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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /x/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/x/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
EARTHLINK NETWORK, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/x/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
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EARTHLINK NETWORK, INC.
3100 New York Drive
Pasadena, California 91107
(626) 296-2400
August 3, 1998
Dear Stockholder:
You are cordially invited to attend the 1998 Annual Meeting of
Stockholders of EarthLink Network, Inc., which will be held at 9:00 a.m. local
time on Friday, August 28, 1998, in the Executive Conference Room of EarthLink,
3100 New York Drive, Pasadena, California (the "Annual Meeting").
The principal business of the meeting will be to elect directors for
the ensuing year and to amend the Company's 1995 Stock Option Plan. During the
meeting, we will also review the results of the past fiscal year and report on
significant aspects of our operations during the first and second quarters of
1998.
Whether or not you plan to attend the Annual Meeting, please complete,
sign, date and return the enclosed proxy card in the postage prepaid envelope
provided so that your shares will be voted at the meeting. If you decide to
attend the meeting, you may, of course, revoke your proxy and personally cast
your votes.
Sincerely yours,
/s/ Sky D. Dayton
Sky D. Dayton
Chairman of the Board
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EARTHLINK NETWORK, INC.
3100 New York Drive
Pasadena, California 91107
(626) 296-2400
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
The 1998 Annual Meeting of the Stockholders of EarthLink Network, Inc.
will be held at 9:00 a.m. local time, Friday, August 28, 1998, in the Executive
Conference Room of EarthLink, 3100 New York Drive, Pasadena, California. The
meeting is called for the following purposes:
(1) To elect directors for the ensuing year;
(2) To amend the Company's 1995 Stock Option Plan; and
(3) To transact such other business as may properly come before the
meeting.
The Board of Directors has fixed the close of business on July 2, 1998
as the record date for the purpose of determining the stockholders who are
entitled to notice of and to vote at the meeting and any adjournment or
postponement thereof.
By order of the Board of Directors,
/s/ Sky D. Dayton
Sky D. Dayton
Chairman of the Board
Pasadena, California
August 3, 1998
IF YOU ARE UNABLE TO BE PRESENT AT THE MEETING, YOU ARE REQUESTED TO
MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD SO THAT YOUR SHARES WILL BE
REPRESENTED.
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EARTHLINK NETWORK, INC.
3100 New York Drive
Pasadena, California 91107
PROXY STATEMENT
This Proxy Statement is furnished by and on behalf of the Board of
Directors of EarthLink Network, Inc. (the "Company" or "EarthLink") in
connection with the solicitation of proxies for use at the 1998 Annual Meeting
of Stockholders of the Company to be held at 9:00 a.m. local time on Friday,
August 28, 1998, in the Executive Conference Room of EarthLink, 3100 New York
Drive, Pasadena, California, and at any adjournments or postponements thereof
(the "Annual Meeting"). This Proxy Statement and the enclosed proxy card will be
mailed on or about August 3, 1998 to the Company's stockholders of record (the
"Stockholders") on the Record Date, as defined below.
THE BOARD OF DIRECTORS URGES YOU TO MARK, SIGN, DATE
AND RETURN THE ENCLOSED PROXY CARD IN THE
POSTAGE PREPAID ENVELOPE PROVIDED.
SHARES ENTITLED TO VOTE
General
Proxies will be voted as specified by the Stockholder or Stockholders
granting the proxy. Unless contrary instructions are specified, if the enclosed
proxy card is executed and returned (and not revoked) prior to the Annual
Meeting, the shares of common stock, $.01 par value per share, of the Company
(the "Common Stock") represented thereby will be voted FOR the election as
directors of the nominees listed in this Proxy Statement. The submission of a
signed proxy will not affect a Stockholder's right to attend and to vote in
person at the Annual Meeting. A Stockholder who executes a proxy may revoke it
at any time before it is voted by filing with the Secretary of the Company
either a written revocation or an executed proxy bearing a later date or by
attending and voting in person at the Annual Meeting.
Only holders of record of Common Stock as of the close of business
on July 2, 1998 (the "Record Date") will be entitled to vote at the Annual
Meeting. As of the close of business on the Record Date, there were
14,193,711 shares of Common Stock (the "Shares") outstanding. Holders of
Shares authorized to vote are entitled to cast one vote per Share on all
matters except with respect with the cumulative voting features applicable to
the election of Directors.
Quorum Required
According to the Company's Bylaws, the holders of a majority of the
Shares entitled to be voted must be present or represented by proxy to
constitute a quorum. Shares as to which authority to vote is withheld and
abstentions are counted in determining whether a quorum exists.
Vote Required
Under Delaware law, directors are elected by a plurality of the votes
of the shares entitled to vote and present in person or represented by proxy at
a meeting at which a quorum is present. Only votes actually cast will be counted
for the purpose of determining whether a particular nominee received more votes
than the persons, if any, nominated for the same seat on the Board of Directors.
In connection with
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the cumulative voting feature applicable to the election of directors, each
Stockholder is entitled to as many votes as shall equal the number of shares
held by such person at the close of business on the record date, multiplied by
the number of directors to be elected. A Stockholder may cast all of such
votes for a single nominee or may apportion such votes among any two or more
nominees. For example, when eight directors are to be elected, a holder of 100
shares may cast 800 votes for a single nominee, apportion 400 votes to each of
two nominees, or apportion 800 votes in any other manner by so noting in the
space provided on the accompanying proxy card. A Stockholder may withhold votes
from any or all nominees by notation to that effect on the proxy card. Except
to the extent that a Stockholder withholds votes from any or all nominees, the
persons named in the proxy card, in their sole discretion, will vote such
proxy for, and, if necessary, exercise cumulative voting rights to secure, the
election of the nominees listed below as directors of the Company.
With respect to any other matters that may come before the Annual
Meeting, if proxies are executed and returned, such proxies will be voted in a
manner deemed by the proxy representatives named therein to be in the best
interests of the Company and its Stockholders.
PROPOSAL I - ELECTION OF DIRECTORS
Nominees
The Company's Bylaws provide that the Company shall have at least one
and not more than eleven directors, the exact number to be fixed by resolution
of the Board of Directors from time to time. The Board has fixed the number of
directors at eleven. At this Annual Meeting, eight directors will be elected for
a term expiring at the 1999 Annual Meeting of Stockholders. The Board of
Directors has nominated Sky D. Dayton, Charles G. Betty, Sidney Azeez, Robert M.
Kavner, Linwood A. Lacy, Jr., Paul McNulty, Kevin M. O'Donnell and Reed E.
Slatkin for election to the Board of Directors at the Annual Meeting, each to
serve until the 1999 Annual Meeting of Stockholders or until their successors
are duly elected and qualified. Pursuant to the Company's Governance Agreement
with Sprint Corporation ("Sprint") and Sprint Communications Company L.P.
("Sprint, L.P.") and the Certificate of Designation for the preferred stock held
by Sprint, until such time as Sprint and Sprint, L.P.'s equity interest in the
Company decreases below Twenty Percent (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 the
Company, as the holder of the Company's Series A Convertible Preferred Stock.
Sprint has designated William T. Esrey and Patti S. Manuel as the initial
Investor Directors.
All Shares represented by properly executed proxies received in
response to this solicitation will be voted for the election of the nine
directors as specified therein by the Stockholders. Unless otherwise specified
in the proxy, it is the intention of the persons named on the enclosed proxy
card to vote FOR the election of the eight nominees listed in this Proxy
Statement to the Board of Directors. Each nominee has consented to serve as a
director of the Company if elected. If at the time of the Annual Meeting a
nominee is unable or declines to serve as a director, the discretionary
authority provided in the enclosed proxy card may be exercised to vote for a
substitute candidate designated by the Board of Directors. The Board of
Directors has no reason to believe that any nominee will be unable or will
decline to serve as a director.
