<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 6, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
WWW HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 4825
(State of Incorporation) (Primary Standard Industrial Classification Number)
<S> <C>
DELAWARE 58-2511877
(State of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
3100 NEW YORK DRIVE
PASADENA, CALIFORNIA 91107
(626) 296-2400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
CHARLES G. BETTY
CHIEF EXECUTIVE OFFICER
3100 NEW YORK DRIVE
PASADENA, CALIFORNIA 91107
(626) 296-2400
(Names and addresses, including zip codes, and telephone numbers, including area
codes, of agents for service)
IT IS RESPECTFULLY REQUESTED THAT THE COMMISSION SEND COPIES OF ALL NOTICES,
ORDERS AND COMMUNICATIONS TO:
<TABLE>
<S> <C>
W. TINLEY ANDERSON, III, ESQ. JOSEPH G. CONNOLLY, JR., ESQ.
DANIEL O. KENNEDY, ESQ. JOHN F. GAUL, ESQ.
HUNTON & WILLIAMS HOGAN & HARTSON L.L.P.
600 PEACHTREE STREET, N.E. COLUMBIA SQUARE
ATLANTA, GEORGIA 30308 553 13TH STREET, N.W.
(404) 888-4000 WASHINGTON, DC 20004
(202) 637-5600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the proposed reorganization described herein have been satisfied
or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
<S> <C> <C> <C> <C>
Common Stock, $.01 par value................. 117,326,457 N/A
Series A Convertible Preferred Stock......... 6,626,250 N/A $3,536,130,906 $933,539
Series B Convertible Preferred Stock......... 978,940 N/A
Series C Convertible Preferred Stock......... 7,083,333 N/A
</TABLE>
(1) This Registration Statement covers the maximum number of shares of Common
Stock, Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock and Series C Convertible Preferred Stock of the Registrant issuable in
connection with the reorganization described herein. This Registration
Statement covers the number of shares of the Registrant's Common Stock that
is estimated to be at least as large as (i) 1.615 times the number of shares
of EarthLink Network, Inc. common stock, (ii) 1.615 times the number of
shares of EarthLink Network, Inc.'s Series A, Series B and Series C
Convertible Preferred Stock, and (iii) the number of shares of MindSpring
Enterprises, Inc. common stock expected to be outstanding at the effective
time of the share exchange. Additionally, this Registration Statement covers
additional shares of the common stock of each of EarthLink Network, Inc. and
MindSpring Enterprises, Inc. that may be issued to prevent dilution
resulting from a stock split, stock dividend, or similar transaction
involving the common stock or preferred stock of EarthLink Network, Inc. and
MindSpring Enterprises, Inc., under Rule 416.
(2) Pursuant to Rule 457(o), the Proposed Maximum Offering Price Per Share is
omitted.
(3) The registration fee was calculated in accordance with (i) Rule 457(f)(1),
based on the average of the high and low sale prices for shares of common
stock of each of EarthLink Network, Inc. and MindSpring Enterprises, Inc. on
Nasdaq on January 4, 2000 and (ii) Rule 457(f)(2), based on the book value
per share for each of the Series A, Series B, and Series C Convertible
Preferred Stock on January 4, 2000 as follows: (a) EarthLink common stock,
32,934,592 shares, multiplied by average price, $42.78; plus (b) EarthLink
Series A Convertible Preferred Stock, 4,102,941 shares, multiplied by book
value per share, $37.79; plus (c) EarthLink Series B Convertible Preferred
Stock, 606,155 shares, multiplied by book value per share $73.06; plus
(d) EarthLink Series C Convertible Preferred Stock, 4,385,965 shares,
multiplied by book value per share, $45.60; plus (e) MindSpring common
stock, 64,137,091, multiplied by average price, $26.94. Pursuant to
Rule 457(b), the total fee required of $933,539 has been reduced by the
$336,023 filing fee previously paid at the time of filing of preliminary
proxy materials by EarthLink Network, Inc. on October 14, 1999 and by the
$365,197 filing fee previously paid at the time of filing of the preliminary
proxy materials by MindSpring Enterprises, Inc. on October 14, 1999.
Accordingly, the total net filing fee paid is $232,319.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
[LOGO]
Dear EarthLink Network, Inc. and MindSpring Enterprises, Inc. Stockholders:
The boards of directors of EarthLink Network, Inc. and MindSpring
Enterprises, Inc. have agreed on the reorganization of EarthLink and MindSpring
into a new company. This proposed transaction is structured as a stock-for-stock
"merger of equals" that will create the nation's second largest Internet service
provider with approximately 2.85 million members, based on September 30, 1999
data. We believe that the combined strengths of the two companies will enable us
to compete more effectively on a national basis as the Internet access business
continues to evolve. We are convinced that this transaction will enable the
combined company to achieve its strategic goals and enhance its market position
more quickly than either EarthLink or MindSpring could have achieved on its own.
In the transaction, EarthLink and MindSpring will combine into a new
corporation to be headquartered in Atlanta and initially named "WWW
Holdings, Inc." Each share of EarthLink common stock that you hold will be
converted automatically into the right to receive 1.615 shares of common stock
of WWW Holdings. Each share of MindSpring common stock that you hold will be
converted automatically into one share of common stock of WWW Holdings. Upon
completion of the reorganization, WWW Holdings will change its name to
"EarthLink, Inc." EarthLink's NASDAQ trading symbol is "ELNK" and MindSpring's
NASDAQ trading symbol is "MSPG." The NASDAQ trading symbol for the new company
will be "ELNK."
We cannot complete the reorganization unless the stockholders of both of our
companies adopt the reorganization agreement. Each of us will hold a meeting of
our stockholders to vote on this reorganization proposal. YOUR VOTE IS VERY
IMPORTANT. Whether or not you plan to attend your stockholders' meeting, please
take the time to vote by completing and mailing the enclosed proxy card to us or
by voting by telephone or through the Internet as instructed on the proxy form.
If you sign, date and mail your proxy card without indicating how you want to
vote, your proxy will be counted as a vote in favor of the reorganization
agreement. Not returning your card or voting by telephone or through the
Internet, or not instructing your broker how to vote any shares held for you in
"street name," will have the same effect as a vote against the reorganization.
The dates, times and places of the meetings are as follows:
<TABLE>
<S> <C>
FOR EARTHLINK STOCKHOLDERS: FOR MINDSPRING STOCKHOLDERS:
February 4, 2000, 8:00 a.m., local time February 4, 2000, 11:00 a.m., local time
Town Hall Conference Room High Museum of Art, Hill Auditorium
2947 Bradley Street 1280 Peachtree Street, NE
Pasadena, California Atlanta, Georgia
</TABLE>
THIS DOCUMENT PROVIDES YOU WITH DETAILED INFORMATION ABOUT THESE MEETINGS
AND THE PROPOSED REORGANIZATION. YOU CAN ALSO GET INFORMATION ABOUT OUR
COMPANIES FROM PUBLICLY AVAILABLE DOCUMENTS THAT OUR COMPANIES HAVE FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. WE ENCOURAGE YOU TO READ THIS ENTIRE
DOCUMENT CAREFULLY AND THOUGHTFULLY, INCLUDING THE SECTION ENTITLED "RISK
FACTORS" ON PAGES THROUGH .
Some of EarthLink's stockholders, including members of management and the
board of directors, who collectively hold 29.3% of the outstanding EarthLink
common stock, have executed stockholder agreements in which they have agreed to
vote all of their shares of EarthLink common stock in favor of the
reorganization agreement, and some of MindSpring's stockholders, including
members of management and the board of directors, who collectively hold 24.5% of
the outstanding MindSpring common stock have executed stockholder agreements in
which they have agreed to vote all of their shares of MindSpring common stock in
favor of the reorganization agreement.
We strongly support this combination of our companies and join with all the
other members of our boards of directors in enthusiastically recommending that
you vote in favor of the reorganization.
<TABLE>
<S> <C>
Sky D. Dayton Charles M. Brewer
Chairman of the Board Chairman
EarthLink Network, Inc. and Chief Executive Officer
MindSpring Enterprises, Inc.
</TABLE>
EACH VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THIS DOCUMENT OR THE SECURITIES TO BE
ISSUED IN THE REORGANIZATION OR DETERMINED IF THIS DOCUMENT IS ACCURATE OR
ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This joint proxy statement/prospectus is dated January 7, 2000
and it is first being mailed on or about January 12, 2000.
<PAGE>
[LOGO]
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
------------------------
NOTICE IS HEREBY GIVEN that EarthLink Network, Inc. will hold a special
meeting of stockholders at 8:00 a.m., local time, on February 4, 2000, in the
Town Hall Conference Room of EarthLink, 2947 Bradley Street, Pasadena,
California, to consider and vote on a proposal recommended by the board of
directors of EarthLink to adopt the reorganization agreement among EarthLink,
MindSpring Enterprises, Inc. and WWW Holdings, Inc., pursuant to which EarthLink
and MindSpring will merge into WWW Holdings, a newly formed company created to
accomplish the consolidation of EarthLink and MindSpring.
The board of directors of EarthLink has fixed the close of business on
December 20, 1999, as the record date for the determination of the stockholders
entitled to notice of, and to vote at, the meeting and any adjournment or
postponement of the meeting. A complete list of stockholders entitled to vote at
the meeting will be open to examination by the stockholders, during regular
business hours, for a period of ten days prior to the meeting at the principal
executive offices of EarthLink, 3100 New York Drive, Pasadena, California 91107.
THE BOARD OF DIRECTORS OF EARTHLINK HAS DETERMINED THAT THE REORGANIZATION
AGREEMENT IS ADVISABLE AND IN THE BEST INTERESTS OF THE EARTHLINK STOCKHOLDERS
AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO ADOPT THE REORGANIZATION AGREEMENT
AT THE SPECIAL MEETING.
By order of the Board of Directors,
[LOGO]
Sky D. Dayton
Chairman of the Board
Pasadena, California
January 7, 2000
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, AND WHETHER
YOU OWN ONE OR MANY SHARES, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, OR VOTE BY
TELEPHONE OR THROUGH THE INTERNET AS INSTRUCTED ON THE ENCLOSED PROXY CARD. YOU
MAY REVOKE YOUR PROXY AT ANY TIME BEFORE THE VOTE IS TAKEN BY DELIVERING TO THE
SECRETARY OF EARTHLINK A WRITTEN REVOCATION OR A PROXY WITH A LATER DATE OR BY
VOTING YOUR SHARES IN PERSON AT THE SPECIAL MEETING.
PLEASE DO NOT SEND STOCK CERTIFICATES WITH YOUR PROXY CARD.
<PAGE>
[LOGO]
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
------------------------
NOTICE IS HEREBY GIVEN that MindSpring Enterprises, Inc. will hold a special
meeting of stockholders at 11:00 a.m., local time, on February 4, 2000 in the
High Museum of Art, Hill Auditorium, 1280 Peachtree Street, NE, Atlanta,
Georgia, to consider and vote on a proposal recommended by the board of
directors of MindSpring to adopt the reorganization agreement among MindSpring,
EarthLink Network, Inc. and WWW Holdings, Inc., pursuant to which MindSpring and
EarthLink will merge into WWW Holdings, a newly formed company created to
accomplish the consolidation of EarthLink and MindSpring.
The board of directors of MindSpring has fixed the close of business on
December 20, 1999 as the record date for the determination of the stockholders
entitled to notice of, and to vote at, the meeting and any adjournment or
postponement of the meeting. A complete list of stockholders entitled to vote at
the meeting will be open to examination by the stockholders, during regular
business hours, for a period of ten days prior to the meeting at the principal
executive offices of MindSpring, 1430 West Peachtree Street, NW, Suite 400,
Atlanta, Georgia 30309.
THE BOARD OF DIRECTORS OF MINDSPRING HAS DETERMINED THAT THE REORGANIZATION
AGREEMENT IS ADVISABLE AND IN THE BEST INTERESTS OF THE MINDSPRING STOCKHOLDERS
AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO ADOPT THE REORGANIZATION AGREEMENT
AT THE SPECIAL MEETING.
By order of the Board of Directors,
[LOGO]
Charles M. Brewer
Chairman and Chief Executive Officer
Atlanta, Georgia
January 7, 2000
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, AND WHETHER
YOU OWN ONE OR MANY SHARES, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, OR VOTE BY
TELEPHONE OR THROUGH THE INTERNET AS INSTRUCTED ON THE ENCLOSED PROXY CARD. YOU
MAY REVOKE YOUR PROXY AT ANY TIME BEFORE THE VOTE IS TAKEN BY DELIVERING TO THE
SECRETARY OF MINDSPRING A WRITTEN REVOCATION OR A PROXY WITH A LATER DATE OR BY
VOTING YOUR SHARES IN PERSON AT THE SPECIAL MEETING.
PLEASE DO NOT SEND STOCK CERTIFICATES WITH YOUR PROXY CARD.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE REORGANIZATION.............. 1
SUMMARY..................................................... 3
The Companies............................................. 3
The Reorganization........................................ 3
What You Will Receive in the Reorganization............... 4
Convertible Notes of MindSpring........................... 5
The EarthLink Special Meeting............................. 5
The MindSpring Special Meeting............................ 5
EarthLink's Reasons for the Reorganization................ 5
MindSpring's Reasons for the Reorganization............... 6
Our Recommendations to Stockholders....................... 7
Comparative Per Share Market Price and Dividend
Information............................................. 7
Opinion of EarthLink Financial Advisor.................... 7
Opinion of MindSpring Financial Advisor................... 8
Regulatory Approvals...................................... 8
Conditions to the Reorganization.......................... 8
Termination of the Reorganization Agreement............... 8
Termination Fee........................................... 8
Material Federal Income Tax Consequences.................. 9
Accounting Treatment...................................... 9
Interests of EarthLink Officers and Directors in the
Reorganization.......................................... 9
Interests of MindSpring Officers and Directors in the
Reorganization.......................................... 9
Comparison of Stockholder Rights.......................... 9
Where You Can Find More Information....................... 9
Comparative Per Share Information......................... 10
EarthLink Network, Inc.--Selected Historical Financial
Information............................................. 11
MindSpring Enterprises, Inc.--Selected Historical
Financial Information................................... 12
WWW HOLDINGS SELECTED PRO FORMA COMBINED FINANCIAL
INFORMATION............................................... 13
A CAUTION ABOUT FORWARD-LOOKING STATEMENTS.................. 15
RISK FACTORS RELATING TO THE REORGANIZATION................. 17
THE EARTHLINK SPECIAL MEETING............................... 28
Date and Purpose of the Special Meeting................... 28
Record Date for the Special Meeting and Who is Entitled to
Vote at the Special Meeting............................. 28
Voting by Proxy and How to Revoke Your Proxy.............. 29
Solicitation of Proxies................................... 29
THE MINDSPRING SPECIAL MEETING.............................. 30
Date and Purpose of the Special Meeting................... 30
Record Date for the Special Meeting and Who is Entitled to
Vote at the Special Meeting............................. 30
Voting by Proxy and How to Revoke Your Proxy.............. 31
Solicitation of Proxies................................... 31
THE REORGANIZATION.......................................... 32
General................................................... 32
EarthLink and MindSpring Stock Option Agreements.......... 33
EarthLink and MindSpring Stockholder Agreements........... 34
What EarthLink Stockholders Will Receive in the
Reorganization.......................................... 35
What MindSpring Stockholders Will Receive in the
Reorganization.......................................... 35
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Cash Payments for Fractional Shares of WWW Holdings Common
Stock................................................... 35
Effect of the Reorganization on Holders of MindSpring
Convertible Subordinated Notes.......................... 35
Background and Negotiation of the Reorganization.......... 35
Reasons of EarthLink for Agreeing to the Reorganization
with MindSpring......................................... 38
Recommendation of the EarthLink Board of Directors........ 40
Opinion of EarthLink Financial Advisor.................... 41
Reasons of MindSpring for Agreeing to the Reorganization
with EarthLink.......................................... 47
Recommendation of the MindSpring Board of Directors....... 49
Opinion of MindSpring Financial Advisor................... 49
No Dissenters' Rights..................................... 55
Accounting for the Reorganization under the Pooling of
Interests Method........................................ 55
Restrictions on Resales by EarthLink and MindSpring
Affiliates.............................................. 55
Material Federal Income Tax Consequences.................. 55
Procedures for Exchange of Stock Certificates............. 57
Interests of EarthLink Directors and Officers in the
Reorganization.......................................... 58
Interests of MindSpring Directors and Officers in the
Reorganization.......................................... 59
Work Force and Employee Benefit Matters................... 60
Headquarters.............................................. 60
Effective Time............................................ 60
Regulatory Approvals Required to Complete the
Reorganization.......................................... 60
Sprint Governance Agreement............................... 61
TERMS AND CONDITIONS OF THE REORGANIZATION AGREEMENT........ 69
Representations and Warranties............................ 69
Covenants................................................. 70
WWW HOLDINGS PRO FORMA FINANCIAL INFORMATION................ 78
MARKET PRICES AND DIVIDENDS PAID............................ 95
INFORMATION ABOUT EARTHLINK................................. 96
INFORMATION ABOUT MINDSPRING................................ 129
INFORMATION ABOUT WWW HOLDINGS.............................. 159
DESCRIPTION OF WWW HOLDINGS CAPITAL STOCK................... 159
General................................................... 159
Common Stock.............................................. 159
WWW Holdings Preferred Stock in General................... 160
WWW Holdings Series A Convertible Preferred Stock......... 160
WWW Holdings Series B Convertible Preferred Stock......... 161
WWW Holdings Series C Convertible Preferred Stock......... 161
COMPARISON OF STOCKHOLDERS' RIGHTS.......................... 163
Limitation of Director Liability.......................... 163
Authorized Capital........................................ 164
Special Meetings of Stockholders.......................... 164
Voting; Election of Directors............................. 164
Mergers, Share Exchanges and Sales of Assets.............. 165
Anti-takeover Statutes.................................... 166
Amendments to Certificates of Incorporation............... 166
Amendments to Bylaws...................................... 167
Stockholder Action by Written Consent..................... 167
Board of Directors........................................ 167
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
MANAGEMENT AND OPERATION OF WWW HOLDINGS AFTER THE
REORGANIZATION............................................ 170
WWW Holdings Board of Directors........................... 170
Management................................................ 172
STOCKHOLDER PROPOSALS....................................... 173
LEGAL MATTERS............................................... 173
EXPERTS..................................................... 173
OTHER MATTERS............................................... 174
WHERE YOU CAN FIND MORE INFORMATION......................... 174
WHAT INFORMATION YOU SHOULD RELY ON......................... 175
ANNEX A--REORGANIZATION AGREEMENT
ANNEX B--OPINION OF CREDIT SUISSE FIRST BOSTON CORPORATION
ANNEX C--OPINION OF DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE REORGANIZATION
Q: WHY ARE EARTHLINK AND MINDSPRING PROPOSING THE REORGANIZATION?
A: We are proposing the reorganization because we believe the combined strengths
of the two companies will enable us to compete more effectively on a
national basis. The combination of EarthLink and MindSpring will create the
second largest Internet service provider in the United States.
Q. WHAT WILL HAPPEN TO EARTHLINK AND MINDSPRING AS A RESULT OF THE
REORGANIZATION?
A: If the reorganization is completed, both EarthLink and MindSpring will merge
into WWW Holdings, Inc., which is a company formed to accomplish the
consolidation of the two companies. WWW HOLDINGS WILL CHANGE ITS NAME TO
"EARTHLINK, INC." AND ITS COMMON STOCK WILL TRADE ON THE NASDAQ NATIONAL
MARKET AS "ELNK."
Q: WHAT WILL I RECEIVE IN THE REORGANIZATION?
A: EARTHLINK COMMON STOCKHOLDERS: Under the terms of the reorganization
agreement, you will receive 1.615 shares of WWW Holdings common stock for
each share of EarthLink common stock you own.
B: MINDSPRING COMMON STOCKHOLDERS: The reorganization agreement provides that
you will receive one share of WWW Holdings common stock for each share of
MindSpring common stock you own.
Q: HOW WILL THE REORGANIZATION AFFECT MY STOCK DIVIDENDS?
A: Neither EarthLink nor MindSpring has historically paid dividends to its
stockholders. We do not anticipate that WWW Holdings will pay dividends to
its stockholders in the foreseeable future.
Q: WHEN DO EARTHLINK, MINDSPRING AND WWW HOLDINGS EXPECT THE REORGANIZATION TO
BE COMPLETED?
A: EarthLink, MindSpring and WWW Holdings are working to complete the
reorganization as quickly as possible. We hope to complete the
reorganization during the first quarter of 2000.
Q: WHAT DO I NEED TO DO NOW?
A: You should carefully read and consider the information contained in this
joint proxy statement/prospectus. You should then complete and sign your
proxy and return it in the enclosed return envelope as soon as possible so
that your shares will be represented at your company's special meeting. If
you sign, date and mail your proxy card without identifying how you want to
vote, your proxy will be voted "FOR" the reorganization agreement. You may
also vote your shares by telephone or through the Internet by following the
instructions provided on the enclosed proxy form. If you do not vote in
person, by telephone, by Internet or by returning your completed proxy card,
it will have the same effect as a vote "AGAINST" the reorganization
agreement.
Q. ARE EARTHLINK OR MINDSPRING STOCKHOLDERS ENTITLED TO DISSENTERS' RIGHTS?
A: No. Under Delaware law, which governs both companies, neither the EarthLink
stockholders nor the MindSpring stockholders are entitled to dissenters'
rights of appraisal or other rights to demand fair value for their shares in
cash by reason of the reorganization.
Q: WHO MUST APPROVE THE REORGANIZATION?
A: In addition to the approvals of the boards of directors of EarthLink,
MindSpring and WWW Holdings, which have already been obtained, the
stockholders of EarthLink and MindSpring must approve the reorganization
agreement. We must also obtain some regulatory approvals for the
reorganization. Please read the more detailed description of the required
regulatory approvals on pages to .
1
<PAGE>
Q. CAN I CHANGE MY VOTE AFTER I MAIL MY SIGNED PROXY OR VOTE BY TELEPHONE OR
THROUGH THE INTERNET?
A: Yes. You can change your vote at any time before your proxy is voted at the
special meeting of your company's stockholders. You can do this in one of
three ways. First, you can send a written notice stating that you would like
to revoke your proxy. Second, you can complete and submit a new proxy. If
you choose either of these two methods, you must submit your notice of
revocation or your new proxy for EarthLink shares at the address on page
and for MindSpring shares at the address on page . Third, you can attend
the special meeting of your company's stockholders and vote in person. If
you vote by telephone or through the Internet, you can also change your vote
by any of these three methods or you can revote by following the
instructions on the enclosed proxy form.
Q: MY SHARES ARE HELD IN "STREET NAME." WILL MY BROKER VOTE MY SHARES ON THE
REORGANIZATION?
A: A broker will vote your shares with respect to the reorganization agreement
only if you provide him or her with instructions on how to vote. You should
follow the directions provided by your broker regarding how to instruct
brokers to vote the shares.
Q: SHOULD I SEND IN MY CERTIFICATES NOW?
A: NO, YOU SHOULD NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY. You will
receive instructions for exchanging your stock certificates if the
reorganization is consummated.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have any questions about the reorganization or if you need additional
copies of this joint proxy statement/ prospectus or the enclosed proxy, you
should contact EarthLink's and MindSpring's proxy solicitor:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072
Attn: Paul R. Schulman
Telephone: (201) 896-5690
2
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS JOINT PROXY
STATEMENT/PROSPECTUS. IT DOES NOT CONTAIN ALL OF THE DETAILED INFORMATION THAT
MAY BE IMPORTANT TO YOU. TO UNDERSTAND THE REORGANIZATION FULLY AND FOR A MORE
COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE REORGANIZATION, YOU SHOULD READ
CAREFULLY THIS ENTIRE DOCUMENT AND THE OTHER DOCUMENTS TO WHICH WE REFER. FOR
MORE INFORMATION ABOUT EARTHLINK, MINDSPRING AND WWW HOLDINGS, SEE "WHERE YOU
CAN FIND MORE INFORMATION" ON PAGE . EACH ITEM IN THIS SUMMARY REFERS TO THE
PAGES WHERE THAT SUBJECT IS DISCUSSED MORE FULLY.
THE COMPANIES (PAGES THROUGH )
EARTHLINK NETWORK, INC.
3100 New York Drive
Pasadena, California 91107
Telephone: (626) 296-2400
EarthLink Network, Inc. is a leading Internet service provider providing
reliable nationwide Internet access and related value-added services to its
individual and business members. Its member base has grown rapidly to
approximately 1.6 million members as of September 30, 1999, making EarthLink one
of the world's leading Internet service providers. EarthLink believes that its
growth has resulted from its efforts to enhance members' Internet experience
through simple, rapid and reliable access to the Internet, high quality service
and member education and support.
MINDSPRING ENTERPRISES, INC.
1430 West Peachtree Street, NW,
Suite 400
Atlanta, Georgia 30309
Telephone: (404) 815-0770
MindSpring Enterprises, Inc. is a leading national Internet service provider
with approximately 1.3 million members as of September 30, 1999. MindSpring
focuses on serving individuals and small businesses. Its primary service
offerings are dial-up Internet access and business services, which MindSpring
offers in various price and usage plans designed to meet the needs of its
members. MindSpring's business services include Web hosting, which entails
maintaining a customer's Internet Web site, high-speed, dedicated Internet
access, Web page design, e-commerce services and domain name registration.
WWW HOLDINGS, INC.
3100 New York Drive
Pasadena, California 91107
Telephone: (626) 296-2400
WWW Holdings, Inc. is a newly formed corporation that has not, to date,
conducted any activities other than those incident to its formation, the
execution of the reorganization agreement and the preparation of this joint
proxy statement/prospectus. IN THE REORGANIZATION, EARTHLINK AND MINDSPRING WILL
MERGE INTO WWW HOLDINGS AND WWW HOLDINGS WILL CHANGE ITS NAME TO
"EARTHLINK, INC." The business of WWW Holdings will be the combined businesses
currently conducted by EarthLink and MindSpring. We anticipate that immediately
after the reorganization is completed, based on December 20, 1999 data and after
giving effect to Apple's investment in EarthLink, (1) the former common and
preferred stockholders of EarthLink will own approximately 82.5 million shares,
or 53.3%, of the WWW Holdings common stock on a fully diluted basis, which
assumes conversion of the preferred stock into common stock, and (2) the former
common stockholders of MindSpring will own approximately 72.2 million shares, or
46.7%, of the WWW Holdings common stock on a fully diluted basis.
THE REORGANIZATION (PAGE )
The reorganization agreement is attached as ANNEX A to this joint proxy
statement/prospectus and is incorporated by reference into this document. We
encourage you to read the entire reorganization agreement because it is the
legal document that governs the reorganization.
The reorganization agreement provides for the combination of EarthLink and
MindSpring in a stock-for-stock merger of equals. If the reorganization is
adopted by our stockholders,
3
<PAGE>
we will combine our businesses through two separate mergers into WWW Holdings.
Some stockholders of EarthLink, including members of management and the
board of directors, who collectively own approximately 29.3% of EarthLink's
outstanding common stock, and some stockholders of MindSpring, including members
of management and the board of directors, who collectively own approximately
24.5% of MindSpring's outstanding common stock, have signed agreements to vote
their shares in favor of the reorganization. See "EarthLink and MindSpring
Stockholder Agreements" on page for a more detailed description of the
stockholder agreements.
In addition, EarthLink and MindSpring have granted each other options under
which, in certain circumstances, EarthLink can buy up to 19.9% of the common
stock of MindSpring or MindSpring can buy up to 19.9% of the common stock of
EarthLink. See "EarthLink and MindSpring Stock Option Agreements" on pages
through for a more detailed discussion of the option agreements.
WHAT YOU WILL RECEIVE IN THE REORGANIZATION (PAGE )
In the merger of EarthLink into WWW Holdings, each share of EarthLink common
stock will be converted into 1.615 shares of WWW Holdings common stock. In the
merger of MindSpring into WWW Holdings, each share of MindSpring common stock
will be converted into one share of WWW Holdings common stock.
Former EarthLink common stockholders will receive cash in payment for any
fraction of a share of WWW Holdings common stock that they would be entitled to
receive in the reorganization. The value of this fraction of a share will be
determined based on the mean of the high and low sales prices of WWW Holdings
common stock on its first full day of trading on The Nasdaq National Market.
Each share of EarthLink series A convertible preferred stock will be
converted into 1.615 shares of WWW Holdings series A convertible preferred
stock, each share of EarthLink series B convertible preferred stock will be
converted into 1.615 shares of WWW Holdings series B convertible preferred stock
and each share of EarthLink series C convertible preferred stock will be
converted into 1.615 shares of WWW Holdings series C convertible preferred
stock.
The terms of the WWW Holdings series A convertible preferred stock, the WWW
Holdings series B convertible preferred stock and the WWW Holdings series C
convertible preferred stock will be the same as the terms of the EarthLink
series A convertible preferred stock, the EarthLink series B convertible
preferred stock and the EarthLink series C convertible preferred stock. The WWW
Holdings series A convertible preferred stock and the WWW Holdings series B
convertible preferred stock will be convertible into WWW Holdings common stock
at the option of the holder and the WWW Holdings series C convertible preferred
stock will be convertible into WWW Holdings common stock at the option of the
holder beginning on January 4, 2001. Immediately after the mergers, based on
December 20, 1999 data, assuming acceleration of the series A and B convertible
preferred stock conversion rights and assuming that Apple's $200 million
investment in EarthLink had occurred on December 20, 1999, the WWW Holdings
series A convertible preferred stock will be convertible into approximately
14.2 million shares, or 9.2%, of WWW Holdings common stock on a fully diluted
basis.
OPTIONS, WARRANTS AND OTHER RIGHTS
Each outstanding option, warrant and other right to purchase shares of
EarthLink common stock will be converted into an option, warrant or other right,
as the case may be, to purchase a number of shares of WWW Holdings common stock
equal to the number of shares of EarthLink common stock that were subject to the
option, warrant or other right, multiplied by 1.615. The exercise price per
share for each option, warrant or other right will be divided by 1.615. All
other terms will remain unchanged.
Each outstanding option, warrant and other right to purchase shares of
MindSpring common
4
<PAGE>
stock will be converted into an option, warrant or other right, as the case may
be, to purchase the same number of shares of WWW Holdings common stock on the
same terms and conditions, including the same exercise price.
CONVERTIBLE NOTES OF MINDSPRING (PAGE )
Completion of the reorganization will constitute a "change in control" of
MindSpring under the indentures governing the 5% convertible subordinated notes
due 2006 issued by MindSpring in April 1999. Consequently, after the
reorganization is completed, each holder of notes will have the option to
require WWW Holdings to repurchase that holder's notes at a repurchase price of
100% of the principal amount plus accrued interest to the date of repurchase.
The reorganization agreement provides that the repurchase price for the notes
will be paid in cash. Notes not repurchased will become notes of WWW Holdings
convertible into WWW Holdings common stock.
THE EARTHLINK SPECIAL MEETING (PAGE )
The special meeting of EarthLink stockholders will be held in the Town Hall
Conference Room, at 2947 Bradley Street, Pasadena, California, on February 4,
2000, at 8:00 a.m., local time.
At the special meeting, EarthLink stockholders will be asked to vote to
adopt the reorganization agreement. Adoption of the reorganization agreement
requires the favorable vote of a majority of the outstanding shares of EarthLink
common stock. The vote of the holders of EarthLink's preferred stock is not
required to adopt the reorganization agreement.
You can vote at the special meeting of EarthLink stockholders if you owned
EarthLink common stock at the close of business on December 20, 1999. As of that
date, directors and executive officers of EarthLink owned approximately 31% of
the outstanding shares of EarthLink common stock.
If you do not vote your shares of EarthLink common stock, the effect will be
the same as a vote against the reorganization agreement.
THE MINDSPRING SPECIAL MEETING (PAGE )
The special meeting of MindSpring stockholders will be held at the High
Museum of Art, Hill Auditorium, 1280 Peachtree Street, NE, Atlanta, Georgia, on
February 4, 2000, at 11:00 a.m., local time.
At the special meeting, MindSpring stockholders will be asked to vote to
adopt the reorganization agreement. Adoption of the reorganization agreement
requires the favorable vote of a majority of the outstanding shares of
MindSpring common stock.
You can vote at the special meeting of MindSpring stockholders if you owned
MindSpring common stock at the close of business on December 20, 1999. As of
that date directors and executive officers of MindSpring owned approximately
7.8% of the outstanding shares of MindSpring common stock.
If you do not vote your shares, the effect will be the same as a vote
against the reorganization agreement.
EARTHLINK'S REASONS FOR THE REORGANIZATION (PAGE )
The EarthLink board of directors believes that the reorganization is
advisable and in the best interests of EarthLink and its stockholders, and that
it offers strategic and financial benefits to EarthLink. In reaching its
decision, the EarthLink board of directors considered the following factors,
among others:
- - the EarthLink board's thorough evaluation of a variety of potential strategic
alternatives and its analysis of the viability of, and risks associated with,
each alternative;
- - the potential increased value of the EarthLink brand after the reorganization;
- - the combination of the companies' member bases to form the second largest
Internet service provider in the United States;
- - the combined management skills of the two companies' management teams;
- - the ability to take advantage of the greater combined resources and efforts of
the two
5
<PAGE>
companies under one brand to accelerate member growth;
- - the competitive environment in the Internet industry;
- - the possible financial benefit of the reorganization to EarthLink's
relationships with its existing and potential members; and
- - the opinion of Credit Suisse First Boston Corporation, EarthLink's financial
advisor, that the EarthLink common stock exchange ratio was fair from a
financial point of view to the EarthLink common stockholders, other than
MindSpring and its affiliates, the EarthLink series A preferred stock exchange
ratio was fair from a financial point of view to the holders of the EarthLink
series A preferred stock, and the EarthLink series B preferred stock exchange
ratio was fair from a financial point of view to the holders of the EarthLink
series B preferred stock.
