has obtained authorization, typically in the form of a
license, to distribute third-party software incorporated in EarthLink Network
TotalAccess. Applications licensed by the Company include Netscape Communicator
(which automatically renews each December for additional one-year terms unless
either party terminates the license on 120 days notice), Microsoft Internet
Explorer (which automatically renews each December for additional one-year
terms, although either party may terminate the license at any time on 30 days
notice), and MacTCP software from Apple (which automatically renews each
December for additional one-year terms unless either party terminates the
license on twelve-month notice). The only software in the EarthLink Network
TotalAccess package that is developed by the Company is the front-end and
installation/registration program. The Company currently intends to maintain or
negotiate renewals of existing software licenses and authorizations. The Company
may want or need to license other applications in the future. The failure to
renew existing software licenses or the
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Company's inability to license additional applications could have a material
adverse effect on the Company.
TRADEMARKS. "EarthLink Network-Registered Trademark-," "EarthLink Network
TotalAccess-TM-," "bLink-TM-," "The Arena-TM-," "All the Internet You Can
Eat-TM-," "It's Your Internet-TM-," "Personal Start Page-TM-",
"StarterSite-TM-", "the Mall-TM-", and the EarthLink logo are trademarks of the
Company.
GOVERNMENT REGULATION
The Company provides Internet services, in part, through data transmissions
over public telephone lines. These transmissions are governed by regulatory
policies establishing charges and terms for wire line communications. The
Company currently is not subject to direct regulation by the Federal
Communications Commission (the "FCC") or any other governmental agency, other
than regulations applicable to businesses generally. However, in the future the
Company could become subject to regulation by the FCC or another regulatory
agency as a provider of basic telecommunications services. The FCC has
considered the issue of whether Internet service providers ("ISPs") should be
subject to access charges and regulation, and has determined that it would not
adopt such regulations. There are no active proceedings considering these
specific issues at this time. The FCC has announced, however, that it will be
issuing a Notice of Proposed Rule Making ("NPRM") to explore proposals to create
incentives for companies to make the most efficient use of the telephone network
for Internet and other information services. While the FCC has announced that it
does not intend for this Notice of Proposed Rule Making to consider the
imposition of access charges or regulations on ISPs, it could result in the
creation of more competition for the Company. In addition, the FCC could reopen
and reconsider these issues at any time.
The Telecommunications Act of 1996 (the "Telecommunications Act") contains
certain provisions that lift, or establish procedures for lifting, certain
restrictions relating to the regional Bell operating companies' ("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. The same regulations that permit ISPs to operate
outside of the regulations applied to carriers also permits other providers of
Internet services, including voice and facsimile services, to operate more
easily. These could provide additional sources of competition for the Company.
As the FCC auctions wireless spectrum and relaxes the restraints for the use of
spectrum, it will be easier for additional wireless competitors to enter into
the marketplace. Competition from these companies could have an adverse effect
on the Company's business.
The Telecommunications Act, through the portion commonly known as the "1996
Communications Decency Act," imposed fines for certain uses of the Internet, and
the provision of access to indecent and obscene services. These provisions were
struck down as unconstitutional by the Supreme Court of the United States in
June of 1997. On March 12, 1998, the Senate Commerce Committee approved two
bills that reconstruct the unconstitutional provisions of the 1996
Communications Decency Act. While it is too early to determine the ultimate
course of these bills, and to evaluate the constitutionality of the proposals,
there is a possibility that these provisions, if enacted, could pose possible
liability on ISPs.
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.
Legislation has been introduced to define and protect citizens from illegal
Internet gambling. Other Internet-related legislation has been introduced which
may limit commerce and discourse on the Internet. The FCC currently is
considering (i) whether ISPs are information service providers or
telecommunications providers; (ii) whether ISPs are legally required to
contribute to the Universal Service Fund; (iii) how various companies in the
Internet/information/data/telephony service provider field should be classified;
and (iv) whether ISPs should benefit from the Universal Service Fund. Changes in
the regulatory environment
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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 RBOCs or others, could have a material
adverse effect on the Company.
EMPLOYEES
As of December 31, 1997, the Company employed 785 people on a full-time
basis, including 98 sales and marketing personnel, 579 operations and customer
and technical support representatives and 108 administrative personnel. As of
that date, the Company also employed 22 people on a part-time basis. None of the
Company's employees are represented by a labor union, and the Company is not a
party to any collective bargaining agreement.
PROPERTIES
EarthLink's corporate headquarters are located in an 85,500 square-foot
facility in Pasadena, California. In June 1997, the Company amended the lease
for its corporate headquarters facility. Under the amended lease, the lessor
will provide improvements costing up to $1.4 million and convert approximately
45,000 square feet of the existing facility to office space. Base rent is
currently $73,000 per month. Under the amended lease, the Company increased the
existing irrevocable letter of credit to the lessor from $200,000 to $450,000.
The Company has an option to extend this lease for an additional five years at
the then prevailing market rate following its September 30, 2007 expiration.
EarthLink's data center and its primary data hubs are housed in a 55,000 square
foot facility adjacent to its headquarters. EarthLink's lease for this space has
an initial ten-year term at $66,000 per month for the first 60 months and
$77,000 per month for the remaining 60 months. The Company has an option to
extend this lease for an additional ten years at the then prevailing market
rate. In addition to the Company's corporate headquarters and data center, the
Company also leases approximately 7,200 square feet of office space in Los
Angeles that presently houses a secondary portion of the Company's data center
operations and network hub; however, the Company anticipates that these
operations will be moved to its Pasadena data center in 1998. The lease for this
space expires July 31, 1999 and currently provides for rental payments of
approximately $10,000 per month.
LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings that it
believes could have, either individually or in the aggregate, a material adverse
effect on its business or financial condition. There are proceedings pending
before the FCC that could affect the ISP industry and the means by which ISPs
such as the Company conduct their business. See "Business--Government
Regulation." The Company is not a party to these proceedings.
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EARTHLINK--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Financial Condition and Results of
Operations of the Company should be read in conjunction with the financial
statements and notes thereto included elsewhere herein.
OVERVIEW
The Company has experienced net losses since it commenced operations. Net
losses were approximately $6.3 million from inception through 1995, $31.1
million for 1996, and $29.9 million for the year ended December 31, 1997. As of
December 31, 1997, the Company had an accumulated deficit of approximately $66.1
million (exclusive of $1.3 million of losses incurred while the Company was an S
Corporation for tax purposes, which, upon the Company's conversion to C
Corporation status in June 1995, were charged to the Company's capital
accounts). The Company expects that it will continue to incur net losses as it
continues to expend substantial resources on sales and marketing as it attempts
to rapidly increase its market share. There can be no assurance that the Company
will achieve or sustain profitability or positive cash flow from its operations.
The market for the Company's services is rapidly evolving and is
characterized by an increasing number of market entrants who have introduced new
products and services for Internet. The Company and its prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the new and rapidly evolving market for Internet
services and products.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
1995 REVENUES 1996 REVENUES 1997 REVENUES
--------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues:
Recurring revenues $ 2,422 80% $ 26,879 83% $ 72,943 92%
Other revenues 606 20% 5,624 17% 6,231 8%
--------- ----------- ---------- ----------- ---------- -----------
Total revenues 3,028 100% 32,503 100% 79,174 100%
Operating costs and expenses:
Cost of recurring revenues 1,055 35% 18,462 57% 37,974 48%
Cost of other revenues 349 11% 2,699 8% 3,401 4%
--------- ----------- ---------- ----------- ---------- -----------
Total cost of revenues 1,404 46% 21,161 65% 41,375 52%
Gross profit 1,624 54% 11,342 35% 37,799 48%
Sales and marketing 3,711 123% 15,258 47% 21,020 27%
General and administrative 2,062 68% 10,534 32% 14,333 18%
Operations and member support 1,869 62% 15,808 49% 30,900 39%
--------- ----------- ---------- ----------- ---------- -----------
7,642 253% 41,600 128% 66,253 84%
--------- ----------- ---------- ----------- ---------- -----------
Loss from operations (6,018) (199%) (30,258) (93%) (28,454) (36%)
Interest expense (136) (4%) (1,041) (3%) (2,099) (3%)
Interest income 34 1% 150 0% 637 1%
--------- ----------- ---------- ----------- ---------- -----------
Net loss $ (6,120) (202%) $ (31,149) (96%) $ (29,916) (38%)
</TABLE>
1997 COMPARED TO 1996
RECURRING REVENUES. Recurring revenues consist of monthly fees charged to
members for Internet access and other monthly services. Recurring revenues are
recognized over the period for which the
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services are provided. Recurring revenues increased $46.1 million or 171% from
1996 to 1997 due to the increase in the Company's member base from 227,000 to
420,000 during 1997.
OTHER REVENUES. Other revenues generally represent one-time non-refundable
set up fees and are recognized as earned.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
PERCENT PERCENT
OF OTHER OF OTHER
1996 REVENUES 1997 REVENUES
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Dial-up set up fees...................................................... $ 4,563 81% $ 3,478 56%
Other set up fees and revenues........................................... 1,061 19% 2,753 44%
--------- --- --------- ---
Total other revenues..................................................... $ 5,624 100% $ 6,231 100%
</TABLE>
Other revenues increased $600,000 or 11% from 1996 to 1997. Due to
competitive pricing and other pressures, the Company waives set up fees for
dial-up members acquired through certain affinity marketing partnerships. This
caused a decrease in dial-up set up fees earned during 1997. This trend is
expected to continue for dial-up set up fees. During 1997, the Company began to
aggressively promote its Web hosting and high speed access services and in the
fourth quarter began to capitalize on incremental revenue activities. The
decline in dial-up set up fees was offset by increases in the other set up fees
and revenues attributable to the Company's Web hosting, high speed access
services and related products.
COST OF RECURRING REVENUES. Cost of recurring revenues principally includes
telecommunications costs such as fees paid to UUNET and PSINet for local access
to their nationwide systems of POPs and depreciation expense on equipment used
in network operations for ongoing member services.
Cost of recurring revenues increased $19.5 million due to the increase in
the Company's member base but decreased from 69% of recurring revenues in 1996
to 52% of recurring revenues in 1997. The decrease from 1996 to 1997 was
primarily due to the Company's ability to effectively manage communications
costs and economies of scale to reduce per member costs as the total member base
expanded. Until October 1996 the Company paid UUNET a fixed monthly fee per
member plus a variable amount based on member usage in excess of a threshold
number of hours per month. The Company's agreement with UUNET was amended as of
October 1996 to change the basis of per member costs to peak port hours. In June
1997, UUNET agreed to waive monthly revenue minimums, and excess hours fees, and
peak service user targets during the six months ended December 31, 1997. In
return, EarthLink agreed not to invoke its early termination right until
September 1998. If usage becomes more concentrated during peak times, the fees
paid by the Company to UUNET will increase, thereby adversely affecting the
Company's operating margins. Under the Company's agreement with PSINet, the
Company pays PSINet a fixed monthly fee for each customer accessing the
Company's services through a PSINet POP. As the Company continues to expand, the
Company anticipates that it may build and use additional Company-owned POPs in
those geographical areas where there is a sufficient concentration of members to
support the cost of such investment. Upon consummation of the transactions
contemplated by the Investment Agreement with Sprint, the Company's members will
also have access to Sprint's network of POPs.
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COST OF OTHER REVENUES. Cost of other revenues principally includes
expenses related to the registration of new members such as licensing fees for
software, software duplication costs commissions and bounties paid to third
parties for referring new members to the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
PERCENT PERCENT
OF OTHER OF OTHER
1996 REVENUES 1997 REVENUES
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Royalties................................................................ $ 1,907 34% $ 930 15%
Bounties................................................................. 465 8% 1,744 28%
Other.................................................................... 327 6% 727 12%
--------- --- --------- ---
Total cost of other revenues............................................. $ 2,699 48% $ 3,401 55%
--------- --- --------- ---
--------- --- --------- ---
</TABLE>
Cost of other revenues increased $700,000 or 26% during 1997. The increase
was due to growth in affinity marketing partnerships and payment of the related
bounties. The growth in bounties was partially offset by a decrease in royalty
expense due to the renewal of various contracts under more favorable terms. The
increase in the total cost of other revenues as a percentage of other revenues
was attributable to the decrease in other revenues, specifically, dial-up set up
fees.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
sales commissions, salaries, cost of promotional material, advertising, travel
and third-party sales commissions. Sales and marketing expenses increased $5.8
million or 38% during 1997. The increase was primarily due to the emphasis on
marketing the Company's services, expanding sales and marketing efforts
nationwide, increased sales commissions and increased marketing personnel
headcount. The Company does not defer sales, marketing or other direct costs
associated with the acquisition of members.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of costs associated with the accounting and human resources
departments, professional expenses, rent, bad debts and compensation related to
certain executive officers. General and administrative expenses increased $3.8
million or 36% due to increases in bad debt, payroll, rent, depreciation
expenses and credit card fees. Bad debt expense was $2.5 million or 7.7% of
total revenue in 1996 due to difficulties in billing and in disconnecting
late-paying members on a timely basis. Bad debt expense was $3.5 million or 4.4%
of revenue in 1997. The increase in bad debt was due to management's review and
elimination of accounts with questionable payment history and the compression of
the Company's collection cycle. The rise in payroll costs was primarily due to
growth in headcount. Personnel engaged in general and administrative activities
increased from 85 to 110 during 1997. The rise in depreciation expense is due to
the acquisition of office equipment and the build-out of leasehold improvements.
The increase in credit card processing fees was primarily due to the increase in
the Company's member base.
OPERATIONS AND MEMBER SUPPORT. Operations and member support expenses
consist primarily of costs associated with technical support and member service
and costs to register and maintain member accounts. Employees engaged in
operations and member support activities increased from 401 to 565 during 1997.
The increase of $15.4 million or 98% reflects management's efforts to retain
existing members by devoting significant resources to expanding technical
support and network operations capabilities. During 1997 the Company created a
new call center and invested in training programs and hardware and software to
solve member problems. The Company intends to continue to invest in this area.
1996 COMPARED TO 1995
REVENUES. Recurring revenues increased $24.5 million or more than 1,000%
during 1996 as a result of an increase in the number of EarthLink members. The
increase in revenues was partially offset by credits
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given to members under the Company's member referral program. Under this
program, the Company waives one month of standard service fees in consideration
for each new member referred by an existing member. This waived service fee
results in a reduction of revenues. The increase in other revenues during 1996
was primarily due to the increase in the number of new members during that
period and one-time set up fees collected from those new members. From time to
time, the Company waives the one-time set up fee it charges new members as a
result of competitive pricing and other pressures.
COST OF REVENUES. Cost of recurring revenues increased from 44% of
recurring revenues in 1995 to 69% of recurring revenues in 1996 due the
Company's expansion to nationwide service through its relationship with UUNET.
The Company paid UUNET a fixed monthly fee per member plus a variable amount
based on customer usage in excess of a threshold number of hours per month. The
Company's agreement with UUNET was amended as of October 1996 so that the key
variable component is peak usage rather than hourly usage.
SALES AND MARKETING. Sales and marketing expenses consisted primarily of
sales commissions, salaries, cost of promotional material, advertising, travel
and third-party sales commissions. EarthLink's principal strategy has been to
rapidly expand its customer base and increase its market share of the under
penetrated market for Internet access services. To realize this strategy, the
Company has aggressively invested in sales and marketing. This strategy required
substantial initial cash outlays which outpaced the resultant growth in
revenues. In the latter part of 1996 EarthLink's marketing efforts emphasized
the variety of services available to business members, including business Web
sites, high-speed ISDN communications capability, high-speed frame relay
connections and Internet access through corporate Intranets.
GENERAL AND ADMINISTRATIVE. Since inception, general and administrative
expenses have increased as a result of increased employee headcount, rent,
depreciation and credit card fees. During 1996, the Company hired a number of
senior management personnel, moved into a new headquarters building and engaged
professional consultants to assist in the development of an administrative
infrastructure to accommodate anticipated increases in the number of members and
employees, which resulted in a significant increase in general and
administrative expenses as compared to 1995. General and administrative expenses
for 1996 included bad debt expense of $2.5 million which resulted from
difficulties in billing and in disconnecting late-paying members on a timely
basis. In addition, in September 1996, the Company issued 37,500 shares of
Common Stock as consideration for the termination of a consulting agreement. The
value of the stock, $413,000, was included in general and administrative
expenses for the year ended December 31, 1996.
OPERATIONS AND MEMBER SUPPORT. Operations and member support expenses
consist primarily of expenses associated with technical support and member
services to register and maintain member accounts. These expenses have increased
significantly since the Company's inception. This trend reflects the costs
associated with building a member service organization to support the Company's
member base and anticipated member growth. Employees engaged in operations and
member support activities increased from 118 to 401 during 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has not generated net cash from operations since its inception.
The Company has funded its operations primarily through private and public sales
of equity securities, borrowings from third parties and lease financing. Cash
used in operating activities was approximately $3.6 million, $16.2 million and
$21.3 million during the three years ended December 31, 1997, respectively.
Cash used in investing activities has consisted primarily of equipment
purchases for POP and network expansion. Capital expenditures amounted to
approximately $2.8 million, $18.8 million and $14.5 million, respectively, for
the three years ended December 31, 1997. During 1997 the Company purchased the
rights to subscribers and related assets of Internet in a Mall, a Tarzana,
California based Internet access provider
63
<PAGE>
at a cost of approximately $1.4 million. The Company estimates that capital
expenditures for 1998 will be approximately $18.5 million including network
enhancements, data center expansion, and procurement of telecommunication and
office equipment and furniture and fixtures. Where feasible, the Company will
seek to finance certain of these expenditures through capital leases.
Cash provided by financing activities provided the Company with
approximately $8.2 million, $38.3 million and $49.8 million during the three
years ended December 31, 1997, respectively. The Company's financing activities
have consisted of the private sale of debt, the public and private sale of
equity securities and capital lease transactions primarily for equipment. The
Company issued 367,155 shares of Common Stock at $0.82 per share, 827,085 shares
of Common Stock at $1.81 per share and 921,745 at $4.84 per share on March 10,
1995, June 19, 1995 and October 31, 1995, respectively. As a result of these
placements, the Company raised, in the aggregate $6,258,000 during 1995. The
Company issued 45,485 shares of Common Stock at $4.84 per share and 25,000
shares of Common Stock at $4.84 per share on January 18, 1996 and March 20,
1996, respectively. On May 6, 1996, the Company issued 852,460 shares of common
stock at $9.76 per share in a private placement. On September 24, 1996, the
Company issued 2,727,273 shares of Series A Convertible Preferred Stock at $5.50
per share which was converted into 1,363,624 shares of Common Stock upon the
close of the Company's initial public offering in January 1997. As a result of
these placements, EarthLink raised, in the aggregate, net proceeds of $22.7
million during 1996. In January 1997, the Company sold 2,000,000 shares of
Common Stock in its initial public offering. Net proceeds from the offering were
approximately $22.8 million. In February 1997, the underwriter of the public
offering exercised its over allotment option and purchased and sold an
additional 284,750 shares of Common Stock. Net proceeds to the Company were
approximately $3.4 million. On September 19, 1997, the Company closed a private
placement of 1,459,759 shares of its unregistered restricted Common Stock. Net
proceeds from the offering were approximately $15.4 million. Capital lease
obligations generally result from the sale and leaseback of equipment. During
the three years ended December 31, 1997, the Company financed the acquisition of
data processing and office equipment amounting to approximately $556,000, $11.3
million and $10.5 million, respectively, by entering into a number of agreements
for the sale and leaseback of equipment. The sale leaseback transactions are
recorded at cost, which approximates the fair market value of the property and,
therefore, no gains or losses have been recorded. The property remains on the
books and continues to be depreciated. A financing obligation representing the
proceeds is recorded and reduced based upon payments under the lease agreement.
During the second quarter of 1996, the Company received short-term debt
financing (issued in the form of 10% Promissory Notes that were to mature in
June 1997) of $2.95 million from a limited number of investors, including
certain directors and existing stockholders. The holders of $725,000 of such
notes converted the notes into 55,767 shares of Common Stock upon closing of the
Company's initial public offering. The remaining $2,225,000 of 10% promissory
notes were paid in full in January 1997.
In connection with an amendment of its strategic network services
relationship with UUNET, in October 1996, the Company issued a $5.0 million,
one-year promissory note to UUNET. This note bears interest at 10.25% and is
convertible into up to approximately 391,515 shares of Common Stock. The note
was amended in October 1997 to extend the due date for an additional year. On
March 31, 1998, UUNET converted the note into 391,515 shares of Common Stock.
As of December 31, 1996 and December 31, 1997, the Company had cash and cash
equivalents of approximately $4.0 million and $16.5 million, respectively. The
Company believes that available cash will be sufficient to meet the Company's
operating expenses and capital requirements for at least the next 12 months.
Under the terms of its announced alliance with Sprint Corporation and assuming
that the Sprint transactions close, EarthLink will obtain approximately $24
million in cash and have available up to $100 million in convertible debt
financing over three years. The Company's capital requirements depend on
numerous factors, including the rate of market acceptance of the Company's
services, the Company's ability to maintain and expand its member 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,
64
<PAGE>
information systems and research and development activities, the availability of
hardware and software provided by third-party vendors and other factors. The
timing and amount of such capital requirements cannot accurately be predicted.
If capital requirements vary materially from those currently planned, the
Company may require additional financing sooner than anticipated. The Company
has no commitments for any additional financing, and there can be no assurance
that any such commitments can be obtained on favorable terms, if at all. Any
additional equity financing may be dilutive to the Company's stockholders, and
debt financing, if available, may involve restrictive covenants with respect to
dividends, raising future capital and other financial and operational matters.
If the Company is unable to obtain additional financing as needed, the Company
may be required to reduce the scope of its operations or its anticipated
expansion, which could have a material adverse effect on the Company.
YEAR 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000 (the "Year 2000 Phenomenon"). The Company utilizes software, computer
technology and other services provided by third-party vendors that may not be
Year 2000 Phenomenon ready. Much of the third-party software, computer
technology and services is not essential to the Company's operations. However,
as discussed elsewhere herein, the Company is dependent on UUNET and PSINet for
network communications services and Microsoft and Netscape for Web browser
software. The Company is also indirectly dependent on the institutions involved
in processing the Company's members' credit card payments for the Company's
services. The failure of the software and computing systems of these and other
third-party vendors to be Year 2000 Phenomenon ready could have material adverse
effects on the Company. The Company has assessed its proprietary software and
systems and has determined them to be Year 2000 Phenomenon ready. However, the
Company is currently assessing the Year 2000 Phenomenon readiness of its
third-party supplied software, computer technology and other services. Based
upon the results of this assessment, the Company will develop and implement, if
necessary, a remediation plan with respect to third-party software, computer
technology and services which may fail to be Year 2000 Phenomenon ready.
Management anticipates that the Company's business, including components thereof
provided by third-party vendors, will be Year 2000 Phenomenon ready by 2000. At
this time, the expenses associated with this assessment and potential
remediation plan cannot presently be determined.
65
<PAGE>
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for the eight quarters ended December 31, 1997. In the opinion of the Company's
management, this unaudited information has been prepared on the same basis as
the audited financial statements contained herein and includes all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the
information set forth therein when read in conjunction with the Financial
Statements and Notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
1996 1997
------------------------------------------------ ------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Recurring revenues............................ $ 2,628 $ 5,014 $ 8,272 $ 10,965 $ 14,086 $ 17,479
Other revenues................................ 790 1,714 1,744 1,376 1,632 1,367
----------- ----------- --------- ----------- ----------- -----------
Total revenues............................ 3,418 6,728 10,016 12,341 15,718 18,846
Cost of revenues.............................. 1,698 3,865 6,173 6,726 7,955 9,187
Cost of other revenues........................ 569 758 693 679 915 804
Sales and marketing........................... 2,209 3,263 4,395 5,391 4,961 5,056
General and administrative.................... 1,632 2,423 3,783 2,696 3,502 3,449
Operations and member support................. 2,098 3,094 4,749 5,867 6,422 7,791
----------- ----------- --------- ----------- ----------- -----------
8,206 13,403 19,793 21,359 23,755 26,287
Loss from operations.......................... (4,788) (6,675) (9,777) (9,018) (8,037) (7,441)
Interest expense.............................. (100) (161) (422) (358) (507) (444)
Interest income............................... 19 1 94 36 165 135
----------- ----------- --------- ----------- ----------- -----------
Net loss $ (4,869) $ (6,835) $ (10,105) $ (9,340) $ (8,379) $ (7,750)
----------- ----------- --------- ----------- ----------- -----------
----------- ----------- --------- ----------- ----------- -----------
Basic and diluted net loss per share(1) $ (0.96) $ (1.21) $ (1.65) $ (1.26) $ (0.92) $ (0.80)
Weighted average shares outstanding(1) 5,097 5,652 6,139 7,386 9,094 9,738
----------- ----------- --------- ----------- ----------- -----------
----------- ----------- --------- ----------- ----------- -----------
EBITDA(2)..................................... (4,338) (5,916) (8,213) (7,638) (6,157) (5,263)
<CAPTION>
THIRD FOURTH
QUARTER QUARTER
----------- -----------
<S> <C> <C>
Recurring revenues............................ $ 19,044 $ 22,334
Other revenues................................ 1,559 1,673
----------- -----------
Total revenues............................ 20,603 24,007
Cost of revenues.............................. 9,543 11,289
Cost of other revenues........................ 741 941
Sales and marketing........................... 5,636 5,367
General and administrative.................... 3,511 3,871
Operations and member support................. 7,970 8,717
----------- -----------
27,401 30,185
Loss from operations.......................... (6,798) (6,178)
Interest expense.............................. (516) (632)
Interest income............................... 116 221
----------- -----------
Net loss $ (7,198) $ (6,589)
----------- -----------
----------- -----------
Basic and diluted net loss per share(1) $ (0.72) $ (0.59)
Weighted average shares outstanding(1) 9,932 11,241
----------- -----------
----------- -----------
EBITDA(2)..................................... (4,285) (3,372)
</TABLE>
AS A PERCENTAGE OF TOTAL REVENUES
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Recurring revenues........................... 77% 75% 83% 89% 90% 93% 92%
Other revenues............................... 23% 25% 17% 11% 10% 7% 8%
--------- --------- --------- --------- --------- --------- ---------
Total revenues........................... 100% 100% 100% 100% 100% 100% 100%
Cost of revenues............................. 50% 57% 62% 55% 50% 49% 46%
Cost of other revenues....................... 17% 11% 7% 6% 6% 4% 4%
Sales and marketing.......................... 65% 48% 44% 44% 32% 27% 27%
General and administrative................... 48% 36% 38% 22% 22% 18% 17%
Operations and member support................ 61% 46% 47% 48% 41% 41% 39%
--------- --------- --------- --------- --------- --------- ---------
241% 198% 198% 175% 151% 139% 133%
Loss from operations......................... (140%) (99%) (98%) (73%) (51%) (39%) (33%)
Interest expense............................. (3%) (2%) (4%) (3%) (3%) (2%) (3%)
Interest income.............................. 1% 0% 1% 0% (1%) 1% (1%)
--------- --------- --------- --------- --------- --------- ---------
Net loss..................................... (142%) (101%) (101%) (76%) (55%) (40%) (37%)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
EBITDA(2).................................... (127%) (88%) (82%) (62%) (39%) (28%) (21%)
<CAPTION>
Recurring revenues........................... 93%
<S> <C>
Other revenues............................... 7%
---------
Total revenues........................... 100%
Cost of revenues............................. 48%
Cost of other revenues....................... 4%
Sales and marketing.......................... 22%
General and administrative................... 16%
Operations and member support................ 36%
---------
126%
Loss from operations......................... (26%)
Interest expense............................. (3%)
Interest income.............................. 1%
---------
Net loss..................................... (28%)
---------
---------
EBITDA(2).................................... (14%)
</TABLE>
- ------------------------
(1) SFAS No. 128, "Earnings per Share" and Staff Accounting Bulletin No. 98
require companies, such as EarthLink, that incorporated the SAB 83 concept
of "cheap stock" in determining pre-IPO EPS data to restate EPS data to
conform to SFAS 128. Basic EPS now represents the weighted average number of
shares divided into net income during a given period. Potential common stock
items, options, warrants or convertible instruments are not included in the
calculation of EPS due to their anti-dilutive effect.
66
<PAGE>
(2) Represents earnings (loss) before depreciation and amortization, interest
income and expense and income tax expense. EBITDA is not determined in
accordance with generally accepted accounting principles, is not indicative
of cash used by operating activities and should not be considered in
isolation or as an alternative to, or more meaningful than measures of
performance determined in accordance with generally accepted accounting
principles.
SAFE HARBOR STATEMENT
The following "Safe Harbor Statement" is made pursuant to the Private
Securities Litigation Reform Act of 1995. Certain of the statements contained
herein are forward-looking statements (rather than historical facts) that are
subject to risks and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements. With respect
to such forward-looking statements, the Company seeks the protections afforded
by the Private Securities Litigation Reform Act of 1995. These risks include,
without limitation, (i) that the Company will not retain or grow its member
base, (ii) that the Company will fail to be competitive with existing and new
competitors, (iii) that if the Sprint Transactions close, they will not be as
beneficial to the Company as management anticipates, (iv) that the Company will
not be able to sustain its current growth, (v) that the Company will not
adequately respond to technological developments impacting the Internet, and
(vi) that needed financing will not be available to the Company if and as
needed. This list is intended to identify certain of the principal factors that
could cause actual results to differ materially from those described in the
forward-looking statements included elsewhere herein. These factors are not
intended to represent a complete list of all risks and uncertainties inherent in
the Company's business, and should be read in conjunction with the more detailed
cautionary statements included elsewhere herein.
67
<PAGE>
OTHER INFORMATION ABOUT EARTHLINK
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades under the symbol "ELNK" on the Nasdaq
National Market. The Common Stock began trading on January 22, 1997, the date of
the Company's initial public offering. The following table sets forth the high
and low sales prices for the Common Stock on a per share basis for each quarter
during 1997 and to date in 1998.
<TABLE>
<CAPTION>
SALES PRICE
--------------------
1997: HIGH LOW
- ------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter (from the date of the Company's initial public offering,
January 22, 1997)....................................................... $ 20.25 $ 10.125
Second Quarter........................................................... 18.50 8.63
Third Quarter............................................................ 19.50 10.25
Fourth Quarter........................................................... 25.75 16.00
1998:
- -------------------------------------------------------------------------
First Quarter............................................................ $ 56.44 $ 24.50
Second Quarter (through May 11, 1998).................................... 77.00 55.88
</TABLE>
On February 10, 1998, the last full day of trading before public
announcement of the execution of the Investment Agreement, the high and low
sales price per share of the Common Stock was $38.875 and $34.50, respectively.
As of May 11, 1998, the high and low sales price per share was $67.63 and
$62.00, respectively. As of the Record Date, there were 176 holders of record of
Common Stock. The Company has never paid cash dividends on its Common Stock.
BOARD OF DIRECTORS; SPRINT DESIGNEES
Pursuant to the Governance Agreement and the Certificate of Designation,
from the Closing generally until such time as Sprint and Sprint L.P.'s equity
interest in Newco decreases to below 20% (which percentage is subject to certain
adjustments) for three consecutive months, Sprint shall have the right to elect
two persons (the "Investor Directors") to the Board of Directors of each of the
Company, Newco and any Significant Subsidiaries (as defined therein). Sprint may
also designate one Investor Director to any strategic business planning
committee, finance committee and, subject to certain exceptions, all other
committees, if any exist. The Governance Agreement requires Newco to use its
best efforts to solicit proxies from stockholders to effect the above
requirements, and requires the Affiliated Equity Holders (generally Sprint,
Sprint L.P. and their affiliates) to take all actions (including voting) to
effect such provisions. Sprint has designated the following persons as the
initial Investor Directors:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT;
NAME AND BUSINESS ADDRESS 5 YEAR EMPLOYMENT HISTORY
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
William T. Esrey Chairman and Chief Executive Officer of Sprint; Director
Sprint Corporation of Duke Energy Corporation, The Equitable Life Assurance
2330 Shawnee Mission Parkway Society of the United States, Everen Capital Corporation
Westwood, Kansas 66205 and General Mills, Inc. Mr. Esrey has been Chairman of
Sprint since 1990, Chief Executive Officer since 1985
and a Director of Sprint since 1985. Mr. Esrey is the
Chairman of the Executive Committee of the Board of
Directors.
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT;
NAME AND BUSINESS ADDRESS 5 YEAR EMPLOYMENT HISTORY
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Patti S. Manuel President and Chief Operating Officer--Long Distance
Sprint Corporation Division. Ms. Manuel was elected as President and Chief
2330 Shawnee Mission Parkway Operating Officer--Long Distance Division in February
Westwood, Kansas 66205 1998. She was also elected as President and Chief
Operating Officer of Sprint L.P. in February 1998. She
had served as President of Sprint Business, a division
of Sprint L.P., since May 1997. From 1994 to 1997, she
was President of Sales and Marketing for Sprint
Business. She was named President of Marketing for
Sprint Business in 1993.
</TABLE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth information concerning (i) those persons
known by management of the Company to own beneficially more than 5% of the
Company's outstanding Common Stock, (ii) the directors of the Company, (iii) the
executive officers of the Company, and (iv) all directors and officers of the
Company as a group. Except as otherwise indicated in the footnotes below, such
information is provided as of March 31, 1998. According to rules adopted by the
SEC, a person is the "beneficial owner" of securities if he or she has or shares
the power to vote them or to direct their investment or has the right to acquire
beneficial ownership of such securities within 60 days through the exercise of
an option, warrant or right, the conversion of a security or otherwise. Except
as otherwise noted, the indicated owners have sole voting and investment power
with respect to shares beneficially owned. An asterisk in the percent of class
column indicates beneficial ownership of less than 1% of the outstanding Common
Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNERS (1) BENEFICIAL OWNERSHIP CLASS
- --------------------------------------------------------------------------- -------------------- -------------
<S> <C> <C>
Sky D. Dayton.............................................................. 1,637,500(2) 13.5%
Reed E. Slatkin............................................................ 1,237,047(3) 10.2
Kevin M. O'Donnell......................................................... 1,134,739(4) 9.3
Sidney Azeez............................................................... 590,636(5) 4.9
John W. Sidgmore........................................................... 401,515(6) 3.3
Charles G. Betty........................................................... 143,299(7) 1.2
Linwood A. Lacy, Jr........................................................ 78,066(8) *
Robert M. Kavner........................................................... 44,009(9) *
Paul McNulty............................................................... 504(10) *
Brinton O.C. Young......................................................... 67,500(11) *
Grayson L. Hoberg.......................................................... 5,000(12) *
David R. Tommela........................................................... 3,000(13) *
Dr. Richard D. Edmiston.................................................... 11,875(14) *
Quantum Industrial Partners LDC............................................ 1,523,180(15) 12.6
Storie Partners, L.P....................................................... 696,950(16) 5.8
Sprint Corporation......................................................... 4,783,411(17) 30.8
All directors and officers as a group (13 persons)......................... 5,354,690(18) 42.1
</TABLE>
- ------------------------
(1) Except as otherwise indicated by footnote, the named person has sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned.
(2) Includes options to purchase 137,500 shares of Common Stock. Mr. Dayton's
business address is that of the Company.
69
<PAGE>
(3) Includes (i) warrants to purchase 182,500 shares of Common Stock and (ii)
12,074 shares of Common Stock held in trust for Mr. Slatkin's minor
children. Mr. Slatkin's business address is 890 N. Kellog Avenue, Santa
Barbara, California 93111.
(4) Includes (i) 7,538 shares of Common Stock and options to purchase an
additional 87 shares of Common Stock held by Mr. O'Donnell's son, and (ii)
warrants to purchase 182,500 shares of Common Stock. Mr. O'Donnell disclaims
beneficial ownership of the shares of Common Stock held by his son and the
shares of Common Stock issuable upon exercise of options held by his son.
Mr. O'Donnell's business address is 9933 Beverly Grove Drive, Beverly Hills,
California 90210.
(5) Includes (i) 347,085 shares of Common Stock held by Mr. Azeez's family and
(ii) warrants to purchase 6,667 shares of Common Stock. The business address
of Mr. Azeez is c/o Unitel Cellular Communications Systems, Bayport One,
Suite 400, West Atlantic City, New Jersey 08232.
(6) Includes 10,000 shares of Common Stock issuable upon the exercise of
warrants and 391,515 shares of Common Stock held by UUNET Technologies, Inc.
("UUNET"). Mr. Sidgmore is Chief Executive Officer and a director of UUNET
and shares voting and investment power with the other UUNET directors.
(7) Includes (i) options to purchase 141,250 shares of Common Stock and (ii)
2,049 shares of Common Stock held by Mr. Betty's father-in-law and
mother-in-law of which Mr. Betty disclaims beneficial ownership. Mr. Betty's
business address is that of the Company.
(8) Includes options to purchase 20,000 shares of Common Stock.
(9) Includes warrants to purchase 3,334 shares of Common Stock and options to
purchase 20,000 shares of Common Stock.
(10) Includes warrants to purchase 50 shares of Common Stock.
(11) Includes options to purchase 47,500 shares of Common Stock.
(12) Represents options to purchase 5,000 shares of Common Stock. Mr. Hoberg's
business address is that of the Company.
(13) Represents options to purchase 3,000 shares of Common Stock.
(14) Includes options to purchase 1,875 shares of Common Stock.
(15) Includes warrants to purchase 66,700 shares of Common Stock. Quantum
Industrial Partners LDC ("Quantum Industrial") has investment discretion
with respect to its portfolio investments, including the Common Stock, in
Soros Fund Management ("SFM"), a sole proprietorship of Mr. George Soros.
Mr. Soros may be deemed to be the beneficial owner of the Common Stock held
by Quantum Industrial. The shares shown exclude 214,545 shares of Common
Stock and warrants to purchase 23,600 shares of Common Stock held directly
by Mr. Soros and 45,455 shares of Common Stock and warrants to purchase
5,000 shares of Common Stock held by trusts established for the benefit of
certain children of Mr. Soros. The shares shown also exclude 36,817 shares
of Common Stock and warrants to purchase 3,925 shares of Common Stock held
by certain managing directors and other employees of SFM, of which Mr. Soros
disclaims beneficial ownership. The business address of Quantum Industrial
is: c/o Curacao Company N.V., Kaya Flamboyan 9, Willemstad, Curacao,
Netherlands Antilles.
(16) The general partner of Storie Partners, L.P. is Storie Advisors, Inc., a
California corporation, which is controlled by Steven A. Ledger and Richard
E. Dirickson. The business address of Storie Partners L.P. is: c/o Mr.
Steven Ledger, One Bush Street, Suite 1350, San Francisco, California 94104.
(17) Includes 1,250,000 shares of Common Stock acquired pursuant to the Offer
and 3,533,411 shares of Common Stock into which Sprint's 4,102,941 shares of
Convertible Preferred Stock would have been convertible on the Closing Date.
In addition, Sprint may be deemed to be a member of a group with certain
Company stockholders who are parties to the Agreement to Vote and Tender
Stock covering 3,989,114 Shares, and a member of a group with certain other
Company stockholders who are parties
70
<PAGE>
to the Agreement to Vote covering 2,950,382 Shares, and thus may be viewed
as sharing voting and dispositive power over those Shares for these
purposes. As a result of membership in such groups, for purposes hereof,
Sprint may be deemed to share beneficial ownership of an aggregate of
6,939,496 Shares (representing 57.8% of the outstanding Shares) of Common
Stock subject to such agreements. Sprint may also be deemed to be a member
of a group with certain stockholders in those two groups who are parties to
the Stockholders' Agreement covering a total of 5,394,996 Shares included
among the above number of Shares. Sprint's address is 2330 Shawnee Mission
Parkway, Westwood, Kansas 66205. See "Description of the Offer" and
"Description of Certain Ancillary Agreements--Stockholders' Agreement."
(18) Includes (i) options and warrants to purchase 725,551 shares of Common
Stock, (ii) 368,746 shares of Common Stock owned by family members or
affiliates of certain members of the group, (iii) options and warrants held
by family members or affiliates of certain members of the group to purchase
87 shares of Common Stock, and (iv) up to 391,515 shares of Common Stock
issuable upon the conversion of outstanding indebtedness held by UUNET, of
which Mr. Sidgmore serves as Chief Executive Officer and a director.
71
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected historical financial information has been derived
from historical financial statements of the Company audited by Price Waterhouse
LLP, independent accountants, and should be read in conjunction with such
historical financial statements and the notes thereto, which balance sheets at
December 31, 1996 and 1997 and the related statements of operations and of cash
flows for the three years ended December 31, 1997 and notes thereto of the
Company appear elsewhere in this Proxy Statement/ Prospectus. See "Available
Information."
<TABLE>
<CAPTION>
INCEPTION
(MAY 26, 1994)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ---------------------------------
1994 1995 1996 1997
--------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUES:
Recurring revenues........................................... $ 53 $ 2,422 $ 26,879 $ 72,943
Other revenues............................................... 58 606 5,624 6,231
------ --------- ---------- ----------
Total revenues........................................... 111 3,028 32,503 79,174
OPERATING COSTS AND EXPENSES:
Cost of recurring revenues................................... 4 1,055 18,462 37,974
Cost of other revenues....................................... 12 349 2,699 3,401
Sales and marketing.......................................... 37 3,711 15,258 21,020
General and administrative................................... 168 2,062 10,534 14,333
Operations and member support................................ 38 1,869 15,808 30,900
------ --------- ---------- ----------
259 9,046 62,761 107,628
------ --------- ---------- ----------
Loss from operations........................................... (148) (6,018) (30,258) (28,454)
Interest expense............................................... -- (136) (1,041) (2,099)
Interest income................................................ -- 34 150 637
------ --------- ---------- ----------
Net loss................................................. $ (148) $ (6,120) $ (31,149) $ (29,916)
------ --------- ---------- ----------
------ --------- ---------- ----------
Basic and diluted net loss per share......................... $ (0.10) $ (1.59) $ (5.13) $ (2.99)
------ --------- ---------- ----------
------ --------- ---------- ----------
Weighted average shares outstanding.......................... 1,550 3,837 6,069 10,001
OTHER OPERATING DATA:
EBITDA (1)................................................... $ (141) $ (5,713) $ (26,105) $ (19,077)
Cash flows from:
Operating activities....................................... $ (146) $ (3,643) $ (16,222) $ (21,290)
Investing activities....................................... $ (97) $ (4,266) $ (18,361) $ (16,095)
Financing activities....................................... $ 243 $ 8,199 $ 38,286 $ 49,842
Subscriber count............................................. 3,000 29,000 227,000 420,000
Number of employees.......................................... 9 175 593 785
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C> <C>
1994 1995 1996 1997
--------- --------- ---------- ---------
BALANCE SHEET DATA
Cash and cash equivalents............................................. $ -- $ 290 $ 3,993 $ 16,450
Total assets.......................................................... 186 4,874 27,119 46,887
Long-term debt........................................................ -- 355 6,088 8,218
Total liabilities..................................................... 89 4,584 34,367 40,812
Accumulated (deficit)................................................. (148) (5,007) (36,156) (66,072)
Stockholders' equity (deficit)........................................ 97 290 (21,261) 6,075
Book value per share.................................................. 0.06 0.08 (3.50) 0.61
</TABLE>
- ------------------------
(1) Represents earnings (loss) before depreciation and amortization, interest
income and expense and income tax expense. EBITDA is not determined in
accordance with generally accepted accounting principles, is not indicative
of cash used by operating activities and should not be considered in
isolation or as an alternative to, or more meaningful than measures of
performance determined in accordance with generally accepted accounting
principles.
72
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
give effect to the acquisition by Newco of the Sprint Internet Passport business
("SIP") of Sprint in a transaction to be accounted for as a purchase. The
unaudited pro forma balance sheet is based on the balance sheet of the Company
included elsewhere in this Proxy Statement/Prospectus and the assets acquired
and liabilities assumed from SIP and Sprint and has been prepared to reflect the
acquisition by Newco of SIP as of December 31, 1997. The unaudited statement of
operations is based on the statement of operations of the Company and the
statement of revenues and direct expenses of SIP appearing elsewhere in this
Proxy Statement/Prospectus, and combines the results of operations of the
Company and of SIP for the year ended December 31, 1997 as if the acquisition
occurred on January 1, 1997. These unaudited pro forma financial statements
should be read in conjunction with the historical statement of revenues and
direct expenses and notes thereto of SIP and historical financial statements and
notes thereto of the Company both included elsewhere in this Proxy
Statement/Prospectus. The historical statement of revenues and direct expenses
of SIP is not necessarily indicative of the financial condition or results of
operations of such operations on a prospective basis because of the omission of
various operating expenses from such presentation and the change in the nature
and scope of such business as it will be operated by Newco.
The purchase price paid by Newco will consist of approximately 4.1 million
shares of Convertible Preferred Stock. The Convertible Preferred Stock has been
valued at $135,000,000. In exchange for the Convertible Preferred Stock, the
Company will obtain SIP's customer base of approximately 130,000 members, cash
of $23,750,000 from Sprint, and Sprint will provide access to $100 million in
convertible debt financing. Sprint and Newco have also entered into a Marketing
Agreement and Newco will obtain access to Sprint's data network. Newco is
acquiring no other assets of SIP or Sprint. Accordingly, the purchase price will
be allocated to the cash and intangible assets acquired. For purposes of this
pro forma information, the purchase price has been allocated to cash and
intangible assets. The excess of the purchase price over the fair value of the
assets acquired has been allocated to goodwill. The final allocation may differ
from that used in the unaudited pro forma condensed combined financial
statements. The acquisition will be accounted for using the purchase method.
Sprint began offering Internet access in the fourth quarter of 1996 and
reports this operation within its Emerging Businesses Segment (the "Group").
Sprint maintains the financial information relative to the Internet subscribers
in the Group. Sprint maintains revenue and direct operating expense information
separately within the Group. Direct operating expenses include cost of services
and products, selling, general and administrative expense, and depreciation
expense. It however, does not separately maintain and account for other costs
and expenses to operate this business. Newco is unable to determine or estimate
these costs on a historical and pro forma basis. In addition, Sprint does not
separately maintain and account for all assets used in the individual business.
Such assets, primarily network related, are recorded in the other businesses of
Sprint and used by the other divisions of Sprint, in addition to the Group.
73
<PAGE>
NEWCO
PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
EARTHLINK ACQUIRED AND
NETWORK, LIABILITIES PRO FORMA
INC. ASSUMED COMBINED
------------ ------------ -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Cash and cash equivalents............................................. $ 16,450 $ 23,750[a] $ 40,200
Restricted short-term investment...................................... 1,250 1,250
Accounts receivable, net.............................................. 2,520 2,520
Prepaid expenses...................................................... 1,109 1,109
Other assets.......................................................... 753 753
------------ ------------ -----------
Total current assets................................................ 22,082 23,750 45,832
Other long-term assets................................................ 449 449
Property and equipment, net........................................... 23,398 23,398
Intangibles, net...................................................... 958 119,718[b] 120,676
------------ ------------ -----------
$ 46,887 $ 143,468 $ 190,355
------------ ------------ -----------
------------ ------------ -----------
Trade accounts payable................................................ $ 6,472 $ 6,472
Accrued payroll and related expenses.................................. 2,316 2,316
Other accounts payable and accrued liabilities........................ 3,717 $ 8,468[c] 12,185
Current portion of capital lease obligations.......................... 7,112 7,112
Notes payable......................................................... 9,387 9,387
Deferred Revenue...................................................... 3,590 3,590
------------ ------------ -----------
Total current liabilities........................................... 32,594 8,468 41,062
Long-term debt........................................................ 8,218 8,218
------------ ------------ -----------
Total liabilities................................................. 40,812 8,468 49,280
------------ ------------ -----------
Stockholders' equity (deficit)
Preferred stock..................................................... 41[d] 41
Common stock........................................................ 112 112
Additional paid-in capital.......................................... 70,942 134,959[d] 205,901
Warrants to purchase common stock................................... 1,093 1,093
Accumulated deficit................................................. (66,072) (66,072)
------------ ------------ -----------
Total stockholders' equity (deficit).................................. 6,075 135,000 141,075
------------ ------------ -----------
$ 46,887 $ 143,468 $ 190,355
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
74
<PAGE>
NEWCO
PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET
Pro forma adjustments are as follows:
a. This adjustment reflects the cash acquired of $23,750,000.
b. This adjustment reflects the fair value of the intangible assets
acquired consisting of a customer base of $65,000,000, intangible assets
related to Sprint's provision of customers and the co-branding feature of
the Marketing Agreement of $20,000,000 and the excess of consideration over
the fair value of assets acquired totaling $34,718,000.
c. Represents incremental acquisition costs directly attributable to the
transactions consisting of primarily investment banking, legal and
accounting professional fees.
d. These adjustments reflect the issuance of approximately 4.1 million
shares of Convertible Preferred Stock in connection with the transactions
contemplated by the Investment Agreement at estimated fair value. The
Convertible Preferred Stock will pay dividends for the first five years in
the form of increases in its Liquidation Value ("Liquidation Accretion
Dividends"), at a rate of 3% of the Liquidation Value. Thereafter, the
Convertible Preferred Stock will pay a cash dividend of 3% for 15 years
increasing from 8% to 12% in years 21 through 23.
75
<PAGE>
NEWCO
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIP
EARTHLINK REVENUES AND
NETWORK, DIRECT PRO FORMA PRO FORMA
INC. EXPENSES ADJUSTMENTS COMBINED
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Recurring revenues................................. $ 72,943 $ 72,943
Other revenues..................................... 6,231 6,231
Net operating revenues............................. $ 14,489 14,489
------------ ------------ ----------- -----------
Total revenues................................... 79,174 14,489 93,663
Operating costs and expenses:
Cost of recurring revenues......................... 37,974 37,974
Cost of other revenues............................. 3,401 3,401
Cost of services................................... 51,313 51,313
Sales and marketing................................ 21,020 21,020
General and administrative......................... 14,333 $ 69,728[a] 84,061
Operations and member support...................... 30,900 30,900
Selling, general and administrative................ 13,099 13,099
Depreciation....................................... 6,070 (6,070)[b]
Other.............................................. 3,404 3,404
------------ ------------ ----------- -----------
107,628 73,886 63,658 245,172
------------ ------------ ----------- -----------
Loss from operations............................... (28,454) (59,397) (63,658) (151,509)
Interest expense................................... (2,099) (2,099)
Interest income.................................... 637 637
------------ ------------ ----------- -----------
Net loss......................................... (29,916) (59,397) (63,658) (152,971)
Deductions for dividends on convertible preferred
stock.............................................. 9,355[c] 9,355
------------ ------------ ----------- -----------
Net loss attributable to common stockholders..... $ (29,916) $ (59,397) $ (73,013) $ (162,326)
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Basic and diluted net loss per share............... $ (2.99) $ (16.23)
------------ -----------
------------ -----------
Weighted average shares outstanding................ 10,001 10,001[d]
------------ -----------
------------ -----------
</TABLE>
76
<PAGE>
NEWCO
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
Pro Forma adjustments are as follows:
a. This entry reflects the amortization of intangible assets on a
straight-line basis as follows: (i) customer base amortized over 18 months,
(ii) the Marketing Agreement amortized over two periods: (A) five years,
which is the life of the portion of the contract related to Sprint's
provision of customers; and (B) ten years, which is the overall contract
life relative to the co-branding feature, and (iii) the excess of purchase
price over net assets acquired amortized over 18 months. Additional costs to
provide service to the acquired members are not considered to be material.
b. Newco will acquire no depreciable assets of SIP. This adjustment
eliminates the depreciation expense recorded by SIP.
c. This adjustment reflects the Liquidation Dividends based upon a 3%
Liquidation Value accretion dividend ($3,736,000) and the accretion of a
dividend related to the beneficial conversion feature in accordance with
EITF Topic No. D-60 based upon the rate at which the preferred stock becomes
convertible ($5,619,000).
d. Pro forma per share data are based on the number of shares of the
Company's Common Stock and common equivalent shares that would have been
outstanding had SIP been acquired on January 1, 1997, but excludes any
shares to be purchased by Sprint in the Offer. As of December 31, 1997,
EarthLink had reserved for issuance 1,688,611 shares upon the exercise of
outstanding employee stock options, 391,515 shares reserved for issuance
pursuant to its Convertible Note issued to UUNET Technologies, Inc. and
887,647 reserved for issuance upon exercise of outstanding warrants. These
common stock equivalents and 4.1 million shares of the Convertible Preferred
Stock have been excluded from the calculation as their effect is
antidilutive. The pro forma per share data also reflects the exchange on a
one for one basis of common stock between the Company and Newco upon
consummation of the Merger.
77
<PAGE>
INFORMATION ABOUT SPRINT
GENERAL
Sprint is a Kansas corporation with its principal executive offices at 2330
Shawnee Mission Parkway, Westwood, Kansas 66205. Sprint is a diversified
telecommunications holding company providing domestic and international voice,
video and data communications through its subsidiaries. Sprint has two major
business divisions: local telephone operations and long-distance operations.
Complementary businesses include distribution of telecommunications equipment
and telephone directory publishing. Sprint's affiliates operate local exchange
telephone systems serving more than 7 million access lines in 19 states.
Sprint is a 40% partner in Sprint Spectrum Holding Company, L.P. ("Sprint
PCS"), a partnership with Tele-Communications, Inc., Comcast Corporation and Cox
Communications, Inc. Sprint PCS is building the nation's first single
technology, 100% digital, state-of-the-art wireless network to provide personal
communication services ("PCS") across the United States. Sprint is also a
partner in Global One, a joint venture with Deutsche Telekom Ag and France
Telecom to provide seamless global telecommunications services to business,
residential and carrier markets worldwide. Sprint is a one-third partner in
Global One's operating group serving Europe (excluding France and Germany), and
is a 50% partner in Global One's operating group for the worldwide activities
outside the United States and Europe.
Sprint's principal emerging businesses include consumer Internet access
services, competitive local exchange carrier services, international development
activities (outside the scope of Global One), provision of PCS in markets with
licenses controlled by Sprint, and integration, management and support services
for computer network (Paranet).
If the Offer is consummated, Sprint L.P. will assign its SIP Subscribers at
the Closing to the Company, together with certain other consideration, in
exchange for the acquisition of 4,102,941 shares of Convertible Preferred Stock.
Additional information concerning Sprint and its subsidiaries is contained
in Sprint's Annual Report on Form 10-K for the year ended December 31, 1997. The
audited financial statements of Sprint's Consumer Interest Access Services
(referred to herein as Sprint Internet Passport(SM) services) begin at page F-1
of this Proxy Statement/Prospectus.
78
<PAGE>
DESCRIPTION OF THE CAPITAL STOCK OF NEWCO
GENERAL
Pursuant to the Certificate of Incorporation of Newco, Newco is authorized
to issue a total of 75 million shares of capital stock, consisting of 50 million
shares of common stock, $.01 par value per share (the Newco Common Stock), and
25 million shares of preferred stock, $.01 par value per share (the "Preferred
Stock").
COMMON STOCK
Holders of Newco Common Stock are entitled to one vote per share on all
matters on which the holders of common stock are entitled to vote. Subject to
the preferential rights of holders of Preferred Stock, including the Convertible
Preferred Stock, holders of Newco Common Stock are entitled to receive dividends
as may be declared by the Board of Directors from time to time out of funds
legally available therefor. Holders of Newco Common Stock have no cumulative
voting rights, preemptive, conversion, redemption or sinking fund rights, In the
event of a liquidation, dissolution or winding-up of Newco, holders of shares of
Newco Common Stock are entitled to share equally and ratably in the assets of
Newco, if any, remaining after payment of all debts and liabilities of Newco and
the liquidation or other preferences of any then-outstanding shares of Preferred
Stock, including the Convertible Preferred Stock. The Newco Common Stock to be
issued to holders of the Company Common Stock in the Merger will be, when
issued, fully paid and nonassessable. The rights, preferences and privileges of
holders of shares of Newco Common Stock are subject to those of any series of
Preferred Stock which Newco may issue from time to time in the future.
PREFERRED STOCK
The Board of Directors of Newco is authorized by its Certificate of
Incorporation to provide for the issuance, without stockholder approval, of
shares of Preferred Stock in series, and to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof. Any Preferred Stock so
issued may rank senior to the Newco Common Stock with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding up of Newco, or
both. In addition, any such shares of Preferred Stock may have voting rights.
The issuance of Preferred Stock, as established by the Board of Directors,
could, among other things, adversely affect the voting power of the holders of
Common Stock and, under certain circumstances, make it more difficult for a
third party to gain control of the Company, discourage bids for the Common Stock
(at a premium or otherwise), or otherwise adversely affect the market price of
the Company Common Stock.
The Convertible Preferred Stock will be established as of the Effective Time
of the Merger pursuant to the Certificate of Designation the proposed form of
which is attached hereto as Appendix C, to be filed with the Secretary of State
of Delaware on such date. See "Company Stockholder Vote Matters --Proposal No.
2--Approval for the Issuance of Convertible Preferred Stock"
CERTAIN CHARTER AND BYLAW PROVISIONS
Following the consummation of the Merger, Newco will be subject to the
"business combination" statute of the DGCL. This statute prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner, such as the approval of
a majority of certain members of the Board of Directors. The term "business
combination" includes mergers and stock and asset sales. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years, did own) 15% or more of the corporation's voting stock. The
effect of this statute could, among other things, make it
79
<PAGE>
more difficult for a third party to gain control of Newco discourage bids for
the Newco Common Stock at a premium or otherwise adversely affect the market
price of the Newco Common Stock.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY; INDEMNIFICATION
Newco has included in its Certificate of Incorporation provisions that limit
the personal liability of its officers and directors for monetary damages for
breach of their fiduciary duty of directors, except for liability that cannot be
eliminated under the DGCL. The Certificate of Incorporation provides that, to
the fullest extent provided by the DGCL, directors of the Company will not be
personally liable for monetary damages for breach of their fiduciary duty as
directors. The DGCL does not permit a provision in a corporation's certificate
of incorporation that would eliminate such liability (i) for any breach of their
duty of loyalty to Newco or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) for any unlawful payment of a dividend or unlawful stock repurchase or
redemption, as provided in Section 174 of the DGCL, or (iv) for any transaction
from which the director derived an improper personal benefit.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or recission based on a director's
breach of his or her duty of care. The provisions described above apply to an
officer of a corporation only if he or she is a director of such corporation and
is acting in his or her capacity as director, and do not apply to the officers
of the corporation who are not directors.
Newco's Bylaws provide that, to the fullest extent permitted by the DGCL,
Newco may indemnify its directors, officers and employees. The Bylaws further
provide that Newco may similarly indemnify its other employees and agents. In
addition, Newco anticipates that each director will enter into an
indemnification agreement with Newco pursuant to which Newco will indemnify such
director to the fullest extent permitted by the DGCL. At present, there is no
pending litigation or proceeding involving a director or officer of Newco in
which indemnification is required or permitted, and Newco is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the Boards of Directors
of the Company knows of no matters that will be presented for consideration at
the Special Meeting other than as described in this Proxy Statement/Prospectus.
However, if any other matters shall properly come before the Special Meeting or
any adjournments thereof and be voted upon, the enclosed respective proxies
shall be deemed to confer discretionary authority to the individuals named as
proxies therein to vote the shares represented by such proxies as to any such
matters.
A representative of Price Waterhouse LLP, the principal accounting firm of
the Company for the current year and for its most recently completed fiscal
year, is expected to attend the Special Meeting and, if he or she desires to do
so, will have the opportunity to make a statement and will be available to
respond to appropriate questions.
EXPERTS
The financial statements as of December 31, 1997 and 1996 and for each of
the three years in the period ended December 31, 1997 included in this Proxy
Statement/Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The statement of revenue and direct expenses of Consumer Internet Access
Services of Sprint for the year ended December 31, 1997, appearing in this Proxy
Statement/Prospectus and in the Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the shares of Newco Common Stock to be issued in the Merger
and certain tax aspects of the Merger will be passed upon by Hunton & Williams,
Atlanta, Georgia.
80
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
EARTHLINK NETWORK, INC.