Stockholders may withhold their votes from the entire slate of nominees
by so indicating in the space provided on the enclosed proxy card. Stockholders
may withhold their votes from any particular nominee by writing that nominee's
name in the space provided for that purpose on the enclosed proxy card.
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Set forth below is certain biographical information furnished to the
Company by each director nominee. Each such nominee currently serves as a
director of the Company.
Information Regarding Nominees For Directors
Sky D. Dayton
Age: 26
Mr. Dayton, the founder of the Company, has served as Chairman of the
Board of Directors since the Company's inception in May 1994 and served as its
Chief Executive Officer from May 1994 until May 1996. From 1992 to 1993, he
served as co-owner of a computer-based digital imaging firm, Dayton Walker
Design. From 1991 to 1992, he served as Director of Marketing for new products
at Executive Software, a VAX/VMS utility software maker. From 1990 to 1994, Mr.
Dayton co-owned Cafe Mocha, a coffee house in Los Angeles, which he co-founded,
and was a co-owner of Joe Cafe, a coffee house in Studio City, California.
Charles G. Betty
Age: 41
Mr. Betty has served as the President and as a director of the Company
since January 1996, and, was named the Company's Chief Executive Officer in May
1996. From February 1994 to January 1996, Mr. Betty was a strategic planning
consultant, advising, among others, Reply Corp., Perot Systems Corporation and
Microdyne, Inc. From September 1989 to February 1994, Mr. Betty served as
President, Chief Executive Officer and a director of Digital Communications
Associates, Inc., a publicly traded network connectivity provider.
Sidney Azeez
Age: 66
Mr. Azeez has been a director of the Company since June 1996. During
the past five years, Mr. Azeez has been a private investor. Mr. Azeez founded
Ultronic Systems Corp., which produced a stock and commodity quotation system.
He also founded American Cellular Network, Inc. and Universal Telecell, Inc.
("Unitel"), both of which are cellular telephone companies, PCS, Inc., a
wireless communications company, and several banks in Colorado and New Jersey.
Mr. Azeez is a director of Unitel and Thermal Tech Development, Inc.
Robert M. Kavner
Age: 55
Mr. Kavner has been a director of the Company since June 1996. Since
September 1996, he has served as President and Chief Executive Officer of On
Command Corporation, a provider of on demand video for the hospitality industry.
From 1994 through August 1995, he was director of business advisory services for
Creative Artist Agency. From 1984 to 1994, Mr. Kavner held several senior
management positions at AT&T, including Senior Vice President and Chief
Financial Officer, Executive Vice President of the Communications Products
Group, Chief Executive Officer of the Multimedia Products and Services Group,
President of the Computer Division, Chairman of the UNIX Systems Laboratory,
Chairman of AT&T Capital Corporation, Chairman of AT&T Paradyne Corporation and
Chairman of AT&T Venture
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Capital Group. Mr. Kavner also served as a member of AT&T's Executive Committee.
Mr. Kavner serves as a director of Fleet Financial Group, Ascent Entertainment,
Inc. and Tandem Computers, Inc.
Linwood A. Lacy, Jr.
Age: 53
Mr. Lacy has been a director of the Company since June 1996. From
October 1996 to October 1997 he has served as President and Chief Executive
Officer of Micro Warehouse Incorporated. From 1989 to May 1996, he served as the
Co-Chairman and Chief Executive Officer of Ingram Micro, Inc., a microcomputer
products distributor and a then wholly-owned subsidiary of Ingram Industries
Inc. From December 1993 to June 1995, Mr. Lacy was also President of Ingram
Industries Inc. From June 1995 until April 1996, he was President and CEO of
Ingram Industries Inc., and from April 1996 to May 1996 served as its Vice
Chairman. Mr. Lacy serves as a director of Entex Information Services, Inc.
Paul McNulty
Age: 36
Mr. McNulty has been a Director of the Company since November 1996. Mr.
McNulty has been a Managing Director of Soros Fund Management ("SFM"), a New
York-based investment firm, since January 1996, and was a Securities Analyst at
SFM from January 1993 until January 1996. Prior thereto, Mr. McNulty was
employed as an Associate at MVP Ventures, a venture capital firm in Boston,
Massachusetts.
Kevin M. O'Donnell
Age: 47
Mr. O'Donnell, a co-founder of the Company, has been a director of the
Company since its inception. Mr. O'Donnell is President of O'Donnell &
Associates, a venture capital firm specializing in emerging high technology
companies. In 1982, Mr. O'Donnell founded Government Technology Services, Inc.,
a reseller of computer equipment to the federal government, and from 1982 to
1990 served as its Chairman, Chief Executive Officer and President.
Reed E. Slatkin
Age: 49
Mr. Slatkin, a co-founder of the Company, has been a director of
the Company since its inception. Mr. Slatkin is a private investor and money
manager who has invested in public and private companies for the last 15 years.
Mr. Slatkin is a director of Havenwood Ventures, Inc.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
VOTE "FOR" THE ELECTION AS DIRECTORS OF THE NOMINEES NAMED ABOVE.
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Information Regarding Investor Directors
Because the two Investor Directors are elected by Sprint, the following
biographies are provided for Stockholder informational purposes only.
William T. Esrey
Age: 58
Mr. Esrey was designated a director of the Company in June 1998. Mr.
Esrey is the Chairman and Chief Executive Officer of Sprint, and has served as
Chairman of Sprint since 1990, Chief Executive Officer since 1985 and a Director
since 1985. Mr. Esrey is a director of Duke Energy Corporation, The Equitable
Life Assurance
Society of the United States, Everen Capital Corporation and General Mills, Inc.
Patti S. Manuel
Age: 42
Ms. Manuel was designated a director of the Company in June, 1998.
Ms. Manuel is the President and Chief Operating Officer - Long Distance Division
of Sprint and President and Chief Operating Officer of Sprint, L.P., and has
served in those capacities since February, 1998. Ms. Manuel has also served as
President of Sprint Business, a division of Sprint, L.P. since May 1997. Ms.
Manuel served as President of Sales and Marketing for Sprint Business from 1994
to 1997. Ms. Manuel was named President of Marketing for Sprint Business in
1993.
Additional Information Concerning The Board Of Directors
The Company's Board of Directors held five (5) meetings during 1997.
The Board has an Audit Committee and a Compensation Committee, but does not have
a Nominating Committee. During 1997, no director attended less than 75% of the
aggregate number of meetings of the Board and the committees of the Board on
which he served that were held during his term as a director of the Company.
Committees of the Board of Directors. Presently the Compensation
Committee of the Board of Directors consists of Messrs. Lacy, O'Donnell and
Slatkin. The Compensation Committee establishes cash and long-term incentive
compensation for executive officers and other key employees of the Company. The
Compensation Committee also administers the Company's 1995 Incentive Stock
Option Plan. The Compensation Committee held three (3) meetings in 1997.
Presently the Audit Committee of the Board of Directors consists of
Messrs. Azeez, Kavner and Slatkin. The Audit Committee is responsible for making
recommendations to the Board regarding the selection of independent auditors,
reviews the results and scope of audits and other services provided by the
Company's independent auditors and reviews and evaluates the Company's internal
audit and control functions. The Audit Committee held one (1) meeting in 1997.