The EarthLink board of directors also considered potentially negative
factors in arriving at its decision, including among others:
- - the potential disruption of EarthLink's business that might result from the
announcement of the reorganization;
- - the risk that anticipated benefits of the reorganization for EarthLink
stockholders may not be realized; and
- - the risk that the reorganization would not be consummated and that, under some
circumstances, EarthLink could be required to pay a termination fee to
MindSpring.
The EarthLink board did not believe that the negative factors were
sufficient, individually or in the aggregate, to outweigh the potential
advantages of the reorganization.
You should recognize, however, that EarthLink's stockholders may not achieve
the benefits of the reorganization mentioned above because of the risks and
uncertainties discussed in the section "Risk Factors Relating to the
Reorganization" beginning on page and the section "A Caution About
Forward-Looking Statements" beginning on page .
MINDSPRING'S REASONS FOR THE REORGANIZATION (PAGE )
The MindSpring board of directors believes that the reorganization is
advisable and in the best interests of MindSpring and its stockholders, and that
it offers strategic and financial benefits to MindSpring. In reaching its
decision, the MindSpring board of directors considered the following factors,
among others:
- - the opportunity of the two companies to create the second largest provider of
Internet access in the U.S. after America Online, Inc., and establish the
combined company as a national brand alternative to America Online;
- - the strategic alternatives available to MindSpring, including potential
business combinations with other entities, and the strong strategic fit
between MindSpring and EarthLink;
- - the ability of the combined company to share resources and capitalize on
synergies to better attract and retain members;
- - the increased opportunities that could be available to the larger, combined
company, including potentially greater leverage with vendors, network
providers and content providers;
- - the opportunity to become a leading Internet service provider portal site and
the opportunity to develop alternative revenue streams;
- - the significant opportunities for cost savings, revenue growth, technological
development and other benefits resulting from the reorganization; and
- - the opinion of Donaldson, Lufkin & Jenrette Securities Corporation,
MindSpring's financial advisor, that, as of the date of the opinion, the ratio
for the exchange of shares of MindSpring common stock for shares of WWW
Holdings common stock in the reorganization was fair, from a financial point
of view, to the stockholders of MindSpring.
You should recognize, however, that MindSpring's stockholders may not
achieve the benefits of the reorganization mentioned above
6
<PAGE>
because of the risks and uncertainties discussed in the section "Risk Factors
Relating to the Reorganization" beginning on page and the section "A Caution
About Forward-Looking Statements" beginning on page . In addition, as a
result of the reorganization:
- - we anticipate that initially the loss per share of WWW Holdings will be
greater than the loss per share of MindSpring had the reorganization not
occurred;
- - the holders of MindSpring's 5% convertible subordinated notes will have the
option to require WWW Holdings to repurchase the notes at a repurchase price
equal to one hundred percent (100%) of the principal amount plus accrued
interest; and
- - unless renegotiated, MindSpring will be in default under its credit agreement
with the group of financial institutions led by First Union National Bank and
these lenders will have the right to terminate MindSpring's credit facility.
In the opinion of the MindSpring board of directors, these considerations
are not sufficient, individually or in the aggregate, to outweigh the potential
advantages of the reorganization.
OUR RECOMMENDATIONS TO STOCKHOLDERS (PAGE )
EARTHLINK (PAGE )
All of the members of the board of directors of EarthLink recommend that its
stockholders vote "FOR" the adoption of the reorganization agreement.
MINDSPRING (PAGE )
All of the members of the board of directors of MindSpring recommend that
its stockholders vote "FOR" the adoption of the reorganization agreement.
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION (PAGE )
Shares of EarthLink and MindSpring common stock are listed on The Nasdaq
National Market. On September 22, 1999, the last trading day prior to the public
announcement of the proposed reorganization, EarthLink common stock closed at
$43 1/2 per share and MindSpring common stock closed at $32 7/8 per share. On
January 4, 2000 the last day for which such information was available before the
date of this joint proxy statement/prospectus, EarthLink common stock closed at
$41.87 per share and MindSpring common stock closed at $26.31 per share.
Neither EarthLink nor MindSpring has historically paid dividends. We do not
anticipate that WWW Holdings will pay dividends to its stockholders in the
foreseeable future.
OPINION OF EARTHLINK FINANCIAL ADVISOR (PAGE )
In deciding to approve the reorganization agreement, the EarthLink board of
directors considered a number of factors, including the opinion of its financial
advisor, Credit Suisse First Boston Corporation. On September 22, 1999, Credit
Suisse First Boston delivered to the EarthLink board of directors its opinion
that, as of that date, the EarthLink common stock exchange ratio was fair from a
financial point of view to the EarthLink common stockholders, other than
MindSpring and its affiliates, the EarthLink series A preferred stock exchange
ratio was fair from a financial point of view to the holders of the EarthLink
series A preferred stock, and the EarthLink series B preferred stock exchange
ratio was fair from a financial point of view to the holders of the EarthLink
series B preferred stock.
THE FULL TEXT OF CREDIT SUISSE FIRST BOSTON'S OPINION, DATED SEPTEMBER 22,
1999, IS ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS ANNEX B. WE
ENCOURAGE YOU TO READ THIS OPINION CAREFULLY FOR A DESCRIPTION OF THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN.
CREDIT SUISSE FIRST BOSTON'S OPINION IS DIRECTED TO THE EARTHLINK BOARD AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER WITH RESPECT TO ANY MATTER
RELATING TO THE PROPOSED REORGANIZATION. CREDIT SUISSE FIRST BOSTON'S OPINION
SPEAKS ONLY AS OF ITS DATE AND CREDIT SUISSE FIRST BOSTON IS UNDER NO OBLIGATION
TO CONFIRM ITS OPINION AS OF A LATER DATE. FURTHERMORE, EARTHLINK'S BOARD OF
7
<PAGE>
DIRECTORS MAY NOT NECESSARILY REQUEST THAT CREDIT SUISSE FIRST BOSTON CONFIRM
ITS OPINION AS OF A LATER DATE.
OPINION OF MINDSPRING FINANCIAL ADVISOR (PAGE )
In connection with the reorganization, the MindSpring board received a
written opinion from Donaldson, Lufkin & Jenrette Securities Corporation as to
the fairness, from a financial point of view, to the holders of MindSpring
common stock, of the ratio for the exchange of shares of MindSpring common stock
for shares of WWW Holdings common stock in the reorganization. The opinion was
delivered to the MindSpring board on September 22, 1999.
THE FULL TEXT OF DONALDSON, LUFKIN & JENRETTE'S OPINION, DATED
SEPTEMBER 22, 1999, IS ATTACHED TO THIS JOINT PROXY STATEMENT/ PROSPECTUS AS
ANNEX C. WE ENCOURAGE YOU TO READ THIS OPINION CAREFULLY FOR A DESCRIPTION OF
THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN. DONALDSON, LUFKIN & JENRETTE'S OPINION, WHICH SPEAKS ONLY AS OF
SEPTEMBER 22, 1999, IS DIRECTED TO THE MINDSPRING BOARD AND DOES NOT CONSTITUTE
A RECOMMENDATION TO ANY STOCKHOLDER WITH RESPECT TO ANY MATTER RELATING TO THE
PROPOSED REORGANIZATION.
REGULATORY APPROVALS (PAGE )
In order to complete the reorganization, EarthLink and MindSpring were
required to make filings with the Department of Justice and the Federal Trade
Commission and wait for the expiration or early termination of the required
waiting period. EarthLink and MindSpring received notice on November 3, 1999
that the waiting period under the Hart Scott Rodino Antitrust Improvements Act
of 1976 had been terminated.
CONDITIONS TO THE REORGANIZATION (PAGE )
The reorganization will not be completed unless customary conditions are
satisfied or waived by EarthLink, MindSpring and WWW Holdings. Examples of the
conditions include stockholder approval, regulatory approval and the absence of
governmental action to block the reorganization. None of the preceding
conditions may be waived. If either EarthLink or MindSpring waives a material
condition to the consummation of the reorganization, it intends to resolicit
stockholder approval of the reorganization. Material conditions to the
consummation of the reorganization would include the receipt of a letter from
each of MindSpring's and EarthLink's independent public accountants that the
accountants concur with their client's management's conclusions that no
conditions exist with respect to their client that would preclude WWW Holdings
from accounting for the mergers of EarthLink and MindSpring into WWW Holdings as
a pooling of interests and the receipt of legal opinions that the mergers of
EarthLink and MindSpring into WWW Holdings will qualify as reorganizations
within the meaning of the federal income tax laws.
TERMINATION OF THE REORGANIZATION AGREEMENT (PAGE )
The reorganization agreement may be terminated by either EarthLink or
MindSpring in a number of circumstances, in which case the reorganization will
not be consummated. Breaches of the reorganization agreement, withdrawal of a
board of directors' recommendation that stockholders adopt the reorganization
agreement and the failure of a company's stockholders to adopt the
reorganization agreement are some of the factors that could permit EarthLink or
MindSpring to terminate the reorganization agreement. See "Termination" on
page for a more detailed description of the termination provisions of the
reorganization agreement.
TERMINATION FEE (PAGE )
If the reorganization agreement is terminated, under some circumstances
EarthLink may have to pay MindSpring, or MindSpring may have to pay EarthLink, a
termination fee of $70,000,000. See "Payment of Termination Fee by EarthLink"
and "Payment of Termination Fee by MindSpring" on pages and for more
information about when a termination fee may become payable.
8
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (PAGE )
One of the conditions to the consummation of the reorganization is that the
exchange of your EarthLink common stock or MindSpring common stock for WWW
Holdings common stock qualify as a tax-free exchange of stock for United States
federal income tax purposes. Even with the tax-free treatment, however, you will
be taxed on any cash you receive for any fraction of a share.
To review the tax consequences of the reorganization in greater detail,
please read the tax discussion beginning on page .
ACCOUNTING TREATMENT (PAGE )
The companies have structured the reorganization to be accounted for as a
pooling of interests for financial reporting and accounting purposes in
accordance with generally accepted accounting principles.
INTERESTS OF EARTHLINK OFFICERS AND DIRECTORS IN THE REORGANIZATION (PAGE )
In considering the EarthLink board's recommendation that you vote for the
reorganization agreement, you should be aware that some of the EarthLink
officers and directors identified in this joint proxy statement/ prospectus have
interests in the reorganization that are different from, or in addition to,
their rights as EarthLink stockholders.
INTERESTS OF MINDSPRING OFFICERS AND DIRECTORS IN THE REORGANIZATION (PAGE )
In considering the MindSpring board's recommendation that you vote for the
reorganization agreement, you should be aware that some of the MindSpring
officers and directors identified in this joint proxy statement/ prospectus have
interests in the reorganization that are different from, or in addition to,
their rights as MindSpring stockholders.
COMPARISON OF STOCKHOLDER RIGHTS (PAGE )
When the reorganization is completed, EarthLink and MindSpring stockholders
will become holders of WWW Holdings common stock. Their rights will continue to
be governed by Delaware law, but will also be governed by WWW Holdings'
certificate of incorporation and bylaws (instead of EarthLink's or MindSpring's
certificate of incorporation and bylaws). The material differences between the
rights of WWW Holdings stockholders and those of EarthLink or MindSpring
stockholders are summarized beginning on page .
WHERE YOU CAN FIND MORE INFORMATION (PAGE )
If you would like more information about EarthLink or MindSpring, it can be
found in documents filed by each company with the Securities and Exchange
Commission. Instructions on how you can obtain copies of these documents are on
page .
9
<PAGE>
COMPARATIVE PER SHARE INFORMATION (UNAUDITED)
We based the information in the following table on the historical
information of EarthLink and MindSpring included in prior filings with the
Securities and Exchange Commission and on pro forma information included in this
document. When you read the summary financial information we provide in the
following tables, you also should read the historical and pro forma financial
information contained elsewhere in this joint proxy statement/prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
EARTHLINK HISTORICAL PER COMMON SHARE:
Net loss per share--basic and diluted (1)................ $(2.57) $(1.50) $(2.58) $(1.64) $(2.78)
Book value per share (3)................................. $ 4.91
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
MINDSPRING HISTORICAL PER COMMON SHARE:
Net income (loss) per share--basic (2)................... $(0.24) $(0.09) $ 0.21 $ 0.14 $(0.35)
Net income (loss) per share--diluted (2)................. $(0.24) $(0.09) $ 0.21 $ 0.13 $(0.35)
Book value per share (3)................................. $ 7.56
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
WWW HOLDINGS (EarthLink and MindSpring Combined)
PRO FORMA COMBINED PER COMMON SHARE:
Net loss per share--basic and diluted.................... $(0.76) $(0.65) $(2.35) $(1.68) $(1.07)
Net loss per equivalent EarthLink share--basic and
diluted................................................ $(1.23) $(1.05) $(3.80) $(2.71) $(1.72)
Net income (loss) per equivalent MindSpring share --basic
and diluted............................................ $(0.76) $(0.65) $(2.35) $(1.68) $(1.07)
Book value per WWW Holdings share (3).................... $ 5.13
Book value per equivalent EarthLink share (4)............ $ 8.28
Book value per equivalent MindSpring share (4)........... $ 5.13
</TABLE>
- --------------------------
(1) Basic earnings (loss) per common share was computed by dividing net income
(loss) attributable to common stockholders by the weighted-average number of
shares of common stock outstanding for the period then ended. Diluted
earnings (loss) per common share reflects the potential dilution that could
occur if options, similar securities or other contracts to issue common
stock were exercised or converted into common stock. However, WWW Holdings
has not included potential common stock in the calculation of earnings
(loss) per common share as such inclusion would have an anti-dilutive
effect.
(2) Basic earnings (loss) per common share was computed by dividing net income
(loss) by the weighted-average number of shares of common stock outstanding
for the period then ended. The effect of the MindSpring's stock options,
using the treasury stock method, was included in the computation of diluted
earnings (loss) per common share for the year ended December 31, 1998 and
the nine months ended September 30, 1998. For the nine months ended
September 30, 1999 and each of the two years ended December 31, 1997 and
1996, the effect of the options is excluded, as it is anti-dilutive.
(3) The historical book value per share is computed by dividing common
stockholders' equity by the number of shares of common stock outstanding at
September 30, 1999. The pro forma combined book value per share is computed
by dividing pro forma common stockholders' equity by the pro forma number of
shares of WWW Holdings common stock outstanding as of September 30, 1999, as
if the reorganization had occurred as of that date.
(4) The book value per equivalent EarthLink share is calculated by multiplying
the book value per WWW Holdings share amount by the exchange ratio of 1.615.
The book value per equivalent MindSpring share remains unchanged as the
exchange ratio to WWW Holdings is 1-to-1.
10
<PAGE>
EARTHLINK NETWORK, INC.--SELECTED HISTORICAL FINANCIAL INFORMATION
We derived the information below from the audited consolidated financial
statements of EarthLink Network, Inc. for its fiscal years ended December 31,
1994 through 1998 and from the unaudited consolidated financial statements for
the nine months ended September 30, 1998 and 1999. You should not expect the
results for the prior periods to be an indication of the results to be achieved
for future periods. This information is only a summary and should be read in
conjunction with EarthLink Network, Inc. historical consolidated financial
statements, and related notes, contained elsewhere in this joint proxy
statement/prospectus.
<TABLE>
<CAPTION>
INCEPTION NINE MONTHS
(MAY 26, 1994) ENDED
THROUGH YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------------------------ -------------------
1994 1995 1996 1997 1998 1998 1999
------------------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues............................ $ 111 $ 3,028 $ 33,230 $ 80,888 $175,941 $117,640 $235,818
Operating costs and expenses........ 259 9,046 63,488 109,342 238,180 155,796 325,614
Loss from operations................ (148) (6,018) (30,258) (28,454) (62,239) (38,156) (89,796)
Net loss............................ (148) (6,120) (31,149) (29,916) (59,782) (37,249) (78,155)
Deductions for accretion dividends
(1)............................... -- -- -- -- (7,601) (4,330) (10,677)
Net loss attributable to common
stockholders...................... $ (148) $(6,120) $(31,149) $ (29,916) $(67,383) $(41,579) $(88,832)
Basic and diluted net loss per share
(2)............................... $ (0.05) $ (0.80) $ (2.57) $ (1.50) $ (2.58) $ (1.64) $ (2.78)
Weighted average shares (2)......... 3,100 7,674 12,138 20,002 26,157 25,292 31,925
Other operating data:
EBITDA (3)........................ $ (141) $(5,713) $(26,105) $ (19,077) $ (7,513) $ (4,759) $(21,660)
Cash flows from
Operating activities............ (146) (3,643) (16,222) (21,290) 26,597 14,398 (8,034)
Investing activities............ (97) (4,266) (18,361) (16,095) (9,239) (1,031) (33,709)
Financing activities............ 243 8,199 38,286 49,842 107,056 104,580 239,194
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------------- -------------
1994 1995 1996 1997 1998 1999
------------------- -------- -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents...... $ -- $ 290 $ 3,993 $ 16,450 $140,864 $338,315
Total assets................... 186 4,874 27,119 46,887 266,341 443,512
Long-term debt................. -- 355 6,088 8,218 7,701 9,201
Total liabilities.............. 89 4,584 34,367 40,812 68,997 87,627
Accumulated deficit............ (148) (5,007) (36,156) (66,072) (133,454) (222,287)
Stockholders' equity
(deficit).................... 97 290 (21,261) 6,075 197,344 355,885
</TABLE>
- ------------------------------
(1) Reflects the accretion of liquidation dividends on series A and B
convertible preferred stock at 3% compounded quarterly and the accretion of
a dividend related to the beneficial conversion feature in accordance with
EITF D-60.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of weighted average shares outstanding in
the net loss per share computation.
(3) 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 from, as an alternative to, or more meaningful than measures of
performance determined in accordance with generally accepted accounting
principles.
11
<PAGE>
MINDSPRING ENTERPRISES, INC.--SELECTED HISTORICAL FINANCIAL INFORMATION
We derived the information below from the audited financial statements of
MindSpring Enterprises, Inc. for its fiscal years ended December 31, 1994
through 1998 and from the unaudited financial statements for the nine months
ended September 30, 1998 and 1999. You should not expect the results for the
prior periods to be an indication of the results to be achieved for future
periods. This information is only a summary and should be read in conjunction
with MindSpring Enterprises, Inc. financial statements, and related notes,
contained elsewhere in this joint proxy statement/prospectus.
<TABLE>
<CAPTION>
INCEPTION FOR THE
PERIOD NINE MONTHS
(FEBRUARY 24, ENDED
1994 THROUGH YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ----------------------------------------- --------------------
1994) 1995 1996 1997 1998 1998 1999
------------- -------- -------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE,
MEMBERSHIP AND RATIO AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues................................ $ 103 $ 2,227 $18,132 $52,556 $114,673 $75,139 $ 235,468
Operating costs......................... 178 3,461 25,654 56,301 106,887 68,651 273,716
Operating income (loss)................. (75) (1,234) (7,522) (3,745) 7,786 6,488 (38,248)
Net income (loss)....................... $ (75) $(1,959) $(7,612) $(4,083) $ 10,544 $ 6,866 $ (21,219)
Basic and diluted income (loss) per
share................................. $ (0.10) $ (0.24) $ (0.09) $ 0.21 $ 0.13 $ (0.35)
Weighted average common shares
outstanding Diluted................... 19,860 31,516 45,084 50,862 50,892 61,042
OTHER OPERATING DATA:
Approximate members at end of period.... 1,000 12,000 122,000 278,000 693,000 455,000 1,297,000
EBITDA (1).............................. $ (70) $ (969) $(4,237) $ 4,950 $ 23,013 $15,732 $ 35,829
Cash flows from:
Operating activities.................. $ (33) $ (70) $(2,005) $11,354 $ 35,501 $18,318 $ 54,416
Financing activities.................. (127) (3,724) (21,336) (9,002) (47,467) (11,934) (269,479)
Investing activities.................. 745 3,634 32,569 (2,619) 170,503 46,728 434,153
Ratio of earnings to fixed charges
(2)................................... -- -- -- -- 9.7 7.4 --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $585 $ 425 $9,653 $ 9,386 $167,743 $386,833
Total assets................................. 722 4,845 35,232 44,286 247,599 719,543
Total long-term debt......................... -- -- 2,043 -- -- 179,975
Total liabilities............................ 52 4,363 9,825 22,873 40,518 239,612
Accumulated deficit.......................... (75) (2,034) (9,646) (13,729) (3,185) (24,404)
Total stockholders' equity................... 670 482 25,407 21,413 207,081 471,931
</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 from, as an alternative to, or more meaningful than measures of
performance determined in accordance with generally accepted accounting
principles.
(2) Earnings consist of income before income taxes, plus fixed charges. Fixed
charges consist of interest charges and amortization of debt issuance costs
and the portion of rent expense under operating leases representing
interest. For the Inception Period, the years ended December 31, 1995, 1996,
and 1997 and the nine months ended September 30, 1999, earnings would have
been insufficient to cover fixed charges by $75, $1,959, $7,612, $4,083, and
$27,859, respectively.
12
<PAGE>
WWW HOLDINGS SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
The selected unaudited pro forma combined financial data present the effect
of the proposed consolidation of EarthLink and MindSpring on a pooling of
interests basis, and the January 5, 2000 investment by Apple Computer of
$200 million in EarthLink. The EarthLink and MindSpring unaudited pro forma
combined financial data are based on the historical consolidated financial
statements and the related notes included elsewhere in this document. The
unaudited pro forma combined balance sheet data assume that the consolidation of
EarthLink and MindSpring into WWW Holdings and the investment by Apple Computer
took place on September 30, 1999. The unaudited pro forma combined statements of
operations data assume that the consolidation of EarthLink and MindSpring took
place as of the beginning of the periods presented. In addition, the unaudited
pro forma combined statements of operations data reflect acquisitions completed
by EarthLink and MindSpring during 1999 and 1998 as described below as if the
acquisitions had been completed on January 1, 1998.
On June 5, 1998, EarthLink acquired the Sprint Internet Passport business of
Sprint Corporation in a transaction accounted for as a purchase. The unaudited
pro forma combined statement of operations data for the year ended December 31,
1998 and the nine months ended September 30, 1998 is based upon Sprint Internet
Passport's historical results of operations and combines the results of
operations as if the transaction had been completed on January 1, 1998.
On October 15, 1998, MindSpring acquired from America Online, Inc. assets
used in connection with the consumer dial-up Internet access business of
Spry, Inc. On February 17, 1999, MindSpring acquired some of the tangible and
intangible assets and rights used in connection with the Internet services
business operated in the United States by NETCOM On-Line Communication
Services, Inc. The unaudited pro forma combined statements of operations data
reflect the Spry, Inc. acquisition as if it occurred on January 1, 1997, for the
year ended December 31, 1997, and January 1, 1998, for the year ended
December 31, 1998 and the nine months ended September 30, 1998. In addition, the
unaudited pro forma combined statement of operations data for the nine months
ended September 30, 1999 reflects the acquisition of NETCOM as if it had been
completed on January 1, 1998.
The unaudited pro forma combined financial data are presented for
illustrative purposes only and are not necessarily indicative of the combined
financial position or results of operations of future periods or the results
that actually would have been realized had the entities been a single entity
during these periods. The unaudited pro forma combined financial data as of
September 30, 1999 and for each of the three years in the period ended
December 31, 1998, and for the nine months ended September 30, 1999 and 1998,
are derived from the unaudited pro forma condensed combined financial statements
included elsewhere in this document and should be read in conjunction with those
statements and the related notes. See "WWW Holdings Pro Forma Financial
Information" on page .
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ---------------------
1996 1997 1998 1998 1999
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS,)EXCEPT PER SHARE
DATA
PRO FORMA COMBINED STATEMENTS OF
OPERATIONS DATA:
Revenues................................ $ 51,362 $183,635 $ 481,980 $ 345,422 $ 490,143
Operating costs and expenses............ 89,142 235,700 709,672 498,041 633,891
Loss from operations.................... (37,780) (52,065) (227,692) (152,619) (143,748)
Net loss................................ (38,761) (53,873) (219,084) (149,792) (114,628)
Deductions for accretion dividends
(1)................................... -- -- (13,126) (8,946) (10,677)
Net loss attributable to common
stockholders.......................... $(38,761) $(53,873) $(232,210) $(158,738) $(125,305)
Basic and diluted net loss per share.... $ (0.76) $ (0.65) $ (2.35) $ (1.68) $ (1.07)
Weighted average shares................. 51,119 83,387 99,016 94,596 117,436
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
PRO FORMA COMBINED BALANCE SHEET DATA: -------------
<S> <C>
Cash and cash equivalents................................... $ 925,148
Total assets................................................ 1,339,396
Long-term debt.............................................. 189,702
Total liabilities........................................... 347,739
Accumulated deficit......................................... (290,850)
Stockholders' equity........................................ 991,657
</TABLE>
- ------------------------
(1) Reflects the accretion of liquidation dividends on series A and B
convertible preferred stock at 3% compounded quarterly and the accretion of
a dividend related to the beneficial conversion feature in accordance with
EITF D-60.
14
<PAGE>
A CAUTION ABOUT FORWARD-LOOKING STATEMENTS
The matters discussed throughout this joint proxy statement/prospectus that
are not historical facts are forward-looking and, accordingly, involve
estimates, projections, goals, forecasts, assumptions and uncertainties that
could cause actual results or outcomes to differ materially from those expressed
in the forward-looking statements.
These forward-looking statements may relate to, but are not limited to,
future capital expenditures, acquisitions, future revenues, earnings, margins,
costs, demand for Internet access, market trends in the Internet service
business, inflation and various economic and business trends. You can identify
forward-looking statements by the use of words such as "expect," "estimate,"
"project," "budget," "forecast," "anticipate," "plan" and similar expressions.
Forward-looking statements include all statements regarding expected financial
position, results of operations, cash flows, dividends, financing plans,
business strategies, operating efficiencies or synergies, budgets, capital and
other expenditures, competitive positions, growth opportunities for existing or
proposed products or services, plans and objectives of management, and markets
for stock of WWW Holdings, EarthLink and MindSpring.
Examples of factors that you should consider with respect to any
forward-looking statements made throughout this joint proxy statement/prospectus
include, but are not limited to, the following:
- general industry trends and the effects of vigorous competition in the
Internet access and business services industry, including the entry of
large computer hardware and software, media and telecommunications
companies into the industry;
- legislative and regulatory initiatives that could affect the provision of
Internet services;
- market demand for Internet services, changes in the economies of
geographic areas served by the companies and catastrophic natural
disasters;
- the ability of EarthLink, MindSpring, WWW Holdings and their suppliers and
customers to successfully address Year 2000 readiness issues;
- unanticipated changes in operating expenses and capital expenditures;
- customer business conditions, including demand for online access to their
products or services;
- financial or regulatory accounting principles or policies imposed by the
Financial Accounting Standards Board, the Securities and Exchange
Commission and similar agencies with regulatory oversight;
- employee workforce factors, including loss or retirement of key
executives;
- the availability and terms of Internet service provider access to
broadband facilities owned by other companies;
- technological developments resulting in competitive disadvantages and
creating the potential for impairment of existing assets;
- unexpected costs or difficulties related to the integration of the
businesses of EarthLink and MindSpring;
- regulatory delays or conditions imposed by regulatory bodies in approving
the reorganization;
- general economic factors including inflation and capital market
conditions; and
- adverse changes in the securities markets.
These factors are difficult to predict. They also involve uncertainties that
may materially affect actual results, and may be beyond the control of
EarthLink, MindSpring or WWW Holdings. New
15
<PAGE>
factors may emerge from time to time and it is not possible for us to predict
new factors, nor can we assess the potential effect of any new factors on
EarthLink, MindSpring or WWW Holdings.
These forward-looking statements are found at various places throughout this
joint proxy statement/prospectus. We caution you not to place undue reliance on
these forward-looking statements, which speak only as of the date they were
made. None of EarthLink, MindSpring or WWW Holdings undertakes any obligation to
publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date of this joint proxy statement/prospectus
or to reflect the occurrence of events that we do not currently anticipate.
16
<PAGE>
RISK FACTORS RELATING TO THE REORGANIZATION
IN ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, YOU SHOULD CAREFULLY READ AND CONSIDER THE FOLLOWING
FACTORS IN EVALUATING THE PROPOSALS TO BE VOTED ON AT YOUR COMPANY'S
STOCKHOLDERS MEETING.
THE COSTS OF THE REORGANIZATION, THE COSTS OF INTEGRATING THE EARTHLINK AND
MINDSPRING BUSINESSES AND OTHER POTENTIAL ADJUSTMENTS ARE SUBSTANTIAL.
We estimate that it will cost approximately $20.5 million to consummate the
reorganization. These costs will consist of transaction fees for investment
bankers, attorneys, accountants and other related costs incurred by EarthLink
and MindSpring. WWW Holdings expects to incur additional nonrecurring
restructuring charges, the amount of which has not been estimated. All of these
charges will be recorded in the period in which the reorganization is
consummated.
There can be no assurance that WWW Holdings will not incur additional
charges in excess of these amounts to reflect costs associated with the
reorganization, including the costs of integrating the EarthLink and MindSpring
businesses.
After the reorganization is completed, the holders of MindSpring's 5%
convertible subordinated notes will have the option to require WWW Holdings to
repurchase the notes at a repurchase price equal to one hundred percent (100%)
of the principal amount plus accrued interest. The reorganization agreement
provides that the repurchase price for the notes will be paid in cash. If all of
the holders of the notes exercise their repurchase rights, WWW Holdings will be
required to pay to the note holders up to $179,975,000 in cash plus accrued
interest. This would reduce WWW Holdings' cash on hand, which could have an
adverse effect on its business operations. On the other hand, if a substantial
portion of these notes remain outstanding, the amount of debt WWW Holdings would
have could adversely affect it by:
- limiting its ability to obtain necessary financing;
- potentially placing it at a disadvantage compared to its competitors who
have lower levels of debt; and
- making it more vulnerable in a business downturn.
If MindSpring's secured credit facility is terminated or all or a portion of
MindSpring's 5% convertible subordinated notes are repurchased as a result of
the reorganization, WWW Holdings will recognize an expense of $1.8 million or up
to $5.8 million, respectively, related to deferred financing costs.
AS A RESULT OF THE REORGANIZATION, WWW HOLDINGS WILL REVERSE MINDSPRING'S
PREVIOUSLY RECOGNIZED INCOME TAX BENEFITS.
In 1998, MindSpring's management reviewed its net deferred tax asset,
consisting primarily of net operating loss carryforwards, and based on the net
income generated in 1998 as well as MindSpring's projections of future income,
determined that it was more likely than not that the deferred tax assets would
be realized. As a result of this determination, MindSpring reversed its
valuation allowance in 1998 and did not record an allowance for the nine months
ended September 30, 1999. In the course of the reorganization discussions,
management of EarthLink and MindSpring reviewed the combined net deferred tax
assets and concluded that, due to uncertainty related to the integration of the
two companies and the projected losses of WWW Holdings in the foreseeable
future, it is currently uncertain whether the net deferred tax assets will be
realized. Accordingly, upon consummation of the reorganization, WWW Holdings
expects to reverse the income tax benefits previously realized by MindSpring,
which aggregated to approximately $1.5 million for the year ended December 31,
1998 and $13.6 million for the nine months ended September 30, 1999, in its
combined financial statements for
17
<PAGE>
those periods and to reestablish a valuation allowance on the MindSpring net
deferred tax asset, which was approximately $23.7 million at September 30, 1999.
IF EARTHLINK AND MINDSPRING CANNOT BE SUCCESSFULLY INTEGRATED INTO A SINGLE
ENTITY, WE MAY NOT ACHIEVE THE ANTICIPATED BENEFITS OF THE REORGANIZATION.
After the reorganization is completed, we will need to integrate two large
companies. The failure to successfully integrate our operations may adversely
affect WWW Holdings' business, operations, properties, assets, financial
condition, results of operations or business prospects. Integrating two
companies like EarthLink and MindSpring involves a number of risks, including:
- the diversion of management's attention away from ongoing operations;
- difficulties and expenses in combining the operations, technology and
systems of the two companies;
- difficulties and expenses in the assimilation and retention of employees,
including the integration of teams that have not previously worked
together;
- difficulties in the creation and maintenance of uniform standards,
controls, procedures and policies;
- different geographic locations of the principal operations of EarthLink
and MindSpring;
- challenges in keeping and attracting members and business customers; and
- potential adverse short-term effects on operating results, primarily as a
result of increased costs resulting from the integration of the two
businesses.
INCREASED COMPETITION IN THE INTERNET SERVICE INDUSTRY MAY MAKE IT DIFFICULT
FOR WWW HOLDINGS TO ATTRACT AND RETAIN MEMBERS AND TO MAINTAIN CURRENT PRICING
LEVELS.
We operate in the Internet services market, which is extremely competitive.
Our current and prospective competitors include many large companies that have
substantially greater market presence, financial, technical, marketing and other
resources than we have. We compete directly or indirectly with the following
categories of companies:
- established online service providers, such as America Online, Inc., the
Microsoft Network and Prodigy Communications Corporation;
- local, regional and national Internet service providers, such as
RMI.NET, Inc. and Internet America, Inc.;
- national telecommunications companies, such as AT&T Corp. and GTE
Corporation;
- regional Bell operating companies, such as BellSouth Corporation and SBC
Communications Inc.;
- personal computer manufacturers with Internet service provider businesses
such as Gateway, Inc. and Dell Computer Corporation;
- "free access" Internet service providers, such as NetZero, Inc.; and
- online cable services, such as Excite@Home Corporation and Roadrunner
Computer Systems, Inc.