Report of Independent Accountants.......................................................................... F-2
Balance Sheet as of December 31, 1996 and 1997............................................................. F-3
Statement of Operations for the three years ended December 31, 1997........................................ F-4
Statement of Stockholders' Equity (Deficit) for the three years ended December 31, 1997.................... F-5
Statement of Cash Flows for the three years ended December 31, 1997........................................ F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of EarthLink Network, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of EarthLink
Network, Inc. at December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Costa Mesa, California
January 29, 1998
F-2
<PAGE>
EARTHLINK NETWORK, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1997
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 3,993 $ 16,450
Restricted short-term investment........................................................ 1,087 1,250
Accounts receivable, net of allowance of $781,000 and $165,000 at December 31, 1996 and
1997, respectively.................................................................... 1,725 2,520
Prepaid expenses........................................................................ 885 1,109
Other assets (Note 5)................................................................... 1,383 753
---------- ----------
Total current assets................................................................ 9,073 22,082
Other long-term assets (Note 5)........................................................... 329 449
Property and equipment, net (Notes 1 and 4) 17,401 23,398
Intangibles, net (Notes 3, 6 and 9)....................................................... 316 958
---------- ----------
$ 27,119 $ 46,887
---------- ----------
---------- ----------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable.................................................................. $ 11,207 $ 6,472
Accrued payroll and related expenses.................................................... 1,469 2,316
Other accounts payable and accrued liabilities.......................................... 2,061 3,717
Current portion of capital lease obligations (Note 11).................................. 3,582 7,112
Notes payable (Note 7).................................................................. 7,950 9,387
Deferred revenue........................................................................ 2,010 3,590
---------- ----------
Total current liabilities 28,279 32,594
Long-term debt (Note 11).................................................................. 6,088 8,218
---------- ----------
Total liabilities................................................................... 34,367 40,812
Commitments and contingencies (Note 11)
Mandatorily redeemable convertible preferred stock (Note 8)............................... 14,013 --
Stockholders' equity (deficit)
Preferred stock, $0.01 par value, 10,000,000 shares authorized, 2,727,273 and nil shares
outstanding as redeemable preferred stock (Note 8).................................... -- --
Common stock, $0.01 par value, 50,000,000 shares authorized, 6,022,724 and 11,250,372
shares issued and outstanding (Note 8).................................................... 60 112
Additional paid-in capital.............................................................. 14,236 70,942
Warrants to purchase common stock (Note 9).............................................. 599 1,093
Accumulated deficit..................................................................... (36,156) (66,072)
---------- ----------
Total stockholders' equity (deficit)................................................ (21,261) 6,075
---------- ----------
$ 27,119 $ 46,887
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
EARTHLINK NETWORK, INC
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Revenues:
Recurring revenues........................................................... $ 2,422 $ 26,879 $ 72,943
Other revenues............................................................... 606 5,624 6,231
--------- ---------- ----------
Total revenues............................................................. 3,028 32,503 79,174
Operating costs and expenses:
Cost of recurring revenues................................................... 1,055 18,462 37,974
Cost of other revenues....................................................... 349 2,699 3,401
Sales and marketing.......................................................... 3,711 15,258 21,020
General and administrative................................................... 2,062 10,534 14,333
Operations and member support................................................ 1,869 15,808 30,900
--------- ---------- ----------
9,046 62,761 107,628
--------- ---------- ----------
Loss from operations......................................................... (6,018) (30,258) (28,454)
Interest expense............................................................. (136) (1,041) (2,099)
Interest income.............................................................. 34 150 637
--------- ---------- ----------
Net loss................................................................... $ (6,120) $ (31,149) $ (29,916)
--------- ---------- ----------
--------- ---------- ----------
Basic and diluted net loss per share (Note 1).................................. $ (1.59) $ (5.13) $ (2.99)
--------- ---------- ----------
--------- ---------- ----------
Weighted average shares outstanding (Note 1)................................... 3,837 6,069 10,001
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
EARTHLINK NETWORK, INC
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL SHAREHOLDERS'
---------------------- PAID-IN WARRANTS ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL ISSUED DEFICIT (DEFICIT)
--------- ----------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance at December 31, 1994...................... 2,941 $ 29 $ 147 $ 69 $ (148) $ 97
Issuance of Common Stock.......................... 2,116 22 6,236 -- -- 6,258
Reclassification of S Corporation accumulated
deficit.......................................... -- -- (1,261) -- 1,261 --
Warrants issued for lease guarantee (Note 9)...... -- -- -- 50 -- 50
Warrants issued for non-competition agreement
(Note 9)......................................... -- -- -- 5 -- 5
Net loss.......................................... -- -- -- -- (6,120) (6,120)
--------- ----- ----------- ----------- ------------ --------------
Balance at December 31, 1995...................... 5,057 51 5,122 124 (5,007) 290
Issuance of Common Stock.......................... 923 9 8,651 -- -- 8,660
Issuance of Common Stock for services............. 43 -- 463 -- -- 463
Warrants issued in connection with equipment
leases and other financings (Note 9)............. -- -- -- 475 -- 475
Net loss.......................................... -- -- -- -- (31,149) (31,149)
--------- ----- ----------- ----------- ------------ --------------
Balance at December 31, 1996...................... 6,023 60 14,236 599 (36,156) (21,261)
Initial Public Offering, net of expenses.......... 2,000 20 22,766 22,786
Conversion of redeemable preferred stock into
common stock..................................... 1,364 13 14,000 -- -- 14,013
Conversion of debt to common stock................ 56 -- 725 -- -- 725
Underwriters over-allotment....................... 285 3 3,437 -- -- 3,440
Issuance of common stock in connection with
Private Placement................................ 1,460 15 15,394 -- -- 15,409
Issuance of Common Stock pursuant to exercise of
stock options.................................... 62 1 384 -- -- 385
Warrants issued in exchange for services (Note
9)............................................... -- -- -- 494 -- 494
Net loss.......................................... -- -- -- -- (29,916) (29,916)
--------- ----- ----------- ----------- ------------ --------------
Balance at December 31, 1997...................... 11,250 $ 112 $ 70,942 $ 1,093 $ (66,072) $ 6,075
--------- ----- ----------- ----------- ------------ --------------
--------- ----- ----------- ----------- ------------ --------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
EARTHLINK NETWORK, INC
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................................... $ (6,120) $ (31,149) $ (29,916)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization............................................... 305 4,153 9,377
Provision for doubtful accounts receivable.................................. -- 781 (615)
Issuance of Common Stock in exchange for professional services.............. -- 50 --
Issuance of Common Stock in exchange for termination of consulting
agreement................................................................. -- 413 --
Issuance of warrants in exchange for professional services.................. -- -- 494
Increase in accounts receivable............................................. (191) (2,288) (180)
(Increase) decrease in prepaid expenses and other assets.................... (141) (2,353) 202
Increase (decrease) in accounts payable and accrued liabilities............. 2,292 12,373 (2,232)
Increase in deferred revenue................................................ 212 1,798 1,580
--------- ---------- ----------
Net cash used in operating activities..................................... (3,643) (16,222) (21,290)
--------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment........................................... (2,766) (18,774) (14,528)
Purchase of restricited short-term investment................................. (1,500) (1,087) (200)
Liquidation of restricted short-term investment............................... -- 1,500 37
Purchase of member base....................................................... -- -- (1,404)
--------- ---------- ----------
Net cash used in investing activities..................................... (4,266) (18,361) (16,095)
--------- ---------- ----------
Cash flows from financing activities:
Proceeds from (payment of) line of credit 1,494 (1,494) 4,387
(Payment of) proceeds from notes payable...................................... (67) 7,950 (2,225)
Proceeds from capital lease obligations....................................... 556 11,348 10,544
Principal payments under capital lease obligations............................ (42) (2,191) (4,884)
Proceeds from issuance of mandatorily redeemable convertible preferred
stock....................................................................... -- 14,013 --
Proceeds from initial public offering......................................... -- -- 26,226
Proceeds from stock options exercised......................................... -- -- 385
Proceeds from private placements of Common Stock.............................. 6,258 8,660 15,409
--------- ---------- ----------
Net cash provided by financing activities................................. 8,199 38,286 49,842
--------- ---------- ----------
Net increase in cash and cash equivalents....................................... 290 3,703 12,457
Cash and cash equivalents, beginning of year.................................... -- 290 3,993
--------- ---------- ----------
Cash and cash equivalents, end of period........................................ $ 290 $ 3,993 $ 16,450
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
EarthLink Network, Inc. ("EarthLink" or the "Company") was organized on May
26, 1994 as a California corporation and reincorporated in 1996 as a Delaware
corporation. The Company is an Internet service provider that was formed to help
members derive meaningful benefits from the extensive resources of the Internet.
The Company has experienced operating losses since inception as a result of
efforts to build its network infrastructure and internal staffing, develop its
systems, and expand into new markets. The Company expects that it will continue
to incur net losses as it continues to expend substantial resources on sales and
marketing as it attempts to rapidly increase its market share. There can be no
assurance that the Company will achieve or sustain profitability or positive
cash flow from its operations.
REVENUES
Recurring revenues consists of monthly fees charged to members for Internet
access and other ongoing services from monthly Internet service and are
recognized over the period services are provided. Other revenues generally
represent one-time non-refundable set up fees. Such revenues are recorded as
earned.
CASH AND CASH EQUIVALENTS
All highly liquid investments with an original maturity of three months or
less at the date of acquisition are classified as cash equivalents.
ACCOUNTS RECEIVABLE AND DEFERRED REVENUES
Commencing in 1995, the Company began to bill for Internet service generally
one month in advance. Accordingly, these non-cancelable advanced billings are
included in both accounts receivable and deferred revenue.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
or credit risk consist principally of cash investments and trade receivables.
The Company's cash investment policies limit investments to short-term,
investment grade instruments. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of members comprising the
Company's member base.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful life of the assets, which is
generally three years for computers and computer related equipment and five
years for other non-computer furniture and equipment. Leasehold improvements are
amortized using the straight-line method over the shorter of their estimated
lives or the term of the lease, ranging from one to ten years.
F-7
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT UNDER CAPITAL LEASE
The Company leases certain of its data communications and other equipment
under capital lease agreements. The assets and liabilities under capital lease
are recorded at the lesser of the present value of aggregate future minimum
lease payments, including estimated bargain purchase options, or the fair value
of the assets under lease. Assets under capital lease are amortized over the
lesser of their estimated useful lives of three to five years or the term of the
lease.
INTANGIBLES
Intangible assets consist primarily of deferred financing and professional
service costs, prepaid lease guarantee costs, goodwill, rights to client lists
and a covenant not to compete. The costs assigned to intangible assets are being
amortized on a straight-line basis over the estimated useful lives of the
assets, which range from one to three years. The Company regularly reviews the
recoverability of intangible assets based on estimated undiscounted future cash
flows from operating activities compared with the carrying values of the
intangibles.
ADVERTISING AND CUSTOMER ACQUISITION COSTS
Advertising and customer acquisition costs are included in sales and
marketing. Such costs are expensed as incurred. Advertising expenses were
$937,000, $3.2 million and $5.1 million, respectively, for the three years ended
December 31, 1997.
INCOME TAXES
Income taxes are accounted for under the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting basis and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
NET LOSS PER SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share" (EPS) and Staff Accounting Bulletin (SAB) No. 98. SAB
No. 98 states that companies, such as EarthLink, that completed an initial
public offering ("IPO") within the past 5 years and incorporated the SAB No. 83
concept of "cheap stock" in determining pre-IPO EPS data must restate all EPS
data to conform to SFAS No. 128. Accordingly, all EPS data have been restated to
conform to SFAS No. 128. SFAS No. 128 requires a dual presentation of basic and
diluted EPS. Basic EPS represents the weighted average number of shares divided
into net income during a reported period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. However, the Company has not
included potential common stock in the calculation of EPS since inception as
such inclusion would have an anti-dilutive effect.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-8
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
COMMON STOCK BASED COMPENSATION
The Company continues to account for its employee stock based compensation
in accordance with the provisions of APB 25 and provides pro forma disclosures
in the notes to the financial statements (see note 9), as if the measurement
provisions of SFAS No. 123 had been adopted.
RECLASSIFICATION
Certain amounts in the prior year financial statements have been
reclassified to conform to current year presentation.
2. PURCHASE OF CERTAIN ASSETS FROM BECKEMEYER DEVELOPMENT TECHNOLOGIES
In order to recruit the principal shareholder of Beckemeyer Development
Technologies ("BDT") to serve as the Company's Vice President of Engineering, on
November 7, 1995, the Company agreed to purchase all fixtures, equipment, and
the client list of BDT for cash of $64,000. In addition to the above, the
principal shareholder was issued warrants to purchase 10,330 shares of the
Company's Common Stock at $4.84 per share as consideration for an agreement not
to compete for a two-year period. The value assigned to the warrants was $5,000
based upon an appraisal obtained by the Company. The warrants expire October 10,
2005. This purchase price was allocated to the assets acquired with the
remainder reflected as an intangible asset. At the time of purchase, BDT was not
material to the results of operations, financial position or customer base of
EarthLink.
3. PURCHASE OF CERTAIN ASSETS FROM INTERNET IN A MALL
In April 1997, the Company purchased the subscribers and related assets,
including accounts receivable related to the consumer dial-up Internet access
service of Internet in a Mall, a Tarzana, California based Internet access
provider. Under the terms of the agreement, as amended, the Company purchased
rights to approximately 28,000 subscriber accounts as of April 1997.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
--------- ----------
<S> <C> <C>
(IN THOUSANDS)
Data communications equipment.......................................... $ 11,464 $ 17,056
Office and other equipment............................................. 6,686 12,196
Leasehold improvements................................................. 646 5,013
Construction in progress............................................... 2,841 1,901
--------- ----------
21,637 36,166
Less accumulated depreciation and amortization......................... (4,236) (12,768)
--------- ----------
$ 17,401 $ 23,398
--------- ----------
--------- ----------
</TABLE>
F-9
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT (CONTINUED)
Property under capital lease, primarily data communications equipment
included above, aggregated $11,904,000, and $22,448,000 at December 31, 1996 and
1997, respectively. Included in accumulated depreciation and amortization are
amounts related to property under capital lease of $2,896,000 and $8,528,000 at
December 31, 1996 and 1997, respectively. Depreciation expense charged to
operations was $305,000, $3,924,000 and $8,531,000 in 1995, 1996, and 1997,
respectively, and included $56,000, $2,840,000 and $5,632,000, respectively,
pertaining to property under capital lease.
5. OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Deposits................................................................... $ 409 $ 789
Deferred offering costs.................................................... 804 --
Inventory.................................................................. 499 413
--------- ---------
$ 1,712 $ 1,202
--------- ---------
--------- ---------
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Deferred financing costs................................................... $ 347 $ 430
Rights to client lists..................................................... 10 1,414
Other...................................................................... 188 188
--------- ---------
545 2,032
Less accumulated amortization.............................................. (229) (1,074)
--------- ---------
$ 316 $ 958
--------- ---------
--------- ---------
</TABLE>
7. NOTES PAYABLE
In June 1996, the Company issued to 17 investors, 10% Promissory Notes
aggregating $2,950,000. Certain of the investors were directors and stockholders
of the Company. As described in Note 9, the Company issued warrants valued at
$116,000 to the note holders. The fair value of the warrants was recorded as
deferred financing costs and amortized as interest expense over the life of the
notes. Upon consummation of the Company's initial public offering on January 22,
1997, the holders of $725,000 of the 10% Promissory Notes converted their
indebtedness into 55,767 shares of Common Stock. In January 1997, the Company
repaid the $2,225,000 balance remaining on the 10% Promissory Notes.
The Company has a convertible note payable to UUNET Technologies, Inc.
("UUNET"). The $5 million Convertible Note was extended one year, and as such
the entire amount is due October 31, 1998, if not converted. The convertible
note will become due and payable immediately if the monthly amounts payable
under Company's Network Service Agreement with UUNET are less than $1.5 million
during any
F-10
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE (CONTINUED)
consecutive three months. The convertible note bears interest at 10.25% and is
convertible into a maximum of 391,515 shares of Common Stock at a conversion
price of $12.88 per share.
8. CAPITAL STOCK AND MANDATORILY REDEEMABLE EQUITY SECURITIES
COMMON STOCK
The Company issued 367,155 shares of Common Stock at $0.82 per share,
827,085 shares of Common Stock at $1.81 per share and 921,745 at $4.84 per share
on March 10, 1995, June 19, 1995 and October 31, 1995, respectively. As a result
of these placements, the Company raised, in the aggregate $6,258,000 during
1995. The Company issued 45,485 shares of Common Stock at $4.84 per share and
25,000 shares of Common Stock at $4.84 per share on January 18, 1996 and March
20, 1996, respectively. On May 6, 1996, the Company issued 852,460 shares of
Common Stock at $9.76 per share in a private placement. As a result of these
placements, EarthLink raised, in the aggregate, $8,660,000 during 1996. On
September 19, 1997, the Company closed a private placement of 1,459,759 shares
of its unregistered restricted Common Stock. Net proceeds from the offering were
approximately $15.4 million.
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
On September 10, 1996, the Company issued 2,727,273 shares of its Series A
Redeemable Convertible Preferred Stock to investors including among others,
certain directors, stockholders and the Underwriter associated with the
Company's initial public offering and certain of its associates for $15,000,000.
Stock issuance costs of $987,000 have been charged to redeemable convertible
preferred stock. Each two shares of the Series A Convertible Preferred Stock was
automatically converted into one share of Common Stock upon consummation of the
initial public offering of the Company's common stock on January 22, 1997.
INITIAL PUBLIC OFFERING
On January 22, 1997 the Company commenced its initial public offering. The
offering consisted of 2,000,000 shares of common stock issued at $13 per share.
Net proceeds to the Company were approximately $22.8 million. Upon consummation
of the offering 2,727,273 shares of the Company's Series A Convertible Preferred
Stock were converted to 1,363,624 shares of Common Stock. In February 1997, the
Underwriter exercised its over-allotment option and purchased 284,750 shares at
the initial public offering price of $13.00. Net proceeds to the Company were
approximately $3.4 million.
COMMON STOCK ISSUANCES FOR OTHER THAN CASH
In May 1996, the Company issued 5,122 shares of Common Stock at $9.76 per
share, to a sub-contractor in lieu of cash for services provided to the Company.
In September 1996, the Company issued 37,500 shares of Common Stock at $11.00
per share as consideration for the termination of a consulting agreement.
F-11
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
1995 STOCK OPTION PLAN
In September 1995, the Company established the EarthLink Network 1995 Stock
Option Plan (the "1995 Plan"). The 1995 Plan provides for the grant of incentive
stock options to purchase up to 1,250,000 shares of common stock to employees of
the Company and non-qualified stock options to employees, officers, directors
and consultants of the Company. The 1995 Plan is administered by a committee
appointed by the Board which determines the terms of the options granted,
including the exercise price, the number of shares subject to option, and the
option vesting period. The exercise price of all options granted under the plan
must be at least 100% of the fair market value on the date of grant. Options
generally vest in equal quarterly increments over a five year period. As of
December 31, 1997, 87,432 options remain available for issuance under the 1995
Incentive Stock Option Plan.
DIRECTORS STOCK OPTION PLAN
In September 1995, the Company established the EarthLink Directors Stock
Option Plan (the "Directors Plan"). The Directors Plan as amended and restated
in December 1996, provides for the grant of options to purchase 62,500 shares of
Common Stock to directors who do not also serve as employees of the Company and
do not beneficially own, nor are employees, directors or officers of any entity
which owns 5% or more of the outstanding shares of the Company's capital stock.
Under the Directors Plan, grants of options to purchase 10,000 and 2,500 shares
of Common Stock are automatically made to each non-management director at such
time as the person first becomes a member of the Board of Directors and at the
beginning of each fiscal year, respectively. Options generally vest in equal
quarterly increments over a five year period. As of December 31, 1997, there
were no outstanding options to purchase shares of Common Stock outstanding under
the Directors Plan.
NON-QUALIFIED OPTION GRANTS
In addition to the options granted under the plans described above, the
Company granted non-qualified stock options to certain employees, officers and
directors. Non-qualified options generally have a maximum term of ten years and
generally vest in equal quarterly increments over a five-year period.
VALUE OF OPTIONS GRANTED TO EMPLOYEES
For disclosure purposes the fair value of all stock options granted is
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions used for stock options granted in 1997: no annual
dividends, expected volatility of 69%, risk-free interest rate of 6.49%, and
expected life of 6.6 years. For 1995 and 1996, the fair value of each option
grant is estimated on the date of grant using the minimum value method with the
following assumptions used for grants during both periods: dividend yield of
0.0%, risk free interest rate of 5.83% and expected option term of 10 years.
F-12
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
Had compensation cost been determined on the basis of fair value pursuant to
SFAS No. 123, net loss and net loss per share would have been increased as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Net loss
As reported..................................................................... $ 6,120 $ 31,149 $ 29,916
--------- --------- ---------
--------- --------- ---------
Pro forma....................................................................... $ 6,145 $ 31,477 $ 30,737
--------- --------- ---------
--------- --------- ---------
Basic and diluted net loss per share
As reported..................................................................... $ 1.59 $ 5.13 $ 2.99
--------- --------- ---------
--------- --------- ---------
Pro forma....................................................................... $ 1.60 $ 5.19 $ 3.07
--------- --------- ---------
--------- --------- ---------
</TABLE>
WARRANTS
The Company has issued to certain Board members, consultants, lessors,
creditors and others, warrants to purchase shares of the Company's Common Stock.
In September 1995, certain stockholders guaranteed a $500,000 lease for
networking equipment. The Company issued warrants to purchase 50,000 shares of
Common Stock at $1.81 per share, valued at $25,000, based upon an appraisal
obtained by the Company, as consideration for this guarantee. These warrants
expire August 31, 2000.
In December 1995, certain stockholders provided the Company with a $250,000
Irrevocable Standby Letter of Credit as a performance guarantee for a real
estate lease. In conjunction with this transaction the Company issued warrants
to purchase 50,000 shares at $4.84 per share, valued at $25,000, based upon an
appraisal obtained by the Company. These warrants expire December 1, 2000.
F-13
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
In January 1996, certain stockholders guaranteed a $1,500,000 lease for
networking equipment. The Company issued warrants to purchase 100,000 shares of
Common Stock at $4.84 per share. The fair value of the warrants has been
reflected in intangible assets. These warrants expire January 11, 2001.
In January 1996 the Company issued warrants to purchase 100,000 shares of
Common Stock at $4.84 to Board members. The warrants vest quarterly over five
years. As these warrants were issued for service on the Board of Directors they
are accounted for under APB 25 and as such are included in the summary of
non-qualified options and are not included in the summary of warrant grants.
In January 1996, LINC Capital Partners, Inc. ("LINC") provided a $1,500,000
lease line for equipment. The Company issued warrants to LINC to purchase 50,000
shares of Common Stock at $4.84 per share. The fair value of the warrants has
been reflected as deferred financing costs. These warrants expire January 18,
2006.
In February 1996, Boston Financial & Equity Corporation ("Boston Financial")
provided a $700,000 lease line for equipment. The Company issued warrants to
Boston Financial to purchase 5,000 shares of Common Stock at $9.76 per share.
The fair value of the warrants has been reflected as deferred financing costs.
These warrants expire February 15, 2006.
In May 1996, the Company issued warrants to purchase 45,477 shares of Common
Stock at $9.76 per share to various lessors in return for lease lines and other
services to the Company. The fair value of the warrants has been reflected as
deferred financing costs. The warrants expire on May 10, 2006.
In May 1996, in connection with the amendment and restatement of the UUNET
Agreement, the Company agreed to issue warrants to purchase 10,000 shares of
Common Stock at an exercise price of $20.00 per share. The fair value of the
warrants has been reflected as deferred financing costs.
In connection with the issuance of 10% Promissory Notes aggregating
$2,950,000, the Company issued to the lenders warrants to purchase an aggregate
of 98,340 shares of Common Stock at an exercise price of $11.00 per share, as
adjusted. The fair value of the warrants has been reflected as deferred
financing costs.
In connection with the execution of the PSINet, Inc. ("PSINet") agreement in
July 1996, (Note 11) the Company issued warrants to purchase 100,000 shares of
Common Stock at an exercise price of $20.00 per share. The fair value of the
warrants has been reflected as deferred financing costs.
In connection with the private placement of Series A Convertible Preferred
Stock, described above, the Company granted to certain purchasers of the Series
A Convertible Preferred Stock warrants to purchase 100,000 shares of common
stock at $11.00 per share.
WARRANTS ISSUED FOR SERVICES
In May 1996, the Company entered into an agreement with NMC, a producer of
infomercials and commercials, pursuant to which NMC agreed to produce and
broadcast commercials for EarthLink's services in exchange for Warrants. Upon
completion of the infomercial in April 1997 the Company issued warrants to NMC
to purchase 50,000 shares of Common Stock, having an exercise price of $9.76 per
share. In September 1997, the parties verbally agreed to rescind the agreement.
The rescission agreement included the return of the 50,000 warrants and the
cancellation of any future obligations of either party. However, the rescission
agreement was never executed and thus may be considered non-operative. The fair
F-14
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
value of the warrants, $76,000, has been recorded as prepaid advertising and
will be expensed upon airing of the infomericals.
In January 1997 and October 1997, the Company issued warrants to purchase
6,000 and 25,000 shares, respectively, of the Company's Common Stock to certain
consultants. The respective exercise prices of the warrants were $13.00 and
$17.75. The fair value of the warrants is reflected as prepaid consulting fees
and amortized ratably over the life of the consulting agreement. Consulting
expense recorded with respect to warrants issued to consultants was $23,340
during 1997.
In September 1996 the Company issued warrants to purchase 7,500 shares of
the Company's common stock at $11.00 per share to each of the three members of
the Company's Technology Advisory Council. The warrants vest quarterly over two
years. The fair value of the warrants is reflected as deferred professional
services expense and amortized ratably over the member's two year term of
service in the Technology Advisory Council.
On March 1997 and October 1997, the Company issued warrants to purchase
7,500 shares of the Company's common stock to each of two new members of the
Company's Technology Advisory Council. The warrants have an exercise price of
$10.50 per share and $17.75 per share, respectively, and vest quarterly over two
years. The fair value of the warrants is reflected as deferred professional
services expense and amortized ratably over the member's two year term of
service in the Technology Advisory Council.
Following is a summary of stock option and warrant activity during the three
years ended December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON STOCK
------------------------------------ WEIGHTED
INCENTIVE AVERAGE
STOCK NON-QUALIFIED PRICE PER EXERCISE
OPTIONS STOCK OPTIONS WARRANTS SHARE PRICE
---------- ------------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994..................... -- -- 150,000 $ 1.81 $ 1.81
Granted.......................................... 232,500 425,000 110,330 $ 0.60- 4.84 $ 3.04
Forfeited........................................ -- (60,209) -- $ 0.60 $ 0.60
---------- ------------- --------- ------------- -----------
Balance at December 31, 1995..................... 232,500 364,791 260,330 $ 1.81- 4.84 $ 3.00
Granted.......................................... 806,250 175,000 531,317 $ 1.81-20.00 $ 9.14
Forfeited........................................ (10,500) -- -- $ 9.76 $ 9.76
---------- ------------- --------- ------------- -----------
Balance at December 31, 1996..................... 1,028,250 539,791 791,647 $ 1.81-11.00 $ 6.91
Granted.......................................... 345,625 50,000 96,000 $ 1.81-20.00 $ 13.42
Forfeited........................................ (211,307) -- -- $ 4.84-13.00 $ 9.02
Exercised........................................ (48,957) (14,791) -- $ 0.60-13.00 $ 5.64
---------- ------------- --------- ------------- -----------
Balance at December 31, 1997..................... 1,113,611 575,000 887,647 $ 1.81-20.00 $ 8.01
---------- ------------- --------- ------------- -----------
---------- ------------- --------- ------------- -----------
Exercisable at December 31, 1997................. 299,355 208,750 836,920 $ 1.81-20.00 $ 7.32
---------- ------------- --------- ------------- -----------
---------- ------------- --------- ------------- -----------
</TABLE>
The weighted average fair values of the options granted during the three
years ended December 31, 1997, were $0.69, $2.01 and $9.95, respectively. The
weighted average fair values of warrants granted during the three years ended
December 31, 1997, were $0.09, $1.71 and $6.98, respectively.
F-15
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
Following is a summary of stock options and warrants outstanding as of December
31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------- ----------- --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ 1.81 - $ 1.81 500,000 7.32 $ 1.81 350,000 $ 1.81
$ 4.84 - $ 4.84 787,630 7.98 $ 4.84 409,380 $ 4.84
$ 9.76 - $11.00 879,378 8.17 $ 10.40 454,508 $ 10.48
$11.50 - $19.88 299,250 9.49 $ 15.21 21,137 $ 12.77
$20.00 - $20.00 110,000 8.54 $ 20.00 110,000 $ 20.00
----------- ----------
$ 1.81 - $20.00 2,576,258 8.12 $ 8.00 1,345,025 $ 7.32
----------- ----------
----------- ----------
</TABLE>
F-16
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
The stockholders, upon incorporating the Company, elected to treat the
Company as an S Corporation under the Internal Revenue Code. On June 19, 1995,
this election was revoked as certain ineligible entities (i.e partnerships and
corporations) became stockholders. Losses of $1,261,000 incurred from inception
through June 19, 1995 have been reclassified from accumulated deficit to Common
Stock as a result of the change to C Corporation status. The Company is now
subject to income taxes on income earned after June 19, 1995. At December 31,
1996 and 1997, the Company had net operating loss carryforwards for federal
income tax purposes totaling approximately $33,751,000, and $61,004,000,
respectively, which begin to expire in 2011. The Internal Revenue Code of 1986,
as amended, includes provisions which may limit the net operating loss
carryforwards available for use in any given year if certain events occur,
including significant changes in ownership. Due to the Company's initial public
offering and other issuances of Common Stock and Common Stock equivalents,
utilization of the Company's net operating loss carryforwards to offset future
income may be limited.
Deferred tax assets include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards...................................... $ 13,578 $ 24,584
Deferred financing costs.............................................. 88 118
Depreciation.......................................................... 50 323
Accrued Liabilities................................................... 103 201
---------- ----------
Gross deferred tax assets............................................. 13,819 25,226
Deferred tax asset valuation allowance................................ (13,819) (25,226)
---------- ----------
$ -- $ --
---------- ----------
---------- ----------
</TABLE>
The Company recorded a full valuation allowance for net deferred tax assets
due to the uncertainty of future taxable income.
PROFIT SHARING PLAN
Effective January 1997, the Company implemented a profit sharing plan (the
Plan) pursuant to Section 401(k) of the Internal Revenue code, whereby
participants may contribute a percentage of compensation, but not in excess of
the maximum allowed under the Code. The Company makes a discretionary matching
contribution of 25% up to a maximum of 6% of the participant's total eligible
compensation. The Company's matching contributions vest over four years from the
participant's date of hire. Total contributions for 1997 were $84,000.
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities and certain equipment under non-cancelable
operating leases expiring in various years through 2008. Total rent expense in
1995, 1996 and 1997, respectively, for all operating leases amounted to
$145,000, $914,000 and $1.9 million, respectively. The Company also leases
equipment, primarily data communications equipment, under non-cancelable capital
leases. Most of the Company's capital leases include purchase options at the end
of the lease term.
In February 1997, EarthLink commenced occupation of a 55,000 square feet in
a facility located adjacent to its corporate headquarters to house the Company's
data center. In June 1997, the Company amended the lease for its corporate
headquarters facility. Under the amended lease the Company will
F-17
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
occupy an additional 45,000 square feet of the existing facility and deliver an
irrevocable letter of credit in the amount of $450,000 to the Lessor.
During the three years ended December 31, 1997, the Company financed the
acquisition of data processing and office equipment amounting to approximately
$556,000, $11.3 million and $10.5 million, respectively, by entering into a
number of agreements for the sale and leaseback of equipment. The sale leaseback
transactions are recorded at cost, which approximates the fair market value of
the property and, therefore, no gains or losses have been recorded. The property
remains on the books and continues to be depreciated. A financing obligation
representing the proceeds is recorded and reduced based upon payments under the
lease agreement.
Minimum lease commitments under non-cancelable leases at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
1998........................................................................................ $ 8,576 $ 1,898
1999........................................................................................ 6,516 2,126
2000........................................................................................ 3,258 1,994
2001........................................................................................ 657 1,767
2002........................................................................................ 91 1,897
Thereafter.................................................................................. 8 8,807
--------- -----------
Total minimum lease payments................................................................ 19,106 $ 18,489
-----------
-----------
Less amount representing interest........................................................... (3,776)
---------
---------
Present value of future lease payments...................................................... 15,330
Less current portion........................................................................ 7,112
---------
---------
$ 8,218
---------
---------
</TABLE>
GUARANTEED USAGE LEVELS
At December 31, 1997, the Company has committed to guaranteed usage levels
of data and voice communication with certain telecommunication vendors in the
aggregate amount of $3 million in 1998.
SIGNIFICANT AGREEMENTS
Access to the Internet for members outside of the Company's California
regional base is provided through points of presence ("POP") capacity leased
from UUNET and PSINet. EarthLink is, in effect, buying this capacity in bulk at
a discount, and providing access to EarthLink's member base at EarthLink's
normal rates. Payment to UUNET and PSINet is generally concurrent with
EarthLink's receipt of funds from members. At December 31, 1997, $2.0 million
and $2.1 million in amounts due to UUNET were recorded in accounts payable and
other accrued liabilities, respectively, and $540,000 and $4.4 million in
amounts due PSINet were recorded in other accrued liabilities and notes payable,
respectively.
Effective June 30, 1997 the Company's agreement with UUNET was amended.
UUNET agreed to waive monthly revenue minimums, excess hours fees, and peak
service user targets during the six months ended December 31, 1997. In return,
EarthLink agreed not to invoke its early termination right prior to
F-18
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
September 1998. If the number of hours used by EarthLink members accessing the
Internet through UUNET increases beyond the amount provided for in the agreement
or the usage becomes more concentrated during peak times, the fees paid by the
Company to UUNET would increase, which would adversely affect the Company's
operating margins.
EarthLink has licensed Netscape Communicator software ("Netscape
Communicator") from Netscape Communications Corporation, and Microsoft Internet
Explorer software ("Internet Explorer") from Microsoft Corporation. These
licenses permit the Company to distribute Netscape Communicator and Internet
Explorer in the EarthLink Network TotalAccess software package. Management
believes that contract renewal for both of the browsers, under conditions
acceptable to EarthLink, is probable.
Minimum commitments under non-cancelable network service agreements from
UUNET and PSINet are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, IN MILLIONS
-----------
<S> <C>
1998.............................................................................. $ 22.8
1999.............................................................................. 6.0
-----
Total............................................................................. $ 28.8
-----
-----
</TABLE>
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid for:
Interest $ 60 $ 1,041 $ 1,965
--------- --------- ---------
--------- --------- ---------
Income Taxes $ 1 $ 1 $ 1
--------- --------- ---------
--------- --------- ---------
</TABLE>
13. SUBSEQUENT EVENTS
STRATEGIC ALLIANCE WITH SPRINT CORPORATION
On February 11, 1998, the Company announced a long-term strategic alliance
with Sprint Corporation. In connection with this alliance, Sprint has tendered
to purchase approximately 1.25 million shares of EarthLink's Common Stock at $45
per share. Upon closing of this tender offer, Sprint will purchase
approximately, 4.1 million shares of convertible preferred stock from Dolphin,
Inc. ("Newco") a new corporation formed by EarthLink for the purpose of
consummating the Sprint transactions. In exchange for the convertible preferred
stock Sprint will transfer its Sprint Internet Passport customer base of
approximately 130,000 members, pay approximately $24 million in cash, and
provide access to $100 million in convertible debt financing. Sprint and
EarthLink will also enter into a marketing and distribution arrangement and
EarthLink will obtain access to Sprint's data network. Concurrently with the
closing of these transactions, a wholly-owned subsidiary of Newco will merge
with and into EarthLink and each share of EarthLink Common Stock outstanding
will convert into one share of Newco common stock. Sprint will also secure two
seats on Newco's board of directors.
CONVERSION OF NOTE PAYABLE (UNAUDITED)
On March 31, 1998, UUNET converted the $5 million Convertible Note and
related accrued interest into 391,515 shares of the Company's common stock at a
conversion price of $12.88 per share.
F-19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Sprint Corporation
We have audited the accompanying statement of revenues and direct expenses
of the Consumer Internet Access Services of Sprint Corporation (the "Company")
for the year ended December 31, 1997. This statement is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the revenues and direct expenses are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit also
includes assessing the basis of accounting used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statement of revenues and direct expenses was prepared for
inclusion in the Registration Statement on Form S-4 of Dolphin, Inc. for
purposes of complying with the rules and regulations of the Securities and
Exchange Commission in lieu of the full financial statements required by Rule
3-05 for the pending transaction between EarthLink Network, Inc. and Sprint
Corporation. The statement is not intended to be a complete presentation of the
Consumer Internet Access Services of Sprint Corporation revenues and expenses.
In our opinion, the statement of revenues and direct expenses referred to
above presents fairly, in all material respects, the revenues and direct
expenses described in the note to the statement of revenues and expenses for the
Consumer Internet Access Services of Sprint Corporation for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Kansas City, Missouri
March 6, 1998
F-20
<PAGE>
CONSUMER INTERNET ACCESS SERVICES OF SPRINT CORPORATION
STATEMENT OF REVENUES AND DIRECT EXPENSES
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Net operating revenues............................................................ $ 14,489
<S> <C>
Direct expenses:
Cost of services................................................................ 51,313
Selling, general and administrative............................................. 13,099
Depreciation.................................................................... 6,070
Other........................................................................... 3,404
---------
Total direct expenses............................................................. 73,886
---------
Direct expenses in excess of revenues............................................. $ (59,397)
---------
---------
</TABLE>
SEE ACCOMPANYING NOTE.
F-21
<PAGE>
CONSUMER INTERNET ACCESS SERVICES OF SPRINT CORPORATION
NOTE TO STATEMENT OF REVENUES AND DIRECT EXPENSES
YEAR ENDED DECEMBER 31, 1997
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF PRESENTATION
The statement of revenues and direct expenses represents the activities
related to the Consumer Internet Access Services of Sprint Corporation and has
been prepared in connection with the pending transaction between EarthLink
Network, Inc. and Sprint Corporation. The statement of revenues and direct
expenses is not intended to be a complete presentation of the revenues and
expenses of the Consumer Internet Access Services of Sprint Corporation because
corporate allocated expenses have not been included. Direct expenses are defined
as those costs which were incurred as a direct result of providing Consumer
Internet Access Services and which will no longer be incurred by Sprint
Corporation subsequent to consummation of the pending transaction with EarthLink
Network, Inc.
Sprint Corporation began offering Internet access in the fourth quarter of
1996 and any revenues generated and direct operating expenses incurred from
inception through December 31, 1996, were nominal. Sprint Corporation reports
this operation within its "Emerging Businesses Segment" (the "Group") and
maintains the financial information relative to the Internet subscribers in the
Group. Revenues and direct operating expense information are separately
maintained for the Consumer Internet Access Services within the Group. Sprint
Corporation does not, however, separately maintain and account for other costs
and expenses to operate this business and is unable to determine or reasonably
estimate these costs on a historical basis. In addition, Sprint Corporation does
not separately maintain and account for all assets used in the consumer Internet
access services business. Such assets, primarily network related, are recorded
in the other businesses of Sprint Corporation and used by the other divisions of
Sprint Corporation, including the Group. Accordingly, financial statements for
1996 and full financial statements required by Rule 3-05 of Regulation S-X have
not been presented.
The statement of revenues and direct expenses is not indicative of the
financial condition or results of operations of this business going forward
because of the change in the business and the omission of various operating
expenses.
REVENUE RECOGNITION
Operating revenues are recognized as services are rendered to customers and
are recorded net of an estimate for uncollectible accounts. The provision for
doubtful accounts for the year ended December 31, 1997 was $723,000.
DEPRECIATION
The cost of property, plant and equipment is depreciated on a straight-line
basis over estimated economic useful lives.
USE OF ESTIMATES
The statement of revenues and direct expenses is prepared in accordance with
generally accepted accounting principles which requires management to make
estimates and assumptions that affect the amounts reported in the financial
statement. Actual results could differ from those estimates.
F-22
<PAGE>
Appendix A
================================================================================
INVESTMENT AGREEMENT
AMONG
SPRINT CORPORATION,
A KANSAS CORPORATION
SPRINT COMMUNICATIONS COMPANY L.P.,
A DELAWARE LIMITED PARTNERSHIP
DOLPHIN, INC.,
A DELAWARE CORPORATION
DOLPHIN SUB, INC.,
A DELAWARE CORPORATION
AND
EARTHLINK NETWORK, INC.,
A DELAWARE CORPORATION.
DATED AS OF FEBRUARY 10, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I THE OFFER AND FINANCING..................................................... 2
1.01. The Offer...................................................................... 2
1.02. Company Actions................................................................ 3
1.03. Issuance of Convertible Preferred Stock........................................ 4
1.04. Marketing Agreement............................................................ 5
1.05. Convertible Debt Financing..................................................... 5
1.06. Merger of Newco Sub into the Company and Conversion of
Company into Newco Stock..................................................... 6
1.07. Governance Agreement and Stockholders Agreement................................ 7
1.08. Registration Rights Agreement.................................................. 8
1.09. Closing........................................................................ 8
ARTICLE II CONDITIONS TO OFFER AND CLOSING............................................. 12
2.01. Mutual Conditions to Offer..................................................... 12
2.02. Conditions to Offer for Benefit of Sprint and Sprint L.P....................... 13
2.03. Conditions to Offer for Benefit of the Company, Newco, and Newco Sub........... 15
2.04. Condition to Closing of All Parties............................................ 16
ARTICLE III REPRESENTATIONS AND WARRANTIES.............................................. 17
3.01. Representations and Warranties of the Company.................................. 17
3.02. Representations and Warranties of Newco and Newco Sub.......................... 24
3.03. Representations and Warranties of Sprint and Sprint L.P........................ 27
ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS AND OF THE COMPANY.................31
4.01. Conduct of Business............................................................ 31
4.02. Access to Property and Information............................................. 33
4.03. Public Disclosure.............................................................. 33
4.04. HSR Act Filings................................................................ 33
4.05. Information.................................................................... 34
4.06. Further Assurances............................................................. 34
4.07. No Solicitation................................................................ 34
4.08. Efforts Regarding Outstanding Warrants and Other Dilutable Securities.......... 35
ARTICLE V ADDITIONAL AGREEMENTS....................................................... 36
5.01. Reasonable Efforts; Notification............................................... 36
5.02. Fees and Expenses.............................................................. 37
5.03. Stockholder Litigation......................................................... 37
5.04. Nasdaq Listing................................................................. 37
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
5.05. Confidentiality................................................................37
5.06. No Acceleration of Options or Termination Payments.............................38
5.07. Amortization and Writeoffs of Goodwill and Assets..............................38
5.08. Maintaining SIP Subscribers at Newco...........................................38
5.09. Certification of SIP Subscribers...............................................38
ARTICLE VI TERMINATION, AMENDMENT AND WAIVER...........................................39
6.01. Termination....................................................................39
6.02. Effect of Termination..........................................................40
ARTICLE VII MISCELLANEOUS...............................................................40
7.01. Notices........................................................................41
7.02. Entire Agreement...............................................................42
7.03. Waiver, Amendment, Etc.........................................................42
7.04. Successors and Assigns.........................................................42
7.05. Governing Law..................................................................43
7.06. Severability...................................................................43
7.07. Counterparts...................................................................43
7.08. Headings.......................................................................43
7.09. No Third-Party Beneficiaries...................................................43
7.10. Interpretation.................................................................43
7.11. Inclusion of Information in Schedules..........................................44
7.12. Exclusive Jurisdiction and Consent to Service of Process.......................44
7.13. Amendment......................................................................44
7.14. Survival.......................................................................44
7.15. WAIVER OF JURY TRIAL...........................................................44
ARTICLE VIII DEFINITIONS.................................................................45
Definitions...........................................................................45
</TABLE>
ii
<PAGE>
PAGE
----
EXHIBITS:
A - Form of Certificate of Designation
B - Form of Master Assignment
C - Network Agreement
D - Marketing Agreement
E - Credit Agreement
F - Agreement and Plan of Merger
G - Governance Agreement
H - Stockholder's Agreement
I - Registration Rights Agreement
J - Agreement To Vote
K - Agreement to Vote and Tender Stock
iii
<PAGE>
INVESTMENT AGREEMENT
THIS INVESTMENT AGREEMENT dated as of February 10, 1998 (this "Agreement"),
among Sprint Corporation, a Kansas corporation ("Sprint"), Sprint Communications
Company L.P., a Delaware limited partnership ("Sprint L.P."), EarthLink Network,
Inc., a Delaware corporation (the "Company"), Dolphin, Inc., a Delaware
corporation ("Newco"), and Dolphin Sub, Inc., a Delaware corporation and a
wholly-owned subsidiary of Newco ("Newco Sub").
WHEREAS, the respective Boards of Directors of Sprint, the General Partner
of Sprint L.P., Newco and the Company have determined to enter into a strategic
relationship in the area of Internet access and related services and Sprint and
Sprint L.P. will make investments in Newco and the Company in connection with
the Merger of Newco Sub and the Company in order to enhance the capabilities for
growth and financial and strategic success;
WHEREAS, Sprint proposes to make a tender offer (as it may be amended from
time to time as permitted under this Agreement, with the Company's consent if
required hereby, the "Offer") to purchase 1,250,000 shares of Common Stock for
an aggregate cash consideration of $56,250,000 and at a price per share of
Common Stock of $45 net to each seller in cash (such price, as may hereafter be
changed, the "Offer Price"), upon the terms and subject to the conditions set
forth in this Agreement; and the Board of Directors of the Company has approved
the Offer and the other transactions contemplated hereby and is recommending
that the Company's stockholders who wish to receive cash for their shares of
Common Stock accept the Offer;
WHEREAS, immediately following the closing of the Offer, Sprint L.P.
proposes to purchase 4,102,941 shares of Series A Convertible Preferred Stock,
par value $.01 per share of Newco (the "Convertible Preferred Stock") in
exchange for (i) an aggregate cash consideration of $23,750,000, (ii) the
assignment to Newco of 100% of the Sprint Internet Passport Subscribers, and
(iii) entering into a network agreement whereby Newco and the Company will
utilize Sprint L.P.'s long-distance network under specified terms and
conditions;
WHEREAS, Sprint, Sprint L.P., the Company and Newco will enter into a
marketing agreement whereby Newco and the Company will utilize the Sprint brand
under specified terms and conditions and will, inter alia, have the right to use
----- ----
Sprint L.P. distribution channels under specified terms and conditions and agree
to sell certain Sprint L.P. products;
WHEREAS, Sprint shall provide Newco and the Company, as co-borrowers, with
up to $25 million of Convertible Senior Debt financing on or after the Closing,
with such amount to increase to up to $100 million over time (the "Convertible
Debt Financing"), such indebtedness to be evidenced by one or more Convertible
Senior Promissory Note(s) (the "Convertible Notes") and to be subject to the
terms and conditions of the Credit Agreement;
WHEREAS, the closing of the acquisition of the Convertible Preferred Stock
and the other transactions referred to above other than the Offer shall take
place concurrently with the merger of
1
<PAGE>
Newco Sub into the Company (the "Merger") and the conversion of each share of
the Company's outstanding Common Stock into one share of Newco common stock, par
value $.01 per share ("Newco Common Stock") pursuant to the Merger, in each case
upon the terms and subject to the conditions set forth in this Agreement and/or
the Ancillary Agreements (as defined below);
WHEREAS, to induce Sprint and Sprint L.P. to enter into this Agreement and
the Ancillary Agreements, and to consummate the transactions contemplated
thereby, (i) the Voting Stockholders have executed and delivered to Sprint and
Sprint L.P. the Agreement to Vote Stock, (ii) the Tendering Stockholders have
executed and delivered to Sprint and Sprint L.P. the Agreement to Vote and
Tender Stock, and (iii) certain stockholders have entered into a Stockholders
Agreement with Sprint and Sprint L.P.; and
WHEREAS, Sprint, Sprint L.P., the Company, Newco and Newco Sub desire to
make certain representations, warranties, covenants and agreements and also to
prescribe various conditions in connection with the transactions contemplated
hereby;
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement and in the Ancillary
Agreements, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties hereby agree as
follows:
ARTICLE I
THE OFFER AND FINANCING
SECTION 1.01 The Offer. (a) Subject to the provisions of this Agreement,
as promptly as practicable, but in no event later than five business days after
the date of this Agreement, Sprint shall commence the Offer. The obligation of
Sprint to commence the Offer and accept for payment, and pay for, any shares of
Common Stock tendered pursuant to the Offer shall be subject to the conditions
set forth in Sections 2.01, 2.02 and 2.03 (or written waivers as set forth
therein) and to the terms and conditions of this Agreement. Sprint may not
consummate the Offer prior to March 20, 1998, modify or amend the terms of the
Offer, terminate the Offer other than in accordance with the terms hereof or
extend the Offer beyond June 15, 1998 (the earlier of June 15, 1998 or the date
of acceptance for payment of the shares of Common Stock tendered pursuant to the
Offer is hereinafter referred to as the "Expiration Date") in any such case
without the prior written consent of the Company (such consent to be authorized
by the Board of Directors of the Company). Subject to the terms and conditions
thereof, the Offer shall expire at midnight New York City time on the date that
is 20 business days from the date the Offer is first published, sent or given to
holders of Common Stock; provided, however, that without the Company's consent,
-------- -------
Sprint may (i) extend the Offer, if at the scheduled expiration date of the
Offer any of the conditions to Sprint's obligation to accept for payment, and
pay for, shares of Common Stock shall not have been satisfied or waived, until
such time as such conditions are satisfied or waived, (ii) extend the Offer for
any period required by any rule, regulation, interpretation or position of the
SEC applicable to the Offer and (iii) extend
2
<PAGE>
the Offer for any reason on one occasion for an aggregate period of not more
than 5 business days beyond the latest expiration date that would otherwise be
permitted under clause (i) or (ii) of this sentence but in no event may the
Offer extend beyond the Expiration Date.
(b) On the date of commencement of the Offer, Sprint shall file with the
SEC a Tender Offer Statement on Schedule 14D-1 with respect to the Offer, which
shall contain an offer to purchase and a related letter of transmittal and
summary advertisement (such Schedule 14D-1 and the documents included therein
pursuant to which the Offer will be made, together with any supplements or
amendments thereto, the "Offer Documents"). Sprint agrees that the Offer
Documents shall comply as to form in all material respects with the Exchange Act
and that the Offer Documents on the date first published, sent or given to the
Company's stockholders shall not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading, except that no representation is made by Sprint
or Sprint L.P. with respect to information supplied by the Company, Newco or
Newco Sub specifically for inclusion in the Offer Documents. Each of the
Parties agrees promptly to correct any information provided by it for use in the
Offer Documents if and to the extent that such information shall have become
false or misleading in any material respect, and Sprint further agrees to take
all steps necessary to amend or supplement the Offer Documents and to cause the
Offer Documents as so amended or supplemented to be filed with the SEC and to be
disseminated to the Company's stockholders, in each case as and to the extent
required by applicable Federal securities laws. The Company and its counsel
shall be given a reasonable opportunity to review the Offer Documents and all
amendments and supplements thereto prior to their filing with the SEC or
dissemination to stockholders of the Company. Sprint agrees to provide the
Company and its counsel any comments that Sprint or its counsel may receive from
the SEC or its staff with respect to the Offer Documents promptly after the
receipt of such comments.
SECTION 1.02 Company Actions. (a) The Company hereby approves of and
consents to the Offer and the other transactions contemplated hereby and by the
Ancillary Agreements and the Company, Newco and Newco Sub represent and warrant
that the Boards of Directors of the Company, Newco and Newco Sub at meetings
duly called and held, duly and unanimously adopted resolutions, as appropriate,
approving this Agreement, the Ancillary Agreements, the Offer and the issuance
of the Convertible Preferred Stock to Sprint L.P. and the Convertible Notes to
Sprint as contemplated hereby, determining that this Agreement and the
transactions contemplated hereby and by the Ancillary Agreements, including the
Offer and the acquisition of the Convertible Preferred Stock, are fair to, and
in the best interests of, the Company's stockholders and recommending that those
stockholders who wish to receive cash for their shares of Common Stock, accept
the Offer and tender their shares pursuant to the Offer. The Company represents
that its Board of Directors has received the opinion of Deutsche Morgan Grenfell
Inc. that the transactions contemplated by this Agreement, when taken together,
are fair, from a financial point of view, to the Company's stockholders and that
a complete and correct signed copy of such opinion has been delivered by the
Company to Sprint.
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(b) On the date the Offer Documents are filed with the SEC, the Company
shall file with the SEC a Solicitation/Recommendation Statement on Schedule 14D-
9 with respect to the Offer (such Schedule 14D-9, as amended from time to time,
the "Schedule 14D-9") containing the recommendation described in paragraph (a)
of this Section 1.02 and shall mail the Schedule 14D-9 to the stockholders of
the Company. The Company agrees that the Schedule 14D-9 shall comply as to form
in all material respects with the requirements of the Exchange Act and, on the
date filed with the SEC and on the date first published, sent or given to the
Company's stockholders, shall not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that no representation is
made by the Company with respect to information supplied by Sprint or Sprint
L.P. specifically for inclusion in the Schedule 14D-9. Each of the Company,
Newco and Newco Sub agrees promptly to correct any information provided by it
for use in the Schedule 14D-9 if and to the extent that such information shall
have become false or misleading in any material respect, and the Company further
agrees to take all steps necessary to amend or supplement the Schedule 14D-9 and
to cause the Schedule 14D-9 as so amended or supplemented to be filed with the
SEC and disseminated to the Company's stockholders, in each case as and to the
extent required by applicable Federal securities laws. Sprint and its counsel
shall be given a reasonable opportunity to review the Schedule 14D-9 and all
amendments and supplements thereto prior to their filing with the SEC or
dissemination to stockholders of the Company. The Company agrees to provide
Sprint and its counsel in writing with any comments the Company or its counsel
may receive from the SEC or its staff with respect to the Schedule 14D-9
promptly after the receipt of such comments.
(c) In connection with the Offer, the Company shall cause its transfer
agent to furnish Sprint promptly with mailing labels containing the names and
addresses of the record holders of Common Stock as of a recent date and of those
persons becoming record holders subsequent to such date, together with copies of
all lists of stockholders, security position listings and computer files and all
other information in the Company's possession or control regarding the
beneficial owners of Common Stock, and shall furnish to Sprint such information
and assistance (including updated lists of stockholders, security position
listings and computer files) as Sprint may reasonably request to facilitate
communication of the Offer to the Company's stockholders. Subject to the
requirements of applicable law, and except for such steps as are necessary to
disseminate the Offer Documents, Sprint and its agents shall hold in confidence
the information contained in any such labels, listings and files, will use such
information only in connection with the Offer and the other transactions
contemplated hereby and, if this Agreement shall be terminated, will deliver,
and will use their best efforts to cause their agents to deliver, to the Company
all copies of such information then in their possession or control.
SECTION 1.03 Issuance of Convertible Preferred Stock. Newco agrees to
issue to Sprint L.P., and Sprint L.P. agrees to acquire from Newco, 4,102,941
shares of Convertible Preferred Stock having the voting powers, preferences and
other rights set forth in the form of Certificate of Designation, Preferences
and Rights attached hereto as Exhibit A ("Certificate of Designation") and which
is to be filed with the Delaware Secretary of State on or prior to the Closing
Date, for the "Preferred Stock Consideration," which shall be delivered at the
Closing for the duly authorized and
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executed certificates evidencing such shares. The Preferred Stock Consideration
shall consist of the following:
(i) cash in the amount of $23,750,000, which payment shall be made
by wire transfer of immediately available funds pursuant to the wire
transfer instructions to be provided to Sprint L.P. by a duly authorized
officer of Newco at least 72 hours prior to the Closing;
(ii) all of the right, title and interest of Sprint L.P. in and to
all agreements with SIP Subscribers and all rights to provide Internet
access services to the SIP Subscribers after the Closing Date, as evidenced
by the Master Assignment and Assumption Agreement in the form attached
hereto as Exhibit B (the "Master Assignment"), which (A) shall have a
Schedule A attached thereto showing the number and identity of SIP
Subscribers as of a date no earlier than 10 days prior to the Closing Date,
(B) shall include the obligations to be assumed by Newco at the Closing to
continue the performance of all of such agreements after the Closing Date,
and (C) shall be executed and delivered by the Parties thereto on the
Closing Date; and
(iii) the right to utilize a minimum and maximum number of ports on
Sprint L.P.'s long-distance network specified, along with the pricing and
other terms and conditions set forth, in the Network Agreement attached
hereto as Exhibit C ("Network Agreement"), which shall be executed and
delivered by the Parties thereto on the date hereof, but which shall not
become effective until the Closing and then only if all of the applicable
conditions to Closing have been satisfied or waived.
SECTION 1.04 Marketing Agreement. The Marketing Agreement attached
hereto as Exhibit D shall be executed and delivered by the Parties thereto on
the date hereof, and pursuant to which (A) Newco and the Company shall have the
right to utilize certain distribution channels of Sprint L.P., and the Parties
shall provide certain cooperation and support to each other in specified
marketing matters, and (B) Newco and the Company shall be granted a license
requiring the use of the Sprint brand in conjunction with the Company's brand,
in each case upon the terms and subject to conditions set forth in the Marketing
Agreement, but which Agreement shall not become effective until the Closing and
then only if all of the applicable conditions to Closing have been satisfied or
waived.
SECTION 1.05 Convertible Debt Financing. Sprint agrees to make advances
of funds to Newco and the Company, as co-borrowers, in the amounts and at the
times specified in, and subject to the terms and conditions set forth in, the
Credit Agreement attached hereto as Exhibit E (the "Credit Agreement"), (A)
which shall be executed and delivered by the Parties thereto on the date hereof,
but which shall not become effective until the Closing and then only if all of
the applicable conditions to the Closing have been satisfied or waived, and (B)
advances thereunder shall be evidenced by one or more Convertible Notes which
shall be convertible into Newco Common Stock, a form of which Convertible Note
is attached to the Credit Agreement.
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SECTION 1.06 Merger of Newco Sub into the Company and Conversion of
Company Stock into Newco Stock. (a) The Company, Newco and Newco Sub shall duly
execute and deliver on the date hereof the Agreement and Plan of Merger among
them attached hereto as Exhibit F, but which shall not become effective until
the Closing, and pursuant to which, inter alia, at the Closing, (i) Newco Sub
----- ----
shall be merged with and into the Company and the Company shall be the surviving
corporation (the "Surviving Corporation"), (ii) the certificate of incorporation
and bylaws of Newco Sub shall be the certificate of incorporation and bylaws of
the Surviving Corporation, (iii) except as disclosed in Schedule 1.06 hereto;
the certificate of incorporation and bylaws of Newco shall be identical to the
certificate of incorporation and bylaws of the Company, (iv) the directors and
officers of the Company shall be the directors and officers of Newco until their
successors have been duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with Newco's certificate of
incorporation and bylaws, except that the two directors elected by the holders
of the Convertible Preferred Stock shall be elected immediately following the
Closing and (v) each outstanding share of Common Stock of the Company shall be
converted into one share of Newco Common Stock.
(b) Subject to the provisions of this Agreement, as promptly as
practicable, the Company, Newco and Newco Sub shall prepare and file with the
SEC a proxy statement relating to a special meeting of the Company's
stockholders (the "Special Meeting") to be held in connection with the Merger
(the "Proxy Statement") that will serve as the prospectus included as Part I of
a registration statement on Form S-4 (the "S-4") to be filed by Newco with the
SEC to register the Newco Common Stock to be issued in the Merger by Newco. The
Proxy Statement and S-4 shall also seek approval by the Company's stockholders
of (i) the issuance and sale of the Convertible Preferred Stock, the Convertible
Notes, and the Newco Common Stock issuable upon conversion of the Convertible
Preferred Stock and/or the Convertible Notes, (ii) the other transactions
contemplated by this Agreement and the Ancillary Agreements, and (iii) any
related matters that must be approved by the holders of Common Stock or Newco
Common Stock in order for the transactions contemplated by the Investment
Agreement or any Ancillary Agreement to be consummated (the matters referred to
in clauses (i), (ii) and (iii) together with approval of the Merger, the
"Company Stockholder Vote Matters"). Each of the Company, Newco and Newco Sub
shall use all reasonable efforts to (i) have the S-4 declared effective under
the Securities Act as promptly as practicable after such filing, and (ii) to
cause the Proxy Statement to be mailed to all stockholders of the Company at the
earliest practicable date. The Company, Newco and Newco Sub agree that the S-4
and the Proxy Statement shall comply as to form in all material respects with
the Securities Act and the Exchange Act and shall not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, except that no
representation is made by the Company, Newco or Newco Sub with respect to any
information supplied by Sprint specifically for inclusion in the S-4 and the
Proxy Statement. Each of the Parties agrees promptly to correct any information
provided by it for use in the S-4 and the Proxy Statement if and to the extent
that such information shall have become false or misleading in any material
respect, and the Company, Newco and Newco Sub further agree to take all steps
necessary to amend or supplement the S-4 and the Proxy Statement and to cause
the S-4 and the Proxy Statement as so amended or supplemented to be filed with
the SEC and to cause the Proxy Statement to be disseminated to the Company's
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stockholders, in each case as and to the extent required by applicable Federal
securities laws. Sprint and its counsel shall be given a reasonable opportunity
to review the S-4 and the Proxy Statement and all amendments and supplements
thereto prior to their filing with the SEC or dissemination to stockholders of
the Company. The Company, Newco and Newco Sub agree to provide Sprint and its
counsel any comments that the Company, Newco and Newco Sub or its counsel may
receive from the SEC or its staff with respect to the S-4 and the Proxy
Statement promptly after the receipt of such comments.
(c) The Company shall call the Special Meeting to be held as promptly as
practicable after the date hereof for the purpose of voting upon the Company
Stockholder Vote Matters. Subject to Section 4.07(a), the Company will, through
its Board of Directors, recommend that its stockholders vote their shares in
favor of the approval of the Company Stockholder Vote Matters and shall use its
reasonable best efforts to obtain approval and adoption by the Company's
stockholders of the Company Stockholder Vote Matters. The Company and Sprint
shall coordinate and cooperate with respect to the timing of the Special Meeting
and shall use all reasonable efforts to hold such meeting as soon as practicable
after the date hereof. Newco shall (i) cause Newco Sub promptly to submit this
Agreement and the transactions contemplated hereby for approval and adoption by
Newco as its sole stockholder by written consent or stockholder vote, (ii)
authorize and cause an officer of Newco to vote Newco's shares of Newco Sub for
adoption and approval of, or act by written consent to adopt and approve, this
Agreement and the Ancillary Agreements and the transactions contemplated hereby
and thereby, and (iii) take all additional actions as the sole stockholder of
Newco Sub necessary to adopt and approve this Agreement and the Ancillary
Agreements and the transactions contemplated hereby and thereby. Newco will, on
or prior to the Closing Date, execute and deliver to Sprint and the Company a
written consent by the sole stockholder of Newco (i) approving this Agreement,
the Ancillary Agreements and the transactions contemplated hereby and thereby,
and (ii) authorizing the taking of all additional actions as the sole
stockholder of Newco necessary to adopt and approve this Agreement and the
Ancillary Agreements and the transactions contemplated hereby and thereby.
SECTION 1.07 Governance Agreement and Stockholders Agreement.
(a) Sprint, Sprint L.P., Newco and the Company shall execute and
deliver on the date hereof the Governance Agreement attached hereto as
Exhibit G to establish therein certain terms and conditions concerning the
corporate governance of Newco, the acquisition of Newco's equity securities
by Sprint and its Affiliates, and the rights of Sprint to make offers to
purchase all of the outstanding securities not owned by Sprint and its
Affiliates and the rights of the Board of Directors of Newco to receive
offers to effect business combinations, which agreement shall not become
effective until the Closing.
(b) Sprint, Sprint L.P., Newco, the Company and the stockholders of
the Company identified on a schedule to the following agreement shall
execute and deliver on the date hereof a Stockholders' Agreement attached
hereto as Exhibit H to effectuate the intent and provisions of the
Governance Agreement and to provide for certain rights and obligations
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of such parties with respect to the voting and disposition of equity
securities of Newco, which agreement shall not become effective until the
Closing.
SECTION 1.08 Registration Rights Agreement. Sprint, Sprint L.P. and
Newco shall execute and deliver on the date hereof the Registration Rights
Agreement attached hereto as Exhibit I with respect to the rights of Sprint and
its Affiliates in connection with public offerings and sales of Newco Common
Stock acquired in the Merger, through conversion of the Convertible Preferred
Stock or the Convertible Notes, pursuant to the Governance Agreement or
otherwise, which agreement shall not become effective until the Closing.
SECTION 1.09 Closing. (a) Closing Date and Location. The closing of the
transactions contemplated by Sections 1.03., 1.04., 1.05., 1.06., 1.07., and
1.08. (the "Closing") shall be held at the offices of Stinson, Mag & Fizzell,
P.C., 1201 Walnut, Suite 2900, Kansas City, Missouri 64106, immediately
following, and subject only to, the acceptance for payment of shares of Common
Stock pursuant to the Offer, or at such other date, time or place as the parties
may mutually agree. The date on which the Closing shall occur is hereinafter
referred to as the "Closing Date."