The Investor Directors have the right to appoint one Investor Director
to each committee of the Board of Directors.
Director Compensation. Directors do not receive cash compensation for
serving in that capacity, but are reimbursed for the expenses they incur in
attending meetings of the Board or committees thereof. Non-employee directors
are eligible to receive options to purchase Common Stock awarded under the
Company's Directors Stock Option Plan.
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Executive Officers
The executive officers of the Company serve at the discretion of
the Board of Directors and presently include Messrs. Sky D. Dayton, Charles G.
Betty, Grayson L. Hoberg, David R. Tommela, Brinton O.C. Young and Dr. Richard
D. Edmiston. See "Information Regarding Directors" for information regarding
Messrs. Dayton and Betty.
Grayson L. Hoberg
Age: 39
Mr. Hoberg has served as Vice President, Finance and Administration and
Chief Financial Officer of the Company since December 1997. From September 1993
to December 1997, he served in various capacities for, and ultimately as, the
Vice President of Business Operations for TCI.NET, the Internet Division of TCI
Cable. From December 1991 to September 1993, he was Manager of Information
Systems at Coors Brewery. From January 1988 to December 1991, he was Consulting
Manager at Price Waterhouse.
David R. Tommela
Age: 59
Mr. Tommela has served as Vice President, Operations of the Company
since December 1995. From 1973 to August 1995, he served in various capacities
for, and ultimately as the Chief Information Officer of Southern California
Edison Company, an electric power utility.
Brinton O.C. Young
Age: 46
Mr. Young has served as Vice President, Strategic Planning of the
Company since March 1996. From 1990 to 1996, Mr. Young was President of Young &
Associates, a consulting firm specializing in strategic planning for high growth
companies.
Dr. Richard D. Edmiston
Age: 55
Dr. Edmiston has served as Vice President of Research and Development
of the Company since January 1997. From December 1992 to January 1997, Dr.
Edmiston was Vice President of Network Planning and Architecture at BBN
Corporation, a leading Internet research and development organization, and the
founder of BBN Planet, a leading provider of Internet services to businesses.
From September 1990 to November 1992, Dr. Edmiston managed distributed computer
and information systems research at GTE Laboratories.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's directors, executive officers and persons who own
beneficially more than 10% of the Company's Common Stock to file reports of
ownership and changes in ownership of such stock with the Securities and
Exchange Commission (the "SEC") and the National Association of Securities
Dealers, Inc. These persons are also required by SEC regulations to furnish the
Company with copies of all such forms they file. To the Company's knowledge,
based solely on a review of the copies of such reports furnished to the Company
and
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written representations that no other reports were required, all of the
Company's reporting persons complied during fiscal 1997 with all applicable
Section 16(a) filing requirements.
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
executives officers named in the Summary Compensation Table included elsewhere
herein, 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
July 10, 1998, the Record Date. 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 (2) Class
----------------------------------------- ------------------------ -----
<S> <C> <C>
Sky D. Dayton............................. 1,397,286 (3) 9.8%
Reed E. Slatkin........................... 1,064,183 (4) 7.4
Kevin M. O'Donnell........................ 978,016 (5) 6.8
Sidney Azeez.............................. 504,772 (6) 3.6
Charles G. Betty.......................... 197,117 (7) 1.4
Linwood A. Lacy, Jr....................... 68,437 (8) *
Robert M. Kavner.......................... 40,581 (9) *
Paul McNulty.............................. 309(10) *
Brinton O.C. Young........................ 65,625(11) *
Dr. Richard D. Edmiston................... 11,750(12) *
Grayson L. Hoberg......................... 7,500(13) *
David R. Tommela.......................... 7,875(14) *
William T. Esrey.......................... 1,495,018(15) 10.5
Patti S. Manuel........................... 1,495,018(16) 10.5
Quantum Industrial Partners LDC........... 945,466(17) 6.6
Sprint Corporation........................ 1,495,018(18) 10.5
All directors and executive officers as a group
(14 persons)............................ 5,838,469(19) 39.4
</TABLE>
- ----------------------
* Represents beneficial ownership of less than 1% of the Company's Common Stock.
(1) Except as otherwise indicated by footnote (i) the named person has sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owed, and (ii) the address of the named person is
that of the Company.
(2) Beneficial ownership is determined in accordance with the rules of the SEC,
based on factors including voting and investment power with respect to
shares, subject to applicable community property laws. Shares of Common
Stock
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subject to options or warrants exercisable within 60 days of June 10,
1998 are deemed outstanding for the purpose of computing the percentage
ownership of the person holding such options or warrants, but are not
deemed outstanding for computing the percentage ownership of any other
person.
(3) Includes options to purchase 12,500 shares of Common Stock.
(4) 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.
(5) Includes (i) 7,538 shares of Common Stock 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.
(6) Includes 303,049 shares of Common Stock held by members of Mr. Azeez's
family.
(7) Includes options to purchase 138,750 shares of Common Stock.
(8) Includes options to purchase 40,000 shares of Common Stock.
(9) Includes (i) warrants to purchase 3,334 shares of Common Stock, and (ii)
options to purchase 20,000 shares of Common Stock.
(10) Includes warrants to purchase 50 shares of Common Stock.
(11) Includes options to purchase 55,625 shares of Common Stock.
(12) Includes options to purchase 3,750 shares of Common Stock.
(13) Represents options to purchase 7,500 shares of Common Stock.
(14) Includes options to purchase 7,875 shares of Common Stock.
(15) Includes 1,495,018 shares of stock beneficially owned by Sprint and which
Mr. Esrey may be deemed to beneficially own.
(16) Includes 1,495,018 shares of stock beneficially owned by Sprint and which
Ms. Manuel may be deemed to beneficially own.
(17) Includes warrants to purchase 66,700 shares of Common Stock. Quantum
Industrial Partners LDC ("Quantum Industrial") has vested investment
discretion with respect to its portfolio investments, including the Common
Stock, in Soros Fund Management LLC, a Delaware limited liability company
of which Mr. Soros serves as Chairman ("SFM"). Mr. Soros may be deemed to
be the beneficial owner of the Common Stock held by Quantum Industrial.
The shares shown exclude 126,489 shares of Common Stock and warrants to
purchase 23,600 shares of Common Stock held directly by Mr. Soros and
26,720 shares of Common Stock and warrants to purchase 5,000 shares of
Common Stock held by trusts established for the benefit of the children of
Mr. Soros. The shares shown also exclude shares of Common Stock and
warrants to purchase 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 Corporation Company N.V., Kaya Flamboyan 9, Willemstad, Curacao,
Netherlands Antilles.
(18) Includes 1,250,0000 shares of Common Stock acquired by Sprint on June 5,
1998 but excludes 4,102,941 shares of Common Stock into which Sprint's
Series A Convertible Preferred Stock would be convertible assuming
acceleration of certain dividend rights. The Series A Convertible
Preferred Stock is not convertible until June 5, 1999. Also includes
245,018 shares of Common Stock which Sprint purchased in the Company's
secondary offering pursuant to certain preemptive rights under the terms
of the transaction with Sprint. Sprint's address is 2330 Shawnee Mission
Parkway, Westwood, Kansas 66205.
(19) Includes (i) options and warrants to purchase 614,384 shares of Common
Stock, (ii) 322,661 shares of Common Stock owned by family members or
affiliates of certain members of the group.