We will also face competition from companies that provide broadband and
other high-speed connections to the Internet, including local and long-distance
telephone companies, cable television companies, electric utility companies, and
wireless communications companies. These companies may use broadband
technologies to include Internet access or Web hosting in their basic bundle of
services
18
<PAGE>
or may offer Internet access or Web hosting services for a nominal additional
charge. Broadband technologies enable consumers to transmit and receive print,
video, voice and data in digital form at significantly faster access speeds than
existing dial-up modems.
These companies may also prevent us from delivering Internet access through
their systems. If the owners of these high-speed, broadband facilities
increasingly use them to provide Internet access and we are unable to gain
access to these facilities on reasonable terms, our business, financial
condition and results of operations could be materially adversely affected.
Neither EarthLink nor MindSpring currently competes internationally. If the
ability to provide Internet access internationally becomes a competitive
advantage in the Internet access industry, WWW Holdings may be at a competitive
disadvantage relative to our competitors.
Our competition is likely to increase. We believe this will probably happen
as large diversified telecommunications and media companies acquire Internet
service providers, as Internet service providers consolidate into larger, more
competitive companies and as providers who offer free access to the Internet
grow in number and size. Diversified competitors may bundle other services and
products with Internet connectivity services, potentially placing us at a
significant competitive disadvantage. In addition, competitors may charge less
than we do for Internet services, or may charge nothing at all in some
circumstances, causing us to reduce, or preventing us from raising, our fees. As
a result, our business may suffer.
WWW HOLDINGS' RESULTS OF OPERATIONS COULD BE AFFECTED BY FLUCTUATIONS IN THE
USE OF THE INTERNET FOR E-COMMERCE TRANSACTIONS.
Use of the Internet for retail transactions is a relatively recent
development and the continued demand and growth of a market for services and
products via the Internet is uncertain. The Internet may ultimately prove not to
be a viable commercial marketplace for a number of reasons, including:
- unwillingness of consumers to shift their purchasing from traditional
retailers to online purchases;
- lack of acceptable security for data and concern for privacy of personal
information;
- limitations on access and ease of use;
- congestion leading to delayed or extended response times;
- inadequate development of the Web infrastructure to keep pace with
increased levels of use; and
- increased or excessive government regulation.
If use of the Internet for commercial transactions declines or does not
increase, and if other uses, such as e-mail and personal Web sites, do not
increase, this could have a material adverse effect on the business and results
of operations of WWW Holdings.
ANY DISRUPTION IN THE INTERNET ACCESS PROVIDED BY WWW HOLDINGS COULD
ADVERSELY AFFECT WWW HOLDINGS' BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
WWW Holdings' systems and infrastructure will be susceptible to natural and
man-made disasters such as earthquakes, fires, floods, power loss and sabotage.
WWW Holdings' systems also will be vulnerable to disruptions from computer
viruses and attempts by hackers to penetrate WWW Holdings' network security.
WWW Holdings will be covered by insurance from loss of income from some of
the events listed above, but this insurance may not be adequate to cover all
instances of system failure. WWW Holdings also will have insurance from loss of
income due to earthquakes, but the amount of such insurance may
19
<PAGE>
be insufficient, especially given the frequency and magnitude of earthquakes in
California, where a number of WWW Holdings' facilities will be located.
Any of the events described above could cause interference, delays, service
interruptions or suspensions and adversely affect WWW Holdings' business and
results of operations.
WWW Holdings must continue to expand and adapt its system infrastructure to
keep pace with the increase in the number of members who use the services it
expects to provide. Demands on infrastructure that exceed WWW Holdings' current
forecasts could result in technical difficulties with its servers. Continued or
repeated system failures could impair WWW Holdings' reputation and brand names
and reduce WWW Holdings' revenues.
If, in the future, WWW Holdings cannot modify these systems to accommodate
increased traffic, WWW Holdings could suffer slower response times, problems
with customer service and delays in reporting accurate financial information.
Any of these factors could significantly and adversely affect the results of WWW
Holdings' operations.
WWW HOLDINGS MUST CONTINUE TO ENHANCE ITS PRODUCTS AND SERVICES AND DEVELOP
NEW ONES TO BE SUCCESSFUL IN THE RAPIDLY EVOLVING MARKET FOR INTERNET SERVICES,
AND WE CANNOT BE CERTAIN THAT WWW HOLDINGS WILL BE ABLE TO DO SO
COST-EFFECTIVELY.
Rapid technological change, changing customer needs, frequent new product
and service introductions and evolving industry standards characterize the
Internet market. These market characteristics could render WWW Holdings'
services, technology and systems obsolete. WWW Holdings must continually improve
the performance, features and reliability of its services to respond to evolving
market demands and competition. WWW Holdings' business, operating results and
financial condition would be materially adversely affected if it is unable to
respond in a cost-effective and timely manner to changing market conditions or
customer requirements.
IF WWW HOLDINGS' THIRD PARTY NETWORK PROVIDERS ARE UNABLE OR UNWILLING TO
PROVIDE INTERNET ACCESS TO OUR MEMBERS ON COMMERCIALLY REASONABLE TERMS, WWW
HOLDINGS MAY SUFFER THE LOSS OF CUSTOMERS, HIGHER COSTS AND LOWER OVERALL
REVENUES.
EarthLink provides dial-up access through company-owned points of presence
and through the networks of Worldcom/UUNet, PSINet, Level 3 and Sprint.
MindSpring provides dial-up access through company-owned points of presence and
through the networks of ICG Netahead, Worldcom/ UUNet, GTE/BBN and PSINet.
Approximately 94% of the members of WWW Holdings will live in a geographic area
served by two or more network providers. WWW Holdings will be able to serve its
members through the combination of network providers that it deems most
efficient. Only 6% of the members of WWW Holdings will live in a geographic area
served by only one network provider. The following providers are the sole
provider of network access for the percentage of our combined member base
indicated: UUNet, 2.8%; PSINet, 0.4%; Level 3, 0.4%; Sprint, 0.5%; EarthLink,
0.3%; MindSpring, 1.4%; and ICG Netahead, 0.3%. Our ability to provide Internet
access to our members will be limited if our third-party network providers are
unable or unwilling to provide access to our members, we are unable to secure
alternative arrangements upon termination of third-party network provider
agreements, or there is a loss of access to third-party providers for other
reasons. These events could also limit our ability to further expand nationally,
which could have a material adverse affect on our business. If we lose access to
third-party providers under current arrangements, we may not be able to make
alternative arrangements on terms acceptable to us, or at all. We do not
currently have any plans or commitments with respect to alternative third-party
provider arrangements in areas served by only one network provider. Moreover,
while the contracts with the third-party providers require them to provide
commercially reliable service to our members with a significant assurance of
accessibility to the Internet, the performance of third-party providers may not
meet our requirements, which could materially adversely affect our business,
financial condition and results of operations.
20
<PAGE>
WWW HOLDINGS MAY NOT BE ABLE TO MAINTAIN OR INCREASE ITS MEMBERSHIP LEVELS
IF IT DOES NOT HAVE UNINTERRUPTED AND REASONABLY PRICED ACCESS TO THE LOCAL AND
LONG-DISTANCE TELECOMMUNICATIONS LINES NECESSARY FOR IT TO PROVIDE INTERNET
ACCESS TO ITS MEMBERS.
WWW Holdings will rely on local telephone companies and other companies to
provide data communications capacity through local telecommunications lines and
leased long-distance lines. We may experience disruptions or capacity
constraints in these telecommunications services. If disruptions or capacity
constraints occur, we may have no means of replacing these services on a timely
basis, or at all. In addition, local phone service is sometimes available only
from the local monopoly telephone company in each of the markets we serve. We
believe that the Federal Telecommunications Act of 1996 generally will lead to
increased competition in the provision of local telephone services, but we
cannot predict when or to what extent this will occur or the effect of increased
competition on pricing or supply.
WWW HOLDINGS' REVENUES AND RESULTS OF OPERATIONS WILL BE DEPENDENT UPON WWW
HOLDINGS' PROPRIETARY TECHNOLOGY AND WWW HOLDINGS MAY NOT BE SUCCESSFUL IN
PROTECTING ITS PROPRIETARY RIGHTS OR AVOIDING CLAIMS THAT IT INFRINGES UPON THE
PROPRIETARY RIGHTS OF OTHERS.
Our success depends in part upon the software and related documentation of
EarthLink and MindSpring. We principally rely upon copyright, trade secret and
contract laws to protect our proprietary technology. We cannot be certain that
we have taken adequate steps to prevent misappropriation of our technology or
that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technology.
We have permission and, in some cases, licenses from each manufacturer of
the software that we bundle in EarthLink's and MindSpring's front-end software
product for members. Although we do not believe that the software or the
trademarks we use or any of the other elements of our business infringe on the
proprietary rights of any third parties, third parties may assert claims against
us for infringement of their proprietary rights and these claims may be
successful.
We could incur substantial costs and diversion of management resources in
the defense of any claims relating to proprietary rights, which could materially
adversely affect our business, financial condition, and results of operations.
Parties making these claims could secure a judgment awarding substantial damages
as well as injunctive or other equitable relief that could effectively block our
ability to license our products in the United States or abroad. Such a judgment
could have a material adverse effect on our business, financial condition and
results of operations. If a third party asserts a claim relating to proprietary
technology or information against us, we may seek licenses to the intellectual
property from the third party. We cannot be certain, however, that third parties
will extend licenses to us on commercially reasonable terms, or at all. If we
fail to obtain the necessary licenses or other rights, it could materially
adversely affect WWW Holdings' business, financial condition and results of
operations.
DIFFICULTIES WWW HOLDINGS MAY ENCOUNTER WITH ITS GROWTH AND EXPANSION COULD
ADVERSELY AFFECT THE RESULTS OF WWW HOLDINGS' OPERATIONS.
WWW Holdings' strategy will be to grow its membership at a rapid pace. This
strategy is likely to place a significant strain on WWW Holdings' resources
because of:
- the need to manage relationships with various strategic partners,
technology licensors, members and other third parties (based on
September 30, 1999 data, WWW Holdings will have approximately 22
significant strategic partners, approximately 5 significant licensors of
technology material to the business, and approximately 2.85 million
members upon consummation of the reorganization);
21
<PAGE>
- difficulties in hiring and retaining skilled personnel necessary to
support WWW Holdings' business (based on September 30, 1999 data, WWW
Holdings will have approximately 4,100 employees upon consummation of the
reorganization);
- increased demand on customer service and technical support;
- pressures for the continued development of WWW Holdings' financial and
information management systems; and
- potential challenges associated with strategic acquisitions of
complementary member accounts and businesses, if any, including systems
integration difficulties and infrastructure strains on our ongoing
business.
Difficulties WWW Holdings may encounter in dealing successfully with the
above risks could adversely affect the results of WWW Holdings' operations.
THE ABILITY OF WWW HOLDINGS STOCKHOLDERS TO EFFECT CHANGES IN CONTROL OF WWW
HOLDINGS WILL BE LIMITED.
There are provisions in WWW Holdings' certificate of incorporation, bylaws,
and the Delaware General Corporation Law that could delay or impede the removal
of incumbent directors and could make more difficult a merger, tender offer, or
proxy contest involving WWW Holdings or could discourage a third party from
attempting to acquire control of WWW Holdings, even if these events would be
beneficial to the interests of the stockholders. In particular, the board of
directors could delay a change in control of WWW Holdings. In addition, WWW
Holdings' certificate of incorporation will authorize its board to provide for
the issuance of shares of preferred stock of WWW Holdings, in one or more
series, which the board of directors could issue without further stockholder
approval and with terms and conditions and rights, privileges and preferences
determined by the board of directors. There are no current plans to issue any
shares of preferred stock other than as a result of the conversion of the
EarthLink convertible preferred stock into WWW Holdings convertible preferred
stock as a result of the merger of EarthLink into WWW Holdings. Also, WWW
Holdings will be governed by Section 203 of the Delaware Corporation Law. In
general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless specified conditions are met. These
factors could have the effect of delaying, deferring, or preventing a change of
control of WWW Holdings.
SPRINT CORPORATION WILL BE ONE OF OUR PRINCIPAL STOCKHOLDERS AND IT CAN
EXERCISE SIGNIFICANT INFLUENCE OVER WWW HOLDINGS.
Sprint Corporation will own approximately 4.41% of the common stock of WWW
Holdings immediately following the reorganization and it also will own preferred
stock that will be convertible into approximately 9.89% of WWW Holdings'
outstanding common stock immediately following the reorganization. Assuming that
Sprint fully exercises its right to maintain its current ownership levels,
Sprint will own approximately 27.8% of WWW Holdings, including approximately 10%
of the common stock of WWW Holdings. As a result in either case, Sprint will be
able to exercise significant influence over most matters requiring stockholder
approval, including the election of directors and the approval of significant
corporate matters, such as some types of change-of-control transactions. For
example, the approval by both of Sprint's representatives on the EarthLink board
of directors was required for EarthLink to go forward with the reorganization.
Sprint did not participate in, or materially seek to influence EarthLink's
management in its negotiations with, MindSpring, however, to the extent that WWW
Holdings engages in significant transactions in the future, we may be required
to seek Sprint's prior approval.
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Sprint's ownership of WWW Holdings preferred stock will permit it to elect
two of WWW Holdings directors, whose approval will be required for WWW Holdings
to undertake various activities. Also, without Sprint's consent, WWW Holdings
will not be able to enter into certain commercial relationships with competitors
of Sprint such as AT&T and MCI WorldCom. This may reduce or eliminate
opportunities for revenue growth. Further, Sprint's competitors may choose not
to engage in commercial relationships with us because of our close relationship
with Sprint, potentially significantly reducing our opportunities for revenue
growth. A more complete description of Sprint's rights and our related
obligations in this area may be found beginning on page under the heading
"Sprint Governance Agreement."
On October 5, 1999, Sprint announced that it entered into an agreement to be
acquired by MCI WorldCom Inc. We cannot guarantee you that WWW Holdings'
relationship with MCI WorldCom will provide WWW Holdings with the same benefits
that were expected to come from its relationship with Sprint.
WE MAY BECOME REGULATED BY THE FEDERAL COMMUNICATIONS COMMISSION OR OTHER
GOVERNMENT AGENCIES, WHICH COULD SIGNIFICANTLY INCREASE OUR OVERHEAD COSTS AND
REQUIRE US TO MODIFY OUR GROWTH STRATEGIES AND OPERATING PLANS.
As Internet service providers, EarthLink and MindSpring are not currently
directly regulated by the Federal Communications Commission or any other agency,
other than regulations applicable to businesses and publicly-traded companies
generally. In a report to Congress on April 10, 1998, the Federal Communications
Commission reaffirmed that Internet service providers should be classified as
unregulated "information service providers" rather than regulated
"telecommunications providers" under the terms of the Federal Telecommunications
Act of 1996.
Nevertheless, Internet-related regulatory policies are continuing to
develop, and it is possible that we could be exposed to regulation in the
future. For example, in the same report to Congress, the Federal Communications
Commission stated its intention to consider whether to regulate voice and fax
telephony services provided over the Internet as "telecommunications" even
though Internet access itself would not be regulated. We cannot predict whether
in the future the Federal Communications Commission will modify its current
policies against regulation of Internet service providers.
ACCESS CHARGES. WWW Holdings also could be affected by any change in the
ability of customers to reach our network through a dial-up telephone call
without any additional charges. This practice has allowed Internet service
providers to offer flat-rate, non-usage sensitive pricing, and has been an
important reason for the growth in Internet use. Recently, the Federal
Communications Commission ruled that connections linking end users to their
Internet service providers are jurisdictionally interstate rather than local,
but the Federal Communications Commission did not subject such calling to the
access charges that apply to traditional telecommunications companies. Local
telephone companies assess access charges to long distance companies for the use
of the local telephone network to originate and terminate long-distance calls,
generally on a per-minute basis. WWW Holdings could be adversely affected by any
regulatory change that would result in application of access charges to Internet
service because this would substantially increase the cost of using the
Internet. However, the FCC Chairman has stated that he opposes Internet-related
access charges, and we believe that this development is unlikely, with one
possible exception that is not currently relevant to our business. Specifically,
there is substantial debate as to whether carrier access charges should apply to
Internet-based telephone services that substitute for conventional telephony. We
have no current plans to install gateway equipment and other telephony, and so
we do not believe we would be directly affected by these developments were they
to occur.
POTENTIAL LIABILITY. The law relating to the liability of Internet service
providers and on-line services companies for information carried on, stored on,
or disseminated through their network is unsettled, even with the recent
enactment of the Digital Millennium Copyright Act. While no one has
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ever filed a claim against EarthLink or MindSpring relating to information
carried on, stored on, or disseminated through their network, someone may
file a claim of that type in the future and may be successful in imposing
liability on us. If that happens, we may have to spend significant amounts of
money to defend ourselves against these claims and, if we are not successful in
our defense, the amount of damages that we will have to pay may be significant.
Any costs that we incur as a result of defending these claims or the amount of
liability that we may suffer if our defense is not successful could materially
adversely affect our business, financial condition and results of operations.
If, as the law in this area develops, we become liable for information
carried on, stored on, or disseminated through our network, we may decide to
take actions to reduce our exposure to this type of liability. This may require
us to spend significant amounts of money for new equipment and may also require
us to discontinue offering some of our products or services.
OTHER ISSUES. Due to the increasing popularity and 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;
- privacy;
- access to some types of content by minors;
- pricing;
- bulk e-mail or "spam;"
- encryption standards;
- consumer protection;
- electronic commerce;
- taxation;
- copyright infringement; and
- other intellectual property issues.
We cannot predict the impact, if any, that any future regulatory changes or
developments may have on our business, financial condition, and results of
operations. Changes in the regulatory environment relating to the Internet
access industry, including regulatory changes that directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition from
regional telephone companies or others, could have a material adverse effect on
our business, financial condition and results of operations.
FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE MAY HAVE ADVERSE EFFECTS ON THE
OPERATIONS AND FINANCIAL PERFORMANCE OF EARTHLINK, MINDSPRING AND WWW HOLDINGS.
Our failure, or the failure of third parties on which we rely, to adequately
address Year 2000 readiness issues could result in an interruption, or a
failure, of some normal business activities or operations. Presently, we believe
that the primary risks that we face with regard to the Year 2000 are those
arising from third-party services or products.
In particular, EarthLink and MindSpring depend heavily on a significant
number of third-party vendors to provide both network services and equipment. A
significant Year 2000-related disruption to these network services or equipment
could cause our customers to consider seeking alternate providers or cause an
unmanageable burden on customer service and technical support. This in turn
could materially and adversely affect WWW Holdings' results of operations,
liquidity and financial condition.
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Furthermore, our business depends on the continued operation of, and
widespread access to, the Internet. To the extent that the normal operation of
the Internet is disrupted by Year 2000 problems, or if a large portion of our
customers are unable to access the Internet due to Year 2000-related issues in
connection with their own systems, WWW Holdings' results of operations,
liquidity and financial condition could be materially and adversely affected.
MindSpring has completed its assessment of the Year 2000 readiness of its
internally-developed and third-party supplied software, computer technology and
other services. Based upon the results of this assessment, MindSpring believes
that its own systems, including the components of its systems provided by
third-party vendors, are Year 2000 compliant. MindSpring anticipates that all of
its material third party providers are Year 2000 compliant and that all of its
other providers are substantially compliant. As of November 30, 1999, MindSpring
had incurred expenses of approximately $600,000 in connection with the
implementation of its Year 2000 compliance program. These costs were expensed as
incurred. MindSpring estimates that it will incur minimal expenses through the
remainder of the Year 2000 compliance program. To the extent it can be
determined at this time, MindSpring has not suffered any Year 2000 problems with
its computer and business systems, nor did any of its significant third-party
vendors, that materially affect MindSpring's business.
EarthLink has incurred insignificant amounts in its efforts to make its
systems Year 2000 compliant and does not anticipate incurring any further
material expenditures as part of these efforts. To the extent it can be
determined at this time, Earthlink has not suffered any Year 2000 problems with
its computer and business systems, nor did any of its significant third-party
vendors, that materially affect EarthLink's business.
IF APPLE'S INVESTMENT IN EARTHLINK IS UNWOUND BECAUSE OF LACK OF REGULATORY
APPROVAL PRIOR TO MARCH 31, 2000, EARTHLINK MAY LOSE SOME OF THE VALUE OF ITS
STRATEGIC RELATIONSHIP WITH APPLE.
On January 4, 2000, a subsidiary of Apple Computer, Inc. purchased
$200 million of EarthLink's series C convertible preferred stock. This purchase,
however, closed in escrow pending the termination or expiration of the required
regulatory waiting period imposed by the Hart-Scott-Rodino Antitrust
Improvements Act. If the waiting period does not expire or terminate prior to
March 31, 2000, this investment will be unwound, Apple's investment will be
returned to Apple and the series C convertible preferred stock will be
cancelled. If this occurs, WWW Holdings may lose the benefits of the strategic
relationship with Apple. In particular, without an investment relationship,
Apple may not promote WWW Holdings' services to Apple customers as vigorously as
it otherwise would. Also, without an investment relationship, Apple would not
have the right, as the holder of WWW Holdings' series C convertible preferred
stock, to elect a director to WWW Holdings' board. Without an Apple member on
WWW Holdings' board, WWW Holdings may be deprived of the business expertise and
prestige an Apple representative could bring to the company. Please carefully
read the section of this joint proxy statement/prospectus titled "Recent
Development--Strategic Alliance with Apple Computer, Inc."
IF WWW HOLDINGS IS UNABLE TO RAISE CAPITAL ON ACCEPTABLE TERMS, WWW HOLDINGS
MAY BE REQUIRED TO MODIFY ITS GROWTH STRATEGIES AND OPERATING PLANS.
After the reorganization, we expect that WWW Holdings will need capital to
continue to enhance and develop the companies' combined network to maintain our
competitive position and continue to meet the increasing demands for service
quality, availability, and competitive pricing. We may also need to spend
significant amounts of cash to:
- fund growth, operating losses and increases in expenses;
- take advantage of unanticipated major strategic alliances or other special
marketing opportunities;
- acquire complementary businesses or assets;
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- develop new products or services; or
- otherwise respond to unanticipated developments or competitive pressures.
If we do not have enough cash on hand, cash generated from our operations,
or cash available under our credit facility with Sprint to meet these cash
requirements, we will need to seek alternative sources of financing to carry out
our growth and operating plans. We may not be able to raise needed cash on terms
acceptable to us or at all. Financings may be on terms that are dilutive or
potentially dilutive to our stockholders. If alternative sources of financing
are required, but are insufficient or unavailable on terms that are acceptable
to us, we will be required to modify our growth and operating plans to the
extent of available funding and attempt to attain profitability in our existing
operations.
MindSpring also has a credit agreement with a group of financial
institutions led by First Union National Bank for a $100 million secured
revolving credit facility. There are no amounts currently outstanding under this
facility. Unless the parties successfully negotiate an amendment to this credit
agreement, the reorganization will give the bank the right to terminate the
credit agreement. If the MindSpring credit agreement with First Union is not
re-negotiated, WWW Holdings may have difficulty in obtaining alternative funds,
if needed. Currently, all amounts that MindSpring may borrow under this credit
agreement are secured by all of MindSpring's assets. Should we decide to
re-negotiate this agreement, it is likely that First Union will require us to
pledge all of the assets of WWW Holdings as security for any amounts borrowed
and WWW Holdings' business activities would likely be subject to numerous
restrictive covenants contained in the credit agreement. These conditions could
place constraints on our ability to conduct our business.
WWW HOLDINGS' STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY REGARDLESS OF WWW
HOLDINGS' ACTUAL OPERATING PERFORMANCE.
There is no current public market for WWW Holdings common stock. Immediately
following completion of the reorganization, WWW Holdings common stock will be
listed for trading on The Nasdaq National Market. The trading price of WWW
Holdings' common stock is likely to be highly volatile. WWW Holdings' stock
price could be subject to wide fluctuations in response to a variety of factors,
including:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- new products or services offered by WWW Holdings or its competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet services industry and the portal and
community services segment in particular;
- WWW Holdings' announcement of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
- additions or departures of key personnel;
- sales of common stock; and
- other events that may be beyond WWW Holdings' control.
In addition, The Nasdaq National Market, where most publicly-held Internet
companies are traded, has recently experienced extreme price and volume
fluctuations. These fluctuations often have been unrelated or disproportionate
to the operating performance of these companies. The trading prices of many
Internet companies' stocks are, or recently have been, at or near historical
highs and these trading prices and multiples are substantially above historical
levels. These trading prices and
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multiples may not be sustainable. These broad market and industry factors may
materially adversely affect the market price of WWW Holdings' common stock,
regardless of WWW Holdings' actual operating performance. In the past, following
periods of volatility in the market price of an individual company's securities,
securities class action litigation often has been instituted against that
company. This type of litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources.
SALES OF SUBSTANTIAL AMOUNTS OF WWW HOLDINGS' COMMON STOCK IN THE OPEN
MARKET COULD DEPRESS WWW HOLDINGS' STOCK PRICE.
If WWW Holdings' stockholders sell substantial amounts of WWW Holdings'
common stock in the public market following consummation of the reorganization,
including shares issued on the exercise of outstanding options and warrants, the
market price of WWW Holdings' common stock could fall. These sales might also
make it more difficult for WWW Holdings to sell equity or equity related
securities at a time and price that WWW Holdings would deem appropriate.
Sales of a large number of shares of common stock in the public market
following the consummation of the reorganization, or even the belief that such
sales could occur, could cause a drop in the market price of WWW Holdings'
common stock and could impair WWW Holdings' ability to raise capital through
offerings of WWW Holdings' equity securities. Immediately after the
reorganization, there will be approximately 117 million shares of WWW Holdings'
common stock outstanding. All of the shares issued to EarthLink and MindSpring
stockholders will be freely tradable without restrictions or further
registration under the Securities Act of 1933, unless such shares are held by
any WWW Holdings "affiliate" or any "affiliate" of EarthLink or MindSpring prior
to the reorganization, as that term is defined under the Securities Act of 1933.
The term "affiliate" would include directors, executive officers and some
significant stockholders.
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THE EARTHLINK SPECIAL MEETING
DATE AND PURPOSE OF THE SPECIAL MEETING
The special meeting of EarthLink stockholders is scheduled to be held on
February 4, 2000, at 8:00 a.m., local time, in the Town Hall Conference Room at
2947 Bradley Street, Pasadena, California. It may be adjourned or postponed to
another date and/or place for proper purposes. The purpose of the meeting is to
consider and vote upon a proposal to adopt the reorganization agreement. The
EarthLink stockholders also might be asked to vote upon a proposal to adjourn
the EarthLink special meeting for the purpose, among others, of allowing
additional time for the solicitation of additional votes to adopt the
reorganization agreement.
RECORD DATE FOR THE SPECIAL MEETING AND WHO IS ENTITLED TO VOTE AT THE SPECIAL
MEETING
RECORD DATE. The EarthLink board has fixed the close of business on
December 20, 1999, as the record date for the determination of the EarthLink
stockholders entitled to receive notice of and to vote at the EarthLink special
meeting. A complete list of stockholders entitled to vote at the meeting will be
open to examination by the stockholders, during regular business hours, for a
period of ten days before the meeting at the principal executive offices of
EarthLink at 3100 New York Drive, Pasadena, California. As of the record date,
32,928,892 shares of EarthLink common stock were outstanding and entitled to
vote on the adoption of the reorganization agreement.
VOTING RIGHTS. Each EarthLink stockholder is entitled to one vote for each
share of EarthLink common stock held on the record date with regard to the
proposal to adopt the reorganization agreement and with regard to each other
matter that may properly come before the EarthLink special meeting. The vote of
the holders of EarthLink's preferred stock is not required for adoption of the
reorganization agreement.
QUORUM REQUIREMENTS. A majority of the EarthLink common stock outstanding
and entitled to vote, represented in person or by proxy, constitutes a quorum
for consideration of each matter at the EarthLink special meeting. If a quorum
is not present at the EarthLink special meeting, management will adjourn it in
order to solicit additional proxies.
VOTE REQUIRED. The affirmative vote of the holders of a majority of the
outstanding shares of EarthLink common stock entitled to vote at the EarthLink
special meeting will be sufficient to adopt the reorganization agreement.
ABSTENTIONS, FAILURES TO VOTE, AND BROKER NON-VOTES. Abstentions may be
specified with respect to the proposal being considered at the EarthLink special
meeting. A properly executed proxy marked "ABSTAIN" will be counted as present
for purposes of determining whether there is a quorum. Because the affirmative
votes of a majority of the outstanding shares of the EarthLink common stock are
required for adoption of the reorganization agreement, a proxy marked "ABSTAIN"
with respect to the reorganization agreement will have the effect of a vote
"AGAINST" the reorganization agreement. In addition, the failure of an EarthLink
stockholder to return a proxy or vote in person at the EarthLink special meeting
or by other permitted means will have the effect of a vote "AGAINST" the
adoption of the reorganization agreement. Brokers who hold shares in street name
for customers have the authority to vote on "routine" proposals when they have
not received instructions from beneficial owners. Brokers are precluded from
exercising their voting discretion with respect to proposals for non-routine
matters such as the adoption of the reorganization agreement. Thus, absent
specific instructions from the beneficial owner of shares of EarthLink common
stock, brokers are not permitted to vote these shares with respect to the
adoption of the reorganization agreement. Since the affirmative vote described
above is required for adoption of the reorganization agreement, a broker
non-vote will have the effect of a vote "AGAINST" adoption of the reorganization
agreement.
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BECAUSE ADOPTION OF THE REORGANIZATION AGREEMENT REQUIRES THE AFFIRMATIVE
VOTE OF A MAJORITY OF THE VOTES ENTITLED TO BE CAST BY THE HOLDERS OF EARTHLINK
COMMON STOCK AT THE EARTHLINK SPECIAL MEETING, ABSTENTIONS AND BROKER NON-VOTES
WILL HAVE THE SAME EFFECT AS NEGATIVE VOTES. THE FAILURE TO VOTE YOUR SHARES
WILL ALSO HAVE THE SAME EFFECT AS A NEGATIVE VOTE. ACCORDINGLY, THE EARTHLINK
BOARD URGES YOU TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY IN THE ENCLOSED, POSTAGE-PAID ENVELOPE, OR TO CAST YOUR VOTE ON THE
INTERNET OR BY TELEPHONE IN ACCORDANCE WITH THE INSTRUCTIONS ON THE PROXY FORM.
As of the record date, EarthLink directors and executive officers owned
approximately 10.1 million shares of EarthLink common stock, or approximately
31% of the shares entitled to vote at the EarthLink special meeting. It is
currently expected that each director or executive officer will vote the shares
of EarthLink common stock beneficially owned by him for adoption of the
reorganization agreement.
Some of EarthLink's stockholders, including members of management and the
board of directors, who collectively own approximately 29.3% of the outstanding
common stock of EarthLink, have entered into agreements with MindSpring in which
they have agreed to vote their shares "FOR" adoption of the reorganization
agreement. See "EarthLink and MindSpring Stockholder Agreements" on page for
more information about these agreements.
VOTING BY PROXY AND HOW TO REVOKE YOUR PROXY
You may vote shares either in person or by duly authorized proxy. In
addition, you may vote your shares by telephone or through the Internet by
following the instructions provided on the enclosed proxy form. You may use the
proxy accompanying this joint proxy statement/prospectus if you are unable to
attend the EarthLink special meeting in person or if you wish to have your
shares voted by proxy even if you do attend the EarthLink special meeting. You
may revoke any proxy given by you in response to this solicitation at any time
before the proxy is voted at the EarthLink special meeting by delivering a
written notice of revocation, by delivery to EarthLink a subsequently dated,
properly executed proxy or by attending the EarthLink special meeting and
electing to vote in person. Your attendance at the EarthLink special meeting, by
itself, will not constitute a revocation of a proxy. You should address any
written notices of proxy revocation to: EarthLink Network, Inc., at 3100 New
York Drive, Pasadena, California 91107, Attention: Corporate Secretary.
All shares represented by effective proxies on the accompanying form of
EarthLink proxy received by EarthLink at or before the EarthLink special
meeting, and not revoked before they are exercised, will be voted at the
EarthLink special meeting in accordance with their terms. If no instructions are
given, the EarthLink proxies will be voted "FOR" the adoption of the
reorganization agreement and at the discretion of the proxies on any other
matters that properly come before the EarthLink special meeting. The EarthLink
board is not aware of any other matters to be presented at the EarthLink special
meeting other than matters incidental to the conduct of the EarthLink special
meeting.
SOLICITATION OF PROXIES
EarthLink will bear the entire cost of the solicitation of proxies for the
EarthLink special meeting and of the printing, mailing and filing of this joint
proxy statement/prospectus. In addition to the solicitation of proxies by mail,
officers, directors, employees and agents of EarthLink may solicit proxies by
correspondence, telephone, telegraph, telecopy or other electronic means, or in
person, but without extra compensation. EarthLink has retained Corporate
Investor Communications, Inc., a proxy solicitation firm, to assist it in the
solicitation of proxies for the EarthLink special meeting at a cost of
approximately $5,000 plus reimbursement of reasonable out-of-pocket expenses.
EarthLink will request banks, brokers and other record holders to send proxies
and proxy materials to the beneficial owners of EarthLink common stock and
secure their voting instructions and will reimburse their reasonable charges and
expenses incurred in forwarding the proxies and proxy materials. Further
solicitation of proxies may be made by telephone or in person with some
EarthLink stockholders following the original solicitation. All further
solicitation will be made by officers and other employees of EarthLink who will
not be additionally compensated for their activities.
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THE MINDSPRING SPECIAL MEETING
DATE AND PURPOSE OF THE SPECIAL MEETING
The special meeting of MindSpring's stockholders is scheduled to be held on
February 4, 2000, at 11:00 a.m., local time, in the High Museum of Fine Art,
Hill Auditorium, 1280 Peachtree Street, NE, Atlanta, Georgia. It may be
adjourned or postponed to another date and/or place for proper purposes. The
purpose of the MindSpring special meeting is to consider and vote upon a
proposal to adopt the reorganization agreement. The MindSpring stockholders also
might be asked to vote upon a proposal to adjourn the MindSpring special meeting
for the purpose, among others, of allowing additional time for the solicitation
of additional votes to adopt the reorganization agreement.