(b) Deliveries by Newco and Newco Sub. At the Closing, Newco and Newco Sub
shall take the following actions:
(i) deliver to Sprint L.P. duly executed certificates evidencing
4,102,941 shares of Convertible Preferred Stock in exchange for the
Preferred Stock Consideration;
(ii) deliver to Sprint L.P. a duly executed and delivered instrument
acknowledging receipt of payment of the cash portion of the Preferred Stock
Consideration;
(iii) deliver to Sprint and Sprint L.P. each of the Ancillary
Agreements to which either of them is a party, which shall have been duly
executed and delivered by them;
(iv) deliver to Sprint and Sprint L.P. a certificate on behalf of
Newco and Newco Sub signed by a duly authorized executive officer, dated as
of the Closing Date, certifying the fulfillment of the conditions set forth
in Sections 2.02(d) and (e);
(v) deliver to Sprint and Sprint L.P. the legal opinion of Hunton &
Williams, counsel to the Company, Newco and Newco Sub, dated as of the
Closing Date, in form and substance reasonably satisfactory to Sprint and
Sprint L.P.;
(vi) deliver to Sprint and Sprint L.P. a Certificate of the
Secretary of Newco (A) as to true and complete copies of the certificate of
incorporation, bylaws and resolutions of the Board of Directors authorizing
the execution, delivery and performance of this Agreement and each of the
Ancillary Agreements to which it is a party and the transactions
contemplated hereby and thereby, (B) certifying that the execution,
delivery and performance of this Agreement and each of the Ancillary
Agreements and the transactions contemplated hereby and thereby were duly
and validly approved by the sole stockholder of Newco, and (C) as to
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incumbency of the Newco officers executing the Agreement and each of the
Ancillary Agreements to which it is a party;
(vii) deliver to Sprint and Sprint L.P. the certificate of
incorporation of Newco and all amendments to date, certified by the
Delaware Secretary of State, as of a date not earlier than three (3)
business days prior to the Closing Date;
(viii) deliver to Sprint and Sprint L.P. a Long Form Certificate of
Good Standing from the Delaware Secretary of State certifying that Newco is
in good standing, as of a date not earlier than three (3) business days
prior to the Closing Date;
(ix) deliver to Sprint and Sprint L.P. the SEC Order of
Effectiveness with respect to the S-4 if then in the possession of the
Company or Newco;
(x) deliver to Sprint and Sprint L.P. a Certificate of the
Secretary of Newco Sub (A) as to true and complete copies of the
certificate of incorporation, bylaws and resolutions of the Board of
Directors authorizing the execution, delivery and performance of this
Agreement and each of the Ancillary Agreements to which it is a party and
the transactions contemplated hereby and thereby, (B) certifying that the
execution, delivery and performance of this Agreement and each of the
Ancillary Agreements to which it is a party and the transactions
contemplated hereby and thereby were duly and validly approved by Newco as
the sole stockholder of Newco Sub, and (C) as to incumbency of the Newco
Sub officers executing this Agreement and each of the Ancillary Agreements
to which it is a party;
(xi) deliver to Sprint and Sprint L.P. the certificate of
incorporation of Newco Sub and all amendments to date, certified by the
Delaware Secretary of State, as of a date not earlier than three (3)
business days prior to the Closing Date; and
(xii) deliver to Sprint and Sprint L.P. a Long Form Certificate of
Good Standing from the Delaware Secretary of State certifying that Newco
Sub is in good standing, as of a date not later than three (3) business
days prior to the Closing Date.
(c) Deliveries by the Company. At the Closing, the Company shall deliver
to Sprint and Sprint L.P. the following:
(i) each of the Ancillary Agreements to which the Company is a
party, which shall have been duly executed and delivered by it;
(ii) a certificate on behalf of the Company signed by a duly
authorized executive officer, dated as of the Closing Date, certifying the
fulfillment of the conditions set forth in Sections 2.02(d) and (e);
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(iii) the legal opinion of Hunton & Williams, counsel to the Company,
Newco and Newco Sub dated as of the Closing Date, in form and substance
reasonably satisfactory to Sprint and Sprint L.P.;
(iv) a Certificate of the Secretary of the Company (A) as to true
and complete copies of the certificate of incorporation, bylaws and
resolutions of the Board of Directors authorizing the execution, delivery
and performance of this Agreement and each of the Ancillary Agreements to
which it is a party and the transactions contemplated hereby and thereby,
(B) certifying that the execution, delivery and performance of this
Agreement and each of the Ancillary Agreements and the transactions
contemplated hereby and thereby were duly and validly approved by the
stockholders of the Company, and (C) as to incumbency of the Company
officers executing the Agreement and each of the Ancillary Agreements to
which it is a party;
(v) the certificate of incorporation of the Company and all
amendments to date, certified by the Delaware Secretary of State, as of a
date not later than three (3) business days prior to the Closing Date;
(vi) a Long Form Certificate of Good Standing from the Delaware
Secretary of State certifying that the Company is in good standing, as of a
date not later than three (3) business days prior to the Closing Date;
(vii) the Certificate of Inspector of Election in connection with the
Special Meeting.
(d) Deliveries by Sprint. At the Closing, Sprint shall deliver to the
Company, Newco and Newco Sub the following:
(i) each of the Ancillary Agreements to which Sprint is a party,
which shall have been duly executed and delivered by it;
(ii) a certificate on behalf of Sprint signed by a duly authorized
executive officer, dated as of the Closing Date, certifying the fulfillment
of the conditions set forth in Sections 2.03(b), (c) and (e);
(iii) the legal opinion of Stinson, Mag & Fizzell, P.C., counsel to
Sprint and Sprint L.P., dated as of the Closing Date, in form and substance
reasonably satisfactory to Newco and the Company.
(iv) a Certificate of Secretary of Sprint (A) as to true and
complete copies of the articles of incorporation, bylaws and resolutions of
the Board of Directors authorizing the execution, delivery and performance
of this Agreement and each of the Ancillary Agreements to which it is a
party and the transactions contemplated hereby and thereby, and (B) as to
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incumbency of the Sprint officers executing this Agreement and each of the
Ancillary Agreements to which it is a party; and
(v) a Long Form Certificate of Good Standing from the Kansas
Secretary of State certifying that Sprint is in good standing, as of a date
not later than three (3) business days prior to the Closing Date.
(e) Deliveries by Sprint L.P. At the Closing, Sprint L.P. shall deliver
to the Company, Newco and Newco Sub the following:
(i) the cash portion of the Preferred Stock Consideration to Newco
by wire transfer of immediately available funds pursuant to wire transfer
instructions from a duly authorized officer of Newco;
(ii) each of the Ancillary Agreements to which Sprint L.P. is a
party, which shall have been duly executed and delivered by it;
(iii) a certificate on behalf of Sprint L.P. signed by a duly
authorized executive officer, dated as of the Closing Date, certifying the
fulfillment of the conditions set forth in Sections 2.03(b) and (c);
(iv) the legal opinion of Stinson, Mag & Fizzell, P.C., counsel to
Sprint and Sprint L.P., dated as of the Closing Date, in form and substance
reasonably satisfactory to Newco and the Company;
(v) a Certificate of Secretary of Sprint L.P. (A) as to true and
complete copies of the limited partnership agreement of Sprint L.P. and
resolutions of the Board of Directors of the General Partner of Sprint L.P.
authorizing the execution, delivery and performance of this Agreement and
each of the Ancillary Agreements to which it is a party and the
transactions contemplated hereby and thereby, and (B) as to incumbency of
the Sprint L.P. officers executing this Agreement and each of the Ancillary
Agreements to which it is a party; and
(vi) a Long Form Certificate of Good Standing from the Delaware
Secretary of State certifying that Sprint L.P. is in good standing, as of a
date not later than three (3) business days prior to the Closing Date.
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ARTICLE II
CONDITIONS TO OFFER AND CLOSING
SECTION 2.01 Mutual Conditions to Offer. Sprint shall not, and shall have
no obligation to, accept for payment or, subject to any applicable rules and
regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating
to Sprint's obligation to pay for or return tendered shares of Common Stock
after the termination or withdrawal of the Offer), pay for any shares of Common
Stock tendered pursuant to the Offer unless the following conditions are
satisfied on or prior to the Offer Acceptance Time (or waived in a writing
executed by Sprint, Sprint L.P., Newco, Newco Sub and the Company).
(a) Minimum Tender Condition. At least 1,250,000 shares of Common
Stock shall have been validly tendered and not withdrawn prior to the
expiration of the Offer (the "Minimum Tender Condition").
(b) Waiting Periods. The filing and waiting period requirements of
the HSR Act relating to the Offer, the Preferred Stock Consideration and
the Merger shall have been complied with and there shall be no action taken
or instituted by the Department of Justice, the Federal Trade Commission or
by any other Governmental Entity to delay or otherwise enjoin the
transactions contemplated by this Agreement and by the Ancillary Agreements
and the waiting period applicable under the HSR Act shall have expired or
received early termination.
(c) Other Approvals. In addition to the filing and expiration of the
waiting period contemplated by Section 2.01(b), all authorizations,
consents, orders or approvals of, or declarations or filings with, or
expirations of waiting periods imposed by, any Governmental Entity, the
failure to obtain which would have a Material Adverse Effect on Sprint,
Sprint L.P. and their respective Subsidiaries, the Company or Newco and
Newco Sub, in each case, taken as a whole, shall have been filed, occurred
or been obtained.
(d) Form S-4. The S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order.
(e) Actions, Suits or Proceedings. There shall not be Threatened or
pending by any Governmental Entity any Action which has a reasonable
likelihood of success, and there shall not be pending by any other Person
any Action which has a substantial likelihood of success, (i) seeking to
restrain or prohibit the acquisition by Sprint of any shares of Common
Stock or any Convertible Notes or the acquisition by Sprint L.P. of any
shares of Convertible Preferred Stock, the making or consummation of the
Offer or the performance by any of the Parties hereto of any of the other
transactions contemplated by this Agreement or any of the Ancillary
Agreements, or seeking to obtain from the Company, Newco, Sprint or Sprint
L.P. any damages that are material in relation to Sprint, Newco or the
Company and their respective subsidiaries taken as a whole, (ii) seeking to
impose limitations on the ability of
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Sprint or Sprint L.P. to acquire or hold, or exercise full rights of
ownership of, any shares of Common Stock accepted for payment by Sprint
pursuant to the Offer or any shares of Convertible Preferred Stock, any
Convertible Notes or any Common Stock received upon conversion of either
thereof, including, without limitation, the right to vote such Common
Stock, Newco Common Stock and Convertible Preferred Stock on all matters
properly presented to the stockholders of the Company or Newco, as the case
may be, (iii) seeking to prohibit any Party from exercising any of its
material rights under this Agreement or any Ancillary Agreement; or (iv)
seeking to prohibit or limit the ownership or operation by any Party or its
respective Subsidiaries of a material portion of the business or assets of
such Party on a consolidated basis, or to compel any Party to dispose of or
hold separate any material portion of the business or assets of such Party
on a consolidated basis, as a result of the Offer or any of the other
transactions contemplated by this Agreement or the Ancillary Agreements.
(f) No Injunctions or Restraints. No statute, rule, regulation,
executive order, decree, temporary restraining order, preliminary or
permanent injunction or other order enacted, entered, promulgated, enforced
or issued by any Governmental Entity or other legal restraint or
prohibition (x) preventing the consummation of the Merger or any of the
other transactions contemplated hereby or by the Ancillary Agreements that
are to occur by the Closing shall be in effect or, (y) applicable to the
Offer or the issuance of shares of Convertible Preferred Stock, any
Convertible Notes or any Newco Common Stock received upon conversion of
either thereof having any of the consequences described in clauses (i)
through (iv) of Section 2.01(e) shall be in effect; provided, however, that
-------- -------
prior to invoking this condition, each Party shall use all reasonable
efforts to have any such decree, ruling, injunction or order vacated,
except as otherwise contemplated by this Agreement.
(g) Stockholder Approval. The holders of Common Stock of the Company
shall have approved the Company Stockholder Vote Matters.
(h) Termination of Agreement. This Agreement shall not have
terminated in accordance with its terms prior to the Expiration Date.
SECTION 2.02 Conditions to Offer for Benefit of Sprint and Sprint L.P.
Sprint shall have no obligation to accept for payment or, subject to any
applicable rules and regulations of the SEC, including Rule 14e-1(c) under the
Exchange Act (relating to Sprint's obligation to pay for or return tendered
shares of Common Stock after the termination or withdrawal of the Offer), pay
for any shares of Common Stock tendered pursuant to the Offer unless the
following conditions are satisfied on or prior to the Offer Acceptance Time (or
waived in a writing executed by Sprint and Sprint L.P.).
(a) Approval of the Board of Directors. (i) The Board of Directors of
the Company or Newco shall not have withdrawn or modified in a manner
adverse to Sprint or Sprint L.P. its approval of the Offer or the other
transactions contemplated by this Agreement or the Ancillary Agreements, or
approved any Acquisition Proposal or approved the solicitation of
additional Acquisition Proposals, (ii) the Company shall not have entered
into
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any agreement with respect to any Acquisition Proposal, or (iii) the Board
of Directors of the Company or Newco or any committee thereof shall not
have resolved to take any of the foregoing actions referred to in (i) or
(ii) above.
(b) Execution, Delivery, Effectiveness and Satisfaction of Ancillary
Agreements. Each of the Company, Newco and Newco Sub shall have executed
and delivered to Sprint and Sprint L.P., as the case may be, each Ancillary
Agreement to which it is a party. Each Ancillary Agreement shall be in
full force and effect and all of the terms and conditions of each such
Ancillary Agreement shall be satisfied in all material respects.
(c) Stockholder Agreements. (i) Each of (A) the stockholders named on
Schedule A of the Stockholders Agreement, and (B) each of Garry Betty,
Brinton Young, Robert Kavner and Chip Lacy, shall have executed, and
delivered to Sprint the Stockholders Agreement in the form attached hereto
as Exhibit H, including the Irrevocable Proxies related thereto (the
"Stockholders Agreement"), (ii) each of the Voting Stockholders shall have
executed and delivered to Sprint the Agreement To Vote Stock (the
"Agreement to Vote"), in the form attached hereto as Exhibit J, and (iii)
each of the Tendering Stockholders shall have executed and delivered to
Sprint the Agreement to Vote and Tender Stock (the "Agreement to Vote and
Tender"), in the form attached hereto as Exhibit K. The Stockholders
Agreement, each Agreement to Vote and each Agreement to Vote and Tender, to
the extent necessary to approve the Company Stockholder Vote Matters, shall
be in full force and effect and all of the terms and conditions of such
agreements shall be satisfied in all material respects.
(d) Representations and Warranties. The representations and
warranties of the Company, Newco and Newco Sub shall be true and correct
(i) as of the date referred to in any representation or warranty that
addresses a matter as of a particular date, or (ii) as to all other
representations and warranties, as of the date of this Agreement and as of
the Offer Acceptance Time; unless, in either the case of clause (i) or
(ii), the inaccuracies under such representations and warranties, would
not, individually or in the aggregate, (x) have a Material Adverse Effect
on the Company or Newco, (y) materially impair the ability of the Company,
Newco and Newco Sub to enter into and perform this Agreement or any
Ancillary Agreement to which any of them is a Party and their respective
obligations thereunder, or (z) materially reduce Sprint's expected
ownership interest in Newco by virtue of material inaccuracies in the
representations and warranties set forth in Section 3.01(c) hereof, in each
case without giving effect to any supplement to any schedule to this
Agreement or to any Ancillary Agreement (provided, however, that any
-------- -------
supplement must be objected to before the earlier of the Offer Acceptance
Time or 10 Business Days from the date of delivery thereof). Sprint and
Sprint L.P. shall also have each received a separate certificate to such
effect dated the Offer Acceptance Date and executed by the chief executive
officer and chief financial officer of each of the Company, Newco and Newco
Sub, in each such case without giving effect to any supplement to any
Schedule to this Agreement or to any Ancillary Agreement.
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(e) Performance of Obligations and Covenants of the Company, Newco
and Newco Sub. Each of the Company, Newco and Newco Sub shall have
performed in all material respects all of the respective obligations and
covenants required to be performed or complied with by them under this
Agreement and each of the Ancillary Agreements at or prior to the time of
the Closing.
(f) Legal Opinions. Sprint shall have received the legal opinion of
Hunton & Williams, dated as of the Closing Date, counsel to Newco, Newco
Sub, and the Company in form and substance reasonably satisfactory to
Sprint and Sprint L.P.
(g) Amendments and Modifications of Warrants and other Dilutable
Securities. There shall not be any warrants to purchase Common Stock or
other Dilutable Securities of the Company outstanding on the Closing Date
which could be exercised on the Closing Date (assuming the expiration of
any applicable vesting periods or the satisfaction of any other conditions
to conversion, exchange, exercise or issuance) into a number of shares of
Common Stock which, in the aggregate, would constitute more than 8% of the
shares of Common Stock outstanding immediately prior to the Closing, which,
upon or after the Merger will be convertible into or exchangeable for or
give the right to acquire Common Stock or other voting securities of the
Company, and the Company shall have provided copies of all amendments or
other modifications of any Warrants and other Dilutable Securities obtained
by the Company pursuant to Section 4.08.
SECTION 2.03 Conditions to Offer for Benefit of the Company, Newco, and
Newco Sub. Sprint shall not accept for payment or, subject to any applicable
rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act
(relating to Sprint's obligation to pay for or return tendered shares of Common
Stock after the termination or withdrawal of the Offer), pay for any shares of
Common Stock tendered pursuant to the Offer unless the following conditions are
satisfied on or prior to the Offer Acceptance Time (or waived in a writing
executed by Newco, Newco Sub and the Company).
(a) Approval, Execution, Delivery, Effectiveness and Satisfaction of
Ancillary Agreements. (i) The Board of Directors of Sprint, and the Board
of Directors of the General Partners of Sprint L.P. shall not have
withdrawn or modified in a manner adverse to Newco or the Company their
approval of the Offer or the other transactions contemplated by this
Agreement or the Ancillary Agreements, or approved any Acquisition Proposal
or approved the solicitation of additional Acquisition Proposals, (ii)
Sprint shall not have entered into any agreement with respect to any
Acquisition Proposal, or (iii) the Board of Directors of Sprint, or the
Board of Directors of the General Partner of Sprint L.P., or any committee
thereof shall not have resolved to take any of the foregoing actions
referred to in (i) or (ii) above. Sprint and Sprint L.P. shall have
executed and delivered to the Company, Newco and Newco Sub, as the case may
be, and performed each Ancillary Agreement to which it is a party. Each
Ancillary Agreement shall be in full force and effect and all of the terms
and conditions of each such Ancillary Agreement shall be satisfied in all
material respects.
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(b) Representations and Warranties. The representations and
warranties of Sprint and Sprint L.P. shall be true and correct (i) as of
the date referred to in any representation or warranty that addresses a
matter as of a particular date, or (ii) as to all other representations and
warranties, as of the date of this Agreement and as of the Offer Acceptance
Time; unless, in either the case of clause (i) or (ii), the inaccuracies
under such representations and warranties, would not, individually or in
the aggregate, (x) have a Material Adverse Effect on Sprint or Sprint L.P.,
or (y) materially impair the ability of Sprint and Sprint L.P. to enter
into and perform this Agreement or any Ancillary Agreement to which any of
them is a Party and their respective obligations thereunder, in each case
without giving effect to any supplement to any schedule to this Agreement
or to any Ancillary Agreement (provided, however, that any supplement must
-------- -------
be objected to before the earlier of the Offer Acceptance Time or 10
Business Days from the date of delivery thereof). The Company, Newco, and
Newco Sub shall have each received a separate certificate to such effect
dated the Offer Acceptance Date and executed by a duly authorized executive
officer of each of Sprint and Sprint L.P., in each case without giving
effect to any supplement to any Schedule to this Agreement or to any
Ancillary Agreement.
(c) Performance of Obligations and Covenants. Sprint shall have
performed or complied in all material respects with all obligations and
covenants required by this Agreement and each of the Ancillary Agreements
to be performed or complied with by Sprint by the time of the Closing.
(d) Legal Opinion. The Company, Newco and Newco Sub shall have
received the legal opinion of Stinson, Mag & Fizzell, P.C., counsel to
Sprint and Sprint L.P., dated as of the Closing Date, in form and substance
reasonably satisfactory to Newco and the Company.
(e) Sprint Acquisition Proposal. Sprint shall not have entered into
an agreement providing for a transaction contemplated by an Acquisition
Proposal, nor shall it have consummated any such transaction, nor shall
Sprint have received any Acquisition Proposal (i) recommended by the Board
of Directors of Sprint, or (ii) if not so recommended, which the Board of
Directors of the Company reasonably determines in good faith upon
consultation with its outside financial advisors is reasonably likely to be
consummated.
SECTION 2.04 Condition to Closing of All Parties. The obligations of
Sprint, Sprint L.P., Newco, Newco Sub and the Company to consummate the
transactions contemplated to occur at the Closing other than the Offer are
subject to the satisfaction of the condition that Sprint shall have accepted for
payment shares of Common Stock pursuant to the Offer in accordance with this
Agreement (the "Offer Acceptance Condition").
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 Representations and Warranties of the Company. Except as
disclosed in the schedules attached to this Agreement setting forth exceptions
to the Company's representations and warranties set forth herein (the "Company
Disclosure Schedules"), the Company represents and warrants to Sprint and Sprint
L.P. as set forth below. The Company Disclosure Schedules will be arranged in
sections corresponding to sections of this Agreement to be modified thereby.
(a) Organization, Standing and Power. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated and has all requisite power and
authority to own, lease and operate its properties and to carry on its
business as now being conducted. The Company is duly qualified or licensed
to do business and is in good standing in each jurisdiction in which the
nature of its business or the ownership or leasing of its properties makes
such qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed (individually or in the
aggregate) would not have a Material Adverse Effect on the Company. The
Company has made available to Sprint for its review complete and correct
copies of its certificate of incorporation and bylaws, in each case as
amended to the date of this Agreement.
(b) Subsidiaries and Joint Ventures. The Company does not have any
Subsidiaries. The Company does not have the right to acquire an equity
interest in any corporation, partnership, limited liability company, joint
venture, business trust or any other entity, except for Newco and Newco Sub
pursuant to the Merger.
(c) Capital Structure. The authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock and 10,000,000 shares of
preferred stock, par value $0.01 per share. At the close of business on
January 31, 1998, (i) 11,293,394 shares of Common Stock and no shares of
preferred stock of the Company were issued and outstanding, (ii) no shares
of Common Stock were held by the Company in its treasury, (iii) 1,072,012
shares of Common Stock were reserved for issuance pursuant to outstanding
stock options granted under the 1995 Stock Option Plan to purchase shares
of Common Stock ("Employee Stock Options") and an additional 96,158 shares
of Common Stock were available for the grant of Employee Stock Options
pursuant to such plan (and upon approval by the Company's stockholders of a
pending proposal there will be 600,000 additional shares of Common Stock as
to which options can be granted under the 1995 Stock Option Plan), (iv) no
shares of Common Stock were reserved for issuance pursuant to outstanding
stock options granted under the Directors Stock Option Plan to purchase
shares of Common Stock ("Director Stock Options") and an additional 62,500
shares of Common Stock were available for the grant of Director Stock
Options pursuant to such plan, (v) 391,500 shares of Common Stock were
reserved for issuance pursuant to the Company's convertible note with UUNET
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Technologies, Inc., and (vi) 887,647 shares of Common Stock were reserved
for issuance upon the exercise of outstanding warrants. Except as set forth
above or as otherwise expressly provided herein, at the close of business
on January 31, 1998, no shares of capital stock or other voting securities
of the Company were issued, reserved for issuance or outstanding and except
as set forth on Schedule 3.01(c), there are not any phantom stock or other
contractual rights the value of which is determined in whole or in part by
the value of any capital stock of the Company ("Stock Equivalents"). There
are no outstanding stock appreciation rights ("SARs") with respect to
Common Stock that were not granted in tandem with a related Employee Stock
Option. When issued and sold to Sprint, the Convertible Preferred Stock and
the Convertible Notes will be duly authorized, validly issued, fully paid
and non-assessable and free and clear of all Liens. The Newco Common Stock
issued upon conversion of the Convertible Preferred Stock and the
Convertible Notes, will be duly authorized, validly issued, fully paid and
nonassessable and free and clear of all Liens. Other than this Agreement
and the Ancillary Agreements, the Convertible Preferred Stock and the
Convertible Notes are not, and the Newco Common Stock issuable upon
conversion of the Convertible Preferred Stock and the Convertible Notes
will not be, subject to any voting trust agreement or other contract,
agreement, arrangement, commitment or understanding, including any such
agreement, arrangement, commitment or understanding restricting or
otherwise relating to the voting or disposition of the Convertible
Preferred Stock or the Convertible Notes. All outstanding shares of capital
stock of the Company are, and all shares that may be issued pursuant to any
stock plans and the other agreements and instruments listed above will be,
when issued, duly authorized, validly issued, fully paid and nonassessable
and not subject to preemptive rights. Except as set forth above and in
Schedule 3.01(c), and as otherwise expressly set forth in this Agreement,
and except for changes since January 31, 1998 resulting from the grant or
exercise of Employee Stock Options, Director Stock Options, or warrants and
the conversion of notes described in clauses (v) and (vi) above, as of the
date of this Agreement, there are not any securities, options, warrants,
calls, rights to purchase, rights of first refusal, securities convertible
into or exchangeable for voting securities, commitments, agreements,
arrangements or undertakings of any kind to which the Company or any of its
Subsidiaries is a party or by which any of them is bound obligating the
Company to issue, deliver or sell or create, or cause to be issued,
delivered or sold or created, additional shares of capital stock or other
voting securities or Stock Equivalents of the Company or obligating the
Company to issue, grant, extend or enter into any such security, option,
warrant, call, right, commitment, agreement, arrangement or undertaking
(collectively referred to as "Dilutable Securities"). As of the date of
this Agreement, there are not any outstanding contractual obligations of
the Company to repurchase, redeem or otherwise acquire any shares of
capital stock of the Company, except pursuant to existing employee
arrangements.
(d) Authority; Noncontravention. The Company has the requisite
corporate power and authority to enter into this Agreement and the
Ancillary Agreements and, subject, with respect to consummation of the
Merger, to prior approval of the Merger by the stockholders of the Company,
Newco and Newco Sub, as appropriate, in accordance with the
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Delaware General Corporation Law ("DGCL"), to consummate the transactions
contemplated by this Agreement and the Ancillary Agreements. Except as set
forth on Schedule 3.01(d), the execution and delivery by the Company of
this Agreement and each Ancillary Agreement to which it is a party and the
consummation by it of the transactions contemplated by this Agreement and
the Ancillary Agreements have been duly authorized by all necessary
corporate action on the part of the Company, subject, with respect to
consummation of the Merger, to prior approval of the Merger by the
stockholders of the Company, Newco and Newco Sub, as appropriate, in
accordance with the DGCL. This Agreement and the Ancillary Agreements to
which it is party have been duly executed and delivered by each of the
Company, Newco and Newco Sub, as appropriate, and, subject, with respect to
consummation of the Merger, to approval of the Merger by the stockholders
of the Company in accordance with DGCL, and assuming this Agreement and the
Ancillary Agreements constitute the valid and binding agreements of Sprint,
constitute valid and binding obligations of each of them enforceable
against the Company, Newco, and Newco Sub, respectively, in accordance with
their respective terms, except to the extent that the enforcement of this
Agreement or the Ancillary Agreements may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally, and (ii)
general principles of equity regardless of whether enforceability is
considered in a proceeding in equity or at law. Except as set forth on
Schedule 3.01(d), the execution and delivery of this Agreement and the
Ancillary Agreements by the Company did not, and the consummation of the
transactions contemplated by this Agreement and the Ancillary Agreements,
and compliance with the provisions of the Marketing Agreement and the
Network Agreement, without obtaining the consent of any third party will
not, conflict with, or result in any violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to the loss
by the Company of a material benefit under, or result in the creation of
any Lien upon any of the properties or assets of the Company under, (i) the
certificate of incorporation or bylaws of the Company, (ii) any loan or
credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit or license applicable to the Company or its
properties or assets or (iii) subject to the governmental filings and other
matters referred to in the following sentence, any Law applicable to the
Company or its respective properties or assets, other than, in the case of
clauses (ii), (iii) and (iv), any such conflicts, violations, defaults,
rights or Liens that individually or in the aggregate would not (x) have a
Material Adverse Effect on the Company, (y) materially impair the ability
of the Company to perform its obligations under this Agreement or any
Ancillary Agreement to which it is a party or (z) prevent the consummation
of any of the transactions contemplated by this Agreement or any of the
Ancillary Agreements. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required by the Company in connection with the execution and delivery of
this Agreement and the Ancillary Agreements or the consummation by the
Company of the transactions contemplated by this Agreement and the
Ancillary Agreements, except for (i) the filing of a premerger notification
and report form by the Company under the HSR Act and the expiration of the
applicable waiting period or early termination thereof and, (ii) the filing
with the SEC of (w) the Proxy Statement, (x) the S-4,
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(y) a solicitation/recommendation statement on Schedule 14D-9 and (z) such
reports under Sections 12 and 13(a) of the Exchange Act as may be required
in connection with this Agreement, the Ancillary Agreements and the
transactions contemplated by this Agreement and the Ancillary Agreements,
(iii) the filing of the Certificate of Merger with the Secretary of State
of the State of Delaware, and (iv) such other consents, approvals, orders,
authorizations, registrations, declarations and filings as are set forth on
Schedule 3.01(d).
(e) SEC Documents; Undisclosed Liabilities. The Company has filed all
required reports, schedules, forms, statements and other documents with the
SEC since the filing of its initial registration statement with respect to
its initial public offering which was declared effective on January 22,
1997 (the "SEC Documents" which are deemed to include such registration
statement). As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, applicable to such SEC Documents, and
none of the SEC Documents contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company has
filed all exhibits to its SEC documents required by Item 601 of SEC
Regulation S-K or which would have been required to be filed if there were
no exclusions or exceptions in paragraph (b)(10) of such Item 601. The
financial statements of the Company included in the SEC Documents comply as
to form in all material respects with applicable accounting requirements
and the published rules and regulations of the SEC with respect thereto,
have been prepared in accordance with generally accepted accounting
principles (except, in the case of unaudited statements, as permitted by
Form 10-Q of the SEC and SEC Regulations S-X) applied on a consistent basis
during the periods involved (except as may be indicated in the notes
thereto) and fairly present the financial position of the Company as of the
dates thereof and its statements of operations, stockholders equity and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal, recurring year-end audit adjustments). Except as set
forth in the SEC Documents filed and publicly available prior to the date
of this Agreement ("Company Filed SEC Documents"), as of the date hereof,
the Company has no liabilities or obligations of any nature (whether
accrued, contingent, absolute, determined, determinable or otherwise),
other than (i) liabilities provided for in the Company's unaudited balance
sheet included in the Company's Quarterly Report on Form 10-Q for its third
fiscal quarter ("Unaudited Balance Sheet"), dated as of September 30, 1997
(the "Unaudited Balance Sheet Date"), (ii) liabilities and obligations
incurred in the Ordinary Course of Business since the Unaudited Balance
Sheet Date, and (iii) liabilities and obligations under this Agreement and
the Ancillary Agreements.
(f) Absence of Certain Changes or Events. Except as disclosed in
Schedule 3.01(f) or as reflected in Section 3.01(c), the Company Filed SEC
Documents, or except as contemplated by this Agreement, since the Unaudited
Balance Sheet Date, the Company has conducted its business only in the
Ordinary Course of Business and (i) there has not occurred any transaction,
or condition (financial or otherwise) of any character (whether or not in
the Ordinary Course of Business), event or change (including the incurrence
of any
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liabilities of any nature, whether or not accrued, contingent or otherwise)
having individually or in the aggregate, a Material Adverse Effect on the
Company, and (ii) the Company has not taken any action that would have been
prohibited under Section 4.01 hereof as if the Agreement had been in effect
on the date of such action.
(g) Litigation. Except as disclosed in the Company Filed SEC
Documents or as set forth on Schedule 3.01(g), there is no suit, action or
proceeding pending or, to the Knowledge of the Company, Threatened against
the Company that, individually or in the aggregate, would have a Material
Adverse Effect on the Company.
(h) Benefit Plans.
(i) Schedule 3.01(h) hereto contains a true and complete list
of each Benefit Plan. With respect to each Benefit Plan, the Company
has made available to Sprint a true and correct copy of (a) the most
recent annual report (Form 5500) filed with the IRS, if any, (b) the
plan document, (c) any summary plan description relating to such
Benefit Plan, and (d) each trust agreement and group annuity contract,
if any, relating to such Benefit Plan.
(ii) With respect to the Benefit Plans, individually and in the
aggregate, no event has occurred, and to the Company's Knowledge,
there exists no present condition or set of circumstances in
connection with which the Company is now subject to, or could
reasonably be expected to be subject to, any liability under ERISA,
the Code, or any other applicable Law, except liability for benefit
claims and funding obligations or contributions payable in the
ordinary course, and to the Company's Knowledge each of the Benefit
Plans has at all times in all material respects been in compliance
with and administered in accordance with its terms, the applicable
provisions of ERISA, the Code or any other applicable Law.
(iii) Each of the Benefit Plans and related trusts that is
intended to be qualified in form under Section 401(a) and tax exempt
under Section 501(a) of the Code, respectively, has been determined by
the IRS to so qualify under the Code and, to the Company's Knowledge,
nothing has occurred since such determination to cause any of such
Benefit Plans not to qualify under Section 401(a) or any of such
related trusts not to be tax exempt under Section 501(a) of the Code
other than the effective date of certain amendments of the Code and
ERISA, the remedial amendment period for which has not expired.
(iv) With respect to the Benefit Plans, individually and in the
aggregate, all required reports and descriptions have been
appropriately filed and distributed to the extent ERISA, the Code or
applicable Law requires.
(v) With respect to the Benefit Plans, individually and in the
aggregate, there has been no prohibited transaction within the meaning
of Section 406 of ERISA
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or Section 4975 of the Code involving the Company, and there is no
action, suit, grievance, arbitration or other claim with respect to
the administration or investment of assets of the Benefit Plans (other
than routine claims for benefits made in the ordinary course) pending,
or to the Company's Knowledge, Threatened, and to the Company's
Knowledge there is no present condition or set of circumstances which
could reasonably be expected to give rise to any such action, suit,
grievance, arbitration or other claim.
(vi) Neither the Company nor any corporation, trade or business
which is affiliated with the Company, in the manner described in
Section 414(b), (c), (m) and (o) of the Code or Section 4001(a)(14) of
ERISA, has ever sponsored, or made or been obligated to make
contributions to, (i) any defined benefit pension plan subject to
Title IV of ERISA or any plan subject to the minimum funding standards
under Section 412 of the Code or Section 302 of ERISA; or (ii) any
nonqualified deferred compensation plan or arrangement, including,
without limitation, any plans providing for post employment benefits
such as life or health insurance or any other benefits.
(i) Taxes. Except as set forth on Schedule 3.01(i), the Company has
timely filed all Returns and reports required to be filed by it on or
before the date hereof, except where failure to timely file would not have
a Material Adverse Effect on the Company. All such Returns are complete
and accurate except where the failure to be complete or accurate would not
have a Material Adverse Effect on the Company. The Company has paid or has
set up an adequate reserve for the payment of all Taxes shown as due on
such Returns, except where the failure to do so would not have a Material
Adverse Effect on the Company. The Unaudited Balance Sheet contains an
adequate reserve for all Taxes payable by the Company accrued through the
Unaudited Balance Sheet Date. Except as set forth on Schedule 3.01(i), no
deficiencies for any Taxes have been asserted, proposed or assessed against
the Company in writing that have not been paid or otherwise settled or
reserved against, except for deficiencies the assertion, proposing or
assessment of which would not have a Material Adverse Effect on the
Company, and no waivers of the time to assess any such Taxes are pending.
There are no material Liens for Taxes (other than for current taxes not yet
due and payable) on the assets of the Company.
(j) Voting Requirements. The only vote of the holders of any class or
series of the Company's capital stock that is necessary to approve this
Agreement, the Ancillary Agreements or the transactions contemplated by
this Agreement and the Ancillary Agreements is (i) the affirmative vote by
a majority of the votes cast by the holders of Common Stock entitled to
vote with respect to the issuance and sale of the Convertible Preferred
Stock and Convertible Notes, as may be required by paragraph (i) of NASD
Rule 4460, and (ii) the affirmative vote by the holders of a majority of
the outstanding shares of Common Stock entitled to vote with respect to the
Merger, as required by Section 251 of the DGCL.
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(k) Brokers. No broker, investment banker, financial advisor or other
person, other than Deutsche Morgan Grenfell Inc., the fees and expenses of
which will be paid by the Company, is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission, in connection with
the transactions contemplated by this Agreement and the Ancillary
Agreements, based upon arrangements made by or on behalf of the Company
(except as set forth on Schedule 3.01(k)).
(l) Compliance with Laws. The Company has in effect all approvals,
authorizations, certificates, filings, franchises, licenses, notices,
permits, variances, exemptions, orders and rights ("Permits") necessary for
it to own, lease or operate its properties and assets and to carry on its
business as now conducted, and there has not occurred any default under any
Permit, except for the absence of Permits and for defaults under Permits
that, individually or in the aggregate, have not had a Material Adverse
Effect on the Company. Except as disclosed in the Company Filed SEC
Documents, the Company is in compliance with all applicable Law, except
where failures to so comply, individually or in the aggregate, would not
have a Material Adverse Effect on the Company. Except as set forth in
Schedule 3.01(l) hereto or as described in Company Filed SEC Documents
filed prior to the date hereof, as of the date of this Agreement, no
investigation or review by any Governmental Entity with respect to the
Company is pending or, to the Company's Knowledge, Threatened, other than,
in each case, those the outcome of which would not have a Material Adverse
Effect on the Company.
(m) Environmental Matters. The Company is and at all times has been
in full compliance with, and has not been and is not in violation of or
liable under, any Environmental Law (which compliance includes the
possession by the Company of all Permits required under applicable
Environmental Law and compliance with the terms and conditions thereof),
except for such failure to be in compliance which, individually or in the
aggregate, would not have a Material Adverse Effect on the Company. There
are no pending or, to the Company's Knowledge, Threatened claims, orders,
notices, administrative or judicial actions, or Encumbrances, relating to
environmental, health, and safety liabilities arising under or pursuant to
any federal, state or local Environmental Laws, with respect to or
affecting any of the properties and assets (whether real, personal, or
mixed) in which the Company has an interest, except for any such claim,
order, notice, administrative or judicial action, Encumbrance or other
restriction that would not, individually or in the aggregate, have a
Material Adverse Effect on the Company.
(n) Intellectual Property. The Company owns sufficient right, title
and interest in and to, or has valid licenses of sufficient scope and
duration for, all patents, patent rights, copyrights, trademarks, service
marks, trade names, software, trade secrets, confidential information and
other intellectual property material to the operation of the business of
the Company as currently conducted or
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proposed to be conducted (the "Intellectual Property Assets") and as
presently proposed to be conducted. The Intellectual Property Assets are
free and clear of all Liens which would materially impair the Company's
ability to use the Intellectual Property Assets in the business of the
Company as currently conducted or proposed to be conducted. The Company has
granted to no third party any rights in and to the Intellectual Property
Assets except for distribution rights, OEM rights, end user licenses and
rights to reproduce certain of the Intellectual Property Assets in the
Ordinary Course of Business in connection with the marketing and
distribution of the Company's product and service offerings, and which
individually and in the aggregate would not have a Material Adverse Effect.
Except as set forth on Schedule 3.01(n), none of the Intellectual Property
Assets owned or licensed by the Company infringes, or conflicts with, or to
the Company's Knowledge, is alleged to infringe upon or conflict with the
intellectual property rights of any third party, which infringement or
alleged infringement could have a Material Adverse Effect. The Company has
no Knowledge that any of its employees performing or managing key functions
of the Company is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to
any judgment, decree or order of any court or administrative agency, that
would interfere with the use of such employee's best efforts to promote the
interests of the Company or that would conflict with the Company's business
as proposed to be conducted. To the Company's Knowledge, neither the
execution nor delivery of this Agreement or any Ancillary Agreement, nor
the conduct of the Company's business by the employees of the Company, nor
the conduct of the Company's business as proposed, will conflict with or
result in a breach of the terms, conditions or provisions of, or constitute
a default under, any contract, covenant or instrument under which any of
such employees is now obligated, which conflict or breach would have a
Material Adverse Effect. The Company does not presently utilize or intend
to utilize any inventions of any of its employees (or people it currently
intends to hire) made prior to their employment by the Company. To the
Company's Knowledge, any software owned by the Company, and any software
used independently by the Company and owned by third parties and licensed
to the Company is, in all material respects, Year 2000 Compliant. "Year
2000 Compliant" means (i) the software is capable of correctly processing,
providing and receiving date data within and between the twentieth and
twenty-first century (including accounting for all required leap year
calculations); and (ii) all date fields in the software use four digit year
fields.
(o) Certain Payments. Neither the Company, nor any of its directors,
officers, agents, or employees, or to the Company's Knowledge, any other
Person associated with or acting for or on behalf of the Company, has
directly or indirectly (a) made any contribution, gift, bribe, rebate,
payoff, influence payment, kickback, or other payment to any Person,
private or public, regardless of form, whether in money, property, or
services (i) to obtain favorable treatment in securing business, (ii) to
pay for favorable treatment for business secured, (iii) to obtain special
concessions or for special concessions already obtained, for or in respect
of the Company or any Affiliate of the Company, (b) established or
maintained any fund or asset that has not been appropriately recorded in
the books and records of the Company, which in the case of either clause
(a) or (b) would be in violation of Law or would have a Material Adverse
Effect.
SECTION 3.02 Representations and Warranties of Newco and Newco Sub. Newco
and Newco Sub represent and warrant to Sprint and Sprint L.P., jointly and
severally, as follows:
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(a) Organization, Standing and Power. Newco and Newco Sub were each
incorporated under the DGCL on January 30, 1997 and neither of them has
engaged in any business, owns any property or assets (except for $10 in
cash received by Newco for the issuance of 10 shares of its common stock to
its sole stockholder (which is not the Company or an Affiliate of the
Company) and $10 in cash received by Newco Sub for the issuance of 10
shares of its common stock to Newco, which in each case represents all of
their outstanding shares of capital stock) or is a party to any agreement,
except for this Agreement. Each of Newco and Newco Sub is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated. Newco will, immediately following
the Merger, be duly qualified or licensed to do business and be in good
standing in each jurisdiction in which the nature of the business conducted
or the ownership or leasing of its properties makes such qualification or
licensing necessary, other than in such jurisdictions where the failure to
be so qualified or licensed (individually or in the aggregate) would not
have a Material Adverse Effect on Newco immediately following the Merger.
Each of Newco and Newco Sub has made available to Sprint for its review
complete and correct copies of its certificate of incorporation and bylaws,
in each case as amended to the date of this Agreement.
(b) Authority; Noncontravention. Each of Newco and Newco Sub has the
requisite corporate power and authority to enter into this Agreement and
the Ancillary Agreements and, subject, with respect to consummation of the
Merger, to approval of the Merger by the stockholders of the Company, Newco
and Newco Sub in accordance with the DGCL, to consummate the transactions
contemplated by this Agreement and the Ancillary Agreements. Except as set
forth on Schedule 3.02(b), the execution and delivery by each of Newco and
Newco Sub of this Agreement and each Ancillary Agreement to which it is a
party and the consummation by each of them of the transactions contemplated
by this Agreement and the Ancillary Agreements have been duly authorized by
all necessary corporate action on the part of Newco and Newco Sub,
respectively, subject, with respect to consummation of the Merger, to prior
approval of the Merger by the stockholders of the Company, Newco and Newco
Sub in accordance with DGCL. This Agreement and the Ancillary Agreements to
which it is party have been duly executed and delivered by each of Newco
and Newco Sub and, subject, with respect to consummation of the Merger, to
prior approval of the Merger by the stockholders of the Company, Newco and
Newco Sub in accordance with DGCL, and assuming this Agreement and the
Ancillary Agreements constitute the valid and binding agreements of Sprint
and the Company, constitute valid and binding obligations of each of them
enforceable against Newco and Newco Sub, respectively, in accordance with
their respective terms, except to the extent that the enforcement hereof
and thereof may be limited by (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights generally, and (ii) general principles of equity
regardless of whether enforceability is considered in a proceeding in
equity or at law. Except as set forth on Schedule 3.02(b), the execution
and delivery of this Agreement and the Ancillary Agreements by Newco and
Newco Sub did not, and the consummation of the transactions contemplated by
this Agreement and the Ancillary Agreements and compliance
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with the provisions of the Marketing Agreement and the Network Agreement
without obtaining the consent of any third party will not, conflict with,
or result in any violation of, or default (with or without notice or lapse
of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to loss by Newco or Newco
Sub of a material benefit under, or result in the creation of any Lien upon
any of the properties or assets of Newco or Newco Sub under, (i) the
certificate of incorporation or bylaws of Newco or Newco Sub, (ii) any loan
or credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit or license applicable to Newco or Newco Sub
or their respective assets or (iii) subject to the governmental filings and
other matters referred to in the following sentence, any Law applicable to
Newco or Newco Sub or their respective assets, other than, in the case of
clauses (ii) and (iii), any such conflicts, violations, defaults, rights or
Liens that individually or in the aggregate would not (x) have a Material
Adverse Effect on Newco or Newco Sub, (y) materially impair the ability of
Newco and Newco Sub to perform its obligations under this Agreement or any
Ancillary Agreement to which it is a party or (z) prevent the consummation
of any of the transactions contemplated by this Agreement or any of the
Ancillary Agreements. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required by Newco or Newco Sub in connection with the execution and
delivery of this Agreement and the Ancillary Agreements or the consummation
by Newco and Newco Sub of the transactions contemplated by this Agreement
and the Ancillary Agreements, except for (i) the filing with the SEC of (i)
the S-4, (ii) the filing of the Certificate of Merger with the Secretary of
State of the State of Delaware, and (iii) such other consents, approvals,
orders, authorizations, registrations, declarations and filings as are set
forth on Schedule 3.02(b).
(c) Litigation. There is no suit, action or proceeding pending or, to
the Knowledge of Newco or Newco Sub, Threatened against Newco or Newco Sub.
(d) Voting Requirements. The only vote of the holders of any class or
series of the capital stock of Newco and Newco Sub that is necessary to
approve this Agreement, the Ancillary Agreements or the transactions
contemplated by this Agreement and the Ancillary Agreements is the
affirmative vote by the holders of a majority of their respective
outstanding shares of common stock entitled to vote with respect to the
Merger, as required by Section 251 of the DGCL.
(e) Brokers. No broker, investment banker, financial advisor or other
person, other than Deutsche Morgan Grenfell Inc., the fees and expenses of
which will be paid by the Company, is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with
the transactions contemplated by this Agreement and the Ancillary
Agreements based upon arrangements made by or on behalf of Newco and Newco
Sub.
(f) Compliance with Laws. Newco and Newco Sub will, immediately
following the Merger, have all Permits necessary for them to own, lease or
operate the properties and assets now owned by the Company and to carry on
the business now conducted by the
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Company, except for such Permits, the absence of which would not have,
individually or in the aggregate, a Material Adverse Effect on Newco and
Newco Sub, taken as a whole.
SECTION 3.03 Representations and Warranties of Sprint and Sprint L.P..
Sprint and Sprint L.P., jointly and severally, represent and warrant to the
Company, Newco and Newco Sub as follows:
(a) Organization, Standing and Power. Sprint is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated. Sprint L.P. is a limited
partnership duly organized, validly existing and in good standing under the
laws of the jurisdiction in which it is organized. Each of Sprint and
Sprint L.P. has all requisite power and authority to own, lease and operate
their respective properties and to carry on their respective businesses as
now being conducted. Each of Sprint and Sprint L.P. and each of their
respective Significant Subsidiaries is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the nature
of its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed (individually or in the
aggregate) could not reasonably be expected to have a Material Adverse
Effect on Sprint or Sprint L.P. and their respective Subsidiaries, taken as
a whole. Sprint has made available to the Company, Newco and Newco Sub for
their review complete and correct copies of its certificate of
incorporation and bylaws. Sprint L.P. has made available to the Company,
Newco and Newco Sub for their review a complete and correct copy of its
constitutive documents.
(b) Subsidiaries. A schedule to Sprint's Annual Report on Form 10-K
for 1996 lists each Significant Subsidiary of Sprint. All the outstanding
shares of capital stock of each Significant Subsidiary that is a
corporation have been validly issued and are fully paid and nonassessable
and are not subject to any options or other rights to acquire any such
shares.
(c) Authority; Noncontravention. Sprint has the requisite corporate
power and authority, and Sprint L.P. has the requisite power and authority,
to enter into this Agreement and the Ancillary Agreements and to consummate
the transactions contemplated by this Agreement and the Ancillary
Agreements. The execution and delivery by Sprint and Sprint L.P. of this
Agreement and each Ancillary Agreement to which it is a party and the
consummation by it of the transactions contemplated by this Agreement and
the Ancillary Agreements have been duly authorized by, in the case of
Sprint, all necessary corporate action, and in the case of Sprint L.P., all
necessary action of the limited partnership and its general partner. This
Agreement and the Ancillary Agreements to which Sprint or Sprint L.P. is
party have been duly executed and delivered by Sprint and Sprint L.P. and,
assuming this Agreement and the Ancillary Agreements constitute the valid
and binding agreements of the Company, Newco and Newco Sub, constitute
valid and binding obligations enforceable against Sprint and Sprint L.P. in
accordance with their respective terms, except to the extent
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that the enforcement of this Agreement or the Ancillary Agreements may be
limited by (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights
generally, and (ii) general principles of equity regardless of whether
enforceability is considered in a proceeding in equity or at law. Except as
set forth on Schedule 3.03(c), the execution and delivery of this Agreement
and the Ancillary Agreements by Sprint and Sprint L.P. did not, and the
consummation of the transactions contemplated by this Agreement and the
Ancillary Agreements and compliance with the provisions of the Marketing
Agreement and the Network Agreement without obtaining the consent of any
third party will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of any
obligation or to loss by Sprint, Sprint L.P. or any of Sprint's Significant
Subsidiaries, of a material benefit under, or result in the creation of any
Lien upon any of the properties or assets of Sprint or Sprint L.P. under,
(i) the certificate of incorporation or bylaws of Sprint or the comparable
charter or organizational documents of Sprint L.P. or any of Sprint's
Significant Subsidiaries, (ii) any loan or credit agreement, note, bond,
mortgage, indenture, lease or other agreement, instrument, permit or
license applicable to Sprint, Sprint L.P. or any of Sprint's Significant
Subsidiaries or their respective properties or assets or (iii) subject to
the governmental filings and other matters referred to in the following
sentence, any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Sprint, Sprint L.P. or any of Sprint's Significant
Subsidiaries or their respective properties or assets, other than, in the
case of clauses (ii) and (iii), any such conflicts, violations, defaults,
rights or Liens that individually or in the aggregate would not (x) have a
Material Adverse Effect on Sprint, Sprint L.P. and Sprint's Subsidiaries,
taken as a whole, (y) materially impair the ability of Sprint or Sprint
L.P. to perform their respective obligations under this Agreement or any
Ancillary Agreement to which it is a party or (z) prevent the consummation
of any of the transactions contemplated by this Agreement or any of the
Ancillary Agreements. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required by or with respect to Sprint or Sprint L.P. or any of Sprint's
Significant Subsidiaries in connection with the execution and delivery of
this Agreement and the Ancillary Agreements or the consummation by Sprint
or Sprint L.P. of the transactions contemplated by this Agreement and the
Ancillary Agreements, except for (i) the filing of a premerger notification
and report form by Sprint or Sprint L.P. under the HSR Act and the
expiration of the applicable waiting period or early termination thereof
and, (ii) the filing with the SEC of (x) a tender offer statement on
Schedule 14D-1 and (y) such reports under Sections 12 and 13(a) of the
Exchange Act as may be required in connection with this Agreement, the
Ancillary Agreements and the transactions contemplated by this Agreement
and the Ancillary Agreements, and (iii) such other consents, approvals,
orders, authorizations, registrations, declarations and filings as are set
forth on Schedule 3.03(c).
(d) Brokers. No broker, investment banker, financial advisor or other
person, other than SBC Warburg Dillon Read, Inc. the fees and expenses of
which will be paid by Sprint, is entitled to any broker's, finder's,
financial advisor's or other similar fee or
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commission in connection with the transactions contemplated by this
Agreement and the Ancillary Agreements based upon arrangements made by or
on behalf of Sprint or Sprint L.P.
(e) Ownership of Common Stock. As of the date of this Agreement,
neither Sprint nor Sprint L.P. beneficially owns any shares of Common
Stock.
(f) Investment Intent. Sprint is purchasing the Convertible Notes for
advances under the Credit Agreement, and Sprint L.P. is purchasing the
Convertible Preferred Stock in exchange for the Preferred Stock
Consideration, in each case for their own account for investment and not
with a present view to, or for sale in connection with, any distribution
thereof in violation of the Securities Act. The certificates evidencing the
Convertible Preferred Stock, the Convertible Notes and any shares of Common
Stock issued upon conversion of the Convertible Preferred Stock or the
Convertible Notes shall bear substantially the following legend (modified
accordingly in the case of the Convertible Notes) until such time as there
is a sale or transfer in accordance with this Agreement and the Ancillary
Agreements or the termination thereof:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. THE
DISPOSITION AND VOTING OF SUCH SHARES IS SUBJECT TO THE
CONDITIONS SPECIFIED IN THE INVESTMENT AGREEMENT DATED AS OF
FEBRUARY 10, 1998, AMONG THE COMPANY, SPRINT, SPRINT L.P.,
NEWCO, AND NEWCO SUB AND THE GOVERNANCE AGREEMENT DATED AS
OF FEBRUARY 10, 1998, AMONG THE COMPANY, SPRINT, SPRINT
L.P., AND NEWCO, AND NEWCO RESERVES THE RIGHT TO REFUSE THE
TRANSFER OF SUCH SHARES UNTIL SUCH CONDITIONS HAVE BEEN
FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY OF SUCH
CONDITIONS WILL BE FURNISHED BY NEWCO TO THE HOLDER HEREOF
UPON WRITTEN REQUEST AND WITHOUT CHARGE. THESE SECURITIES
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED
OR HYPOTHECATED EXCEPT IN ACCORDANCE THEREWITH."
(g) Acquisition for Investment and Rule 144. Sprint and Sprint L.P.
understand that the shares of Convertible Preferred Stock issued to them
pursuant to the Agreement ("Sprint Shares") and Sprint understands that the
Convertible Notes issued to Sprint pursuant to the Credit Agreement will
not be registered under the Securities Act by reason of a specific
exemption from the registration provision of the Securities Act which
depends upon, among other things, the bona fide nature of their investment
intent as expressed herein. Except as otherwise provided in Section
3.03(i), Sprint and Sprint L.P. acknowledge that the Sprint Shares and the
Convertible Notes must be held indefinitely unless they are subsequently
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registered under the Securities Act or an exemption from such registration
is available. Sprint and Sprint L.P. have been advised or are aware of the
provisions of Rule 144 promulgated under the Securities Act which permit
limited resale of shares purchased in a private placement subject to the
satisfaction of certain conditions. Sprint and Sprint L.P. are aware that
the certificates representing the Sprint Shares, and that the Convertible
Notes, will bear such legends relating to restrictions on resale under the
Securities Act as provided in Section 3.01(f) and Newco under certain
conditions may issue instructions to its stock transfer agent to stop the
transfer of the Sprint Shares and the Convertible Notes unless made in
accordance with this Agreement or any Ancillary Agreement.
(h) Legal Investment. The purchase of the Convertible Preferred Stock
by Sprint L.P. and the purchase of Convertible Notes by Sprint hereunder is
legally permitted by all applicable Law and all consents, approvals,
authorizations of or designations, declarations or filings in connection
with the valid execution and delivery of this Agreement by Sprint and
Sprint L.P. or the purchase of the Convertible Preferred Stock by Sprint
L.P. and the Convertible Notes by Sprint have been obtained, or will be
obtained prior to the Closing Date.
(i) Purchase Entirely for Own Account. Sprint is purchasing the
Convertible Notes for advances under the Credit Agreement, and Sprint L.P.
is purchasing the Convertible Preferred Stock in exchange for the Preferred
Stock Consideration, in each case for their own account and not as a
nominee or agent, and not with a view to the resale or distribution of any
part thereof, except for transfers permitted by this Agreement. Neither
Sprint L.P. nor Sprint has any present intention of selling, granting any
participation in, or otherwise distributing the Convertible Preferred Stock
or the Convertible Notes. Neither Sprint nor Sprint L.P. has 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 Convertible Preferred Stock or the Convertible Notes. Notwithstanding
any other provision of this Agreement, Sprint and Sprint L.P. shall be
permitted to transfer the Convertible Preferred Stock, the Convertible
Notes and the Newco Common Stock issued upon conversion thereof to any
Affiliate of Sprint or Sprint L.P. without an opinion of counsel, without
registration under the Securities Act or any state securities law, and
without the consent of Newco, provided that any such Affiliate who acquires
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such Convertible Preferred Stock, Convertible Notes or Newco Common Stock
agrees in writing to be subject to the applicable requirements of this
Section 3.03 and any restrictions on transfer contained in any of the
Ancillary Agreements to the same extent as if such Affiliate were the
original purchaser thereof.
(j) Agreements with SIP Subscribers. Sprint L.P. has previously
furnished to each of the Company, Newco and Newco Sub the form of agreement
between Sprint L.P. and the SIP Subscribers governing the receipt of
internet access services from Sprint L.P. ("SIP Agreements"). Sprint L.P.
has complied in all material respects with all applicable terms and
requirements of the SIP Agreements. As of the date hereof, Sprint has
approximately 130,000 SIP Subscribers who are subject to SIP Agreements.
Except as set forth in Schedule 3.03(j), the SIP Agreements are assignable
to Newco in accordance with this Agreement and are enforceable against
Sprint L.P. in accordance with their respective terms, except to the
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extent enforcement thereof may be limited by: (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally, and (ii) general principals of
equity, regardless of whether enforceability is considered in a proceeding
in equity or at law; provided, however, that the SIP Agreements are subject
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to immediate termination by unilateral action of the SIP Subscribers.
(k) Financial Capability. Sprint has sufficient funds available to
finance the Offer and the other transactions contemplated by this Agreement
and the Ancillary Agreements, and is not engaged in any financing activity,
the consummation of which would be necessary in order for Sprint to
consummate the Offer and the other transactions contemplated by this
Agreement and the Ancillary Agreements.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS AND
OF THE COMPANY
SECTION 4.01 Conduct of Business. (a) Conduct of Business by the
Company. During the period from the date of this Agreement to the Closing Date,
the Company shall carry on its business in accordance with applicable Laws and
in the usual, regular and Ordinary Course in substantially the same manner as
heretofore conducted and, to the extent consistent therewith, use all reasonable
efforts to preserve intact its current business organization, keep available the
services of its current officers and employees and preserve its relationships
with customers, suppliers, licensors, licensees, distributors, joint venturers
and others having business dealings with it, except to the extent that the
failure to do so would not have a Material Adverse Effect on the Company.
Without limiting the generality of the foregoing, except as contemplated by this
Agreement, during the period from the date of this Agreement to the Closing
Date, the Company shall not, without obtaining the prior written consent of
Sprint, undertake any of the following:
(i) (x) declare, set aside or pay any dividends on, or make any
other distributions in respect of any of its capital stock, (y) split,
combine or reclassify any of its capital stock or issue or authorize
the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock or (z) purchase, redeem
or otherwise acquire any shares of capital stock of the Company or any
other equity securities of the Company or any rights, warrants or
options to acquire, or convert into or exchange for, any such shares
or other equity securities, except for Employee Stock Options, shares
repurchased or redeemed pursuant to any existing arrangements with
existing employees;
(ii) except as set forth in subsection (iv) hereof below, issue,
deliver, sell, pledge or otherwise encumber any shares of capital
stock, any other voting securities or any securities convertible into
or exchangeable for, or any rights, warrants or options to acquire,
any such shares, voting securities or convertible or exchangeable
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securities (other than (x) the issuance of new Employee Stock Options
or Director Stock Options under existing Benefit Plans or Common Stock
upon the exercise or conversion of Employee Stock Options or Director
Stock Options, warrants or convertible notes outstanding on the date
of this Agreement and in accordance with their present terms, and (y)
the issuance and sale of the Convertible Preferred Stock and the
Convertible Notes in accordance with the terms hereof);
(iii) any amendment to the certificate of incorporation or
bylaws of the Company;
(iv) acquire or agree to acquire (x) by merging or
consolidating with, or by purchasing a substantial portion of the
stock or assets of, or by any other manner, any business or any
corporation, partnership, joint venture, association or other business
organization or division thereof if the consideration paid by the
Company in such transaction is in the form of an issuance of capital
stock or Dilutable Securities which in the aggregate are in excess of
the Issuance Percentage Limitation or (y) any assets that are
material, individually or in the aggregate, to the Company;
(v) sell, lease, license, mortgage or otherwise encumber or
subject to any Lien or otherwise dispose of any of its Intellectual
Property Assets or any other properties or assets if, as a result
thereof, the Company would suffer a Material Adverse Effect;
(vi) (A) incur any indebtedness for borrowed money or guarantee
any such indebtedness of another Person, issue or sell any debt
securities or warrants or other rights to acquire any debt securities
of the Company, guarantee any debt securities of another Person, enter
into any "keep well" or other agreement to maintain any financial
statement condition of another Person or enter into any arrangement
having the economic effect of any of the foregoing, except for short-
term borrowings incurred in the Ordinary Course of Business or which
do not exceed $10 million in the aggregate, or (B) make any loans,
advances or capital contributions to, or investments in, any other
Person other than (1) pursuant to existing contractual rights and (2)
non-material loans or advances to employees in the Ordinary Course of
Business;
(vii) make or agree to make any new capital expenditures or
expenditures (other than capital expenditures which are contained in a
duly approved budget of the Company as of the date hereof), which, are
in excess of $5 million in the aggregate.
(viii) change any accounting policy or procedure, other than any
changes required by GAAP or applicable SEC accounting policy;
(ix) fail to maintain its books, accounts and records in any
manner other than the usual, regular and ordinary manner, on a basis
consistent with prior years and in a business-like manner in
accordance with sound commercial practice;
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(x) fail to timely file all tax returns and reports required to
be filed with any Governmental Entity; or
(xi) authorize any of, or commit or agree to take any of, the
foregoing actions.
(b) Other Actions. The Company, Newco, Newco Sub, Sprint and Sprint L.P.
shall not, and Sprint shall not permit any of its Subsidiaries to, take any
action that would result in (i) any of the representations and warranties of
such party set forth in this Agreement or the Ancillary Agreements that are
qualified as to materiality becoming untrue, (ii) any of such representations
and warranties that are not so qualified becoming untrue in any material respect
or (iii) any of the conditions set forth in Article II not being satisfied. Each
of the Parties agrees to and shall use its respective commercially reasonable
efforts to cause the conditions for the respective benefit of the other Parties
hereto and set forth in Article II to be satisfied.
(c) Advice of Changes. Each of the Parties shall promptly notify the other
Parties of any change or event having a Material Adverse Effect on the other
Parties. If a Party provides notice to the other Parties of a change or event
having a Material Adverse Effect on the other Parties, and as to any of the
other Parties that fails to deliver notice within five (5) business days to such
notifying Party of its intention to not Close as a result of such change or
event, then such Party failing to deliver such notice shall be deemed to have
waived such change or event.
SECTION 4.02 Access to Property and Information. Sprint, Sprint L.P. and
their counsel, accountants, auditors and representatives shall have full access
during normal business hours to the facilities of the Company and to its books,
records, Contracts and documents concerning its business, assets and properties
that may reasonably be requested, provided that such inspections will not
--------
unreasonably disrupt the Company's business or employees and the Company
receives reasonable advance notice of such inspections.
SECTION 4.03 Public Disclosure. No public release or announcement of the
transactions contemplated by this Agreement or any of the Ancillary Agreements
or related discussions or negotiations shall be made without advance approval
thereof by Sprint, the Company and Newco, except as may be required by Law or
legal process, in which case the other Parties shall receive prior notification
and opportunity for review before release.