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EXECUTIVE COMPENSATION
Pursuant to SEC rules for proxy statement disclosure of executive
compensation, the Compensation Committee of the Board of Directors of the
Company has prepared the following Report on Executive Compensation. The
Committee intends that this report clearly describe the current executive
compensation program of the Company, including the underlying philosophy of the
program and the specific performance criteria on which executive compensation is
based. This report also discusses in detail the compensation paid to the
Company's Chief Executive Officer, Mr. Charles G. Betty.
Compensation Committee Report on Executive Compensation
This report by the Compensation Committee of the Board of Directors
(the "Committee") discusses the Committee's compensation objectives and policies
applicable to the Company's executive officers. The report reviews the
Committee's policy generally with respect to the compensation of all executive
officers as a group for fiscal 1997 and specifically reviews the compensation
established for the Company's Chief Executive Officer as reported in the Summary
Compensation Table. The Committee is composed entirely of non-employee directors
of the Company. The Committee also administers the Company's Stock Option Plans.
Compensation Philosophy
The Committee consists of three non-employee directors. The Committee
is responsible for setting cash and long-term incentive compensation for
executive officers and other key employees of the Company.
The Company's compensation policies are intended to create a direct
relationship between the level of compensation paid to executives and the
Company's current and long-term level of performance. The Committee believes
that this relationship is best implemented by providing a compensation package
of separate components, all of which are designed to enhance the Company's
overall performance. The components are base salary, short-term compensation in
the form of annual bonuses and long-term incentive compensation in the form of
stock options.
Base Salaries
The base salaries for the Company's executive officers for 1997 was
established subjectively by the Committee. The salaries of the executive
officers were established based on the market environment and the Company's need
to attract and retain key personnel for whom the Company must compete against
larger, more established companies.
Short-Term Annual Bonuses
Annual bonuses established for the executive officers are intended to
provide an incentive for improved performance in the short term. Target bonus
levels for the executive officers are established by the Committee at the
beginning of the year. For 1997, these bonuses were established based on member
count level, cash flow and profitability.
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Long-Term Incentive Compensation
The Company's long-term incentive compensation plan for its executive
officers is based on the Company's stock option plans. These plans promote
ownership of the Company's Common Stock which, in turn, provides a common
interest between the stockholder of the Company and the executive officers of
the Company. In establishing a long-term compensation plan, the Board of
Directors concluded that any compensation received under such plans should be
directly linked to the performance of the Company, as reflected by increases in
the price of its Common Stock, and the contribution of the individual thereto.
Options have an exercise price equal to the fair market value of the shares on
the date of grant and, to encourage a long-term perspective, have an exercise
period of ten years and generally vest over five years. The number of options
granted to executive officers is determined by the Committee, which is charged
with administering the stock option plans.
The base salaries, targeted bonus amounts and number of stock options
established for or granted to the Company's executive officers for 1997 are
based, in part on the Committee's understanding of compensation amounts and
forms paid to persons in comparable roles performing at comparable levels at
other companies in the same or related industries. Such amounts however, mainly
reflect the subjective discretion of the members of the Committee based on the
evaluation of the Company's current and anticipated future financial
performance, the contribution of the individual executive officers to such
financial performance, the contribution of the individual executive officers to
the Company in areas not necessarily reflected by the Company's financial
performance and the most appropriate incentive to link the performance and
compensation of the executive officers to the stockholder's return on the
Company's Common Stock.
Compensation of the Chief Executive Officer
In January 1996, the Company entered into a two-year employment
agreement with Mr. Charles G. Betty which was renewed for an additional year in
December 1997. Under this agreement, during 1997 the Company compensated Mr.
Betty with a base salary of $240,000 plus a travel allowance of $8,363 for Mr.
Betty and his family and such other benefits as are generally made available to
other senior executives of the Company. The agreement further entitles Mr.
Betty, upon the attainment of certain performance goals, to an annual bonus of
up to $75,000. As a result of Mr. Betty's contributions not necessarily being
reflected in the Company's financial performance, the Committee reconsidered the
plan and in its discretion, allowed Mr. Betty to participate in the 1997 annual
bonus plan that provided for a cash bonus based on achieving certain member
count levels, cash flow and profitability awarded Mr. Betty an actual bonus of
$60,621. In December 1997 the Company amended Mr. Betty's agreement to increase
Mr. Betty's base salary to $300,000 for 1998.
Benefits
The Company believes that it must offer a competitive benefits program
to attract and retain all of its full time employees. Accordingly, the Company
provides the same medical and other benefits to its executive officers that are
generally available to its other employees.
12
<PAGE>
Limitations on Deductibility of Compensation
Under the 1993 Omnibus Budget Reconciliation Act, a portion of annual
compensation payable after 1993 to any of the Company's five highest paid
executive officers would not be deductible by the Company for federal income tax
purposes to the extent such officer's overall compensation exceeds $1,000,000.
Qualifying performance-based incentive compensation, however, would be both
deductible and excluded for purposes of calculating the $1,000,000 base.
Although the Committee does not presently intend to award compensation in excess
of the $1,000,000 cap, it will continue to address this issue when formulating
compensation arrangements for the Company's executive officers.
Submitted by: THE COMPENSATION COMMITTEE
Linwood A. Lacy, Jr.
Kevin M. O'Donnell
Reed E. Slatkin
The Compensation Committee Report on Executive Compensation shall not
be deemed to be incorporated by reference as a result of any general
incorporation by reference of this Proxy Statement or any part hereof in the
Company's 1997 Annual Report to Stockholders or its Report on Form 10-K.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Company's Board of Directors
currently consists of Messrs. Lacy, O'Donnell and Slatkin. No member of the
Compensation Committee was, during the last fiscal year, an officer or employee
of the Company nor was formerly an officer of the Company. The following
transactions involve, among others, members of the Compensation Committee and
are required to be described under the rules of the Securities and Exchange
Commission (the "SEC"):
In January 1996, Mr. Slatkin guaranteed a $1.5 million lease for
network equipment. As consideration for this agreement, the Company issued Mr.
Slatkin warrants to purchase 100,000 shares of Common Stock at an exercise price
of $4.84 per share, the amount then determined by the Board of Directors to
constitute the fair market value as of January 1996. The Company and Mr.
O'Donnell subsequently agreed to indemnify Mr. Slatkin against certain liability
arising out of this lease. As consideration for this agreement, Mr. Slatkin
transferred one-half of these warrants to Mr. O'Donnell.
In June 1996, the Company issued $2,950,000 of its 10% Promissory Notes
to 17 purchasers, including certain of its directors and more than five percent
stockholders. In connection with this financing, and as additional consideration
for the investment of these purchasers, the Company also issued warrants to
purchase 98,340 shares of Common Stock having an exercise price of $11.00 per
share. The 10% Promissory Notes were due on or before June 6, 1997 with interest
payable monthly until such date. The warrants are exercisable for five years
commencing on the date of issuance. The following directors and more than five
percent stockholders participated in this financing: Sidney Azeez, $200,000
note, 6,667 warrants; Robert M. Kavner, $100,000 note, 3,334 warrants; Kevin M.
O'Donnell, $225,000 note, 7,500 warrants; Reed E. Slatkin, $225,000 note, 7,500
warrants; and Storie Partners, L.P., $300,000 note, 10,000 warrants. The holders
of $725,000 of the 10% Promissory Notes including Messrs. Slatkin and Abbott and
Storie Partners, L.P., converted their indebtedness into 55,767 shares of Common
Stock upon consummation of the Company's initial public offering in January
1997. At that time, the Company also repaid the remaining balance of the 10%
Promissory Notes.