RECORD DATE FOR THE SPECIAL MEETING AND WHO IS ENTITLED TO VOTE AT THE SPECIAL
MEETING
RECORD DATE. The MindSpring board has fixed the close of business on
December 20, 1999, as the record date for the determination of the MindSpring
stockholders entitled to receive notice of and to vote at the MindSpring special
meeting. A complete list of stockholders entitled to vote at the meeting will be
open to examination by the stockholders during regular business hours, for a
period of ten days before the MindSpring special meeting at the principal
executive offices of MindSpring at 1430 Peachtree Street, NW, Suite 400,
Atlanta, Georgia. As of the record date, 63,644,368 shares of MindSpring common
stock were outstanding and entitled to vote on the adoption of the
reorganization agreement.
VOTING RIGHTS. Each MindSpring stockholder is entitled to one vote for each
share of MindSpring common stock held on the record date with regard to the
proposal to adopt the reorganization agreement and with regard to each other
matter that may properly come before the MindSpring special meeting.
QUORUM REQUIREMENTS. A majority of the MindSpring common stock outstanding
and entitled to vote, represented in person or by proxy, constitutes a quorum
for consideration of each matter at the MindSpring special meeting. If a quorum
is not present at the MindSpring special meeting, management will adjourn it in
order to solicit additional proxies.
VOTE REQUIRED. The affirmative vote of the holders of a majority of the
outstanding shares of MindSpring common stock entitled to vote at the MindSpring
special meeting will be sufficient to adopt the reorganization agreement.
ABSTENTIONS, FAILURES TO VOTE, AND BROKER NON-VOTES. Abstentions may be
specified with respect to the proposal being considered at the MindSpring
special meeting. A properly executed proxy marked "ABSTAIN" will be counted as
present for purposes of determining whether there is a quorum. Because the
affirmative votes of a majority of the outstanding shares of the MindSpring
common stock are required for adoption of the reorganization agreement, a proxy
marked "ABSTAIN" with respect to the reorganization agreement will have the
effect of a vote "AGAINST" the adoption of the reorganization agreement. In
addition, the failure of a MindSpring stockholder to return a proxy or vote in
person at the MindSpring special meeting or by other permitted means will have
the effect of a vote "AGAINST" the adoption of the reorganization agreement.
Brokers who hold shares in street name for customers have the authority to vote
on "routine" proposals when they have not received instructions from beneficial
owners. Brokers are precluded from exercising their voting discretion with
respect to proposals for non-routine matters such as the adoption of the
reorganization agreement. Thus, absent specific instructions from the beneficial
owner of shares of MindSpring common stock, brokers are not permitted to vote
these shares with respect to the adoption of the reorganization agreement. Since
the affirmative vote described above is required for adoption of the
reorganization agreement, a broker non-vote will have the effect of a vote
"AGAINST" the adoption of the reorganization agreement.
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BECAUSE ADOPTION OF THE REORGANIZATION AGREEMENT REQUIRES THE AFFIRMATIVE
VOTE OF A MAJORITY OF THE VOTES ENTITLED TO BE CAST BY THE HOLDERS OF MINDSPRING
COMMON STOCK AT THE MINDSPRING SPECIAL MEETING, ABSTENTIONS AND BROKER NON-VOTES
WILL HAVE THE SAME EFFECT AS NEGATIVE VOTES. THE FAILURE TO VOTE YOUR SHARES
ALSO WILL HAVE THE SAME EFFECT AS A NEGATIVE VOTE. ACCORDINGLY, THE MINDSPRING
BOARD URGES YOU TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY IN THE ENCLOSED, POSTAGE-PAID ENVELOPE OR TO CAST YOUR VOTE ON THE
INTERNET OR BY TELEPHONE IN ACCORDANCE WITH THE INSTRUCTIONS ON THE PROXY FORM.
As of the record date, MindSpring directors and executive officers owned
approximately 4.9 million shares of MindSpring common stock, or approximately
7.8% of the shares entitled to vote at the MindSpring special meeting. It is
currently expected that each director or executive officer will vote the shares
of MindSpring common stock beneficially owned by him "FOR" adoption of the
reorganization agreement.
Some of MindSpring's stockholders, including members of management and the
board of directors, who collectively own approximately 24.5% of the outstanding
common stock of MindSpring, have entered into agreements with EarthLink in which
they have agreed to vote their shares "FOR" adoption of the reorganization
agreement. See "EarthLink and MindSpring Stockholder Agreements" on page for
more information about these agreements.
VOTING BY PROXY AND HOW TO REVOKE YOUR PROXY
You may vote shares either in person or by duly authorized proxy. In
addition, you may vote your shares by telephone or through the Internet by
following the instructions provided in the enclosed proxy form. You may use the
proxy accompanying this joint proxy statement/prospectus if you are unable to
attend the MindSpring special meeting in person or if you wish to have your
shares voted by proxy even if you do attend the MindSpring special meeting. You
may revoke any proxy given by you in response to this solicitation at any time
before the proxy is voted at the MindSpring special meeting by delivering a
written notice of revocation, by delivering to MindSpring a subsequently dated,
properly executed proxy or by attending the MindSpring special meeting and
electing to vote in person. Your attendance at the MindSpring special meeting,
by itself, will not constitute a revocation of a proxy. You should address any
written notices of proxy revocation to: MindSpring Enterprises, Inc., 1430 West
Peachtree Street, NW, Suite 400, Atlanta, Georgia 30309, Attention: Corporate
Secretary.
All shares represented by effective proxies on the accompanying form of
MindSpring proxy received by MindSpring at or before the MindSpring special
meeting, and not revoked before they are exercised, will be voted at the
MindSpring special meeting in accordance with their terms. If no instructions
are given, the MindSpring proxies will be voted "FOR" the adoption of the
reorganization agreement and at the discretion of the proxies on any other
matters that properly come before the MindSpring special meeting. The MindSpring
board is not aware of any other matters to be presented at the MindSpring
special meeting other than matters incidental to the conduct of the MindSpring
special meeting.
SOLICITATION OF PROXIES
MindSpring will bear the entire cost of the solicitation of proxies for the
MindSpring special meeting and of the printing, mailing and filing of this joint
proxy statement/prospectus. In addition to the solicitation of proxies by mail,
officers, directors, employees and agents of MindSpring may solicit proxies by
correspondence, telephone, telegraph, telecopy or other electronic means, or in
person, but without extra compensation. MindSpring has retained Corporate
Investor Communications, Inc., a proxy solicitation firm, to assist it in the
solicitation of proxies for the MindSpring special meeting at a cost of
approximately $7,000 plus reimbursement of reasonable out-of-pocket expenses.
MindSpring will request banks, brokers and other record holders to send proxies
and proxy materials to the beneficial owners of MindSpring common stock and
secure their voting instructions and will reimburse their reasonable charges and
expenses incurred in forwarding the proxies and proxy materials. Further
solicitation of proxies may be made by telephone or in person with some
MindSpring stockholders following the original solicitation. All further
solicitation will be made by officers and other employees of MindSpring who will
not be additionally compensated for their activities.
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THE REORGANIZATION
THE FOLLOWING INFORMATION RELATING TO THE REORGANIZATION IS NOT INTENDED TO
BE A COMPLETE DESCRIPTION OF ALL THE INFORMATION RELATING TO THE REORGANIZATION
BUT IS INTENDED TO INCLUDE THE MATERIAL TERMS OF THE REORGANIZATION. MORE
DETAILED INFORMATION IS CONTAINED ELSEWHERE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, INCLUDING THE ANNEXES. A COPY OF THE REORGANIZATION
AGREEMENT IS SET FORTH IN ANNEX A AND IS INCORPORATED BY REFERENCE INTO THIS
JOINT PROXY STATEMENT/PROSPECTUS. YOU ARE URGED TO READ THE REORGANIZATION
AGREEMENT CAREFULLY FOR A COMPLETE DESCRIPTION OF THE TERMS OF THE
REORGANIZATION.
GENERAL
The reorganization agreement provides that, as a part of the reorganization,
each of EarthLink and MindSpring will be merged into WWW Holdings, and WWW
Holdings will change its name to EarthLink, Inc. The mergers will become
effective when the certificates of merger are filed with the Secretary of State
of the State of Delaware or at the specific times set forth in the certificates
of merger. Immediately following completion of the mergers, assuming that
Apple's $200 million investment in EarthLink had occurred on December 20, 1999
and based on December 20, 1999 data:
- EarthLink and MindSpring will have been merged into WWW Holdings and will
no longer exist as separate entities;
- Charles M. Brewer, Sky D. Dayton, Charles G. Betty, Campbell B. Lanier,
III, William S. Esrey, William H. Scott, III, Michael S. McQuary, Len J.
Lauer, Linwood A. Lacy, Jr. and Reed E. Slatkin will be directors of WWW
Holdings, and an additional three directors to be named later will be
selected by a specifically-formed nominating committee;
- officers of WWW Holdings will include Charles M. Brewer, as chairman;
Charles G. Betty, as chief executive officer; and Michael S. McQuary, as
president;
- former EarthLink common and preferred stockholders will collectively own
approximately 53.3% of the outstanding common stock of WWW Holdings on a
fully diluted basis; and former MindSpring common stockholders will
collectively own approximately 46.7% of the outstanding common stock of
WWW Holdings on a fully diluted basis;
- former EarthLink common stockholders will collectively own approximately
53.2 million shares of WWW Holdings common stock;
- former MindSpring common stockholders will collectively own approximately
63.6 million shares of WWW Holdings common stock;
- approximately 8.0 million shares of WWW Holdings common stock will be
issuable upon the exercise of EarthLink options and warrants;
- approximately 5.6 million shares of WWW Holdings common stock will be
issuable upon the exercise of MindSpring options;
- Sprint will own approximately 6.6 million shares of WWW Holdings series A
convertible preferred stock and 979,000 shares of WWW Holdings series B
convertible preferred stock which will be all of the WWW Holdings
series A and B convertible preferred stock outstanding and which, assuming
the acceleration of the series A convertible preferred stock conversion
rights, will be convertible into approximately 14.2 million shares, or
approximately 9.2% on a fully diluted basis, of WWW Holdings common stock;
and
- Apple will own approximately 7.1 million shares of WWW Holdings series C
convertible preferred stock, which will be all of the WWW Holdings
series C convertible preferred stock outstanding and which will be
convertible into approximately 7.1 million shares, or 4.6%, of WWW
Holdings common stock.
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EARTHLINK AND MINDSPRING STOCK OPTION AGREEMENTS
The following information relating to the stock option agreements is not
intended to be a complete description of all of the information relating to the
stock option agreements, but is intended to include the material terms of the
stock option agreements.
As a condition to the execution by EarthLink and MindSpring of the
reorganization agreement, EarthLink and MindSpring entered into stock option
agreements with one another under which EarthLink has the option to acquire up
to 19.9% of the outstanding MindSpring common stock and MindSpring has the
option to acquire up to 19.9% of the outstanding EarthLink common stock, all
subject to the terms and conditions described below, among others.
The terms and conditions of the stock option agreements are parallel, except
as noted below, and include the following:
The option granted under the stock option agreement may only be exercised if
the party exercising the option is not in material breach of the reorganization
agreement or the stock option agreement and one of the following events occurs:
- the reorganization agreement is terminated by the option holder because
the other party's board of directors amended, modified, withdrew,
conditioned or qualified its recommendation that its stockholders adopt
the reorganization agreement or because the other party's board of
directors has recommended that its stockholders adopt an agreement with a
third party to sell itself or a significant amount of its stock or assets
to the third party;
- the party that granted the option terminates the reorganization agreement
after its board of directors withdraws its recommendation that its
stockholders adopt the reorganization agreement as permitted in some
circumstances under the reorganization agreement; or
- the reorganization agreement is terminated and a termination fee becomes
payable under the terms of the reorganization agreement. See page
for a more detailed description of the circumstances under which the
reorganization agreement may be terminated or a termination fee becomes
payable.
The option holder will have 90 days from the occurrence of one of these
events to give notice of its decision to exercise its option. Each option will
expire if it is not exercised before:
- the mergers of EarthLink and MindSpring into WWW Holdings occur; or
- eighteen months pass after the occurrence of an event that makes the
option exercisable.
The exercise price under MindSpring's option to acquire EarthLink common
stock is $43.50 per share and the exercise price under EarthLink's option to
acquire MindSpring common stock is $32.875 per share. In either case, the option
holder's profit upon the ultimate sale of the underlying common stock or on
exercise of the option for cash plus any termination fee received pursuant to
the reorganization agreement, as described below, cannot exceed $80,000,000. The
shares subject to the option will be adjusted to account for stock dividends,
stock splits, mergers, share exchanges and the like. Accordingly, the option
exercise prices will be adjusted to account for stock dividends, stock splits,
mergers, shares exchanges or the like by multiplying the exercise price by a
fraction, the numerator of which is equal to the number of shares subject to the
option prior to the event requiring the adjustment and the denominator of which
is equal to the number of shares that are subject to the option following the
event requiring the adjustment. For example, if the option holder could have
purchased 1,000 shares under the option for $32.875 per share and the party
granting the option engages in a 3-for-1 stock split, the number of shares
subject to the option will become 3,000 and the new exercise price will be
$32.875 multiplied by 1/3, or approximately $10.958 per share.
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The party granting the option has the choice of either issuing the shares of
common stock for which the option is being exercised, paying cash instead of
issuing the common stock, or delivering any combination of cash and common
stock. The cash amount would be determined by subtracting the option exercise
price from an amount equal to the greater of the average closing price for the
common stock for the ten trading days prior to the exercise of the option and
the per share consideration for the common stock proposed to be paid in a
pending third-party proposal to acquire all or a significant part of the common
stock or assets of the party granting the option, and then multiplying that
amount by the number of shares of common stock for which cash is being paid. The
number of shares of common stock issued as a result of the exercise of the
option may not be less than 5% of the total number of shares of outstanding
common stock of the party granting the option immediately after the issuance of
the shares pursuant to the option.
If the option holder exercises the option, it has the right to cause the
party that granted the option to register the shares of common stock that it
purchases under the Securities Act of 1933, so long as the shares to be
registered equal at least 2% of the outstanding shares of the party that granted
the option on a fully diluted basis. The option holder has no right to cause the
registration of any shares of common stock that may be sold under Rule 144(k) of
the Securities Act of 1933, which generally permits sales of securities by
persons who have not been affiliated with the issuer of those securities for at
least three months prior to the sale, so long as at least two years have passed
since the securities were acquired from the issuer or one of its affiliates.
EARTHLINK AND MINDSPRING STOCKHOLDER AGREEMENTS
The following information relating to the stockholder agreements is not
intended to be a complete description of all of the information relating to the
stockholder agreements, but is intended to include the material terms of the
stockholder agreements.
As a condition to the execution by EarthLink and MindSpring of the
reorganization agreement, some of the stockholders of MindSpring, including
members of management and the board of directors, entered into stockholder
agreements for the benefit of EarthLink and some of the stockholders of
EarthLink, including members of management and the board of directors, entered
into stockholder agreements for the benefit of MindSpring.
Pursuant to the stockholder agreements, the stockholders agreed to vote
their shares of EarthLink and MindSpring common stock in favor of adoption of
the reorganization agreement and to cause anyone to whom they transfer their
voting rights in the common stock to do the same. The obligations under the
stockholder agreements terminate automatically upon the termination of the
reorganization agreement.
The following holders of EarthLink common stock, representing 9,635,393
shares or approximately 29.3% of its outstanding common stock, are parties to
stockholder agreements for the benefit of MindSpring: Sprint, Sidney Azeez,
Charles G. Betty, Sky D. Dayton, Richard D. Edmiston, William S. Heys, Grayson
L. Hoberg, Robert M. Kavner, Linwood A. Lacy, Jr., Kevin M. O'Donnell, Reed E.
Slatkin, David R. Tommela and Brinton O. C. Young.
The following holders of MindSpring common stock, representing 15,612,652
shares or approximately 24.5% of its outstanding common stock, are parties to
stockholder agreements for the benefit of EarthLink: ITC Service Company, Inc.,
Charles M. Brewer, Michael S. McQuary, Campbell B. Lanier, III, William H.
Scott, III, Lance Weatherby, Gregory J. Stromberg and O. Gene Gabbard.
WHAT EARTHLINK STOCKHOLDERS WILL RECEIVE IN THE REORGANIZATION
Each share of EarthLink common stock, EarthLink series A convertible
preferred stock, EarthLink series B convertible preferred stock and EarthLink
series C convertible preferred stock issued and
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outstanding at the effective time of the merger of EarthLink into WWW Holdings
will be converted automatically into 1.615 shares of WWW Holdings common stock,
WWW Holdings series A convertible preferred stock, WWW Holdings series B
convertible preferred stock or WWW Holdings series C convertible preferred
stock, as the case may be. Also at the effective time of the merger of EarthLink
into WWW Holdings, each option, warrant or other right to purchase shares of
EarthLink common stock will be converted automatically into a new option,
warrant or other right to purchase a number of shares of WWW Holdings common
stock equal to the number of shares of EarthLink common stock subject to the
option, warrant or other right multiplied by 1.615. The per share exercise price
of the new option, warrant or other right will be divided by 1.615. Otherwise,
the terms and conditions of the option, warrant or other right will remain
unchanged.
WHAT MINDSPRING STOCKHOLDERS WILL RECEIVE IN THE REORGANIZATION
Each share of MindSpring common stock issued and outstanding at the
effective time of the merger of MindSpring into WWW Holdings will be converted
automatically into one share of WWW Holdings common stock. Also at the effective
time of the merger of MindSpring into WWW Holdings, each option, warrant or
other right to purchase shares of MindSpring common stock will be converted
automatically into an option, warrant or other right to purchase the same number
of shares of WWW Holdings common stock on the same terms and conditions.
CASH PAYMENTS FOR FRACTIONAL SHARES OF WWW HOLDINGS COMMON STOCK
If the conversion of EarthLink shares of common stock into shares of WWW
Holdings common stock results in any former EarthLink stockholder being entitled
to receive a fraction of a share of WWW Holdings common stock, no fraction of a
share of WWW Holdings common stock will be delivered. Rather than receiving a
fraction of a share, former EarthLink common stockholders will receive a cash
payment, without interest and subject to the payment of applicable withholding
taxes, based on the mean of the high and low sales prices of WWW Holdings common
stock as reported on The Nasdaq National Market on the first full day on which
the WWW Holdings common stock is traded on The Nasdaq National Market.
EFFECT OF THE REORGANIZATION ON HOLDERS OF MINDSPRING CONVERTIBLE SUBORDINATED
NOTES
As required by the indentures governing the 5% convertible subordinated
notes due 2006 issued by MindSpring in April 1999, upon completion of the
reorganization, WWW Holdings will adopt the indentures and the notes will become
convertible into shares of common stock of WWW Holdings. Completion of the
reorganization will constitute a "change in control" of MindSpring under the
indentures. Therefore, after the reorganization is completed, each holder of
notes will have the option to require WWW Holdings to repurchase that holder's
notes at a repurchase price of 100% of the principal amount plus accrued
interest to the date of repurchase. The reorganization agreement provides that
the repurchase price for the notes will be paid in cash. A holder that chooses
not to have the notes repurchased will thereafter hold convertible subordinated
notes of WWW Holdings.
BACKGROUND AND NEGOTIATION OF THE REORGANIZATION
Mr. Betty, Mr. Dayton and Mr. Brewer have known each other for several
years, and have encountered one another in a variety of business and industry
settings on a fairly regular basis. Beginning on May 26, 1999, Mr. Betty,
Mr. Dayton and Mr. Brewer had several conversations regarding whether they had
any potential interest in a business combination between EarthLink and
MindSpring. On May 31, 1999, Mr. Betty, Mr. Brewer, Mr. McQuary and Mr. Dayton
met at Mr. Brewer's home in Atlanta for preliminary discussions of the concept
of a potential combination of the two companies, including overall structure,
company philosophies, business strategy and general conceptual matters. No
agreement on any terms was reached at that meeting.
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On June 2, 1999, another meeting among Mr. Betty, Mr. Brewer and Mr. Dayton
was held at Mr. Dayton's home in Los Angeles for further preliminary discussions
regarding a potential business combination between EarthLink and MindSpring.
This meeting included additional discussions regarding overall structure,
company philosophies, overall business strategy and general conceptual matters
in connection with a possible merger or other type of business combination
between the companies. The participants were unable to agree upon an exchange
ratio, the management structure of the new company or the name of the new
company and did not reach agreement on any other terms.
On June 3 and June 4, 1999, Mr. Betty and Mr. Brewer continued their
discussions via telephone, during which additional details of possible terms of
a business combination were discussed, including among other areas relative
equity ownership, composition of the board of directors and executive management
positions. During the June 4 telephone call, Mr. Brewer expressed his view that
the parties could not reach agreement on the general terms of a proposed merger
between EarthLink and MindSpring. Thereafter, the parties mutually agreed to
terminate any further discussions regarding a possible business combination or
other relationship.
In early June 1999, MindSpring also received an unsolicited inquiry from
another company regarding a potential business combination. MindSpring engaged
Donaldson, Lufkin and Jenrette Securities Corporation to provide financial
advice in connection with evaluating this inquiry and potential strategic
alternatives. Donaldson, Lufkin and Jenrette proceeded to identify various
potential transaction candidates, and to seek indications of interest from
several parties in pursuing a business combination with MindSpring. Between June
and September 1999, MindSpring had discussions with several of these parties
regarding possible business combinations or strategic transactions. No
agreements were reached other than the agreement with EarthLink.
On July 9 and July 10, 1999, Mr. Brewer and Mr. Betty reopened preliminary
discussions and discussed by telephone a proposed "merger of equals" between the
companies. They did not reach any agreement on any terms during these
discussions, and MindSpring continued to consider alternative transactions.
On July 12, 1999, Mr. Brewer transmitted to Mr. Betty written terms of a
possible merger that Mr. Brewer was willing to discuss and pursue, based on an
acquisition of one company by the other rather than a merger of equals.
Mr. Betty informed Mr. Brewer that his written proposed terms of merger were
unacceptable, and that a merger under the proposed terms would not take place.
At that time, Mr. Betty and Mr. Brewer once again mutually agreed to terminate
any further discussions of a business combination.
During July and August, EarthLink engaged in discussions with several other
entities regarding potential business combinations and other strategic
alternatives. These discussions did not result in any agreements.
In early August 1999, Mr. Betty telephoned Mr. Brewer to discuss possibly
reinitiating merger discussions, to which Mr. Brewer agreed. On August 9, 1999,
Mr. Betty and Mr. Brewer held a meeting at Mr. Brewer's home in Atlanta to
discuss a possible merger of equals between EarthLink and MindSpring. Although
no agreement on any terms of a proposed transaction was reached at that meeting,
Mr. Betty and Mr. Brewer agreed to continue discussing the possibility of a
merger and possible terms of a transaction, and to discuss the same with their
respective investment banking and financial advisory firms--Credit Suisse First
Boston for EarthLink and Donaldson, Lufkin & Jenrette for MindSpring.
On August 17, 1999, Credit Suisse First Boston on behalf of EarthLink
transmitted a preliminary proposed term sheet setting forth the principal
proposed terms of a merger of equals to MindSpring and Donaldson, Lufkin &
Jenrette.
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On August 18, 1999, Mr. Betty, Mr. Dayton and Mr. Brewer discussed by
telephone the preliminary term sheet and related merger matters. During that
conference call, Mr. Brewer indicated that he and the MindSpring board of
directors needed additional time to analyze the proposed terms and consider the
overall concept of a business combination between EarthLink and MindSpring.
Mr. Brewer also suspended any further merger discussions between EarthLink and
MindSpring in order to permit MindSpring to adequately consider alternative
transactions, and told Mr. Betty that he would contact him on August 24, 1999.
On August 24, 1999, Mr. Brewer and Mr. Betty held a telephonic meeting during
which Mr. Brewer terminated the merger discussions between EarthLink and
MindSpring.
On August 26, 1999, at Mr. Betty's request, Mr. Betty and Campbell B. Lanier
III, one of the MindSpring directors, met in West Point, Georgia to resume
discussions. Mr. Betty made a presentation regarding a potential merger of
equals between EarthLink and MindSpring. No agreement on any specific terms
regarding a business combination was reached during that meeting.
On September 8, 1999, Mr. Betty, Mr. Brewer, Mr. Lanier and Mr. McQuary held
a meeting in Atlanta to begin preliminary substantive discussions of a merger of
equals between EarthLink and MindSpring. The attendees discussed various terms
of a merger, including overall structure, share exchange values, composition of
the board of directors and executive management, location of headquarters, name
of the post-merger company and overall company strategy and company
philosophies. On September 9, 1999, Mr. McQuary and Mr. Betty had a telephone
conversation to further discuss these matters. The representatives of EarthLink
and MindSpring reached preliminary agreement on some of the basic terms of the
proposed reorganization, including transaction structure, share exchange terms
and the name of the combined company, and authorized their respective investment
banking firms and law firms to prepare and negotiate a term sheet for a
reorganization of the companies.
Throughout September 1999, Mr. Betty and EarthLink's legal counsel,
Hunton & Williams, engaged in discussions with Sprint Corporation and its legal
counsel regarding interpretation of the various agreements and documents entered
into by EarthLink, Sprint and Sprint's affiliates in connection with the 1998
strategic alliance between EarthLink and Sprint. In those discussions, EarthLink
and Sprint confirmed that they were in agreement about the impact under the
applicable documents of an EarthLink--MindSpring merger on the strategic
alliance. Under the governance agreement between EarthLink and Sprint, Sprint's
approval of the proposed reorganization was required. At a meeting of the
EarthLink board of directors, both of the Sprint designees to EarthLink's board
of directors gave special approval to the proposed reorganization.
Also throughout September, EarthLink's independent accountants,
PricewaterhouseCoopers LLP and MindSpring's independent auditors, Arthur
Andersen LLP, engaged in analysis and discussions with members of the
accounting, financial and legal staffs of both EarthLink and MindSpring
regarding whether the proposed reorganization could qualify as a
pooling-of-interests for accounting purposes.
On September 10, 1999, EarthLink delivered a term sheet to MindSpring.
Following their analysis of the terms and provisions of the proposed
reorganization as set forth in the term sheet, representatives of MindSpring,
Donaldson, Lufkin & Jenrette and MindSpring's legal counsel, Hogan & Hartson
L.L.P., entered into substantive negotiations and discussions with EarthLink and
its counsel and Credit Suisse First Boston, which included discussions regarding
board representation, management structure, termination fees and options, among
other things. At the conclusion of these negotiations the term sheet was
finalized.
From September 10, 1999 through September 22, 1999, definitive documents
implementing the reorganization were drafted, discussed and negotiated by the
various parties, including members of the executive management of EarthLink and
MindSpring as well as their respective legal, investment banking and accounting
advisors. During that period, many meetings and conferences took place in
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Pasadena and Atlanta and via telephone for negotiation of the reorganization
agreement, legal and accounting issues, due diligence and other related
purposes.
On September 14, 1999, Mr. Lanier and William H. Scott, III, two of
MindSpring's directors, met in Kansas City, Missouri with several members of
Sprint's board of directors to discuss the proposed reorganization.
On September 17 and 21, 1999, the EarthLink board of directors met to
discuss the proposed reorganization, including without limitation the share
exchange terms, key terms of the reorganization agreement and structure of the
reorganization and the post-reorganization entity. At the September 21, 1999
meeting, Credit Suisse First Boston made a presentation to the EarthLink board
of directors as to the fairness of the transaction and the share exchange ratios
from a financial point of view. After reviewing all the various factors in its
assessment of the proposed reorganization, Credit Suisse First Boston indicated
that in its opinion, the proposed share exchange ratios and the reorganization
would be fair from a financial point of view.
On September 16 and 21, 1999, the MindSpring board of directors met to
discuss the proposed reorganization, including without limitation the share
exchange terms, key terms of the reorganization agreement and structure of the
reorganization and the post-reorganization entity.
On September 22, 1999, the EarthLink board of directors met to deliberate
and make a final decision on whether to approve or reject the proposed
reorganization with MindSpring. After full consideration and discussion of the
structure, terms and conditions of the proposed reorganization with MindSpring,
the EarthLink board of directors unanimously approved the proposed transaction
as in the best interests of its stockholders.
Also on September 22, 1999, the MindSpring board of directors met to
deliberate and make a final decision on whether to approve or reject the
proposed reorganization with EarthLink. At the September 22, 1999 meeting,
Donaldson, Lufkin and Jenrette made a financial presentation to the MindSpring
board of directors and Donaldson, Lufkin & Jenrette delivered its opinion to the
board of directors of MindSpring that the ratio for the exchange of shares of
MindSpring common stock in the reorganization was fair, from a financial point
of view, to the stockholders of MindSpring. After full consideration and
discussion of the structure, terms and conditions of the proposed reorganization
with EarthLink, the MindSpring board of directors unanimously approved the
proposed transaction as in the best interests of its stockholders.
On September 22, 1999, EarthLink, MindSpring and WWW Holdings finalized and
executed the reorganization agreement and all related agreements and documents.
On September 23, 1999, the parties announced the proposed consolidation of
EarthLink and MindSpring by a joint press release sent to the major business
wire and media agencies.
REASONS OF EARTHLINK FOR AGREEING TO THE REORGANIZATION WITH MINDSPRING
At a meeting held on September 22, 1999, the board of directors of EarthLink
voted unanimously to approve the transactions contemplated by the reorganization
agreement, determined that such transactions were fair to, in the best interests
of, and advisable for the stockholders of EarthLink, and resolved to recommend
that the stockholders adopt the reorganization agreement. In arriving at its
decision to approve the reorganization agreement and to recommend its adoption
to the EarthLink stockholders, the board gave careful consideration to the
following factors, among others:
- the board's thorough evaluation of a variety of potential strategic
alternatives and its analysis of the viability of and risks associated
with each alternative;
- the aggregation of EarthLink's member base with the member base of
MindSpring, forming the second largest Internet service provider in the
United States;
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- the larger total market capitalization of the combined company and the
opportunity for EarthLink stockholders to participate in a company with
higher trading volumes and enhanced liquidity;
- the opportunity for each EarthLink common stockholder to receive shares of
common stock in the new combined entity in a tax-free reorganization,
other than taxes payable on cash paid instead of fractional shares;
- the overall strategic importance of the potential combination with
MindSpring, including the potential increased value of the EarthLink brand
that a combination with MindSpring will create;
- the potential commercial impact of having access to MindSpring's marketing
and distribution channels;
- the combined management skills of the two companies' management teams and
the opportunity to leverage the greater combined resources and efforts of
the two companies under one brand to accelerate member growth;
- the board's analysis of information relating to the business, operations,
assets, liabilities, financial performance and financial prospect of the
combined company;
- the historical and forecasted financial information for EarthLink and
MindSpring and the information gathered during EarthLink's due diligence
review of MindSpring;
- the competitive environment in the Internet services industry and the
perceived beneficial effect of the combination of MindSpring and EarthLink
and their members, products and services and the ability of the combined
company to compete in a market where size is becoming an important
competitive factor;
- the probability that the mergers of EarthLink and MindSpring into WWW
Holdings and the other transactions contemplated by the reorganization
will be consummated, given the achievable nature of the conditions to
consummation of the reorganization and the other transactions;
- the EarthLink board's review of presentations by, and discussion of the
terms of the reorganization with, EarthLink's senior management,
representatives of its legal counsel and representatives of its financial
advisor;
- the opportunity to reduce costs through economies of scale, increased
leverage with third party providers and the elimination of redundant
operations;
- the terms of the reorganization agreement, including the fixed nature of
the ratio for the exchange of shares, the size of the termination fee and
the circumstances under which it is payable;
- the fact that the reorganization agreement would permit EarthLink to
terminate the reorganization agreement, upon payment of a termination fee
to MindSpring, if the EarthLink board withdraws its recommendation for
adoption of the reorganization agreement to the stockholders pursuant to
its terms; and
- the opinion of Credit Suisse First Boston Corporation, EarthLink's
financial advisor, that, as of the date of the opinion, the EarthLink
common stock exchange ratio was fair from a financial point of view to the
EarthLink common stockholders, other than MindSpring and its affiliates,
the EarthLink series A preferred stock exchange ratio was fair from a
financial point of view to the holders of the EarthLink series A preferred
stock, and the EarthLink series B preferred stock exchange ratio was fair
from a financial point of view to the holders of the EarthLink series B
preferred stock. THE OPINION OF CREDIT SUISSE FIRST BOSTON CONTAINS A
DESCRIPTION OF THE
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FACTORS CONSIDERED, THE ASSUMPTIONS MADE AND THE SCOPE OF REVIEW
UNDERTAKEN BY CREDIT SUISSE FIRST BOSTON IN RENDERING ITS OPINION. A MORE
DETAILED DESCRIPTION OF CREDIT SUISSE FIRST BOSTON'S FAIRNESS OPINION IS
PROVIDED BELOW UNDER THE CAPTION "OPINION OF EARTHLINK FINANCIAL ADVISOR"
AND THE FULL TEXT OF THE FAIRNESS OPINION RECEIVED BY THE BOARD OF
DIRECTORS FROM CREDIT SUISSE FIRST BOSTON IS INCLUDED AS ANNEX B ATTACHED
TO THIS JOINT PROXY STATEMENT/PROSPECTUS.