SECTION 4.04 HSR Act Filings. As soon as practicable, the Company and
Sprint shall each file completed notification reports under the HSR Act, in
connection with the transactions contemplated by this Agreement and the
Ancillary Agreements and will cooperate with each other in attempting to secure
a waiver of the applicable waiting periods under such Act, and, upon the request
of either the Federal Trade Commission or the United States Department of
Justice, will supply such agency with any additional requested information as
expeditiously as possible.
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SECTION 4.05 Information. Each Party will promptly inform the other party
in writing of (i) any litigation commenced against such Party in respect of the
transactions contemplated by this Agreement or any Ancillary Agreement, or (ii)
any material litigation commenced against such Party which would have a Material
Adverse Effect on such Party and its Subsidiaries taken as a whole.
SECTION 4.06 Further Assurances. Each Party shall each execute and
deliver or cause to be executed and delivered such further instruments of
transfer, assignment and conveyance and take such other action as may be
reasonably required to more effectively carry out the consummation of the
transactions contemplated by this Agreement and the Ancillary Agreements.
SECTION 4.07 No Solicitation. (a) The Company shall not and shall not
authorize or permit any officer, director or employee of, or any investment
banker, attorney or other advisor or representative of, the Company to, (i)
solicit or initiate, or encourage the submission of, any Acquisition Proposal,
or approve or authorize any of the foregoing, or (ii) participate in any
discussions or negotiations regarding, or furnish to any person any information
with respect to, or take any other action to expedite any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any Acquisition Proposal; provided, however, that to the extent required by
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the fiduciary obligations of the Board of Directors of the Company, as
determined in good faith by the Board of Directors based on the advice of
outside counsel, the Company may, (A) in response to an unsolicited request
therefor, furnish information with respect to the Company to any person pursuant
to a customary confidentiality agreement and discuss such information with such
person, (B) upon receipt by the Company of an Acquisition Proposal, following
delivery to Sprint of the notice required pursuant to Section 4.07(b),
participate in negotiations regarding such Acquisition Proposal, and (C) modify
or withdraw the recommendation to accept the Offer contemplated by Section
1.02(a) or its recommendation that the stockholders of the Company vote in favor
of the Company Stockholder Vote Matters as contemplated by Section 1.06(c).
(b) The Company shall (i) promptly notify Sprint of (A) the existence of
any request for confidential information with respect to, or the receipt of, any
Acquisition Proposal, (B) any inquiry or discussions with respect to, or which
could reasonably be expected to lead to, any Acquisition Proposal, (C) the
execution of a confidentiality agreement with respect to an Acquisition
Proposal, (D) the furnishing of any information in contemplation of an
Acquisition Proposal, whether or not pursuant to a confidentiality agreement,
(ii) describe the terms and conditions of any Acquisition Proposal in reasonable
detail, and (iii) furnish to Sprint all information made available to any Person
making the Acquisition, or contemplating the making of an Acquisition Proposal,
subject to a customary confidentiality agreement.
(c) The Company shall not take any action that would enhance the ability
of any other Person proposing an Acquisition Proposal to obtain the approval of
the Company's stockholders or otherwise consummate such Acquisition Proposal
(including granting any approval pursuant to Section 203 of the DGCL) without
also taking a comparable action that would similarly enhance the ability of
Sprint to obtain any necessary approval of the Company's stockholders of, and
otherwise to consummate, the transactions contemplated by this Agreement and the
Ancillary Agreements or
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an alternative transaction initiated by Sprint and concurrently withdrawing any
impediments thereto that do not similarly impede such other Person.
(d) Nothing contained in this Section 4.07 shall prohibit the Company from
taking and disclosing to its stockholders a position contemplated by Rule 14e-2
under the Exchange Act.
SECTION 4.08 Efforts Regarding Outstanding Warrants and Other Dilutable
Securities. Prior to the Closing, the Company will use its commercially
reasonable efforts to cause each of the Warrants and other Dilutable Securities
of the Company outstanding on the Closing Date to be amended or otherwise
modified so that such Warrants and other Dilutable Securities would be
thereafter only convertible into, exchangeable for or give the right to acquire
a number of shares of Newco Common Stock equal to the number of shares of Common
Stock into which such are convertible, exchangeable or exercisable. The Company
shall, at any time reasonably requested by Sprint, update Sprint with respect to
(i) any warrants or other Dilutable Securities of the Company that will be
convertible into, exchangeable for, or given the right to acquire Common Stock
or other voting securities of the Company after the Merger, and (ii) the
Company's progress in obtaining amendments or modifications to each of the
agreements and/or instruments governing and/or evidencing such warrants and/or
Dilutable Securities in order to ensure that such warrants and/or Dilutable
Securities will be convertible into, exchangeable for, or given the right to
acquire solely the same respective number of shares of Newco Common Stock after
the Merger.
ARTICLE V
ADDITIONAL AGREEMENTS
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SECTION 5.01 Reasonable Efforts; Notification. (a) Upon the terms and
subject to the conditions set forth in this Agreement, each of the Parties shall
use all commercially reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, and to assist and cooperate with the
other parties in doing, all things necessary, proper or advisable to consummate
and make effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement and the Ancillary Agreements, including (i) the
obtaining of all necessary actions or nonactions, waivers, consents and
approvals from Governmental Entities and the making of all necessary
registrations and filings (including filings with Governmental Entities, if any)
and the taking of all reasonable steps as may be necessary to obtain an approval
or waiver from, or to avoid an action or proceeding by, any Governmental Entity,
(ii) the obtaining of all necessary consents, approvals or waivers from third
parties, (iii) the defending of any lawsuits or other legal proceedings, whether
judicial or administrative, challenging this Agreement or any of the Ancillary
Agreements or the consummation of the transactions contemplated by this
Agreement or the Ancillary Agreements, including seeking to have any stay or
temporary restraining order entered by any court or other Governmental Entity
vacated or reversed, and (iv) the execution and delivery of any additional
instruments necessary to consummate the transactions contemplated by, and to
fully carry out the purposes of, this Agreement and the Ancillary Agreements.
In connection with and without limiting the foregoing, the Company, Newco and
their respective Boards of Directors shall (i) take all action requested by
Sprint or Sprint L.P. reasonably necessary so that no state takeover statute of
the States of California or Delaware or similar statute or regulation in such
states is or becomes applicable to this Agreement, the Ancillary Agreements or
any transaction contemplated by this Agreement or the Ancillary Agreements and
(ii) if any state takeover statute of the States of California or Delaware or
similar statute or regulation in such states becomes applicable to this
Agreement, any Ancillary Agreement or any transaction contemplated by this
Agreement or any Ancillary Agreement, take all action reasonably requested by
Sprint or Sprint L.P. and within the Company's or Newco's power to permit the
transactions contemplated by this Agreement and the Ancillary Agreements to be
consummated as promptly as practicable on the terms contemplated by this
Agreement and the Ancillary Agreements and otherwise take such actions as are
reasonably requested by Sprint or Sprint L.P. and within the Company's or
Newco's power to minimize the effect of such statute or regulation on the
transactions contemplated by this Agreement and the Ancillary Agreements.
Notwithstanding the foregoing, the Board of Directors of the Company shall not
be prohibited from taking any action permitted by Section 4.07.
(b) Each Party shall give prompt notice to the other parties, of (i) any
representation or warranty made by it contained in this Agreement or any
Ancillary Agreement that is qualified as to materiality becoming untrue or
inaccurate in any respect, subject to such qualification, or any such
representation or warranty that is not so qualified becoming untrue or
inaccurate in any material respect or (ii) the failure of that Party to comply
with or satisfy in any material respect any covenant, condition or agreement to
be complied with or satisfied by it under this Agreement or any Ancillary
Agreement (including the Knowledge of Sprint of any circumstance or condition
that could reasonably be expected to render Sprint to be unable to satisfy the
condition set forth in Section 2.03(e)); provided, however, that no such
-------- -------
notification shall affect the representations, warranties, covenants or
agreements of the Parties or the conditions to the obligations of the Parties
under this Agreement or the Ancillary Agreements.
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SECTION 5.02 Fees and Expenses. Except as provided below, all fees and
expenses incurred in connection with the Offer, this Agreement and the
transactions contemplated by this Agreement and the Ancillary Agreements shall
be paid by the Party incurring such fees or expenses, whether or not the Offer,
the sale of the Convertible Preferred Stock or the Convertible Notes, or the
other transactions contemplated by this Agreement or any Ancillary Agreement on
the terms contemplated hereby or thereby is consummated; provided, however, that
-------- -------
one-half of the reasonable out-of-pocket expenses incurred by the Company in
preparing the Proxy Statement and S-4, printing and mailing the Proxy Statement,
the SEC filing fees for the S-4 and in holding the Special Meeting shall be paid
by Sprint.
SECTION 5.03 Stockholder Litigation. The Company shall give Sprint prompt
notice of any stockholder litigation against the Company and its directors
relating to the transactions contemplated by this Agreement and the Ancillary
Agreements; provided, however, that no settlement of any such litigation shall
-------- -------
be agreed to until the Company has consulted with Sprint.
SECTION 5.04 Nasdaq Listing. The Company shall use its best efforts to
cause the Newco Common Stock to be included in The Nasdaq National Market after
the Closing.
SECTION 5.05 Confidentiality. Prior to the date of this Agreement, and
between the date of this Agreement and until the earlier of the Closing Date or
the termination of this Agreement, and thereafter in accordance with the
Ancillary Agreements and the transactions and ongoing business conducted by the
Parties as contemplated hereby and thereby, the Parties have provided, or shall
provide, one another with information which is protected, secret, non-public or
proprietary in nature ("Confidential Information"); provided, however, that the
-------- -------
term Confidential Information shall not include information which: (a) is or
becomes publicly available other than as a result of a disclosure by the
disclosing Party or its representatives, (b) is or becomes available to the
receiving Party on a nonconfidential basis from a source (other than the
disclosing Party or its representatives) which, to the receiving Party's
knowledge after due inquiry, is not prohibited from disclosing such information
to the receiving Party by a legal, contractual or fiduciary obligation to the
disclosing Party, (c) is independently developed by the receiving Party without
use of the Confidential Information, or (d) is already known by the receiving
Party. Each Party agrees to (i) hold confidential, to protect, and not to
disclose except on a need-to-know basis to its directors, officers, employees,
agents, financial advisors and legal counsel, all Confidential Information
provided to it by any other Party to this Agreement or any Ancillary Agreement,
and except as otherwise required by Law or legal process, or (ii) to use
Confidential Information for any purpose other than to the extent necessary to
evaluate and enforce its rights under this Agreement and any Ancillary
Agreement. The covenants set forth in this Section 5.05 shall remain in effect
until the Closing Date and so long thereafter as any Ancillary Agreement remains
in effect. If this Agreement is terminated prior to consummation of the
transactions contemplated hereby or by any Ancillary Agreement, then each Party
shall return all documents and other material, whether or not confidential,
provided to it pursuant to this Agreement by or on behalf of any other Party to
this Agreement. The foregoing obligations of confidentiality, non-disclosure
and limited use shall be in effect for a period of three years beyond such
termination. During such period, none of the Parties shall use any of the
Confidential Information received from
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any other Party to the detriment of such other Party. Notwithstanding any other
provision of this Section 5.05, each Party shall have the right to retain and to
use any Confidential Information to the extent necessary to evaluate and enforce
its rights under this Agreement or any Ancillary Agreement.
SECTION 5.06 No Acceleration of Options or Termination Payments. (a) The
Company shall, prior to the Closing, amend, or cause to be amended, (i) the 1995
Stock Option Plan and, if necessary, any options granted thereunder, (ii) the
employment agreement with Charles G. Betty and any other employment agreements
with officers, directors or employees of the Company, (iii) any other plan,
agreement, arrangement or understanding giving rise to any options, warrants or
any other rights to purchase capital stock of the Company are granted or issued,
(iv) any plan, agreement, arrangement or understanding pursuant to which any
termination or severance pay or other compensation of any officer, director or
employee of the Company is or may become due, in order, in any such case, to
ensure that none of the transactions contemplated by this Agreement or any of
the Ancillary Agreements (including, without limitation, conversion of the
Convertible Preferred Stock and/or the Convertible Notes) will, constitute a
"change of control," or any similar event or occurrence within the meaning of
any such term or any similar term contained in any of the foregoing, or
otherwise cause or result in the acceleration of the vesting of such options or
rights or of the time at which such options or rights are permitted to be
exercised, or the acceleration of the right to receive termination or severance
pay or other compensation, in any such case either alone or together with any
other event or occurrence, such as the termination or constructive termination
of employment of any officer, director or employee of the Company.
SECTION 5.07 Amortization and Writeoffs of Goodwill and Assets. The
Company and Newco agree that none of the goodwill, or other tangible or
intangible assets acquired pursuant to, the transactions contemplated by this
Agreement or any Ancillary Agreement shall be amortized or written off other
than on a straight line basis of equal amounts taken over a period of no less
than 24 months commencing with the Closing Date, except for any such amount
which, individually or in the aggregate, is not material.
SECTION 5.08 Maintaining SIP Subscribers at Newco. The Company and Newco
agree that all of the SIP Subscribers assigned to Newco at the Closing shall be
maintained as customers of Newco and not the Company for a period of at least
two years after the Closing Date (unless such customers terminate their customer
agreement with Newco on their own initiative); provided, however, that such
-------- -------
customers may be serviced by the Company pursuant to an agreement to do so
containing terms and conditions as would be obtained by Persons dealing at arms
length. During the period commencing on the Closing Date and continuing until
the 31st day after the Closing Date, Newco shall not (i) discontinue or modify,
or publicly announce the discontinuance or modification, of the current $5.00
credit program (i.e., whereby SIP Subscribers are entitled to a $5.00 credit
upon certain circumstances set forth in the terms and conditions governing such
program), or (ii) make any change or modification to any other term or condition
of the SIP Agreement which is reasonably likely to result in a reduction in the
number of SIP Subscribers within the aforementioned time period.
SECTION 5.09 Certification of SIP Subscribers.
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(a) On or before the 15th day following the Closing Date, Sprint L.P.
shall prepare and deliver to the Company a schedule certified by a duly
authorized executive officer showing (i) the number and identity of the SIP
Subscribers assigned to the Company at Closing pursuant to Section 1.03(ii)
who have paid pursuant to the SIP Agreements at any time on or prior to the
Closing Date and (ii) the number and identity of SIP Subscribers assigned
to the Company at Closing pursuant to Section 1.03(ii) who had not paid
pursuant to the SIP Agreements at any time on or prior to the Closing Date.
For purposes of this Section 5.09, a SIP Subscriber shall be deemed to have
paid on the date of receipt of payment or upon which the subscriber's
credit card is billed by Sprint L.P., the Company or Newco, as the case may
be.
(b) On or before the 45th day following the Closing Date, Newco shall
prepare and deliver to Sprint L.P. a schedule (the "SIP True-Up
Certificate") certified by its chief financial officer showing (i) the
number and identity of the SIP Subscribers who have paid pursuant to SIP
Agreements at any time on or prior to the 31st day after the Closing Date
("Paid SIP Subscribers") and (ii) the number and identity of the SIP
Subscribers who have not paid pursuant to SIP Agreements at any time on
prior to the 31st day after the Closing Date. The Parties agree to
cooperate and to provide such further information as may be reasonably
requested to verify the matters covered by the SIP True-Up Certificate,
with such mutually agreed upon number of Paid SIP Subscribers referred to
as the "Final Number of Paid SIP Subscribers."
(c) If the Final Number of Paid SIP Subscribers is less than 130,000,
then Sprint L.P. shall forfeit to Newco a number of shares of Convertible
Preferred Stock equal to the product of (i) five shares of Convertible
Preferred Stock, times (ii) 130,000 minus the Final Number of Paid SIP
Subscribers, with such product referred to as the "Number of Forfeited
Shares of Convertible Preferred Stock." Sprint L.P. shall deliver to Newco
the stock certificate evidencing its shares of Convertible Preferred Stock
originally issued to it on the Closing Date (the "Number of Original Shares
of Convertible Preferred Stock"), together with duly executed stock power
transferring to Newco the Number of Forfeited Shares of Convertible
Preferred Stock and Newco shall thereupon issue to Sprint L.P. a balance
certificate evidencing a number of shares of Convertible Preferred Stock
equal to the difference between the Number of Original Shares of
Convertible Preferred Stock and the Number of Forfeited Shares of
Convertible Preferred Stock.
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
SECTION 6.01 Termination. (a) Anything contained herein to the contrary
notwithstanding, this Agreement may be terminated, and the transactions
contemplated hereby or by any Ancillary Agreement abandoned, at any time prior
to the Closing Date:
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(i) by mutual written consent of all of the Parties;
(ii) by any of the Parties if the Offer shall not have been
consummated on or before the Expiration Date;
(iii) by Sprint and Sprint L.P. if any of the conditions set forth in
Sections 2.01 or 2.02 shall have become incapable of fulfillment, and shall
not have been waived by Sprint and Sprint L.P.; or
(iv) by the Company, Newco and Newco Sub if (x) any of the
conditions set forth in Sections 2.01 or 2.03 shall have become incapable
of fulfillment, and shall not have been waived by the Company, Newco and
Newco Sub, or (y) Sprint shall have failed to commence the Offer within
five business days following the date of initial public announcement of the
Offer;
provided, however, that the Party seeking termination pursuant to clause (ii),
- - -------- -------
(iii) or (iv) is not in material breach of any of its representations,
warranties, covenants or agreements contained in this Agreement or any Ancillary
Agreement.
(b) In the event of termination by any of the Parties pursuant to this
Section 6.01, written notice thereof shall forthwith be given to the other
Parties and the transactions contemplated by this Agreement and the Ancillary
Agreements shall be terminated, without further action by any Party.
SECTION 6.02 Effect of Termination. Each Party's right of termination
under Section 6.01 is in addition to any other rights it may have under this
Agreement, any Ancillary Agreement or otherwise, and the exercise of a right of
termination will not be an election of remedies. If this Agreement is
terminated pursuant to Section 6.01 (other than those obligations set forth in
Sections 5.02 and 5.05 which shall continue to apply upon termination of this
Agreement prior to the consummation of the transactions contemplated by this
Agreement or by any Ancillary Agreement, all further obligations of the Parties
under this Agreement and any Ancillary Agreement will terminate; provided,
--------
however, that if this Agreement is terminated by a Party because of fraud or a
- - -------
willful and material breach of the Agreement or any Ancillary Agreement by any
other Party or because one or more of the conditions to the terminating party's
obligations under this Agreement is not satisfied as a result of any other
Party's fraud or willful and material failure to comply with its obligations
under this Agreement or any Ancillary Agreement, the terminating Party's right
to pursue all legal remedies will survive such termination unimpaired.
ARTICLE VII
MISCELLANEOUS
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SECTION 7.01 Notices. Unless otherwise provided herein, any notice,
request, waiver, instruction, consent or document or other communication
required or permitted to be given by this Agreement shall be effective only if
it is in writing and (a) delivered by hand or sent by certified mail, return
receipt requested, (b) if sent by a nationally-recognized overnight delivery
service with delivery confirmed, or (c) if telexed or telecopied, with receipt
confirmed as follows:
The Company: 3100 New York Drive
Pasadena, California 91107
Attn: President and CEO
Telecopy No.: (626) 296-4161
with a copy to: Hunton & Williams
NationsBank Plaza, Suite 4100
600 Peachtree Street, N.E.
Atlanta, Georgia 30308-2216
Attn: Scott M. Hobby, Esq.
Telecopy No.: (404) 888-4190
Newco and Newco Sub: 3100 New York Drive
Pasadena, California 91107
Attn: President and CEO
Telecopy No.: (626) 296-4161
with a copy to: Hunton & Williams
NationsBank Plaza, Suite 4100
600 Peachtree Street, N.E.
Atlanta, Georgia 30308-2216
Attn: Scott M. Hobby, Esq.
Telecopy No.: (404) 888-4190
Sprint: Sprint Corporation
2330 Shawnee Mission Parkway
Westwood, Kansas 66205
Attn: Chief Financial Officer
Telecopy No.: (913) 624-8426
with a copy to: Sprint Corporation
2330 Shawnee Mission Parkway
Westwood, Kansas 66205
Attn: Corporate Secretary
Telecopy No.: (913) 624-8233
with an additional copy to: Stinson, Mag & Fizzell, P.C.
1201 Walnut, Suite 2800
P.O. Box 419251
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Kansas City, Missouri 64141-6251
Attn: John A. Granda, Esq.
Telecopy No.: (816) 691-3495
The Parties shall promptly notify each other of any change in their respective
addresses or facsimile numbers or of the Person or office to receive notices,
requests or other communications under this Section 7.02. Notice shall be
deemed to have been given as of the date when so personally delivered, when
actually delivered by the U.S. Postal Service at the proper address, the next
day when delivered during business hours to an overnight delivery service
properly addressed or when receipt of a telex or telecopy is confirmed, as the
case may be, unless the sending party has actual Knowledge that such notice was
not received by the intended recipient.
SECTION 7.02 Entire Agreement. This Agreement and, upon execution by all
Parties thereto, the Ancillary Agreements, together with the respective
Schedules and Exhibits hereto and thereto, embody the entire agreement and
understanding of the Parties in respect to the matters contemplated hereby and
thereby and supersede and render null and void all other prior agreements and
understandings, written and oral, with respect to the subject matters hereof and
thereof, provided that this provision shall not abrogate any other written
--------
agreement among the Parties executed simultaneously with this Agreement. No
Party shall be liable or bound to any other Party in any manner by any promises,
conditions, representations, warranties, covenants, agreements and
understandings, except as specifically set forth herein or therein.
SECTION 7.03 Waiver, Amendment, Etc. Except as otherwise permitted in
this Agreement, this Agreement may not be amended or supplemented, unless set
forth in a writing signed by, and delivered to, all the Parties.
Except as otherwise permitted in this Agreement, the terms or conditions of
this Agreement may not be waived unless set forth in a writing signed by the
Party entitled to the benefits thereof. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of such provision at
any time in the future or a waiver of any other provision hereof. The rights
and remedies of the Parties are cumulative and not alternative. Except as
otherwise provided in this Agreement, neither the failure nor any delay by any
Party in exercising any right, power or privilege under this Agreement, or any
of the other Ancillary Agreements or the documents referred to in this Agreement
or therein will operate as a waiver of such right, power or privilege, and no
single or partial exercise of any such right, power or privilege will preclude
any other or further exercise of such right, power or privilege or the exercise
of any other right, power or privilege.
SECTION 7.04 Successors and Assigns. Neither this Agreement nor any of
the rights, interests or obligations under this Agreement shall be assigned or
transferred, in whole or in part, by any of the Parties without the prior
written consent of the other Parties; provided, however, that such assignment or
-------- -------
transfer may be made by (i) Sprint to any of its Affiliates, or (ii) pursuant to
any merger or sale of substantially all of the assets or stock of Sprint or such
Affiliates (or any transaction having such effect) that is pursuant to an
agreement entered into after the Closing Date. Subject to the
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preceding sentence, this Agreement will be binding upon, inure to the benefit
of, and be enforceable by, the parties and their respective successors and
assigns.
SECTION 7.05 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to conflict of laws principles.
SECTION 7.06 Severability. If any term or provision of this Agreement or
the Ancillary Agreements or the application thereof to either party or set of
circumstances shall, in any jurisdiction and to any extent, be finally held
invalid or unenforceable, such term or provision shall only be ineffective as to
such jurisdiction, and only to the extent of such invalidity or
unenforceability, without invalidating or rendering unenforceable any other
terms or provisions of this Agreement or the Ancillary Agreements or under any
other circumstances, and the parties shall negotiate in good faith a substitute
provision which comes as close as possible to the invalidated or unenforceable
term or provision, and which puts each party in a position as nearly comparable
as possible to the position it would have been in but for the finding of
invalidity or unenforceability, while remaining valid and enforceable.
SECTION 7.07 Counterparts. This Agreement may be executed in one or more
counterparts each of which when so executed and delivered shall for all purposes
be deemed to be an original but all of which, when taken together, shall
constitute one and the same Agreement.
SECTION 7.08 Headings. The table of contents, captions and headings used
in this Agreement or any Ancillary Agreements are inserted for convenience only
and shall not be deemed to constitute part of this Agreement or any Ancillary
Agreements or to affect the construction or interpretation hereof.
SECTION 7.09 No Third-Party Beneficiaries. Nothing in this Agreement or
any Ancillary Agreements, express or implied, shall create or confer upon any
Person (including but not limited to any employees), other than the Parties or
their respective successors and permitted assigns, any legal or equitable
rights, remedies, obligations, liabilities or claims under or with respect to
this Agreement or any Ancillary Agreements, except as expressly provided herein.
SECTION 7.10 Interpretation. (a) Unless specifically stated otherwise,
references to Articles, Sections, Exhibits and Schedules refer to Articles,
Sections, Exhibits and Schedules in this Agreement. References to "includes"
and "including" mean "includes without limitation" and "including without
limitation."
(b) Each Party is a sophisticated legal entity that was advised by
experienced counsel and, to the extent it deemed necessary, other advisors in
connection with this Agreement and the Ancillary Agreements. Accordingly, each
Party hereby acknowledges that no Party has relied or will rely in respect of
this Agreement or any Ancillary Agreements or the transactions contemplated
hereby or thereby upon any document or written or oral information previously
furnished to or discovered by it or its representatives, other than this
Agreement or any Ancillary Agreements or the documents and instruments delivered
at the Closing.
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(c) No provision of this Agreement or any Ancillary Agreement shall be
interpreted in favor of, or against, any of the Parties by reason of the extent
to which any such Party or its counsel participated in the drafting thereof or
by reason of the extent to which any such provision is inconsistent with any
prior draft hereof or thereof.
SECTION 7.11 Inclusion of Information in Schedules. The inclusion of any
information in any disclosure schedule (i) shall not be deemed an admission that
any such information is material for purposes of the representation and warranty
to which it relates or any other representation and warranty or for any other
purpose related to the Agreement or any Ancillary Agreement or the transactions
contemplated hereby or thereby, including, without limitation, for purposes of
any covenants, closing conditions or any other remedies the Parties may have,
and (ii) shall not be used or interpreted in any manner to create a standard of
materiality for any such purpose.
SECTION 7.12 Exclusive Jurisdiction and Consent to Service of Process.
The Parties agree that any Action arising out of or relating to this Agreement,
the Ancillary Agreements or the transactions contemplated hereby or thereby
shall be brought by the Parties only in a Delaware state court or a federal
court sitting in that state, which shall be the exclusive venue of any such
Action. Each Party waives any objection which such party may now or hereafter
have to the laying of venue of any such Action, and irrevocably consents and
submits to the jurisdiction of any such court (and the appropriate appellate
courts) in any such Action. Any and all service of process and any other notice
in any such Action shall be effective against such Party when transmitted in
accordance with Section 7.01. Nothing contained herein shall be deemed to affect
the right of any Party to serve process in any manner permitted by Law.
SECTION 7.13 Amendment. No amendment, modification or alteration of the
terms or provisions of this Agreement or any Ancillary Agreement, including any
Schedules and Exhibits hereto or thereto, shall be binding unless the same shall
be in writing and duly executed by the Party against whom such amendment,
modification or alteration is sought to be enforced.
SECTION 7.14 Survival. Except for the covenants or agreements set forth
in Article V or any other covenants or agreements contained in this Agreement or
any Ancillary Agreements which shall continue after the Closing, the
representations, warranties, agreements and covenants in this Agreement, or in
the Schedules, Exhibits hereto, and in certificates delivered at the Closing,
shall not survive after the Closing; provided, however, that with respect to
-------- -------
claim(s) for fraud and/or willful and material breach(es) hereof, all such
representations, warranties, agreements and covenants shall survive the Closing,
and continue for 24 months, except for any agreement or covenant which by its
terms continues in effect for a longer or shorter time period, and shall in no
way be affected by any investigation of the subject matter thereof made by or on
behalf of any Party or any information capable of being acquired by any Party.
SECTION 7.15 WAIVER OF JURY TRIAL. THE COMPANY, NEWCO, NEWCO SUB, SPRINT
AND SPRINT L.P. HEREBY IRREVOCABLY AND
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UNCONDITIONALLY WAIVE ANY RIGHT THAT THEY MAY HAVE TO A TRIAL BY JURY IN ANY
ACTION INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT,
CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH
THIS AGREEMENT OR ANY ANCILLARY AGREEMENT OR THE RELATIONSHIP ESTABLISHED
HEREUNDER OR THEREUNDER.
ARTICLE VII
DEFINITIONS
Definitions. For purposes of this Agreement, the terms set forth below
shall have the following meanings:
"Acquisition Proposal" means any proposal for a tender or exchange
offer, a merger, consolidation or other business combination,
recapitalization, liquidation, dissolution or similar transaction involving
a Party or any proposal or offer to acquire in any manner, directly or
indirectly, a material equity interest in, or a material amount of voting
securities (with the acquisition of beneficial ownership of 15% or more of
a Party's voting securities being deemed to be material for this purpose)
or assets of, a Party, other than the transactions contemplated by this
Agreement and the Ancillary Agreements.
"Action" means any action, suit, arbitration, inquiry, proceeding or
investigation by or before any Government Entity.
"Affiliate" means, with respect to any Person, or any other Person
controlling, controlled by, or under common control with such Person. For
purposes of this Agreement, the term "control" (including, with correlative
meanings, the terms "controlled by" and "under common control with" as used
with respect to any Person) means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and
policies of such Person whether through ownership of voting securities, by
contract or otherwise.
"Agreement" means this Agreement, together with the Schedules and
Exhibits hereto.
"Agreement and Plan of Merger" means the Agreement and Plan of Merger
among Newco, Newco Sub and the Company, dated as of the date hereof,
setting forth, inter alia, the terms and conditions of the merger of Newco
----- ----
Sub into the Company, a copy of which is attached to the Agreement as
Exhibit F.
"Agreement to Vote" means the Agreement To Vote Stock, a copy of which
is attached to the Agreement as Exhibit J, executed in favor of Sprint by
Voting Stockholders in connection with the Offer and the other transactions
contemplated hereby and by the Ancillary Agreements.
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"Agreement to Vote and Tender" means the Agreement to Vote and Tender
Stock, a copy of which is attached to the Agreement as Exhibit K, executed
in favor of Sprint by the Tendering Stockholders in connection with the
Offer and the other transactions contemplated hereby and by the Ancillary
Agreements.
"Ancillary Agreements" means any and all of the Certificate of
Designation, the Governance Agreement, the Master Assignment, the Marketing
Agreement, the Network Services Agreement, the Registration Rights
Agreement, the Credit Agreement, the Stockholders Agreement, the Agreement
and Plan of Merger, the Agreement to Vote and the Agreement to Vote and
Tender.
"Benefit Plan" means pension, retirement, savings, profit sharing,
deferred compensation, incentive compensation, stock option, severance or
termination pay, medical, dental, life or other insurance, disability or
other written employee benefit plan, program, agreement or arrangement
maintained, sponsored or contributed to by the Company, whether covering
employees of the Company, former employees of the Company, or directors or
former directors of the Company (including, but not limited to, any
"Employee Benefit Plan," as defined in Section 3(3) of ERISA).
"Certificate of Designation" shall have the meaning set forth in
Section 1.03.
"Closing" shall have the meaning set forth in Section 1.09.
"Closing Date" shall have the meaning set forth in Section 1.09.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the common stock, par value $.01 per share, of
the Company.
"Company Filed SEC Documents" shall mean the SEC Documents of the
Company filed and publicly available prior to the date of this Agreement.
"Company's Knowledge" means the actual knowledge of any of the
executive officers and directors (excluding John W. Sidgmore) of Company
without any duty to inquire or attribution of knowledge from any other
Person to the persons in such capacities.
"Company Stockholder Vote Matters" shall have the meaning set forth in
Section 1.06(b).
"Confidential Information" shall have the meaning set forth in Section
5.05.
"Contract" means all contracts, agreements, instruments, leases,
licenses, commitments and arrangements.
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"Convertible Debt Financing" shall have the meaning set forth in the
fifth WHEREAS paragraph of the preamble to this Agreement.
"Convertible Notes" shall have the meaning set forth in the fifth
WHEREAS paragraph of the preamble to this Agreement.
"Convertible Preferred Stock" means the Series A Convertible Preferred
Stock, par value $.01 per share, of Newco.
"Credit Agreement" means the Credit Agreement dated as of the date
hereof among Sprint, Newco and the Company whereby Sprint agrees to provide
Newco and the Company, as co-borrowers, with the Convertible Debt
Financing, a copy of which is attached to the Agreement as Exhibit E.
"DGCL" means the Delaware General Corporate Law, title 8 of the
Delaware Code.
"Dilutable Securities" shall have the meaning set forth in Section
3.01(c).
"Director Stock Options" shall have the meaning set forth in Section
3.01(c).
"Dollars" or "$" means lawful currency of the United States.
"Employee Stock Options" shall have the meaning set forth in Section
3.01(c).
"Encumbrance" means any charge, claim, community property interest,
equitable interest Lien, Tax lien, option, pledge, security interest, right
of first refusal or restriction of any kind, including any restriction on
transfer, receipt of income or exercise of any other attribute of
ownership.
"Environment" means soil, land surface or subsurface strata, surface
waters (including navigable waters, ocean waters, streams, ponds, drainage
basins, and wetlands), groundwaters, drinking water supply, stream
sediments, ambient air (including indoor air), plant and animal life, and
any other environmental medium or natural resource.
"Environmental Law" means any Law that requires or relates to
protection of human health or the Environment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities and Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder as in effect
at the applicable time.
"Expiration Date" shall have the meaning set forth in Section 1.01.
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"GAAP" shall mean Generally Accepted Accounting Principles, as in
effect on the date of this Agreement. All references herein to financial
statements prepared in accordance with GAAP shall mean in accordance with
GAAP consistently applied throughout the periods to which reference is
made.
"Governance Agreement" shall mean the Governance Agreement, dated as
of the date hereof, among Sprint, Sprint L.P., the Company and Newco, a
copy of which is attached to the Agreement as Exhibit G.
"Governmental Entity" means any federal, state, foreign or local
government, any of its subdivisions, administrative agencies, authorities,
commissions, boards or bureaus, any federal, state, foreign or local court
or tribunal and any arbitrator.
"Hazardous Activity" means the distribution, generation, handling,
importing, management, manufacturing, processing, production, refinement,
release, storage, transfer, transportation, treatment, or use (including
any withdrawal or other use of groundwater) of Hazardous Materials in, on,
under, about, or from the facilities or any part thereof into the
Environment.
"Hazardous Materials" means any waste or other substance that is
listed, defined, designated, or classified as, or otherwise determined to
be, hazardous, radioactive, or toxic or a pollutant or a contaminant under
or pursuant to any Environmental Law, including any mixture or solution
thereof, and specifically including petroleum and all derivatives thereof
or synthetic substitutes therefor and asbestos or asbestos-containing
materials.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the regulations promulgated thereunder.
"Intellectual Property Assets" includes all marks, patent rights,
copyrights and trade secrets of the Company.
"IRS" means the United States Internal Revenue Service.
"Issuance Percentage Limitation" means the lesser of (a) 20%, or (b)
the percentage of shares of outstanding Common Stock which if issued, and
after taking into effect such issuance, would cause the total number of
shares of Common Stock subject to (i) all irrevocable proxies granted in
favor of Sprint to vote "for" the Company Stockholder Vote Matters, and
(ii) votes "for" the Company Stockholder Vote Matters pursuant to
Agreements to Vote to constitute, in the aggregate, less than 51% of the
outstanding shares of Common Stock. For purposes of this definition,
"outstanding shares of Common Stock" shall be calculated on a fully diluted
basis, excluding any Dilutable Securities which are not or will not be
vested or otherwise exercisable on or prior to the Offer Acceptance Time.
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"Knowledge" means the actual knowledge of any of the executive
officers and directors of the Parties without any duty to inquire or
attribution of knowledge from any other Person to the persons in such
capacities.
"Law" means any federal, state, local, municipal, foreign,
international, multinational, or other judicial or administrative order,
judgment, decree, constitution, law, ordinance, common law of California
and Delaware, regulation, statute, or treaty.
"Lien" means any lien, pledge, security interest or Encumbrance
whatsoever, mortgage, deed of trust, security interest, retention of title
agreement, easement, encroachment, condition, reservation, covenant, lis
pendens lien, claim of lien, adverse claim, or restriction on attributes of
ownership.
"Marketing Agreement" means the Marketing and Distribution Agreement,
dated as of the date hereof, among Sprint, Sprint L.P., Newco and the
Company, whereby Sprint, Sprint L.P., Newco and the Company agree to
provide certain cooperation and support to each other in specified
marketing matters and Sprint L.P. grants Newco the right to utilize certain
distribution channels of Sprint L.P., a copy of which is attached to the
Agreement as Exhibit D.
"Master Assignment" means the Master Assignment and Assumption
Agreement, dated as of the date hereof, between Sprint L.P. and Newco, by
which Sprint L.P. grants to Newco all of the right, title and interest of
Sprint L.P. in and to all agreements with SIP Subscribers and all rights to
provide Internet access services to the SIP Subscribers after the Closing
Date and Newco assumes all of the obligations to continue the performance
of such agreements after the Closing Date, a copy of which is attached to
the Agreement as Exhibit B.
"Material Adverse Effect" means any change or effect having a material
adverse effect (or any development as to which there is a substantial
likelihood, insofar as can be foreseen, that would have such an effect) on
the business, properties, assets, condition (financial or otherwise), or
results of operations of the Company, Newco, Newco Sub, Sprint, Sprint L.P.
and Sprint's Subsidiaries.
"Merger" means the merger of Newco Sub into the Company in accordance
with the terms and conditions set forth in the Agreement and Plan of
Merger.
"Minimum Tender Condition" shall have the meaning set forth in Section
2.01(a).
"Network Agreement" means the Network Agreement, dated as of the date
hereof, among Sprint L.P., Newco and the Company, which grants Newco and
the Company the right to use a minimum and maximum number of ports on
Sprint L.P.'s long-distance network, along with pricing and other terms set
forth therein, a copy of which is attached to the Agreement as Exhibit C.
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"Newco Common Stock" shall have the meaning set forth in the sixth
WHEREAS paragraph of the preamble of this Agreement.
"Offer" shall have the meaning set forth in the second WHEREAS
paragraph of the preamble to this Agreement.
"Offer Acceptance Condition" shall have the meaning set forth in
Section 2.04.
"Offer Acceptance Time" means the date and time upon which Sprint
accepts for payment shares of Common Stock pursuant to the Offer.
"Offer Documents" shall have the meaning set forth in Section 1.01(b).
"Offer Price" shall have the meaning set forth in the second WHEREAS
paragraph of the preamble to this Agreement.
"Ordinary Course of Business" means an action taken by a Person will
be deemed to have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such Person
and is taken in the ordinary course of the normal day-to-day operations of
such Person; and
(b) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons exercising
similar authority);
"Paid SIP Subscribers" shall have the meaning set forth in Section
5.09(b).
"Party" means any Person that is a signatory to this Agreement.
"Permits" shall have the meaning set forth in Section 3.01(l).
"Person" means any natural person, corporation, partnership, limited
liability company, trust, unincorporated organization or other entity.
"Preferred Stock Consideration" shall have the meaning set forth in
Section 1.03.
"Proxy Statement" shall have the meaning set forth in Section 1.06(b).
"Registration Rights Agreement" shall mean the Registration Rights
Agreement, dated as of the date hereof, among Newco, Sprint and Sprint
L.P., a copy of which is attached hereto as Exhibit I.
"Returns" means all tax returns that must be filed with any federal,
state or local taxing authority.
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"S-4" shall have the meaning set forth in Section 1.06(b).
"SARs" means stock appreciation rights.
"SEC" means the Securities and Exchange Commission and the staff
thereof.
"SEC Documents" shall have the meaning set forth in Section 3.01(e).
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder as in effect at the applicable
time.
"Significant Subsidiary" means any Subsidiary of a Party that
constitutes a significant subsidiary within the meaning of Rule 1-02 of
Regulation S-X of the SEC.
"SIP Agreements" means the agreements between Sprint L.P. and the SIP
Subscribers governing the receipt of Internet access from Sprint L.P.
"SIP Subscriber" shall mean a registered customer of Sprint L.P.'s
"Sprint Internet Passport" service, regardless of whether on an hourly
payment plan or a fixed payment plan, and regardless of whether in an
initial introductory period.
"Special Meeting" shall have the meaning set forth in Section 1.05(b).
"Sprint Shares" shall have the meaning set forth in Section 3.03(g)
"Stock Equivalents" shall have the meaning set forth in Section
3.01(c).
"Stockholders Agreement" means the Stockholders Agreement, dated as of
the date hereof, among Sprint and certain stockholders of the Company, a
copy of which is attached to the Agreement as Exhibit H.
"Subsidiary" shall mean a Person, the equity of which is at least 50%
owned by another Person.
"Surviving Corporation" shall have the meaning set forth in Section
1.05(a).
"Tax" or "Taxes" means all income, profits, franchise, gross receipts,
capital, sales, use, withholding, value added, ad valorem, transfer,
employment, social security, disability, occupation, property, severance,
production, excise and other taxes, duties and similar governmental charges
and assessments imposed by or on behalf of any Governmental Entity
(including interest and penalties thereon).
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"Tendering Stockholders" means the holders of Common Stock who are
identified in Schedule 1 to the Agreement to Vote and Tender.
"Threatened" means any demand or statement that has been made in
writing that would lead a prudent person to conclude that a claim,
proceeding, dispute, Action, or other matter is likely to be asserted,
commenced, taken, or otherwise pursued in the future.
"Unaudited Balance Sheet" means the Unaudited Consolidated Balance
Sheet of the Company dated at the Unaudited Balance Sheet Date.
"Unaudited Balance Sheet Date" means September 30, 1997.
"Voting Stockholders" means the holders of Common Stock who are
identified in Schedule 1 to the Agreement to Vote.
52
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IN WITNESS WHEREOF, the Parties have caused their respective duly
authorized officers to execute this Agreement as of the day and year first above
written.
SPRINT CORPORATION
By: /s/ Theodore H. Schell
------------------------------------
Name: Theodore H. Schell
Title: Vice President - Strategic
Planning and Corporate
Development
SPRINT COMMUNICATIONS COMPANY L.P.
By: US Telecom, Inc., General Partner.
By: /s/ Don A. Jensen
------------------------------------
Name: Don A. Jensen
Title: Vice President and
Secretary
EARTHLINK NETWORK, INC.
By: /s/ Charles G. Betty
------------------------------------
Name: Charles G. Betty
Title: President & CEO
DOLPHIN, INC.
By: /s/ Charles G. Betty
------------------------------------
Name: Charles G. Betty
Title: President & CEO
DOLPHIN SUB, INC.
By: /s/ Charles G. Betty
------------------------------------
Name: Charles G. Betty
Title: President & CEO
SIGNATURE PAGE FOR INVESTMENT AGREEMENT
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APPENDIX B
AGREEMENT AND PLAN OF MERGER
AMONG EARTHLINK NETWORK, INC.,
A DELAWARE CORPORATION
DOLPHIN, INC.,
A DELAWARE CORPORATION, AND
DOLPHIN SUB, INC.,
A DELAWARE CORPORATION
THIS AGREEMENT AND PLAN OF MERGER dated as of February 10, 1998 (the
"Agreement") is among Earthlink Network, Inc., a Delaware corporation
("Earthlink"), Dophin, Inc., a Delaware corporation ("Newco"), and Dolphin
Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Dolphin
("Newco Sub"), Earthlink and Newco Sub are sometimes referred to herein as
the "Constituent Corporation."
RECITALS
A. Earthlink is a corporation duly organized and existing under the
laws of the State of Delaware and has an authorized capital of sixty million
(60,000,000) shares, fifty million (50,000,000) of which are designated as
common stock, $.01 par value share (the "EarthLink Common Stock"), and ten
million (10,000,000) of which are designated as preferred stock, $.01 par
value per share.
B. Newco is a corporation duly organized and existing under the laws
of the State of Delaware and has an authorized capital of seventy-five
million (75,000,000) shares, fifty million (50,000,000) of which are
designated as common stock, $.01 par value per share (the "Newco Common
Stock") and twenty five million (25,000,000) of which are designated as
preferred stock $.01 par value per share (the "Newco Preferred Stock"). As of
February 10, 1998, ten (10) shares of Newco Common Stock were issued and
outstanding (the "Newco Subscription Shares") and no shares of Newco
Preferred Stock were issued and outstanding.
C. Newco Sub is a corporation duly organized and existing under the
laws of the State of Delaware and has an authorized capital of sixty million
(60,000,000) shares, fifty million (50,000,000) of which are designated as
common stock, $.01 par value per share (the "Newco Sub Common Stock.") and
ten million (10,000,000) of which are designated as preferred stock, $.01 par
value per share. As of February 10, 1998, ten (10) shares of Newco Sub Common
Stock were issued and outstanding, all of which were held by Newco.
D. The Boards of Directors of EarthLink and Newco Sub have
determined that is is advisable and in the best interests of EarthLink and
Newco Sub, respectively, that Newco Sub merge with and into EarthLink upon
the terms and conditions herein provided.
E. The Boards of Directors of each of EarthLink, Newco and Newco Sub
have approved this Agreement and the transactions contemplated hereby and
directed that this agreement be excuted by the respective undersigned
officers of each of those corporations.
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F. The Board of Directors of EarthLink and Newco Sub have directed
that this Agreement be submitted to a vote of their respective stockholders
with the recommendation that such stockholders approve the Agreement and the
transactions contemplated hereby.
NOW THEREFORE, in consideration of the mutual agreements and covenants
set forth herein, EarthLink Newco and Newco Sub hereby agree, subject to the
terms and conditions hereinafter set forth as follows:
1. Merger
1.1 Merger. In accordance with the provisions of this Agreement and
the Delaware General Corporation Law, Newco Sub shall be merged with and into
EarthLink (the "Merger"), the separate existence of Newco Sub shall cease and
EarthLink shall be, and is herein sometimes referred to as, the "Surving
Corporation," and the name of the surviving Corporation shall be EarthLink
Operations, Inc. Upon the Effective Date of the Merger (as defined below),
Newco shall file a change of name amendment to its Certificate of
Incorporation, whereby it shall assume the name "EarthLink Network, Inc."
1.2 Filing and Effectiveness. The Merger shall become effective when
the following actions shall have been completed:
(a.) This Agreement and Merger shall have been adopted and
approved by the stockholders of each of the Constituent Corporations in
accordance with the requirements of the Delaware General Corporation Law; and
(b.) An executed Certificate of Merger or an executed
counterpart of this Agreement meeting the requirements of the Delaware
General Corporation Law shall have been filed with the Secretary of the State
of Delaware.
The date and time when the Merger shall become effective, as aforesaid,
is herein called the "Effective Time of the Merger."
1.3 Effect of the Merger. Upon the Effective Time of the Merger,
the separate existence of Newco Sub shall cease and EarthLink, as the
Surviving Corporation, (i) shall continue to possess all of its assets,
rights, powers, and property as constuted immediately prior to the Effective
Time of the Merger, (ii) shall be subject to all actions previously taken by
its and Newco Sub's Board of Directors, (iii) shall succeed, without other
transfer, to all of the assets, rights, powers, and property of Newco Sub in
the manner more fully set forth in Section 259 of the Delaware General
Corporation Law, (iv) shall continue to be subject to all of the debts,
liabilities, and obligations of Newco Sub in the same manner as if Earthlink
had itself incurred them, all as more fully provided under the applicable
provisions of the Delaware General Corporation Law.
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II. CHARTER DOCUMENTS, DIRECTORS AND OFFICERS
2.1 Certificate of Incorporation. The Certificate of Incorporation
of Newco Sub as in effect immediately prior to the Effective Time of the
Merger shall continue in full force and effect as the Certificate of
Incorporation of the Surving Corporation until duly amended in accordance
with the provisions thereof and applicable law. The Certificate of
Incorporation of Newco Sub is attached hereto as Appendix A.
2.2 Bylaws. The Bylaws of Newco Sub as in effect immediately prior
to the Effective Time of the Merger shall continue in full force and
effect as the Bylaws of the Surviving Corporation until duly amended in
accordance with the provisions thereof and applicable law. The Bylaws of
Newco Sub are attached hereto as Appendix B.
2.3 Directors and Officers. The directors and officers of EarthLink
immediately prior to the Effective Time of the Merger shall be the directors
and officers of each of Newco and the Surviving Corporation until their
successors shall have been duly elected and qualified or until as otherwise
provided by law, the Certificate of Incorporation or the Bylaws of Newco or
the Surviving Corporation, respectively.
III. MANNER OF CONVERSION OF STOCK
3.1 Newco Sub Common Stock. Upon the Effective Time of the Merger,
the shares of Newco Sub Common Stock issued and outstanding immediately prior
thereto shall by virtue of the Merger and without any action by the
Constituent Corporations, the holder of such shares or any other person, be
converted into and exchanged for such number of fully paid and nonassessable
shares of common stock of the Surviving Corporation as is equal to the number
of shares of EarthLink Common Stock outstanding at the Effective Time of the
Merger.
3.2 EarthLink Common Stock. Upon the Effective Time of the Merger,
each share of EarthLink Common Stock issued and outstanding immediately prior
thereto shall by virtue of the Merger and without any action by the
Constituent Corporations, the holder of such shares or any other person, be
converted into and exchanged for one fully paid and nonassessable share of
Newco Common Stock.
3.3 Newco Subscription Shares. Upon the Effective Time of the
Merger, the Newco Subscription Shares shall be canceled and thereafter held
as treasury stock of Newco.
3.4 EarthLink Options, Stock Purchase Rights and Convertible
Securities.
(a.) Upon the Effective Time of the Merger to the extent
permitted by the terms of such instruments as in effect at the Effective Time
of the Merger, Newco shall assume the obligations of EarthLink under any and
all securities, warrants, calls, rights to purchase, rights of first refusal,
securities convertible into or exchangeable for voting securities,
commitments, agreements, arrangements, or undertakings of any kind to which
EarthLink is a party or by which it is bound obligating EarthLink to issue,
deliver or sell or create, or cause to
3
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be issued, delivered or sold or created, additional shares of the capital
stock of or other voting securities or phantom stock or other contractual
rights the value of which is determined in whole or in part of the value of
any capital stock of EarthLink, or obligating EarthLink to issue, grant,
extend or enter into any such security, option, warrant, call right,
commitment, agreement, arrangement, or undertaking (collectively, the
"Dilutive Securities") on the same terms and conditions as were in effect
immediately prior to the Merger; thereafter, each such Dilutive Security
shall become, subject to the provisions in paragraph (c) hereof, an option,
right to purchase or a security convertible into Newco Common Stock on the
basis of one share of Newco Common Stock for each one share of EarthLink
Common Stock issuable pursuant to any such Dilutive Security, on the same
terms and conditions and at an exercise price equal to the exercise price
applicable to any Dilutive Security at the Effective Time of the Merger.
(b.) A number of shares of Newco Common Stock shall be
reserved for issuance upon the exercise of options, stock purchase rights and
convertible securities equal to the number of shares of EarthLink Common
Stock so reserved immediately prior to the Effective Date of the Merger.
(c.) The assumed Rights shall not entitle any holder thereof
to a fractional share upon exercise or conversion (unless the holder was
entitled to a fractional interest immediately prior to the Merger). In lieu
thereof, any fractional share interests to which a holder of an assumed Right
(other than an option issued pursuant to EarthLink's 1995 Stock Option Plan,
as amended) would otherwise be entitled upon exercise or conversion shall be
aggregated (but only with other similar Rights which have the same per share
terms.) To the extent that after such aggregation the holder would still be
entitled to a fractional share with respect thereto upon exercise of
conversion, the holder shall be entitled, upon the exercise or conversion of
all such assumed Rights pursuant to their terms (as modified herein), to one
full share of common stock in lieu of such fractional share. With respect to
each class of such similar Rights, no holder will be entitled to more than
one full share in lieu of a fractional share upon exercise or conversion.
3.5 Stock Certificates
(a.) Upon the Effective Time of the Merger, each
outstanding certificate theretofor representing shares of EarthLink Common
Stock shall be deemed for all purposes to represent the number of shares of
Newco Common Stock into which such shares of EarthLink Common Stock were
converted in the Merger. The registered owner of shares of EarthLink Common
Stock on the books and records of EarthLink shall be entitled, as of the
Effective Time of the Merger, to exercise any voting and other rights with
respect to, and receive dividends and other distributions upon, the shares of
Newco Common Stock represented by such outstanding certificate as provided
above.
(b.) Upon the Effective Time of the Merger, Newco, the
sole stockholder of Newco Sub, shall surrender the outstanding certificate
representing shares of Newco Sub to the Surviving Corporation in exchange for
a certificate or certificates representing the number of shares of common
stock of the Surviving Corporation into which the surrended shares were
converted as herein provided. Such certificate for shares of common stock of
the Surviving
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Corporation shall bear the same legends, if any, with respect to the
restrictions on transferability as the certificate of Newco Sub so converted
and given in exchange therefor, unless otherwise determined by the Board of
Directors of the Surviving Corporation in compliance with applicable laws.
IV. GENERAL
4.1 Assurances. From time to time, as and when required by the
parties hereto or by their successors or assigns, there shall be executed and
delivered on behalf of the parties hereto such deeds and other instruments,
and there shall be taken or caused to be taken by it such further and other
actions as shall be appropriate or necessary in order to vest or perfect in
or conform of record or otherwise by the parties hereto the title to and
possession of all the property, interests, assets, rights, privileges,
immunities, powers, franchises and authority of the parties hereto and
otherwise to carry out the purposes of this Agreement, and the officers and
directors of the parties hereto are fully authorized in the name and on
behalf of such parties or otherwise to take any and all such action and to
execute and deliver any and all such deeds and other instruments.
4.2 Abandonment. At any time before the Effective Time of the
Merger, this Agreement may be terminated and the Merger may be abandoned for
any reason whatsoever by the Board of Directors of any of EarthLink, Newco or
Newco Sub, notwithstanding the approval of this Agreement by the stockholders
of EarthLink or by the sole stockholder of Newco or Newco Sub.
4.3 Amendment. Subject to the Investment Agreement dated February
10, 1998, by and among EarthLink, Newco, Newco Sub, Sprint Corporation and
Sprint Communications Company L.P., the Boards of Directors of the
Constituent Corporations may amend this Agreement at any time prior to the
filing of this Agreement (or certificate in lieu thereof) with the Secretary
of State of the State of Delaware, provided that an amendment made subsequent
to the adoption of this Agreement by the stockholders of either Constituent
Corporation shall not: (i) alter or change the amount or kind of shares,
securities, cash, property and/or rights to be received in exchange for or in
conversion of all or any of the shares of any class or series thereof of
either of the Constituent Corporations, (ii) alter or change any term of the
Certificate of Incorporation of the Surviving Corporation to be effected by
the Merger, or (iii) alter or change any of the terms and conditions of this
Agreement if such alteration or change would adversely affect the holders of
any class or series of capital stock or either of the Constituent
Corporations.
4.4 Registered Office. The registered office of the Surviving
Corporation in the State of Delaware is 1209 Orange Street, Wilmington, DE
19801 and The Corporation Trust Company is the registered agent of the
Surviving Corporation at such address.
4.5 Agreement. Executed copies of this Agreement will be on file
at the principal place of business of the Surviving Corporation at 3100 New
York Drive, Suite 201, Pasadena, California 91107, and copies thereof will be
furnished to any stockholder of either Constituent Corporation upon request
and without cost.
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4.6 Governing Law. This Agreement shall in all respects be
construed, interpreted and enforced in accordance with and governed by the
laws of the State of Delaware.
4.7 Counterparts. In order to facilitate the filing and recording of
this Agreement, the same may be executed in any number of counterparts, each
of which shall be deemed to be an original and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement having first been approved by the
resolutions of the Board of Directors of EarthLink Network, Inc., a Delaware
corporation, Dolphin, Inc., a Delaware corporation, Dolphin Sub, Inc., a
Delaware corporation, and is hereby executed on behalf of each such
corporations and attested by their respective officers thereunto duly
authorized.
EARTHLINK, NETWORK, INC.
a Delaware corporation
By: __________________________
Sky D. Dayton, Chairman
ATTEST:
_________________________________________
Kirsten Hansen, Secretary
DOLPHIN, INC.
a Delaware corporation
By: ________________________
Sky D. Dayton, Chariman
ATTEST:
________________________________________
Kirsten Hansen, Secretary
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DOLPHIN SUB, INC.
a Delaware corporation
By: ________________________
Sky D. Dayton, Chariman
ATTEST:
________________________________________
Kirsten Hansen, Secretary
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Appendix C
DOLPHIN, INC.
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK
-----------------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
------------------------------------------
Dolphin, Inc. (the "Corporation"), certifies that pursuant to the
authority contained in Article IV of its Certificate of Incorporation, and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, its Board of Directors has adopted the following
resolution creating a series of the Preferred Stock, $.01 par value, designated
as Series A Convertible Preferred Stock:
RESOLVED, that a series of the class of Preferred Stock, $.01 par
value, of the Corporation be hereby created, and that the designation and amount
thereof and the voting powers, preferences, and relative, participating,
optional and other special rights of the shares of such series, and the
qualifications, limitations or restrictions thereof are set forth in this
Certificate of Designation, Preferences and Rights of Series A Convertible
Preferred Stock (the "Certificate of Designation") as follows:
1. Designation and Amount. Preferred Stock of the Corporation created
and authorized for issuance hereby shall be designated as "Series A Convertible
Preferred Stock" (herein referred to as "Series A Preferred Stock"), having a
par value per share equal to $.01, and the number of shares constituting such
series shall be 10,000,000. The Corporation shall only originally issue shares
of Series A Preferred Stock to Sprint Corporation, a Kansas corporation
("Sprint"), and its successors and Affiliates.
2. Rank. The Series A Preferred Stock shall, with respect to dividend
rights and rights upon liquidation, winding up or dissolution, whether voluntary
or involuntary, rank prior to the Common Stock (as defined in Section 10 hereof)
and all classes or series of preferred stock, preference stock or any other
capital stock or equity securities of the Corporation, whether now issued or
hereafter created. All equity securities of the Corporation to which the Series
A Preferred Stock ranks prior, including the Common Stock, are collectively
referred to herein as the "Junior Securities."
<PAGE>
3. Dividend Provisions.
(a) Dividends.
(i) Mandatory PIK Dividends. On and before the fifth
anniversary of the Purchase Date, the Corporation shall pay,
and the holders of outstanding shares of Series A Preferred
Stock ("Holders") shall be entitled to receive on each
Dividend Payment Date, a dividend on each share of Series A
Preferred Stock at a rate per annum equal to three percent
(3.00%) of the Liquidation Value (as then increased, as
provided in Section 4(a)) per share of Series A Preferred
Stock, accruable and compounded quarterly on each of the
Dividend Accrual Dates, which dividend shall be in the form of
an increase in the Liquidation Value in such amount (each such
increase is referred to as a "Liquidation Accretion
Dividend"). All dividends shall accrue quarterly in arrears
and shall compound on each Dividend Accrual Date, commencing
on the first Dividend Accrual Date after the date of issuance
of the applicable shares of Series A Preferred Stock. The
Board of Directors shall declare and pay such accrued
dividends on each Dividend Payment Date and the Corporation
shall take all further actions necessary to cause such
dividend to be paid to the Holders in the form and manner
prescribed herein. Notwithstanding the foregoing, upon the
first date of the consummation of a Business Combination, or
an Optional Redemption by the Corporation pursuant to Section
6(a), the Corporation shall pay, and the Holders of
outstanding shares of Series A Preferred Stock shall be
entitled to receive, a dividend on each share of Series A
Preferred Stock in the form of an aggregate increase in the
Liquidation Value in an amount equal to the amount by which
the Liquidation Value would have increased pursuant to this
Section 3(a)(i) if such Holder had held such shares of Series
A Preferred Stock, until the first Dividend Payment Date on or
following the fifth anniversary of the Purchase Date.
(ii) Cash Dividends. After the fifth anniversary of
the Purchase Date, the Corporation shall pay, and the Holders
of outstanding shares of Series A Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of
Directors, out of funds legally available therefor, cumulative
dividends on each share of Series A Preferred Stock at a rate
per annum equal to three percent (3.00%) of the Liquidation
Value per share of Series A Preferred Stock, accruable
quarterly on each of the Dividend Accrual Dates, payable only
in cash; provided, however, that after the twentieth
anniversary of the Purchase Date, the Corporation shall pay,
and the Holders of outstanding shares of Series A Preferred
Stock shall be entitled to receive, when, as and if declared
by the Board of Directors, out of funds legally available
therefor, cumulative dividends on each share of Series A
Preferred Stock at a rate per annum equal to 8% of the
Liquidation Value per share of Series A Preferred Stock,
accruable quarterly on each of the Dividend Accrual Dates,
payable only in cash, which rate shall increase by 200 basis
points on each anniversary of the Closing Date thereafter, but
not to exceed a maximum rate of 12%. All cash dividends shall
be
2
<PAGE>
cumulative, whether or not declared, on a daily basis from the
fifth anniversary of the Purchase Date or the date of
issuance, whichever is later, and shall accrue quarterly in
arrears on each Dividend Accrual Date, commencing on the first
Dividend Accrual Date after the fifth anniversary of the
Purchase Date or the date of issuance, whichever is later. The
Board of Directors shall declare and pay such accrued
dividends at such time and to the extent permitted by law.
(iii) General Provisions. Each distribution in the
form of a cash dividend shall be payable to Holders of record
as they appear on the stock books of the Corporation on such
record date, not less than 10 nor more than 60 days preceding
the relevant Dividend Payment Date, as shall be fixed by the
Board of Directors of the Corporation. For any period during
which any share of Series A Preferred Stock is outstanding
less than a full quarterly dividend period ending on a
Dividend Accrual Date, the dividends payable shall be computed
on the basis of a 360 day year consisting of twelve 30-day
months and the actual number of days elapsed in the period for
which the dividends are payable. If any Dividend Payment Date
for a dividend payable in cash occurs on a day that is not a
Business Day, any accrued dividends otherwise payable on such
Dividend Payment Date shall be paid on the next succeeding
Business Day.
(b) Certain Other Non-Cash Distributions. If the Corporation
shall at any time, or from time to time, after the Purchase Date,
declare, order, pay or make a dividend or other distribution
(including, without limitation, any distribution or issuance of stock
or other securities or property or rights or warrants to subscribe for
securities of the Corporation or any of its Subsidiaries by way of
dividend or spinoff or rights to purchase Common Stock or other Junior
Securities) on its Common Stock, other than (i) dividends payable in
cash in an aggregate amount in any fiscal year which, when declared,
are not expected to exceed the net income of the Corporation during
such year from continuing operations before extraordinary items, as
determined in accordance with generally accepted accounting principles
consistently applied in accordance with past practice, or (ii) any
dividend or distribution described in Section 5(c)(i), Section 5(c)(ii)
or Section 5(c)(iii), then, and in each such case (a "Triggering
Distribution"), each Holder of shares of Series A Preferred Stock shall
be entitled to receive from the Corporation, with respect to the shares
of Series A Preferred Stock held by such Holder, the same dividend or
distribution that such Holder would have received if immediately prior
to the earlier of such Triggering Distribution or any record date
therefor (i) a Business Combination had occurred causing the last
sentence of Section 3(a)(i) to be effected, and (ii) such Holder
converted all of such Holder's shares of Series A Preferred Stock into
shares of Common Stock. Any such dividend, distribution or issuance
shall be declared, ordered, paid or made on the Series A Preferred
Stock at the same time such dividend, distribution or issuance is
declared, ordered, paid or made on the Common Stock.