13
<PAGE>
In September 1997, the Company sold 1,459,759 shares of its Common
Stock to certain purchasers, including, among others, certain directors and
stockholders. The following directors and more than five percent stockholders
(including certain of their family members and affiliates) participated in this
financing: Reed E. Slatkin (55,810 shares); Sidney Azeez (46,512 shares);
Charles G. Betty (10,000 shares); Linwood A. Lacy, Jr. (23,256 shares); Richard
D. Edmiston (10,000 shares); Brinton O.C. Young (10,000 shares); and Quantum
Industrial Partners LDC (465,117 shares).
Until October 1997, Mr. Lacy also served as President and Chief
Executive Officer of Micro Warehouse Incorporated ("Micro Warehouse"), one of
the Company's affinity marketing partners. For the year ended December 31, 1997,
the Company paid Micro Warehouse approximately $35,200 in bounties for new
Company members generated by Micro Warehouse.
Mr. Esrey serves as Chairman of the Board of Directors and Chief
Executive Officer of Sprint. Ms. Manuel serves as President of Marketing of
Sprint. On June 5, 1998 the Company consummated a series of transactions with
Sprint which, among other things, resulted in Sprint purchasing 1.25 million
shares of the Company's Common Stock at $45 per share in a tender offer and
purchasing approximately 4.1 million shares of the Company's Series A
Convertible Preferred Stock in exchange for certain commercial and financial
arrangements (the "Sprint Transaction").
The Company believes that the foregoing transactions were on terms no
less favorable to the Company than could be obtained from unaffiliated parties.
It is the Company's current policy that all transactions by the Company with
officers, directors, more than five percent stockholders and their affiliates
will be entered into only if such transactions are approved by a majority of
disinterested independent directors and are on terms such directors believe are
no less favorable to the Company than could be obtained from unaffiliated
parties.
Executive Officer Compensation
Table I - Summary Compensation Table
The following table presents certain information required by the SEC
relating to various forms of compensation awarded to, earned by or paid to the
Company's Chief Executive Officer and the five most highly compensated executive
officers other than the Chief Executive Officer who earned more than $100,000
during fiscal 1997 and was serving at the end of fiscal 1997. Such executive
officers are referred to as the "Named Executive Officers."
<TABLE>
<CAPTION>
Long Term
Compensation
-----------------
Annual Compensation Securities
------------------- Underlying All Other
Name and Principal Position Year Salary Bonus Options (#) Compensation
--------------------------- ----- ------ ----- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Sky Dayton........................ 1997 $180,000 $45,411 -- --
Chairman (1) 1996 153,036 70,006 -- --
1995 97,726 16,573 250,000 --
Charles G. Betty.................. 1997 240,000 60,621 -- $ 10,578(2)
President and Chief Executive 1996 220,550 77,635 250,000 24,000(3)
Officer (1) 1995 -- -- -- --
Grayson L. Hoberg (4)............. 1997 8,654 -- 100,000 --
Vice President, Finance and 1996 -- -- -- --
Administration 1995 -- -- -- --
and Chief Financial Officer
14
<PAGE>
David R. Tommela.................. 1997 132,000 26,723 -- 1,218(5)
Vice President, Operations 1996 130,392 34,439 12,500 --
1995 8,862 -- 37,500 --
Richard D. Edmiston............... 1997 185,000 33,398(6) 27,500 33,626(7)
Vice President, Research and 1996 -- -- --
Development 1995 -- -- --
Brinton O.C. Young................ 1997 140,000 29,754 -- --
Vice President, Strategic Planning 1996 73,681 18,409 112,500 --
1995 -- -- -- --
</TABLE>
- ----------
(1) Mr. Dayton served as the Company's President until January 15, 1996
when Mr. Betty's employment commenced. Mr. Dayton served as the
Company's Chief Executive Officer until May 7, 1996 when Mr. Betty was
appointed to that position.
(2) Consists of reimbursement of $8,363 of travel expenses pursuant to Mr.
Betty's employment agreement and $2,215 in matching contributions to
Mr. Betty's account under the Company's 401(k) plan.
(3) Consists of reimbursement of travel expenses pursuant to Mr. Betty's
employment agreement.
(4) Mr. Hoberg commenced employment on December 5, 1997 with an annualized
base salary of $150,000.
(5) Consists of matching contributions to Mr. Tommela's account under the
Company's 401(k) plan.
(6) Includes a signing bonus of $15,000 paid to Mr. Edmiston pursuant to
his employment with the Company.
(7) Consists of reimbursement of $32,203 of travel expenses pursuant to Mr.
Edmiston's employment and $1,423 in matching contributions to Mr.
Edmiston 's account under the Company's 401(k) plan.
Table II - Option Grants in Fiscal 1997
This table presents information regarding options granted to the
Company's Named Executive Officers during fiscal 1997 to purchase shares of the
Company's Common Stock. In accordance with SEC rules, the table shows the
hypothetical "gains" or "option spreads" that would exist for the respective
options based on assumed rates of annual compound stock price of 5% and 10% from
the date the options were granted over the full option term.
<TABLE>
<CAPTION>
Potential Realizable Value
% of Total at Assumed Annual Rates
Number of Options of Stock Price Appreciation
Securities Granted to for the Option Term (1)
---------------------------
5% 10%
Underlying Employees Exercise ------- -------
Name Options in Fiscal Price Expiration
Granted (#) Year ($/sh) Date
----------- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Grayson L. Hoberg..... 50,000(2) 12.6% $16.00 11/07/07 $1,297,207 $2,539,443
50,000(3) 12.6 19.88 12/05/07 1,103,452 2,345,693
Richard D. Edmiston... 27,500(4) 7.0% 13.00 1/23/07 795,961 1,479,194
</TABLE>
- -----------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These
gains are based on assumed rates of stock price appreciation of 5% and
10% compounded annually from the date the respective options were
granted to their expiration date based upon a price of $25.75 per
share, the closing price of a share of Common Stock on December 31,
1997. These assumptions are not intended to forecast future
appreciation of the
15
<PAGE>
Company's stock price. The potential realizable value computation does
not take into account federal or state income tax consequences of
option exercises or sales of appreciated stock.
(2) Vests in equal increments of 5% per quarter over the five-year
period beginning on the date of grant, November 7, 1997.
(3) Vests in equal increments of 5% per quarter over the five-year
period beginning on the date of grant, December 5, 1997.
(4) Vests in equal increments of 5% per quarter over the five-year
period beginning on the date of grant, January 23, 1997.
Table III - Option Exercises In Fiscal 1997 and Fiscal 1997 Year-End Option
Values
None of the Named Executive Officers exercised any stock options during
fiscal 1997. The following table shows the number of shares of Common Stock
subject to exercisable and unexercisable stock options held by each of the Named
Executive Officers as of December 31, 1997. The table also reflects the values
of such options based on the positive spread between the exercise price of such
options and $25.75, which was the closing sales price of a share of Common Stock
reported on the Nasdaq National Market on December 31, 1997.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options (1)
------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Sky D. Dayton.......................... 125,000 125,000 $2,992,500 $2,992,500
Charles G. Betty....................... 80,000 170,000 1,557,300 3,208,200
Grayson L. Hoberg...................... - 100,000 - 781,250
David R. Tommela....................... 18,750 31,250 373,613 610,388
Richard D. Edmiston.................... 4,125 23,375 52,594 298,031
Brinton O.C. Young..................... 33,750 78,750 539,663 1,259,213
</TABLE>
- -----------
(1) The value of "in-the-money" options represents the difference between
the exercise price of stock options and $25.75, the closilng saes price
reported by the Nasdaq National Market of the Company's Common Stock
for December 31, 1997.