The EarthLink board also considered potentially negative factors in its
deliberations concerning the reorganization, including:
- the potential disruption of EarthLink's business that might result from
the announcement of the reorganization;
- the risk that some key employees of EarthLink would depart;
- the risk that anticipated benefits of the reorganization for EarthLink
stockholders may not be realized as a result of possible changes in the
Internet services industry in general or potential difficulties in
integrating the businesses of EarthLink and MindSpring;
- the significant cost involved in consummating the reorganization, the
substantial management time and effort required to effect the
reorganization and integrate the businesses of EarthLink and MindSpring
and the related disruption to EarthLink's operations; and
- the possible difficulties of integrating the operations, management and
corporate cultures of MindSpring and EarthLink; and
- the risk that the reorganization would not be consummated and that, under
some circumstances, EarthLink could be required to pay a termination fee
to MindSpring.
The EarthLink board did not believe that the negative factors were
sufficient, individually or in the aggregate, to outweigh the potential
advantages of the reorganization.
In light of all of the factors set forth above, the EarthLink board of
directors unanimously approved the transactions contemplated by the
reorganization agreement and, in order to induce MindSpring to enter into the
reorganization agreement, unanimously approved the grant of an option to
MindSpring to purchase up to 19.9% of EarthLink's outstanding common stock. 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
specific factors considered in reaching its decision, although the overall
strategic value of the transactions, as reflected above, were of paramount
importance to the board's decision. In evaluating the merger of EarthLink into
WWW Holdings and the other transactions contemplated by the reorganization
agreement, the board concluded that EarthLink's prospects for growth would be
substantially improved by entering into the reorganization agreement with
MindSpring, while, at the same time, significantly reducing the attendant
operational risks.
RECOMMENDATION OF THE EARTHLINK BOARD OF DIRECTORS
THE EARTHLINK BOARD BELIEVES THAT THE TERMS OF THE REORGANIZATION AGREEMENT
ARE ADVISABLE AND IN THE BEST INTERESTS OF EARTHLINK AND ITS STOCKHOLDERS. THE
EARTHLINK BOARD HAS UNANIMOUSLY APPROVED THE REORGANIZATION AGREEMENT, AND
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF EARTHLINK VOTE FOR THE ADOPTION
OF THE REORGANIZATION AGREEMENT.
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OPINION OF EARTHLINK FINANCIAL ADVISOR
EarthLink retained Credit Suisse First Boston to act as its exclusive
financial advisor in connection with the reorganization. Credit Suisse First
Boston was selected by the EarthLink board of directors to act as EarthLink's
financial advisor based on Credit Suisse First Boston's qualifications,
expertise and reputation, as well as Credit Suisse First Boston's investment
banking relationship and familiarity with EarthLink. On September 22, 1999, the
EarthLink board of directors met to review the proposed reorganization with
MindSpring and the final terms of the reorganization agreement. During this
meeting Credit Suisse First Boston rendered its oral opinion, subsequently
confirmed in writing on September 22, 1999, that, as of that date, based upon
and subject to the various considerations set forth in the Credit Suisse First
Boston opinion: the EarthLink common stock exchange ratio of 1.615 shares of WWW
Holdings common stock for each share of EarthLink common stock was fair from a
financial point of view to EarthLink's common stockholders, other than
MindSpring and its affiliates; the EarthLink series A exchange ratio of 1.615
shares of WWW Holdings series A convertible preferred stock for each share of
EarthLink series A convertible preferred stock was fair from a financial point
of view to EarthLink's series A preferred stockholders; and the EarthLink
series B exchange ratio of 1.615 shares of WWW Holdings series B convertible
preferred stock in exchange for each share of EarthLink series B convertible
preferred stock was fair from a financial point of view to EarthLink's series B
preferred stockholders.
A summary of the material terms of the Credit Suisse First Boston opinion is
set forth below. The full text of the opinion is attached as ANNEX B to this
joint proxy statement/prospectus and is incorporated by reference into this
joint proxy statement/prospectus. Credit Suisse First Boston has consented to
the use of its fairness opinion in connection with this joint proxy
statement/prospectus. EarthLink stockholders are urged to, and should, read the
Credit Suisse First Boston opinion carefully. The full text of the Credit Suisse
First Boston opinion sets forth, among other things, assumptions made,
procedures followed, matters considered and limitations on the scope of the
review undertaken by Credit Suisse First Boston in rendering its opinion. The
Credit Suisse First Boston opinion addresses only the fairness from a financial
point of view of: the EarthLink common stock exchange ratio of 1.615 shares of
WWW Holdings common stock for each share of EarthLink common stock to
EarthLink's common stockholders, other than MindSpring and its affiliates; the
EarthLink series A exchange ratio of 1.615 shares of WWW Holdings series A
convertible preferred stock for each share of EarthLink series A convertible
preferred stock to EarthLink's series A preferred stockholders; and the
EarthLink series B exchange ratio of 1.615 shares of WWW Holdings series B
convertible preferred stock to each share of EarthLink's series B convertible
preferred stock to EarthLink's series B preferred stockholders, as of the date
of the Credit Suisse First Boston opinion, and does not constitute a
recommendation to any EarthLink stockholder as to how that stockholder should
vote at the EarthLink special meeting. Credit Suisse First Boston was not
requested to, and did not, make any recommendation as to the value of the
reorganization exchange ratio, which matters were determined through
negotiations between MindSpring and EarthLink. The Credit Suisse First Boston
opinion was rendered on September 22, 1999. As such, it does not take into
account the effects of EarthLink's strategic alliance with Apple. Please refer
to the section titled "Information about EarthLink--Business--Recent
Development--Strategic Alliance with Apple Computer, Inc."
In connection with its opinion, Credit Suisse First Boston, among other
things:
- reviewed publicly available business and financial information relating to
EarthLink and MindSpring, as well as the reorganization agreement;
- reviewed other information, including financial forecasts, provided to it
by EarthLink and MindSpring, and met with the management of both EarthLink
and MindSpring to discuss the business and prospects of EarthLink and
MindSpring;
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- relied upon the views of EarthLink's and MindSpring's management
concerning the business, operational and strategic benefits and
implications of the reorganization, including financial information
provided to Credit Suisse First Boston by EarthLink and MindSpring
relating to the synergistic values and operating cost savings expected to
be achieved through the combination of the operations of EarthLink and
MindSpring;
- considered certain financial and stock market data of EarthLink and
MindSpring, and compared that data with similar data for other publicly
held companies in businesses it deemed similar to those of EarthLink and
MindSpring;
- considered the financial terms, to the extent publicly available, of
certain other business combinations and other transactions that have
recently been effected; and
- considered other information, financial studies, analyses and
investigations and financial, economic and market criteria as it deemed
relevant.
In connection with its review, Credit Suisse First Boston did not assume any
responsibility for independent verification of any of the information described
above and relied on its being complete and accurate in all material respects.
Credit Suisse First Boston assumed that any estimates or information used in its
analysis had been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of each of EarthLink and
MindSpring as to the future financial performance of EarthLink and MindSpring,
as the case may be, and, upon consummation of the reorganization, WWW Holdings.
In addition, Credit Suisse First Boston did not make an independent evaluation
or appraisal of the assets or liabilities, contingent or otherwise, of EarthLink
or MindSpring, nor was Credit Suisse First Boston furnished with any evaluations
or appraisals of these assets or liabilities. The Credit Suisse First Boston
opinion is necessarily based upon financial, economic, market and other
conditions as they existed and could be evaluated on the date of the Credit
Suisse First Boston opinion.
Credit Suisse First Boston did not express any opinion as to what the value
of the WWW Holdings common stock, WWW Holdings series A convertible preferred
stock or WWW Holdings series B convertible preferred stock actually will be when
issued to EarthLink's stockholders pursuant to the merger of EarthLink into WWW
Holdings or the prices at which the WWW Holdings common stock, WWW Holdings A
convertible preferred stock or WWW Holdings series B convertible preferred stock
will trade subsequent to the reorganization. With the consent of the EarthLink
board of directors, Credit Suisse First Boston did not consider, and its opinion
does not in any manner address, the impact of the reorganization on any
governance rights or other rights or interests that holders of the EarthLink
series A convertible referred stock or series B convertible preferred stock may
have with respect to EarthLink under the terms of the securities or under
agreements with EarthLink and/or any third parties.
In preparing the Credit Suisse First Boston opinion, Credit Suisse First
Boston performed a variety of financial and comparative analyses. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. Credit Suisse First
Boston 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 Credit Suisse First Boston opinion. No company or
transaction used in the analysis performed by Credit Suisse First Boston as a
comparison is identical to EarthLink, MindSpring or the contemplated
reorganization. In addition, Credit Suisse First Boston 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, so that the range of
valuation resulting from any particular analysis described below should not be
taken to be Credit Suisse First Boston's view of the actual value of EarthLink,
MindSpring or WWW Holdings. In performing its analyses, Credit Suisse First
Boston made numerous assumptions with respect to industry performance, general
business and
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economic conditions and other matters, many of which are beyond the control of
EarthLink or MindSpring. The analyses performed by Credit Suisse First Boston
are not necessarily indicative of actual values or actual future results, which
may be significantly more or less favorable than suggested by the 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 Credit Suisse First Boston's analysis of the fairness of the EarthLink common
stock exchange ratio from a financial point of view to EarthLink's common
stockholders, other than MindSpring and its affiliates, the EarthLink series A
exchange ratio from a financial point of view to EarthLink's series A preferred
stockholders and the EarthLink series B exchange ratio from a financial point of
view to EarthLink's series B preferred stockholders, and were provided to the
EarthLink board of directors in connection with the delivery of the Credit
Suisse First Boston opinion.
The following is a summary of the material financial analyses performed by
Credit Suisse First Boston in connection with the preparation of its opinion,
and reviewed with the EarthLink board of directors at a meeting of the EarthLink
board held on September 21, 1999. Certain of the summaries of those financial
analyses include information presented in tabular format. In order to understand
fully the material financial analyses used by Credit Suisse First Boston, the
tables should be read together with the text of each summary. The tables alone
do not constitute a complete description of the material financial analyses.
HISTORICAL STOCK PRICE ANALYSIS. Credit Suisse First Boston analyzed the
prices at which the EarthLink common stock traded since EarthLink's initial
public offering on January 22, 1997, through September 17, 1999. Credit Suisse
First Boston noted that the all-time high price for EarthLink common stock was
$90.50 on April 13, 1999, and the all-time low price for EarthLink common stock
was $4.31 on May 1, 1997.
Credit Suisse First Boston also analyzed the prices at which the MindSpring
common stock traded since MindSpring's initial public offering on March 14,
1996, through September 17, 1999. Credit Suisse First Boston noted that the
all-time high price for MindSpring common stock was $62.47 on April 26, 1999,
and the all-time low price for MindSpring common stock was $0.93 on December 4,
1996.
EXCHANGE RATIO ANALYSIS. Credit Suisse First Boston reviewed the average of
the ratio of the closing price of EarthLink common stock divided by the closing
price of MindSpring common stock over various periods ending September 17, 1999,
and computed the premium (discount) represented by the EarthLink common stock
exchange ratio and the ratio of the closing price of EarthLink common stock over
the closing price of the MindSpring common stock as of September 17, 1999,
referred to as the current market exchange ratio over the average exchange
ratios. The following table sets forth the average exchange ratios over the
various periods covered and the premium (discount) represented by the current
market exchange ratio and the EarthLink common stock exchange ratio over the
average exchange ratio:
<TABLE>
<CAPTION>
PREMIUM (DISCOUNT) PREMIUM REPRESENTED BY
AVERAGE AVERAGE TRADING PRICE REPRESENTED BY CURRENT EARTHLINK COMMON STOCK
PERIOD ENDING EXCHANGE ---------------------- MARKET EXCHANGE RATIO OVER EXCHANGE RATIO OVER
SEPTEMBER 17, 1999 RATIOS EARTHLINK MINDSPRING AVERAGE EXCHANGE RATIOS AVERAGE EXCHANGE RATIOS
------------------ -------- --------- ---------- -------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
Current market.......... 1.479x $40.13 $27.13 0.0% 9.2%
10 trading days......... 1.576x $43.78 $27.76 (6.2)% 2.4%
30 trading days......... 1.595x $45.92 $28.80 (7.3)% 1.2%
60 trading days......... 1.478x $51.32 $35.40 0.1% 9.3%
90 trading days......... 1.461x $51.61 $35.76 1.3% 10.6%
180 trading days........ 1.460x $60.11 $41.46 1.4% 10.7%
Since January 2, 1999... 1.470x $60.92 $41.72 0.6% 9.8%
</TABLE>
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Credit Suisse First Boston noted that the EarthLink common stock exchange
ratio of 1.615 shares of WWW Holdings common stock for each share of EarthLink
common stock represented a premium over the Average Exchange Ratios for all
periods considered and the Current Market Exchange Ratio represented a premium
over the Average Exchange Ratios for all periods considered, except for the 10
and 30 trading day periods ending on September 17, 1999.
Credit Suisse First Boston noted that the EarthLink common stock exchange
ratio of 1.615 shares of WWW Holdings common stock for each share of EarthLink
common stock implied a nominal transaction value of $43.81 per share of
EarthLink common stock based on the closing stock price as of September 17,
1999. Credit Suisse First Boston also noted that the implied transaction value
of $43.81 per share of EarthLink common stock as of September 17, 1999 was above
the average of the closing stock prices for EarthLink for the periods ending
one day and 10 days prior to September 17, 1999 and was below the averages for
the other periods.
PRECEDENT MERGER-OF-EQUALS TRANSACTIONS ANALYSIS. Credit Suisse First
Boston reviewed 56 merger-of-equal transactions across a wide range of
industries and compared certain publicly available statistics for the selected
merger-of-equals transactions to the comparable financial statistics for
EarthLink and MindSpring based on the value of MindSpring implied by the
MindSpring common stock exchange ratio and the closing prices of the EarthLink
common stock and MindSpring common stock as of September 17, 1999.
The following table presents the median and mean exchange ratio premium both
one trading day and 30 trading days prior to the announcement of the
transaction:
<TABLE>
<CAPTION>
EXCHANGE RATIO PREMIUM
(DISCOUNT)
---------------------------------
1 DAY PRIOR TO 30 DAYS PRIOR TO
ANNOUNCEMENT ANNOUNCEMENT
-------------- ----------------
<S> <C> <C>
Median...................................................... 12.2% 15.1%
Mean........................................................ 15.5% 17.7%
MindSpring.................................................. (8.4)% (10.7)%
</TABLE>
Credit Suisse First Boston noted that the MindSpring common stock exchange
ratio of 1.00 share of WWW Holdings common stock for each share of MindSpring
common stock represented a discount to the ratio of the closing price of
MindSpring common stock multiplied by the EarthLink common stock exchange ratio
and divided by the closing price of EarthLink common stock, measured on both one
trading day and 30 trading days prior to the announcement of the transaction by
way of comparison, Credit Suisse First Boston noted that in the selected
merger-of-equals transactions, the median and mean of the corresponding ratios
resulted in a premium to the ratio of the stock prices of the respective
companies both one trading day and 30 trading days prior to the announcement of
the respective transaction.
No transaction utilized as a comparison in the precedent merger-of-equals
transactions analysis is identical to the reorganization. In evaluating the
merger-of-equals transaction, Credit Suisse First Boston made judgments and
assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of EarthLink and MindSpring, such as the impact of competition on the
businesses of EarthLink and MindSpring and the industry generally, industry
growth and the absence of any adverse material change in the financial condition
and prospects of EarthLink, MindSpring or the industry or in the financial
markets in general. Mathematical analysis, such as determining the average or
median, is not in itself a meaningful method of using comparable transaction
data.
CONTRIBUTION ANALYSIS. Credit Suisse First Boston analyzed the relative
contributions of MindSpring and EarthLink to various operational and financial
metrics for various periods in calendar
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years 1999, 2000 and 2001, based on estimates prepared by securities research
analysts with respect to MindSpring, EarthLink's management with respect to
EarthLink, and EarthLink's and MindSpring's managements with respect to WWW
Holdings. In particular, Credit Suisse First Boston compared the contribution of
EarthLink to the projected number of members of WWW Holdings at the end of
calendar years 2000 and 2001 and to net income before sales and marketing
expenses in calendar year 2001 to the pro forma primary and fully-diluted
ownership of WWW Holdings by EarthLink's stockholders of 51.0% and 51.9%,
respectively, implied by the reorganization. The following table sets forth the
results of Credit Suisse First Boston's analysis:
<TABLE>
<CAPTION>
EARTHLINK CONTRIBUTION
----------------------
<S> <C>
Members as of December 31, 2000............................. 59.9%--61.1%
Members as of December 31, 2001............................. 47.4%--48.9%
Net Income Before Sales and Marketing Expenses for Calendar
year 2001................................................. 40.8%--48.3%
</TABLE>
Credit Suisse First Boston noted that the pro forma primary and
fully-diluted ownership of WWW Holdings by EarthLink's stockholders was less
than EarthLink's contribution of members to WWW Holdings as of December 31,
2000, but exceeded EarthLink's contribution of members to WWW Holdings as of
December 31, 2001 and of net income before sales and marketing expense for
calendar year 2001.
PRO FORMA EARNINGS IMPACT ANALYSIS. Credit Suisse First Boston analyzed
certain pro forma effects of the mergers of EarthLink and MindSpring into WWW
Holdings, including, among other things, the impact of the mergers on the
estimated earnings per share as reported and earnings per share before sales and
marketing expenses for calendar years 2000 and 2001 based on estimates prepared
by securities research analysts with respect to MindSpring, EarthLink's
management with respect to EarthLink and EarthLink's and MindSpring's
managements with respect to WWW Holdings. The following table sets forth the
resulting accretion/(dilution) to WWW Holdings' earnings per share as reported
and earnings per share before sales and marketing expenses for the calendar
years 2000 and 2001 based on such estimates:
<TABLE>
<CAPTION>
ACCRETION/(DILUTION)
----------------------------------------------
CALENDAR YEAR 2000 CALENDAR YEAR 2001
--------------------- ----------------------
<S> <C> <C>
Earnings per Share As Reported........................... 19.4%--108.0% (38.8)%--(0.4)%
Earnings per Share Before Sales and Marketing Expenses... (14.7)%--(3.7)% 7.0%--26.6%
</TABLE>
ILLUSTRATIVE FUTURE TRADING ANALYSIS. Credit Suisse First Boston computed
the equivalent per share value of EarthLink common stock both on a stand-alone
basis and assuming the reorganization is completed. This analysis was based upon
the projected number of members at the end of calendar years 1999, 2000 and 2001
prepared by securities research analysts with respect to MindSpring, EarthLink's
management with respect to EarthLink and EarthLink's and MindSpring's management
with respect to WWW Holdings. The analysis was also based on a range of value
per member of $1,000 to $5,000. Based on the stand-alone estimates for
EarthLink, Credit Suisse First Boston noted the following equivalent values per
share of EarthLink common stock:
<TABLE>
<CAPTION>
RANGE OF VALUE PER EQUIVALENT VALUES PER SHARE OF
MEMBER EARTHLINK COMMON STOCK
-------------------- ------------------------------
<S> <C> <C>
End of Calendar Year 1999........................... $ 1,000--$5,000 $ 52.37--$231.16
End of Calendar Year 2000........................... $ 1,000--$5,000 $ 81.18--$375.22
End of Calendar Year 2001........................... $ 1,000--$5,000 $ 104.13--$490.00
</TABLE>
Based on the projected number of members at the end of calendar years 1999,
2000 and 2001 and assuming that the reorganization is completed and taking into
account synergies and cost savings
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<PAGE>
expected to be achieved through the reorganization, Credit Suisse First Boston's
analysis resulted in the following equivalent values per share of EarthLink
common stock:
<TABLE>
<CAPTION>
RANGE OF VALUE PER EQUIVALENT VALUES PER SHARE OF
MEMBER EARTHLINK COMMON STOCK
-------------------- ------------------------------
<S> <C> <C>
End of Calendar Year 1999........................... $ 1,000--$5,000 $ 45.28--$201.93
End of Calendar Year 2000........................... $ 1,000--$5,000 $ 65.68--$309.73
End of Calendar Year 2001........................... $ 1,000--$5,000 $ 103.76--$509.64
</TABLE>
Credit Suisse First Boston analyzed the equivalent per share value of
EarthLink common stock based upon calendar year 2000 revenues based on estimates
prepared by securities research analysts with respect to MindSpring, EarthLink's
management with respect to EarthLink and EarthLink's and MindSpring's
managements with respect to WWW Holdings and on multiples ranging from 2.5 times
to 7.0 times one-year forward revenues. Based on the stand-alone estimates, this
analysis resulted in a stand-alone equivalent value per share of EarthLink
common stock one year from the date of this analysis ranging from $61.73 to
$159.76. Based on the pro forma calendar year 2000 revenues for WWW Holdings
taking into account synergies and cost savings expected to be achieved through
the reorganization, the analysis resulted in an equivalent value per share of
EarthLink common stock one year from the date of this analysis ranging from
$58.81 to $161.28.
Credit Suisse First Boston also analyzed, on a stand-alone basis and
assuming the reorganization is completed, the earnings per share and equivalent
values per share of EarthLink common stock based on estimates prepared by
securities research analysts with respect to MindSpring, EarthLink's management
with respect to EarthLink and EarthLink's and MindSpring's managements with
respect to WWW Holdings. The following table sets forth Credit Suisse First
Boston's analysis, using a range of one-year forward earnings per share
multiples and a range of operating margins indicated in the table:
<TABLE>
<CAPTION>
RANGE OF RANGE OF EQUIVALENT VALUE PER
EARNINGS PER OPERATING EARNINGS SHARE OF EARTHLINK
SHARE MULTIPLES MARGIN PER SHARE COMMON STOCK
--------------- ------------------ ------------------ ----------------------
<S> <C> <C> <C> <C>
EarthLink Stand-Alone........... 30x--60x 15.0%--25.0% $ 3.74--$6.02 $ 112.17--$361.32
Pro Forma WWW Holdings.......... 30x--60x 10.9%--25.0% $ 2.68--$6.10 $ 80.48--$366.12
</TABLE>
Credit Suisse First Boston noted that the ranges of equivalent values per
share of EarthLink common stock derived from the illustrative future trading
analysis generally overlapped.
As described above, Credit Suisse First Boston's opinion and presentation to
the EarthLink board of directors was one of many factors taken into
consideration by the EarthLink board of directors in making its determination to
recommend the reorganization agreement and the transactions contemplated by the
reorganization agreement. Consequently, the analyses described above should not
be viewed as determinative of the opinion of the EarthLink board of directors or
the management of EarthLink with respect to the value of EarthLink or MindSpring
or whether the EarthLink board of directors would have been willing to agree to
a different exchange ratio.
The EarthLink board of directors retained Credit Suisse First Boston to act
as its financial advisor in connection with the reorganization. Credit Suisse
First Boston was selected by the EarthLink board of directors based on Credit
Suisse First Boston's qualifications, expertise and reputation, as well as its
familiarity with EarthLink. Credit Suisse First Boston is an internationally
recognized investment banking and advisory firm. Credit Suisse First Boston, as
part of its investment banking business, is continuously engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. Credit Suisse First Boston acted as
lead underwriter in connection with EarthLink's January 13, 1999 follow-on
offering of common stock and received approximately $3.3 million from EarthLink
in connection with
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its role as lead underwriter. In the ordinary course of its business, Credit
Suisse First Boston and its affiliates may actively trade the debt and equity
securities of EarthLink and MindSpring for its own account and for the accounts
of its customers and, accordingly, may at any time hold a long or short position
in those securities.
Pursuant to an engagement letter dated June 10, 1999 and amended on
September 15, 1999, EarthLink engaged Credit Suisse First Boston to provide
financial advisory services to the EarthLink board of directors in connection
with the reorganization, including, among other things, rendering its opinion
and making the presentation referred to above. Pursuant to the terms of the
engagement letter, EarthLink has agreed to pay Credit Suisse First Boston a fee
based on the enterprise value of EarthLink, which fee, based upon the closing
sale price for EarthLink common stock on December 1, 1999, of $55.125 per share,
would equal approximately $11 million. In addition, EarthLink has agreed to
reimburse Credit Suisse First Boston for its out-of-pocket expenses, including
attorney's fees, incurred in connection with its engagement and to indemnify
Credit Suisse First Boston and certain related persons against various
liabilities and expenses arising out of or in conjunction with its rendering of
services under its engagement, including liabilities arising under the federal
securities laws.
REASONS OF MINDSPRING FOR AGREEING TO THE REORGANIZATION WITH EARTHLINK
The Internet access market currently is characterized by one dominant
provider, America Online Inc., or AOL, and numerous other providers of Internet
access ranging from national commercial Internet service providers and
telecommunications companies to regional and local Internet service providers.
The MindSpring board believes that significant advantages will accrue to the
first company that can distinguish itself from the pack and establish itself as
the clear alternative to AOL in the Internet access market. By combining their
businesses, MindSpring and EarthLink will create the nation's second largest
provider of Internet access after AOL, and establish the combined company as a
national brand alternative to AOL. In addition, the combined company will be
able to share resources and capitalize on synergies that will increase its
ability to attract and retain members and compete effectively at the top tier of
the industry. The MindSpring board believes that the reorganization will enable
the combined company to achieve these goals and enhance its strategic and market
position more quickly than MindSpring could have achieved on its own.
In addition, the combined company is expected to realize several benefits
from the increased size of its operations. The MindSpring board believes that
the increased scale of operations will enable the combined company to, among
other things:
- strengthen its negotiating position with vendors, network providers and
content providers;
- become a leading Internet service provider portal site on the Internet;
and
- provide greater opportunities to develop alternative revenue streams.
The MindSpring board further believes that the combined size of MindSpring and
EarthLink will likely provide additional business and marketing opportunities to
the combined company that might not otherwise be available to the two companies
on an individual basis.
The MindSpring board also believes that the reorganization will result in
significant opportunities for cost savings, revenue growth, technological
development and other benefits. The combined company is expected to achieve
significant revenue, expense and capital synergies through economies of scale,
the elimination of duplicative expenditures and the consistent use of the best
practices of MindSpring and EarthLink. The MindSpring board expects the combined
company to obtain brand efficiency in sales and marketing by utilizing the
combined resources of the two companies to promote one national brand instead of
two. The combined company will also be able to take advantage of the
complementary blend of assets and capabilities contributed by MindSpring and
EarthLink to improve and expand its service offerings and accelerate its member
growth rate.
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In reaching its decision to approve, declare advisable and recommend
adoption of the reorganization agreement and the transactions contemplated by
the reorganization agreement, the MindSpring board also considered a number of
additional factors, including those described below:
- the strategic alternatives available to MindSpring, including potential
business combinations with other entities, the strong strategic fit
between MindSpring and EarthLink and the potential for significant near
term and long term synergies expected to result from the reorganization;
- information concerning the business, assets, liabilities, capital
structure, financial performance and condition and prospects of MindSpring
and EarthLink;
- historical and forecasted financial information relating to MindSpring and
EarthLink, the results of MindSpring's due diligence investigation of
EarthLink and the other information exchanges with EarthLink;
- the views of MindSpring's management regarding the proposed reorganization
and the anticipated economic and operational benefits to be achieved
through the application of economies of scale and the anticipated
synergies resulting from the proposed reorganization;
- the consistency of the strategies that the two companies were pursuing;
- the impact of the reorganization on the combined company's ability to
maintain and enhance its reputation for delivering high quality services
to customers;
- the impact that the reorganization would be expected to have on the
combined company's balance sheet, earnings and cash flow;
- the merger exchange ratio and the current and historical market prices for
MindSpring and EarthLink common stock;
- the financial presentation and opinion of Donaldson, Lufkin and Jenrette
Securities Corporation to the MindSpring board to the effect that, on the
date of its opinion and based upon and subject to the various
considerations set forth in its opinion, the ratio for the exchange of
shares of MindSpring common stock for WWW Holdings common stock to be
effected in the merger of MindSpring into WWW Holdings was fair, from a
financial point of view, to the stockholders of MindSpring (see "Opinion
of MindSpring Financial Advisor");
- the composition and strength of the management of the combined company and
the composition of the board of directors of the combined company;
- the terms and structure of the transaction and the terms and conditions of
the reorganization agreement, including the fixed nature of the ratio for
the exchange of shares, the size of the termination fees and the
circumstances in which they are payable;
- the fact that the reorganization agreement would permit MindSpring to
terminate the reorganization agreement, upon payment of a termination fee
to EarthLink, if the MindSpring board withdraws its recommendation for
adoption of the reorganization agreement to the stockholders pursuant to
its terms;
- the ability to consummate the mergers of MindSpring and EarthLink into WWW
Holdings as a tax free reorganization for federal income tax purposes;
- the ability to treat the reorganization for accounting purposes as a
pooling of interests; and
- the terms of the option agreements, which were reciprocal in nature and
which the board of directors approved in order to induce EarthLink to
enter into the reorganization agreement.
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The MindSpring board also considered a number of countervailing factors in
its deliberations concerning the reorganization, including:
- the potential disruption of MindSpring's business that might result from
the announcement of the reorganization;
- the risk that some key employees of MindSpring would depart;
- the possible difficulties of integrating the operations, management and
corporate cultures of MindSpring and EarthLink; and
- the risk that the reorganization would not be consummated.
In the view of the MindSpring board of directors, these considerations were
not sufficient, individually or in the aggregate, to outweigh the advantages of
the reorganization.
The foregoing discussion of the information and factors considered by the
MindSpring board of directors in approving the reorganization is not meant to be
exclusive, but includes the material factors considered by the MindSpring board
of directors in reaching its decision. In light of the wide variety of factors
considered in its evaluation of the reorganization and the complexity of these
matters, the MindSpring board of directors did not find it practicable to and
did not attempt to quantify, rank or otherwise assign relative weights to these
factors. The MindSpring board of directors conducted an overall analysis of the
factors described above, including discussion with MindSpring's management and
legal, financial and accounting advisors. In considering the factors described
above, individual members of the MindSpring board of directors may have given
different weight to different factors. The MindSpring board of directors
considered all these factors as a whole and considered the factors overall to be
favorable to, and to support, its determination.
After considering all of the factors described above as of the date of this
joint proxy statement/ prospectus, the MindSpring board of directors continues
to believe that the reorganization is advisable and in the best interests of
MindSpring and its stockholders and continues to recommend that MindSpring
stockholders vote FOR adoption of the reorganization agreement.
RECOMMENDATION OF THE MINDSPRING BOARD OF DIRECTORS
THE MINDSPRING BOARD BELIEVES THAT THE TERMS OF THE REORGANIZATION AGREEMENT
ARE ADVISABLE AND IN THE BEST INTERESTS OF MINDSPRING AND ITS STOCKHOLDERS, HAS
UNANIMOUSLY APPROVED THE REORGANIZATION AGREEMENT, THE OPTION AGREEMENTS AND THE
TRANSACTIONS CONTEMPLATED BY THE REORGANIZATION AGREEMENT, AND UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF MINDSPRING VOTE FOR THE ADOPTION OF THE
REORGANIZATION AGREEMENT.
OPINION OF MINDSPRING FINANCIAL ADVISOR
Donaldson, Lufkin & Jenrette Securities Corporation has acted as the
exclusive financial advisor to MindSpring in connection with the reorganization.
In its role as financial advisor to MindSpring, Donaldson, Lufkin & Jenrette was
asked by MindSpring to render an opinion to the board of directors of MindSpring
as to the fairness, from a financial point of view, of the exchange ratio of one
share of WWW Holdings common stock in exchange for each share of MindSpring
common stock to the holders of MindSpring common stock. On September 22, 1999,
at a meeting of the MindSpring board of directors held to evaluate the
reorganization, Donaldson, Lufkin & Jenrette delivered to the MindSpring board a
written opinion, dated September 22, 1999, to the effect that, as of the date of
the opinion and based on and subject to the assumptions, limitations and
qualifications stated in the opinion, the exchange ratio of one share of WWW
Holdings common stock in exchange for each share of MindSpring common stock was
fair, from a financial point of view, to the holders of the MindSpring common
stock.
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A COPY OF DONALDSON, LUFKIN & JENRETTE'S OPINION IS ATTACHED HERETO AS ANNEX
C AND SHOULD BE READ CAREFULLY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED,
ASSUMPTIONS MADE, OTHER MATTERS CONSIDERED AND LIMITATIONS OF THE REVIEW
UNDERTAKEN BY DONALDSON, LUFKIN & JENRETTE IN ARRIVING AT ITS OPINION.
DONALDSON, LUFKIN & JENRETTE'S OPINION WAS PREPARED FOR THE MINDSPRING BOARD AND
IS DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO OF ONE SHARE OF WWW
HOLDINGS COMMON STOCK IN EXCHANGE FOR EACH SHARE OF MINDSPRING COMMON STOCK,
FROM A FINANCIAL POINT OF VIEW, TO THE HOLDERS OF MINDSPRING COMMON STOCK AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY MINDSPRING STOCKHOLDER AS TO HOW
THAT STOCKHOLDER SHOULD VOTE ON THE ADOPTION OF THE REORGANIZATION AGREEMENT.
DONALDSON, LUFKIN & JENRETTE'S OPINION SPEAKS ONLY AS OF SEPTEMBER 22, 1999 AND,
ACCORDINGLY, DOES NOT TAKE INTO ACCOUNT THE EFFECTS OF EARTHLINK'S STRATEGIC
ALLIANCE WITH APPLE. SEE "INFORMATION ABOUT EARTHLINK--BUSINESS--RECENT
DEVELOPMENT--STRATEGIC ALLIANCE WITH APPLE COMPUTER, INC."
The MindSpring board selected Donaldson, Lufkin & Jenrette to act as its
exclusive financial advisor in the reorganization because Donaldson, Lufkin &
Jenrette is an internationally recognized investment banking firm with
substantial expertise in the technology industry and in transactions similar to
the reorganization and because Donaldson, Lufkin & Jenrette is familiar with
MindSpring and its business. Donaldson, Lufkin & Jenrette, as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes.