3
<PAGE>
(c) Limitation on Dividends and Other Distributions. Unless
full cumulative dividends, if any, accrued on all outstanding shares of
the Series A Preferred Stock have been or contemporaneously are
declared and paid for all periods prior to and ending on the most
recent Dividend Accrual Date, no dividend shall be declared or paid or
set aside for payment or other distribution declared or made upon the
Junior Securities (other than a dividend or distribution paid solely in
shares of, or warrants, rights or options solely exercisable for or
convertible into, Junior Securities), nor shall any Junior Securities
be redeemed, purchased or otherwise acquired for any consideration, nor
may any moneys be paid to or made available for a sinking fund for the
redemption of any shares of any such securities, by the Corporation
(other than redemptions and purchases pursuant to or in accordance with
agreements between the Corporation and its or its subsidiaries'
directors, officers and key employees), except by conversion into or
exchange for Junior Securities.
4. Liquidation Preference.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation ("Liquidation Event"), the
Holders of Series A Preferred Stock then outstanding shall be entitled
to receive, prior and in preference to any distribution of any of the
assets of the Corporation to the holders of Common Stock and other
Junior Securities by reason of their ownership thereof, an amount per
share equal to the sum of (i) the average of the Closing Price per
share of Common Stock for the 30 Trading Days immediately preceding the
Purchase Date (the "Average Stock Price") for each outstanding share of
Series A Preferred Stock, (ii) the amount of all Liquidation Accretion
Dividends that have been paid pursuant to Section 3(a)(i) (including an
amount equal to a prorated dividend pursuant to Section 3(a)(i) for the
period from the Dividend Accrual Date immediately preceding the date of
the Liquidation Event through the date of the Liquidation Event), and
(iii) all accumulations of accrued but unpaid dividends payable in cash
pursuant to Section 3(a)(ii) on each share of Series A Preferred Stock
(including an amount equal to a prorated dividend pursuant to Section
3(a)(ii) for the period from the Dividend Accrual Date immediately
prior to the receipt of such sum to the date of receipt of such sum),
with the sum of the amounts referred to in clauses (i), (ii) and (iii)
referred to herein as the "Liquidation Value". The schedule of (i) the
amount of the applicable Liquidation Accretion Dividend for each Share
of Series A Preferred Stock for each Dividend Payment Date therefor,
and (ii) the cumulative amount of the Liquidation Value for each Share
of Series A Preferred Stock, as of each Dividend Payment Date, is as
follows:
<TABLE>
<CAPTION>
Amount of Applicable Quarterly Liquidation
Dividend Payment Date for Accretion Dividend for Each Share of Cumulative Liquidation Value for
Quarter Series A Preferred Stock Each Share of Series A Preferred Stock
--------- -------------------------- --------------------------------------
<S> <C> <C>
1
2
3
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Amount of Applicable Quarterly Liquidation
Dividend Payment Date for Accretion Dividend for Each Share of Cumulative Liquidation Value for
Quarter Series A Preferred Stock Each Share of Series A Preferred Stock
--------- -------------------------- --------------------------------------
<S> <C> <C>
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
</TABLE>
If upon the occurrence of such Liquidation Event, the assets
and funds are not sufficient to pay in full the liquidation payments
payable to the Holders of the Series A Preferred Stock, then the
Holders of outstanding shares of Series A Preferred Stock shall share
ratably in such distribution of assets. Except as provided in this
Section 4(a), Holders of Series A Preferred Stock shall not be entitled
to any additional distribution upon the occurrence of a Liquidation
Event.
(b) After the distribution described in Section 4 (a) has been
paid, the remaining assets of the Corporation available for
distribution to shareholders shall be distributed among the holders of
Junior Securities in accordance with their respective rights thereto.
(c) Neither the consolidation, merger, Business Combination or
any other form of business combination of the Corporation with or into
any other person or entity, nor the sale, lease, exchange, conveyance
or disposition of all or substantially all of the assets of the
Corporation to persons or entities other than the holders of Junior
Securities shall be deemed to be a Liquidation Event for purposes of
this Section 4.
5. Conversion. The Holders of the Series A Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Optional Conversion Rights and Automatic Conversion.
5
<PAGE>
(i) Each share of Series A Preferred Stock shall be
convertible, at the option of the Holder thereof, at any time
after the first anniversary of the Purchase Date, at the
office of the Corporation or any transfer agent for the Series
A Preferred Stock, into such number of validly issued, fully
paid and nonassessable shares of Common Stock, free and clear
of all pledges, claims, liens, charges, encumbrances and
security interests of any kind or nature whatsoever, as is
determined by dividing the Liquidation Value by the Conversion
Price at the time in effect for such share; provided, however,
that, notwithstanding any other provision hereof to the
contrary, conversion of all outstanding shares of Series A
Preferred Stock shall be required in the event of consummation
of a Business Combination. The Conversion Price per share for
shares of Series A Preferred Stock shall be (i) for the period
from the Purchase Date through the Dividend Accrual Date
immediately after the fifth anniversary of the Purchase Date,
the product of (A) the Average Stock Price, times (B)
116.118%, and (ii) thereafter, the Conversion Price then in
effect shall be increased at a rate per annum equal to six
percent (6%) thereof, accruable quarterly, and in each case
the Conversion Price shall be subject to adjustment, from time
to time as set forth in Section 5(c).
(ii) Upon conversion of any Series A Preferred Stock,
payment shall be made for (A) dividends under Section 3(a)(i)
on each converted share of Series A Preferred Stock in an
amount equal to a prorated Liquidation Accretion Dividend for
the period from the Dividend Accrual Date immediately prior to
the date of conversion to such conversion date, and (B) unpaid
dividends under Section 3(b) resulting from events described
therein and occurring prior to the date of conversion.
(b) Mechanics of Conversion. If the Holder of shares of Series
A Preferred Stock desires to exercise such right of conversion, such
Holder shall give written notice to the Corporation (the "Conversion
Notice") of that Holder's election to convert a stated whole number of
shares of Series A Preferred Stock (the "Conversion Shares") into
shares of Common Stock, and surrender to the Corporation, at its
principal office or at such other office or agency maintained by the
Corporation for such purpose, such Holder's certificate or certificates
evidencing such Conversion Shares. The Conversion Notice shall also
contain a statement of the name or names (with addresses) in which the
certificate or certificates for Common Stock shall be issued.
Notwithstanding the foregoing, the Corporation shall not be required to
issue any certificates to any person other than the Holder thereof
unless the Corporation has obtained reasonable assurance that such
transaction is exempt from the registration requirements of, or is
covered by an effective registration statement under, the Securities
Act of 1933, as amended (the "Act"), and all applicable state
securities laws, including, if necessary in the reasonable judgment of
the Corporation or its legal counsel, receipt of an opinion to such
effect from counsel reasonably satisfactory to the Corporation. In no
event would such opinion be required if the shares of Common Stock
could, upon conversion, be resold pursuant to Rule 144 or Rule 144A
under the Act. As promptly as practicable, and in any event within five
business days, after the receipt of the Conversion
6
<PAGE>
Notice and the surrender of the certificate or certificates
representing the Conversion Shares, the Corporation shall issue and
deliver, or cause to be delivered, to the Holder of the Conversion
Shares or his nominee or nominees, (i) a certificate or certificates
for the number of shares of Common Stock issuable upon the conversion
of such Conversion Shares and (ii) if less than the full number of
shares of Series A Preferred Stock evidenced by the surrendered
certificate or certificates are being converted, a new certificate or
certificates, of like tenor, evidencing the number of shares evidenced
by such surrendered certificate or certificates less the number of
Conversion Shares. Such conversion shall be deemed to have been
effected as of the close of business on the date the Corporation
received the Conversion Notice and the certificate or certificates
representing the Conversion Shares, and the person or persons entitled
to receive the shares of Common Stock issuable upon conversion shall be
treated for all purposes as the holder or holders of record of such
shares of Common Stock as of the close of business on such date,
provided, however, that if such conversion by a Holder of Series A
Preferred Stock would give rise to the waiting period of the HSR Act,
such conversion shall not be effective and shall be contingent upon (i)
the expiration or termination of such waiting period, and (ii) the
absence of any action taken or instituted by the Department of Justice,
the Federal Trade Commission or any other governmental entity by the
expiration or termination of such waiting period to delay, enjoin or
place conditions on such conversion.
(c) Conversion Price Adjustments of Preferred Stock.
(i) If the Corporation should at any time or from
time to time after the Purchase Date fix a record date for the
effectuation of a split or subdivision of the outstanding
shares of Common Stock or the determination of holders of
Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock,
then, as of such record date (or, if no record date is fixed,
as of the close of business on the date on which the Board of
Directors adopts the resolution relating to such dividend,
distribution, split or subdivision), the Conversion Price
shall be decreased to equal the product of the Conversion
Price in effect immediately prior to such date multiplied by a
fraction, the numerator of which shall be the number of shares
of Common Stock outstanding immediately prior thereto and the
denominator of which shall be the number of shares of Common
Stock outstanding immediately thereafter.
(ii) If the number of shares of Common Stock
outstanding at any time or from time to time after the
Purchase Date is decreased by a combination of the outstanding
shares of Common Stock, then following such combination, the
Conversion Price shall be increased to equal the product of
the Conversion Price in effect immediately prior thereto
multiplied by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior
thereto and the denominator of which shall be the number of
shares of Common Stock outstanding immediately thereafter. So
long as any shares of Series A
7
<PAGE>
Preferred Stock are outstanding, the Corporation shall not
combine any shares of Common Stock unless it likewise combines
all shares of Common Stock.
(iii) If the Corporation shall at any time and from
time to time after the Purchase Date issue rights or warrants
to all holders of the Common Stock entitling such holders to
subscribe for or purchase Common Stock at a price per share
less than the Current Market Price per share of the Common
Stock on the record date for the determination of stockholders
entitled to receive such rights or warrants, then, and in each
such case, the number of shares of Common Stock into which
each share of Series A Preferred Stock is convertible shall be
adjusted so that the holder of each share thereof shall be
entitled to receive, upon the conversion thereof, the number
of shares of Common Stock determined by multiplying the number
of shares of Common Stock into which such share was
convertible on the day immediately prior to such record date
by a fraction, (A) the numerator of which is the sum of (1)
the number of shares of Common Stock outstanding on such
record date and (2) the number of additional shares of Common
Stock which such rights or warrants entitle holders of Common
Stock to subscribe for or purchase ("Offered Shares"), and (B)
the denominator of which is the sum of (1) the number of
shares of Common Stock outstanding on the record date and (2)
a fraction, (x) the numerator of which is the product of the
number of Offered Shares multiplied by the subscription or
purchase price of the Offered Shares and (y) the denominator
of which is the Current Market Price per share of Common Stock
on such record date. Such adjustment shall become effective
immediately after such record date.
(iv) If the Corporation shall be a party to any
transaction, including any capital reorganization,
reclassification or recapitalization involving the Common
Stock of the Corporation (other than (A) a transaction
described in clauses (i) and (ii) of this Section 5(c) or in
Section 3(b) or (B) a consummated Business Combination), or
some other form of transaction (other than a consummated
Business Combination) in which the previously outstanding
shares of Common Stock shall be changed into or, pursuant to
the operation of law or the terms of the transaction to which
the Corporation is a party, exchanged, or would have been
changed or exchanged as required by the Certificate of
Incorporation if such Common Stock were outstanding, for
different securities of the Corporation or common stock or
other securities of another corporation or interests in a
non-corporate entity (such other corporation or non-corporate
entity is referred to herein as the "Surviving Entity") or
other property (including cash) or any combination of the
foregoing, then, as a condition to the consummation of such
transaction, lawful and adequate provision shall be made
whereby the Holders of the Series A Preferred Stock shall
thereafter have the right to receive, in lieu of the shares of
Common Stock of the Corporation immediately theretofore
receivable with respect to the conversion of such shares of
Series A Preferred Stock, such shares of stock or securities
(such stock and securities are referred to herein as the
"Surviving Entity Securities") or assets as would have been
8
<PAGE>
issued or payable with respect to or in exchange for the
shares of Common Stock which such holders would have held had
the shares of Series A Preferred Stock been converted
immediately prior to such transaction. In any such case,
appropriate provisions shall be made with respect to the
rights and interests of the Holders of the Series A Preferred
Stock to the end that such conversion rights (including,
without limitation, provisions for adjustment of the
Conversion Price) shall thereafter be
applicable, as nearly as may be practicable in relation to any
shares of Surviving Entity Securities or assets thereafter
deliverable upon the exercise thereof.
(d) Stock Transfer Taxes. The issuance of stock certificates
upon the conversion of the Series A Preferred Stock shall be made
without charge to the converting Holder for any tax in respect of such
issuance. The Corporation shall not, however, be required to pay any
tax which may be payable in respect of any transfer involved in the
issuance and delivery of shares in any name other than that of the
Holder of such shares of Series A Preferred Stock converted, and the
Corporation shall not be required to issue or deliver any such stock
certificate unless and until the person or persons requesting the
issuance thereof shall have paid to the Corporation the amount of such
tax, if any.
(e) No Fractional Shares: Certificate as to Adjustments.
(i) No fractional shares shall be issued upon
conversion of the Series A Preferred Stock, and the number of
shares of Common Stock to be issued shall be rounded to the
nearest whole share.
(ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Price of Series A Preferred
Stock pursuant to this Section 5, the Corporation, at its
expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare
and furnish to each Holder of Series A Preferred Stock a
certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written
request at any time of any Holder of Series A Preferred Stock,
furnish or cause to be furnished to such Holder a like
certificate setting forth (A) such adjustment and
readjustment, (B) the Conversion Price at the time in effect,
and (C) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received
upon the conversion of a share of Series A Preferred Stock.
(f) Notices of Record Date. In the event of any taking by the
Corporation of a record of the Holders of any class of securities for
the purpose of determining the Holders thereof who are entitled to
receive any dividend (other than a cash dividend or a Liquidation
Accretion Dividend) or other distribution, any right or warrant to
subscribe for, purchase or otherwise acquire any shares of stock or any
class of any other securities or property, or to receive any other
right (including, without limitation, making a dividend or other
9
<PAGE>
distribution of any rights under a stockholder rights plan (sometimes
known as a "poison pill" plan), whether now existing or hereafter
created), the Corporation shall mail to each Holder of Series A
Preferred Stock, at least 20 days prior to the date specified therein,
a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution, right or warrant, and
the amount and character of such dividend, distribution, right or
warrant. The Corporation shall not issue such dividend, distribution,
right or warrant described herein or in Section 5(c)(iii), or
consummate any Business Combination, or any reorganization,
reclassification or recapitalization described in Section 5(c)(iv),
unless it provides the Holders of the Series A Preferred Stock at least
20 days advance written notice thereof.
(g) Reservation of Securities Issuable upon Conversion. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose
of effecting the conversion of the shares of the Series A Preferred
Stock, free from any preemptive right or other obligation, such number
of its shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of the Series A
Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the
conversion of all then outstanding shares of the Series A Preferred
Stock, in addition to such other remedies as shall be available to the
Holder of such Series A Preferred Stock, the Corporation will take such
corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be
sufficient for such purposes. The Corporation shall prepare and shall
use commercially reasonable efforts to obtain and keep in force such
governmental or regulatory permits or other authorizations as may be
required by law, and shall comply with all requirements as to
registration, qualification or listing of the Common Stock in order to
enable the Corporation to lawfully issue and deliver to each Holder of
record of Series A Preferred Stock such number of shares of its Common
Stock as shall from time to time be sufficient to effect the conversion
of all Series A Preferred Stock then outstanding and convertible into
shares of Common Stock, including, without limitation, compliance with
the filing and waiting period requirements of the HSR Act.
(h) Notices. Any notice required by the provisions of this
Section 5 to be given to the Holders of shares of Series A Preferred
Stock shall only be effective upon receipt and may be given by personal
delivery, U.S. certified mail, return receipt requested, or by a
nationally recognized overnight delivery service (e.g., United Parcel
Service or Federal Express), delivery or postage prepaid and addressed
to each Holder of record at his address appearing on the books of this
Corporation (and, in the case of any Holder that is a corporation ore
other entity, to the attention of the President).
6. Redemption.
10
<PAGE>
(a) Optional Redemption. The Series A Preferred Stock may be
redeemed (subject to (i) the right of any or all shares of Series A
Preferred Stock to be converted into Common Stock at any time prior to
the Redemption Date (as defined in Section 6(b)), and (ii) subject to
the restrictions described in this Section 6(a) and the legal
availability of funds therefor) at any time after the third anniversary
of the Purchase Date, at the Corporation's option, in whole or in part,
in the manner provided in Section 6(b), at a redemption price per share
of Series A Preferred Stock (expressed as a percentage of the
Liquidation Value, which includes the full accelerated amount of the
Liquidation Accretion Dividends as prescribed by Section 3(a)(i)) set
forth above), if redeemed during the 12-month period beginning on the
anniversary date of the Purchase Date of each of the years set forth
below:
<TABLE>
<CAPTION>
Year Percentage
<S> <C>
2001 103%
2002 102%
2003 101%
Thereafter 100%
</TABLE>
In the event a redemption of less than all of the outstanding shares of
Series A Preferred Stock pursuant to this Section 6(a), the Corporation
shall effect such redemption either prorata according to the number of
shares held by each Holder of shares of Series A Preferred Stock, or by
lot, in each case, as may be determined by the Corporation in its sole
discretion.
(b) Procedures for Redemption.
(i) At least 30 days and not more than 60 days prior
to the date fixed for any redemption of the Series A Preferred
Stock, written notice (the "Redemption Notice") shall be given
by first-class mail, postage prepaid, to each Holder of record
on the record date fixed for such redemption (the "Redemption
Date") of the Series A Preferred Stock at such Holder's
address as the same appears on the stock register of the
Corporation, provided that no failure to give such notice nor
any deficiency therein shall affect the validity of the
procedure for the redemption of any shares of Series A
Preferred Stock to be redeemed except as to the Holder or
Holders to whom the Corporation has failed to give said notice
or except as to the Holder or Holders whose notice was
defective; provided, further, that the Corporation may
withdraw such Redemption Notice and thereby have no obligation
to consummate the redemption described therein at any time
prior to the third day prior to the Redemption Date set forth
therein by providing written notice of such withdrawal to each
Holder who received such Redemption Notice. The Redemption
Notice shall state:
(1) the redemption price;
11
<PAGE>
(2) whether all or less than all the
outstanding shares of the Series A Preferred Stock
are to be redeemed and the total number of shares of
the Series A Preferred Stock being redeemed;
(3) the number of shares of Series A
Preferred stock held, as of the appropriate record
date, by the Holder that the Corporation intends to
redeem;
(4) the Redemption Date;
(5) that the Holder is to surrender to the
Corporation, at the place or places where
certificates for shares of Series A Preferred Stock
are to be surrendered for redemption, in the manner
and at the price designated, Holder's certificate or
certificates representing the shares of Series A
Preferred Stock to be redeemed; and
(6) that cash dividends on the shares of the
Series A Preferred Stock to be redeemed shall cease
to accrue on such Redemption Date unless the
Corporation defaults in the payment of the redemption
price.
(ii) Each Holder of Series A Preferred Stock shall
surrender the certificate or certificates representing such
shares of Series A Preferred Stock to the Corporation, duly
endorsed, in the manner and at the place designated in the
Redemption Notice and on the Redemption Date. The full
redemption price for such shares of Series A Preferred Stock
shall be payable in cash to the person whose name appears on
such certificate or certificates as the owner thereof, and
each surrendered certificate shall be canceled and retired. In
the event that less than all of the shares represented by any
such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares.
(iii) Unless the Corporation defaults in the payment
in full of the applicable redemption price, cash dividends on
the shares of Series A Preferred Stock called for redemption
shall cease to accrue and accumulate on the Redemption Date,
and the Holders of such redeemed shares shall cease to have
any further rights with respect thereto from and after the
Redemption Date, other than the right to receive the
redemption price on the Redemption Date, without interest.
7. Voting Rights. (a) The Holders of shares of Series A Preferred Stock
shall not be entitled to any voting rights, except as hereinafter provided in
Section 7(b) and Section 8 or as otherwise provided by law or by that certain
Governance Agreement between the Corporation, Sprint, Sprint L.P. and Dolphin,
Inc., a Delaware corporation, dated the Purchase Date (the "Governance
Agreement"). Notwithstanding any other provision of this Section 7 or Section 8,
the
12
<PAGE>
Holders of shares of Series A Preferred Stock shall not be entitled to any
voting rights hereunder with respect to a Business Combination which is not a
Discriminatory Transaction.
(b) Election of Directors.
(i) Except as otherwise provided herein, at all times
from and after the Purchase Date, the Holders of shares of
Series A Preferred Stock shall have the right to elect two (2)
of the directors of the Corporation (the "Investor
Directors"). If the Corporation or any Significant Subsidiary
of the Corporation shall have a Strategic and Business
Planning Committee (or other committee responsible for
strategic and business planning) or a Finance Committee (or
other committee responsible for finance) during the time that
the Holders of Series A Preferred Stock shall have the right
to elect one or more Investor Directors under this Section
7(b)(i), such Investor Directors may appoint one of the
Investor Directors to each such committee. If there is no such
committee, the Holders of Series A Preferred Stock shall have
a reasonable opportunity to review and discuss the
Corporation's strategic and business plans and financing plans
with management of the Corporation prior to the submission of
any such plans to the Board of Directors of the Corporation or
any Significant Subsidiary of the Corporation. The Investor
Directors shall also have the right to appoint one Investor
Director to each of the other committees of the Board of
Directors, except as otherwise provided in this Section 7(b)
and except for appointments to any existing committee of the
Board of Directors if the scope of authority of such committee
is not hereafter expanded. The Holders of Series A Preferred
Stock shall receive copies of all information and materials
provided to the directors of the Corporation and any
Signifanct Subsidiary of the Corporation or to committee
members, except for information and materials provided to a
committee that an Investor Director is prohibited from
participating in as set forth in this Section 7(b)(i), at the
time such information and materials are provided to such
directors. Notwithstanding the foregoing, nothing set forth
herein shall entitle any Investor Director to participate on
any committee of the Board of Directors of the Corporation or
any Significant Subsidiary of the Corporation created for the
purpose of considering a Business Combination, an Acquisition
Proposal, a Sprint Offer or a Qualified Offer, or to
participate in the Board's deliberations with respect to any
of the foregoing.
(ii) Notwithstanding anything in the Section 7(b)(i)
to the contrary, if at the end of any three consecutive
months, (A) Sprint's Percentage Interest shall be less than
the Higher Threshold, the Holders shall promptly take action
to cause one of its Investor Directors to resign from the
Board, or (B) Sprint's Percentage Interest shall be less than
the Lower Threshold, the Holders shall promptly take action to
cause any and all remaining Investor Directors to resign from
the Board; and, upon resignation of each respective Investor
Director, the Holders of shares of Series A Preferred
13
<PAGE>
Stock shall forever cease to have any voting rights with
respect to the election of that director.
(iii) Except as otherwise provided in Section
7(b)(ii), the Holders of Series A Preferred Stock shall have
the right to elect any replacement for an Investor Director
designated for nomination or nominated in accordance with this
Section 7(b) upon the death, resignation, retirement,
disqualification or removal from office for other cause of
such Director.
(iv) Until the date the Governance Agreement is
terminated in accordance with Section 7.01 thereof, and for
the duration of any period in which Sprint's Percentage
Interest is greater than the Lower Threshold, the Investor
Directors shall have the approval rights set forth in Section
2.06 of the Governance Agreement.
8. Protective Provisions.
(a) Class Voting. So long as shares of Series A Preferred
Stock are outstanding, this Corporation shall not, without first
obtaining the approval (by vote or written consent) of the Holders of
sixty-six and two-thirds percent (662/3%) of the then outstanding
shares of Series A Preferred Stock (voting as a class):
(i) alter or change the rights, preferences or
privileges of the shares of Series A Preferred Stock so as to
affect adversely the shares;
(ii) increase the number of authorized shares of
Series A Preferred Stock, or create any new series of stock or
any other securities convertible into equity securities of the
Corporation having a preference over, or being on a parity
with, the Series A Preferred Stock with respect to voting,
dividends, distribution of assets upon liquidation,
dissolution, winding up or otherwise or conversion rights;
(iii) amend the Certificate of Incorporation, Bylaws
or other organizational documents of the Corporation or take
any action or enter into any other agreements which, prohibit
or materially conflict with the Corporation's obligations
hereunder with respect to the Holders of Series A Preferred
Stock; or
(iv) engage in a Liquidation Event.
(b) No Impairment. The Corporation will not, by amendment of
its Certificate of Incorporation, Bylaws or other organizational
documents or through any reorganization, reclassification,
recapitalization, Liquidation Event, issue or sale of securities or any
other voluntary action by the Corporation, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed hereunder by the Corporation but will at all times in good
faith assist in the carrying out of all the provisions of this
Certificate of
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<PAGE>
Designation, and in the taking of all such action as may be necessary
or appropriate in order to protect the conversion and other rights of
the Holders of the Series A Preferred Stock against impairment;
provided, however, that the protection provided by this Section 8(b)
shall not apply to a Business Combination in which (i) neither the
Liquidation Value nor the Conversion Price of the Series A Preferred
Stock is changed, and (ii) the Holders of Series A Preferred Stock
shall be entitled to receive consideration at the same time, and in the
same amount and in the same form per share, as if each share of Series
A Preferred Stock had been converted into Common Stock immediately
prior to such Business Combination, after giving effect to the
acceleration of the full amount of all of the Liquidation Accretion
Dividends as contemplated by the last sentence of Section 3(a)(i).
Without limiting the foregoing, but subject to the proviso in the
immediately preceding sentence, the Corporation will not effect any
transaction described in this Section 8(b), the result of which is to
adversely affect any of the rights of Holders of Common Stock relative
to the rights of Holders of any other securities other than the Series
A Preferred Stock.
(c) Tolling of Automatic Conversion and Other Time periods for
HSR Compliance. Notwithstanding any other provision of this Certificate
of Designation, until such time as the filing and waiting period
requirements of the HSR Act relating to the conversion of any of the
shares of Series A Preferred Stock pursuant to Section 5 shall have
been complied with, if any, and there shall be no action taken or
instituted by the United States Department of Justice or the United
States Federal Trade Commission to delay, enjoin or impose conditions
on such conversion, and such waiting period applicable under the HSR
Act shall have expired or received early termination: (i) there shall
be no automatic conversion of the Series A Preferred Stock into Common
Stock, (ii) the Redemption Date shall be automatically extended for a
period of five Business Days beyond the latest date contemplated by the
first sentence of Section 6(b)(i) (as so extended, the "Extended
Redemption Date") and each Holder of shares of Series A Preferred Stock
shall be entitled to convert any or all of such shares into Common
Stock prior to the Extended Redemption Date, and (iii) each other date
or event that would otherwise impair any right to convert the Series A
Preferred Stock into Common Stock or otherwise impair the rights of the
Series A Preferred Stock shall be tolled until 10 days after the
expiration or early termination of all waiting periods under the HSR
Act; provided, however, that no cash dividends shall accrue during the
period after the date originally set for redemption pursuant to Section
6. Any Holder who is required to comply with the filing and waiting
period requirements of the HSR Act with respect to the conversion of
any shares of Series A Preferred Stock shall use commercially
reasonable efforts to cause such filing to be made as soon as
practicable after such Holder has provided notice of its intention to
convert such shares of Series A Preferred Stock and to diligently and
in good faith pursue expiration or termination of the waiting period of
the HRS Act.
9. Stockholder Rights Plan. Notwithstanding any other provision of this
Certificate of Designation to the contrary, if the Corporation shall adopt a
stockholders rights plan (sometimes known as a "poison pill" plan), and shall
declare, order, pay or make a dividend or other distribution
15
<PAGE>
of rights thereunder with respect to the Common Stock (whether or not separate
from the Common Stock), each Holder of shares of Series A Preferred Stock shall
be entitled to receive from the Corporation, upon conversion of such shares of
Series A Preferred Stock into Common Stock pursuant to Section 5, all of the
rights distributed under such plan (but without any limitation or restriction or
the exercise of such rights that are not also applicable to holders of Common
Stock) fully and to the same extent as if immediately prior to the earlier of
such distribution or any record date therefor (i) the Liquidation Value of such
shares of Series A Preferred Stock had then increased by the full amount of all
Liquidation Accretion Dividends payable as if such shares of Series A Preferred
Stock had been held through and including the first Dividend Payment Date on or
following the fifth anniversary of the Purchase Date, and (ii) such Holder had
then converted all of such Holder's shares of Series A Preferred Stock into
shares of Common Stock. The preceding sentence shall provide the exclusive
protection under this Certificate of Designation to the Holders of the Series A
Preferred Stock (including any adjustments that would otherwise be required by
Section 5(c)) with respect to the subject matter of the immediately preceding
sentence.
10. Status of Converted Stock. In the event any shares of Series A
Preferred Stock shall be converted pursuant to Section 5 hereof, the shares so
converted shall be canceled and thereupon restored to the status of authorized
but unissued Preferred Stock undesignated as to class or series.
11. Certain Definitions. For purposes of this Certificate of
Designation, Preferences and Rights of Series A Preferred Stock, unless the
context otherwise requires:
(i) "Acquisition Proposal" shall have the meaning set
forth in the Governance Agreement.
(ii) "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 under
the Exchange Act as such Rule is in effect on the Purchase
Date.
(iii) A Person shall be deemed to "beneficially own,"
any securities:
(A) which such Person or any of such
Person's Affiliates or Associates, directly or
indirectly, has the right to acquire (whether such
right is exercisable immediately or only after the
passage of time) pursuant to any agreement,
arrangement or understanding (whether or not in
writing) or upon the exercise of conversion rights,
exchange rights, rights, warrants or options, or
otherwise;
(B) which such Person or any of such
Person's Affiliates or Associates, directly or
indirectly, has the right to vote or dispose of or
has "beneficial ownership" of (as determined pursuant
to Rule 13d-3 under the Exchange Act as such Rule is
in effect on the date of this Agreement), including
pursuant to any agreement, arrangement or
understanding, whether
16
<PAGE>
or not in writing; provided, however, that a Person
shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," any security under this
subparagraph (B) as a result of an agreement,
arrangement or understanding to vote such security if
such agreement, arrangement or understanding arises
solely from a revocable proxy given in response to a
public proxy or consent solicitation made by the
Corporation pursuant to, and in accordance with, the
applicable provisions of the General Rules and
Regulations under the Exchange Act; or
(C) which are beneficially owned, directly
or indirectly, by any other Person (or any Affiliate
or Associate thereof) with which such Person (or any
of such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (whether or
not in writing), for the purpose of acquiring,
holding, voting (except pursuant to a revocable proxy
as described in the proviso to subparagraph (B)) or
disposing of any voting securities of the
Corporation; provided, however, that nothing in this
subparagraph (C) shall cause a person engaged in
business as an underwriter of securities to be the
"Beneficial Owner" of, or to "beneficially own," any
securities acquired through such person's
participation in good faith in a firm commitment
underwriting under the Act until the expiration of 40
days after the date of such acquisition.
(iv) "Business Combination" shall have the meaning
set forth in the Governance Agreement.
(v) "Business Day" means any day other than a
Saturday, Sunday or a day on which banking institutions in the
State of New York are authorized or obligated by law or
executive order to close.
(vi) "Closing Price" per share of Common Stock on any
date shall be the last sale price, 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
the New York Stock Exchange or, if the Common Stock is not
listed or admitted to trading on the New York Stock Exchange,
as reported in the principal consolidated transaction
reporting system with respect to securities listed on the
principal national securities exchange on which the Common
Stock is listed or admitted to trading or, if the Common Stock
is not listed or admitted to trading on any national
securities exchange, if such shares of Common Stock are not
listed or admitted to trading on such exchange, as reported on
the Nasdaq National Market, or if not quoted on the Nasdaq
National Market, the last quoted sale price or, if not so
quoted, the average of the high bid and low asked prices in
the over-the-counter market, as reported by Nasdaq or such
other system
17
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then in use, or, if on any such date the Common Stock is not
quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market
maker making a market in the Common Stock selected by the
Board of Directors. If the Common Stock is not publicly held
or so listed or publicly traded, "Closing Price" shall mean
the Fair Market Value per share as determined in good faith by
the Board of Directors of the Corporation.
(vii) "Common Stock" shall mean the Corporation's
authorized Common Stock, $.01 par value, as constituted on the
Purchase Date, and any stock into which
such Common Stock may thereafter be changed or reclassified,
including, without limitation, any Surviving Entity
Securities; provided, however, that if Common Stock is changed
or reclassified into more than one class or series of equity
securities, the term "Common Stock" shall refer to the class
or series of such equity securities having the greatest
general voting power in the election of directors of the
Corporation as compared to the other classes or series of
equity securities.
(viii) "Corporation" means Dolphin, Inc., a Delaware
corporation, together with any successors of the Corporation,
whether by merger, consolidation or otherwise, including
without limitation a Surviving Entity.
(ix) "Current Market Price" per share of Common Stock
on any date shall be deemed to be the Closing Price per share
of Common Stock on the Trading Day immediately prior to such
date.
(x) "Discriminatory Transaction" shall have the
meaning set forth in the Governance Agreement.
(xi) "Dividend Accrual Date" shall mean each
anniversary date of the Purchase Date and the dates three
months, six months and nine months of each year thereafter,
beginning with the date three months after the Purchase Date,
or at such additional times and for such interim periods, if
any, as determined by the Board of Directors.
(xii) "Dividend Payment Date" shall mean with respect
to dividends under Section 3(a)(i), the Dividend Accrual Date,
and with respect to dividends under Section 3(a)(ii), the date
established by the Board of Directors for the payment of all
or part of the accrued dividends on the Series A Preferred
Stock.
(xiii) "Equity Security" means (i) any Common Stock,
(ii) any debt or equity securities of the Corporation
convertible into or exchangeable for Common Stock or other
Equity Securities of the Corporation that grant the right to
vote generally in the election of directors ("Voting Equity
Securities"), (iii) any options, rights or warrants (or any
other similar securities) issued by the Corporation to
18
<PAGE>
acquire Common Stock or other Voting Equity Securities or (iv)
any security issuable in connection with any stock split,
stock dividend, recapitalization or other similar transaction
in which securities are issued on a proportionate basis to all
holders of a class of Equity Securities.
(xiv) "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended and in effect on the Purchase
Date.
(xv) "Fair Market Value" means the amount which a
willing buyer would pay a willing seller in an arm's-length
transaction.
(xv) "Higher Threshold" shall have the meaning set
forth in the Governance Agreement.
(xvi) "HSR Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the regulations
promulgated thereunder.
(xvii) "Lower Threshold" shall have the meaning set
forth in the Governance Agreement.
(xviii) "Person" means any individual, firm,
corporation, partnership, limited liability company or other
entity, and shall include any successor (by merger or
otherwise) of such entity.
(xix) "Purchase Date" means the date of the Closing
as defined in the Governance Agreement.
(xx) "Qualified Offer" shall have the meaning set
forth in the Governance Agreement.
(xxi) "Significant Subsidiary" shall have the meaning
set forth in the Governance Agreement.
(xxii) "Sprint Offer" shall have the meaning set
forth in the Governance Agreement.
(xxiii) "Sprint's Percentage Interest" shall have the
meaning set forth in the Governance Agreement.
(xxiv) "Subsidiary" of any person means any
corporation or other entity of which a majority of the voting
power of the voting equity securities or equity interest is
owned, directly or indirectly, by such person.
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<PAGE>
(xxv) "Trading Day" means a day on which the
principal national securities exchange Nasdaq or other
securities market on which the Common Stock is listed or
admitted to trading is open for the transaction of business
or, if the Common Stock is not listed or admitted to trading
on any national securities exchange, any day other than a
Saturday, Sunday, or a day on which banking institutions in
the State of New York are authorized or obligated by law or
executive order to close.
IN WITNESS WHEREOF, the Corporation has caused the foregoing
certificate to be signed on ________________________, 1998.
DOLPHIN, INC.
By:
----------------------------
Charles G. Betty, President
20
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APPENDIX D
================================================================================
CREDIT AGREEMENT
BETWEEN
DOLPHIN, INC.
AND
EARTHLINK NETWORK, INC.
AS BORROWERS,
AND
SPRINT CORPORATION
AS LENDER
DATED AS OF FEBRUARY 10, 1998
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
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<C>
<S>
ARTICLEI I DEFINITIONS................................................................2
1.01. Definitions................................................................2
ARTICLE II THE CREDITS 11
2.01. Advances...................................................................11
2.02. Facility Termination Date..................................................11
2.03. Minimum Amount of Each Advance............................................ 12
2.04. Commitment Increases...................................................... 12
2.05. Borrowing Notices for New Advances........................................ 12
2.06. Rates Applicable After an Event of Default................................ 13
2.07. Method of Payment......................................................... 13
2.08. Notes..................................................................... 13
2.09. Interest Rate; Interest Payment Dates; Interest and Fee Basis............. 13
2.10. Waivers; Special Agreements of Borrowers.................................. 13
ARTICLE III CONVERSION AND PREPAYMENT................................................ 14
3.01. Conversion................................................................ 14
3.02. No Impairment............................................................. 18
3.03. Stock Transfer Taxes...................................................... 18
3.04. No Fractional Shares: Certificate as to Adjustments....................... 19
3.05. Notices of Record Date.................................................... 19
3.06. Reservation of Securities Issuable upon Conversion........................ 19
3.07. Prepayment................................................................ 20
3.08. Mandatory Prepayments..................................................... 20
3.09. Stockholder Rights Plan................................................... 20
3.10. Tolling of Automatic Conversion and Other Time periods for HSR Compliance 21
ARTICLE IV ADVANCE CONDITIONS........................................................ 21
ARTICLE V REPRESENTATIONS AND WARRANTIES............................................ 22
5.01. Organization, Standing and Power.......................................... 22
5.02. Subsidiaries and Joint Ventures........................................... 22
5.03. Authority; Noncontravention............................................... 23
5.04. Taxes..................................................................... 23
5.05. Compliance with Laws...................................................... 23
5.06. Environmental Matters..................................................... 24
5.07. Intellectual Property..................................................... 24
5.08. Certain Payments.......................................................... 25
</TABLE>
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<TABLE>
<S> <C>
ARTICLE VI COVENANTS.................................................................... 25
6.01. Financial Reporting........................................................... 25
6.02. Subsidiaries as Borrowers; Use of Proceeds.................................... 27
6.03. Notice of Default............................................................. 27
6.04. Conduct of Business; Merger, Sale of Assets, Etc.............................. 27
6.05. Taxes......................................................................... 28
6.06. Insurance..................................................................... 28
6.07. Compliance with Laws.......................................................... 28
6.08. Maintenance of Properties..................................................... 28
6.09. Inspection.................................................................... 28
6.10. Investments and Purchases..................................................... 28
6.11. Liens......................................................................... 29
6.12. Affiliates.................................................................... 30
6.13. Environmental Matters......................................................... 30
6.14. Change in Corporate Structure; Fiscal Year.................................... 30
6.15. Inconsistent Agreements....................................................... 31
6.16. Indebtedness.................................................................. 31
6.17. ERISA Compliance.............................................................. 31
ARTICLE VII EVENTS OF DEFAULT......................................................... 32
7.01................................................................................... 32
7.02................................................................................... 32
7.03................................................................................... 32
7.04................................................................................... 32
7.05................................................................................... 33
7.06................................................................................... 33
7.07................................................................................... 33
7.08................................................................................... 33
7.09................................................................................... 33
ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES............................ 33
ARTICLE IX SETOFF...................................................................... 34
ARTICLE X BENEFIT OF AGREEMENT; ASSIGNMENTS............................................. 35
10.01. Successors and Assigns........................................................ 35
10.02. Assignments by Sprint......................................................... 35
10.03. Dissemination of Information.................................................. 36
ARTICLE XI MISCELLANEOUS ............................................................... 36
11.01. Notices....................................................................... 36
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
11.02. Entire Agreement............................................................... 37
11.03. Waiver......................................................................... 37
11.04. Governing Law.................................................................. 38
11.05. Severability................................................................... 38
11.06. Counterparts................................................................... 38
11.07. Headings....................................................................... 38
11.08. No Third-Party Beneficiaries................................................... 38
11.09. Interpretation................................................................. 38
11.10. Inclusion of Information in Schedules.......................................... 39
11.11. Amendment...................................................................... 39
11.12. Joint and Several Obligations of Borrowers..................................... 39
11.13. Effectiveness of Agreement..................................................... 39
11.14. Reliance on Investment Agreement............................................... 39
11.15. Exclusive Jurisdiction and Consent to Service of Process....................... 39
11.16. WAIVER OF JURY TRIAL........................................................... 41
</TABLE>
iii
<PAGE>
PAGE
----
EXHIBITS
- - --------
Exhibit A (Section 1) Convertible Senior Promissory Note
Exhibit B (Section 6.1(d)) Compliance Certificate
Exhibit C ( Section 6.2(a)) Agreement to Add Borrower
Exhibit D (Section 10.2.1) Assignment Agreement
SCHEDULES
- - ---------
Schedule 6.10 - Investments
Schedule 6.11 - Liens
Schedule 6.12 - Certain Affiliate Agreements
iv
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of February 10, 1998, is between Dolphin,
Inc., a Delaware corporation ("Newco"), and EarthLink Network, Inc., a Delaware
corporation (the "Company"), and Sprint Corporation, a Kansas corporation
("Sprint"), as lender.
WHEREAS, the respective Boards of Directors of Sprint, the general partner
of Sprint Communications L.P., a Delaware limited partnership ("Sprint L.P.")
and the Company have determined to enter into a strategic relationship in the
area of Internet access and related services and Sprint and Sprint L.P. will
make investments in Newco and the Company in connection with the Merger (as
defined below) of Newco Sub, Inc., a Delaware corporation and wholly-owned
subsidiary of Newco ("Newco Sub") and the Company in order to enhance the
capabilities for growth and financial and strategic success;
WHEREAS, Sprint, Sprint L.P., the Company, Newco and Newco Sub have entered
into an Investment Agreement as of the date hereof (the "Investment Agreement")
contemplating that strategic alliance and addressing the terms and conditions of
such investment and related transactions;
WHEREAS, Sprint proposes to make a tender offer (as it may be amended from
time to time as permitted under the Investment Agreement, with the Company's
consent if required thereby, the "Offer") to purchase 1,250,000 shares of common
stock, par value $.01 per share, of the Company (the "Company Common Stock"),
for an aggregate cash consideration of $56,250,000 and at a price per share of
Company Common Stock of $45 net to each seller in cash (such price, as may
hereafter be changed, the "Offer Price"), upon the terms and subject to the
conditions set forth in the Investment Agreement; and the Board of Directors of
the Company has approved the Offer and the other transactions contemplated by
the Investment Agreement and is recommending that the Company's stockholders who
wish to receive cash for their shares of Company Common Stock accept the Offer;
WHEREAS, immediately following the closing of the Offer, Sprint L.P.
proposes to purchase 4,102,941 shares of Series A Convertible Preferred Stock,
par value $.01 per share of Newco (the "Convertible Preferred Stock") in
exchange for (i) an aggregate cash consideration of $23,750,000, (ii) the
assignment to Newco of 100% of the Sprint Internet Passport Subscribers, and
(iii) entering into a network agreement whereby Newco and the Company will
utilize Sprint's long-distance network under specified terms and conditions;
WHEREAS, Sprint, Sprint L.P., the Company and Newco will enter into a
marketing agreement whereby Newco and the Company will utilize the Sprint brand
under specified terms and conditions and will, inter alia, have the right to use
----- ----
Sprint L.P. distribution channels under specified terms and conditions and agree
to sell certain Sprint L.P. products;
1
<PAGE>
WHEREAS, Sprint shall provide Newco and the Company, as co-borrowers, with
up to $25 million of Convertible Senior Debt financing (the "Convertible Debt
Financing") on or after the Closing, with such amount to increase to up to $100
million over time, such indebtedness to be evidenced by one or more Notes;
WHEREAS, the closing of the acquisition of the Convertible Preferred Stock
and the other transactions referred to above other than the Offer shall take
place concurrently with the merger of Newco Sub into the Company (the "Merger")
and the conversion of each outstanding share of Company Common Stock into one
share of Newco Common Stock, par value $.01 per share ("Newco Common Stock')
pursuant to the Merger, in each case upon the terms and subject to the
conditions set forth in the Investment Agreement and/or the Ancillary
Agreements;
WHEREAS, to induce Sprint and Sprint L.P. to enter into the Investment
Agreement and the Ancillary Agreements, and to consummate the transactions
contemplated thereby, (i) certain stockholders of the Company have entered into
a Stockholders' Agreement with Sprint and Sprint L.P., and (ii) certain other
stockholders have granted to Sprint agreements to vote and/or tender their
shares of Company Common Stock in connection with the transactions contemplated
by the Investment Agreement;
WHEREAS, each Borrower hereunder recognizes and acknowledges that this
Agreement, the Investment Agreement and the Ancillary Agreements, and the
Advances made hereunder to such Borrower and to Affiliates of such Borrower,
serve to benefit, directly or indirectly, such Borrower; and
WHEREAS, Newco intends to make the credit facility provided for in this
Agreement and Advances thereunder available to its Subsidiaries for working
capital and other purposes permitted hereunder.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the Investment Agreement
and in the Ancillary Agreements, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions. Definitions as used in this Agreement:
"Action" means any action, suit, arbitration, inquiry, proceeding or
investigation by or before any Governmental Entity.
2
<PAGE>
"Advance" means a borrowing hereunder.
"Affiliate" and "Associate" shall have the respective meanings ascribed to
such terms in Rule 12b-2 under the Securities Exchange Act of 1934, as amended,
as such Rule is in effect on the Closing Date.
"Aggregate Available Commitment" means, at any time, the Aggregate
Commitment at such time, minus the aggregate amount of all Advances.
-----
"Aggregate Commitment" means the total amount which Sprint is obligated to
advance under Section 2.04 below
------------
"Agreement" means this Credit Agreement, as it may be amended, modified or
restated and in effect from time to time.
"Ancillary Agreements" is defined in Article VIII of the Investment
Agreement.
"Authorized Officer" means any of the chairman, chief executive officer or
chief financial officer of the Borrowers, or any other officer of the Borrowers
they or any of them designate to Sprint.
"Average Market Price" means the average of the Closing Prices for the 30
Trading Days immediately preceding an Advance.
"Bankruptcy Code" means Title 11, United States Code, sections 101 et seq.,
-- ---
as the same may be amended from time to time, and any successor thereto or
replacement therefor which may be hereafter enacted.
"Borrower" means each of Newco and the Company and any Subsidiary added as
a "Borrower" under Section 6.02(a).
---------------
"Borrower Filed SEC Documents" is defined in Section 6.01.
------------
"Borrowing Date" means a date on which an Advance is made hereunder.
"Borrowing Notice" is defined in Section 2.05.
------------
"Business Day" means with respect to any borrowing or payment, a day (other
than a Saturday or Sunday) on which banks generally are open in Kansas City,
Missouri for the conduct of substantially all of their commercial lending
activities.
"Business Combination" shall have the same meaning as given such term in
the Governance Agreement.
3
<PAGE>
"Capitalized Lease" of a Person means any lease of Property by such Person
as lessee which would be capitalized on a balance sheet of such Person prepared
in accordance with GAAP.
"Capitalized Lease Obligations" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with GAAP.
"Closing" shall have the same meaning as given such term in the Investment
Agreement.
"Closing Price" per share of Common Stock on any date shall be the last
sale price, 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 the New York Stock Exchange or,
if the Common Stock is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Common Stock is listed or admitted to trading or, if the Common
Stock is not listed or admitted to trading on any national securities exchange,
if such shares of Common Stock are not listed or admitted to trading on such
exchange, as reported on the NASDAQ National Market, or if not quoted on the
NASDAQ National Market, the last quoted sale price or, if not so quoted, the
average of the high bid and low asked prices in the over-the-counter market, as
reported by NASDAQ or such other system then in use, or, if on any such date the
Common Stock is not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Common Stock selected by the Board of Directors. If the Common Stock is
not publicly held or so listed or publicly traded, "Closing Price" shall mean
the Fair Market Value per share as determined in good faith by the Board of
Directors.
"Code" means the Internal Revenue Code of 1986.
"Common Stock" shall mean Newco's authorized Common Stock, $.01 par value,
as constituted on the Closing Date, and any stock into which such Common Stock
may thereafter be changed or reclassified, including, without limitation, any
Surviving Entity Securities; provided, however, that if Common Stock is changed
or reclassified into more than one class or series of equity securities, the
term "Common Stock" shall refer to the class or series of such equity securities
having the greatest general voting power in the election of directors of Newco
as compared to the other classes or series of equity securities.
"Company" has the meaning set forth in the recitals.
"Condemnation" is defined in Section 7.08.
------------
4
<PAGE>
"Consolidated" or "consolidated", when used in connection with any
calculation, means a calculation to be determined on a consolidated basis (as
determined in accordance with GAAP) for Newco.
"Consolidated Person" means, for the taxable year of reference, each Person
which is a member of the affiliated group of which Newco is a member if
consolidated returns are or shall be filed for such affiliated group for federal
income tax purposes or any combined or unitary group of which Newco is a member
for state income tax purposes.
"Contingent Obligation" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other Person, or otherwise assures any creditor of such other Person
against loss, including, without limitation, any operating agreement or take-or-
pay contract or application for a letter of credit.
"Controlled Group" means all members of a controlled group of corporations
and all trades or businesses (whether or not incorporated) under common control
which, together with Newco or any of its Subsidiaries and after giving effect
to the transactions contemplated by the Investment Agreement and the Ancillary
Agreements, are treated as a single employer under Section 414 of the Code.
"Conversion Rights," "Conversion Notice," "Conversion Amount," and
"Conversion Price" are defined in Section 3.01.
------------
"Current Market Price" per share of Newco Common Stock on any date shall be
deemed to be the Closing Price per share of Newco Common Stock on the Trading
Day immediately prior to such date, except that "Current Market Price" for
purposes of an adjustment resulting from a Spin-Off under Section 3.01(c)(v)
------------------
shall mean the average Closing Price for the 20 Trading Days following the 10th
Trading Day following the effective date of any Spin-Off, as defined in Section
-------
3.01(c)(v).
- - ----------
"Default" means any event or condition the occurrence of which would, with
the passage of time or the giving of notice, or both, constitute an Event of
Default.
"Encumbrance" means any charge, claim, community property interest,
equitable interest lien, tax lien, option, pledge, security interest, right of
first refusal or restriction of any kind, including any restriction on transfer,
receipt of income or exercise of any other attribute of ownership.
"Environment" means soil, land surface or subsurface strata, surface waters
(including navigable waters, ocean waters, streams, ponds, drainage basins, and
wetlands), groundwaters, drinking water supply, stream sediments, ambient air
(including indoor air), plant and animal life, and any other environmental
medium or natural resource.
5
<PAGE>
"Environmental Law" means any Law that requires or relates to protection of
human health or the Environment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Event of Default" is defined in Article VII.
"Facility Termination Date" is defined in Section 2.02.
------------
"Fair Market Value" means the amount which a willing buyer would pay a
willing seller in an arm's-length transaction.
"Fiscal Quarter" means one of the four consecutive three-month accounting
periods beginning on the first day of each Fiscal Year.
"Fiscal Year" means the twelve-month accounting period ending on December
31 of each year.
"Foreign Entity" means any Person that is not a resident of the United
States or organized under the laws of the United States or any state thereof or
any Person that has property equal to a Substantial Portion located outside the
United States.
"GAAP" means generally accepted accounting principles, consistently
applied.
"Governance Agreement" means the Governance Agreement, dated as of the date
hereof, among Sprint, Sprint L.P., the Company and Newco.
"Governmental Entity" means any federal, state, foreign or local
government, any of its subdivisions, administrative agencies, authorities,
commissions, boards or bureaus, any federal, state, foreign or local court or
tribunal and any arbitrator.
"Holder" is defined in Section 3.01.
------------
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Indebtedness" of a Person means such Person's (a) obligations for borrowed
money, (b) obligations representing the deferred purchase price of Property or
services (other than accounts payable arising in the ordinary course of such
Person's business), (c) obligations, whether or not assumed, secured by Liens or
payable out of the proceeds or production from Property now or hereafter owned
or acquired by such Person, (d) obligations which are evidenced by notes,
acceptances, or other instruments, (e) Capitalized Lease Obligations, (f)
Contingent Obligations, and
6
<PAGE>
(g) repurchase obligations or liabilities of such Person with respect to
accounts receivable or notes receivable sold by such Person.
"Investment" of a Person means any loan, advance (other than commission,
travel and similar advances to officers and employees made in the ordinary
course of business), extension of credit (other than accounts receivable arising
in the ordinary course of business), or contribution of capital by such Person
to any other Person or any investment in, or purchase or other contribution of,
the stock, partnership interests, notes, debentures or other securities of any
other Person made by such Person valued at historical cost.
"Investment Agreement" is defined in the recitals hereof.
"Knowledge" means the actual knowledge of any of the executive officers and
directors of the Parties (except in respect of the Company, John W. Sidgmore)
without any duty to inquire or attribution of knowledge from any other Person to
the persons in such capacities.
"Law" means any federal, state, local, municipal, foreign, international,
multinational, or other judicial or administrative order, judgment, decree,
constitution, law, ordinance, common law of California and Delaware, regulation,
statute, or treaty.
"Lien" means any lien, pledge, claim, security interest or Encumbrance
whatsoever, mortgage, deed of trust, security interest (including any
Capitalized Lease or other title retention agreement), charge, pledge, retention
of title agreement, easement, encroachment, condition, reservation, covenant,
lis pendens lien, claim of lien, adverse claim, restriction on attributes of
ownership, or other Encumbrance affecting title.
"Loan" means the aggregate of all Advances.
"Loan Documents" means this Agreement, the Notes, and the other documents
and agreements contemplated by this Agreement and executed by any Borrower in
favor of Sprint in connection with this Agreement.
"Margin Stock" has the meaning assigned to that term under Regulation G of
the Board of Governors of the Federal Reserve.
"Marketing Agreement" means the Marketing and Distribution Agreement, dated
as of the date hereof, among Sprint L.P., Newco and the Company.
"Material Adverse Effect" means any change or effect having a material
adverse effect (or any development as to which there is a substantial
likelihood, insofar as can be foreseen, would have such an effect) on the
business, properties, assets, condition (financial or otherwise), or results of
operations of Newco, the Company and their Subsidiaries taken as a whole.
7
<PAGE>
"Multiemployer Plan" means a Plan coming within Section 4001(a)(3) of
ERISA.
"Net Income" means, for any computation period, with respect to Newco on a
consolidated basis with its Subsidiaries (other than any Subsidiary which is
restricted from declaring or paying dividends or otherwise advancing funds to
its parent whether by contract or otherwise), cumulative net income earned
during such period in accordance with GAAP.
"Note" and "Notes" means one or more of the Convertible Senior Promissory
Notes substantially in the form attached hereto as Exhibit A each evidencing an
Advance (including any such Convertible Senior Promissory Notes issued in
exchange or substitution).
"Obligations" means all unpaid principal of and accrued and unpaid interest
on the Notes, all accrued and unpaid fees and all expenses, reimbursements,
indemnities and other obligations of a Borrower to Sprint or any indemnified
party hereunder arising under any of the Loan Documents.
"Ordinary Course of Business" means an action taken by a Person will be
deemed to have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such Person
and is taken in the ordinary course of the normal day-to-day operations of
such Person; and
(b) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons exercising
similar authority);
"Party" and "Parties" shall mean individually a party to this Agreement and
collectively all of the parties to this Agreement.
"Payment Date" means the fifteenth day of each January, April, July and
October and any other date on which any payment of principal and/or interest is
due hereunder or under any Note.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
thereto.
"Person" means any natural person, corporation, limited liability company,
firm, joint venture, partnership, association, enterprise, trust or other entity
or organization, or any government or political subdivision or any agency,
department, division or instrumentality of any of the foregoing.
"Plan" means an employee pension benefit plan, as defined in Section 3(2)
of ERISA, as to which Newco or any member of the Controlled Group has any
liability.
"Prime Rate" means the interest rate from time to time on corporate loans
at large U.S. money center commercial banks (as published from time to time in
The Wall Street Journal under the caption "Money Rates - Prime Rates"). In the
event that such rate is no longer published in The Wall Street Journal as
contemplated by this definition, then the reference rate of interest or formula,
8
<PAGE>
identified in a written notice from Sprint to Newco, that is substantially
similar to the reference rate contemplated by this definition shall be used.
"Property" of a Person means any and all property, whether real, personal,
tangible, intangible, or mixed, of such Person, or other assets owned, leased or
operated by such Person.
"Purchase" means any transaction, or any series of related transactions,
consummated on or after the date of this Agreement, by which Newco or any of its
Subsidiaries (a) acquires any going business or all or substantially all of the
assets of any other Person, whether through purchase of assets, merger or
otherwise, or (b) directly or indirectly acquires (in one transaction or as the
most recent transaction in a series of transactions) at least a majority (in
number of votes) of the securities of a corporation which have ordinary voting
power for the election of directors (other than securities having such power
only by reason of the happening of a contingency) or a majority in interest (by
percentage or voting power) of the outstanding interests of any other Person.
"Release" is defined in the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, 42 U.S.C. (S) 9601 et seq.
-- ---
"Reportable Event" means a reportable event as defined in Section 4043 of
ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC has by regulation waived
the requirement of Section 4043(a) of ERISA that it be notified within 30 days
of the occurrence of such event; provided, that a failure to meet the minimum
--------
funding standard of Section 412 of the Code and of Section 302 of ERISA shall be
a Reportable Event regardless of the issuance of any such waiver of the notice
requirement in accordance with Section 4043(a) of ERISA.
"Returns" means all tax returns that must be filed with any federal, state
or local taxing authority.
"SEC" means the Securities and Exchange Commission of the United States
Government.
"Single Employer Plan" means a Plan subject to Title IV of ERISA, other
than a Multiemployer Plan.
"Sprint" means Sprint Corporation, a Kansas corporation and its successors
and assigns.
"Stockholders' Equity" means stockholders' equity of Newco determined in
accordance with GAAP.
"Subsidiary" of any Person means any corporation or other entity of which a
majority of the voting power of the voting equity securities or equity interest
is owned, directly or indirectly, by such Person.
9
<PAGE>
"Substantial Portion" means, with respect to the Property of Newco and its
Subsidiaries, Property which (a) represents more than 15% of the consolidated
assets of Newco, as would be shown in the consolidated financial statements of
Newco as at the end of the Fiscal Quarter next preceding the date on which such
determination is made, or (b) is responsible for more than 15% of the
consolidated net sales or of the Net Income of Newco for the 12-month period
ending as of the end of the Fiscal Quarter next preceding the date of
determination.
"Surviving Entity" and "Surviving Entity Securities" are defined in Section
-------
3.01(c)(iv) hereof.
- - ----------
"Tax" or "Taxes" means all income, profits, franchise, gross receipts,
capital, sales, use, withholding, value added, ad valorem, transfer, employment,
social security, disability, occupation, property, severance, production, excise
and other taxes, duties and similar governmental charges and assessments imposed
by or on behalf of any Governmental Entity (including interest and penalties
thereon).
"Termination Event" means, with respect to a Plan which is subject to Title
IV of ERISA, (a) a Reportable Event, (b) the withdrawal of Newco or any other
member of the Controlled Group from such Plan during a plan year in which Newco
or any other member of the Controlled Group was a "substantial employer" as
defined in Section 4001(a)(2) of ERISA or was deemed such under Section 4066 of
ERISA, (c) the termination of such Plan or the filing of a notice of intent to
terminate such Plan under Section 4041 of ERISA, or (d) the institution by the
PBGC of proceedings to terminate such Plan or the occurrence of any event or
condition which constitutes grounds under Section 4042 of ERISA for the
termination of, or appointment of a trustee to administer, such Plan.
"Threatened" means any demand or statement that has been made in writing
that would lead a prudent person to conclude that a claim, proceeding, dispute,
Action, or other matter is likely to be asserted, commenced, taken, or otherwise
pursued in the future.
"Total Liabilities" means all liabilities of Newco, on a consolidated
basis, reflected on a balance sheet prepared in accordance with GAAP, including
all Indebtedness.
"Trading Day" means a day on which the principal national securities
exchange, NASDAQ or other securities market on which Newco Common Stock is
listed or admitted to trading is open for the transaction of business or, if
Newco Common Stock is not listed or admitted to trading on any national
securities exchange, any day other than a Saturday, Sunday, or a day on which
banking institutions in the State of New York are authorized or obligated by law
or executive order to close.
"Unfunded Liability" means the amount (if any) by which the present value
of all vested and unvested accrued benefits under a Single Employer Plan exceeds
the fair market value of assets allocable to such benefits, all determined as of
the then most recent valuation date for such Plan using PBGC actuarial
assumptions for single employer plan terminations.
10
<PAGE>
Any capitalized terms appearing herein and not otherwise defined shall have
the meaning ascribed to them in the Investment Agreement.
ARTICLE II
THE CREDITS
SECTION 2.01. Advances. (a) From and after the Closing, but prior to the
Facility Termination Date, Sprint agrees, on the terms and subject to the
conditions set forth in this Agreement, to make Advances to the Borrowers from
time to time in amounts not to exceed the Aggregate Available Commitment
existing at such time. Although the Borrowers may obtain multiple Advances
hereunder, this is not a revolving line of credit and Advances may not be repaid
and re-advanced. Prepayment may only be made in accordance with Sections 3.07
-------------
and 3.08.
- - --------
(b) The Borrowers, jointly and severally, agree that if at any time the
outstanding balance of the Loan exceeds the Aggregate Commitment, the Borrowers
shall repay immediately the then outstanding Loan balance in such amount as is
necessary to eliminate such excess.
(c) The Borrowers' obligation to pay the principal of, and interest on,
each Advance shall be evidenced by a Note executed by the Borrowers in the
principal amount equal to such Advance and dated the date of such Advance. Each
Borrower's joint and several obligations as co-maker of each Note shall exist
regardless of which Borrower actually receives the applicable Advance.
Each Advance shall mature, and the principal amount thereof and any unpaid
accrued interest thereon shall be due and payable, on the 5/th/ anniversary of
the Borrowing Date for such Advance (or as otherwise provided in the related
Note or in Section 3.08).
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SECTION 2.02. Facility Termination Date. The Facility Termination Date is
the date after which Sprint is no longer obligated to make Advances hereunder
and shall occur upon the first to occur of the following:
(a) The 5/th/ anniversary of the Closing;
(b) Acceleration by Sprint in accordance with the provisions of Article
VIII;
(c) Consummation of a Business Combination; or
(d) Termination of the Marketing Agreement other than a termination by
Sprint under Section 24(b)(ii) thereof and other than a termination by
the Company under Section 24(c), 24(d)(i) and 24(d)(ii) thereof.
11
<PAGE>
Such termination of the credit facility shall not affect in any way Sprint's
rights, including the Conversion Rights and rights to accelerate the Loans,
under this Agreement and the Notes.
SECTION 2.03. Minimum Amount of Each Advance. Each Advance shall be in the
minimum amount of $5,000,000 (and in multiples of $1,000,000 if in excess
thereof); provided, however, that any Advance may be in the amount of the
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Aggregate Available Commitment.