Convertible Securities Vesting Plan
In December 1997, the Board of Directors adopted a plan whereby the
vesting of stock options and warrants held by certain directors and employees
will accelerate upon a change in control of the Company. Generally, a change in
control includes the sale of all or substantially all of the Company's assets or
the acquisition by a person or group (as that term is defined in Section 13(d)
of the Securities Exchange Act of 1934, as amended, and the rules promulgated
thereunder) of 25% or more of the Company's outstanding voting securities. In
connection with the Sprint Transaction, the Company amended this plan so that
the Sprint Transaction would not constitute a change in control.
Key Employee Compensation Continuation Plan
In January 1998 the Board of Directors adopted a plan whereby those
employees identified as "key" or critical to the Company are entitled to a
severance payment equal to fifty percent (50%) of their compensation and certain
other benefits received during the twelve-month period ending upon their
termination. The Company adopted this plan to attract the highest quality
individuals to become key members of the Company's leadership team and to retain
the high-quality individuals who are presently members of the Company's
leadership team.
16
<PAGE>
Employment Agreement
Effective April 1998, the Company amended and restated its employment
agreement with Mr. Charles G. Betty. Under this agreement, the Company continues
to employ Mr. Betty as its President and Chief Executive Officer at a salary of
not less than $300,000 per year, plus a $24,000 a year travel allowance for Mr.
Betty and his family, and such other benefits as are generally made available to
other senior executives of the Company. Mr. Betty is entitled, upon the
attainment of specified performance goals, to an annual bonus in the amount
equal to 50% of his base salary. In addition, the agreement provides that Mr.
Betty will receive a severance payment equal to 100% of his then current base
salary, will receive the full bonus to which he would have otherwise been
entitled during the year in which the termination occurs, and will continue to
receive health, medical, life and liability insurance coverage for one year (i)
if he is terminated by the Company other than for "cause" as defined in the
agreement, (ii) if the Company elects not to extend the term of the employment
agreement at the end of the first three-year term or any yearly extension or
(iii) if Mr. Betty terminates his employment because of a breach of the
employment agreement by the Company. In connection with the amended and restated
employment agreement, Mr. Betty was granted an option to purchase an additional
150,000 shares of Common Stock at an exercise price of $44.75 per share 75,000
of which vested June 5, 1998. In the event of a "change in control," as defined
in the agreement, the termination of Mr. Betty by the Company other than for
"cause" or if Mr. Betty terminates his employment because of a breach of the
agreement by the Company, all unvested options held by Mr.
Betty will vest immediately.
Stock Performance Graph
The following indexed line graph indicates the Company's total return
to stockholders from January 22, 1997, the date on which the Company's Common
Stock began trading on the Nasdaq National Market, to December 31, 1997, as
compared to the total return for the Nasdaq Stock Market - US Index and the
Nasdaq Telecommunications Index for the same period. The calculations in the
graph assume that $100 was invested on January 22, 1997, in each of the
Company's Common Stock and each index and also assume dividend reinvestment.
<TABLE>
<CAPTION>
- ----------------------------------------- -------------- -------------- --------------- -------------- --------------
1-22-97 3-31-97 6-30-97 9-30-97 12-31-97
- ----------------------------------------- -------------- -------------- --------------- -------------- --------------
- ----------------------------------------- -------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
EarthLink Network, Inc. $100 $96 $100 $144 $198
- ----------------------------------------- -------------- -------------- --------------- -------------- --------------
- ----------------------------------------- -------------- -------------- --------------- -------------- --------------
Nasdaq Stock Market - US Index $100 $88 $104 $122 $114
- ----------------------------------------- -------------- -------------- --------------- -------------- --------------
- ----------------------------------------- -------------- -------------- --------------- -------------- --------------
Telecommunications Index $100 $89 $112 $130 $141
- ----------------------------------------- -------------- -------------- --------------- -------------- --------------
</TABLE>
17
<PAGE>
PROPOSAL 2 - AMENDMENT OF 1995 STOCK OPTION PLAN
On April 30, 1998, the Board of Directors adopted and recommended for
submission to the Stockholders for their approval a proposal to amend the
Company's Stock Option Plan. The proposed amendment to the Stock Option Plan
will increase the number of shares of Common Stock reserved for issuance under
the Stock Option Plan from 1,850,000 to 2,850,000. The proposed amendment is
necessary to reserve a sufficient number of shares of Common Stock under the
Stock Option Plan to allow the Company to grant stock options to existing and
future employees.
The purposes of the Stock Option Plan are to attract and retain the
best available personnel, to provide additional incentive to the employees of
the Company and its subsidiaries, if any, to promote the success of the
Company's business and to enable the Company's employees to share in the growth
and prosperity of the Company by providing them with an opportunity to purchase
stock in the Company.
The Board has reserved 1,850,000 shares of Common Stock for grants of
options under the Stock Option Plan. Since the Company's inception through July
10, 1998, the Compensation Committee of the Company's Board of Directors has
granted options to purchase 1,826,575 shares of Common Stock under the Stock
Option Plan. Of the options granted to date, options to purchase 242,824 shares
have been recaptured from employees whose employment with the Company has
terminated. Accordingly, if the proposal to amend and restate the Stock Option
Plan is approved, there will be 1,103,749 shares of Common Stock available for
future grants under the Stock Option Plan. The primary features of the Stock
Option Plan are summarized below.
Plan Summary and Other Information
General. Under the Stock Option Plan, options may be granted to
employees of the Company and its Subsidiaries (as defined in the Stock Option
Plan), if any. As of December 31, 1997, there were approximately 800 persons
eligible to receive grants of options under the Stock Option Plan, subject to
the Compensation Committee's approval of individual grants.
The Stock Option Plan offers to eligible employees ("Participants" or,
individually, a "Participant") the opportunity to purchase shares of Common
Stock through stock options granted to them under the Stock Option Plan. A stock
option entitles the optionee to purchase shares of Common Stock from the Company
at the exercise price. Two types of options, incentive stock options ("ISOs")
and nonstatutory stock options, may be granted under the Stock Option Plan. The
two types of options differ primarily in the tax consequences associated with
the exercise of an option and the disposition of the shares of Common Stock
received upon exercise of an option. See "--Certain Federal Income Tax
Consequences." No Participant may be granted options that relate to more than
250,000 shares of Common Stock during any one-year period.
Grants Under the Stock Option Plan. The Compensation Committee, which
is comprised of two or more non-employee directors appointed by the Board of
Directors, administers the Stock Option Plan and designates Participants to whom
options are granted, specifies whether the option is intended to be an ISO or a
nonstatutory stock option and specifies the number of shares of Common Stock
subject to each option. All options granted under the Stock Option Plan are
evidenced by option agreements ("Option Agreements" or, individually, an "Option
Agreement") that are subject to the applicable provisions of the Stock Option
Plan and to such other terms, conditions and restrictions as the Compensation
Committee may determine to be appropriate.
18
<PAGE>
In the case of ISOs, the aggregate Fair Market Value (as defined in the
Plan) of Common Stock with respect to which stock options intended to meet the
requirements of Code Section 422 of the Internal Revenue Code of 1986, as
amended, become exercisable for the first time by an individual during any
calendar year under all plans of the Company and its subsidiaries may not exceed
$100,000; provided further, that if the limitation is exceeded, the ISOs that
cause the limitation to be exceeded will be treated as nonstatutory stock
options.
Set forth below is the number of incentive stock options that had been
granted to certain employees of the Company under the Stock Option Plan and that
remained outstanding as of December 31, 1997. No nonstatutory stock options have
been granted under the Stock Option Plan. The closing sales price reported by
the Nasdaq National Market of the Company's Common Stock on December 31, 1997
was $25.75 per share.