Donaldson, Lufkin & Jenrette was not requested to, and did not, make any
recommendation as to the value of the reorganization exchange ratio, which
matters were determined through arm's length negotiations between MindSpring and
EarthLink. Donaldson, Lufkin & Jenrette's opinion does not address the terms and
conditions of the reorganization agreement and the related documents, other than
the exchange ratio of one common share of WWW Holdings common stock in exchange
for each share of MindSpring common stock. In addition, Donaldson, Lufkin &
Jenrette's opinion does not address the relative merits of the reorganization
agreement or the other business strategies considered by the MindSpring board,
nor does it address the decision of MindSpring's board to approve the
reorganization. No restrictions or limitations were imposed by MindSpring upon
Donaldson, Lufkin & Jenrette with respect to the investigations made or
procedures followed by Donaldson, Lufkin & Jenrette in rendering its opinion.
In arriving at its opinion, Donaldson, Lufkin & Jenrette:
- reviewed drafts of the reorganization agreement and its exhibits;
- reviewed financial and other information that was publicly available or
furnished to it by MindSpring and EarthLink, including financial
projections prepared by the managements of MindSpring and EarthLink and
other information provided during discussions with MindSpring and
EarthLink;
- compared financial and securities data of MindSpring and EarthLink with
various other companies whose securities are traded in public markets;
- reviewed the historical stock prices of MindSpring common stock and
EarthLink common stock; and
- conducted other financial studies, analyses and investigations as
Donaldson, Lufkin & Jenrette deemed appropriate for purposes of its
opinion.
In rendering its opinion, Donaldson, Lufkin & Jenrette relied on and assumed
the accuracy and completeness of all of the financial and other information that
was available to it from public sources, that was provided to it by MindSpring,
EarthLink or their respective representatives, or that it otherwise reviewed. In
particular, Donaldson, Lufkin & Jenrette relied on the estimates of the
management of MindSpring of the operating synergies achievable as a result of
the reorganization and
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upon discussion of such synergies with the management of EarthLink. With respect
to the financial projections relating to MindSpring and EarthLink supplied to
Donaldson, Lufkin & Jenrette, Donaldson, Lufkin & Jenrette relied on
representations that they were reasonably prepared on the basis reflecting the
best currently available estimates and judgments of MindSpring and EarthLink as
to the future operating and financial performance of MindSpring, EarthLink and
the pro forma combined company. Donaldson, Lufkin & Jenrette did not assume any
responsibility for making any independent evaluation of any assets or
liabilities or for making any independent verification of any of the information
that it reviewed. Donaldson, Lufkin & Jenrette further assumed that the
reorganization would qualify for pooling of interests accounting treatment and
as a "tax-free" reorganization for federal income tax purposes. Donaldson,
Lufkin & Jenrette also relied as to certain legal matters on the advice of
counsel to MindSpring.
Donaldson, Lufkin & Jenrette's opinion is necessarily based on economic
market, financial and other conditions as they existed on, and on the
information made available to it as of, the date of its opinion. It should be
understood that Donaldson, Lufkin & Jenrette's opinion speaks only as of
September 22, 1999 and, accordingly, does not take into account the effects of
EarthLink's strategic alliance with Apple. See "Information about
EarthLink--Business--Recent Development--Strategic Alliance with Apple Computer,
Inc." Donaldson, Lufkin & Jenrette expressed no opinion as to the prices at
which WWW Holdings common stock will actually trade at any time.
The following is a summary of the material analyses that Donaldson,
Lufkin & Jenrette presented to the MindSpring board at its September 22, 1999,
meeting in connection with the preparation of its opinion. THE FINANCIAL
ANALYSES SUMMARIZED BELOW INCLUDE INFORMATION PRESENTED IN TABULAR FORMAT. IN
ORDER TO FULLY UNDERSTAND DONALDSON, LUFKIN & JENRETTE'S FINANCIAL ANALYSES, THE
TABLES MUST BE READ TOGETHER WITH THE TEXT OF EACH SUMMARY. THE TABLES ALONE DO
NOT CONSTITUTE A COMPLETE DESCRIPTION OF THE FINANCIAL ANALYSES. CONSIDERING THE
DATA IN THE TABLES BELOW WITHOUT CONSIDERING THE FULL NARRATIVE DESCRIPTION OF
THE FINANCIAL ANALYSES, INCLUDING THE METHODOLOGIES AND ASSUMPTIONS UNDERLYING
THE ANALYSIS, COULD CREATE A MISLEADING OR INCOMPLETE VIEW OF DONALDSON,
LUFKIN & JENRETTE'S FINANCIAL ANALYSES.
SELECTED PUBLIC COMPANY ANALYSIS
Donaldson, Lufkin & Jenrette compared financial and operating data of
MindSpring and EarthLink with the following selected Internet service providers:
- America Online, Inc.;
- Flashnet Communications, Inc.;
- Prodigy Communications Corporation; and
- Voyager.Net, Inc.
Donaldson, Lufkin & Jenrette reviewed enterprise values, calculated as
market value of equity (as of September 20, 1999), plus debt and minority
interests, less cash and investments in unconsolidated affiliates, as multiples
of, among other things, 1999 and 2000 estimated revenues, 1999 and 2000
estimated earnings before interest, taxes, depreciation and amortization,
commonly known as "EBITDA," and members as of June 30, 1999. Donaldson,
Lufkin & Jenrette also reviewed equity values as multiples of 1999 and 2000
estimated net income before amortization expense.
Estimated financial and operating data for the selected companies were based
on research analysts' estimates and estimated financial and operating data for
MindSpring and EarthLink were based on internal estimates of the managements of
MindSpring and EarthLink.
As of September 20, 1999, MindSpring's enterprise value was 4.7x estimated
1999 revenue, 2.8x estimated 2000 revenue, 71.9x estimated 1999 EBITDA, 28.3x
estimated 2000 EBITDA, and $1,285.80 per member. MindSpring's equity value was
458.3x estimated 1999 net income before amortization
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expense and 119.6x estimated 2000 net income before amortization expense.
EarthLink's enterprise value was 4.0x estimated 1999 revenue, 2.1x estimated
2000 revenue, 30.9x estimated 2000 EBITDA, and $1,031.10 per member. EarthLink's
equity value was 58.1x estimated 2000 net income before amortization expense.
EarthLink's trading multiples based on 1999 estimated EBITDA and net income
before amortization expense were not meaningful, because the underlying values
were negative numbers. The comparable group's (median) enterprise value was 6.0x
estimated 1999 revenue, 3.5x estimated 2000 revenue, and $1,256.10 per member.
The comparable group's (median) trading multiples on estimated 1999 and 2000
EBITDA and 1999 and 2000 net income before amortization expense were not
meaningful, because the underlying values were negative numbers. Donaldson,
Lufkin & Jenrette noted that the trading multiples referred to above, other than
those determined to be not meaningful, were generally in the range of the
relevant multiples for the comparable group.
No company utilized in the "Selected Public Company Analysis" is identical
to MindSpring or EarthLink. Accordingly, an analysis of the above results
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of MindSpring and EarthLink and other
factors that could affect the public trading values of MindSpring and EarthLink
and the selected companies to which they are being compared. Mathematical
analysis is not in itself a meaningful method of using selected company data.
HISTORICAL EXCHANGE RATIO ANALYSIS
Donaldson, Lufkin & Jenrette analyzed historical average exchange ratios
between EarthLink and MindSpring. Donaldson, Lufkin & Jenrette reviewed the
1-month average, 3-month average, 6-month average, and 12-month average as of
September 20, 1999. The exchange ratio is calculated by dividing EarthLink's
stock price by MindSpring's stock price. The historical exchange ratios and
resulting implied EarthLink per share values and premiums paid per share are as
follows:
<TABLE>
<CAPTION>
TIME PERIOD EXCHANGE RATIO IMPLIED EARTHLINK VALUE IMPLIED PREMIUM FOR EARTHLINK
- ----------- -------------- ----------------------- -----------------------------
<S> <C> <C> <C>
September 20, 1999... 1.436 $39.50 0.0%
1-month average...... 1.594 43.84 11.0
3-month average...... 1.478 40.65 2.9
6-month average...... 1.442 39.66 0.4
12-month average..... 1.648 45.32 14.7
Transaction.......... 1.615 44.41 12.4
</TABLE>
Donaldson, Lufkin & Jenrette noted that the transaction exchange ratio fell
within the range of the average exchange ratios indicated at various intervals
during the last twelve months. Donaldson, Lufkin & Jenrette further noted that
the 1.615 transaction exchange ratio implied an EarthLink common share value of
$44.41 and an implied premium of 12.4% per EarthLink common share.
DISCOUNTED CASH FLOW ANALYSIS
Donaldson, Lufkin & Jenrette performed discounted cash flow analyses of
MindSpring and EarthLink, on a stand-alone basis, based on estimates of the
managements of MindSpring and EarthLink, respectively, in order to estimate the
net present value of the unlevered, after-tax cash flows that MindSpring and
EarthLink could generate for the remainder of 1999 through 2004. Applying
discount rates of 15.0% to 19.0% and multiples of terminal year 2004 EBITDA of
11.0x to 13.0x, this analysis produced an implied equity reference range for
MindSpring of approximately $28.00 to $38.00 per share and approximately $48.00
to $63.00 per share for EarthLink as compared to closing stock prices on
September 22, 1999 of $32.875 and $43.50 for MindSpring and EarthLink,
respectively. Based on the discounted cash flow analyses described above the
implied ownership percentage of the combined company for MindSpring would be
between 47.1% and 47.7% and the implied ownership percentage of EarthLink would
be between 52.3% and 52.9%. This compares to the actual ownership
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split in the reorganization of approximately 50% for MindSpring stockholders and
approximately 50% for EarthLink stockholders, which actual split is higher for
the MindSpring stockholders than the range of implied ownership percentages
produced by this analysis.
PRO FORMA DISCOUNTED CASH FLOW ANALYSIS
Donaldson, Lufkin & Jenrette performed a discounted cash flow analysis of
WWW Holdings based on combined estimates of the managements of MindSpring and
EarthLink in order to estimate the net present value of the after-tax cash
flows, excluding interest or other payments attributable to indebtedness or
equity interests, that WWW Holdings could generate for the remainder of 1999
through 2004. Applying discount rates of 15.0% to 19.0% and multiples of
terminal year 2004 EBITDA of 11.0x to 13.0x, this analysis produced an implied
equity reference range for MindSpring stockholders of WWW Holdings of
approximately $35.00 to $47.00 per share. Donaldson, Lufkin & Jenrette noted
that MindSpring's closing stock price on September 22, 1999 was $32.875.
PRO FORMA REORGANIZATION ANALYSIS
Donaldson, Lufkin & Jenrette analyzed the potential pro forma effect of the
reorganization on the earnings per share before amortization expense from the
perspective of MindSpring stockholders using projections provided by the
managements of MindSpring and EarthLink. Assuming that the reorganization
qualifies for pooling of interests accounting treatment and the cost savings and
other potential synergies anticipated by the managements of MindSpring and
EarthLink to result from the reorganization are achieved, Donaldson, Lufkin &
Jenrette estimated that the reorganization would be accretive to earnings per
share before amortization expense for MindSpring stockholders in 2000 and 2001,
respectively. The actual results achieved by WWW Holdings may vary from
projected results, and the variations may be material.
CONTRIBUTION ANALYSIS
Donaldson, Lufkin & Jenrette analyzed the respective contributions of
MindSpring and EarthLink to the estimated 1999, 2000, and 2001 revenues, EBITDA,
EBITDA before sales and marketing expense and net income before amortization
charges of WWW Holdings based on internal estimates of the managements of
MindSpring and EarthLink. This analysis indicated the following relative
contributions of EarthLink and MindSpring:
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED ESTIMATED
1999 2000 2001
CONTRIBUTION CONTRIBUTION CONTRIBUTION
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
MindSpring............................................... 49.2% 45.7% 45.1%
EarthLink................................................ 50.8 54.3 54.9
EBITDA
MindSpring............................................... NM 55.7% 41.4%
EarthLink................................................ NM 44.3 58.6
EBITDA BEFORE SALES AND MARKETING EXPENSES
MindSpring............................................... 55.3% 45.2% 43.6%
EarthLink................................................ 44.7 54.8 56.4
NET INCOME BEFORE AMORTIZATION CHARGES
MindSpring............................................... NM 34.7% 30.2%
EarthLink................................................ NM 65.3 69.8
</TABLE>
- ------------------------
NM means not meaningful
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This compares to the actual ownership split in the reorganization of
approximately 50% for MindSpring stockholders and approximately 50% for
EarthLink stockholders. Donaldson, Lufkin & Jenrette noted that the analysis
yielded contribution percentages for each of MindSpring and EarthLink that,
depending on the measure and year considered, were above and below an
approximately 50% ownership split for each of MindSpring and EarthLink. In
particular, Donaldson, Lufkin & Jenrette noted that MindSpring's contribution
percentages were less than 50% for all measures except for EBITDA in 2000
(estimated) and EBITDA before sales and marketing expenses in 1999 (estimated).
FAIRNESS OPINION PROCESS
The above summary does not purport to be a complete description of
Donaldson, Lufkin & Jenrette's analyses but describes, in summary form, the
material analyses that Donaldson, Lufkin & Jenrette presented to the MindSpring
board on September 22, 1999, in connection with the preparation of its opinion.
The preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant methods of financial analysis and the application
of those methods to the particular circumstances and, therefore, a fairness
opinion is not readily susceptible to partial or summary description. Each of
the analyses conducted by Donaldson, Lufkin & Jenrette was carried out in order
to provide a different perspective on the reorganization and add to the total
mix of information available. Donaldson, Lufkin & Jenrette did not form a
conclusion as to whether any individual analysis, considered in isolation,
supported or failed to support an opinion as to the fairness of the exchange
ratio of one share of WWW Holdings common stock in exchange for each share of
MindSpring common stock from a financial point of view. Rather, in reaching its
conclusion, Donaldson, Lufkin & Jenrette considered the results of the analyses
in light of each other and ultimately rendered its opinion based on the results
of all of the analyses taken as a whole. Donaldson, Lufkin & Jenrette did not
place particular reliance or weight on any individual analysis, but instead
concluded that its analyses, taken as a whole, supported its determination.
Accordingly, notwithstanding the separate factors summarized above, Donaldson,
Lufkin & Jenrette believes that its analyses must be considered as a whole and
that selecting portions of its analyses and the factors considered by it or
focusing on information presented in tabular format, without considering all
such factors and analyses or the narrative description of the analyses, could
create an incomplete or misleading view of the process underlying its opinion.
In addition, analyses relating to the value of businesses or securities do not
necessarily purport to be appraisals or to reflect the prices at which such
businesses or securities can actually be sold. The analyses performed by
Donaldson, Lufkin & Jenrette are not necessarily indicative of actual past or
future results or values, which may be significantly more or less favorable than
such estimates as those suggested by its analyses.
ENGAGEMENT LETTER WITH DONALDSON, LUFKIN & JENRETTE
Pursuant to an engagement letter dated June 21, 1999, MindSpring engaged
Donaldson, Lufkin & Jenrette to provide financial advisory services, which
included, among other things, rendering its opinion and making the presentation
referred to above. Pursuant to the terms of the engagement letter, MindSpring
has agreed to pay Donaldson, Lufkin & Jenrette a fee based on the enterprise
value of MindSpring, which fee, based upon the closing sales price for the
MindSpring common stock on January 3, 2000 of $28.00 per share, would equal
approximately $6.0 million. MindSpring has also agreed to reimburse Donaldson,
Lufkin & Jenrette for all out-of-pocket expenses, including the reasonable fees
and expenses of counsel, incurred by Donaldson, Lufkin & Jenrette in connection
with its engagement, and to indemnify Donaldson, Lufkin & Jenrette and related
persons against liabilities, including liabilities under the federal securities
laws, relating to or arising out of its services.
Donaldson, Lufkin & Jenrette provides a full range of financial, advisory
and brokerage services and, in the ordinary course of business, Donaldson,
Lufkin & Jenrette and its affiliates may actively trade the debt and equity
securities of MindSpring and EarthLink for its own account and for the account
of customers and accordingly may at any time hold a long or short position in
such securities.
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Donaldson, Lufkin & Jenrette has performed investment banking and other services
for MindSpring in the past and has received customary compensation for such
services. These services consisted of acting as lead manager of the MindSpring's
May 29, 1998 equity offering, co-manager of MindSpring's December 14, 1998
equity offering, and a co-manager of MindSpring's April 7, 1999 concurrent
equity and convertible debt offerings, in which Donaldson, Lufkin & Jenrette
earned fees from MindSpring of approximately $3.9 million in the aggregate.
NO DISSENTERS' RIGHTS
EarthLink and MindSpring are Delaware corporations. Neither the EarthLink
nor the MindSpring stockholders have dissenters' rights of appraisal under
Delaware corporation law because their shares of common stock are traded on The
Nasdaq National Market and the stockholders will receive stock of the surviving
corporation that is listed on The Nasdaq National Market and cash instead of
fractional shares in exchange for their common stock as a result of the
reorganization. Regardless of the inapplicability of the statutory grant of
dissenters' rights of appraisal under Delaware corporation law, a Delaware
corporation may provide in its certificate of incorporation that dissenters'
rights will be available for the shares of any class or series of its stock as a
result of any merger or consolidation to which the corporation is a party.
Neither EarthLink nor MindSpring, however, have provided for dissenters' rights
of appraisal in their respective certificates of incorporation, and therefore,
their stockholders have no dissenters' rights of appraisal.
ACCOUNTING FOR THE REORGANIZATION UNDER THE POOLING OF INTERESTS METHOD
EarthLink and MindSpring intend to account for their mergers into WWW
Holdings using the pooling of interests method of accounting.
The mergers are conditioned on the receipt of favorable letters from the
independent public accountants of each of EarthLink and MindSpring to the effect
that each of the independent public accountants concurs with its client's
management's conclusions that no conditions exist with respect to its client
that would preclude WWW Holdings from accounting for the mergers of EarthLink
and MindSpring into WWW Holdings as a pooling of interests in conformity with
generally accepted accounting principles as described in Accounting Principles
Board Opinion No. 16 and the applicable rules and regulations of the Securities
and Exchange Commission.
RESTRICTIONS ON RESALES BY EARTHLINK AND MINDSPRING AFFILIATES
All shares of WWW Holdings common stock that will be distributed to
stockholders of EarthLink and MindSpring in the reorganization will be freely
transferable, except for the restrictions on transfer imposed by the federal
securities laws on "affiliates" of EarthLink, MindSpring or WWW Holdings. Shares
of WWW Holdings common stock received by persons who are deemed to be affiliates
of EarthLink or MindSpring may be resold by them only in transactions permitted
by the resale provisions of Rule 145 or as otherwise permitted under the
Securities Act of 1933. Persons who may be deemed to be affiliates of EarthLink
or MindSpring generally include officers, directors and significant stockholders
of EarthLink and MindSpring. The reorganization agreement requires EarthLink and
MindSpring to use commercially reasonable efforts to cause each of their
affiliates to execute a written agreement to the effect that such persons will
not sell or dispose of any of the shares of WWW Holdings common stock issued to
them in the reorganization unless the sale or disposition has been registered
under the Securities Act of 1933, complies with Rule 145 or, in the opinion of
the affiliate's legal counsel, is otherwise exempt from the registration
requirements under the Securities Act of 1933.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion describes the material federal income tax
consequences of the reorganization to you as an EarthLink stockholder or a
MindSpring stockholder. This discussion is
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based on current law, which is subject to change at any time, possibly with
retroactive effect. This discussion is not a complete description of all tax
consequences of the reorganization and, in particular, does not address all of
the federal income tax consequences applicable to stockholders who are subject
to special treatment under federal income tax law. In addition, this discussion
does not address the tax consequences of the reorganization under applicable
state, local or foreign laws. This discussion assumes you hold your shares of
EarthLink stock or MindSpring stock as a capital asset within the meaning of the
Internal Revenue Code. YOU SHOULD CONSULT WITH YOUR OWN TAX ADVISOR ABOUT THE
TAX CONSEQUENCES OF THE REORGANIZATION IN LIGHT OF YOUR PARTICULAR
CIRCUMSTANCES, INCLUDING THE APPLICATION OF ANY STATE, LOCAL OR FOREIGN LAW.
EarthLink has received the opinion of Hunton & Williams, counsel to
EarthLink, that the merger of EarthLink into WWW Holdings will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. MindSpring has received the opinion of Hogan & Hartson L.L.P., counsel to
MindSpring, that the merger of MindSpring into WWW Holdings will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. Accordingly:
- as an EarthLink stockholder or a MindSpring stockholder, you will not
recognize gain or loss upon the exchange of your stock for WWW Holdings
stock in the reorganization, except with respect to the receipt of cash
instead of a fractional share;
- none of EarthLink, MindSpring or WWW Holdings will recognize gain or loss
upon completion of the merger of EarthLink or MindSpring into WWW
Holdings;
- the aggregate tax basis of the shares of WWW Holdings common stock or
preferred stock you receive in the reorganization will be the same as your
aggregate tax basis in the shares of EarthLink common stock or preferred
stock or MindSpring common stock you surrender in the reorganization,
decreased by the tax basis that is allocable to any fractional share of
WWW Holdings common stock for which you receive cash;
- the holding period of the shares of WWW Holdings common stock or preferred
stock you receive in the reorganization will include the holding period of
the shares of EarthLink common stock or preferred stock or MindSpring
common stock that you surrender in the reorganization; and
- if you receive cash instead of a fractional share of WWW Holdings common
stock, you will recognize gain or loss equal to the difference between the
amount of cash received and your tax basis that is allocable to the
fractional share; the gain or loss you recognize generally will constitute
capital gain or loss.
The preceding description of federal income tax consequences references the
opinion of Hunton & Williams as to EarthLink and the EarthLink stockholders and
the opinion of Hogan & Hartson L.L.P. as to MindSpring and the MindSpring
stockholders.
Receipt by EarthLink of substantially the same tax opinion of Hunton &
Williams as of the closing date and receipt by MindSpring of substantially the
same tax opinion of Hogan & Hartson L.L.P. as of the closing date are conditions
to consummation of the mergers of EarthLink and MindSpring into WWW Holdings.
These opinions are based on, and the opinions to be given as of the closing date
will be based on, customary assumptions and representations. Hunton & Williams'
opinion and Hogan & Hartson L.L.P.'s opinion represent their best legal judgment
and are not binding on the Internal Revenue Service or any court. If the mergers
of EarthLink and MindSpring into WWW Holdings do not qualify as a
reorganizations within the meaning of Section 368(a) of the Internal Revenue
Code, the exchange of stock in the mergers of EarthLink and MindSpring into WWW
Holdings would be taxable to EarthLink's stockholders and to MindSpring's
stockholders.
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PROCEDURES FOR EXCHANGE OF STOCK CERTIFICATES
WWW Holdings has appointed American Stock Transfer and Trust Co. as exchange
agent in connection with the reorganization. Immediately prior to the time the
mergers of EarthLink and MindSpring into WWW Holdings become effective, WWW
Holdings will deposit with American Stock Transfer, in trust for the benefit of
former EarthLink stockholders and former MindSpring stockholders, certificates
representing shares of WWW Holdings common stock to be issued and the cash to be
paid instead of fractional shares under the terms of the reorganization
agreement.
Promptly after the reorganization is consummated, American Stock Transfer
will send to each former stockholder of EarthLink and MindSpring a letter and
instructions for exchanging the stockholder's EarthLink or MindSpring stock
certificates for the stock certificates of WWW Holdings. After the
reorganization becomes effective, shares of the EarthLink common stock and
preferred stock and the MindSpring common stock will represent only the right to
receive:
- certificates representing shares of WWW Holdings common stock into which
the stockholder's shares of EarthLink common stock or MindSpring common
stock are converted; and
- a check for any fractional share interests and any dividends or
distributions as described below.
The WWW Holdings common stock certificates and any checks will be delivered
to each former EarthLink common stockholder and each former MindSpring common
stockholder on receipt by American Stock Transfer of certificates representing
the stockholder's shares of EarthLink common stock and MindSpring common stock,
along with a properly completed letter transmitting the certificates. If any of
the certificates of EarthLink common stock or MindSpring common stock have been
lost, stolen or destroyed, the stockholder must deliver a bond reasonably
satisfactory to WWW Holdings and American Stock Transfer. No interest will be
paid on any cash to be paid instead of fractional shares.
YOU SHOULD NOT SEND IN YOUR CERTIFICATES REPRESENTING EARTHLINK COMMON STOCK
OR PREFERRED STOCK OR MINDSPRING COMMON STOCK UNTIL YOU RECEIVE INSTRUCTIONS
FROM AMERICAN STOCK TRANSFER.
None of EarthLink, MindSpring, WWW Holdings or American Stock Transfer will
be liable to any former EarthLink stockholder or former MindSpring stockholder
for any shares or cash delivered in good faith to a public official pursuant to
applicable abandoned property, escheat or similar laws.
Until their outstanding certificates representing EarthLink common stock or
MindSpring common stock are surrendered, former stockholders of EarthLink and
former stockholders of MindSpring will not receive any dividends payable to WWW
Holdings stockholders for any period after the reorganization becomes effective.
When EarthLink stockholders and MindSpring stockholders surrender their
certificates formerly representing EarthLink common stock and MindSpring common
stock, the certificates will be canceled and exchanged for certificates of WWW
Holdings common stock and cash representing fractional shares. In addition, when
WWW Holdings stock certificates are issued to former common stockholders of
EarthLink and MindSpring, any dividend declared by WWW Holdings with a record
date for common stockholders entitled to receive the dividend on or after the
reorganization becomes effective and a date of payment prior to the date the
EarthLink or MindSpring certificates are surrendered will be paid promptly to
the former common stockholders. No interest will be paid on these dividends.
American Stock Transfer may deduct any amounts required to be withheld under
federal, state, local or foreign income tax laws from any shares of common stock
or cash payments made to a former EarthLink or MindSpring stockholder. For
federal income tax purposes, former EarthLink stockholders and former MindSpring
stockholders will be treated as having received any amounts withheld by American
Stock Transfer.
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INTERESTS OF EARTHLINK DIRECTORS AND OFFICERS IN THE REORGANIZATION
In considering the recommendation of the EarthLink board of directors with
respect to the reorganization agreement, EarthLink stockholders should be aware
that various officers and directors of EarthLink, such as those identified
below, have interests in the reorganization that are in addition to, or
different from, their interests as stockholders of EarthLink generally. The
EarthLink board of directors was aware of these interests and considered them
along with other matters in recommending that EarthLink stockholders vote to
adopt the reorganization agreement.
WWW HOLDINGS DIRECTORS AND MANAGEMENT
The reorganization agreement provides that once the reorganization has taken
place, the board of directors of WWW Holdings will consist of 13 directors, four
of whom will be named by the EarthLink board. The EarthLink board has named four
of its existing members, Sky D. Dayton, Charles G. Betty, Linwood A. Lacy, Jr.
and Reed E. Slatkin as its four designees to the WWW Holdings board. The
reorganization agreement also provides that Charles G. Betty, EarthLink's
president and chief executive officer, will be the chief executive officer of
WWW Holdings. See "Management and Operation of WWW Holdings After the
Reorganization" on page .
EARTHLINK STOCK OPTIONS
When the merger of EarthLink into WWW Holdings is consummated, each
outstanding option and warrant to purchase EarthLink common stock, including
options and warrants held by directors and officers, will be converted into an
option or a warrant, as the case may be, to purchase a number of shares of WWW
Holdings common stock equal to the number of shares covered by the option or
warrant, as the case may be, immediately prior to the merger multiplied by
1.615. The directors and officers of EarthLink held options and warrants to
purchase 1,929,404 shares of EarthLink common stock as of December 20, 1999.
CONVERTIBLE SECURITIES VESTING PLAN
In December 1997, EarthLink's board of directors adopted a plan under which
the vesting of stock options and warrants held by some of EarthLink's directors
and employees accelerate upon a change in control of EarthLink. Generally, a
change in control includes the sale of all or substantially all of EarthLink'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 under the Securities Exchange Act of 1934) of 25% or more of
EarthLink's outstanding voting securities. The reorganization would constitute a
change in control for purposes of the vesting plan. As a result, some options
and warrants, including those held by Messrs. Dayton and Betty, will accelerate
and become fully exercisable upon the occurrence of the reorganization.
KEY EMPLOYEE COMPENSATION CONTINUATION PLAN
In January 1998 the EarthLink board of directors adopted a plan under which
those employees identified as "key" or critical to EarthLink are entitled to a
severance payment equal to fifty percent of their compensation and many other
benefits received during the twelve-month period ending upon their termination,
if the subject employees are terminated following a change in control of
EarthLink. The reorganization would constitute a change in control for purposes
of the compensation continuation plan. EarthLink adopted this plan to attract
the highest quality individuals to become key members of its leadership team and
to retain the high-quality individuals who were members of its leadership team
at the time of the adoption of the plan. Messrs. Dayton and Betty, among others,
are entitled to these benefits.
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INDEMNIFICATION AND INSURANCE
Under the reorganization agreement, from the time that the reorganization
becomes effective, WWW Holdings must indemnify all of the former directors,
officers, employees and agents of both EarthLink and MindSpring to the fullest
extent permitted by the Delaware General Corporation Law for all acts or
omissions arising out of their service as directors, officers, employees and
agents, as trustees or fiduciaries of any plan for the benefit of the employees
of either company, or otherwise on behalf of either of the companies. WWW
Holdings must also advance expenses incurred by any of the persons identified
above in any proceeding or investigation in connection with any of their acts or
omissions.
Also, WWW Holdings is required by the reorganization agreement to maintain
for at least six years directors' and officers' liability insurance for the
benefit of EarthLink's and MindSpring's directors and officers similar to the
directors' and officers' liability insurance currently provided by EarthLink and
MindSpring.
INTERESTS OF MINDSPRING DIRECTORS AND OFFICERS IN THE REORGANIZATION
In considering the recommendation of the MindSpring board of directors with
respect to the reorganization agreement, MindSpring stockholders should be aware
that a number of officers and directors of MindSpring, such as those described
below, have interests in the reorganization that are in addition to, or
different from, their interests as stockholders of MindSpring generally. The
MindSpring board of directors was aware of these interests and considered them,
along with other matters in recommending that the MindSpring stockholders vote
to adopt the reorganization agreement.
WWW HOLDINGS' DIRECTORS AND MANAGEMENT
The reorganization agreement provides that once the reorganization has taken
place, the board of directors of WWW Holdings will consist of thirteen
directors, four of whom will be named by MindSpring's board. The MindSpring
board has named four of its existing members, Charles M. Brewer, Michael S.
McQuary, Campbell B. Lanier, III and William H. Scott, III, as its four
designees to the WWW Holdings board. The reorganization agreement also provides
that Charles M. Brewer, MindSpring's chairman and chief executive officer, will
be chairman of WWW Holdings, and Michael S. McQuary, MindSpring's president and
chief operating officer, will be president of WWW Holdings. See "Management and
Operations of WWW Holdings after the Reorganization" on page .
MINDSPRING STOCK OPTIONS
When the merger of MindSpring into WWW Holdings is consummated, each
outstanding option to purchase MindSpring common stock, including options held
by directors and officers, will be converted into an option to purchase a number
of shares of WWW Holdings common stock equal to the number of shares covered by
the option immediately prior to the merger. The directors and executive officers
of MindSpring held options to purchase 1,226,664 shares of MindSpring common
stock as of December 20, 1999.
INDEMNIFICATION AND INSURANCE
Under the reorganization agreement, from the time that the reorganization
becomes effective, WWW Holdings must indemnify all of the former directors,
officers, employees and agents of both EarthLink and MindSpring to the fullest
extent permitted by the Delaware General Corporation Law for all acts or
omissions arising out of their service as directors, officers, employees and
agents, as trustees or fiduciaries of any plan for the benefit of the employees
of either company, or otherwise on behalf of either of the companies. WWW
Holdings must also advance expenses incurred by any of the
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persons identified above in any proceeding or investigation in connection with
any of their acts or omissions.
Also, WWW Holdings is required by the reorganization agreement to maintain
for at least six years directors' and officers' liability insurance for the
benefit of EarthLink's and MindSpring's directors and officers similar to the
directors' and officers' liability insurance currently provided by EarthLink and
MindSpring.
WORK FORCE AND EMPLOYEE BENEFIT MATTERS
WWW Holdings intends to provide benefits to former EarthLink employees
employed by WWW Holdings that are substantially the same as those currently
provided to EarthLink employees. WWW Holdings intends to provide benefits to
former MindSpring employees employed by WWW Holdings that are substantially the
same as those currently provided to MindSpring employees.
HEADQUARTERS
After the reorganization, WWW Holdings' corporate headquarters will be
located in Atlanta, Georgia.
EFFECTIVE TIME
The closing of the transactions contemplated by the reorganization agreement
will take place at 11:00 a.m. on a date agreed upon by EarthLink, MindSpring and
WWW Holdings, which shall be no later than the third business day following the
date when all of the conditions to the obligations of EarthLink, MindSpring and
WWW Holdings set forth in the reorganization agreement have been satisfied or
waived. On the date of the closing, EarthLink and WWW Holdings will file a
certificate of merger with the Secretary of State of the State of Delaware under
which EarthLink will be merged into WWW Holdings. When the certificate of merger
is deemed filed by the Delaware Secretary of State, MindSpring and WWW Holdings
immediately will file a certificate of merger under which MindSpring will be
merged into WWW Holdings. The reorganization will become effective when the
second certificate of merger is deemed filed by the Delaware Secretary of State.
REGULATORY APPROVALS REQUIRED TO COMPLETE THE REORGANIZATION
ANTITRUST CLEARANCE
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 and its related
rules and regulations prohibit EarthLink, MindSpring and WWW Holdings from
completing the reorganization until EarthLink and MindSpring make a filing with
the Antitrust Division of the Department of Justice and the Federal Trade
Commission and the specified Hart-Scott-Rodino Antitrust Improvements Act
waiting period requirements have been satisfied. Even after the waiting period
expires or terminates, the Antitrust Division or the Federal Trade Commission
may later challenge the reorganization on antitrust grounds. If the
reorganization is not completed within 12 months after the expiration or earlier
termination of the initial waiting period, EarthLink and MindSpring will be
required to submit new information to the Antitrust Division and the Federal
Trade Commission, and a new waiting period would begin. EarthLink and MindSpring
made the filing with the Department of Justice and the Federal Trade Commission
on October 20, 1999, and received notice on November 3, 1999 that the waiting
period had been terminated.