SECTION 2.04. Commitment Increases. Sprint shall not be obligated to make
any Advance prior to the Closing. From and after the Closing the "Aggregate
Commitment" shall be $25,000,000 and shall be automatically increased by the
following amounts on the following dates:
<TABLE>
<CAPTION>
Aggregate
Date Increase Commitment
---- -------- ----------
<S> <C> <C>
1/st/ Anniversary of Closing $25,000,000 $ 50,000,000
2/nd/ Anniversary of Closing $25,000,000 $ 75,000,000
3/rd/ Anniversary of Closing $25,000,000 $100,000,000
</TABLE>
SECTION 2.05. Borrowing Notices for New Advances. Newco shall give Sprint
irrevocable notice containing the following information (a "Borrowing Notice")
----------------
not later than 10:00 a.m. (Kansas City time) at least ten (10) Business Days and
not more than twenty (20) Business Days before the proposed Borrowing Date of
each Advance:
(a) the proposed Borrowing Date, which shall be a Business Day, of
such Advance;
(b) the aggregate amount of such Advance;
(c) a statement to the effect that all of the representations and
warranties of each Borrower contained herein are true and correct (i) as of
the date referred to in any representation or warranty that addresses a
matter as of a particular date and (ii) as to all other representations and
warranties as of the date of such Borrowing Notice, unless in either the
case of clause (i) or (ii), the inaccuracies under such representations and
warranties would not, individually or in the aggregate, have a Material
Adverse Effect; and
(d) a description of any Default that exists as to which the proviso
of clause (g) in Article IV may apply.
Subject to the terms hereof and subject to the satisfaction of the conditions
set forth in Article IV, Sprint shall, not later than noon (Kansas City time) on
----------
each Borrowing Date, make available to Newco immediately available funds in the
amount of the Advance requested to be made on such Borrowing Date.
12
<PAGE>
SECTION 2.06. Rates Applicable After an Event of Default. During the
continuance of an Event of Default, Sprint may, at its option, by notice to the
Borrowers (which notice may be revoked at the option of Sprint), declare that
for the duration of time during which such Event of Default shall be continuing,
the outstanding balance of the Loan shall bear a floating rate of interest equal
to the Prime Rate, as in effect from time to time, plus five percent (5%) per
annum calculated for actual days elapsed on the basis of a 360-day year.
SECTION 2.07. Method of Payment. All payments of the Obligations hereunder
shall be made, without setoff, deduction or counterclaim, in immediately
available funds to Sprint pursuant to wire transfer instructions provided to the
Borrowers by a duly authorized executive officer of Sprint, or absent such
instructions, at Sprint's address specified pursuant to Section 11.01, on the
-------------
date when due. If the Borrowers shall be required by law to deduct any such
amounts from or in respect of any sum payable hereunder to Sprint, then the sum
payable hereunder shall be increased so that, after making all required
deductions, Sprint receives an amount equal to the sum it would have received
had no such deduction been made, and the Borrowers, jointly and severally, shall
indemnify Sprint for taxes, assessments and governmental charges imposed by any
jurisdiction on account of amounts paid or payable pursuant to this sentence.
Within 30 days after the date of any payment of any such amount withheld by
either Borrower in respect of any payment to Sprint, such Borrower shall furnish
to Sprint the original or certified copy of a receipt evidencing payment
thereof.
SECTION 2.08. Notes. Upon receipt of a Borrowing Notice, Sprint shall
deliver to the Borrowers a Note for execution by the Borrowers; provided,
--------
however, that Sprint may refuse to deliver such Note if Sprint is not obligated
- - -------
to make an Advance hereunder.
SECTION 2.09. Interest Rate; Interest Payment Dates; Interest and Fee
Basis. Interest on principal shall be payable at a rate equal to six percent
(6%) per annum, provided, however, such interest rate may be increased as
provided in this Agreement under certain circumstances to a floating rate equal
to five percent (5%) above the Prime Rate. Interest accrued on each Advance
shall be payable on each Payment Date, commencing with the first Payment Date to
occur after the Borrowing Date, on any date on which principal is prepaid,
whether due to acceleration or otherwise, and at maturity. Interest shall be
calculated for actual days elapsed on the basis of a 360-day year. Interest
shall be payable for the day an Advance is made but not for the day of any
payment on the amount paid if payment is received prior to noon (Kansas City
time) at the place of payment. If any payment of principal of or interest on an
Advance shall become due on a day which is not a Business Day, such payment
shall be made on the next succeeding Business Day and, in the case of a
principal payment, such extension of time shall be included in computing
interest in connection with such payment.
SECTION 2.10. Waivers; Special Agreements of Borrowers. Each Borrower
warrants to Sprint that it has adequate means to obtain from the other Borrower,
on a continuing basis, information concerning the financial condition of such
other Borrower, and that it is not relying on Sprint to provide such
information, now or in the future. Each Borrower hereby waives any act or
omission of Sprint (except acts or omissions in bad faith) that materially
increases the scope of such
13
<PAGE>
Borrower's risk, including negligent administration of the loan. As a condition
of payment or performance by either Borrower, Sprint is not required to seek to
enforce any remedies against the other Borrower or any other party liable to
Sprint on account of the Obligations; nor is Sprint required to seek to enforce
or resort to any remedies with respect to any Lien granted to Sprint by the
other Borrower or any other party on account of the Obligations. This Agreement
and the Notes shall remain fully enforceable against a Borrower irrespective of
any defenses which the other Borrower may assert with respect to the
Obligations, including failure of consideration, breach of warranty, fraud,
payment, statute of frauds, bankruptcy, lack of legal capacity, statute of
limitations, lender liability, accord and satisfaction and usury.
ARTICLE III
CONVERSION AND PREPAYMENT
SECTION 3.01. Conversion. Sprint or a permitted assignee (in either case,
a "Holder") of a Note shall have conversion rights as follows (the "Conversion
Rights"):
(a) Optional Conversion Rights and Automatic Conversion.
(i) Each Note shall be convertible, in whole or in part, at
the option of the Holder thereof, at any time, and from time to time,
at the office of Newco into such number of validly issued, fully paid
and nonassessable shares of Newco Common Stock, free and clear of all
Liens of any kind or nature whatsoever, as is determined by dividing
the outstanding principal balance of such Note at the time of such
conversion, or the part thereof converted by the Holder, by the
Conversion Price per share at the time in effect for such Note;
provided, however, any such conversion shall be in the following
minimum amounts ("Minimum Conversion Amounts"): (1) If the aggregate
principal amount of the Notes outstanding at the time of such
conversion is less than $5,000,000 then the Minimum Conversion Amount
is such aggregate principal amount; or (2) If the aggregate principal
amount of the Notes is more than $5,000,000, then the Minimum
Conversion Amount is equal to $5,000,000 plus such multiples of
$1,000,000 as the Holder may elect. The Conversion Price per share for
each Note shall be an amount equal to 130% times the Average Market
Price of the Newco Common Stock, calculated with reference to the
related Borrowing Date, which amount shall be inserted in each Note at
the time of its original issuance in the appropriate space identifying
the Conversion Price of such Note, subject to adjustment as
hereinafter provided. It is understood that the Conversion Price for
each Note, if there is more than one Note, may be different. The
Conversion Price for each Note shall be subject to adjustment, from
time to time as set forth in Section 3.01(c).
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14
<PAGE>
(ii) Upon conversion of all or part of the then outstanding
principal balance of a Note, payment shall be made for all accrued but
unpaid interest on that portion of such Note converted through the
date of conversion.
(b) Mechanics of Conversion. If the Holder of a Note desires to
exercise such right of conversion, such Holder shall give written notice to
Newco (the "Conversion Notice") of that Holder's election to convert a
stated amount of the principal balance (the "Conversion Amount") into
shares of Newco Common Stock, and surrender to Newco, at its principal
office or at such other office or agency maintained by Newco for such
purpose, the originally executed Note evidencing such Conversion Amount.
The Conversion Notice shall also contain a statement of the name or names
(with addresses) in which the certificate or certificates for Newco Common
Stock shall be issued. Notwithstanding the foregoing, Newco shall not be
required to issue any certificates to any person other than the Holder of
the converted Note unless Newco has obtained reasonable assurance that such
transaction is exempt from the registration requirements of, or is covered
by an effective registration statement under, the Securities Act of 1933,
as amended (the "Act"), and all applicable state securities laws,
including, if necessary in the reasonable judgment of Newco or its legal
counsel, receipt of an opinion to such effect from counsel reasonably
satisfactory to Newco. In no event would such opinion be required if the
shares of Newco Common Stock could, upon conversion, be resold pursuant to
Rule 144 or Rule 144A under the Act. Promptly as practicable, and in any
event within five business days (subject to the last sentence of Section
3.01(c)(v)), after the receipt of the Conversion Notice and the surrender
of the Note evidencing at least the Conversion Amount, Newco shall issue
and deliver, or cause to be delivered, to the Holder of such Note or his
nominee or nominees, (i) a certificate or certificates for the number of
shares of Newco Common Stock issuable upon the conversion of such
Conversion Amount and (ii) if the Conversion Amount is less than the total
outstanding principal balance of the converted Note which is surrendered, a
new Note, of like tenor, evidencing the remaining portion of the
outstanding principal balance which is not converted. Such conversion
shall be deemed to have been effected as of the close of business on the
date Newco received the Conversion Notice and the originally executed Note
representing at least the Conversion Amount, and the person or persons
entitled to receive the shares of Newco Common Stock issuable upon
conversion shall be treated for all purposes as the holder or holders of
record of such shares of Newco Common Stock as of the close of business on
such date.
(c) Conversion Price Adjustments.
(i) If Newco should at any time or from time to time after the
date of the Advance evidenced by a Note fix a record date for the
effectuation of a split or subdivision of the outstanding shares of
Newco Common Stock or the determination of holders of Newco Common
Stock entitled to receive a dividend or other distribution payable in
additional shares of Newco Common Stock, then, as of such record date
(or, if no record date is fixed, as of the close of business on the
date on
15
<PAGE>
which the Board of Directors of Newco adopts the resolution relating
to such dividend, distribution, split or subdivision), the Conversion
Price for such Note shall be decreased to equal the product of the
Conversion Price in effect immediately prior to such date for such
Note multiplied by a fraction, the numerator of which shall be the
number of shares of Newco Common Stock outstanding immediately prior
thereto and the denominator of which shall be the number of shares of
Newco Common Stock outstanding immediately thereafter.
(ii) If the number of shares of Newco Common Stock outstanding
at any time or from time to time after the date of the Advance
evidenced by a Note is decreased by a combination of the outstanding
shares of Newco Common Stock, then following such combination, the
Conversion Price shall be increased to equal the product of the
Conversion Price in effect immediately prior thereto for such Note
multiplied by a fraction, the numerator of which shall be the number
of shares of Newco Common Stock outstanding immediately prior thereto
and the denominator of which shall be the number of shares of Newco
Common Stock outstanding immediately thereafter. So long as any of the
Notes are outstanding, Newco shall not combine any shares of Newco
Common Stock unless it likewise combines all shares of Newco Common
Stock.
(iii) If Newco shall at any time and from time to time after the
date of the Advance evidenced by a Note issue rights or warrants to
all holders of the Newco Common Stock entitling such holders to
subscribe for or purchase Newco Common Stock at a price per share less
than the Current Market Price per share of the Newco Common Stock on
the record date for the determination of stockholders entitled to
receive such rights or warrants, then, and in each such case, the
Conversion Price shall be adjusted so that the Holder of such Note
shall be entitled to receive, upon the conversion thereof, the number
of shares of Newco Common Stock determined by multiplying the number
of shares of Newco Common Stock into which such Note was convertible
on the day immediately prior to such record date by a fraction, (A)
the numerator of which is the sum of (1) the number of shares of Newco
Common Stock outstanding on such record date and (2) the number of
additional shares of Newco Common Stock which such rights or warrant
entitle holders of Common Stock to subscribe for or purchase ("Offered
Shares"), and (B) the denominator of which is the sum of (1) the
number of shares of Newco Common Stock outstanding on the record date
and (2) a fraction, (x) the numerator of which is the product of the
number of Offered Shares multiplied by the subscription or purchase
price of the Offered Shares and (y) the denominator of which is the
Current Market Price per share of Newco Common Stock on such record
date. Such adjustment shall become effective immediately after such
record date.
(iv) If Newco shall be a party to any transaction, including
any capital reorganization or reclassification of the Newco Common
Stock (other than a
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transaction described in clauses (i), (ii) and (v) of this Section
-------
3.01(c)), or consolidation or merger of Newco, or the sale or
--------
conveyance of all or substantially all of its assets in which the
previously outstanding shares of Newco Common Stock shall be changed
into or, pursuant to the operation of law or the terms of the
transaction to which Newco is a party, exchanged, or would have been
changed or exchanged as required by the Certificate of Incorporation
if such Newco Common Stock were outstanding, for different securities
of Newco or common stock or other securities of another company or
interests in a non-corporate entity (such other company or non-
corporate entity is referred to herein as the "Surviving Entity") or
other property (including cash) or any combination of the foregoing,
then, as a condition to the consummation of such transaction, lawful
and adequate provision shall be made whereby each Holder of a Note
shall thereafter have the right to receive, in lieu of the shares of
Newco Common Stock immediately theretofore receivable with respect to
the conversion of such Holder's Note, such shares of stock or
securities (such stock and securities are referred to herein as the
"Surviving Entity Securities") or assets as are issued or are payable
with respect to or in exchange for the shares of Newco Common Stock
which such Holder would have held had his Note been converted in full
immediately prior to such transaction. In any such case, appropriate
provisions shall be made with respect to the rights and interests of
each Holder of a Note to the end that such conversion rights
(including, without limitation, provisions for adjustment of the
Conversion Price) shall thereafter be applicable, as nearly as may be
practicable in relation to any shares of Surviving Entity Securities
or assets thereafter deliverable upon the exercise thereof.
(v) If Newco shall at any time or from time to time after the
date of an Advance declare, order, pay or make a dividend or other
distribution (including, without limitation, any distribution of stock
or other securities or property or rights or warrants to subscribe for
securities of Newco or any of its Subsidiaries by way of dividend) on
Newco Common Stock, other than (x) regular quarterly dividends payable
in cash or extraordinary cash dividends in an aggregate amount not to
exceed in any Fiscal Quarter an amount equal to 6.25% of the Net
Income for the twelve-month period ending on the day immediately
preceding the first day of such Fiscal Quarter, (y) shares of Newco
Common Stock which are referred to in clause (i) of this Section
-------
3.01(c), or (z) rights or warrants which are referred to in clause
------
(iii) of this Section 3.01(c), then, as a condition to the
--------------
consummation of such dividend or distribution, the Conversion Price of
each Note shall be adjusted so that the Holder of each Note shall be
entitled to receive, upon the conversion of the Note, the number of
shares of Common Stock determined by multiplying (1) the number of
shares of Newco Common Stock into which such share was convertible on
the day immediately prior to the record date fixed for the
determination of stockholders entitled to receive such dividend or
distribution by (2) a fraction, the numerator of which shall be the
Current Market Price per share of Newco Common Stock as of the third
Trading Day prior to such record date, and the denominator of which
shall be such Current Market
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<PAGE>
Price per share of Newco Common Stock less the Fair Market Value per
share of Newco Common Stock (as determined in good faith by the Board
of Directors of Newco, a certified resolution with respect to which
shall be mailed to each Holder of a Note) of such dividend or
distribution; provided, however, that in the event of a distribution
-------- -------
of shares of capital stock of a Subsidiary of Newco (a "Spin-Off")
made to holders of shares of Newco Common Stock, the numerator of such
fraction shall be the sum of the Current Market Price per share of
Newco Common Stock and the Current Market Price of the number of
shares (or the fraction of a share) of capital stock of the Subsidiary
which is distributed in such Spin-Off in respect of one share of Newco
Common Stock and the denominator of which shall be the Current Market
Price per share of Newco Common Stock. An adjustment made pursuant to
this clause (v) shall be made upon the opening of business on the next
Business Day following the date on which any such dividend or
distribution is paid and shall be effective retroactively to such time
immediately after the close of business on the record date fixed for
the determination of stockholders entitled to receive such dividend or
distribution; provided, however, if the proviso in the foregoing
-------- -------
sentence applies, then such adjustment shall be made and be effective
as of the 30th Trading Day after the effective date of such Spin-Off,
and in the event all or part of this Note is converted after the
record date for such Spin-Off but prior to the 30th Trading Day after
the effective date of the Spin-Off, Newco will deliver to the holder
of this Note in accordance with Section 3.01(b) that number of shares
---------------
which would be issued prior to the appropriate adjustment, and issue
the additional number of shares which would be issuable as a result of
the applicable adjustment pursuant to this clause (v) within 35
Trading Days after the effective date of such Spin-Off.
SECTION 3.02. No Impairment. Newco will not, by amendment of its
Certificate of Incorporation, Bylaws or other organizational documents or
through any reorganization, reclassification, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by Newco but will at all
times in good faith assist in the carrying out of all the provisions of Section
-------
3.01 and in the taking of all such action as may be necessary or appropriate in
- - ----
order to protect the Conversion Rights of each Holder of the Notes against
impairment. Without limiting the foregoing, Newco will not effect any
transaction described in this Section 3.02, the result of which is to adversely
------------
affect any of the rights of holders of Newco Common Stock relative to the rights
of holders of any other securities of Newco other than the Notes.
SECTION 3.03. Stock Transfer Taxes. The issuance of stock certificates
upon the conversion of a Note shall be made without charge to the Holder thereof
for any tax in respect of such issuance. Newco shall not, however, be required
to pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of shares in any name other than that of the Holder of the
applicable Note, and Newco shall not be required to issue or deliver any such
stock
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certificate unless and until the person or persons requesting the issuance
thereof shall have paid to Newco the amount of such tax, if any.
SECTION 3.04. No Fractional Shares: Certificate as to Adjustments. (a) No
fractional shares shall be issued upon conversion of a Note, and the number of
shares of Common Stock to be issued shall be rounded to the nearest whole share.
(b) Upon the occurrence of each adjustment or readjustment of the
Conversion Price of a Note pursuant to Section 3.01(c), Newco, at its expense,
---------------
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to the Holder of each Note a certificate
setting forth such adjustment or readjustment for such Holder's Note and showing
in detail the facts upon which such adjustment or readjustment is based. Newco
shall, upon the written request at any time by a Holder of a Note, furnish or
cause to be furnished to such Holder a like certificate setting forth (A) such
adjustment and readjustment, (B) the Conversion Price at the time in effect for
such Note, and (C) the number of shares of Newco Common Stock and the amount, if
any, of other property which at the time would be received upon the total
conversion of such Note.
SECTION 3.05. Notices of Record Date. In the event of any taking by Newco
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, any right to subscribe for,
purchase or otherwise acquire any shares of stock or any class of any other
securities or property, or to receive any other right, Newco shall mail to each
Holder of the Notes, at least ten (10) Business Days prior to the date specified
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right. Newco shall not issue rights
or warrants described in Section 3.01(c)(iii), consummate any reorganization,
--------------------
reclassification, consolidation, merger or sale described in Section
-------
3.01(c)(iv), or dividend or distribution described in Section 3.01(c)(v), unless
- - ----------- ------------------
it provides each Holder of the Notes at least ten (10) Business Days advance
notice thereof.
SECTION 3.06. Reservation of Securities Issuable upon Conversion. Newco
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the Notes, free from any preemptive right or other obligation, such number of
its shares of Newco Common Stock as shall from time to time be sufficient to
effect the conversion of all of the outstanding principal balance of the Notes
issued under this Agreement; and if at any time the number of authorized but
unissued shares of Newco Common Stock shall not be sufficient to effect the
conversion of all of the outstanding principal balance of the Notes issued under
this Agreement, in addition to such other remedies as shall be available to the
Holders of the Notes, Newco will take such corporate action as may be necessary
to increase its authorized but unissued shares of Newco Common Stock to such
number of shares as shall be sufficient for such purposes. Newco shall prepare
and shall use its best efforts to obtain and keep in force such governmental or
regulatory permits or other authorizations as may be required by law, and shall
comply with all requirements as to registration, qualification or listing of the
Newco Common Stock in order to enable Newco to lawfully issue and deliver to the
Holders of the Notes such number
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<PAGE>
of shares of its Newco Common Stock as shall from time to time be sufficient to
effect the conversion of all of the outstanding principal balance of the Notes
issued under this Agreement.
SECTION 3.07. Prepayment. From and after the date which is 42 months after
the Borrowing Date applicable to a Note, the Borrowers shall have the right to
prepay such Note, upon not less than thirty (30) nor more than sixty (60) days'
prior notice setting forth the amount (each prepayment shall be made in the
minimum amount of $5,000,000 and in $1,000,000 increments over the minimum
amount) that it wishes to prepay of such Note and the date of such prepayment
("Prepayment Notice"). In the event that the Borrowers prepay a Note in part,
the Borrowers shall execute and deliver to Holder a new Note in a principal
amount equal to the principal remaining outstanding. Delivery of a Prepayment
Notice shall not affect Holder's right to convert any such Note, in whole or in
part, prior to the date set for prepayment.
SECTION 3.08. Mandatory Prepayments. (a) Newco or the Company shall, as
the case may be, notify Sprint that it intends to enter into a Business
Combination or that a Business Combination may occur at least thirty (30) days
prior to consummation of such proposed Business Combination, setting forth in
such notice all the material facts relating to the Business Combination. Prior
to the consummation of such Business Combination, the Holders shall continue to
have the right to convert the Notes as herein provided. From and after the
consummation of such Business Combination and for a thirty (30) day period
thereafter, the Holders shall have the right to require the Borrowers to prepay
all principal and accrued interest on the Notes (calculating accrued interest to
the date of such prepayment), plus an amount equal to 1% of the principal amount
of such Notes. Such mandatory prepayment shall be made on or before the tenth
day after notice is given by Sprint to the Borrowers demanding such prepayment.
(b) In the event the Facility Termination Date occurs pursuant to Section
2.02(d), then each of the Notes outstanding hereunder shall be required to be
prepaid, without the necessity of any notice or demand by Sprint or any Holder,
on or before the first Business Day following the end of one year after such
Facility Termination Date.
(c) The foregoing provisions of this Section 3.08 shall not affect in any
------------
way the obligation of the Borrowers to pay any Note on its maturity date if such
maturity date is earlier than the required prepayment date.
SECTION 3.09. Stockholder Rights Plan. Notwithstanding any other provision
of this Agreement to the contrary, if Newco shall adopt a stockholders rights
plan (sometimes known as a "poison pill" plan), and shall declare, order, pay or
make a dividend or other distribution of rights thereunder with respect to the
Newco Common Stock (whether or not separate from the Newco Common Stock), each
Holder of a Note shall be entitled to receive from Newco, upon conversion of
such Note into Newco Common Stock pursuant to Article III, all of the rights
distributed under such plan (but without any limitation or restriction on the
exercise of such rights) fully and to the same extent as if immediately prior to
the earlier of such distribution or any record date therefor such Holder had
converted all of such Holder's outstanding principal balance on the Notes into
shares of
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<PAGE>
Newco Common Stock. The preceding sentence shall provide the exclusive
protection under this Agreement to the Holders of the Notes (including
adjustments that would otherwise be required by Section 3.01(c)) with respect to
the subject matter of the immediately preceding sentence.
SECTION 3.10. Tolling of Automatic Conversion and Other Time periods for
HSR Compliance. Notwithstanding any other provision of this Agreement to the
contrary, until such time as the filing and waiting period requirements of the
HSR Act relating to the conversion of any of the Notes into Common Stock
pursuant to Article III shall have been complied with, if any, and there shall
be no action taken or instituted by the United States Department of Justice or
the United States Federal Trade Commission to delay, enjoin or impose conditions
on such conversion, and such waiting period applicable under the HSR Act shall
have expired or received early termination: (i) the date for any prepayments
pursuant to Section 3.07 or 3.08 shall be automatically extended for a period of
--------------------
five (5) Business Days beyond the date of expiration or early termination of the
waiting period of the HSR Act (as so extended, the "Extended Redemption Date")
and each Holder of Notes shall be entitled to convert any or all of the
outstanding principal balance of such Notes into Common Stock prior to the
Extended Redemption Date; and (ii) each other date or event that would otherwise
impair any right to convert the Notes into Common Stock or otherwise impair the
rights of the Notes shall be tolled until the Extended Redemption Date. Any
Holder of Notes who is required to comply with the filing and waiting period
requirements of the HSR Act with respect to the conversion of any Notes shall
use commercially reasonable efforts to cause such filing to be made as soon as
practicable after such Holder has provided notice of its intention to convert
such Notes and to diligently and in good faith pursue expiration or termination
of the waiting period of the HSR Act, provided no conditions are imposed on
Sprint.
ARTICLE IV
ADVANCE CONDITIONS
Sprint shall not be required to make a requested Advance, if on the
proposed Borrowing Date for such Advance:
(a) There is then outstanding any "Recommended Third Party Offer," as
such term is defined in the Governance Agreement;
(b) All representations and warranties of the Borrowers contained
herein are not true and correct (i) as of the date referred to in any
representation or warranty that addresses a matter as of a particular date
and (ii) as to all other representations and warranties as of the date of
such proposed Advance, unless, in either the case of clause (i) or (ii),
the inaccuracy of such representations and warranties would not,
individually or in the aggregate, have a Material Adverse Effect;
21
<PAGE>
(c) The Average Market Price of the Newco Common Stock is less than
$13.00 (adjusted after the date hereof for any stock split, stock dividend
or other subdivision or combination of the Newco Common Stock);
(d) A Borrowing Notice shall not have been properly submitted with
respect to such Advance;
(e) A duly executed Note representing the Advance has not been
received by Sprint;
(f) The Facility Termination Date shall have occurred; or
(g) A Default or Event of Default has occurred and is continuing or
will exist as a result of the requested Advance; provided, however, this
clause (g) shall not apply to any Default, the facts of which have been
specifically disclosed to Sprint in the Borrowing Notice for such Advance
and as to which Sprint has, within five (5) Business Days after Sprint's
receipt of the Borrowing Notice, neither advised the Borrowers of its
intent to declare an Event of Default nor, advised the Borrowers that it
intends to exercise its rights in this clause (g) and not make the
requested Advance (as is Sprint's right, exercising such right in its sole
discretion).
Each Borrowing Notice with respect to each such Advance shall constitute a
representation and warranty by the Borrowers that the conditions contained in
this Article IV have been satisfied. Sprint may require a duly completed
compliance certificate (dated the Borrowing Date) in substantially the form of
Exhibit B hereto as a condition to making an Advance.
- - ---------
ARTICLE V
REPRESENTATIONS AND WARRANTIES
SECTION 5.01. Organization, Standing and Power. Each of the Borrowers is
a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction in which it is incorporated and has all requisite power
and authority to own, lease and operate its properties and to carry on its
business as now being conducted. Each of the Borrowers is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties makes
such qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed (individually or in the
aggregate) would not have a Material Adverse Effect.
SECTION 5.02. Subsidiaries and Joint Ventures. No Borrower has any
Subsidiary that is not also a Borrower hereunder or has the right to acquire an
equity interest in any corporation,
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partnership, limited liability company, joint venture, business trust or any
other entity, except to the extent any such interest may be acquired under
Section 6.10 hereof.
- - ------------
SECTION 5.03. Authority; Noncontravention. Each Borrower has the requisite
corporate power and authority to enter into this Agreement and perform its
obligations hereunder and under the Loan Documents and the same have been duly
authorized by all necessary corporate action on the part of such Borrower, and
assuming this Agreement constitutes the valid and binding agreement of Sprint,
constitute valid and binding obligations of such Borrower enforceable against
such Borrower, in accordance with its terms, except to the extent that the
enforcement thereof may be limited by (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally, and (ii) general principles of equity
regardless of whether enforceability is considered in a proceeding in equity or
at law. The execution and delivery of this Agreement by each Borrower did not,
and the consummation of the transactions contemplated by this Agreement will
not, conflict with, or result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to loss by such Borrower of a
material benefit under, or result in the creation of any Lien upon any of the
properties or assets of such Borrower under, (i) the certificate of
incorporation or bylaws of such Borrower, (ii) any loan or credit agreement,
note, bond, mortgage, indenture, lease or other agreement, instrument, permit or
license applicable to such Borrower or its properties or assets or (iii) subject
to the governmental filings and other matters referred to in the following
sentence, any law applicable to such Borrower or its respective properties or
assets, other than, in the case of clauses (ii), (iii) and (iv), any such
conflicts, violations, defaults, rights or Liens that individually or in the
aggregate would not (x) have a Material Adverse Effect, (y) materially impair
the ability of such Borrower to perform its obligations under this Agreement or
(z) prevent the consummation of any of the transactions contemplated by this
Agreement.
SECTION 5.04. Taxes. Except as set forth on Schedule 5.04, each Borrower
has timely filed all Returns and reports required to be filed by it, except
where failure to timely file would not have a Material Adverse Effect. All such
Returns and reports are complete and accurate except where the failure to be
complete or accurate would not have a Material Adverse Effect. Each Borrower has
paid or has set up an adequate reserve for the payment of all Taxes shown as due
on such Returns except where the failure to do so would not have a Material
Adverse Effect. Except as set forth on Schedule 5.04, no deficiencies for any
Taxes have been asserted, proposed or assessed against any Borrower that have
not been paid or otherwise settled or reserved against, except for deficiencies
the assertion, proposing or assessment of which would not have a Material
Adverse Effect, and no requests for waivers of the time to assess any such taxes
are pending. There are no material Liens for Taxes (other than for current taxes
not yet due and payable) on the assets of any Borrower.
SECTION 5.05. Compliance with Laws. Each Borrower has in effect all
permits from approvals, authorizations, certificates, filings, franchises,
licenses, notices, permits, variances, exemptions, orders and rights ("Permits")
necessary for it to own, lease or operate its properties and assets and to carry
on its business as now conducted, and there has not occurred any default under
any Permit, except for the absence of Permits and for defaults under Permits
that, individually or in
23
<PAGE>
the aggregate, have not had a Material Adverse Effect. Except as disclosed in
the Borrower Filed SEC Documents, such Borrower is in compliance with all
applicable Law, except where failures to so comply, individually or in the
aggregate, would not have a Material Adverse Effect.
SECTION 5.06. Environmental Matters. Each Borrower is and at all times has
been in full compliance with, and has not been and is not in violation of or
liable under, any Environmental Law (which compliance includes the possession by
such Borrower of all Permits required under applicable Environmental Law and
compliance with the terms and conditions thereof), except for such failure to be
in compliance which, individually or in the aggregate, would not have a Material
Adverse Effect. There are no pending or, to the Knowledge of any Borrower,
Threatened claims, orders, notices, administrative or judicial actions, or
Encumbrances, relating to environmental, health, and safety liabilities arising
under or pursuant to any federal, state or local Environmental Laws, with
respect to or affecting any of the properties and assets (whether real,
personal, or mixed) in which such Borrower has an interest, except for any such
claim, order, notice, administrative or judicial action, Encumbrance or other
restriction that would not, individually or in the aggregate, have a Material
Adverse Effect.
SECTION 5.07. Intellectual Property. Each Borrower owns sufficient right,
title and interest in and to, or has valid licenses of sufficient scope and
duration for, all patents, patent rights, copyrights, trademarks, service marks,
trade names, software, trade secrets, confidential information and other
intellectual property material to the operation of the business of such Borrower
as currently conducted or proposed to be conducted (the "Intellectual Property
Assets") and as proposed to be conducted. The Intellectual Property Assets are
free and clear of all Liens which would materially impair such Borrower's
ability to use the Intellectual Property Assets in the business of such Borrower
as currently conducted or proposed to be conducted. No Borrower has granted any
third party any rights in and to the Intellectual Property Assets except for
distribution rights, OEM rights, end user licenses and rights to reproduce
certain of the Intellectual Property Assets in the Ordinary Course of Business
in connection with the marketing and distribution of such Borrower's product and
service offerings, and which individually and in the aggregate would not have a
Material Adverse Effect. Except as set forth on Schedule 5.8, no Intellectual
Property Assets of any Borrower infringes, or conflicts with, or to the
Knowledge of any Borrower, is alleged to infringe upon or conflict with the
intellectual property rights of any third party. No Borrower has Knowledge that
any of its employees performing or managing key functions of such Borrower is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of such
employee's best efforts to promote the interests of such Borrower or that would
conflict with such Borrower's business as proposed to be conducted. To the
Knowledge of any Borrower, neither the execution nor delivery of this Agreement,
nor the carrying on of any Borrower's business by the employees of such
Borrower, nor the conduct of the business of any Borrower as proposed, will
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any of such employees is now obligated, which conflict or breach would have a
Material Adverse Effect. No Borrower utilizes or intends to
24
<PAGE>
utilize any inventions of any of its employees (or people it currently intends
to hire) made prior to their employment by such Borrower.
SECTION 5.08. Certain Payments. No Borrower, or any of the directors,
officers, agents, or employees of any Borrower, or to the Knowledge of any
Borrower, any other Person associated with or acting for or on behalf of any
Borrower, has directly or indirectly (a) made any contribution, gift, bribe,
rebate, payoff, influence payment, kickback, or other payment to any Person,
private or public, regardless of form, whether in money, property, or services
(i) to obtain favorable treatment in securing business, (ii) to pay for
favorable treatment for business secured, (iii) to obtain special concessions or
for special concessions already obtained, for or in respect of a Borrower or any
Affiliate of a Borrower, (b) established or maintained any fund or asset that
has not been appropriately recorded in the books and records of the Borrower,
which in the case of either clause (a) or (b) would be in violation of Law or
would have a Material Adverse Effect.
ARTICLE VI
COVENANTS
So long as any Note remains unpaid, unless Sprint shall otherwise consent
in writing:
SECTION 6.01. Financial Reporting. Newco will maintain, for itself and
each Subsidiary, a system of accounting established and administered in
accordance with GAAP, and furnish to Sprint:
(a) Within five (5) days after its filing with the SEC, and in any
event within 120 days after the close of each Fiscal Year, an unqualified
audit report certified by independent certified public accountants (which
shall be a "Big Six" accounting firm, or another nationally recognized
accounting firm), prepared in accordance with GAAP on a consolidated and
consolidating basis (consolidating statements need not be certified by such
accountants), including balance sheets as of the end of such period and
related statements of income and cash flows, accompanied by (i) any
management letter prepared by said accountants, (ii) a certificate of said
accountants that, in the course of the examination necessary for their
certification of the foregoing, they have obtained no knowledge of any
Default or Event of Default, or if, in the opinion of such accountants, any
Default or Event of Default shall exist, stating the nature and status
thereof, and (iii) a letter from said accountants addressed to Sprint
acknowledging that Sprint is extending credit in primary reliance on such
financial statements and authorizing such reliance. Newco hereby
authorizes Sprint to communicate directly with such accountants following
the occurrence of a Default or Event of Default.
(b) Within five (5) days after its filing with the SEC, and in any
event within 65 days after the close of the first three Fiscal Quarters of
each Fiscal Year, consolidated and consolidating unaudited balance sheets
as at the close of each such period and consolidated and consolidating
statements of income and cash flows for the period from the beginning of
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<PAGE>
such Fiscal Year to the end of such Fiscal Quarter, all certified by its
chief financial officer to have been prepared in accordance with GAAP
(other than the absence of notes to financial statements and subject to
normal recurring year-end audit adjustments).
(c) As soon as available, but in any event not later than 15 days
before the end of each Fiscal Year, beginning with Fiscal Year 1998, a copy
of the plan and forecast (including a projected consolidated and
consolidating balance sheet, income statement and cash flow statement) of
Newco and its Subsidiaries for the next Fiscal Year.
(d) Together with the financial statements required by clauses (a)
-----------
and (b) above, a compliance certificate in substantially the form of
---
Exhibit B hereto signed by its chief financial officer showing the
---------
calculations necessary to determine compliance with this Agreement and
stating that no Default or Event of Default exists and no Business
Combination has occurred, or if any Default or Event of Default exists,
stating the nature and status thereof.
(e) Within 270 days after the close of each Fiscal Year, a statement
of the Unfunded Liabilities of each Single Employer Plan, certified by an
actuary enrolled under ERISA.
(f) As soon as possible and in any event within ten (10) days after
Newco knows that any event has occurred which is a Termination Event with
respect to any Plan which is subject to Title IV of ERISA, a statement,
signed by the chief financial officer of Newco, describing said Termination
Event and any action which Newco proposes to take with respect thereto.
(g) As soon as possible and in any event within ten (10) days after
receipt by Newco, a copy of (i) any notice, claim, complaint or order to
the effect that Newco or any of its Subsidiaries is or may be liable to any
Person as a result of the release by Newco, any of its Subsidiaries, or any
other Person of any Hazardous Materials into the environment or requiring
that action be taken by Newco to respond to or clean up a Release of
Hazardous Materials into the environment, and (ii) any notice, complaint or
citation alleging any violation of any environmental law or environmental
permit by Newco or any of its Subsidiaries. Within ten (10) days after
Newco or any Subsidiary having Knowledge of the proposal, enactment or
promulgation of any environmental law which would have a Material Adverse
Effect, Newco shall provide Sprint with written notice thereof.
(h) Promptly upon the furnishing thereof to the stockholders of
Newco, copies of all financial statements, reports and proxy statements so
furnished.
(i) Promptly, and in any event within five (5) days after the filing
thereof, copies of any reports which Newco or any of its Subsidiaries files
with the SEC.
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(j) Promptly, and in any event within ten (10) days after learning
thereof, notification of (i) any tax assessment, demand, notice of proposed
deficiency or notice of deficiency received by Newco or any other
Consolidated Person or (ii) the filing of any tax Lien or commencement of
any judicial proceeding by or against any such Consolidated Person, if any
such assessment, demand, notice, Lien or judicial proceeding relates to tax
liabilities in excess of $1,000,000.
(k) Such other information (including non-financial information) as
Sprint may from time to time reasonably request.
Each Borrower shall file, on a timely basis, all reports, schedules, forms,
statements and other documents that are required to be filed with the SEC
("Borrower Filed SEC Documents"). As of their respective dates, the Borrower
Filed SEC Documents will comply in all material respects with the requirements
of the Securities Act of 1933 or the Securities and Exchange Act of 1934, as the
case may be, applicable to such Borrower Filed SEC Documents, and none of the
Borrower Filed SEC Documents will contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
SECTION 6.02. Subsidiaries as Borrowers; Use of Proceeds. (a) Prior to or
simultaneously with any Person (other than a Foreign Entity), becoming a
Subsidiary of a Borrower the Borrower agrees to cause such Person to enter into
an agreement with Sprint pursuant to which such Person shall be added as a party
hereto and a "Borrower" hereunder, such agreement to be substantially in the
form of Exhibit B hereto.
(b) The Borrowers will use the proceeds of the Advances to meet the
working capital needs of the Borrowers. No Borrower will use any of the proceeds
of the Advances to purchase or carry any Margin Stock.
SECTION 6.03. Notice of Default. The Borrowers will give prompt notice in
writing to Sprint of the occurrence of any Default or Event of Default and of
any other development relating to any Borrower, financial or other, which would
have a Material Adverse Effect.
SECTION 6.04. Conduct of Business; Merger, Sale of Assets, Etc. (a) Each
Borrower will carry on and conduct its business in generally the same manner and
in generally the same fields of enterprise as it is presently conducted and to
do all things necessary to remain duly incorporated, validly existing and in
good standing as a domestic corporation in its jurisdiction of incorporation
and, except where the failure to do so would not have a Material Adverse Effect,
maintain all requisite authority to conduct its business in each jurisdiction in
which its business is conducted.
(b) No Borrower shall sell, transfer, lease or otherwise dispose of any of
its Property which, when taken together with all other Property of the Borrowers
disposed of during the twelve
27
<PAGE>
month period ending with the month in which such disposition occurs, constitutes
a Substantial Portion.
SECTION 6.05. Taxes. Each Borrower will timely file complete and correct
United States federal and applicable foreign, state and local tax returns
required by applicable law and pay when due all taxes, assessments and
governmental charges and levies upon it or its income, profits or Property,
except those which are being diligently contested in good faith by appropriate
proceedings and with respect to which adequate reserves have been set aside.
SECTION 6.06. Insurance. Each Borrower will maintain with financially
sound and reputable insurance companies insurance on all its Property in such
amounts and covering such risks as is consistent with sound business practice,
and Newco will furnish to Sprint upon request full information as to the
insurance carried.
SECTION 6.07. Compliance with Laws. Each Borrower will comply with all
laws, rules, regulations, orders, writs, judgments, injunctions, decrees or
awards to which it may be subject, the failure to comply with which would have a
Material Adverse Effect.
SECTION 6.08. Maintenance of Properties. Each Borrower will do all things
necessary to maintain, preserve, protect and keep its Property in good repair,
working order and condition, and make all necessary and proper repairs, renewals
and replacements so that its business carried on in connection therewith may be
properly conducted at all times.
SECTION 6.09. Inspection. Each Borrower will permit Sprint, by its
representatives and agents, to inspect any of the Property, corporate books and
financial records of each Borrower, to examine and make copies of the books of
accounts and other financial records of each Borrower, and to discuss the
affairs, finances and accounts of each Borrower with, and to be advised as to
the same by, their respective officers at such reasonable times and intervals as
Sprint may designate; provided, that if a Default has occurred and is
--------
continuing, each Borrower shall permit Sprint or its representatives and agents,
to exercise the inspection rights set forth above during normal business hours
without limitation, whether by reason of a Borrower's claims of inconvenience,
interruption of business operations or otherwise, so long as no Default has
occurred and is continuing, no such action shall unreasonably and in a material
fashion interfere with the normal business operations of a Borrower. Each
Borrower will keep or cause to be kept, appropriate records and books of account
in which complete entries are to be made reflecting its business and financial
transactions, such entries to be made in accordance with GAAP.
SECTION 6.10. Investments and Purchases. No Borrower will make or suffer
to exist any Investments or commitments therefor, or become or remain a partner
in any partnership or joint venture, or make any Purchase of any Person, except:
(a) Obligations that have a term of one year or less or are fully
guaranteed by the United States of America;
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<PAGE>
(b) Commercial paper rated A-l or better by Standard and Poor's
Rating Group or P-l or better by Moody's Investors Service, Inc.;
(c) Demand deposit accounts maintained in the ordinary course of
business;
(d) Certificates of deposit issued by and time deposits with
commercial banks (whether domestic or foreign) having capital and surplus
in excess of $100,000,000;
(e) Repurchase agreements issued by any commercial bank or trust
company organized under the laws of the United States or any state thereof
having capital and surplus in excess of $100,000,000 and whose commercial
paper (or that of its parent corporation) is rated A-1 or better by
Standard & Poor's Ratings Group or P-1 or better by Moody's Investors
Service, Inc.;
(f) Investments in existence on the date hereof and described in
Schedule 6.10 hereto; and
-------------
(g) Subject to Section 6.10(h) hereof, Investments in Borrowers; and
---------------
(h) Any other Investment which, when aggregated with all other
Investments made under this clause (h), does not exceed $20,000,000,
provided that no more than $5,000,000 of such Investments in the aggregate
shall be made in one or more Foreign Entities.
SECTION 6.11. Liens. No Borrower will create, incur, or suffer to exist
any Lien in, of or on the Property of such Borrower, except:
(a) Liens for taxes, assessments or governmental charges or levies on
its Property if the same shall not at the time be delinquent or thereafter
can be paid without penalty, or are being contested in good faith and by
appropriate proceedings and for which adequate reserves in accordance with
GAAP shall have been set aside on its books;
(b) Liens imposed by law, such as landlords', carriers',
warehousemen's and mechanics' liens and other similar liens arising in the
ordinary course of business which secure payment of obligations not more
than 60 days past due or which are being contested in good faith by
appropriate proceedings and for which adequate reserves in accordance with
GAAP shall have been set aside on its books;
(c) Liens arising out of pledges or deposits under worker's
compensation laws, unemployment insurance, old age pensions, or other
social security or retirement benefits, or similar legislation;
29
<PAGE>
(d) Utility easements, building restrictions and such other
encumbrances or charges against real property as are of a nature generally
existing with respect to properties of a similar character and which do not
in any material way adversely affect the marketability of the same or
interfere with the use thereof in the business of any Borrower;
(e) Capitalized Leases, whether currently existing or hereafter
created, under which the Capitalized Lease Obligations do not exceed in the
aggregate (i) $56,250,000 in 1998, (ii) $90,000,000 in 1999, (iii)
$100,000,000 in 2000, and (iv) $150,000,000 thereafter; and
(f) All other Liens securing Indebtedness (other than Capitalized
Lease Obligations) which does not exceed in the aggregate (i) $30,000,000
in 1998, (ii) $45,000,000 in 1999, (iii) $60,000,000 in 2000, and (iv)
$90,000,000 thereafter.
SECTION 6.12. Affiliates. No Borrower shall enter into any transaction
(including, without limitation, the purchase or sale of any Property or service)
with, or make any payment or transfer to, any other Affiliate (other than
another Borrower) except (a) pursuant to the agreements described in the
Prospectus included in Newco's registration statement declared effective by the
SEC on January 22, 1997, (b) where expressly permitted, or (c) in the Ordinary
Course of Business and pursuant to the reasonable requirements of such
Borrower's business and upon fair and reasonable terms no less favorable to such
Borrower than such Borrower would obtain in a comparable arms-length
transaction.
SECTION 6.13. Environmental Matters. Each Borrower shall (a) at all times
materially comply with all applicable Environmental Laws and (b) take any and
all remedial actions as are required by Environmental Laws in response to the
Release of any Hazardous Materials on, under or about any real property owned,
leased or operated by such Borrower. In the event that a Borrower undertakes any
remedial action with respect to any Hazardous Material on, under or about any
real property, such Borrower shall conduct and complete such remedial action in
compliance with all applicable Environmental Laws, except when such Borrower's
liability for such Release of any Hazardous Material is being contested in good
faith by such Borrower and appropriate reserves therefor have been established.
If Sprint at any time has a reasonable basis to believe that there may be a
material violation of any Environmental Law by any Borrower, a Release of a
material amount of Hazardous Materials on any real property owned, leased or
operated by a Borrower or a Release of a material amount of Hazardous Materials
from such real property onto real property adjacent to such real property, then
the Borrowers shall, upon the request of Sprint, provide Sprint with all such
reports, certificates, engineering studies and other written material or data
relating thereto as Sprint may reasonably require which shall be maintained as
confidential by Sprint to the fullest extent authorized by law.
SECTION 6.14. Change in Corporate Structure; Fiscal Year. No Borrower
shall (a) permit any amendment or modification to be made to its certificate of
incorporation or bylaws which is adverse to the interests of Sprint or (b)
subject to Sprint's consent (which consent shall not be
30
<PAGE>
unreasonably withheld), change its Fiscal Year to end on any date other than
December 31 of each year.
SECTION 6.15. Inconsistent Agreements. No Borrower shall enter into any
indenture, agreement, instrument or other arrangement which contains any
provision which would be violated or breached by the making of Advances or by
the performance by any Borrower of any of such Borrower's obligations under any
Loan Document, the Investment Agreement or any Ancillary Agreement.
SECTION 6.16. Indebtedness. Newco shall not permit its consolidated
Indebtedness as of any date during a Fiscal Year identified below (including the
aggregate of Capitalized Lease Obligations and other Indebtedness secured by
Liens limited by Section 6.11(e) and (f)) to exceed the greater of (a) the
amount listed below opposite such Fiscal Year and (b) four and one-half (4 1/2)
times EBITDA for the latest period of four (4) fiscal quarters ended prior to
the date of determination:
<TABLE>
<CAPTION>
DURING FISCAL YEAR AMOUNT
------------------ ------
<S> <C>
1998 $ 75,000,000
1999 150,000,000
2000 200,000,000
2001 and beyond 300,000,000
</TABLE>
As used herein, "EBITDA" means Net Income for a specified period, plus the sum
of the amounts equal to the interest expense, the provision for taxes based on
income and the depreciation and amortization expense deducted in determining
such Net Income.
SECTION 6.17. ERISA Compliance. With respect to any Plan, no Borrower
shall:
(a) engage in any "prohibited transaction" (as such term is defined
in Section 406 of ERISA or Section 4975 of the IRC) for which a civil
penalty pursuant to Section 502(i) of ERISA or a tax pursuant to Section
4975 of the IRC in excess of $1,000,000 is imposed;
(b) incur any "accumulated funding deficiency" (as such term is
defined in Section 302 of ERISA) in excess of $1,000,000, whether or not
waived, or permit any Unfunded Liability in excess of $1,000,000, to exist
for more than 30 days after learning thereof;
(c) permit the occurrence of any Termination Event which results in a
liability to a Borrower or any other member of the Controlled Group in
excess of $1,000,000;
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(d) fail to make any contribution or payment to any Multiemployer
Plan which either Borrower or any other member of the Controlled Group is
required to make under any agreement relating to such Multiemployer Plan or
Title IV of ERISA which results in a liability in excess of $1,000,000; or
(e) permit the establishment or amendment of any Plan or fail to
comply with the applicable provisions of ERISA and the IRC with respect to
any Plan which would result in liability to a Borrower or any other member
of the Controlled Group which, individually or in the aggregate, would have
a Material Adverse Effect.
ARTICLE VII
EVENTS OF DEFAULT
The occurrence of any one or more of the following events shall constitute
an Event of Default:
SECTION 7.01. Any representations or warranties of the Borrowers made or
deemed made by or on behalf of a Borrower to Sprint under or in connection with
this Agreement, or in any certificate or information delivered in connection
with this Agreement or any other Loan Document are not true and correct (i) as
of the date referred to in such representations or warranties that addresses a
matter as of a particular date and (ii) as to all other representations and
warranties as of the date of such representation or warranty, except in either
the case of clause (i) or (ii), if the inaccuracy of such representations and
warranties would not in the aggregate have a Material Adverse Effect.
SECTION 7.02. Nonpayment of (a) principal of any Note within fourteen (14)
days after the same becomes due, or (b) interest upon a Note or obligations
under any of the Loan Documents within fourteen (14) days after the same becomes
due.
SECTION 7.03. The breach by a Borrower of any of the terms or provisions
of Sections 6.02, 6.14, 6.15 or 6.16.
------------- ---- ---- ----
SECTION 7.04. The breach by a Borrower (other than a breach which
constitutes a Default under Section 7.01, 7.02 or 7.03) of any of the terms or
------------ ---- ----
provisions of this Agreement, Sections 5.07 or 5.08 of the Investment Agreement,
or Articles II, III or IV of the Governance Agreement, or any material breach by
a Borrower of any terms or provisions of the Registration Rights Agreement (as
defined in the Investment Agreement), in any such case, which is not remedied
within forty-five (45) days after written notice to Newco from Sprint; provided,
however, such forty-five (45) day period shall be reduced to a fifteen (15) day
period for any breach under Section 6.10 or Section 6.12.
------------ ------------
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SECTION 7.05. The default by a Borrower in the performance of any term,
provision or condition contained in any agreement or agreements under which any
Indebtedness aggregating in excess of $5,000,000 was created or is governed, or
the occurrence of any other event or existence of any other condition, the
effect of any of which is to cause, or to permit the holder or holders of such
Indebtedness to cause, such Indebtedness to become due prior to its stated
maturity; or any such Indebtedness of a Borrower shall be declared to be due and
payable or required to be prepaid (other than by a regularly scheduled payment)
prior to the stated maturity thereof.
SECTION 7.06. A Borrower shall (a) have an order for relief entered with
respect to it under the Federal bankruptcy laws as now or hereafter in effect,
(b) make an assignment for the benefit of creditors, (c) apply for, seek,
consent to, or acquiesce in, the appointment of a receiver, custodian, trustee,
examiner, liquidator or similar official for it or any Substantial Portion of
its Property, (d) institute any proceeding seeking an order for relief under the
Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate
it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation,
reorganization, arrangement, adjustment or composition of it or its debts under
any law relating to bankruptcy, insolvency or reorganization or relief of
debtors, (e) take any corporate action to authorize or effect any of the
foregoing actions set forth in this Section 7.06, (f) fail to contest in good
------------
faith any appointment or proceeding described in Section 7.07 or (g) become
------------
unable to pay, not pay, or admit in writing its inability to pay, its debts
generally as they become due.
SECTION 7.07. Without the application, approval or consent of a Borrower,
a receiver, trustee, examiner, liquidator or similar official shall be appointed
for a Borrower or any Substantial Portion of its Property, or a proceeding
described in Section 7.06(d) shall be instituted against a Borrower, and such
---------------
appointment continues undischarged or such proceeding continues undismissed or
unstayed for a period of ninety (90) consecutive days.
SECTION 7.08. Any court, government or governmental agency shall condemn,
seize or otherwise appropriate, or take custody or control of (each a
"Condemnation"), all or any portion of the Property of a Borrower which, when
------------
taken together with all other Property of the Borrowers so condemned, seized,
appropriated, or taken custody or control of, during the twelve-month period
ending with the month in which any such Condemnation occurs, constitutes a
Substantial Portion.
SECTION 7.09. A Borrower shall fail within thirty (30) days to pay, bond
or otherwise discharge any judgments or orders for the payment of money in an
aggregate amount in excess of $1,000,000, which are not stayed on appeal or
otherwise being appropriately contested in good faith.
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
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If any Event of Default described in Section 7.06 or 7.07 occurs with
------------ ----
respect to a Borrower, the obligations of Sprint to make Advances hereunder
shall automatically terminate and the Obligations shall immediately become due
and payable without any election or action on the part of Sprint. If any other
Event of Default occurs, Sprint may terminate or suspend the obligations of
Sprint to make Advances hereunder, or declare the Obligations to be due and
payable, or both, whereupon the Obligations shall become immediately due and
payable, without presentment, demand, protest or notice of any kind, all of
which each of the Borrowers hereby expressly waives.
Within ten (10) Business Days after acceleration of the maturity of the
Obligations or termination of the obligations of Sprint to make Advances
hereunder as a result of any Event of Default (other than any Event of Default
as described in Section 7.06 or 7.07 with respect to a Borrower) and before any
------------ ----
judgment or decree for the payment of the Obligations due shall have been
obtained or entered, Sprint may (in its sole discretion), by notice to the
Borrowers, rescind and annul such acceleration and/or termination.
ARTICLE IX
SETOFF
In addition to, and without limitation of, any rights of Sprint under
applicable law, if any Default or Event of Default or Business Combination
occurs, any and all deposits (including all account balances, whether
provisional or final and whether or not collected or available) and any other
Indebtedness at any time held or owing by Sprint or any Affiliate of Sprint to
or for the credit or account of any Borrower may be offset and applied toward
the payment of the Obligations owing to Sprint or such Affiliate of Sprint,
whether or not the Obligations, or any part hereof, shall then be due or have
matured; provided, however, the foregoing shall not apply to any Business
Combination unless at least ten days prior to such offset or applications,
Sprint has given notice to the Borrowers that a prepayment is being required
under Section 3.08(a).
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ARTICLE X
BENEFIT OF AGREEMENT; ASSIGNMENTS
SECTION 10.01. Successors and Assigns. The terms and provisions of the
Loan Documents shall be binding upon and inure to the benefit of the Borrowers
and Sprint and their respective successors and assigns, except that (a) the
Borrowers shall not have the right to assign any rights or obligations under the
Loan Documents, and (b) any assignment by Sprint must be made in compliance with
Section 10.02. Any assignee or transferee of any Note agrees by acceptance
- - -------------
thereof to be bound by all the terms and provisions of the Loan Documents. Any
request, authority or consent of any Person, who at the time of making such
request or giving such authority or consent is the holder of the Note, shall be
conclusive and binding on any subsequent holder, transferee or assignee of such
Note or of any note or notes issued in exchange therefor.
SECTION 10.02. Assignments by Sprint.
10.02.1. Assignments of this Agreement and the Obligations
-------------------------------------------------
Thereunder. An Assignment or transfer of this Agreement may be made without the
- - ----------
prior consent of the Borrowers (i) by Sprint to any of its Affiliates, provided
that any such assignment or transfer to such Affiliate shall not release Sprint
from the obligations of Sprint under this Agreement, or (ii) pursuant to any
merger or sale of substantially all of the assets or stock of Sprint or such
Affiliates (or any transaction having such effect) that is pursuant to an
agreement entered into after the Closing Date and pursuant to which in the case
of a purchase of substantially all of the assets or stock of Sprint or such
Affiliates, the party purchasing such assets or stock of Sprint or such
Affiliates assumes the obligations of Sprint under this Agreement.
10.02.2. Transfers of the Notes. Sprint may in accordance with
----------------------
applicable law and without the prior consent of the Borrowers, at any time,
transfer and assign all or part of the Notes to one or more Persons
("Transferees"). In the case of such an assignment or transfer, Sprint shall
surrender the Notes subject to such assignment to the Borrowers prior to the
transfer and assignment being effective and the Borrowers shall, simultaneously
with such surrender, reissue and deliver new Notes in the same aggregate
outstanding principal amount as the surrendered Note in the name of such holders
as requested by Sprint. On or after the effective date of such transfer and
assignment, (a) each such Transferee shall acquire all of the rights of Sprint
in the Notes assigned to such Transferee, and (b) Sprint shall remain subject to
the Aggregate Commitment and Loans.
10.02.3. Administration. As a condition to any transfer or
--------------
assignment of the Notes pursuant to Section 10.02.2, each Transferee shall
appoint Sprint (or any other Person to whom this Agreement has been assigned in
accordance with Section 10.02.1 or with the consent of the Borrowers) (the
"Agent") to act as agent of such Transferee, provided that the Agent shall not
have a fiduciary relationship in respect of the Borrowers or any Transferee of
the Notes. The Agent shall exclusively exercise such powers under this
Agreement as are specifically delegated to Sprint by the terms hereof, including
the right to receive notices, requests, waivers, instructions, information
35
<PAGE>
regarding the Borrowers, consents and other documents which the Borrowers may be
required to deliver pursuant to this Agreement. The Agent shall have no implied
duties to the Transferees, or any obligation to the Transferees to take any
action thereunder.
SECTION 10.03. Dissemination of Information. Each Borrower authorizes
Sprint to disclose to any Person to whom this Agreement is being assigned
pursuant to Section 10.02.1 or Transferees under Section 10.02.2 any and all
information in Sprint's possession concerning the creditworthiness of the
Borrowers, subject however, to Sprint obtaining an appropriate confidentiality
agreement respecting such information.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. Notices. Unless otherwise provided herein, any notice,
request, waiver, instruction, consent or document or other communication
required or permitted to be given by this Agreement shall be effective only if
it is in writing and (a) delivered by hand or sent by certified mail, return
receipt requested, (b) if sent by a nationally-recognized overnight delivery
service with delivery confirmed, or (c) if telexed or telecopied, with receipt
confirmed as follows:
The Borrowers: 3100 New York Drive
Pasadena, California 91107
Attn: President and CEO
Telecopy No.: (626) 296-4161
with a copy to: Hunton & Williams
NationsBank Plaza, Suite 4100
600 Peachtree Street, N.E.
Atlanta, Georgia 30308-2216
Attn: Scott M. Hobby, Esq.
Telecopy No.: (404) 888-4190
Sprint: Sprint Corporation
2330 Shawnee Mission Parkway
Westwood, Kansas 66205
Attn: Chief Financial Officer
Telecopy No.: (913) 624-8426
with a copy to: Sprint Corporation
2330 Shawnee Mission Parkway
Westwood, Kansas 66205
Attn: Senior Vice President and
Treasurer
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<PAGE>
Telecopy No.: (913) 624-8426
with additional copies to: Sprint Corporation
2330 Shawnee Mission Parkway
Westwood, Kansas 66205
Attn: Vice President and Assistant
Treasurer
Telecopy No.: (913) 624-8252
Sprint Corporation
2330 Shawnee Mission Parkway
Westwood, Kansas 66205
Attn: Corporate Secretary
Telecopy No.: (913) 624-8233
The Parties shall promptly notify each other of any change in their respective
addresses or facsimile numbers or of the Person or office to receive notices,
requests or other communications under this Section 11.01. Notice shall be
-------------
deemed to have been given as of the date when so personally delivered, when
actually delivered by the U.S. Postal Service at the proper address, the next
day when delivered during business hours to an overnight delivery service
properly addressed or when receipt of a telex or telecopy is confirmed, as the
case may be, unless the sending party has actual Knowledge that such notice was
not received by the intended recipient.
SECTION 11.02. Entire Agreement. This Agreement together with all
Schedules and Exhibits hereto, embody the entire agreement and understanding of
the Parties in respect to the matters contemplated hereby and supersedes and
renders null and void all other prior agreements and understandings, written and
oral, with respect to the subject matters hereof, provided that this provision
--------
shall not abrogate any other written agreement between the Parties executed
simultaneously with this Agreement. No Party shall be liable or bound to any
other Party in any manner by any promises, conditions, representations,
warranties, covenants, agreements and understandings, except as specifically set
forth herein or therein.
SECTION 11.03. Waiver. Except as otherwise permitted in this Agreement,
the terms or conditions of this Agreement may not be waived unless set forth in
a writing signed by the Party entitled to the benefits thereof. No waiver of
any of the provisions of this Agreement shall be deemed or shall constitute a
waiver of such provision at any time in the future or a waiver of any other
provision hereof. The rights and remedies of the Parties are cumulative and not
alternative. Except as otherwise provided in this Agreement, neither the
failure nor any delay by any Party in exercising any right, power or privilege
under this Agreement, or the documents referred to in this Agreement or therein
will operate as a waiver of such right, power or privilege, and no single or
partial exercise of any such right, power or privilege will preclude any other
or further exercise of such right, power or privilege or the exercise of any
other right, power or privilege.
37
<PAGE>
SECTION 11.04. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to conflict of laws principles.
SECTION 11.05. Severability. If any term or provision of this Agreement
or the application thereof to either party or set of circumstances shall, in any
jurisdiction and to any extent, be finally held invalid or unenforceable, such
term or provision shall only be ineffective as to such jurisdiction, and only to
the extent of such invalidity or unenforceability, without invalidating or
rendering unenforceable any other terms or provisions of this Agreement or under
any other circumstances, and the parties shall negotiate in good faith a
substitute provision which comes as close as possible to the invalidated or
unenforceable term or provision, and which puts each party in a position as
nearly comparable as possible to the position it would have been in but for the
finding of invalidity or unenforceability, while remaining valid and
enforceable.
SECTION 11.06. Counterparts. This Agreement may be executed in one or
more counterparts each of which when so executed and delivered shall for all
purposes be deemed to be an original but all of which, when taken together,
shall constitute one and the same Agreement.
SECTION 11.07. Headings. The table of contents, captions and headings
used in this Agreement are inserted for convenience only and shall not be deemed
to constitute part of this Agreement or to affect the construction or
interpretation hereof.
SECTION 11.08. No Third-Party Beneficiaries. Nothing in this Agreement,
express or implied, shall create or confer upon any Person (including but not
limited to any employees), other than the Parties or their respective successors
and permitted assigns, any legal or equitable rights, remedies, obligations,
liabilities or claims under or with respect to this Agreement, except as
expressly provided herein.
SECTION 11.09. Interpretation. (a) Unless specifically stated otherwise,
references to Articles, Sections, Exhibits and Schedules refer to Articles,
Sections, Exhibits and Schedules in this Agreement. References to "includes"
and "including" mean "includes without limitation" and "including without
limitation." Whenever the context may require, any pronoun shall include the
corresponding masculine feminine and neuter forms. Unless the context shall
otherwise require or provide, any reference to any agreement or other instrument
or statute or regulation is to such agreement, instrument statute or regulation
as amended and supplemented from time to time (and, in the case of a statute or
regulation, to any successor provision).