<TABLE>
<CAPTION>
Incentive
Name Options Granted(1)
- ---- ------------------
<S> <C>
Sky D. Dayton......................... --
Charles G. Betty...................... 175,000(2)
David Tommela......................... 50,000(3)
Brinton O.C. Young.................... 112,500(4)
Grayson L. Hoberg..................... 50,000(5)
Richard D. Edmiston................... 27,500(6)
All Executive Officers
as a Group (6 Persons)............... 415,000
Non-Executive Officer
Employees as a Group................. 698,611(7)
</TABLE>
- -----------
(1) All stock options vest in equal increments of 5% per quarter over the
five-year period beginning on the date of grant.
(2) Granted January 15, 1996.
(3) 37,500 granted December 4, 1995; 12,500 granted May 7, 1996.
(4) Granted May 7, 1996.
(5) Granted December 5, 1997.
(6) Granted January 23, 1997.
(7) Represents options granted to 324 employees under the Stock Option
Plan. This figure was adjusted to reflect both the recapture of 221,807
options pursuant to employee terminations and the exercise of 48,957
options by employees as of December 31, 1997.
Although not determinable at the time of this Proxy Statement, the
Compensation Committee of the Board of Directors may award certain of the
Company's executive officers incentive and nonstatutory stock options under the
amended Stock Option Plan, pending the approval of this amendment and the
Compensation Committee's review of the Company's executive compensation policies
for fiscal 1998.
19
<PAGE>
Exercise Price. The exercise price of a share of Common Stock purchased
upon the exercise of an option granted under the Stock Option Plan (the
"Exercise Price") is determined by the Compensation Committee on the date the
option is granted and set forth in the applicable Option Agreement. The Exercise
Price of an ISO may not be less than the Fair Market Value of a share of Common
Stock on the date the option is granted. With respect to each grant of an ISO to
a Participant who beneficially owns more than 10% of the combined voting power
of the Company or any of its Subsidiaries (determined by applying certain
attribution rules), the Exercise Price may not be less than 110% of the Fair
Market Value of the Common Stock on the date the option is granted. These
Exercise Price requirements do not apply to nonstatutory stock options. However,
under the Stock Option Plan, the exercise price of a nonstatutory stock option
may not be less than 85% of the Fair Market Value of a share of Common Stock on
the date of grant.
Exercise and Payment. An option may be exercised in accordance with the
Stock Option Plan and such other terms and conditions as the Compensation
Committee may prescribe. Each option is exercisable by the Participant at such
time or times, or upon the occurrence of such event or events, and in such
amounts, as the Compensation Committee shall specify in the Option Agreement;
provided, however, that subsequent to the grant of an option, the Compensation
Committee, at any time before complete termination of such option, may
accelerate the time or times at which the option may be exercised, in whole or
in part, and may permit the Participant or any other designated person to
exercise the option, or any portion thereof, for all or part of the remaining
option term, notwithstanding any provision of the Option Agreement to the
contrary.
The maximum period during which an ISO may be exercised is determined
by the Compensation Committee on the date of grant, but may not be longer than
ten years, provided that, any ISO granted to a Participant who beneficially owns
more than 10% of the combined voting power of the Company or any of its
Subsidiaries (determined by applying certain attribution rules) may not be
exercisable after the expiration of five years after the date of grant. The term
of any option is specified in the applicable Option Agreement. An option is
considered exercised on the date the Exercise Price is paid to the Company.
The Exercise Price must be paid in cash or a cash equivalent authorized
by the Compensation Committee. If the Option Agreement provides, the payment of
all or part of the Exercise Price may be made by surrendering shares of Common
Stock that have been owned by the Participant for at least six months prior to
the date of exercise to the Company to the extent sufficient to pay the full
Exercise Price. The Exercise Price may also be paid by having the Company
withhold a number of shares, the Fair Market Value of which is sufficient to
satisfy the Exercise Price.
Administration. The Stock Option Plan is administered by the
Compensation Committee of the Board of Directors. Compensation Committee members
generally may not be employees of or consultants to the Company or its
Subsidiaries and serve at the pleasure of the Board of Directors. All members of
the Compensation Committee are appointed (and may be removed) by and serve for
such terms as determined by the Board of Directors. The Compensation Committee
has the authority to interpret all provisions of the Stock Option Plan; to
prescribe the form of Option Agreements; to adopt, amend and rescind rules and
regulations pertaining to the administration of the Stock Option Plan; and to
make all other determinations necessary or advisable for the administration of
the Stock Option Plan. The Compensation Committee's determinations under the
Stock Option Plan need not be uniform and may be made by it selectively among
persons who receive, or are eligible to receive, grants under the Stock Option
Plan (whether or not such persons are similarly situated).
20
<PAGE>
Certain Federal Income Tax Consequences
The following discussion outlines certain federal income tax
consequences of participation in the Stock Option Plan. Individual circumstances
may vary these results. Additionally, federal income tax laws and regulations
are complex and frequently amended, and each Participant should rely on his own
tax counsel for advice regarding the federal income tax consequences of
participation in the Stock Option Plan.
Federal Income Tax Treatment of ISOs. A Participant generally will not
recognize taxable income on the grant or the exercise of an ISO (although the
exercise of an ISO can increase the Participant's alternative minimum tax
liability because the difference between the fair market value of the Common
Stock acquired and the Exercise Price will be included in the Participant's
alternative minimum taxable income). A Participant will recognize taxable income
if and when the Participant disposes of the shares of Common Stock acquired
under the ISO. If the disposition occurs more than two years after the grant of
the ISO and more than one year after the shares of Common Stock are transferred
to the Participant on exercise of the ISO (the "ISO Holding Period"), the
Participant will recognize capital gain (or loss) equal to the excess (or
deficiency) of the amount realized from disposition of the Common Stock less the
Participant's tax basis in the Common Stock. A Participant's tax basis in the
Common Stock generally is the amount the Participant paid on exercise of the
ISO. The capital gain (or loss) will be long-term or short-term depending on the
length of time the Participant held the shares of Common Stock.
If Common Stock acquired under an ISO is disposed of before the
expiration of the ISO Holding Period described in the preceding paragraph (a
"Disqualifying Disposition"), a Participant generally will recognize as ordinary
income in the year of the Disqualifying Disposition the difference between the
fair market value of the Common Stock on the date of exercise of the ISO and the
Exercise Price paid by the Participant. Any additional gain will be treated as
long-term or short-term capital gain depending on the length of time the
Participant held the shares of Common Stock.
A special rule applies to a Disqualifying Disposition of Common Stock
where the amount realized on the disposition is less than the fair market value
of the Common Stock on the date of exercise of the ISO. In that event, the
Participant generally will recognize as ordinary income the difference between
the amount realized on the disposition of the Common Stock and the Exercise
Price paid by the Participant instead of the ordinary income amount described
above for a Disqualifying Disposition. Any additional loss will be treated as a
long-term or short-term capital loss depending on the length of time the
Participant held the shares of Common Stock.
The Company generally will not be entitled to a federal income tax
deduction with respect to the grant or exercise of an ISO. In the event a
Participant disposes of Common Stock acquired under an ISO in a Disqualifying
Disposition, the Company generally will be entitled to a federal income tax
deduction equal to the amount of ordinary income the Participant is to
recognize.