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SPRINT GOVERNANCE AGREEMENT
GENERAL
EarthLink and Sprint entered into a governance agreement, forming a
strategic alliance in the area of Internet access and related services. The
governance agreement establishes terms and conditions concerning:
- EarthLink's corporate governance;
- the acquisition and disposition of EarthLink's equity securities by
Sprint, Sprint L.P. and any of their affiliates;
- the rights of Sprint, Sprint L.P. and any of their affiliates to purchase
EarthLink's outstanding securities; and
- the rights of EarthLink's Board of Directors to solicit, receive and
entertain offers to effect business combinations.
The following is a summary of the material terms of the Sprint governance
agreement.
CORPORATE GOVERNANCE AND ELECTION OF DIRECTORS
The governance agreement provides that EarthLink's board of directors will
determine the fundamental policies and strategic direction of EarthLink.
Consistent with the voting rights granted to the holders of EarthLink's
series A convertible preferred stock, the governance agreement authorizes
Sprint, as the holder of all of the outstanding shares of series A convertible
preferred stock, to designate two directors to sit on the board of directors of
EarthLink. Following the conversion or redemption of EarthLink's series A
convertible preferred stock into common stock, EarthLink is obligated to elect
up to two Sprint nominees for director to the EarthLink board of directors. As
long as Sprint has the right to designate nominees to the board, Sprint is also
entitled to appoint one of its designated directors to any strategic business
and planning committee, finance committee or other significant committee of the
EarthLink board of directors. If no committees like the ones described in the
preceding sentence exist, the governance agreement gives Sprint a reasonable
opportunity to review and discuss EarthLink's strategic and business plans and
financing plans with EarthLink's management before those plans are submitted to
EarthLink's board of directors. Sprint is also entitled to receive advance
copies of information and materials to be provided to EarthLink's board of
directors with respect to those matters. However, no director appointed by
Sprint is entitled to participate on any committee of EarthLink's board of
directors or the board of any significant subsidiary of EarthLink that is
created for the purpose of considering a business combination or any related
matters, or to participate in the EarthLink board's deliberations about a
business combination. Consistent with the voting rights granted to the holders
of the series A convertible preferred stock of EarthLink, Sprint is entitled to
designate two directors for so long as it holds 20% or more of EarthLink's fully
diluted outstanding stock and one director for so long as it holds 10% or more
of EarthLink's fully diluted outstanding stock. The governance agreement allows
upward adjustments to Sprint's ownership percentage for those dilutive events
described in the governance agreement.
If EarthLink's series A convertible preferred stock has been converted into
common stock, EarthLink must use its best efforts to solicit proxies from its
stockholders in favor of Sprint's nominees for directors. The governance
agreement also obligates Sprint, Sprint L.P. and their affiliates to vote in
favor of any other nominee or director selected by EarthLink's board of
directors. Sprint and Sprint L.P.'s voting obligations are supported by an
irrevocable proxy that Sprint and Sprint L.P. granted to EarthLink.
For so long as Sprint, Sprint L.P. and their affiliates' combined equity
stake in EarthLink, when expressed as a percentage of EarthLink's fully-diluted
outstanding stock, exceeds 10%, EarthLink is
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prohibited from taking or authorizing various actions without the approval of
all of the directors designated by Sprint. These actions include:
- the execution or performance of corporate acts or transactions that would
discriminate against Sprint, Sprint L.P. and their affiliates as
stockholders of EarthLink;
- the issuance of any class or series of EarthLink's stock that provides for
voting rights in excess of one vote per share;
- EarthLink or any significant subsidiary of EarthLink engaging in business
activities substantially beyond its current general field of enterprise;
or
- EarthLink's issuance of equity securities in connection with various
business combinations.
EQUITY PURCHASES FROM EARTHLINK; SUBSCRIPTION RIGHTS
So long as Sprint owns at least 17.8% of the outstanding stock of EarthLink
on a fully diluted basis, subject to adjustment for dilutive events described in
the governance agreement and for EarthLink's accumulation of indebtedness under
its convertible debt financing, Sprint, Sprint L.P. and their affiliates have
anti-dilution and subscription rights under the governance agreement. In
addition to their being able to subscribe for stock directly from EarthLink,
Sprint, Sprint L.P. and their affiliates may effect their anti-dilution rights
by making purchases of EarthLink's equity securities at any time from any other
EarthLink stockholder, as long as after giving effect to the purchases, Sprint's
percentage interest in the outstanding stock of EarthLink on a fully diluted
basis, is less than or equal to an amount determined by a formula set forth in
the governance agreement that limits the maximum equity stake that Sprint,
Sprint L.P. and their affiliates may have in EarthLink.
If Sprint's ownership interest in the outstanding stock of EarthLink on a
fully diluted basis exceeds 17.8%, as adjusted under the terms of the governance
agreement, before EarthLink may issue new equity securities, other than in
connection with a business combination, EarthLink must provide Sprint written
notice of EarthLink's intention to issue new equity securities at least five
business days before the EarthLink board of directors' meeting authorizing the
issuance. Sprint has ten business days after receiving EarthLink's notice to
purchase a portion of the issuance, as determined by the formula described in
the preceding paragraph, and if Sprint does so, the new equity securities
offered under the notice will be issued and sold to Sprint by EarthLink at the
same time and on the same terms and conditions as the equity securities would be
sold to third parties. If the new equity securities would be sold in an
underwritten public offering, Sprint could purchase a portion of the securities
offered determined by the formula described in the preceding paragraph at a per
share price equal to the per share price that EarthLink would have sold the
shares of the new equity securities to the underwriters. If for any reason the
issuance of the new equity securities to third parties were not consummated,
Sprint's right to purchase its share of the issuance would lapse.
Sprint's subscription rights generally do not apply to the issuance of
EarthLink's securities in connection with a business combination. However, if
EarthLink determines that Sprint's percentage interest in the outstanding stock
of EarthLink on a fully diluted basis has decreased by five percent or more as a
result of issuances relating to business combinations, EarthLink must notify
Sprint. No later than the second anniversary following Sprint's receipt of
EarthLink's notice, EarthLink must make written offers to Sprint to purchase, in
the aggregate, a number of shares sufficient to bring Sprint's percentage
interest in the outstanding stock of EarthLink on a fully diluted basis up to
its percentage interest before the issuance of the equity securities relating to
the business combinations. The offer is to be made at a purchase price equal to
the average stock price for common stock for the ten trading days before the
date of the issuance, less the underwriting discount applied in the most recent
underwritten offering of common stock. Sprint may accept an offer within five
days after receiving it.
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If EarthLink determines after giving effect to any and all offers to Sprint
described in the preceding paragraph that Sprint's percentage interest in the
outstanding stock of EarthLink on a fully diluted basis has decreased by 0.10 or
more solely as a result of the issuance of equity securities in connection with
a business combination, EarthLink will be obligated to make one or more offers
with respect to not less than the aggregate number of shares of EarthLink stock
that EarthLink is obligated to offer to Sprint pursuant to the foregoing
paragraph resulting from all issuances of equity securities in connection with a
business combination as then calculated, at the earlier of: the passage of two
years from the date of the notice to Sprint described in the preceding
paragraph, or six months after the date Sprint receives notice from EarthLink.
However, in no event is EarthLink obligated to make Sprint an offer that, after
giving effect to the offer, would cause Sprint's percentage interest in the
outstanding EarthLink stock on a fully diluted basis to exceed the formula
described above that limits the maximum equity stake that Sprint, Sprint L.P.
and their affiliates may have in EarthLink.
In addition, with respect to a purchase of new equity securities under
Sprint's anti-dilution rights discussed above, Sprint may, at its option,
purchase new equity securities in the form of shares of a new series of
EarthLink preferred stock having terms that are structured and priced in the
same manner as the EarthLink series A convertible preferred stock. The terms are
determined by reference to the average stock price for a share of EarthLink
common stock for the 30 trading days before the date of issuance of the shares
of the new series. Sprint's purchase of new equity securities in the form of the
shares of the new series are limited:
- to not more than 75% of any issuance of new EarthLink equity securities
from the date that Sprint purchased the EarthLink series A preferred stock
to the second anniversary of that date;
- to not more than 66.67% of any issuance of new EarthLink equity securities
after the second anniversary of date of the purchase by Sprint of
EarthLink's series A preferred stock until the third anniversary of that
purchase;
- after the third anniversary, EarthLink is not obligated to issue any new
EarthLink equity securities in the form of a new series of preferred
stock.
STANDSTILL PROVISIONS
The governance agreement restricts Sprint, Sprint L.P. and their affiliates'
ability to acquire or dispose of EarthLink equity securities. These restrictions
are summarized as follows:
Except for purchases of shares and related activities by Sprint otherwise
permitted under the governance agreement, Sprint, Sprint L.P. and their
affiliates may not, directly or indirectly:
- acquire, offer to acquire or agree to acquire any of EarthLink's equity
securities, or any equity securities of any subsidiary of EarthLink, or
EarthLink or its subsidiaries' material assets;
- make or participate in any solicitation of proxies or otherwise seek to
influence any person with respect to the voting of any EarthLink equity
securities that provide for voting rights;
- make any public announcement regarding, or submit a proposal for, or offer
to effect any purchase of any significant portion of the assets of
EarthLink or any subsidiary or division of EarthLink, any tender or
exchange offer for any EarthLink equity securities, or a merger,
consolidation or other extraordinary transaction involving EarthLink or
Sprint, Sprint's L.P.'s or either of their affiliates' shares of
EarthLink's equity securities;
- form, join or in any way participate in a "group" as defined in
Rule 13d-5(b) under the Securities Exchange Act of 1934; or
- request EarthLink or any of its representatives to amend or waive any of
the above-mentioned provisions.
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In addition, none of Sprint, Sprint L.P. or their affiliates may, directly
or indirectly, sell, transfer or otherwise dispose of any of EarthLink's equity
securities except under a registered underwritten public offering in accordance
with the registration rights agreement among EarthLink, Sprint and Sprint L.P.,
in accordance with certain exemptions from registration under the Securities Act
of 1933, and to any direct or indirect subsidiary of Sprint. Under no
circumstances may Sprint, Sprint L.P. or any of their affiliates sell, transfer
or otherwise dispose of any equity securities of EarthLink to any purchaser if,
after giving effect to the sale, the purchaser would, to Sprint's knowledge,
own, or have the right to acquire, 5% or more of the equity securities of
EarthLink then outstanding. This restriction does not apply in cases where the
purchaser would not reasonably be anticipated to be obligated by virtue of the
purchase to file a Schedule 13D with the Securities and Exchange Commission
under each of paragraphs (b) and (e) of Rule 13d-1 of the Securities Exchange
Act of 1934.
PURCHASES OF ADDITIONAL EQUITY SECURITIES; BUSINESS COMBINATIONS
During the period from September 5, 2001 to September 5, 2003, Sprint will
have the right to make an offer to purchase all, but not less than all, of
EarthLink's outstanding equity securities at a per share price equal to the per
share price determined by dividing the aggregate private market equity value
that an unrelated third party would pay if it were to acquire all of EarthLink's
outstanding equity securities, including those equity securities held by Sprint,
Sprint L.P. and their affiliates, in an arm's length transaction, assuming that
all credible buyers are given an equal opportunity by EarthLink to make a
proposal to acquire directly or indirectly beneficial ownership of 20% or more
of EarthLink's equity securities, the absence of any commercial relations
between EarthLink and Sprint and its affiliates, and the absence of any
ownership stake in EarthLink by Sprint, Sprint L.P. and their affiliates, by the
total number of shares of EarthLink common stock outstanding on a fully diluted
basis.
This fair private market value is to be determined as follows: the
respective boards of EarthLink and Sprint will negotiate the amount of the fair
private market value to be paid under Sprint's offer. If the two parties are
unable to agree on this amount, within 30 days after the submission of Sprint's
offer to EarthLink's board of directors, the parties will agree to be bound to
the valuation determined under the following formula: two appraisals will be
made by recognized investment banks, one selected by each of Sprint and
EarthLink; if the lower of the appraisals is more than 10% less than the higher,
a third independent valuation will be made by an investment bank jointly
selected by EarthLink and Sprint; otherwise, the fair private market value will
be the average of the first two appraisals; and if the third independent
valuation differs in either direction by more than 5% of the average of the
values obtained by the initial appraisals, the fair private market value will be
deemed to equal the average of the two closest valuations. If the third
independent valuation differs from the average of the first two appraisals by
less than 5%, then the third independent valuation will be the fair private
market value.
Sprint's offer may not be subject to any financing contingency, and will be
reflected in a form of definitive agreement that Sprint is prepared to execute.
The conditions to consummation of Sprint's offer and the representations and
warranties incorporated within the offer will be reasonable and customary for
transactions in which a similarly situated stockholder offers to purchase all of
the equity securities not held by that stockholder or its affiliates.
The EarthLink board will have a one-time right, exercisable within 14 days
after receipt of Sprint's offer, to cause Sprint to postpone the making of that
offer for nine months. If EarthLink exercises that right, Sprint is obligated to
withdraw its offer for a period of nine months, but the period in which Sprint
can make an offer will be extended until June 5, 2004, and EarthLink's exercise
of its postponement right will not limit Sprint's right to respond to a
"third-party offer" as explained below.
When the fair private market value of EarthLink's outstanding equity
securities is determined, Sprint generally will be obligated to extend an offer
to buy all of EarthLink's outstanding equity
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securities, but, subject to various limitations, Sprint has a one-time right to
rescind its offer. Sprint must exercise this right within 14 days after receipt
of the determination of the fair private market value. If Sprint chooses to
proceed with its offer, EarthLink's board of directors will support Sprint's
offer by approving and recommending the offer to its stockholders and will cause
EarthLink to take all steps reasonable and necessary to facilitate consummation
of the offer, unless a third party offer determined by the EarthLink board of
directors to be an offer for greater aggregate consideration than Sprint's offer
is also outstanding. Once a third party offer is determined to be for greater
aggregate consideration than the offer proposed by Sprint, Sprint will be
released from its obligation to proceed with its offer, and likewise EarthLink
will be released from its obligation to support and facilitate the consummation
of Sprint's offer. If the third party is in the form of a tender offer, at the
consummation of the tender offer, the offeror will have an option to purchase
from Sprint, Sprint L.P. and any of their affiliates, at the tender offer price,
the number of EarthLink equity securities equal to the quotient of the number of
shares of outstanding EarthLink voting equity securities owned by parties other
than Sprint, Sprint L.P. or their affiliates and tendered and accepted in the
offer, divided by the number of shares of EarthLink voting equity securities
owned by parties other than Sprint, Sprint L.P. or their affiliates, multiplied
by the number of shares of EarthLink voting equity securities owned by Sprint,
Sprint L.P. and their affiliates on the expiration date of the tender offer. In
addition if the offer or a related matter must be approved by EarthLink's
stockholders in order for it to be effectuated, Sprint, Sprint L.P. and their
affiliates are obligated, subject to limited exceptions, to cast in favor of the
offer and any related matters that number of votes as is equal to the number of
EarthLink equity securities that they would be obligated to sell under the
formula described above. Sprint, Sprint L.P. and their affiliates are not
entitled to exercise dissenters' rights of appraisal for any business
combination effected in connection with a third party offer described in this
paragraph.
THIRD-PARTY OFFERS
EarthLink 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. After receiving an offer from a third party, EarthLink's board must
determine whether it intends to recommend the offer to the EarthLink
stockholders or whether the offer is not in the best interests of its
stockholders, in which event it does not intend to recommend the offer to its
stockholders.
For a period of ten days following EarthLink's giving Sprint notice of
receipt of an offer received by a third party, EarthLink may not enter into a
definitive agreement relating to that offer. During that time, Sprint has an
option to make an offer with respect to either a third-party offer that the
EarthLink board recommended to its stockholders or if the board of directors of
Sprint reasonably determines that the conditions to the third-party offer are
reasonably likely to be satisfied and that the third-party offer would
ultimately be consummated, a third-party offer that the EarthLink board has not
recommended to its stockholders. The offer must be made by Sprint, Sprint L.P.
and any of their affiliates to acquire all of the equity securities of EarthLink
not already owned by Sprint, Sprint L.P. and their affiliates at a per share
price in excess of the equivalent per share price set forth in the offer from
the third party. Sprint's offer must be in the form of a definitive agreement
that Sprint, Sprint L.P. and any of their affiliates are prepared to execute,
and the conditions to the consummation of the offer and the representations,
warranties and covenants incorporated in the offer must be customary for
transactions in which a similarly situated stockholder offers to purchase all of
EarthLink's equity securities not held by that stockholder, and may not, in any
event, be more cumbersome in any material respect than those warranties and
representations included in the offer that EarthLink receives from a third
party.
EarthLink may not adopt any takeover defenses, enter into any agreement or
take any other action in connection with a third-party offer recommended by the
EarthLink board that would materially impair Sprint, Sprint LP. or any of their
affiliates' ability to make and consummate their own offer or
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materially increase Sprint's, Sprint L.P.'s or any of their affiliates' cost of
consummating an offer. However, EarthLink is permitted to enter into a
definitive agreement with respect to an EarthLink board recommended third-party
offer that provides for a termination fee that does not exceed 3% of the
consideration to be received per share of common stock multiplied by the number
of shares EarthLink's 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 the
recommended third-party offer must provide that the fees and expenses will not
be payable if Sprint makes an offer complying with the requirements set forth in
the preceding paragraph within 72 hours of the first public announcement of the
recommended third-party offer.
If Sprint has the option to make an offer and exercises its option more than
five days before the date of an EarthLink stockholders' meeting held to consider
a third-party offer, then EarthLink will, unless an offer that the EarthLink
board determines to be for a greater aggregate consideration than Sprint's offer
is then outstanding, support Sprint's offer by approving and recommending it to
the EarthLink's stockholders and cause EarthLink to take all steps reasonable
and necessary to facilitate consummation of Sprint's offer. If a third-party
offer is made subsequent to Sprint's offer that is determined by EarthLink's
board to be for greater aggregate consideration than Sprint's offer, EarthLink's
obligations to support and facilitate Sprint's offer will terminate and
EarthLink will be free to consider and act upon the third-party offer. Sprint is
nonetheless entitled, at any time prior to the consummation of the third-party
offer, to make another offer to purchase all of EarthLink's outstanding equity
securities on a fully diluted basis, at a price per share in excess of the
equivalent per share price set forth in the third-party offer.
If a third-party offer for a business combination that is recommended by
EarthLink's board of directors is undertaken in the form of a tender offer, at
the consummation of the tender offer, the offeror will have an option to
purchase from Sprint, Sprint L.P. or any of their affiliates, at the tender
offer price, in the aggregate, the number of EarthLink equity securities equal
to the quotient of the number of shares of EarthLink voting equity securities
owned by parties other than Sprint, Sprint L.P. or their affiliates and tendered
and accepted in the offer, divided by the number of shares of EarthLink voting
equity securities owned by parties other than Sprint, Sprint L.P. or their
affiliates, multiplied by the number of shares of EarthLink voting equity
securities owned by Sprint, Sprint L.P. and their affiliates on the expiration
date of the tender offer, less the number of EarthLink's equity securities that
have already been tendered to the offeror by Sprint, Sprint L.P. and any of
their affiliates. In addition, if a third-party offer recommended to the
EarthLink stockholders by EarthLink's board or any related matters must be
approved by EarthLink's stockholders in order for such offer to be effectuated,
Sprint, Sprint L.P. and their respective affiliates are obligated, subject to
limited exceptions, to cast in favor of such offer and any such related matter
the number of votes as is equal to the number of EarthLink equity securities
determined by the formula set forth in the preceding sentence. None of Sprint,
Sprint L.P. or their affiliates are entitled to exercise dissenters' rights of
appraisal with respect to any business combination effected in connection with a
third-party offer that is recommended by EarthLink's board to EarthLink's
stockholders.
SOLICITATION OF OFFERS
From June 5, 1998 until the earlier of September 5, 2000 or the termination
of the governance agreement under its terms, EarthLink may not, directly or
indirectly solicit or initiate, or encourage the submission of, any proposal for
a tender or exchange offer, a merger, consolidation share exchange or other
business combination or a proposal to acquire 20% or more of EarthLink's voting
equity securities or a proposal to acquire assets of EarthLink for consideration
equal to 20% of EarthLink's market capitalization as of the date of the
proposal, nor may EarthLink participate in any discussions or negotiations
regarding, or take any action that may reasonably be expected to lead to, any
proposal for a tender or exchange offer, a merger, consolidation share exchange
or other business combination
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or a proposal to acquire 20% or more of EarthLink's voting equity securities or
a proposal to acquire assets of EarthLink for consideration equal to 20% of
EarthLink's market capitalization as of the date of the proposal. However, to
the extent required by the fiduciary obligations of the EarthLink board of
directors, as determined in good faith by the EarthLink board based on the
advice of outside counsel, EarthLink may furnish information in response to any
unsolicited requests therefor and discuss the information. Following delivery to
Sprint of notice of the proposal, EarthLink may participate in negotiations
regarding the proposal and enter into an agreement relating to the proposal or
take any other action ancillary to the entering into the Agreement.
After September 5, 2000 and until the earlier of the September 5, 2001 or
the termination of the governance agreement in accordance with its terms,
EarthLink may not, directly or indirectly, take any of the actions identified in
the forepart of the prior paragraph except through an investment banking firm
EarthLink formally engages for that purpose; but, 30 days before engaging an
investment banking firm, EarthLink must notify Sprint of its intention to engage
an investment banking firm, and for so long as the investment banking firm
remains engaged by EarthLink for that specific purpose, Sprint will be permitted
to prepare and make an offer to purchase all of the outstanding EarthLink equity
securities at a price determined by dividing the fair private market value of
the shares, as determined by a valuation method set forth in the governance
agreement, by the number of shares of EarthLink common stock outstanding on a
fully dilated basis. Subject to the terms of Sprint's offer, and unless a
third-party offer for better aggregate consideration is then outstanding, Sprint
is entitled to pursue its offer for as long as necessary to permit it to be
consummated. EarthLink is obligated to furnish Sprint with copies of all
information provided by EarthLink to its investment banking firm, subject to
Sprint entering into a customary confidentiality agreement with respect to that
information.
EarthLink's board of directors would be obligated under the governance
agreement to:
- promptly notify Sprint in writing of its receipt of a proposal for a
tender or exchange offer, merger, consolidation share exchange or other
business combination or a proposal to acquire 20% or more of EarthLink's
voting equity securities or a proposal to acquire assets of EarthLink for
consideration equal to 20% of EarthLink's market capitalization as of the
date of the proposal;
- promptly notify Sprint in writing of any inquiries or discussions that may
reasonably be expected to lead to proposal described in the preceding two
paragraphs;
- promptly notify Sprint in writing of EarthLink's execution of a
confidentiality agreement with respect to proposal described in the
preceding two paragraphs;
- promptly notify Sprint in writing of the furnishing of any confidential
information in contemplation of proposal described in the preceding two
paragraphs, whether or not pursuant to a confidentiality agreement;
- describe to Sprint the terms and conditions of any proposal described in
the preceding two paragraphs in reasonable detail;
- provide to Sprint copies of any definitive agreements with respect to any
proposal described in the preceding two paragraphs and any confidentiality
agreements with respect to the proposal; and
- subject to Sprint's obligation to hold the information in strict
confidence, make available to Sprint all information made available to the
party making the proposal described in the preceding two paragraphs at the
same time it is provided to the party.
EarthLink generally is obligated under the governance agreement not to take
any action or omit to take any action that would result in Sprint, Sprint L.P.
or any of their affiliates being deemed an "acquiring person" or similar
designation under any stockholders' rights plan, that would result in
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Sprint, Sprint L.P. or any of their affiliates being prejudiced under any
applicable state takeover statute, including Section 203 of the Delaware General
Corporation Law, or that would otherwise cause any takeover defense to
materially impair or obstruct, or prevent, either legally or financially, the
exercise by Sprint, Sprint L.P. or any of their affiliates of rights granted
under article IV of the governance agreement, which governs Sprint's purchase of
additional securities and Sprint's and EarthLink's rights relating to mergers,
share exchanges and other extraordinary business combinations.
STOCKHOLDERS' AGREEMENT; IRREVOCABLE PROXIES
In order to provide for the enforcement of various aspects of the governance
agreement, Sprint and the following EarthLink principal stockholders have
entered into a stockholders' agreement: Sky Dayton, chairman of the EarthLink
board of directors; Quantum Industrial Partners LDC; Reed Slatkin, a director of
EarthLink; Kevin M. O'Donnell, a director of the EarthLink; Sidney Azeez, a
director of EarthLink; and George Soros. Further, in order to provide for
enforcement of the stockholders' agreement and the provisions of the governance
agreement requiring Sprint, Sprint L.P. and their affiliates to vote their
voting equity securities of EarthLink in accordance with the terms of the
governance agreement, Sprint has provided EarthLink an irrevocable proxy.
TERMINATION; SURVIVAL
The governance agreement terminates upon the earliest to occur of the
following events:
- such time as Sprint's percentage interest in EarthLink's outstanding
equity securities is greater than 90% or less than 10%, subject to
adjustment for various dilutive events;
- September 5, 2003;
- the first date on which any person or "group" as defined in Rule 13d-5(b)
of the Securities Exchange Act of 1934 is determined either to
beneficially own or control more than 35% of EarthLink's outstanding
equity securities by virtue of the acquisition of the securities pursuant
to a third-party offer, if the rights granted and process contemplated by
Article IV of the governance agreement have been observed and effected in
accordance with the terms thereof, or to beneficially own or control 50%
or more of EarthLink's outstanding voting equity securities;
- upon the termination of EarthLink's marketing and distribution agreement
with Sprint in various circumstances; or
- upon the exercise of demand or incidental registration rights by any
"holder" of "Registrable Securities" under the registration rights
agreement entered into among EarthLink, Sprint and Sprint L.P.
Even if the governance agreement terminates upon the occurrence of one of
the events listed above, Sprint will still be subject to the standstill
provisions described above until June 5, 2004 and thereafter for so long as
Sprint's combined equity stake in EarthLink exceeds 10% of EarthLink's fully
diluted outstanding stock. Sprint will maintain the governance and anti-dilution
rights described above under "Corporate Governance and Election of Directors"
and "Equity Purchases from EarthLink; Subscription Rights" following the
termination of the governance agreement. Further, if the governance agreement
terminates, the standstill provisions and various other provisions, including
the definitions section, will remain valid until Sprint's percentage interest in
EarthLink's outstanding equity securities falls below 10%, but, during any
period in which the standstill provisions survive, Sprint and its affiliates may
directly approach EarthLink's board in order to make an offer to effect a
business combination.
WWW HOLDINGS TO BE BOUND BY THE GOVERNANCE AGREEMENT
Upon the consummation of the Merger of EarthLink into WWW Holdings, WWW
Holdings will be bound by the provisions of the governance agreement. If the
proposed purchase of Sprint by MCI WorldCom Inc. is consummated, MCI WorldCom
will succeed to Sprint's rights and obligations under the governance agreement.
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TERMS AND CONDITIONS OF THE REORGANIZATION AGREEMENT
Although this section describes the material provisions of the
reorganization agreement, it does not purport to describe all of its provisions.
A copy of the reorganization agreement is attached to this joint proxy
statement/prospectus as ANNEX A, and is incorporated in this document by
reference. All stockholders are urged to read the entire reorganization
agreement carefully.
STRUCTURE. As part of the reorganization, EarthLink will be merged into WWW
Holdings, and, immediately thereafter, MindSpring will be merged into WWW
Holdings, with WWW Holdings being the surviving corporation of both mergers. As
a result, EarthLink and MindSpring will cease to exist.
NAME. As a result of the merger of EarthLink and MindSpring into WWW
Holdings, WWW Holdings will be re-named "EarthLink, Inc."
SHARE CONVERSION. Under the terms of the reorganization agreement, each
stockholder of EarthLink will receive 1.615 shares of WWW Holdings common stock
in exchange for each share of EarthLink common stock held, 1.615 shares of WWW
Holdings series A convertible preferred stock for each share of EarthLink
series A convertible preferred stock held, 1.615 shares of WWW Holdings
series B convertible preferred stock for each share of EarthLink series B
convertible preferred stock held and 1.615 shares of WWW Holdings series C
convertible preferred stock for each share of EarthLink series C convertible
preferred stock held. Each MindSpring stockholder will receive one share of WWW
Holdings common stock for each share of MindSpring common stock held. Cash will
be paid instead of issuing any fraction of a share of WWW Holdings common stock.
STOCK OPTIONS. Each outstanding option to purchase EarthLink common stock
as of the effective time of the mergers will become an option to acquire a
number of shares of WWW Holdings common stock equal to the number of shares
purchasable under the EarthLink option multiplied by 1.615 at a per share price
equal to the exercise price under the EarthLink option divided by 1.615. Each
outstanding option to purchase MindSpring common stock as of the effective time
of the mergers will become an option to acquire a number of shares of WWW
Holdings common stock equal to the number of shares purchasable under the
MindSpring option at a per share price equal to the exercise price under the
MindSpring option. Upon the exercise of any converted option, cash will be paid
instead of issuing any fraction of a share of WWW Holdings common stock.
REPRESENTATIONS AND WARRANTIES
In the reorganization agreement, EarthLink and MindSpring make customary
representations and warranties to each other relating to, among other things:
- corporate authority related to the reorganization agreement;
- government approvals and required consents;
- lack of conflicts with existing agreements;
- capitalization
- documents and other reports that have been or will be filed with the
Securities and Exchange Commission;
- financial statements;
- absence of undisclosed liabilities;
- the absence of material changes and events;
- legal actions and proceedings;
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- taxes;
- employee benefit plan matters;
- compliance with laws;
- title to properties;
- intellectual property;
- environmental matters;
- fairness opinions;
- required vote;
- board approval;
- the applicability of state takeover statutes relating to the
reorganization;
- pooling matters;
- agreements that impose restrictions on the parties; and
- year 2000 compliance matters.
COVENANTS
INTERIM OPERATIONS OF EARTHLINK. From the date of signing the
reorganization agreement and until the effective time of the reorganization,
EarthLink and its subsidiaries are required to conduct their businesses in the
ordinary course consistent with past practice, to use commercially reasonable
efforts to preserve their current business organizations intact, to maintain in
effect all licenses, approvals and other obligations and to preserve their
relationships with customers, suppliers and others with whom they do business.
In addition, EarthLink and its subsidiaries may not, subject to limited
exceptions, take some other actions during this period, including the following:
- amend their certificates of incorporation or bylaws;
- split, combine or reclassify any of their capital stock;
- declare, set aside or pay any dividends;
- purchase, redeem or otherwise acquire any shares of EarthLink's capital
stock;
- issue, deliver or sell any shares of EarthLink's capital stock or options,
warrants or other rights to acquire any capital stock other than the
options to purchase up to an aggregate of 500,000 shares of EarthLink's
common stock, plus an additional number equal to the number of shares
underlying options forfeited prior to closing by EarthLink employees,
under EarthLink's option plans, and upon exercise of employee stock
options and EarthLink common stock upon conversion of EarthLink's
series A and series B convertible preferred stock or pursuant to
EarthLink's agreements with Sprint;
- incur any capital expenditures except for those contemplated by the
capital expenditure budget prepared by EarthLink and delivered to
MindSpring or those incurred in the ordinary course of business;
- acquire any assets or equity interests with a fair market value of more
than $5,000,000, excluding amounts contemplated by the capital expenditure
budget prepared by EarthLink and delivered to MindSpring;
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- sell, lease or encumber assets except in the ordinary course of business
or assets no longer in use;
- incur or generate any debt or issue any debt securities except in the
ordinary course of business consistent with past practices;
- enter into any agreement or arrangement that restricts or limits EarthLink
or its subsidiaries from engaging or competing in any line of business or
in any location;
- amend, modify or terminate any material agreement except in the ordinary
course of business;
- except in the ordinary course of business or as may be required by law or
any existing agreement, increase the amount of compensation of any
director or executive officer or increase any employee benefits, grant any
severance pay to any director officer or employee of EarthLink or adopt or
amend any benefit plan;
- except as may be required as a result of a change in law or in generally
accepted accounting principles, change any of EarthLink's accounting
methods;
- make any material tax election or settle any material income tax liability
other than in the ordinary course of business consistent with past
practices;
- settle any litigation or investigation material to the business of
EarthLink other than the discharge of various liabilities in the ordinary
course of business.
INTERIM OPERATIONS OF MINDSPRING. From the date of signing the
reorganization agreement and until the effective time of the reorganization,
MindSpring and its subsidiaries are required to conduct their businesses in the
ordinary course consistent with past practices, to use commercially reasonable
efforts to preserve their current business organizations intact, to maintain in
effect all licenses, approvals and other obligations and to preserve their
relationships with customers, suppliers and others with whom they do business.