(b) Each Party is a sophisticated legal entity that was advised by
experienced counsel and, to the extent it deemed necessary, other advisors in
connection with this Agreement. Accordingly, each Party hereby acknowledges
that no Party has relied or will rely in respect of this Agreement or the
transactions contemplated hereby upon any document or written or oral
information previously furnished to or discovered by it or its representatives,
other than this Agreement or the documents and instruments delivered at the
Closing.
38
<PAGE>
(c) No provision of this Agreement shall be interpreted in favor of, or
against, any of the Parties by reason of the extent to which any such Party or
its counsel participated in the drafting thereof or by reason of the extent to
which any such provision is inconsistent with any prior draft hereof or thereof.
SECTION 11.10. Inclusion of Information in Schedules. The inclusion of
any information in any Schedule (i) shall not be deemed an admission that any
such information is material for purposes of the representation and warranty to
which it relates or any other representation and warranty or for any other
purpose related to this Agreement or the transactions contemplated hereby,
including for purposes of any covenants, closing conditions or any other
remedies the Parties may have, and (ii) shall not be used or interpreted in any
manner to create a standard of materiality for any such purpose.
SECTION 11.11. Amendment. No amendment, modification or alteration of the
terms or provisions of this Agreement, including any Schedules and Exhibits
hereto or thereto, shall be binding unless the same shall be in writing and duly
executed by the Party against whom such amendment, modification or alteration is
sought to be enforced.
SECTION 11.12. Joint and Several Obligations of Borrowers. Each and
every agreement and obligation of Newco or any Borrower under this Agreement,
any Note or any other Loan Document shall be the joint and several obligation of
each Borrower.
SECTION 11.13. Effectiveness of Agreement. This Agreement shall become
effective at the Closing, provided that this Agreement shall terminate upon the
termination of the Investment Agreement pursuant to Section 6.01(a) thereof.
---------------
SECTION 11.14. Reliance on Investment Agreement. The Borrowers recognize
and acknowledge that in entering into this Agreement Sprint is relying on each
and every representation and warranty made by the Borrowers to Sprint in the
Investment Agreement as of the Closing.
SECTION 11.15. EXCLUSIVE JURISDICTION AND CONSENT TO SERVICE OF PROCESS.
THE PARTIES AGREE THAT ANY ACTION ARISING OUT OF OR RELATING TO THIS AGREEMENT,
THE NOTES, THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY SHALL BE
INSTITUTED IN A FEDERAL COURT SITTING IN DELAWARE OR STATE COURT SITTING IN
DELAWARE, WHICH SHALL BE THE EXCLUSIVE VENUE OF ANY SUCH ACTION. EACH PARTY
WAIVES ANY OBJECTION WHICH SUCH PARTY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF
VENUE OF ANY SUCH ACTION, AND IRREVOCABLY CONSENTS AND SUBMITS TO THE
JURISDICTION OF ANY SUCH COURT (AND THE APPROPRIATE APPELLATE COURTS) IN ANY
SUCH ACTION. ANY AND ALL SERVICE OF PROCESS AND ANY OTHER NOTICE IN ANY SUCH
ACTION SHALL BE EFFECTIVE AGAINST SUCH PARTY WHEN TRANSMITTED IN ACCORDANCE WITH
SECTION 11.01. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO AFFECT
- - -------------
39
<PAGE>
THE RIGHT OF ANY PARTY TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW.
[THE BALANCE OF THIS PAGE LEFT BLANK INTENTIONALLY]
40
<PAGE>
SECTION 11.16. WAIVER OF JURY TRIAL. THE BORROWERS AND SPRINT HEREBY WAIVE
TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE), INCLUDING ANY CLAIM,
COUNTERCLAIM, CROSS-CLAIM, DEFENSE, OR AFFIRMATIVE DEFENSE, IN ANY WAY ARISING
OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP
ESTABLISHED THEREUNDER.
THIS IS THE FINAL EXPRESSION OF THE CREDIT AGREEMENT BETWEEN THE BORROWERS, AS
DEBTORS, AND SPRINT, AS LENDER. THIS CREDIT AGREEMENT MAY NOT BE CONTRADICTED BY
EVIDENCE OF ANY PRIOR ORAL CREDIT AGREEMENT OR OF A CONTEMPORANEOUS ORAL CREDIT
AGREEMENT BETWEEN THE PARTIES.
Newco: Sprint: THS
------------ ------------
Initials Initials
The Company:
-----------
Initials
IN WITNESS WHEREOF, Newco, the Company and Sprint have executed this
Agreement as of the date first above written.
DOLPHIN, INC.
By: /s/ Charles G. Betty
---------------------------------------
Print Name: Charles G. Betty
-------------------------------
Title: President & CEO
------------------------------------
EARTHLINK NETWORK, INC.
By: /s/ Charles G. Betty
---------------------------------------
Print Name: Charles G. Betty
-------------------------------
Title: President & CEO
------------------------------------
SPRINT CORPORATION
By: /s/ Theodore H. Schell
---------------------------------------
Print Name: Theodore H. Schell
-------------------------------
Title: Vice President - Strategic Planning
------------------------------------
and Corporate Development
SIGNATURE PAGE FOR CREDIT AGREEMENT
<PAGE>
EXHIBIT A
---------
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), AND MAY NOT BE OFFERED OR SOLD UNLESS REGISTERED PURSUANT TO THE
PROVISIONS OF SUCH ACT OR AN EXEMPTION FROM REGISTRATION THEREFROM IS AVAILABLE.
NEWCO SHALL NOT BE REQUIRED TO ISSUE ANY CERTIFICATES TO ANY PERSON UPON
CONVERSION OF THIS NOTE OTHER THAN TO THE HOLDER OF SUCH CONVERTED NOTE UNLESS
NEWCO HAS OBTAINED REASONABLE ASSURANCE THAT SUCH TRANSACTION IS EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF, OR IS COVERED BY AN EFFECTIVE REGISTRATION
STATEMENT UNDER, THE ACT AND ALL APPLICABLE STATE SECURITIES LAWS, INCLUDING, IF
NECESSARY IN THE REASONABLE JUDGMENT OF NEWCO OR ITS LEGAL COUNSEL, RECEIPT OF
AN OPINION TO SUCH EFFECT FROM COUNSEL SATISFACTORY TO NEWCO IN ITS REASONABLE
JUDGMENT.
THE UNDERSIGNED BORROWERS ACKNOWLEDGE RECEIPT OF A COPY
OF THIS PROMISSORY NOTE
CONVERTIBLE SENIOR PROMISSORY NOTE
----------------------------------
____________________, ______________________
(City) (State)
$_________________ [Borrowing Date]
FOR VALUE RECEIVED, the undersigned, Dolphin, Inc., a Delaware corporation
and EarthLink Network, Inc., a Delaware corporation, jointly and severally as
co-makers of this Note, (collectively the "Borrowers"), hereby promise to pay to
the order of Sprint Corporation, a Kansas corporation ("Lender"), its successors
and assigns (each a "Holder"), at its office designated below or at such other
place as the Holder hereof may, from time to time, designate in writing, the
following designated principal and interest in the manner set forth below:
<PAGE>
PRINCIPAL: The principal sum of $___________________________________. Such
amount constitutes an Advance under the Credit Agreement (as hereinafter
defined).
INTEREST on the principal shall be payable from the date hereof to and
including the date of maturity at a rate equal to SIX PERCENT (6 %) per annum;
provided, however, such interest rate may be increased as provided in the Credit
Agreement under certain circumstances to a floating rate equal to five percent
(5%) per annum above the Prime Rate.
Interest shall be computed on the basis of the actual number of elapsed
days and a 360-day year.
PRINCIPAL AND INTEREST shall be payable as follows:
PRINCIPAL: Shall be payable five (5) years after the date of this Note.
INTEREST: Shall be payable quarterly on the fifteenth day of January,
April, July and October of each year commencing on the first such day occurring
after the date of this Note and upon any prepayment or conversion hereunder
until such time as all amounts of principal under this Note are paid in full.
If any Payment Date for this Note is not a Business Day (as defined in
the Credit Agreement), payment shall be made on the next successive Business Day
and interest shall be payable thereon at the rate herein specified during such
extension.
Nothing in this Note shall be construed as an express or implied
agreement by Lender to forbear in the collection of any amount owing hereunder,
or be construed as in any way giving Borrowers the right, express or implied, to
fail to make timely payment hereunder.
PLACE OF PAYMENT: All payments of principal and interest shall be made in
lawful currency of the United States of America in immediately available funds
to Lender to an account designated by instructions from Lender or at such other
place as the Holder hereof may from time to time, designate in writing.
DEFINITIONS: The following terms shall have the following meanings herein:
"Credit Agreement" means the Credit Agreement, dated as of ______________,
1998, between Lender and Borrowers.
Capitalized terms not otherwise defined herein shall have the meanings
ascribed to them in the Credit Agreement.
CREDIT AGREEMENT: This Note is issued subject to the provisions of the
Credit Agreement and each and every provision of the Credit Agreement is hereby
incorporated into this
A-2
<PAGE>
Note by reference notwithstanding the termination of the Credit Agreement. Each
Holder of this Note, by accepting the same, agrees to and shall be bound by such
provisions.
SET-OFF: Lender may exercise its right of set off in accordance with
Article IX of the Credit Agreement.
- - ----------
CONVERSION: The Conversion Price of this Note is $___________. This Note is
subject to the Conversion Rights set forth in the Credit Agreement.
In the event of conversion of this Note in part only, the unpaid portion of
interest accrued on the part of the Note converted shall be prepaid as of the
date of such conversion and a New Note evidencing the remaining principal
balance of this Note shall be issued in the name of the Holder hereof upon the
cancellation hereof.
PREPAYMENT: This Note is subject to optional and mandatory prepayment, all
as provided in the Credit Agreement.
DEFAULT AND ACCELERATION: Upon the occurrence of an Event of Default,
Lender may, at its option, declare the entire unpaid balance of principal of and
interest on this Note, as well as the unpaid principal of and interest on any
other indebtedness or liability of Borrowers to Lender, immediately due and
payable without notice or demand. In addition to Lender's right of set-off as
provided above, Lender shall have, upon the occurrence of any Event of Default,
and at any time thereafter, the remedies provided for in the Credit Agreement
and any other document, agreement or instrument evidencing or otherwise relating
to this Note.
PURPOSE OF LOAN: Borrowers hereby warrant and represent that the proceeds
of this loan will be used solely for business purposes of Borrowers and as set
forth in the Credit Agreement.
MISCELLANEOUS TERMS: Demand, presentment, protest and notice of nonpayment
and dishonor of this Note are hereby waived.
Unless otherwise agreed, all payments made by Borrowers to Lender in
connection with the indebtedness evidenced by this Note shall be applied first
toward all amounts owed to Lender for payment of attorneys' fees and costs of
collection, if any, next toward payment of accrued interest and finally toward
principal. If any Event of Default has occurred and is continuing, any and all
sums received from or for the account of Borrowers shall be applied to any
Indebtedness of any kind owed by Borrowers to Lender, whether evidenced by this
Note or otherwise, in such order as Lender may elect.
Each Borrower agrees that Lender may, at its option, assign all or a part
of, the obligation evidenced hereby to such parties as Lender shall determine in
its sole discretion, subject to the provisions of the Credit Agreement.
A-3
<PAGE>
No delay or omission on the part of Lender in exercising any right or
remedy hereunder shall operate as a waiver of such right or remedy. A waiver on
any one occasion shall not be construed as a bar to or waiver of any such right
and/or remedy on any future occasion.
Notwithstanding anything to the contrary herein, the interest rate hereon
shall not exceed the maximum rate, if any, permitted by applicable law to be
contracted by Borrowers for the purposes set forth herein.
This Note shall be governed by and construed and enforced in accordance
with the laws of the State of Delaware.
Borrowers will pay on demand, to the extent permitted by applicable law,
all costs of collection, including attorneys fees actually incurred or paid by
Lender in enforcing this Note.
If any provision or clause of this Note shall be held or deemed to be or
shall, in fact, be inoperative, invalid or unenforceable as applied in any
particular case or in all cases because it conflicts with any provisions of any
constitution or statute or rule of public policy, or for any other reason, such
determination shall not affect in any way any other provision or clause herein
which can be given effect without the inoperative, invalid or unenforceable
provision or clause.
EXCLUSIVE JURISDICTION AND CONSENT TO SERVICE OF PROCESS. THE PARTIES
--------------------------------------------------------
AGREE THAT ANY ACTION ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY SHALL BE INSTITUTED IN A FEDERAL COURT SITTING
IN DELAWARE OR STATE COURT SITTING IN DELAWARE, WHICH SHALL BE THE EXCLUSIVE
VENUE OF ANY SUCH ACTION. EACH PARTY WAIVES ANY OBJECTION WHICH SUCH PARTY MAY
NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH ACTION, AND IRREVOCABLY
CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY SUCH COURT (AND THE APPROPRIATE
APPELLATE COURTS) IN ANY SUCH ACTION. ANY AND ALL SERVICE OF PROCESS AND ANY
OTHER NOTICE IN ANY SUCH ACTION SHALL BE EFFECTIVE AGAINST SUCH PARTY WHEN
TRANSMITTED IN ACCORDANCE WITH SECTION 11.01. NOTHING CONTAINED HEREIN SHALL BE
-------------
DEEMED TO AFFECT THE RIGHT OF ANY PARTY TO SERVE PROCESS IN ANY MANNER PERMITTED
BY LAW.
DOLPHIN, INC.
By_________________________________
Printed Name:______________________
Title______________________________
<PAGE>
EARTHLINK NETWORK, INC.
By________________________________
Printed Name:_____________________
Title_____________________________
[Any additional Borrowers at the Borrowing Date shall also sign the Note]
<PAGE>
EXHIBIT B
---------
AGREEMENT TO ADD BORROWER
-------------------------
THIS AGREEMENT made and entered into this ______ day of ______, _____ by
and between ______________, a ______________ ("Subsidiary") and Sprint
Corporation, a Kansas corporation ("Sprint").
WHEREAS, Sprint, as lender, and Dolphin, Inc. and EarthLink Network, Inc.,
as borrowers, have entered into a Credit Agreement, dated February __, 1998 (the
"Credit Agreement"); and
WHEREAS, it is anticipated that Subsidiary will become a "Subsidiary" (as
that term is defined in the Credit Agreement) of a Borrower under the Credit
Agreement; and
WHEREAS, Subsidiary recognizes and acknowledges that the Credit Agreement,
the Investment Agreement and the Ancillary Agreements, including Advances
heretofore and hereafter made to the Borrowers under the Credit Agreement, serve
to benefit, directly or indirectly, Subsidiary; and
WHEREAS, the Credit Agreement requires that prior to a Person becoming a
Subsidiary, such Person shall enter into this Agreement.
NOW, THEREFORE, the parties hereto hereby agrees as follows:
1. All capitalized terms appearing herein and not otherwise defined shall
have the meaning attributed to them in the Credit Agreement.
2. Sprint hereby agrees that upon the Subsidiary becoming a Subsidiary
(as defined in the Credit Agreement) of a Borrower, the Subsidiary shall be and
become a "Borrower" under the Credit Agreement with all of the rights and
obligations of a Borrower thereunder.
3. In consideration of Sprint's Agreement set forth in paragraph 2 above,
Subsidiary hereby agrees to be bound by all of the terms and conditions of the
Credit Agreement as a "Borrower" thereunder and hereby joins all other Borrowers
therein in making, jointly and severally with each other Borrower, each and
every agreement, warranty and representation made therein by the Borrowers
thereunder, including, without limitation, the joint and several obligation of
the Borrower to pay all Obligations (including those in existence prior to the
date hereof) when the same are due, whether at maturity, by acceleration,
mandatory prepayment or otherwise.
B-1
<PAGE>
4. Subsidiary agrees that at the request of Sprint, it will execute all
Convertible Senior Promissory Notes outstanding prior to the date hereof as an
additional Borrower, joint obligor and co-maker of each such Note.
5. The Credit Agreement is not otherwise amended and shall continue in
full force and effect.
IN WITNESS WHEREOF, the undersigned have entered into this Agreement as of
the day and year first above written.
SPRINT CORPORATION ________________________________
By:________________________________ By:_____________________________
("Sprint") ("Subsidiary")
The undersigned being all of the Borrowers under the above-mentioned Credit
Agreement hereby consent and agree to the foregoing Agreement to Add Borrowers.
Dated ___________, ______
DOLPHIN, INC. EARTHLINK NETWORK, INC.
By:________________________________ By:_____________________________
("Newco") ("The Company")
[The above is to be agreed to by all other Borrowers that exist at the time the
above Agreement is entered into.]
<PAGE>
EXHIBIT C
---------
COMPLIANCE CERTIFICATE
----------------------
This Compliance Certificate is furnished to Sprint Corporation ("Lender")
pursuant to that certain Credit Agreement dated as of ____________, 1998, by and
among Lender and Dolphin, Inc. (the "Newco") and EarthLink Network, Inc.
(collectively, with those Persons added as a party to the Credit Agreement
pursuant to Section 6.02 thereof, the "Borrowers"). Unless otherwise defined
------------
herein, the terms used in this Compliance Certificate have the meanings ascribed
to thereto in the Credit Agreement.
THE UNDERSIGNED HEREBY CERTIFIES THAT:
1. I am the duly appointed chief financial officer of Newco;
2. I have reviewed the terms of the Credit Agreement and I have made, or
have caused to be made under my supervision, a detailed review of the
transactions and conditions of each of the Borrowers during the accounting
period covered by the attached financial statements;
3. The examinations described in paragraph 2 did not disclose, and I have
no knowledge of, the existence of any condition or occurrence of any event which
constitutes a Default or Event of Default during or at the end of the accounting
period covered by the attached financial statements or as of the date of this
Certificate, except as set forth below;
4. No Business Combination has occurred as of the date of this
Certificate;
5. The financial statements required by Section 6.01 of the Credit
------------
Agreement and being furnished to you concurrently with this Certificate are
true, correct and complete as of the date and for the periods covered thereby;
and
6. The Attachment hereto sets forth the financial data and computations
evidencing Newco's compliance with Section 6.11(e) and (f) and Section 6.16 of
----------------------- ------------
the Credit Agreement, which data and computations are, to the best of my
knowledge, true, correct and complete and have been made in accordance with
Section 6.11(e) and (f) and Section 6.16 of the Credit Agreement.
- - ----------------------- ------------
Described below are the exceptions, if any, to paragraph 3 by listing, in
detail, the nature of the condition or event, the period during which it has
existed and the action which the relevant Borrower has taken, is taking, or
proposes to take with respect to each such condition or event:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
C-1
<PAGE>
The foregoing certifications, together with the computations set forth in
the Attachment hereto and the financial statements delivered with this
Certificate in support hereof, are made and delivered this ____________ day of
________________ __________.
_____________________________________
Chief Financial Officer for Newco
<PAGE>
ATTACHMENT TO COMPLIANCE CERTIFICATE
Compliance Calculations for Credit Agreement
Calculations as of ___________________
________________________________________________________________________________
<TABLE>
<CAPTION>
INDEBTEDNESS (SECTION 6.16)
<S> <C> <C>
1. Indebtedness (as defined) $__________________
2. EBITDA (as defined) $__________________
3. 4 1/2 times Line 2 $__________________
4. Fiscal Year Amount
----------- -------
1998 $ 75,000,000
1999 150,000.000
2000 200,000,000
2001 and beyond 300,000,000
</TABLE>
5. As listed in Section 6.16 for the Fiscal years indicated,
Indebtedness shall not exceed the greater of Line 3 above
or the amount indicated in Line 4 above adjacent to the
appropriate Fiscal year.
6. Newco is in compliance?
(Circle yes or no) Yes / No
--------
CAPITALIZED LEASE OBLIGATIONS AND OTHER INDEBTEDNESS SECURED BY LIENS (SECTIONS
6.11(e) AND (f))
1. Capitalized Lease Obligations (as defined) $_____________
2. Other Indebtedness (as defined) secured by Liens
(as defined) $_____________
<TABLE>
<CAPTION>
Capitalized Other
Lease Indebtedness
3. Fiscal Year Obligations Secured by Liens
----------- ----------------
<S> <C> <C>
1998 $ 56,250,000 $30,000,000
1999 90,000,000 45,000,000
2000 100,000,000 60,000,000
2001 and beyond 150,000,000 90,000,000
</TABLE>
<PAGE>
4. As set forth in Section 6.11(e) for the Fiscal years indicated,
---------------
Capitalized Lease Obligations shall not exceed the amount indicated in
Line 3 above adjacent to the appropriate Fiscal year.
Newco is in compliance?
(Circle yes or no) Yes / No
--------
5. As set forth in Seciton 6.11(f) for the Fiscal years indicated, other
Indebtedness secured by Liens shall not exceed the amount indicated in
Line 3 above adjacent to the appropriate Fiscal year.
Newco is in compliance?
(Circle yes or no) Yes / No
--------
C-4
<PAGE>
Appendix E
[DEUTSCHE MORGAN GRENFELL LETTERHEAD]
February 10, 1998
Board of Directors
EarthLink Network, Inc.
3100 New York Drive
Pasadena, CA 91107
Members of the Board:
We understand that Dolphin Sub,Inc. ("Newco Sub"), a wholly-owned
subsidiary of Dolphin, Inc. ("Newco") EarthLink Network, Inc. ("EarthLink" or
the "Company"), Sprint Corporation ("Sprint"), and its indirect subsidiary
Sprint Communications Company L.P. ("Sprint L.P."), propose to enter into an
Investment Agreement dated as of the date hereof (the "Investment
Agreement"), which provides, among other things, for the commencement by
Sprint of a tender offer (the "Offer") to purchase 1,250,000 shares of common
stock, par value $0.01 per share, of the Company ("the Common Stock") for an
aggregate cash consideration of $56,250,000 and at a price per share of
Common Stock of $45 net to the seller in cash (such shares representing
approximately 11% of the shares of Common Stock outstanding on the date
hereof). Unless otherwise defined herein, capitalized terms used herein shall
have the meanings ascribed thereto in the Investment Agreement.
Immediately following the closing of the Offer (the "Closing"), Sprint
L.P. will purchase 4,102,941 shares of Series A Convertible Preferred Stock,
par value $.01 per share, of Newco (the "Convertible Preferred Stock"), in
exchange for (i) aggregate cash consideration of $23,750,000, (ii) the
assignment to Newco of 100% of the SIP Subscribers, and (iii) entering into a
network agreement whereby Newco and the Company will utilize Sprint's
long-distance network under specified terms and conditions. The assets listed
in Clauses (ii) and (iii) of the preceding sentence are herein referred to as
the "Contribution Assets".
We also understand that the closing of the purchase and sale of the
Convertible Preferred Stock shall take place immediately following the
closing of the Offer and concurrently with the merger of Newco Sub into the
Company (the "Merger") and the conversion of each share of Common Stock into
one share of Newco common stock par value of $0.01 per share, pursuant to the
Merger. The Offer,the sale of the Convertible Preferred Stock and the Merger
are collectively referred to herein as the "Transactions". The terms and
conditions of the Transactions are more fully set forth in the Investment
Agreement.
We further understand that Newco Sub, Newco, the Company, Sprint and
Sprint L.P., as applicable, have entered into certain other agreements
including the Certificate of Designation, the Governance Agreement, the
Master Assignment, the Marketing Agreement, the Network Services Agreement,
the Registration Rights Agreement, the Credit Agreement, the Stockholders
Agreement, the Agreement and Plan of Merger, the Agreement to Vote and the
Agreement to Vote and Tender (collectively, the "Ancillary Agreements") and
that stockholders owning more than 1,250,000 shares of the Common Stock have
agreed to tender their shares to Sprint in connection with the Offer pursuant
to the Agreement to Vote and Tender (the "Tendering Stockholders"). As a
result, no stockholder of EarthLink other than the Tendering Stockholders is
required to tender shares of the Common Stock in
<PAGE>
order for the Offer to be completed.
You have asked for our opinion as to whether the Transactions, when taken
together, are fair from a financial point of view to the holders of the
Common Stock.
For purposes of the opinion set forth herein, we have:
(i) analyzed certain publicly available financial statements and other
information concerning Sprint and the Company, respectively;
(ii) analyzed certain internal financial statements and other
financial and operating data concerning the Company prepared by
the management of the Company;
(iii) analyzed certain financial projections relating to the Company
prepared by the management of the Company;
(iv) discussed the past and current operations and financial
condition and the prospects of the Company with senior
executives of the Company;
(v) discussed the financial value of the Contribution Assets with
the management of the Company and the nature of the
Contribution Assets with the management of Sprint;
(vi) analyzed the pro forma impact of the Transactions on the
revenue, operating cash flow, consolidated capitalization and
other financial ratios of the Company;
(vii) reviewed the reported prices and trading activity for the
Common Stock;
(viii) compared the financial performance of the Common Stock and the
prices and trading activity of the Common Stock with that of
certain other comparable publicly-traded companies and their
securities;
(ix) compared the results of operations of the Company with that of
certain companies which we deemed to be reasonably similar to
the Company.
(x) reviewed the financial terms, to the extent publicly available,
of certain comparable transactions;
(xi) discussed, with the management of the Company, the strategic
rationale and certain other benefits to the Company of the
Transactions;
(xii) participated in discussions and negotiations among
representatives of the Company and Sprint and their financial
and legal advisors;
(xiii) reviewed the Investment Agreement and the Ancillary Agreements;
and
(xiv) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes
of this opinion. With respect to the financial projections, we have assumed
that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the future financial
performance of
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the Company. We have also relied upon, without independent verification, the
assessment by the Company's management of the strategic and other benefits
expected to be derived from the Transactions. We have not made any
independent valuation or appraisal of the assets, liabilities or technology
of the Company, or of the Contribution Assets, nor have we been furnished
with any such appraisals. Our opinion is necessarily based on the economic,
market and other conditions as in effect on, and the information made
available to us as of, the date hereof. We have also taken into account that
because the Tendering Stockholders, who collectively own more than 1,250,000
shares of the outstanding Common Stock, have agreed to facilitate the
transaction by tendering their shares to Sprint in connection with the Offer,
such that the Offer will be consummated regardless of whether any other
stockholders of the Company elect to tender their shares into the Offer.
In the course of our assignment in connection with the Transactions we
have had discussions (and are aware that management of the Company has had
discussions) with several parties concerning a possible transaction, business
combination, or strategic alliance including all or any part of the company.
We have acted as financial advisor to the Board of Directors of the
Company in connection with this transaction and will receive a fee for our
services. In addition, in the ordinary course of our business, we may
actively trade the securities and loans of both the Company and Spring for our
own account and for the accounts of our customers and, accordingly, may at
any time hold a long or short position in such securities and loans.
It is understood that this letter is for the information of the Board of
Directors of the Company only and may not be used for any other purpose
without our prior written consent, except that this opinion may be included
in its entirety in any documents filed by the Company with the Securities and
Exchange Commission with respect to the Transactions. In addition, we express
no recommendation or opinion to the holders of the Common Stock as to whether
or not to tender shares of Common Stock pursuant to the Offer or as to how
the stockholders of the company should vote at the stockholders meeting to be
held in connection with the Transactions.
Based on and subject to the foregoing, we are of the opinion on the date
hereof that the Transactions, when taken together, are fair from a financial
point of view to the holders of the Common Stock.
Very truly yours,
DEUTSCHE MORGAN GRENFELL INC.
By: /s/ Ethan Topper
--------------------------
Ethan Topper
Managing Director
By: /s/ Bill Brady
--------------------------
Bill Brady
Managing Director
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APPENDIX F
THIS GOVERNANCE AGREEMENT, dated as of February 10, 1998 (this
"Agreement"), is entered into by and among SPRINT CORPORATION, a Kansas
corporation ("Sprint"), SPRINT COMMUNICATIONS COMPANY L.P., a Delaware limited
partnership ("Sprint L.P."), DOLPHIN, INC., a Delaware corporation ("Newco"),
and EARTHLINK NETWORK, INC., a Delaware corporation (the "Company").
WHEREAS, the respective Boards of Directors of Sprint and the
Company have determined to enter into a strategic relationship in the area of
Internet access and related services and Sprint will make investments in Newco
and the Company in connection with the Merger (as defined below) of Newco Sub,
Inc., a Delaware corporation ("Newco Sub"), and the Company in order to enhance
the capabilities for growth and financial and strategic success;
WHEREAS, pursuant to an Investment Agreement, dated as of
February 10, 1998, among Sprint, Sprint L.P., the Company, Newco and Newco Sub
(the "Investment Agreement"), Sprint proposes to make a tender offer (as it may
be amended from time to time as permitted under the Investment Agreement, with
the Company's consent, if required under the Investment Agreement, the "Tender
Offer") to purchase 1,250,000 shares of Common Stock for an aggregate cash
consideration of $56,250,000 and at a price per share of Common Stock of $45 net
to each seller in cash (such price, as may hereafter be changed, the "Tender
Offer Price"), upon the terms and subject to the conditions set forth in the
Investment Agreement; and the Board of Directors of the Company has approved the
Tender Offer and the other transactions contemplated by the Investment Agreement
and is recommending that the Company's stockholders who wish to receive cash for
their shares of Common Stock accept the Tender Offer;
WHEREAS, immediately following the closing of the Tender
Offer, Sprint L.P. proposes to purchase 4,102,941 shares of Series A Convertible
Preferred Stock, par value $.01 per share of Newco (the "Series A Stock") in
exchange for (i) an aggregate cash consideration of $23,750,000, (ii) the
assignment to Newco of 100% of the Sprint Internet Passport Subscribers, and
(iii) entering into a network agreement whereby Newco and the Company will
utilize Sprint L.P.'s long-distance network under specified terms and
conditions;
WHEREAS, Sprint L.P. will enter into a marketing agreement
whereby Newco and the Company will utilize the Sprint brand under specified
terms and conditions and will, inter alia, have the right to use Sprint L.P.
distribution channels under specified terms and conditions and agree to sell
certain Sprint L.P. products;
WHEREAS, pursuant to the Investment Agreement certain
stockholders of the Company have (i) executed and delivered to Sprint and Sprint
L.P. an Agreement to Vote Stock, (ii) executed and delivered to Sprint and
Sprint L.P. an Agreement to Vote and Tender Stock, and (iii) entered into a
Stockholders Agreement with Sprint and Sprint L.P.;
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WHEREAS, Sprint shall provide Newco and the Company, as
co-borrowers, with up to $25 million of Convertible Senior Debt financing on or
after the Closing, with such amount to increase to up to $100 million over time
(the "Convertible Debt Financing"), such indebtedness to be evidenced by one or
more Convertible Senior Promissory Note(s) (the "Convertible Notes), and to be
subject to the terms and conditions of the Credit Agreement;
WHEREAS, the closing of the acquisition of the Series A Stock
and the other transactions referred to above other than the Tender Offer shall
take place concurrently with the merger of Newco Sub into the Company (the
"Merger") and the conversion of each share of the Company's outstanding Common
Stock into one share of Newco common stock, par value $.01 per share ("Newco
Common Stock"), pursuant to the Merger, in each case upon the terms and subject
to the conditions set forth in any applicable Ancillary Agreement;
WHEREAS, Sprint, Sprint L.P., the Company and Newco desire to
make certain representations, warranties, covenants and agreements and also to
prescribe various conditions in connection with the transactions contemplated by
this Agreement;
WHEREAS, Sprint, Sprint L.P., Newco and the Company desire to
establish in this Agreement certain terms and conditions concerning the
corporate governance of Newco, the acquisition and disposition of Equity
Securities by the Affiliated Equity Holders, the rights of Sprint to make offers
to purchase all of the outstanding securities of Newco not owned by Affiliated
Equity Holders and the rights of the Board of Directors of Newco to receive and
entertain offers to effect Business Combinations, all as more particularly
described herein; and
WHEREAS, Sprint and Sprint L.P. are prepared to ensure that
the voting agreements made by each of them pursuant to this Agreement are
fulfilled by giving the Company and Newco, or either of them, an Irrevocable
Proxy (coupled with an interest).
NOW, THEREFORE, in consideration of the mutual promises and
agreements contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE I
Definitions
SECTION 1.01. Definitions. As used in this Agreement, the
following terms shall have the following meanings:
"Acquisition Proposal" means any proposal for a tender or
exchange offer, a merger, consolidation, share exchange or other business
combination, in which Newco is a constituent party to the merger, consolidation,
share exchange or combination, or a sale of securities (other than Transaction
Securities), recapitalization, liquidation, dissolution or similar transaction
involving Newco or any proposal or offer to acquire in any manner, directly or
indirectly, a material equity interest in, or a material amount of voting
securities (with the
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acquisition of beneficial ownership of 20% or more of the Voting Equity
Securities of Newco being deemed to be material for this purpose) or assets of,
Newco, other than the transactions contemplated by this Agreement with respect
to Affiliated Equity Holders effected in accordance with this Agreement. A
Material Sale will constitute an Acquisition Proposal.
"Affiliate" has the meaning assigned to such term in the
Investment Agreement.
"Affiliated Equity Holders" means Sprint, Sprint L.P. and any
of their respective Affiliates (exclusive of the Company, Newco and Newco's
Subsidiaries) that, as of any relevant date of determination, are holders of
Equity Securities.
"Alternative Securities" means a new series of Preferred Stock
having terms that are structured and priced in the same manner as the terms of
the Series A Stock (including, without limitation, date of allowable optional
redemption, dividend rate, liquidation value, redemption value, conversion
premium and conversion rate), provided, that, all of such terms are determined,
if applicable, by reference to the Average Stock Price for the 30 trading days
prior to the date of issuance of such Alternative Securities.
"Ancillary Agreements" has the meaning assigned to such term
in the Investment Agreement, but for purposes of this Agreement shall also
include the Investment Agreement.
"Associate" has the same meaning as in Rule 12b-2 promulgated
under the Exchange Act.
"Available Top-Up Shares" means, in respect of any issuance of
Transaction Securities, the number of shares of Common Stock underlying Equity
Securities that Sprint may purchase from Newco pursuant to Section 3.01(d)
hereof following an issuance of Transaction Securities, determined as follows:
Available Top-Up Shares = (x) (1/(1-SPI) - 1),
where x equals the number of Transaction Securities issued in such transaction
and SPI equals Sprint's Percentage Interest expressed as a decimal carried to
the third place. As permitted in Section 3.01(e) hereof, Available Top-Up Shares
may, at Sprint's discretion, to the extent indicated in such section, be in the
form of shares of Newco Common Stock or Alternative Securities convertible into
an equivalent number of shares of Newco Common Stock.
"Average Stock Price" means an average of the closing sales
prices of a share of Newco Common Stock for a specified period as reported by
the principal securities market or exchange on which such stock is then traded.
"Beneficial Owner" shall be a Person who shall be deemed to
"beneficially own" any securities:
(a) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether
such right is exercisable immediately or only after the passage of
time) pursuant to any agreement, arrangement or
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understanding (whether or not in writing) or upon the exercise of
conversion rights, exchange rights, rights, warrants, options or
otherwise;
(b) which such Person or any such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of
or has "beneficial ownership" of (as determined pursuant to Rule 13d-3
under the Exchange Act as such Rule is in effect on the date of this
Agreement), including pursuant to any agreement, arrangement or
understanding, whether or not in writing; provided, however, that a
Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," any security under this subparagraph (b) as a
result of an agreement, arrangement or understanding to vote such
security if such agreement, arrangement or understanding arises solely
from a revocable proxy given in response to a public proxy or consent
solicitation made by Newco or the Company pursuant to, and in
accordance with, the applicable provisions of the General Rules and
Regulations under the Exchange Act; or
(c) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which
such Person (or any of such Person's Affiliates or Associates) has an
agreement, arrangement or understanding (whether or not in writing),
for the purpose of acquiring, holding, voting (except pursuant to a
revocable proxy as described in the proviso to subparagraph (b)) or
disposing of any voting securities of Newco or the Company; provided,
however, that nothing in this subparagraph (c) shall cause a person
engaged in business as an underwriter of securities to be the
"Beneficial Owner" of, or to "beneficially own," any securities
acquired through such person's participation in good faith in a firm
commitment underwriting under the Act until the expiration of 40 days
after the date of such acquisition.
"Board" or "Board of Directors" means the Board of Directors
of Newco except where the context requires otherwise.
"Business Combination" means a transaction, undertaken in any
form whatsoever, involving (i) the purchase or acquisition of Equity Securities
if the consummation of such transaction would result in the purchaser
beneficially owning 35% or more of the Equity Securities outstanding, or (ii) a
merger, consolidation, combination, share exchange, reorganization or other
extraordinary transaction with respect to Newco in which, upon consummation
thereof, the shareholders or owners of the other entity that is a party thereto,
or the controlling Persons thereof, would acquire beneficial ownership of 50% or
more of the Equity Securities outstanding. A Significant Sale will constitute a
Business Combination. A Business Combination shall not include (A) transactions
contemplated by this Agreement with respect to Affiliated Equity Holders
effected in accordance with this Agreement or (B) any acquisition of beneficial
ownership of Equity Securities resulting from the formation of a "group," as
defined in Rule 13d-5(b) of the Exchange Act, without the occurrence of any
transaction that would otherwise constitute a Business Combination.
"Certificate of Designation" means the Certificate of
Designation of Rights, Preferences and Privileges for the Series A Stock.
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"Closing" shall have the meaning given to such term in the
Investment Agreement.
"Common Stock" means the common stock, $.01 par value, of the
Company.
"Company" means EarthLink Network, Inc., a Delaware
corporation, and any successor thereto.
"Conversion Ratio" means, with respect to (i) the Series A
Stock, the quotient of the "Liquidation Value" divided by the "Conversion
Price," as those terms are defined in the Certificate of Designation, assuming
the acceleration of the full amount of the Liquidation Accretion Dividends as
contemplated by the last sentence of Section 3(a)(i) of the Certificate of
Designation, (ii) any other class or series of Preferred Stock, the conversion
ratio pertaining to such class or series, as in effect on the date of
determination, and (iii) the Convertible Notes, the "Conversion Price" for each
such note as defined in the Credit Agreement, as in effect on the date of
determination.
"Convertible Notes" shall have the meaning set forth in the
Recitals to this Agreement.
"Dilution Factor" means, in respect of any issuance of
Transaction Securities, a fraction expressed as a decimal carried to the third
place, equal to one minus the quotient of the number of Transaction Securities
issued divided by the total number of shares of Newco Common Stock outstanding
on a Fully-Diluted Basis, after giving effect to such issuance of Transaction
Securities.
"Director" means a member of the Board of Directors.
"Discriminatory Transaction" means any transaction or other
corporate action (other than those specifically contemplated by the express
terms of this Agreement and other than those imposed, without the happening of a
contingency, on each other stockholder on an equal basis) which would (i) impose
limitations on the legal rights of any Affiliated Equity Holder as a stockholder
of Newco, including, without limitation, any action which would impose
restrictions based upon the size of security holding, the business in which a
securityholder is engaged or other considerations applicable to any Affiliated
Equity Holder and not to stockholders generally, (ii) deny any benefit to any
Affiliated Equity Holder, proportionately as a holder of any class of Voting
Equity Securities, that is made available to other holders of any class of
Voting Equity Securities, or (iii) otherwise materially adversely discriminate
against any such Affiliated Equity Holders as stockholders of Newco; provided,
however, that (v) under no circumstances shall the adoption and implementation
by Newco of a Stockholders' Right Plan (commonly known as a "poison pill") be
deemed to be a Discriminatory Transaction if such plan would be permitted under
Section 4.07 hereof; (w) subject to the proviso in the last sentence of Section
2.04 hereof, the adoption and implementation of a classified Board of Directors
through an amendment to Newco's Certificate of Incorporation and Bylaws shall
not be deemed to be a Discriminatory Transaction; (x) under no circumstances
shall a Business Combination be deemed to be a Discriminatory Transaction if in
such Business Combination (A) neither the Liquidation Value
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nor the Conversion Price of the Series A Stock is changed, and (B) upon
consummation of such Business Combination, the automatic conversion of all
outstanding shares of Series A Stock into shares of Newco Common Stock thereupon
and, if applicable, the acceleration of the full amount of the Liquidation
Accretion Dividends as contemplated by the last sentence of Section 3(a)(i) of
the Certificate of Designation, the holders of Series A Stock shall be offered
the right to receive consideration at the same times (except for any differences
in the times at which such holders receive such consideration that occur because
of the application of the HSR Act (or any applicable waiting periods thereunder)
to the conversion of the Series A Stock into Newco Common Stock), and in the
same amount and the same form per share as all other holders of Newco Common
Stock; (y) it shall not be a Discriminatory Transaction for Newco to take action
or omit to take action having any of the consequences identified under (i), (ii)
and (iii) above to the extent that any such consequence occurs as a result of a
material breach or violation by any Affiliated Equity Holder of this Agreement;
and (z) the execution by Newco, the Company or any Significant Subsidiary of a
definitive agreement with respect to a Business Combination, which agreement is
consistent with the requirements of Section 4.03(c) hereof, shall not be a
Discriminatory Transaction.
"Effectiveness of this Agreement" means such time as this
Agreement becomes effective, if ever, pursuant to Section 7.01 hereof.
"Equity Security" means (i) any Newco Common Stock, (ii) any
debt or equity securities of Newco convertible into or exchangeable for Newco
Common Stock or other Voting Equity Securities, (iii) any options, rights or
warrants (or any other similar securities) issued by Newco to acquire Newco
Common Stock or other Voting Equity Securities or (iv) any security issuable in
connection with any stock split, stock dividend, recapitalization or other
similar transaction in which securities are issued on a proportionate basis to
all holders of a class of Equity Securities.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Fair Private Market Value" means the aggregate private market
equity value (including control premium) that an unrelated third party would pay
if it were to acquire all of Newco's outstanding Equity Securities (including
Equity Securities held by Affiliated Equity Holders) in an arm's-length
transaction, assuming (i) that all credible buyers are given an equal
opportunity by Newco to make and effectuate an Acquisition Proposal, (ii) the
absence of any commercial relations between Newco and the Company, on the one
hand, and Sprint and its Affiliates, on the other hand, and (iii) the absence of
any ownership stake in Newco by Affiliated Equity Holders. The Fair Private
Market Value shall be determined in accordance with Section 4.02 hereof.
"Fully-Diluted Basis," with reference to the number of shares
of Newco Common Stock outstanding at any time, means the number of shares of
Newco Common Stock outstanding at that time, plus the number of shares of Newco
Common Stock into which or for which all options (both vested and unvested),
warrants, rights and other Equity Securities
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convertible into or exchangeable for Newco Common Stock may be exercised,
converted or exchanged for shares of Newco Common Stock at the appropriate
Conversion Ratio.
"Higher Threshold" means 20% at Closing, and as thereafter
adjusted following any issuance of Transaction Securities by multiplying the
Higher Threshold in effect prior to such issuance, expressed as a decimal
carried to the third place, by the Dilution Factor; provided, that, if following
such issuance of Transaction Securities, a Primary Share Offer is made by Newco
pursuant to Section 3.01(d) hereof, the Higher Threshold shall immediately be
increased, but never above .200, to H(2), which is to be determined as follows:
H(2) = ((x/y) (H(0) - H(1))) + H1
where:
x = the number of shares offered to Sprint pursuant to a Primary
Share Offer;
y = the number of Available Top-Up Shares;
H(0) = .200; and
H(1) = the Higher Threshold in effect after the issuance of
Transaction Securities.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the regulations promulgated thereunder.
"Independent Director" means a Director of Newco (i) who is
not and has never been an officer or employee of Newco, any Affiliate or
Associate of Newco or of an entity that derived 5% or more of its revenues or
earnings in any of its three most recent fiscal years from transactions
involving Newco or any Affiliate or Associate of Newco, (ii) who is not and has
never been an officer, employee or director of Sprint, any Affiliate or
Associate of Sprint or an entity that derived more than 5% of its revenues or
earnings in any of its three most recent fiscal years from transactions
involving Sprint or any Affiliate or Associate of Sprint and (iii) who has no
affiliation, compensation, consulting or contracting arrangement with Newco,
Sprint or their respective Affiliates or Associates or any other entity such
that a reasonable person would regard such Director as likely to be unduly
influenced by management of Newco, the Company or Sprint, respectively, or their
respective Affiliates or Associates, but shall not include any Investor Director
or Management Director.
"Intervening Offer" means an Offer for aggregate consideration
reasonably determined in good faith by the Board of Directors to be in excess of
the aggregate consideration proposed to be paid by Sprint in a Sprint Offer or a
Qualified Offer, as applicable. An Intervening Offer shall be reflected in a
form of definitive agreement which the offeror is prepared to execute. The
conditions to consummation of an Intervening Offer and the representations,
warranties and covenants set forth in the Intervening Offer shall be customary
for a transaction of that type. In evaluating whether an Offer shall qualify as
an Intervening Offer, the Board of Directors shall, in reliance upon the advice
of its financial advisors, reasonably and in good faith (i) value any securities
or other non-cash property constituting all or
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a portion of the aggregate consideration comprising such Intervening Offer and
(ii) take into consideration in its evaluation of such Intervening Offer the
effect of any financing contingency upon the likelihood of such Intervening
Offer being consummated.
"Investment Agreement" has the meaning set forth in the
Recitals to this Agreement.
"Investor Director" means a Director who is designated for
such position by Sprint in accordance with Section 2.01.
"Irrevocable Proxy" means the Irrevocable Proxy granted by
each of Sprint and Sprint L.P. in the form attached hereto.
"Lower Threshold" means 10% at Closing, and as thereafter
adjusted following any issuance of Transaction Securities by multiplying the
Lower Threshold in effect prior to such issuance, expressed as a decimal carried
to the third place, by the Dilution Factor; provided, that, if following such
issuance of Transaction Securities, a Primary Share Offer is made by Newco
pursuant to Section 3.01(d) hereof, the Lower Threshold shall immediately be
increased, but never above .100, to L(2), which is to be determined as follows:
L(2) = ((x/y) (L(0) - L(1))) + L1
where:
x = the number of shares offered to Sprint pursuant to a Primary
Share Offer;
y = the number of Available Top-Up Shares;
L(0) = .100; and
L(1) = the Lower Threshold in effect after the issuance of
Transaction Securities.
"Management Director" means a Director who is also an employee
of the Company or Newco or any other Director designated as such by the Board of
Directors (or any nominating committee thereof) in accordance with Section 2.01.
"Market Capitalization" shall mean, as of any given date, the
total market value of Newco, determined by multiplying the number of shares of
Newco Common Stock outstanding on a Fully-Diluted Basis by the Market Price as
of that date.
"Market Price" means the closing sale price of a share of
Newco Common Stock on a given date as reported by the principal securities
market or exchange on which such stock is traded.
"Material Sale" means any proposal involving the sale of
assets of Newco or any Subsidiary or the sale of capital stock of any Subsidiary
by Newco, in any such case, for which
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the consideration proposed to be paid in such transaction represents 20% or more
of the Market Capitalization on the date that Newco receives such proposal.
"Newco" means Newco, Inc., a Delaware corporation and any
successors thereto.
"Newco Common Stock" means the common stock, par value, .01
per share of Newco.
"Newco Outstanding Stock Report" means a report provided by
Newco to Sprint pursuant to Section 6.02(a) hereof.
"New Security" means any Equity Security issued by Newco;
provided, that, "New Security" shall not include (i) any Equity Securities
issuable upon exercise or conversion of any exercisable or convertible Equity
Security, (ii) any Equity Securities issuable in connection with any stock
split, stock dividend, recapitalization or other similar transaction with
respect to outstanding Equity Securities in which such securities are issued to
all stockholders of Newco on a proportionate basis, (iii) the first 1,000,000
shares of Newco Common Stock (primary shares, as adjusted for any stock splits
effected after the Closing), sold by Newco after the date hereof (exclusive of
shares issued pursuant to the Merger), which number shall be reduced on a
share-for-share basis for any shares of Common Stock of the Company issued after
the date hereof and prior to Closing (exclusive of shares of Common Stock issued
by the Company pursuant to the exercise of options, warrants or other rights or
convertible securities to purchase such Common Stock), (iv) any Equity
Securities issued or granted to employees or directors of, or consultants to,
Newco pursuant to any employee benefit plan or arrangement, and (v) any Equity
Securities issued to Affiliated Equity Holders.
"Non-Recommended Third-Party Offer" has the meaning given to
such term in Section 4.03(a)(ii) hereof.
"Offer" means a bona fide, written offer from any Person other
than an Affiliated Equity Holder to effect a Business Combination.
"Person" means an individual, a partnership, a joint venture,
a corporation, a limited liability company, a business or other trust, an
incorporated or unincorporated organization, a government or any department or
agency thereof.
"Postponement Right" has the meaning given to such term in
Section 4.02(b) hereof.
"Preferred Stock" means any shares of Preferred Stock issued
by Newco, including without limitation, shares of Series A Stock.
"Primary Share Offer" means an offer made by Newco to Sprint
pursuant to Section 3.01(d) hereof to purchase Available Top-Up Shares following
an issuance of Transaction Securities.
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"Pro Rata Share" means a fraction, expressed as a decimal,
carried to the third place, i)" (i) the numerator of which shall be the sum of
(A) the number of shares of Newco Common Stock owned by Affiliated Equity
Holders at Closing and (B) the number of shares of Newco Common Stock into which
Equity Securities owned by Affiliated Equity Holders are convertible at the
applicable Conversion Ratio at Closing, and ii)" (ii) the denominator of which
shall be the total number of shares of Newco Common Stock outstanding at Closing
on a Fully-Diluted Basis, plus 1,000,000 less any Transaction Securities issued
between the date of this Agreement and Closing. The Pro Rata Share shall be held
constant, except that if indebtedness is incurred pursuant to the Credit
Agreement, then both the numerator and denominator used to recalculate Pro Rata
Share shall increase by the number of Equity Securities created by the
incurrence of such indebtedness. The Parties acknowledge that the Pro Rata
Share, as of the date hereof, equals .278, subject to adjustment as set forth
above.
"Qualified Offer" means an offer made by an Affiliated Equity
Holder to acquire all of the Equity Securities not already owned by Affiliated
Equity Holders at a price per share in excess of the equivalent per share price
set forth in a Third-Party Offer or an Intervening Offer, as the case may be. A
Qualified Offer shall be reflected in a form of definitive agreement which
Sprint is prepared to execute. The conditions to consummation of the Qualified
Offer and the representations, warranties and covenants set forth in the
Qualified Offer shall be customary for transactions in which a similarly
situated stockholder offers to purchase all of the equity securities (capital
stock and any securities that represent rights to purchase such stock) not held
by such stockholder and may not, in any event, in the reasonable judgment of the
Board of Directors exercised in good faith, be more onerous in any material
respect than those set forth in the Third-Party Offer or the Intervening Offer,
as the case may be. In the evaluating whether an offer shall qualify as a
Qualified Offer, the Board of Directors shall, in reliance upon the advice of
its financial advisors, reasonably and in good faith take into consideration in
its evaluation of such Qualified Offer the effect of any financing contingency
upon the likelihood of such Qualified Offer being consummated.
"Recommended Third-Party Offer" has the meaning given to such
term in Section 4.03(a)(i) hereof.
"Registration Rights Agreement" means the Registration Rights
Agreement dated as of the date hereof, by and among Sprint, Sprint L.P. and
Newco.
"Right to Offer Period" shall have the meaning given to such
term in Section 4.02(a) hereof.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations thereunder.
"Series A Stock" means the Series A Convertible Preferred
Stock of Newco.
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"Significant Sale" means the sale of assets of Newco or any
Subsidiary or the sale of capital stock of any Subsidiary by Newco, in any such
case, for which the consideration proposed to be paid in such transaction
represents 35% or more of the Market Capitalization on the date that Newco
agrees to such sale.
"Significant Subsidiary" means, with reference to any person,
a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X
promulgated by the SEC.
"Specified Number of Equity Securities," as it applies to the
Voting Equity Securities owned by Affiliated Equity Holders and required
pursuant to Section 4.02(e) or Section 4.03(d) hereof to be sold by Affiliated
Equity Holders or voted by Affiliated Equity Holders, shall equal (i) in respect
of a tender offer, as of a date immediately prior to the closing of the tender
offer, the quotient of the number of shares of Voting Equity Securities owned by
Unaffiliated Equity Holders validly tendered into such transaction and accepted
for payment thereunder divided by the total number of shares of Voting Equity
Securities owned by Unaffiliated Equity Holders and (ii) in respect of a
stockholder vote, as of the date of such vote, the quotient of the number of
shares of Voting Equity Securities owned by Unaffiliated Equity Holders voted in
favor of the matter divided by the total number of shares of Voting Equity
Securities owned by Unaffiliated Equity Holders; in either case multiplied by
the number of shares of Voting Equity Securities owned by Affiliated Equity
Holders on the expiration date of the tender offer or on the record date for the
stockholders' meeting with respect to the stockholder vote, as applicable;
provided, that, the Affiliated Equity Holders shall have no obligation to effect
a conversion on or before the expiration of the tender offer or the record date
in order to tender or vote such Equity Securities.
"Standstill Provisions" shall have the meaning given to such
term in Section 7.01 hereof.
"Sprint Offer" has the meaning given to such term in Section
4.02(b) hereof.
"Sprint Ownership Report" means a report provided by Sprint to
Newco pursuant to Section 6.02(b) hereof.
"Sprint's Percentage Interest" means the percentage of Equity
Securities owned by Affiliated Equity Holders, determined by converting the
following fraction into a decimal carried to the third place, (i) the numerator
of which shall be the sum of (A) the number of shares of Newco Common Stock
owned by Affiliated Equity Holders and (B) the number of shares of Newco Common
Stock into which Equity Securities owned by Affiliated Equity Holders are
convertible at the applicable Conversion Ratio, and (ii) the denominator of
which shall be the total number of shares of Newco Common Stock outstanding on a
Fully-Diluted Basis plus that portion of the 1,000,000 shares of Newco Common
Stock discussed in the definition of "Pro Rata Share" which has not yet been
issued as of the date of calculation. In determining the total number of shares
of Newco Common Stock outstanding on a Fully-Diluted Basis, Sprint shall be
entitled to rely on capitalization information to be provided by Newco in the
most recent Newco Stock Ownership Report. Notwithstanding any other provision of
this Agreement to the contrary, Sprint shall not be obligated under this
Agreement to sell or otherwise dispose of any
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Equity Securities to reduce Sprint's Percentage Interest below the Pro Rata
Share in the event that the Sprint's Percentage Interest exceeds the Pro Rata
Share due solely to a repurchase or redemption of Equity Securities by Newco,
the effectuation by Newco of a reverse stock split, recapitalization,
reclassification or other action reducing the number of Equity Securities.
"Subsidiary" has the same meaning as in Rule 12b-2 promulgated
under the Exchange Act.
"Tender Offer" has the meaning set forth in the Recitals to
this Agreement.
"Third-Party Offer" has the meaning given to such term in
Section 4.03 hereof.
"Top-Up Threshold" means a decimal, carried to the third
place, determined at Closing to be equal to the Pro Rata Share less .100,
subject to subsequent adjustment (i) for adjustments to the Pro Rata Share in
accordance with the penultimate sentence of the definition thereof and (ii) upon
the issuance of Transaction Securities, by multiplying the Top-Up Threshold in
effect prior to such issuance by the Dilution Factor; provided, that, if,
following such issuance of Transaction Securities, a Primary Share Offer is made
by Newco pursuant to Section 3.01(d) hereof, the Top-Up Threshold shall
immediately be increased to T(2), which is to be determined as follows:
T(2) = ((x/y) (T(0) - T(1))) + T1
where:
x = the number of shares offered to Sprint pursuant to a Primary
Share Offer;
y = the number of Available Top-Up Shares;
T(0) = the Pro Rata Share at Closing less .100; and
T(1) = the Top-Up Threshold in effect after the issuance of a
Transaction Securities.
"Total Voting Power" means the aggregate number of votes
entitled to be voted generally in an election of Directors of Newco by all of
the outstanding Voting Equity Securities.
"Transaction Securities" means New Securities of Newco or
Common Stock of the Company that are issued pursuant to or in connection with
any joint venture, strategic alliance, acquisition, tender or exchange offer,
merger, combination or purchase of all or substantially all of the assets of
another entity effected by Newco or the Company in which or in connection with
which securities of Newco or the Company are issued other than solely for cash.
The number of Transaction Securities issued in any such transaction shall be
determined based on the number of shares of Newco Common Stock on a
Fully-Diluted Basis underlying such New Securities.
"Unaffiliated Equity Holders" means, as of any relevant date
of determination, all holders of Equity Securities other than Affiliated Equity
Holders.
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"Underwriting Discount" means, with respect to a Primary Share
Offer, an amount equal to the underwriting discount applied in the most recent
underwritten offering of Newco Common Stock (including an underwritten offering
simultaneous with such Primary Share Offer).
"Voting Equity Securities" means Equity Securities of Newco
that, at the date of such determination, entitle the holders thereof to vote
generally in any election of Directors.
"Voting Power" means the ability to vote or to control,
directly or indirectly, by proxy or otherwise, the vote of any Voting Equity
Securities.
"Window Period" shall have the meaning given to such term in
Section 3.01(d) hereof.
"13D Group" means any group of Persons formed for the purpose
of acquiring, holding, voting or disposing of Voting Equity Securities which
would be required under Section 13(d) of the Exchange Act to file a statement on
Schedule 13D with the SEC as a "person" within the meaning of Section 13(d)(3)
of the Exchange Act, and Rule 13d-5 under the Exchange Act, if such group
beneficially owned Voting Equity Securities representing more than 5% of any
class of Voting Equity Securities then outstanding. The agreements contemplated
by this Agreement and the Ancillary Agreements shall be deemed not to result in
the formation of a 13D Group.
ARTICLE II
Corporate Governance
SECTION 2.01. Composition of the Board of Directors. The
fundamental policies and strategic direction of Newco, the Company and any
Significant Subsidiary shall be determined by their respective Boards of
Directors. The composition of each of the Board of Directors of Newco, the
Company or any Significant Subsidiary and manner of selecting members thereof
shall be as follows:
(a) At and after the Effectiveness of this Agreement, each of
the Board of Directors shall be comprised of not more than 11 Directors.
(b) Immediately following the Effectiveness of this Agreement,
Newco and the Company shall elect to their respective Boards of Directors, and
shall thereafter cause to be elected to the Board of Directors of any
Significant Subsidiaries of Newco, two individuals, each of whom shall be
designated as an Investor Director by Sprint. Following the Effectiveness of
this Agreement, the current Directors of the Company listed under the heading of
"Management Directors" in Schedule 2.01 shall be deemed to be Management
Directors of Newco and the current Directors of the Company listed under the
heading "Independent Directors" in Schedule 2.01 shall be deemed to be
Independent Directors of Newco, in each case until the expiration of the term of
their respective elections (or any earlier termination, resignation or removal).
If Newco, the Company or any Significant Subsidiary shall have a
Strategic and Business Planning Committee (or other committee responsible for
strategic and business planning) or a
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Finance Committee (or other committee responsible for finance) during the time
when Sprint shall have a right to designate one or more Investor Directors
hereunder, Sprint shall be entitled to appoint one Investor Director to each
such committee. If there is no such committee, Sprint shall have a reasonable
opportunity to review and discuss Newco's strategic and business plans and
financing plans with management of Newco prior to the submission of any such
plans to the Board of Newco, the Company or any Significant Subsidiary. The
Investor Directors shall also have the right to appoint one Investor Director to
each of the other committees of the Board, except as otherwise provided in this
paragraph and except for appointments to any existing committee of the Board if
the scope of authority of such committee is not hereafter expanded. Sprint shall
receive copies of all information and materials provided to the directors of
Newco, the Company and any Significant Subsidiary or to committee members,
except for information and materials provided to a committee that an Investor
Director is prohibited from participating in as set forth in this paragraph, at
the time such information and materials are provided to such directors.
Notwithstanding the foregoing, nothing set forth herein shall entitle any
Investor Director to participate on any committee of the Board of Directors of
Newco, the Company or any Significant Subsidiary created for the purpose of
considering a Business Combination, an Acquisition Proposal, a Sprint Offer or a
Qualified Offer, or to participate in the Board's deliberations with respect to
any of the foregoing.
(c) Except as otherwise provided herein, and except at any
time in which the holders of Series A Stock are entitled to elect any directors
of Newco pursuant to Section 7(b) of the Certificate of Designation, in which
case paragraphs (b), (d) and (e) of this Section 2.01 will not be effective as
to Newco, from and after the Effectiveness of this Agreement, Sprint shall have
the right to designate two Investor Directors, each of whom shall be nominated
by the Board of Directors or any nominating committee thereof.
(d) Notwithstanding anything in the foregoing paragraph (c) to
the contrary, if at the end of any three consecutive months, (i) Sprint's
Percentage Interest shall be less than the Higher Threshold, Sprint shall
promptly take action to cause one of its Investor Directors to resign from the
Boards of Directors of Newco, the Company and any Significant Subsidiary, or
(ii) Sprint's Percentage Interest shall be less than the Lower Threshold, Sprint
shall promptly take action to cause any and all remaining Investor Directors
elected pursuant to Section 2.01(b) or Section 7(b) of the Certificate of
Designation, as the case may be, to resign from the Boards of Directors of
Newco, the Company or any Significant Subsidiary; and, upon the resignation of
each respective Investor Director, Sprint shall forever cease to have any rights
to designate any such Investor Director position pursuant to the terms of this
Agreement or the Certificate of Designation.
(e) Except as otherwise provided in paragraph (d) above,
Sprint shall have the right to designate any replacement for an Investor
Director designated for nomination or nominated in accordance with this Section
2.01 upon the death, resignation, retirement, disqualification or removal from
office for other cause of such Director. The Boards of Directors of Newco, the
Company and any Significant Subsidiary shall elect each person so designated.
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SECTION 2.02. Solicitation and Voting of Shares. (a) Newco
shall use its best efforts to solicit from the stockholders of Newco eligible to
vote for the election of Directors proxies in favor of the nominees selected in
accordance with Section 2.01.
(b) In any election of Directors or any meeting of the
stockholders of Newco called expressly for the removal of Directors, so long as
the Board of Directors includes (and will include after any such removal) any
number of Investor Directors contemplated by Section 2.01, Affiliated Equity
Holders shall be present for purposes of establishing a quorum and shall vote
all their shares of Voting Equity Securities (i) in favor of any nominee or
Director selected in accordance with Section 2.01 (including any nominee
designated as a "Management Director" or an "Independent Director" and any
successor thereto) and (ii) otherwise against the removal of any Director
selected in accordance with Section 2.01 (including any nominee designated as a
"Management Director" or an "Independent Director" and any successor thereto).
Subject to Section 4.02(e), Section 4.03(d) and the terms of the Irrevocable
Proxy, in any other matter submitted to a vote of the stockholders of the
Company, Sprint may vote any or all of its Voting Equity Securities in
accordance with the terms thereof.
(c) The Affiliated Equity Holders will, and will cause any of
their Affiliates (other than Newco, the Company and its Subsidiaries) who are
permitted transferees of the Affiliated Equity Holders' rights under this
Agreement to, take all action as stockholders of Newco as necessary to effect
the provisions of this Agreement.
SECTION 2.03. Enforcement of this Agreement. A majority of the
Directors, excluding the Investor Directors, shall have full and complete
authority on behalf of Newco to enforce the terms of this Agreement.