The foregoing discussion assumes that the Participant exercises the ISO
while the Participant is an employee of the Company or within three months of
termination of employment. The three-month period is extended to one year if the
Participant terminates employment as a result of a total and permanent
disability and indefinitely if the termination is caused by the Participant's
death. If the Participant exercises the ISO outside of these time limits, the
Participant's tax consequences will be the same as described for nonstatutory
stock options. However, the Board of Directors may shorten the time period
during which the Participant may exercise any ISO in the applicable Option
Agreement.
21
<PAGE>
Federal Income Tax Treatment of Nonstatutory Stock Options. A
Participant generally will not recognize taxable income on the grant of a
nonstatutory stock option. On the exercise of a nonstatutory stock option, a
Participant will recognize as ordinary income the difference between the fair
market value of the Common Stock acquired and the Exercise Price paid by the
Participant. A Participant's tax basis in the Common Stock acquired upon the
exercise of a nonstatutory stock option is the amount paid for the Common Stock
plus any amount included in income with respect to the exercise. The
Participant's holding period for the Common Stock begins on the day the Common
Stock is acquired. Any gain or loss that a Participant recognizes on a
subsequent disposition of Common Stock acquired upon the exercise of a
nonstatutory stock option generally will be long-term or short-term capital gain
or loss depending on the length of time the Participant held the shares of
Common Stock. The amount of the gain (or loss) will equal the excess (or
deficiency) of the amount realized on the subsequent disposition less the
Participant's tax basis in his shares of Common Stock.
The exercise of a nonstatutory stock option generally will entitle the
Company to claim a federal income tax deduction equal to the amount of ordinary
income the Participant is to recognize. The amount of ordinary income the
Participant is to recognize on the exercise of a nonstatutory stock option will
constitute wages for withholding and employment tax purposes. Accordingly, the
Company will be required to withhold or obtain payment from the Participant, as
each Option Agreement permits, for the amount of required withholding and
employment taxes.
Special Rules. The foregoing discussion assumes that the Participant
pays the Exercise Price in cash. Special rules apply to a Participant who
exercises an ISO or a nonstatutory stock option by paying the Exercise Price, in
whole or in part, by the transfer of shares of Common Stock that the Participant
already owns.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
"FOR" THE AMENDMENT TO THE 1995 STOCK OPTION PLAN AS DESCRIBED ABOVE.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before
the Annual Meeting. However, if any other matters are properly brought before
the Annual Meeting, the persons appointed in the accompanying proxy intend to
vote the Shares represented thereby in accordance with their best judgment.
SOLICITATION OF PROXIES
The cost of the solicitation of proxies on behalf of the Company will
be borne by the Company. The Company has engaged American Stock Transfer & Trust
Company to assist it in the proxy solicitation process and will pay such firm
approximately $1,000 for its services (exclusive of postage fees). In addition,
directors, officers and other employees of the Company may, without additional
compensation except reimbursement for actual expenses, solicit proxies by mail
in person or by telecommunication. The Company will reimburse brokers,
fiduciaries, custodians and other nominees for out-of-pocket expenses incurred
in sending the Company's proxy materials to, and obtaining instructions relating
to such materials from, beneficial owners.
22
<PAGE>
INDEPENDENT AUDITORS
The firm of Price Waterhouse LLP served as the Company's independent
auditors for the fiscal year ended December 31, 1997 and the Board of Directors
has reappointed this firm as the Company's independent auditors for the fiscal
year ending December 31, 1998. A representative of this firm is expected to
attend the Annual Meeting to respond to questions from stockholders and to make
a statement if he or she so desires.
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Any proposal that a stockholder may desire to have included in the
Company's proxy material for presentation at the 1999 Annual Meeting must be
received by the Company at its executive offices at 3100 New York Drive,
Pasadena, California 91107, Attention Kirsten L. Hansen, Secretary, on or prior
to December 31, 1998.
ANNUAL REPORT
The Company's 1997 Annual Report to Stockholders (which is not part of
the Company's proxy soliciting material) is being mailed to the Company's
Stockholders with this proxy statement.
By order of the Board of Directors,
/s/ Sky D. Dayton
Sky D. Dayton
Chairman of the Board
Pasadena, California
August 3, 1998
23
<PAGE>
8888
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
EARTHLINK NETWORK, INC.
The undersigned stockholder(s) of EarthLink Network, Inc., a Delaware
corporation (the "Company"), hereby acknowledges receipt of the Notice of
Annual Meeting of Stockholders and Proxy Statement, for the Company's 1998
Annual Meeting, and hereby appoints Sky D. Dayton and Charles G. Betty, or
either of them, proxies and attorneys-in-fact, with full power of
substitution, on behalf and in the name of the undersigned, to represent the
undersigned at the 1998 Annual Meeting of Stockholders of the Company to be
held at 9:00 a.m. Pacific Standard Time on Friday, August 28, 1998 at 3100
New York Drive, Pasadena, California 91107 and at any adjournment(s) thereof,
and to vote all shares of Common Stock which the undersigned would be
entitled to vote if then and there personally present, on the matters set
forth on the reverse side of this proxy card.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
<PAGE>
Please Detach and Mail in the Envelope Provided
A /X/ Please mark your votes as in this example.
FOR all nominees WITHHOLD
listed at right, except authority to vote
as indicated below for all nominees
1. ELECTION OF
DIRECTORS: / / / /
Instructions: To withhold authority for any individual nominee, mark "FOR"
above, and write the name of the nominee or nominees as to whom you wish to
withhold authority in the space below. You may also use the space below to
cumulate votes with respect to one or more nominees.
Nominees: Sky D. Dayton, Chairman of the Board of Directors
Charles G. Betty, President, Chief Executive Officer and Director
Sidney Azeez, Director
Robert M. Kavner, Director
Linwood A. Lacy, Jr., Director
Paul McNulty, Director
Kevin M. O'Donnell, Director
Reed E. Slatkin, Director
FOR AGAINST ABSTAIN
2. Proposal to amend the Company's 1995 Stock / / / / / /
Option Plan.
3. In their discretion, upon such other business as may properly come
before the Annual Meeting or any postponement or adjournment thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. THIS PROXY
WILL BE VOTED AS DIRECTED. IN THE ABSENCE OF DIRECTION, THIS PROXY WILL BE
VOTED FOR THE EIGHT NOMINEES FOR ELECTION, AND FOR PROPOSAL 2.
Stockholders are entitled to cumulate votes in the election of directors as
described in the enclosed Proxy Statement. To cumulate votes as to a
particular nominee(s), indicate the name(s) and the number of votes to be
given to such nominee(s) in the space provided at left.
The proxies are authorized to vote, in their discretion, upon such other
matter or matters that may properly come before the meeting or any
adjournment(s) or postponement(s) thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH THE
DIRECTIONS GIVEN BY THE UNDERSIGNED STOCKHOLDER(S). IF NO DIRECTION IS MADE,
IT WILL BE VOTED FOR THE DIRECTOR NOMINEES NAMED IN PROPOSAL (1) ABOVE AND AS
THE PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY COME BEFORE THE
MEETING.
PLEASE COMPLETE, DATE, SIGN AND RETURN THIS PROXY PROMPTLY.
Signature: ________________________________________________
Signature (if held jointly) _______________________________
Dated: ______________________________________________, 1998
NOTE: Please sign exactly as name appears hereon. If shares are registered
in more than one name, the signature of all such persons are required.
A Corporation should sign in its full corporate name by a duly authorized
officer, stating his or her title. Trustees, guardians, executors and
administrators should sign in their official capacity, giving their full
title as such. If a partnership, please sign in the partnership name
by an authorized person.