SECTION 2.04. Certificate of Incorporation and By-laws. Newco
and Sprint shall take or cause to be taken all lawful action necessary to ensure
at all times that Newco's Certificate of Incorporation and By-laws are not at
any time inconsistent with the provisions of this Agreement. At Sprint's
request, the Board of Directors shall adopt (and if necessary submit and
recommend for approval by stockholders) other amendments to Newco's Certificate
of Incorporation or By-laws reasonably necessary to implement the provisions of
this Agreement. Nothing set forth herein shall preclude the Board of Directors
from proposing to the stockholders and, upon their approval of such proposal,
implementing, a classified Board of Directors, provided, that, each Investor
Director must be placed in a different class of Directors.
SECTION 2.05. Advisors. If appropriate under the circumstances
of a given situation, the Independent Directors may retain, at the cost and
expense of Newco or the Company, services of an investment banking firm of
national reputation of their choice and one law firm of their choice to advise
them in their capacity as Independent Directors with respect to any matter on
which the Independent Directors, as a group, are required or permitted to act
hereunder.
SECTION 2.06. Investor Director Concurrence. From the Closing
Date through the date this Agreement is terminated in accordance with Section
7.01 hereof, and for the duration of any period in which Sprint's Percentage
Interest is greater than the Lower Threshold,
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neither the Board of Directors of Newco nor the Board of Directors of any
Significant Subsidiary shall take, authorize or permit any of the following
actions without the concurrence of all Investor Directors serving in such
capacity at that time:
(a) The execution or performance of any Discriminatory
Transaction;
(b) The issuance of any class or series of capital stock
of Newco that provides for voting rights in excess of one vote per share;
(c) The dissolution or liquidation (or adoption of a plan
of dissolution or liquidation) of Newco or any Subsidiary thereof; the
commencement by Newco or any Subsidiary thereof of any suit, case, proceeding or
other action (i) in bankruptcy under the federal bankruptcy or other laws
relating to bankruptcy, insolvency, reorganization or relief of debtors seeking
to adjudicate Newco or any Subsidiary thereof a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding up, liquidation,
dissolution, composition or relief with respect to Newco or any Subsidiary
thereof; or (ii) seeking appointment of a receiver, trustee, custodian or other
similar official for Newco or any Subsidiary thereof, or (iii) seeking to make a
general assignment for the benefit of creditors of Newco, provided, however,
that to the extent required by the fiduciary obligations of the Board of
Directors, exercised in good faith upon the advice of its outside counsel, Newco
or any Subsidiary thereof may undertake the actions set forth in this subsection
(c) without the concurrence of the Investor Directors;
(d) The conduct by Newco or any Significant Subsidiary of
its business substantially outside its current general field of enterprise; or
(e) The issuance of Transaction Securities representing
(i) in any twelve-month period, in one or more transactions, 50% or more of the
number of shares of Newco Common Stock outstanding on a Fully-Diluted Basis
prior to giving effect to such issuances, or (ii) in any one transaction, 35% or
more of the number of shares of Newco Common Stock outstanding on a
Fully-Diluted Basis prior to giving effect to such issuance.
ARTICLE III
Equity Purchases from the Company
SECTION 3.01. Subscription Rights. a)" (a) So long as Sprint's
Percentage Interest is greater than the Top-Up Threshold, the Affiliated Equity
Holders, collectively, shall have the rights provided for in this Section 3.01.
(b) Notwithstanding any provision to the contrary
contained herein, Sprint may effect its rights pursuant to this Section 3.01 by
making purchases of Equity Securities at any time from any Person other than
Newco so long as after giving effect to such purchases, Sprint's Percentage
Interest is less than or equal to the Pro Rata Share.
(c) If the Board of Directors proposes to issue New
Securities (other than New Securities that are Transaction Securities) at such
time as Sprint's Percentage Interest is greater than the Top-Up Threshold, Newco
shall provide written notice to Sprint (the "Subscription
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Notice") of its intent to effect such issuance at least five business days prior
to the date on which the meeting of the Board is held to authorize the issuance
of such New Securities. The Subscription Notice shall set forth (i) the number
of New Securities proposed to be issued and the terms of such New Securities,
(ii) the consideration (or manner of determining the consideration by reference
to the market price), if any, for which such New Securities are proposed to be
issued and the terms of payment, (iii) the number of New Securities Sprint shall
be entitled to purchase in compliance with the provisions of this Section 3.01
and the purchase price (or manner of determining the consideration by reference
to the market price) and form of consideration therefor and (iv) the proposed
date of issuance of such New Securities. For a period of ten business days after
the receipt by Sprint of the Subscription Notice, Sprint shall have the right to
purchase the Pro Rata Share of such issuance and shall notify Newco in writing,
within such time period whether it elects to purchase all or any portion of the
Equity Securities offered to Sprint pursuant to the Subscription Notice. If
Sprint shall elect to purchase any such New Securities, such securities which it
shall have elected to purchase shall be issued and sold to Sprint by Newco at
the same times and on the same terms and conditions as the New Securities are
issued and sold to third parties (except that, if such New Securities are issued
for consideration other than cash, Sprint shall pay the lower of (x) the same
purchase price per share and other terms, including the same form of
consideration paid by the Purchaser for the New Securities or (y) the fair
market value per share thereof, determined by an independent appraiser mutually
selected by Newco and Sprint), in either case, times the number of shares Sprint
is entitled to purchase; provided, however, that if Sprint's purchase of such
Equity Securities would, in the opinion of its counsel, give rise to the
application of waiting periods under the HSR Act, Sprint shall be obligated to
consummate such purchase as soon as practicable after the applicable waiting
period has elapsed or terminated on an unconditional basis, and Sprint shall,
during such time, diligently and in good faith seek expiration or termination of
the applicable waiting period. If, for any reason, the issuance of New
Securities to third parties is not consummated, Sprint's right to purchase its
Pro Rata Share of such issuance shall lapse, subject to Sprint's ongoing
subscription right with respect to issuances of New Securities at later dates or
times.
(d) (i) At such time as Newco, acting in good faith on the
basis of the most recent Sprint Ownership Report provided pursuant to Section
6.02(b) hereof, determines that Sprint's Percentage Interest has decreased by
.05 or more, after giving effect to any and all Primary Share Offers, solely as
a result of issuances of Transaction Securities, Newco shall promptly notify
Sprint of such event in writing, but in any event not later than the due date of
the next Newco Outstanding Stock Report.
(ii) Not later than the second anniversary of Sprint's receipt
of such notice (the "Window Period"), Newco shall be obligated to make written
offers for Sprint to purchase (each, a "Primary Share Offer"), in the aggregate
on the basis of all such Primary Share Offers made in the Window Period, not
less than the sum of the number of Available Top-Up Shares resulting from all
issuances of Transaction Securities that have collectively caused Sprint's
Percentage Interest to have decreased by .05 or more (the "Aggregate Number of
Top-Up Shares") at a purchase price equal to the Average Stock Price for the 10
trading days prior to the date of issuance, less the Underwriting Discount.
Sprint may accept a Primary Share Offer within five business days of its receipt
thereof by giving written notice to Newco of its desire to do so,
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specifying (subject to Section 3.01(e) hereof) the number and form of shares of
Equity Securities of Newco Sprint is willing to purchase pursuant to such
Primary Share Offer, and such transaction shall be consummated in accordance
with such notice within three business days of Newco's receipt thereof. The
Aggregate Number of Top-Up Shares will be reduced by the number of shares
offered to Sprint in the Primary Share Offer.
(iii) If Newco, acting in good faith on the basis of the most
recent Sprint Ownership Report provided pursuant to Section 6.02(b) hereof,
determines that Sprint's Percentage Interest has decreased by .10 or more solely
as a result of the issuance of Transaction Securities, after giving effect to
any and all Primary Share Offers, Newco shall promptly notify Sprint of such
event in writing, but in any event not later than the due date of the next Newco
Outstanding Stock Report. In such event, the Window Period shall be accelerated
such that Newco shall be obligated to make one or more Primary Share Offers with
respect to not less than the Aggregate Number of Top-Up Shares, as then
calculated, at the earlier of (i) the expiration of the Window Period, as
determined above, or (ii) six months after the date Sprint receives the
foregoing notice from Newco.
(iv) Notwithstanding anything contained in this Agreement to
the contrary, in no event whatsoever shall Newco be obligated to make Sprint a
Primary Share Offer that, after giving effect to such transaction, would cause
Sprint's Percentage Interest to exceed the Pro Rata Share.
(e) In respect of a purchase of New Securities pursuant to
Section 3.01(c) or 3.01(d) hereof, Sprint may, at its option, by notice given to
Newco at the time Sprint provides notice of its intention to purchase New
Securities pursuant to either of such sections, acquire such shares in the form
of Alternative Securities (to the extent set forth below) convertible into the
applicable number of shares of Newco Common Stock, assuming the acceleration of
the full amount of any liquidation accretion dividends with respect to such
Alternative Securities, consistent with the acceleration contemplated by the
last sentence of Section 3(a)(i) of the Certificate of Designation. Sprint's
purchase of New Securities in the form of Alternative Securities shall be
limited as follows:
(i) From the Closing to the second anniversary thereof, Sprint
may purchase not more than 75% of any issuance of New
Securities in the form of Alternative Securities;
(ii) After the second anniversary of the Closing until the
third anniversary thereof, Sprint may purchase not more than
66.67% of any issuance of New Securities in the form of
Alternative Securities; and
(iii) After the third anniversary of the Closing, Newco shall
have no obligation to issue New Securities in the form of
Alternative Securities.
SECTION 3.02. Issuance and Delivery of New Securities and
Voting Equity Securities. Newco represents, warrants and covenants to Sprint
that (i) upon issuance, all of the shares of New Securities or Alternative
Securities sold to Sprint pursuant to this Article III shall
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be duly authorized, validly issued, fully paid and nonassessable and will be
approved (if outstanding securities of Newco of the same type are at the time
already approved) for quotation on the Nasdaq National Market or for quotation
or listing on the principal trading market for the securities of Newco at the
time of issuance and (ii) upon delivery of such shares, such shares shall be
free and clear of all claims, liens, encumbrances, security interests and
charges of any nature and shall not be subject to any preemptive right of any
stockholder of Newco or any other rights to purchase or vote such shares or any
power of attorney with respect thereto, except as may be set forth in this
Agreement and the Investment Agreement. Each share issued or delivered by Newco
hereunder shall bear the legend set forth in Section 3.03 of the Investment
Agreement.
ARTICLE IV
Purchases of Additional Equity Securities; Business Combinations
SECTION 4.01. General Standstill Obligations. Subject to the
following provisions and except for (i) purchases of shares made by Sprint
permitted under the provisions of Section 3.01, or (ii) offers, purchases and
other matters effected by Sprint in accordance with the provisions of Section
4.02 or Section 4.03 hereof, none of the Affiliated Equity Holders will, nor
will any Affiliated Equity Holders authorize any of their agents or
representatives to, without prior written consent of the Board of Directors of
Newco, directly or indirectly, acting alone or in concert with other Persons:
(a) acquire, offer to acquire, or agree to acquire, directly
or indirectly, by purchase or otherwise, any Equity Securities or direct or
indirect rights to acquire any Equity Securities, or any equity securities of
any Subsidiary of Newco, material assets of Newco or any Subsidiary or division
of Newco or of any successor or controlling Person of any of the foregoing,
except for its right to convert Series A Stock, Alternative Securities, the
Convertible Notes or other Equity Securities, and to receive stock dividends,
stock splits and other distributions of Equity Securities;
(b) make, or in any way participate, directly or indirectly,
in any "solicitation" of proxies to vote (as such terms are used in the rules of
the SEC), or seek to advise or influence any person or entity with respect to
the voting of any Voting Equity Securities of Newco, except for any solicitation
of proxies to vote or related communications made in response to a proxy contest
by a third party in connection with offers made by Sprint in accordance with
Section 4.02 or Section 4.03 hereof;
(c) make any public announcement with respect to, or submit a
proposal for, or offer to effect (with or without conditions) any purchase of a
significant portion of the assets of Newco or any Subsidiary or division of
Newco, any tender or exchange offer for any of the Equity Securities of Newco or
a merger, consolidation, combination, share exchange, reorganization or other
extraordinary transaction involving Newco or any of its Equity Securities or
assets or any Subsidiary of Newco or any of such Subsidiary's equity securities
or assets, or otherwise make any Acquisition Proposal, except for any
announcement required in connection with Section 4.02 or Section 4.03 hereof;
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(d) form, join or in any way participate in a "group" as
defined in Rule 13d-5(b) under the Exchange Act in connection with any of the
foregoing, except as contemplated by any Ancillary Agreement; or
(e) request Newco or any of its representatives, directly or
indirectly, to amend or waive any provision of this Section 4.01.
Sprint will promptly advise Newco of any inquiry or proposal
made to it with respect to any of the foregoing and describe, in reasonable
detail, the terms and conditions thereof.
Notwithstanding any other provision of this Agreement to the
contrary, in the event that, following termination of this Agreement pursuant to
Section 7.01 hereof, but at such time as Sprint shall still be subject to this
Section 4.01, Newco receives either (i) a Recommended Third-Party Offer or (ii)
a Non-Recommended Third-Party Offer, which the Board of Directors of Sprint
reasonably determines in good faith upon consultation with independent legal
counsel and its outside financial advisors is reasonably likely to be
consummated, Sprint shall be temporarily released from its obligations under
this Section 4.01 insofar as necessary to permit Sprint to present an offer
directly to the Board of Directors. Such release shall survive for so long as
such Third-Party Offer remains outstanding or is consummated or abandoned.
If any agent or representative of an Affiliated Equity Holder
shall violate any provision of this Section 4.01 by purchasing Equity Securities
for the account of any Affiliated Equity Holder or take any other action in
violation of this Section 4.01 for or on behalf of any Affiliated Equity Holder,
each Affiliated Equity Holder shall, within 14 days of becoming aware of such
violation, take such action as is necessary to remedy such violation, including
selling all Equity Securities purchased in violation of this Section 4.01, and,
upon effecting such remedy, such violation shall not be deemed to be a breach of
this Agreement.
SECTION 4.02. Sprint Right to Offer. (a) Following the
39-month anniversary of Closing and prior to the 63-month anniversary of Closing
(such period, the "Right to Offer Period"), Sprint shall have the right to offer
to purchase all, but not less than all, of the outstanding Equity Securities
that it does not already own at a per share price equal to the per share price
determined by dividing the Fair Private Market Value by the total number of
shares of Newco Common Stock outstanding on a Fully-Diluted Basis. The Fair
Private Market Value shall be determined in accordance with Section 4.02(b).
During any time in which Sprint shall be permitted to make an offer under this
Section 4.02(a), Newco shall make available to Sprint such information regarding
the business, properties, assets, condition (financial or otherwise) or results
of operations of Newco, the Company and their Significant Subsidiaries
reasonably requested by Sprint, subject to Sprint entering into a customary
confidentiality agreement with respect to all such information.
(b) (i) In the event Sprint wishes to exercise its right to
offer with respect to all, but not less than all, of the outstanding Equity
Securities that it does not already own, as set forth in Section 4.02(a) hereof,
Sprint shall approach the Board of Directors with an offer in
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writing (the "Sprint Offer"), which shall include the price per share Sprint is
willing to pay based on the definition of Fair Private Market Value and describe
in reasonable detail such other terms and conditions of the Sprint Offer. A
Sprint Offer shall not be subject to any financing contingency. A Sprint Offer
shall be reflected in a form of definitive agreement which Sprint is prepared to
execute. The conditions to consummation of the Sprint Offer and the
representations and warranties set forth in the Sprint Offer shall be reasonable
and customary for transactions in which a similarly situated stockholder offers
to purchase all of the Equity Securities not held by such stockholder or its
Affiliates.
(ii) The Board of Directors of Newco shall have a one-time
right, exercisable by written notice to Sprint given within 14 days after the
receipt of the Sprint Offer, to postpone the making of that offer for nine
months (the "Postponement Right"); provided, that, the Board of Directors may
not exercise the Postponement Right in connection with a Sprint Offer made
pursuant to Section 4.03(b) or Section 4.04(b) hereof. Upon exercise of the
Postponement Right, Sprint shall withdraw the Sprint Offer, in which case it may
not exercise its right to offer under this Section 4.02 for a period of nine
months following the date of exercise of the Postponement Right; provided,
however, that (A) in that event, the Right to Offer Period shall be extended to
the 72-month anniversary of Closing and (B) the Postponement Right shall not
limit Sprint's right to respond to a Third-Party Offer as set forth in Section
4.03 hereof.
(iii) The Board of Directors of Newco and Sprint shall
negotiate the amount of the Fair Private Market Value to be paid pursuant to the
Sprint Offer in good faith and Sprint shall not make any public announcements
relating to this offer without the prior written consent of the Board unless
required by law or legal process. In the event the two parties are unable to
agree on the amount of the Fair Private Market Value within 30 days after
submission of the Sprint Offer to the Board, the parties shall agree to be bound
to the valuation arrived at pursuant to the following formula:
(A) Two appraisals shall be made by
recognized investment banks, one selected by each of Sprint
and Newco (the "Initial Values");
(B) If the lower of the Initial Values is
more than 10% less than the higher of the Initial Values, a
third independent valuation will be made by an investment bank
selected jointly by Sprint and Newco (the "Independent
Valuation"). Otherwise, the Fair Private Market Value shall be
the average of the Initial Values; and
(C) If the Independent Valuation is greater
than or less than the average of the Initial Values by more
than 5%, the Fair Private Market Value shall be deemed to
equal the average of the two closest valuations. If the
Independent Valuation does not differ by such amount, the
Independent Valuation shall be the Fair Private Market Value.
(c) Upon the determination of the amount of the Fair Private
Market Value, Sprint shall be obligated to commence and effectuate the Sprint
Offer, provided, however, that Sprint shall have a one-time right ("Walk-Away
Right"), exercisable by written notice to Newco
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given within 14 days after the receipt of the determination of Fair Private
Market Value, to determine not to proceed to make such Sprint Offer; provided,
further, however, that Sprint may not exercise the Walk-Away Right in connection
with a Sprint Offer made pursuant to Section 4.03(b) or Section 4.04(b) hereof.
If Sprint does not exercise such Walk-Away Right, the Board of Directors shall,
if an Intervening Offer is not then outstanding, i)" (i) support the Sprint
Offer by approving and recommending it to Newco stockholders and ii)" (ii) cause
Newco to take all steps reasonable and necessary to facilitate consummation of
such Sprint Offer. If Sprint exercises such Walk-Away Right, all Affiliated
Equity Holders, Newco, the Company and all of their officers, directors,
employees, representatives and agents shall be obligated to protect and hold in
strict confidence the amount of the Fair Private Market Value determined as set
forth above unless disclosure thereof is required by law or legal process.
(d) [Reserved.]
(e) (i) At such time as a Third-Party Offer shall constitute
an Intervening Offer, (A) Sprint shall be released from its obligation to
commence and effectuate the Sprint Offer, and (B) Newco shall be released from
its obligation to support and facilitate consummation of the Sprint Offer.
Notwithstanding the foregoing, Sprint shall be entitled, at any time prior to
consummation of the Intervening Offer, to make a Qualified Offer. In such event,
the most recent Third-Party Offer shall cease to constitute an Intervening
Offer.
(ii) If an Intervening Offer is undertaken, in whole or in
part, in the form of a tender offer, at the consummation of such tender offer,
the offeror shall have an option, exercisable for a period of 20 days following
the consummation of such tender offer, to purchase from all Affiliated Equity
Holders, at the tender offer price, in the aggregate, the Specified Number of
Equity Securities less the number of Equity Securities that have already been
tendered by the Affiliated Equity Holders.
(iii) If, in the event of an Intervening Offer, such offer, a
Business Combination underlying such offer or any related matter that must be
approved by the stockholders of Newco in order for such offer to be effectuated
is brought before the stockholders of Newco for their consideration and
approval, Sprint and Sprint L.P. shall be obligated, in the event a Qualified
Offer has not been made within five days prior to the date of the stockholders'
meeting, to cast (or to cause to be cast by their Affiliated Equity Holders) in
favor of the Intervening Offer, the Business Combination or any such related
matter such number of votes as is equal to the Specified Number of Equity
Securities, provided, that, such Business Combination does not constitute a
Discriminatory Transaction.
(f) None of the Affiliated Equity Holders shall be entitled to
exercise rights of appraisal under Section 262 of the Delaware General
Corporation Law (or any successor thereto) as to any of the Equity Securities
owned by them in respect of any Business Combination effected in connection with
an Intervening Offer.
SECTION 4.03. Third-Party Offers. (a) Newco shall promptly
provide to Sprint written notice (the "Offer Notice") of its receipt of an Offer
and, in reasonable detail, the proposed terms thereof. Upon receipt of such
Offer, the Board of Directors shall determine that:
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(i) such Offer is in the best interests of Newco's
stockholders and that it intends to recommend such Offer to the stockholders (a
"Recommended Third-Party Offer");
(ii) such Offer is not in the best interests of Newco's
stockholders and that it intends not to recommend such Offer to the stockholders
or no position is taken with respect thereto under Rule 14e-2 of the Exchange
Act within 10 business days of the Board's receipt thereof (a "Non-Recommended
Third-Party Offer" and, together with a Recommended Third-Party Offer, a
"Third-Party Offer"); or
(iii) insufficient information exists on which to base any
such recommendation, in which event the Board may take such action as it deems
necessary or advisable to develop such additional information; provided, that,
if upon developing such additional information, the Board decides to recommend
or not to recommend such Offer to the stockholders, then it shall promptly
notify Sprint of such decision and, at such time, the Offer shall be deemed a
Recommended Third-Party Offer or a Non-Recommended Third-Party Offer, as
appropriate.
(b) For a period of ten days following the giving of the Offer
Notice, Newco may not enter into a definitive agreement with respect to the
Offer. Upon receipt of such Offer Notice, Sprint shall be released from its
obligations under Section 4.01 insofar as necessary to permit Sprint, subject to
the terms and conditions of this Agreement and if an Intervening Offer is not
then outstanding, to make, pursue and consummate a Sprint Offer. However, Newco
shall not be obligated to deem a bona fide, written offer from any Person other
than an Affiliated Equity Holder to effect a Business Combination to be an Offer
and to provide the Offer Notice required by Section 4.03(a) until the earlier of
(i) the date on which Newco determines that such offer meets the requirements of
an Offer and that Newco intends to pursue such Offer with the objective of
having it become a Recommended Third-Party Offer, or (ii) ten days after the
date Newco receives such offer, unless previously rejected by Newco.
(c) In the case of an Offer that is a Recommended Third-Party
Offer, Sprint shall have the option to make a Qualified Offer, and Newco shall
not adopt any takeover defenses (unless amended or waived to permit Sprint to
make a Qualified Offer), enter into any agreement or take any other action if
such action would, in either case, materially impair Sprint's ability to make
and consummate a Qualified Offer or materially increase Sprint's costs of
consummating such Qualified Offer; provided, however, that, notwithstanding the
foregoing, Newco shall be permitted to enter into a definitive agreement with
respect to a Recommended Third-Party Offer that provides for a termination fee
not to exceed 3% of the consideration to be received per share of Newco Common
Stock multiplied by the number of shares of Newco Common Stock outstanding on a
Fully-Diluted Basis (less the number of shares beneficially owned by the
offering party), plus customary fees and expenses, except that the definitive
agreement with respect to such Recommended Third-Party Offer shall provide that
such fee shall not be payable by Sprint if it makes a Qualified Offer within 72
hours of the first public announcement of such Recommended Third-Party Offer
(provided, that, there are at least two business days within such period). In
the case of an Offer that is a Non-Recommended Third-Party Offer, Sprint shall
have the option to make a Qualified Offer, but only if the Board of Directors of
Sprint reasonably determines in good faith upon consultation with independent
legal
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counsel and its outside financial advisors that the conditions to the
Non-Recommended Third-Party Offer are reasonably likely to be satisfied and the
offer consummated.
If Sprint has the option to make a Qualified Offer and does so
more than five days prior to the date of a stockholders meeting held to consider
a Third-Party Offer or an Intervening Offer, the Board of Directors shall, if an
Intervening Offer is not then outstanding, (i) support the Qualified Offer by
approving and recommending it to Newco's stockholders and (ii) cause Newco to
take all steps reasonable and necessary to facilitate the consummation of the
Qualified Offer.
(d) (i) At such time as a Third-Party Offer made subsequent to
a Qualified Offer shall constitute an Intervening Offer, Newco's obligations to
support and facilitate a Qualified Offer as set forth in Section 4.03(c) above
shall terminate and Newco shall be free to consider and act upon such
Intervening Offer. Notwithstanding the foregoing, Sprint shall be entitled, at
any time prior to consummation of the Intervening Offer, to make another
Qualified Offer. In the event Sprint makes such Qualified Offer, the most recent
Third-Party Offer shall cease to constitute an Intervening Offer.
(ii) If a Recommended Third-Party Offer or an Intervening
Offer, as the case may be, is undertaken, in whole or in part, in the form of a
tender offer, at the consummation of such tender offer, the offeror shall have
an option, exercisable for a period of 20 days following the consummation of
such tender offer, to purchase from any Affiliated Equity Holder, at the tender
offer price, the Specified Number of Equity Securities less the number of Equity
Securities that have already been tendered by the Affiliated Equity Holders.
(iii) If, in the event of a Recommended Third-Party Offer or
an Intervening Offer, as the case may be, such offer, a Business Combination
underlying the such offer or any related matter that must be approved by the
stockholders of Newco in order for the offer to be effectuated is brought before
the stockholders of Newco for their consideration and approval, Sprint and
Sprint L.P. shall be obligated, in the event a Qualified Offer has not been made
within five days prior to the date of the stockholders' meeting, to cast (or to
cause to be cast by their Affiliated Equity Holders) in favor of the Recommended
Third-Party Offer or the Intervening Offer, as applicable, the Business
Combination or any such related matter such number of votes as is equal to the
Specified Number of Equity Securities, provided, that, such Business Combination
does not constitute a Discriminatory Transaction.
(e) None of the Affiliated Equity Holders shall be entitled to
exercise rights of appraisal under Section 262 of the Delaware General
Corporation Law (or any successor thereto) as to any of the Equity Securities
owned by them in respect of any Business Combination effected in connection with
a Recommended Third-Party Offer or an Intervening Offer.
SECTION 4.04. Solicitation of Offers.
(a) From the Closing Date until the earlier of the 27-month
anniversary of Closing or the termination of this Agreement in accordance with
its terms, Newco shall not and shall not authorize or permit any officer,
director or employee of, or any investment banker,
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attorney or other advisor or representative of, Newco or its Affiliates, to, (i)
solicit or initiate, or encourage the submission of, any Acquisition Proposal,
or (ii) participate in any discussions or negotiations regarding, or furnish to
any person any information with respect to, or take any other action to expedite
any inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, any Acquisition Proposal; provided, however, that to the
extent required by the fiduciary obligations of the Board of Directors, as
determined in good faith by the Board based on the advice of outside counsel,
Newco may (A) in response to any unsolicited request therefor, furnish
information with respect to Newco or any Subsidiary to any person pursuant to a
customary confidentiality agreement and discuss such information with such
person, (B) upon receipt by Newco of an Acquisition Proposal, following delivery
to Sprint of the notice required pursuant to Section 4.05, participate in
negotiations regarding such Acquisition Proposal, and (C) enter into an
agreement respecting such Acquisition Proposal or enter into any related
agreements or take any other action ancillary thereto, which agreements or
actions are consistent with the requirements of Section 4.03(c) hereof.
(b) After the 27-month anniversary of Closing until the
earlier of the 39-month anniversary of Closing or the termination of this
Agreement in accordance with its terms, Newco shall not, and shall not authorize
or permit any officer, director or employee of, or any attorney or other advisor
or representative of, Newco or its Affiliates, to take any of the actions
limited by Section 4.04(a) except through an investment banking firm formally
engaged by Newco (or actively working with Newco) for such purpose; provided,
that, 30 days prior to so engaging an investment banking firm for that purpose
or to the commencement of such work, Newco shall notify Sprint of its intention
to effect such engagement or commence such work, and Sprint shall be permitted
to prepare and make a Sprint Offer as defined in Section 4.02(b) hereof for so
long as such investment banking firm remains engaged by, or is working for,
Newco for that specific purpose; provided, that, subject to the terms and
conditions of the Sprint Offer and if an Intervening Offer is not then
outstanding, Sprint will pursue any Sprint Offer made pursuant hereto for so
long as necessary to permit such Sprint Offer to be consummated. Newco shall
furnish Sprint with copies of all information provided by Newco to such
investment banking firm at the time such information is provided to such
investment banking firm, subject to Sprint entering into a customary
confidentiality agreement with respect to such information.
(c) [Reserved.]
(d) Nothing contained in this Section 4.04 shall (i) prohibit
Newco from taking and disclosing to its stockholders a position contemplated by
Rule 14e-2 under the Exchange Act or (ii) preclude Newco or the Board from
giving due consideration or responding to any Acquisition Proposal if the
failure to so respond would, in the judgment of the Board of Directors,
exercised in good faith upon the advice of Newco's outside legal counsel, cause
the Board to be in violation of its fiduciary duties to the holders of Equity
Securities.
(e) Nothing contained in this Section 4.04 shall adversely
affect Sprint's right to respond to a Third-Party Offer under Section 4.03
hereof, including Sprint's unwillingness to provide a Sprint Offer under Section
4.04(b) above.
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SECTION 4.05. Notice. The Board of Directors of Newco shall
i)" (i) promptly notify Sprint in writing of A)" (A) its receipt of an
Acquisition Proposal, B)" (B) any inquiries or discussions that may reasonably
be expected to lead to an Acquisition Proposal, C)" (C) the execution by Newco
of a confidentiality agreement with respect to an Acquisition Proposal, or D)"
(D) the furnishing of any confidential information in contemplation of an
Acquisition Proposal, whether or not pursuant to a confidentiality agreement;
ii)" (ii) describe the terms and conditions of any Acquisition Proposal in
reasonable detail; iii)" (iii) provide to Sprint copies of any definitive
agreements with respect to any Acquisition Proposal and any confidentiality
agreements with respect thereto; and iv)" (iv) subject to Sprint's obligation to
hold such information in strict confidence (except as required by law or legal
process), make available to Sprint all information made available to the party
making the Acquisition Proposal at the same time it is provided to such party.
SECTION 4.06. Break-Up Fee. Upon consummation of an
Intervening Offer, Newco shall be obligated to pay Sprint a termination fee
equal to 3% of the aggregate consideration to have been paid in the Sprint Offer
or the Qualified Offer to Unaffiliated Equity Holders plus reasonable fees and
expenses.
SECTION 4.07. Takeover Defenses. Newco shall not take any
action or omit to take an action, and shall cause its Significant Subsidiaries
or any of its or their respective officers, directors, employees,
representatives and agents to take no action or omit to take action, that would
result in (i) any Affiliated Equity Holder being deemed an "acquiring person" or
similar designation under any Stockholders' Rights Plan (commonly known as a
"poison pill") or otherwise being adversely affected by such plan, (ii) any
Affiliated Equity Holder being prejudiced by Newco through its action or its
failure to act under any applicable state takeover statute, including Section
203 of the Delaware General Corporation Law, or (iii) otherwise causing any
takeover defense to materially impair or obstruct, or prevent (either legally or
financially) the exercise by any Affiliated Equity Holder of rights granted
pursuant to this Article IV; provided, however, that (A) Newco may take action
or omit to take action having any such consequence to the extent that such
consequence occurs upon a material breach or violation by any Affiliated Equity
Holder of this Agreement and (B) the execution by Newco, the Company or any
Significant Subsidiary of a definitive agreement in respect of a Business
Combination that is consistent with the requirements of Section 4.03(c) hereof
shall not be deemed to have the effects described in this Section 4.07.
ARTICLE V
Transfer of Equity Securities
SECTION 5.01. Transfer of Equity Securities. (a) None of the
Affiliated Equity Holders shall, directly or indirectly, sell, transfer or
otherwise dispose of any Equity Securities except (i) pursuant to a registered
underwritten public offering in accordance with the Registration Rights
Agreement, (ii) in accordance with Rule 144 promulgated under the Securities
Act, (iii) to any direct or indirect Subsidiary of Sprint and (iv) in a
transaction effected in accordance with the so-called "Section 4(1 1/2)"
exemption under the Securities Act.
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(b) Subject to the provisions of Section 4.02(e), 4.03(d) and
4.04(b) hereof, and notwithstanding the permissive aspects of items (i) through
(iv) of Section 5.01(a) hereof, none of the Affiliated Equity Holders shall,
directly or indirectly, sell, transfer or otherwise dispose of any interest in
any Equity Securities to any purchaser or group (within the meaning of Rule
13d-5(b) under the Exchange Act) of purchasers, if, after giving effect to such
sale, such purchaser or group of purchasers would, to Sprint's knowledge, own,
or have the right to acquire, 5% or more of the Equity Securities then
outstanding, except to any Person that is not obligated (or would not, by virtue
of such purchase, reasonably be anticipated to be obligated) to file a Schedule
13D with the SEC pursuant to each of paragraphs (b) and (e) of Rule 13d-1 under
the Exchange Act.
(c) None of the Affiliated Equity Holders shall sell, transfer
or otherwise dispose of any of the capital stock of any Subsidiary of such
Affiliated Equity Holder that owns Equity Securities, except to another
Subsidiary of Sprint, and then only if such Subsidiary complies with the
transfer and assignment provisions of Section 7.05 hereof.
(d) Purported transfers of Equity Securities that are not in
compliance with this Article V shall be of no force or effect.
(e) Notwithstanding the foregoing, sales, transfers and
dispositions among a group consisting only of Affiliated Equity Holders shall
not constitute a breach of this Section 5.01, provided that each of such
Affiliated Equity Holders complies with the transfer and assignment provisions
of Section 7.05 hereof.
ARTICLE VI
Representations, Warranties and Covenants
SECTION 6.01. Representations and Warranties. Each of Sprint
and Sprint L.P. represents and warrants to the Company and Newco as follows:
(a) Sprint is a corporation, and Sprint L.P. is a partnership,
that is duly organized, validly existing and in good standing under the laws of
the jurisdiction in which it is incorporated or organized and has the power and
authority to execute, deliver and perform this Agreement and to grant the
Irrevocable Proxy.
(b) Each of this Agreement and the Irrevocable Proxy has been
duly executed and delivered by each of Sprint and Sprint L.P., and constitutes a
valid and binding agreement or irrevocable proxy (coupled with an interest),
respectively, and is enforceable in accordance with its respective terms, except
to the extent that the enforcement of this Agreement or the Irrevocable Proxy
may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect relating to creditors' rights
generally, and (ii) general principles of equity regardless of whether
enforceability is considered in a proceeding in equity or at law.
(c) The execution and delivery of this Agreement and of the
Irrevocable Proxy did not, and the performance thereof, without obtaining the
consent of any third party will not,
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conflict with, or result in any violation of, or default (with or without notice
or lapse of time, or both) under (i) in the case of Sprint, the certificate of
incorporation or bylaws of Sprint, (ii) in the case of Sprint L.P., the
partnership agreement of Sprint L.P., (iii) any loan or credit agreement, note,
bond, mortgage, indenture, lease or other agreement, instrument, permit or
license applicable to either Sprint or Sprint L.P. or any of the Equity
Securities owned by either, or (iv) any federal, state, local, municipal,
foreign, international, multinational or other judicial or administrative order,
judgment, decree, constitution, law ordinance, common law of Delaware or Kansas,
regulation, statute or treaty applicable to either of Sprint or Sprint L.P. or
any of the Equity Securities owned by either. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity (as defined in the Investment Agreement) or any party to a contract is
required by or with respect to either Sprint or Sprint L.P. or in connection
with the execution and delivery of this Agreement or the applicable Irrevocable
Proxy.
(d) Except as set forth in this Agreement and the Ancillary
Agreements, none of the Equity Securities owned by either of Sprint or Sprint
L.P. is subject to (i) any preemptive rights, (ii) right of first refusal, (iii)
right to purchase, acquire or vote, (iv) power of attorney, or (v) any other
right.
(e) Each of Sprint and Sprint L.P. has the sole power, right
and authority to vote and to tender the Equity Securities beneficially owned by
it in accordance with the terms of this Agreement and the Irrevocable Proxy.
(f) Each of Sprint and Sprint L.P. will take all action
necessary to cause other Affiliated Equity Holders bound by the terms of this
Agreement to abide by the terms of this Agreement.
SECTION 6.02. Stock Ownership Reports. The following
informational reporting requirements shall apply during the term of this
Agreement:
(a) Newco Stock Report. Newco shall provide to Sprint in
writing a monthly report (the "Newco Outstanding Stock Report") setting forth
certain information and data pertaining to Newco for each calendar month (a
"Month"), which shall be delivered to Sprint on or before the 15th day of the
next following month (a "Report Delivery Date"). The Newco Outstanding Stock
Report shall be reasonable in detail and shall clearly set forth all of the
following information:
(i) the number of New Securities issued by Newco during
the Month;
(ii) the number of New Securities issued by Newco as
Transaction Securities during the Month;
(iii) the total number of shares of Newco Common Stock
outstanding on the last day of the Month;
(iv) the total number of shares of Newco Common Stock,
on a Fully-Diluted Basis, outstanding on the last day of the Month; and
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(v) the total number of Available Top-Up Shares issuable
in respect of Transaction Securities issued in the Month and Newco's calculation
of the Dilution Factor with respect to any such issuance of Transaction
Securities.
(b) Sprint Ownership Report. Sprint shall provide to
Newco in writing a monthly report setting forth certain information and data
pertaining to the ownership of Equity Securities of Newco by Affiliated Equity
Holders (the "Sprint Ownership Report"), which shall be delivered to Newco on or
before the Report Delivery Date; provided, however, that Sprint's only
obligation with respect to furnishing a Sprint Ownership Report for a month in
which no ownership changes occurred shall be to notify Newco in writing of that
fact. The Sprint Ownership Report shall be reasonable in detail and shall
clearly set forth in reasonable detail all of the following information:
(i) the number of shares of Equity Securities of Newco
bought and sold in accordance with the terms of the Governance Agreement during
such Month;
(ii) Sprint's calculation of the number of Available
Top-Up shares with respect to issuances of Transactional Securities, as of the
last day of the Month; and
(iii) Sprint's calculation of Sprint's Percentage
Interest as of the last day of the Month.
(c) Each Newco Outstanding Stock Report and Sprint Ownership
Report (individually, a "Report" and together, the "Reports") shall state the
month to which it applies, and shall be signed by an authorized officer of the
applicable party. Newco represents and warrants that each Newco Outstanding
Stock Report shall be true and correct in all material respects on the Report
Delivery Date. Sprint represents and warrants that each Sprint Ownership Report
shall be true and correct in all material respects on the Report Delivery Date.
If a Report is determined to be incorrect in any respect at any time after
delivery to the other party, the submitting party must resubmit a true and
accurate replacement Report which identifies all such corrections; provided,
however, that the submission of any replacement Report or the failure of any
Party to submit such replacement Report shall not constitute a waiver by any
other Party hereto of any substantive rights otherwise existing under this
Agreement.
ARTICLE VII
Miscellaneous
SECTION 7.01. Effectiveness; Termination; Survival. (a) This
Agreement shall become effective at the Closing. This Agreement shall terminate
at the earliest of the following to occur: i)" (i) the termination of the
Investment Agreement in accordance with its terms; ii)" (ii) such time as
Sprint's Percentage Interest is greater than 90% or less than the Lower
Threshold; iii)" (iii) the expiration of the Sprint Right to Offer Period; iv)"
(iv) the first date on which any Person or 13D Group (other than Affiliated
Equity Holders) is determined (A) to beneficially own or control more than 35%
of the Equity Securities outstanding by virtue of the acquisition of such
securities pursuant to a Third-Party Offer if the rights granted and process
contemplated by Article IV hereof have been effected in accordance with the
terms thereof or (B) to beneficially
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own or control 50% or more of the Voting Equity Securities outstanding; v)" (v)
upon the termination of the Marketing Agreement in accordance with Sections
24(b)(ii), 24(c), 24(d)(i), or 24(d)(ii) thereof; or vi)" (vi) upon the exercise
by any "Holder" of "Registrable Securities" under the Registration Rights
Agreement of registration rights (demand or incidental) held by Person
thereunder.
(b) Notwithstanding the termination of this Agreement as set
forth in Section 7.01(a) above, until the sixth anniversary of the Closing Date
and thereafter for so long as Sprint's Percentage Interest is greater than the
Lower Threshold, then Sprint shall still be subject to the restrictions set
forth in Sections 4.01 and 5.01 hereof (the "Standstill Provisions") and, for so
long as Sprint's Percentage Interest remains greater than the Lower Threshold,
Sprint shall still have rights pursuant to this Agreement under Section 2.01
(subject to termination of such rights by virtue of Section 2.01(d)) and Section
3.01(b). In such event, the Standstill Provisions, Section 2.01, Section
3.01(b), Article VII and any definition or definitional provision of any of the
foregoing provisions of this Agreement shall remain in full force and effect
until such time as Sprint's Percentage Interest is less than the Lower Threshold
(provided, that, the use of any such definitions for such limited purpose shall
not give rise to any of the substantive rights or obligations that relate to
such definitions); provided, however, that during any period in which the
Standstill Provisions survive, Sprint and its Affiliates may directly approach
the Board of Directors of Newco in order to make an offer to effect a Business
Combination.
SECTION 7.02. Notices. Unless otherwise provided herein, any
notice, request, waiver, instruction, consent or document or other communication
required or permitted to be given by this Agreement shall be effective only if
it is in writing and (a) delivered by hand or sent by certified mail, return
receipt requested, (b) if sent by a nationally-recognized overnight delivery
service with delivery confirmed, or (c) if telexed or telescoped, with receipt
confirmed as follows:
The Company: 3100 New York Drive
Pasadena, California 91107
Attn.: President and CEO
Telecopy No.: 626/296-4161
With a copy to: Hunton & Williams
NationsBank Plaza, Suite 4100
600 Peachtree Street, N.E.
Atlanta, Georgia 30308-2216
Attn: Scott M. Hobby, Esq.
Telecopy No.: (404) 888-4190
Newco and Newco Sub: 3100 New York Drive
Pasadena, California 91107
Attn: President and CEO
Telecopy No.: 626/296-4161
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with a copy to: Hunton & Williams
NationsBank Plaza, Suite 4100
600 Peachtree Street, N.E.
Atlanta, Georgia 30308-2216
Attn: Scott M. Hobby, Esq.
Telecopy No.: (404) 888-4190
Sprint: Sprint Corporation
2330 Shawnee Mission Parkway
Westwood, Kansas 66205
Attn: Chief Financial Officer
Telecopy No.:(913) 624-8426
with a copy to: Sprint Corporation
2330 Shawnee Mission Parkway
Westwood, Kansas 66205
Attn: Corporate Secretary
Telecopy No.: (913) 624-8233
with an additional copy to: Stinson, Mag & Fizzell, P.C.
1201 Walnut, Suite 2800
P.O. Box 419251
Kansas City, Missouri 64141-6251
Attn: John A. Granda, Esq.
Telecopy No.: (816) 691-3495
The parties hereto ("Parties") shall promptly notify each other of any change in
their respective addresses or facsimile numbers or of the Person or office to
receive notices, requests or other communications under this Section 7.02.
Notice shall be deemed to have been given as of the date when so personally
delivered, when actually delivered by the U.S. Postal Service at the proper
address, the next day when delivered during business hours to an overnight
delivery service properly addressed or when receipt of a telex or telecopy is
confirmed, as the case may be, unless the sending party has actual Knowledge
that such notice was not received by the intended recipient.
SECTION 7.03. Entire Agreement. This Agreement and, upon
execution by all Parties thereto, the Investment Agreement and the Ancillary
Agreements, together with the respective Schedules and Exhibits hereto and
thereto, embody the entire agreement and understanding of the Parties in respect
to the matters contemplated hereby and thereby and supersedes and renders null
and void all other prior agreements and understandings, written and oral, with
respect to the subject matter hereof and thereof, provided, that, this provision
shall not abrogate any other written agreement between the Parties executed
simultaneously with this Agreement. No Party shall be liable or bound to any
other Party in any manner by any promises, conditions, representations,
warranties, covenants, agreements and understandings, except as specifically set
forth herein or therein.
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SECTION 7.04. Waiver. Except as otherwise permitted in this
Agreement, the terms or conditions of this Agreement may not be waived unless
set forth in a writing signed by the Party entitled to the benefits thereof. No
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of such provision at any time in the future or a waiver of
any other provision hereof. The rights and remedies of the Parties are
cumulative and not alternative. Except as otherwise permitted in this Agreement,
neither the failure nor any delay by any Party in exercising any right, power or
privilege under this Agreement, any of the Ancillary Agreements or the documents
referred to in this Agreement or therein will operate as a waiver of such right,
power or privilege, and no single or partial exercise of any such right, power
or privilege will preclude any other or further exercise of such right, power or
privilege or the exercise of any other right, power or privilege.
SECTION 7.05. Successors and Assigns. Neither this Agreement
nor any of the rights, interests or obligations under this Agreement shall be
assigned or transferred, in whole or in part, by any of the Parties without the
prior written consent of the other Parties; provided, however, that such
assignment or transfer may be made by (i) by Sprint or Sprint L.P. to any of
their respective Affiliates who are "controlled" (as such term is defined in
Rule 12b-2 promulgated pursuant to the Exchange Act) by Sprint or Sprint L.P.,
or (ii) pursuant to any merger or sale of substantially all of the assets of
Sprint or such Affiliates (or any transaction having such effect) that is
pursuant to an agreement entered into after the Closing; provided, however,
that, in either such case, before such assignment may take effect, the proposed
successor or assignee agrees in writing to be bound by all of the provisions
hereof and executes an Irrevocable Proxy. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be enforceable
by, the parties and their respective successors and assigns. Any attempted
assignment in violation of this Section 7.05 shall be void.
SECTION 7.06. Governing Law. This Agreement shall be construed
in accordance with and governed by the laws of the State of Delaware, without
regard to conflict of laws principles.
SECTION 7.07. Severability. If any term or provision of this
Agreement or the application thereof to either party or set of circumstances
shall, in any jurisdiction and to any extent, be finally held invalid or
unenforceable, such term or provision shall only be ineffective as to such
jurisdiction, and only to the extent of such invalidity or unenforceability,
without invalidating or rendering unenforceable any other terms or provisions of
this Agreement or under any other circumstances, and the Parties shall negotiate
in good faith a substitute provision which comes as close as possible to the
invalidated or unenforceable term or provision, and which puts each party in a
position as nearly comparable as possible to the position it would have been in
but for the finding of invalidity or unenforceability, while remaining valid and
enforceable.
SECTION 7.08. Counterparts. This Agreement may be executed in
one or more counterparts each of which when so executed and delivered shall for
all purposes be deemed to be an original but all of which, when taken together,
shall constitute one and the same Agreement.
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SECTION 7.09. Headings. The table of contents, captions and
headings used in this Agreement are inserted for convenience only and shall not
be deemed to constitute part of this Agreement or to affect the construction or
interpretation hereof.
SECTION 7.10. No Third-Party Beneficiaries. Nothing in this
Agreement or any Ancillary Agreements, express or implied, shall create or
confer upon any Person (including but not limited to any employees), other than
the Parties or their respective successors and permitted assigns, any legal or
equitable rights, remedies, obligations, liabilities or claims under or with
respect to this Agreement except as expressly provided herein.
SECTION 7.11. Interpretation. (a) Unless specifically stated
otherwise, references to Articles, Sections, Exhibits and Schedules refer to
Articles, Sections, Exhibits and Schedules in this Agreement. References to
"includes" and "including" mean "includes without limitation" and "including
without limitation."
(b) Each Party is a sophisticated legal entity that was
advised by experienced counsel and, to the extent it deemed necessary, other
advisors in connection with this Agreement. Accordingly, each Party hereby
acknowledges that no Party has relied or will rely in respect of this Agreement
or the transactions contemplated hereby upon any document or written or oral
information previously furnished to or discovered by it or its representatives,
other than this Agreement or the documents and instruments delivered at the
Closing.
(c) No provision of this Agreement shall be interpreted in
favor of, or against, either of the Parties by reason of the extent to which
either such Party or its counsel participated in the drafting thereof or by
reason of the extent to which any such provision is inconsistent with any prior
draft hereof or thereof.
SECTION 7.12. Inclusion of Information in Schedules. The
inclusion of any information in any disclosure schedule (i) shall not be deemed
an admission that any such information is material for purposes of the
representation and warranty to which it relates or any other representation and
warranty or for any other purpose related to this Agreement or any Ancillary
Agreement or the transactions contemplated hereby or thereby, including, without
limitation, for purposes of any covenants, closing conditions or any other
remedies the Parties may have, and (ii) shall not be used or interpreted in any
manner to create a standard of materiality for any such purpose.
SECTION 7.13. Exclusive Jurisdiction and Consent to Service of
Process. The Parties agree that any legal action arising out of or relating to
this Agreement or the transactions contemplated hereby or thereby shall be
instituted by the Parties only in a Delaware state court or a federal court
sitting in that state, which shall be the exclusive venue of any such action.
Each Party waives any objection which such party may now or hereafter have to
the laying of venue of any such action, and irrevocably consents and submits to
the jurisdiction of any such court (and the appropriate appellate courts) in any
such action. Any and all service of process and any other notice in any such
action shall be effective against such Party when transmitted in accordance with
Section 7.02. Nothing contained herein shall be deemed to affect the right of
any Party to serve process in any manner permitted by applicable law.
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SECTION 7.14. Amendment. No amendment, modification or
alteration of the terms or provisions of this Agreement or any Ancillary
Agreement, including any Schedules and Exhibits hereto or thereto, shall be
binding unless the same shall be in writing and duly executed by the Party
against whom such amendment, modification or alteration is sought to be
enforced.
SECTION 7.15. Survival. All of the representations,
warranties, covenants and agreements set forth in this Agreement shall survive
the Closing.
SECTION 7.16. WAIVER OF JURY TRIAL. THE COMPANY, NEWCO, SPRINT
AND SPRINT L.P. HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT THAT IT
MAY HAVE TO A TRIAL BY JURY IN ANY ACTION INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT
OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT OR ANY ANCILLARY AGREEMENT OR
THE RELATIONSHIP ESTABLISHED HEREUNDER OR THEREUNDER.
SECTION 7.17. Specific Performance. The Parties agree that
immediate irreparable damages for which there is no adequate remedy at law would
occur in the event that any provision of this Agreement is not performed in
accordance with the specific terms hereof or is otherwise breached. It is
accordingly agreed that in the event of a failure by a party to perform its
obligations under this Agreement, the non-breaching Party shall be entitled to
specific performance through injunctive relief to prevent breaches of the
provisions of this Agreement and to enforce specifically the provisions of this
Agreement in any action instituted in any court having subject matter
jurisdiction, in addition to any other remedy to which such Party may be
entitled, at law or in equity.
SECTION 7.18. Voting Agreement; Proxy. a)" (a) To the extent
this Agreement constitutes a voting agreement in accordance with Section 218(c)
of the Delaware General Corporation Law, it is intended to comply therewith and
be enforceable thereunder. The voting obligations of Sprint under this
Agreement, including without limitation, those set forth in Sections 2.02, 4.02
and 4.03 hereof, shall be irrevocable.
(b) In order to ensure that the voting agreements set forth in
Sections 2.02, 4.02 and 4.03 hereof will be fulfilled, each of Sprint and Sprint
L.P. agrees to grant, and concurrently with the execution of this Agreement
hereby grants, to the Company and Newco, or either of them, an Irrevocable
Proxy, coupled with an interest, with respect to (a) the matters contemplated by
Section 2.02 hereof, all of the Equity Securities owned by Affiliated Equity
Holders and (b) with respect to the matters contemplated by Section 4.02 or
Section 4.03 hereof, the Specified Number of Equity Securities covered by such
voting agreements which Sprint or Sprint L.P. beneficially owns, as determined
under Rule 13d-3 of the Exchange Act, in each such case, for and in the name,
place and stead of such stockholder or any of its Affiliated Equity Holders, at
any annual or special meeting of the holders of Newco Common Stock and at any
adjournment or postponement thereof, or pursuant to any consent in lieu of a
meeting. The Irrevocable Proxy granted by each of the Sprint and Sprint L.P.
constitutes the valid and effective
34
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irrevocable proxy, coupled with an interest, of each of Sprint and Sprint L.P.
in respect of the Equity Securities beneficially owned by each of them, within
the meaning of Section 212(e) of the Delaware General Corporation Law; revokes
any proxy or proxies or powers of attorney heretofore given by either of them in
respect of such Equity Securities; shall remain in full force and effect and is
and shall be irrevocable until the termination of this Agreement and is coupled
with an interest and an integral part of the benefits and obligations of each of
Sprint and Sprint L.P. and the rights and benefits of the Company and Newco.
35
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
SPRINT CORPORATION
By: /s/ Theodore H. Schell
---------------------------------------
Name: Theodore H. Schell
Title: Vice President--Strategic
Planning and Corporate
Development
SPRINT COMMUNICATIONS COMPANY L.P.
By: U.S. Telecom, Inc., General Partner
---------------------------------------
By: /s/ Don A. Jensen
Name: Don A. Jensen
Title: Vice President and Secretary
EARTHLINK NETWORK, INC.
By: /s/ Charles G. Betty
---------------------------------------
Name: Charles G. Betty
Title: President and CEO
NEWCO, INC.
By: /s/ Charles G. Betty
---------------------------------------
Name: Charles G. Betty
Title: President and CEO
[Signature Page for Governance Agreement]
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<PAGE>
SCHEDULE 2.01 TO
THE GOVERNANCE AGREEMENT
Board of Directors
Management Directors
Sky D. Dayton
C. Garry Betty
Independent Directors
Sidney Azeez
Robert M. Kavner
Linwood A. Lacy, Jr.
Paul McNulty
Kevin M. O'Donnell
John W. Sidgmore
Reed E. Slatkin
37
<PAGE>
IRREVOCABLE PROXY COUPLED WITH AN INTEREST
The undersigned hereby irrevocably appoint(s) EarthLink Network, Inc.,
a Delaware corporation ("EarthLink Network"), or Newco, Inc., a Delaware
corporation ("Newco"), or either of them, as the proxy of the undersigned and
hereby grant(s) to EarthLink Network or Newco this irrevocable proxy coupled
with an interest ("Irrevocable Proxy") with respect to the following Equity
Securities of the undersigned or any Affiliated Equity Holder of the undersigned
that the undersigned owns of record or otherwise has the right to vote, with all
power and authority to vote and to execute and deliver written consents, in each
case in accordance with the terms of Sections 2.02, 4.02 and 4.03 of the
Governance Agreement to the extent specified below:
(a) With respect to any matter contemplated by Section 2.02 of
that certain Governance Agreement dated February 10, 1998 (the
"Governance Agreement") by and among EarthLink Network, Newco, Sprint
Corporation and Sprint Communications Company L.P., as to all Equity
Securities owned by the undersigned or by any Affiliated Equity Holder
of the undersigned;
(b) With respect to any matter contemplated by Section 4.02 or
Section 4.03 of the Governance Agreement, as to the Specified Number of
Equity Securities owned by the undersigned or by any Affiliated Equity
Holder of the undersigned;
in each case, in the name, place and stead of the undersigned, and at any annual
or special meeting of stockholders of EarthLink Network or Newco or at any
adjournment or postponement thereof, or as to any action that can be taken by
written consent; and in each case to the same extent and with the same effect as
the undersigned might or could do under any applicable law or regulation
governing the rights and powers of stockholders of a Delaware corporation,
irrespective of whether the undersigned is present at such meeting.
This Irrevocable Proxy constitutes a valid and effective
irrevocable proxy coupled with an interest of EarthLink Network and Newco in the
Equity Securities, within the meaning of Section 212(e) of the Delaware General
Corporation Law, of the undersigned in respect of the foregoing Equity
Securities and revokes any proxy or proxies heretofore given by the undersigned
in respect of any such Equity Securities. This Irrevocable Proxy shall remain in
full force and effect and be irrevocable until termination of the Governance
Agreement. Unless otherwise defined herein, all capitalized terms shall have the
meanings ascribed to them in the Governance Agreement.
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<PAGE>
Until such time as the Governance Agreement is terminated, this
Irrevocable Proxy shall continue to cover all Equity Securities sold,
transferred or otherwise disposed of after the date hereof other than in
accordance with the terms and provisions of the Governance Agreement.
Dated: February , 1998 SPRINT CORPORATION
By:
------------------------------
Name:
-----------------------------
Title:
----------------------------
SPRINT COMMUNICATIONS COMPANY L.P.
By: U.S. Telecom, Inc.
By:
------------------------------
General Partner
STATE OF )
) ss.
COUNTY OF )
Sworn to and subscribed before me this day of February, 1998
and acknowledged before me as being the free act and deed of the above
signatory(ies).
-----------------------------
Notary Public
My Commission expires:
---------------------------
[Signature Page for Irrevocable Proxy With An Interest]
39
<PAGE>
APPENDIX G
CHAPTER 13 OF THE CALIFORNIA
GENERAL CORPORATION LAW
CORPORATIONS CODE
TITLE 1. CORPORATIONS
DIVISION 1. GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
sec. 1300. SHORT-FORM MERGER; PURCHASE OF SHARES AT FAIR MARKET VALUE;
"DISSENTING SHARES" AND DISSENTING SHAREHOLDER
(a) If the approval of the outstanding shares (Section 152) of a corporation is
required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in
a short-form merger may, by complying with this chapter, require the
corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are
dissenting shares as defined in subdivision (b). The fair market value shall
be determined as of the day before the first announcement of the terms of
the proposed reorganization or short-form merger, excluding any appreciation
or depreciation in consequence of the proposed action, but adjusted for any
stock split, reverse stock split, or share dividend which becomes effective
thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come within
all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100
or (B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this
provision does not apply to any shares with respect to which there exists
any restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of shareholders
entitled to vote on the reorganization and (A) were not voted in favor of
the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were
voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that
subparagraph (A) rather than subparagraph (B) of this paragraph applies
in any case where the approval required by Section 1201 is sought by
written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder of
dissenting shares and includes a transferee of record.
<PAGE>
sec. 1301 DISSENTER'S RIGHTS; DEMAND ON CORPORATION FOR PURCHASE OF SHARES
(a) If, in the case of a reorganization, any shareholders of a corporation have
a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a
notice of the approval of the reorganization by its outstanding shares
(Section 152) within 10 days after the date of such approval, accompanied by
a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value
of the dissenting shares, and a brief description of the procedure to be
followed if the shareholder desires to exercise the shareholder's right
under such sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares as defined
in subdivision (b) of Section 1300, unless they lose their status as
dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase the
shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder
in cash of their fair market value. The demand is not effective for any
purpose unless it is received by the corporation or any transfer agent
thereof (1) in the case of shares described in clause (i) or (ii) of
paragraph (1) of subdivision (b) of Section 1300 (without regard to the
provisos in that paragraph), not later than the date of the shareholders'
meeting to vote upon the reorganization, or (2) in any other case within 30
days after the date on which the notice of the approval by the outstanding
shares pursuant to subdivision (a) or the notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record by
the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such
price.
sec. 1302. DISSENTING SHARES, STAMPING OR ENDORSING
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
sec. 1303. DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE WITH INTEREST; TIME
OF PAYMENT
(a) If the corporation and the shareholder agree that the shares are dissenting
shares and agree upon the price of the shares, the dissenting shareholder is
entitled to the agreed price with interest thereon at the legal rate on
judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market value
of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in
the case of certificated securities, subject to surrender of the
certificates therefor, unless provided otherwise by agreement.
<PAGE>
sec. 1304. DISSENTERS ACTIONS; JOINDER; CONSOLIDATION; APPOINTMENT OF APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152)
or notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court
of the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both
or may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined as
defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is
in issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
sec. 1305. APPRAISERS DUTY AND REPORT; COURT JUDGMENT; PAYMENT; APPEAL; COSTS OF
ACTION
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time
fixed by the court, the appraisers, or a majority of them, shall make and
file a report in the office of the clerk of the court. Thereupon, on the
motion of any party, the report shall be submitted to the court and
considered on such evidence as the court considers relevant. If the court
finds the report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the
court, the court shall determine the fair market value of the dissenting
shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting shares
which any dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest thereon at
the legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to uncertificated
securities and, with respect to certificated securities, only upon the
endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the appraisers
to be fixed by the court, shall be assessed or apportioned as the court
considers equitable, but, if the appraisal exceeds the price offered by the
corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and
interest at the legal rate on judgments from the date of compliance with
Sections 1300,1301 and 1302 if the value awarded by the court for the shares
is more than 125 percent of the price offered by the corporation under
subdivision (a) of Section 1301).
sec. 1306. DISSENTING SHAREHOLDERS; EFFECT OF PREVENTION OF PAYMENT OF FAIR
MARKET VALUE
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
<PAGE>
sec. 1307. DISSENTING SHARES; DISPOSITION OF DIVIDENDS
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
sec. 1308. DISSENTING SHARES; RIGHTS AND PRIVILEGES
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
sec. 1309. DISSENTING SHARES; LOSS OF STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this
chapter all necessary expenses incurred in such proceedings and
reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into
shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending
action as provided in Section 1304, within six months after the date on
which notice of the approval by the outstanding shares or notice pursuant
to subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
sec. 1310. SUSPENSION OF CERTAIN PROCEEDINGS WHILE LITIGATION IS PENDING
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
sec. 1311. CHAPTER INAPPLICABLE TO CERTAIN CLASSES OF SHARES
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
sec. 1312. VALIDITY OF REORGANIZATION OR SHORT-FORM MERGER; ATTACK ON;
SHAREHOLDERS' RIGHTS; BURDEN OF PROOF
(a) No shareholder of a corporation who has a right under this chapter to demand
payment of cash for the shares held by the shareholder shall have any right
at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted
in favor thereof; but any holder of shares of a class whose terms and
provisions specifically set forth the amount to be paid in respect to them
in the event of a reorganization or short-form merger is entitled to payment
in accordance with those terms and provisions or, if the principal terms of
the reorganization are approved pursuant to subdivision (b) of Section 1202,
is entitled to payment in accordance with the terms and provisions of the
approved reorganization.
<PAGE>
(b) If one of the parties to a reorganization or short-form merger is directly
or indirectly controlled by, or under common control with, another party to
the reorganization or short-form merger, subdivision (a) shall not apply to
any shareholder of such party who has not demanded payment of cash for such
shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or
short-form merger or to have the reorganization or short-form merger set
aside or rescinded, the shareholder shall not thereafter have any right to
demand payment of cash for the shareholder's shares pursuant to this
chapter. The court in any action attacking the validity of the
reorganization or short-form merger or to have the reorganization or
short-form merger set aside or rescinded shall not restrain or enjoin the
consummation of the transaction except upon 10 days' prior notice to the
corporation and upon a determination by the court that clearly no other
remedy will adequately protect the complaining shareholder or the class of
shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is directly
or indirectly controlled by, or under common control with, another party to
the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that
the transaction is just and reasonable as to the shareholders of the
controlled party, and (2) a person who controls two or more parties to a
reorganization shall have the burden of proving that the transaction is just
and reasonable as to the shareholders of any party so controlled.