In addition, MindSpring and its subsidiaries may not, subject to limited
exceptions, take various other actions during this period, including the
following:
- amend their certificates of incorporation or bylaws;
- split, combine or reclassify any of their capital stock;
- declare, set aside or pay any dividends;
- purchase, redeem or otherwise acquire any shares of MindSpring's capital
stock;
- issue, deliver or sell any shares of MindSpring's capital stock or
options, warrants or other rights to acquire any capital stock other than
the options to purchase up to an aggregate of 500,000 shares of
MindSpring's common stock, plus an additional number equal to the number
of shares underlying options forfeited prior to closing by MindSpring
employees, under MindSpring's option plans and upon exercise of employee
stock options and MindSpring common stock upon the conversion of
MindSpring's 5% Convertible Subordinated Notes due 2006;
- incur any capital expenditures except for those contemplated by the
capital expenditure budget prepared by MindSpring and delivered to
EarthLink or those incurred in the ordinary course of business;
- acquire any assets or equity interests with a fair market value of more
than $5,000,000 excluding amounts contemplated by the capital expenditure
budget prepared by MindSpring and delivered to EarthLink;
- sell, lease or encumber assets except in the ordinary course of business
or assets no longer in use;
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- incur or generate any debt or issue any debt securities except in the
ordinary course of business consistent with past practices;
- enter into any agreement or arrangement that restricts or limits
MindSpring or its subsidiaries from engaging or competing in any line of
business or in any location;
- amend, modify or terminate any material agreement except in the ordinary
course of business;
- except in the ordinary course of business or as may be required by law or
any existing agreement, increase the amount of compensation of any
director or executive officer or increase any employee benefits, grant any
severance pay to any director officer or employee of MindSpring or adopt
or amend any benefit plan;
- except as may be required as a result of a change in law or in generally
accepted accounting principles, change any of MindSpring's accounting
methods;
- make any material tax election or settle any material income tax liability
other than in the ordinary course of business consistent with past
practices; or
- settle any litigation or investigation material to the business of
MindSpring other than the discharge of various liabilities in the ordinary
course of business.
NO SOLICITATION. Neither EarthLink nor MindSpring may directly or
indirectly solicit, initiate, institute, pursue or knowingly facilitate
submission of an offer to, or participate in discussions or negotiations of
agreements relating to, any merger, consolidation, share exchange, business
combination, tender offer, exchange offer or similar transaction involving, or
any purchase of 10% or more of the assets or any class of securities of,
EarthLink or MindSpring, as the case may be.
Notwithstanding the preceding paragraph, the boards of directors of each of
EarthLink and MindSpring may comply with the securities laws in connection with
an acquisition proposal. The EarthLink and MindSpring boards also may furnish
information or enter into negotiations regarding an unsolicited proposal if the
following conditions are met:
- the board of directors determines in good faith, taking into account the
advice of outside counsel, that furnishing information or entering into
negotiations is reasonably likely to be required for the board of
directors to comply with its fiduciary duties to its stockholders;
- the party receiving the proposal notifies the other party of the proposal,
the identity of the person making the proposal and the party's intention
to provide information or commence discussions and the party receiving the
proposal keeps the other party informed of the status of the discussions;
and
- the party receiving the proposal enters into a confidentiality agreement
with the person making the proposal that is on no more favorable terms
than the confidentiality agreement between EarthLink and MindSpring.
WITHDRAWAL OF RECOMMENDATION; COUNTER-PROPOSAL. Under the circumstances
described below, the board of directors of either EarthLink or MindSpring may
withdraw its recommendation of the reorganization agreement and recommend a
superior proposal. For purposes of the reorganization agreement, a superior
proposal is a proposal:
- that has no financing contingency;
- that is for more than 75% of the aggregate voting power of the outstanding
equity securities of the party receiving the proposal;
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- that the board of directors of the party receiving the proposal believes
in good faith:
to be superior, from a financial point of view, to the proposal
contained in the reorganization agreement, taking into account the
advice of the party's outside financial advisors; and
to be more favorable generally to the party's stockholders, taking into
account all relevant factors, including legal, financial, regulatory and
other aspects of the proposals and the conditions, prospects and time
required for completion; and
- that the board of directors has determined in good faith, taking into
account the advice of outside legal counsel, that it is reasonably likely
to be required to recommend the proposal in order to comply with its
fiduciary duties to its stockholders.
The board of directors of either party may withdraw its recommendation of the
reorganization agreement and recommend a superior proposal:
- if the board gives the other party at least four business days' written
notice of its intention to withdraw its recommendation; and
- if the board of directors determines in good faith, taking into account
the advice of its outside financial advisors, that any counter-proposal
delivered by the other party during this four day period is not at least
as favorable to the party's stockholders as the superior proposal, taking
into account all relevant factors.
MUTUAL COVENANTS. The reorganization agreement also contains other
agreements relating to the conduct of the parties prior to the effective time,
including those requiring the parties:
- to prepare the WWW Holdings registration statement and this joint proxy
statement/prospectus and to cause WWW Holdings to take any required action
under state securities laws in connection with the issuance of WWW
Holdings common stock in the reorganization;
- to cooperate to make any required governmental filing and to obtain all
required third-party consents;
- to cooperate to set a mutually acceptable date for the special meetings;
- to use their reasonable best efforts to cause the WWW Holdings common
stock to be issued in the mergers to be approved for listing on The Nasdaq
National Market with the ticker symbol "ELNK"; and
- to consult with one another before issuing a press release or making any
public statement regarding the reorganization agreement, except as
required by applicable law or any listing agreement with any national
securities exchange association.
Each of EarthLink and MindSpring has agreed to provide the other with access
to its offices and information subject to EarthLink's and MindSpring's
obligations of confidentiality undertaken in connection with the reorganization
agreement.
Each of the parties has agreed to notify the other party of:
- any communication from a governmental entity with respect to the
transactions contemplated by the reorganization agreement; and
- any actions, suits or investigations commenced or, to the knowledge of the
party threatened, against the party.
Each party has agreed that it will use it best efforts to cause the
reorganization to receive tax-free treatment, other than the taxes resulting
from the payment of cash instead of issuing fractional shares, as described in
this joint proxy statement/prospectus in the section entitled "Material Federal
Income
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Tax Considerations" beginning on page , and to qualify for "pooling of
interests" accounting treatment, as described in the section entitled
"Accounting for the Reorganization under the Pooling of Interests Method" at
page .
CONFIDENTIALITY. Each party has agreed that it will hold, and will cause
its representatives to hold, in confidence, all information received in
connection with the transactions contemplated by the reorganization agreement.
The parties will not be subject to this obligation with respect to any
information:
- that is or becomes generally available to the public other than as a
result of a disclosure of the party receiving the information in
connection with the reorganization agreement;
- that was previously available to the party receiving the information on a
non-confidential basis; or
- that becomes available to the party on a non-confidential basis from an
outside source that is not known to the party receiving the information to
be contractually or legally prohibited from disclosing the information.
If the reorganization agreement is terminated, each party will use its best
efforts to cause the documents and other materials subject to the
confidentiality obligations to be destroyed or returned.
STANDSTILL. Each of EarthLink and MindSpring has agreed that for two years
following any termination of the reorganization agreement it will not and it
will cause its affiliates not to:
- except pursuant to the stock option agreements entered into with one
another, acquire or seek to acquire, directly or indirectly, beneficial
ownership of any assets or more than 5% of any class of securities of the
other party or its affiliates, or any rights or options to acquire any
assets or more than 5% of any class of securities of the other party or
its affiliates;
- make or participate in any solicitation of proxies relating to the voting
securities of the other party or seek to encourage or influence any person
with respect to the voting of any voting securities of the other party;
- call for, or participate in a call for, a stockholders' meeting of the
other party;
- form or participate in a "group" within the meaning of Section 13(d)(3) of
the Securities Exchange Act of 1934 with respect to the voting securities
of the other party;
- participate in any way in any tender offer, exchange offer, merger or
other business combination involving the other party; or
- act alone or in concert to control or influence the other party or the
management, board of directors, policies or affairs of the other party.
This agreement does not apply to a party if:
- the other party does not pay any portion of any termination fee it may
owe;
- the party terminates the reorganization agreement because of the willful
breach of the reorganization agreement by the other party; or
- under some specific circumstances, the other party pursues another
acquisition proposal.
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CONDITIONS TO THE REORGANIZATION
Completion of the mergers of EarthLink and MindSpring into WWW Holdings is
subject to conditions set forth in the reorganization agreement, including:
- approval of the reorganization agreement by the stockholders of EarthLink
and MindSpring, as required by law;
- effectiveness of the registration statement of which this document is a
part and obtaining all necessary state securities and blue sky
authorizations;
- approval for listing of the WWW Holdings common stock to be issued
pursuant to the reorganization agreement on The Nasdaq National Market;
- expiration or termination of any applicable waiting period under the
federal anti-trust laws relating to each of the mergers of EarthLink and
MindSpring into WWW Holdings;
- absence of any order, injunction or decree from any governmental entity
relating to the mergers; and
- receipt by each of EarthLink and MindSpring from their respective
accountants of a letter concurring with the conclusions of their clients'
management that no condition exists that would preclude WWW Holdings from
accounting for the mergers of EarthLink and MindSpring into WWW Holdings
as a "pooling of interests" in conformity with generally acceptable
accounting principles.
The obligations of EarthLink on one hand, and MindSpring on the other, to
consummate the mergers of EarthLink and MindSpring into WWW Holdings are also
subject to the fulfillment, on or before the effective time of the mergers, of
the following additional conditions, unless waived in writing:
- the performance by the other party in all material respects of all
obligations required to performed by it;
- the representations and warranties of the other party being true in all
material respects;
- the receipt of an opinion from its counsel to the effect that the merger
of EarthLink into WWW Holdings or the merger of MindSpring into WWW
Holdings, as the case may be, will qualify as a tax free reorganization
within the meaning of federal income tax laws; and
- the receipt or making of all necessary consents, approvals, actions,
registrations and filings.
It is a further condition to EarthLink's obligations that at the effective
time of the mergers of EarthLink and MindSpring into WWW Holdings, the former
stockholders of MindSpring collectively own less than 50% of the outstanding
equity securities of WWW Holdings.
TERMINATION
The reorganization agreement may be terminated at any time, before or after
the approval of the reorganization agreement by EarthLink's or MindSpring's
stockholders, by the mutual agreement of EarthLink and MindSpring.
The boards of directors of EarthLink and MindSpring may terminate the
reorganization agreement if:
- the mergers of EarthLink and MindSpring into WWW Holdings are not
completed by March 31, 2000, unless the party seeking to terminate the
reorganization agreement caused the failure to consummate the
reorganization through its breach of the terms of the reorganization
agreement;
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- a law or regulation makes consummation of the mergers illegal;
- a governmental entity with competent jurisdiction issues a judgment,
injunction or order enjoining consummation of the mergers that is final
and non-appealable and the parties have used their reasonable best efforts
to resist or lift the judgment, injunction or order;
- the holders of the EarthLink common stock fail to adopt the reorganization
agreement; or
- the holders of the MindSpring common stock fail to adopt the
reorganization agreement.
EarthLink may terminate the reorganization agreement if:
- MindSpring's board of directors amends or withdraws its recommendation to
its stockholders for adoption of the reorganization agreement;
- MindSpring's board of directors recommends another proposal to its
stockholders;
- MindSpring or one of its affiliates willfully and materially breaches its
obligations with respect to alternate acquisition proposals;
- MindSpring breaches any representation, warranty or covenant that will
cause a condition to closing not to be satisfied before March 31, 2000;
- EarthLink's board of directors withdraws its recommendation to its
stockholders for approval of the reorganization agreement to pursue a
superior proposal for EarthLink.
MindSpring may terminate the reorganization agreement if:
- EarthLink's board of directors amends or withdraws its recommendation to
its stockholders for approval of the reorganization agreement;
- EarthLink's board of directors recommends another proposal to its
stockholders;
- EarthLink or one of its affiliates willfully and materially breaches its
obligations with respect to alternate acquisition proposals;
- EarthLink breaches any representation, warranty or covenant that will
cause a condition to closing not to be satisfied before March 31, 2000;
- MindSpring's board of directors withdraws its recommendation to its
stockholders for approval of the reorganization agreement to pursue a
superior proposal for MindSpring.
COSTS AND FEES IN CONNECTION WITH THE REORGANIZATION AGREEMENT; TERMINATION FEES
Except as described below, all fees and expenses incurred in connection with
the reorganization agreement will be paid by the party incurring such fees and
expenses.
PAYMENT OF TERMINATION FEE BY EARTHLINK
EarthLink will pay MindSpring a termination fee of $70,000,000 if:
- MindSpring terminates the reorganization agreement because the mergers of
EarthLink and MindSpring into WWW Holdings are not consummated by
March 31, 2000 or the EarthLink stockholders fail to adopt the
reorganization agreement; AND
- within nine months of the termination of the reorganization agreement,
EarthLink enters into an agreement with respect to an alternate
acquisition proposal and EarthLink received an acquisition proposal for
EarthLink prior to the termination; or
- EarthLink terminates the reorganization agreement to pursue a superior
proposal for EarthLink.
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PAYMENT OF TERMINATION FEE BY MINDSPRING
MindSpring will pay EarthLink a termination fee of $70,000,000 if:
- EarthLink terminates the reorganization agreement because the mergers of
EarthLink and MindSpring into WWW Holdings are not consummated by
March 31, 2000, or the MindSpring stockholders fail to adopt the
reorganization agreement; AND
- within nine months of the termination of the reorganization agreement,
MindSpring enters into an agreement with respect to an alternate
acquisition proposal and MindSpring received an acquisition proposal for
MindSpring prior to the termination; or
- MindSpring terminates the reorganization agreement to pursue a superior
proposal for MindSpring.
AMENDMENT; NO WAIVER
Any provision of the reorganization agreement may be amended or waived, in
writing, prior to the effective time of the mergers of EarthLink and MindSpring
into WWW Holdings. Following the approval of the reorganization agreement by the
stockholders of EarthLink, no amendment or waiver will be made that by
applicable law would require the further approval of the stockholders of
EarthLink without obtaining the approval from the stockholders of EarthLink.
Following the approval of the reorganization agreement by the stockholders of
MindSpring, no amendment or waiver will be made that by applicable law would
require the further approval of the stockholders of MindSpring without obtaining
the approval from the stockholders of MindSpring. No failure or delay of any
party to exercise a right or privilege under the reorganization agreement
operates as a waiver of that right or privilege.
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WWW HOLDINGS
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
present the effect of the proposed reorganization of EarthLink and MindSpring,
accounted for as a pooling of interests, and the January 5, 2000 investment by
Apple Computer of $200 million in EarthLink. The EarthLink and MindSpring
unaudited pro forma condensed combined financial statements are based on the
historical consolidated financial statements of each company and the related
notes, which are incorporated by reference into this presentation. The unaudited
pro forma condensed combined balance sheet presents the combined financial
position of EarthLink and MindSpring as of September 30, 1999, assuming that the
proposed reorganization had occurred as of that date. In addition, the unaudited
pro forma condensed combined balance sheet reflects the $200 million investment
of Apple Computer, Inc. in EarthLink's series C convertible preferred stock. The
unaudited pro forma condensed combined statements of operations give effect to
the proposed reorganization by combining the results of operations of EarthLink
for the nine months ended September 30, 1999 and September 30, 1998 and for each
of the three years ended December 31, 1998, with the results of operations of
MindSpring for the same periods, on a pooling of interests basis assuming the
reorganization had occurred on January 1, 1996. In addition, the unaudited pro
forma condensed combined statements of operations reflect acquisitions completed
by EarthLink and MindSpring during 1999 and 1998 as if the acquisitions had been
completed on January 1, 1998. Such information is included herein.
On June 5, 1998, EarthLink acquired the Sprint Internet Passport business of
Sprint Corporation in a transaction accounted for as a purchase. The unaudited
pro forma condensed combined statement of operations for the year ended
December 31, 1998 is based upon Sprint Internet Passport's historical results of
operations and combines the results of operations as if the transaction with
Sprint had been completed on January 1, 1998.
On October 15, 1998, MindSpring acquired from America Online various assets
used in connection with the consumer dial-up Internet access business of
Spry, Inc. On February 17, 1999, MindSpring acquired some of the tangible and
intangible assets and rights used in connection with the Internet services
business operated in the United States by NETCOM On-Line Communication
Services, Inc. The unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1998 and the nine months ended
September 30, 1999 reflect these acquisitions by MindSpring as if they had been
completed on January 1, 1998 and for the year ended December 31, 1997 as if the
Spry, Inc. transaction had been completed on January 1, 1997.
On January 4, 2000, Apple agreed to make a $200 million investment in
EarthLink's series C convertible preferred stock.
The unaudited pro forma condensed combined financial statements are based on
the estimates and assumptions set forth in the notes to the financial
statements, which are preliminary and have been made solely for purposes of
developing the pro forma information. The unaudited pro forma condensed combined
financial statements are not necessarily an indication of the results that would
have been achieved had the transactions been consummated as of the dates
indicated, or that may be achieved in the future, or the results that would have
been realized had the entities been a single entity during these periods. These
unaudited pro forma condensed combined financial statements should be read
together with the audited historical consolidated financial statements and the
related notes of each of EarthLink, MindSpring, Sprint Internet Passport, Spry
and NETCOM and other financial information pertaining to EarthLink and
MindSpring including under the captions "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Risk Factors" included in
the Securities and Exchange Commission filings of each of EarthLink and
MindSpring, which are included herein.
78
<PAGE>
WWW HOLDINGS, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
WWW
HOLDINGS
PRO FORMA PRO FORMA
EARTHLINK (1) MINDSPRING (2) ADJUSTMENTS COMBINED
------------- -------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............. $338,315 $386,833 $200,000 (7) $ 925,148
Accounts receivable, net............... 10,385 5,179 15,564
Deferred income taxes.................. -- 6,452 (6,452)(6) --
Prepaid and other current assets....... 12,745 5,221 17,966
-------- -------- -------- ----------
Total current assets................. 361,445 403,685 193,548 958,678
Property and equipment, net.............. 52,139 78,562 130,701
Intangibles, net......................... 26,933 212,441 239,374
Deferred income taxes.................... 17,207 (17,207)(6) --
Other long-term assets................... 2,995 7,648 10,643
-------- -------- -------- ----------
$443,512 $719,543 $176,341 $1,339,396
======== ======== ======== ==========
CURRENT LIABILITIES:
Trade accounts payable................. $ 22,299 $ 3,361 $ 25,660
Other accounts payable and accrued
liabilities.......................... 32,964 42,432 $ 20,500 (3) 95,896
Current portion of capital lease
obligations.......................... 9,337 2,608 11,945
Deferred revenue....................... 13,826 10,710 24,536
-------- -------- -------- ----------
Total current liabilities............ 78,426 59,111 20,500 158,037
LONG-TERM LIABILITIES:
Convertible debt....................... -- 179,975 179,975
Long-term portion of capital lease
obligations.......................... 9,201 526 9,727
-------- -------- -------- ----------
Total long-term liabilities.......... 9,201 180,501 -- 189,702
-------- -------- -------- ----------
Total liabilities.................. 87,627 239,612 20,500 347,739
STOCKHOLDERS' EQUITY:
Preferred stock........................ 47 -- 29 (4) 76
Common stock........................... 326 635 198 (5) 1,159
Additional paid-in capital............. 577,202 503,700 (198)(5) 1,280,675
200,000 (7)
(29)(4)
Warrants to purchase common stock...... 597 -- 597
Accumulated deficit.................... (222,287) (24,404) (20,500)(3) (290,850)
(23,659)(6)
-------- -------- -------- ----------
Total stockholders' equity........... 355,885 479,931 155,841 991,657
-------- -------- -------- ----------
$443,512 $719,543 $176,341 $1,339,396
======== ======== ======== ==========
</TABLE>
79
<PAGE>
NOTES TO WWW HOLDINGS, INC. PRO FORMA CONDENSED COMBINED BALANCE SHEET
1. This column represents the historical financial position of EarthLink.
2. This column represents the historical financial position of MindSpring.
3. This adjustment records the accrual of estimated costs resulting from the
proposed reorganization. It is anticipated that EarthLink and MindSpring
will incur charges to operations related to the proposed reorganization,
which are currently estimated to be $20.5 million, principally in the
quarter in which the proposed reorganization is consummated. These charges
include direct transaction costs including estimated investment banking
fees, financial advisory fees and fees for other professional services.
These estimated charges are reflected in the unaudited pro forma condensed
combined balance sheet data, but are not reflected in the unaudited pro
forma condensed combined statement of operations data. These charges are a
preliminary estimate only and are subject to change.
4. Pursuant to the terms of the reorganization agreement, each share of
EarthLink series A convertible preferred stock, each share of EarthLink
series B convertible preferred stock and each share of EarthLink series C
convertible preferred stock will be exchanged for 1.615 shares of newly
created WWW Holdings series A convertible preferred stock, 1.615 shares of
newly created WWW Holdings series B convertible preferred stock, and 1.615
shares of newly created WWW Holdings series C convertible preferred stock
having terms substantially similar to the EarthLink series A convertible
preferred stock, the EarthLink series B convertible preferred stock and the
EarthLink series C convertible preferred stock, as the case may be. This
adjustment reflects the increase in the aggregate par value of WWW Holdings'
preferred stock due to the exchange ratio for EarthLink's preferred stock.
5. Pursuant to the terms of the reorganization agreement, each share of
EarthLink common stock will be exchanged for 1.615 shares of WWW Holdings
common stock. This adjustment reflects the increase in the aggregate par
value of WWW Holdings' common stock due to the exchange ratio for
EarthLink's common stock.
6. In 1998 MindSpring's management reviewed its net deferred tax asset,
consisting primarily of net operating loss carryforwards, and based on the
net income generated in 1998, as well as the projections of future income,
determined that it was more likely than not that the deferred tax assets
would be realized. Accordingly, MindSpring reversed its valuation allowance
in 1998. In the course of the reorganization discussions, management of
MindSpring and EarthLink reviewed the combined deferred tax assets and
concluded that sufficient uncertainty now exists regarding realizability of
the net deferred tax asset. Accordingly, this adjustment gives the effect to
the reestablishment of a valuation allowance on the MindSpring net deferred
tax assets for pro forma purposes.
7. This adjustment reflects Apple's $200 million investment in EarthLink's
series C convertible preferred stock.
80
<PAGE>
WWW HOLDINGS, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
WWW
HOLDINGS
MINDSPRING PRO FORMA PRO FORMA
EARTHLINK (3) AS ADJUSTED (2) ADJUSTMENTS COMBINED
------------- --------------- ----------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues.............................. $235,818 $254,325 $ 490,143
Operating costs and expenses:
Cost of revenues.......................... 89,614 86,552 176,166
Selling, general and administrative and
member support.......................... 167,864 133,887 301,751
Depreciation.............................. 15,117 27,493 42,610
Amortization and transaction expenses..... 53,019 60,345 113,364
-------- -------- ---------
325,614 308,277 633,891
-------- -------- ---------
Loss from operations...................... (89,796) (53,952) (143,748)
Interest income, net........................ 11,641 3,914 15,555
-------- -------- ---------
Loss before taxes......................... (78,155) (50,038) (128,193)
Income tax benefit.......................... -- 13,565 13,565
-------- -------- ---------
Net loss.................................. (78,155) (36,473) (114,628)
Deductions for accretion dividends.......... (10,677) (10,677)
-------- -------- ---------
Net loss attributable to common
stockholders............................ $(88,832) $(36,473) $(125,305)
======== ======== =========
Basic and diluted loss per share............ $ (2.78) $ (0.55) $ (1.07)
======== ======== =========
Shares used for computing net loss per
share--basic and diluted.................. 31,925 65,877 19,634(5) 117,436
======== ======== ======== =========
</TABLE>
81
<PAGE>
WWW HOLDINGS, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
WWW
HOLDINGS
EARTHLINK MINDSPRING PRO FORMA PRO FORMA
AS ADJUSTED (1) AS ADJUSTED (2) ADJUSTMENTS COMBINED
---------------- --------------- ----------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues......................... $128,762 $216,660 $ 345,422
Operating costs and expenses:
Cost of revenues..................... 65,530 85,509 151,039
Selling, general and administrative
and member support................. 76,776 127,377 204,153
Depreciation......................... 9,832 28,834 38,666
Amortization and transaction
expenses........................... 36,160 68,023 104,183
-------- -------- ---------
188,298 309,743 498,041
-------- -------- ---------
Loss from operations................. (59,536) (93,083) (152,619)
Interest income, net................... 907 2,132 3,039
-------- -------- ---------
Loss before taxes.................... (58,629) (90,951) (149,580)
Income tax provision................... -- (212) (212)
-------- -------- ---------
Net loss............................. (58,629) (91,163) (149,792)
Deductions for accretion dividends..... (8,946) (8,946)
-------- -------- ---------
Net loss attributable to common
stockholders....................... $(67,575) $(91,163) $(158,738)
======== ======== =========
Basic and diluted loss per share....... $ (2.67) $ (1.70) $ (1.68)
======== ======== =========
Shares used for computing net loss per
share--basic and diluted............. 25,292 53,749 15,555 (5) 94,596
======== ======== ======== =========
</TABLE>
82
<PAGE>
WWW HOLDINGS, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
WWW
HOLDINGS
EARTHLINK MINDSPRING PRO FORMA PRO FORMA
AS ADJUSTED (1) AS ADJUSTED (2) ADJUSTMENTS COMBINED
--------------- --------------- ----------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues............................ $ 187,063 $ 294,917 $ 481,980
Operating costs and expenses:
Cost of revenues........................ 88,348 114,271 202,619
Selling, general and administrative and
member support........................ 115,993 174,208 290,201
Depreciation............................ 12,508 44,081 56,589
Amortization and transaction expenses... 70,693 89,570 160,263
--------- --------- ---------
287,542 422,130 709,672
--------- --------- ---------
Loss from operations...................... (100,479) (127,213) (227,692)
Interest income (expense), net............ 2,457 4,607 7,064
--------- --------- ---------
Loss before taxes....................... (98,022) (122,606) (220,628)
Income tax benefit........................ -- 1,544 1,544
--------- --------- ---------
Net loss................................ (98,022) (121,062) (219,084)
Deductions for accretion dividend......... (13,126) -- (13,126)
--------- --------- ---------
Net loss attributable to common
stockholders.......................... $(111,148) $(121,062) $(232,210)
========= ========= =========
Basic and diluted loss per share.......... $ (4.25) $ (2.13) $ (2.35)
========= ========= =========
Shares used for computing net loss per
share--basic and diluted................ 26,157 56,772 16,087 (5) 99,016
========= ========= ========= =========
</TABLE>
83
<PAGE>
WWW HOLDINGS, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
WWW
HOLDINGS
MINDSPRING PRO FORMA PRO FORMA
EARTHLINK (3) AS ADJUSTED (2) ADJUSTMENTS COMBINED
-------------- --------------- ----------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues.............................. $ 80,888 $102,747 $183,635
Operating costs and expenses:
Cost of revenues.......................... 33,309 46,512 79,821
Selling, general and administrative and
member support.......................... 67,502 60,063 127,565
Depreciation.............................. 8,531 19,783 28,314
-------- -------- --------
109,342 126,358 235,700
-------- -------- --------
Loss from operations........................ (28,454) (23,611) (52,065)
Interest income (expense), net.............. (1,462) (346) (1,808)
-------- -------- --------
Net loss.................................. $(29,916) $(23,957) $(53,873)
======== ======== ========
Basic and diluted loss per share............ $ (1.50) $ (0.47) $ (0.65)
======== ======== ========
Shares used for computing net loss per
share--basic and diluted.................. 20,002 51,084 12,301 (5) 83,387
======== ======== ========= ========
</TABLE>
84
<PAGE>
WWW HOLDINGS, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
WWW
HOLDINGS
PRO FORMA PRO FORMA
EARTHLINK (3) MINDSPRING (4) ADJUSTMENTS COMBINED
-------------- --------------- ----------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues.............................. $ 33,230 $18,132 $ 51,362
Operating costs and expenses:
Cost of revenues.......................... 17,339 8,208 25,547
Selling, general and administrative and
member support.......................... 42,224 14,161 56,385
Depreciation.............................. 3,925 3,285 7,210
-------- ------- --------
63,488 25,654 89,142
-------- ------- --------
Loss from operations........................ (30,258) (7,522) (37,780)
Interest income (expense), net.............. (891) (90) (981)
-------- ------- --------
Net loss.................................. $(31,149) $(7,612) $(38,761)
======== ======= ========
Basic and diluted loss per share............ $ (2.57) $ (0.24) $ (0.76)
======== ======= ========
Shares used for computing net loss per
share--basic and diluted.................. 12,138 31,516 7,465 (5) 51,119
======== ======= ====== ========
</TABLE>
85
<PAGE>
WWW HOLDINGS, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
NOTES TO WWW HOLDINGS, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
1. This column reflects the pro forma results of operations of EarthLink for
the periods presented and the acquisition by EarthLink of the Sprint
Internet Passport business as if it had occurred on January 1, 1998. See
Statements of Revenues and Direct Expenses--Consumer Internet Access
Services of Sprint Corporation herein.
2. This column reflects the pro forma results of operations of MindSpring for
the periods presented and the acquisition by MindSpring of various assets of
NETCOM and of Spry as if the acquisitions had been completed on January 1,
1998 for NETCOM and January 1, 1997 for Spry.
3. These columns represent the historical results of operations of EarthLink
except that depreciation expense, which is normally allocated to costs of
revenues and operating expense accounts, has been separately disclosed for
purposes of these statements.
4. These columns represent the historical results of operations of MindSpring.
5. Pursuant to the terms of the reorganization agreement, each share of
EarthLink common stock will be exchanged for 1.615 shares of WWW Holdings
common stock and each share of MindSpring common stock will be exchanged for
one share of WWW Holdings common stock. All share numbers for all periods
presented have been adjusted to reflect the 2-for-1 stock split of
MindSpring common stock that was completed in July 1999 and the exchange of
each share of EarthLink common stock for 1.615 shares of WWW Holdings common
stock.
86
<PAGE>
EARTHLINK NETWORK, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
EARTHLINK SPRINT INTERNET PRO FORMA EARTHLINK
HISTORICAL PASSPORT (A) ADJUSTMENTS AS ADJUSTED (1)
---------- --------------- ----------- ---------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues........................... $117,640 $ 11,122 $128,762
Operating costs and expenses:
Cost of revenues....................... 47,649 17,881 65,530
Selling, general and administrative and
member support....................... 73,353 3,423 76,776
Depreciation........................... 9,832 3,655 $ (3,655)(b) 9,832
Amortization and transaction
expenses............................. 24,962 11,198(c) 36,160
-------- -------- -------- --------
155,796 24,959 7,543 188,298
-------- -------- -------- --------
Loss from operations................... (38,156) (13,837) (7,543) (59,536)
Interest income, net................... 907 907
-------- -------- -------- --------
Net loss............................. (37,249) (13,837) (7,543) (58,629)
Deductions for accretion dividends..... (4,330) (4,616)(d) (8,946)
-------- -------- -------- --------
Net loss attributable to common
stockholders......................... $(41,579) $(13,837) $(12,159) $(67,575)
======== ======== ======== ========
Basic and diluted net loss per share... $ (1.64) $ (2.67)
======== ========
Weighted average shares outstanding.... 25,292 25,292(e)
======== ========
</TABLE>
87
<PAGE>
EARTHLINK NETWORK, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SPRINT
INTERNET
PASSPORT PRO FORMA EARTHLINK
EARTHLINK HISTORICAL (A) ADJUSTMENTS AS ADJUSTED
--------- -------------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues................................ $175,941 $ 11,122 $ 187,063
Operating costs and expenses:
Cost of revenues............................ 70,467 17,881 88,348
Selling, general and administrative and
member support............................ 112,570 3,423 115,993
Depreciation................................ 12,508 3,655 $ (3,655)(b) 12,508
Amortization and transaction expenses....... 42,635 28,058 (c) 70,693
-------- -------- -------- ---------
238,180 24,959 24,403 287,542
-------- -------- -------- ---------
Loss from operations.......................... (62,239) (13,837) (24,403) (100,479)
Interest income, net.......................... 2,457 2,457
-------- -------- -------- ---------
Net loss.................................... (59,782) (13,837) (24,403) (98,022)
Deductions for accretion dividends............ (7,601) (5,525)(d) (13,126)
-------- -------- -------- ---------
Net loss attributable to common
stockholders................................ $(67,383) $(13,837) $(29,928) $(111,148)
======== ======== ======== =========
Basic and diluted net loss per share.......... $ (2.58) $ (4.25)
======== =========
Weighted average shares outstanding........... 26,157 26,157 (e)
======== =========
</TABLE>
88
<PAGE>
EARTHLINK NETWORK, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
NOTES TO EARTHLINK NETWORK, INC. PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS
(a) The historical Sprint Internet Passport business revenues and expenses
include results from January 1, 1998 through June 5, 1998 (the date of
acquisition).
(b) EarthLink acquired no depreciable assets of the Sprint Internet Passport
business. This adjustment eliminates the depreciation expense recorded by
the Sprint International Passport business.
(c) This entry reflects the amortization of intangible assets as follows:
customer base amortized over 18 months, the Marketing and Distribution
Agreement amortized over five and ten years, which are the lives of the
portion of the contract related to Sprint's provision of customers and the
overall contract period relative to the co-branding feature, respectively,
and 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.
(d) This adjustment reflects the Liquidation Dividends based upon a 3%
Liquidation Value accretion dividend 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.
(e) Pro forma share data are based on the number of shares of EarthLink's common
stock and common equivalent shares that would have been outstanding had the
Sprint International Passport business been acquired on January 1, 1998, but
excludes any shares purchased by Sprint in the tender offer. EarthLink's
common stock equivalents have been excluded from the calculation as their
effect is antidilutive.
89
<PAGE>
MINDSPRING ENTERPRISES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NETCOM
DOMESTIC
MINDSPRING OPERATIONS SUBTOTAL ADJUSTMENTS (A) PRO FORMA
---------- ---------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................ $235,468 $18,857 $254,325 -- $254,325
Costs and expenses:
Selling, general and
administrative.................. 120,756 13,131 133,887 -- 133,887
Cost of revenue................... 78,882 7,670 86,552 -- 86,552
Depreciation and amortization..... 74,077 4,156 78,233 $ 9,605 (b) 87,838
-------- ------- -------- ------- --------
273,715 24,957 298,672 (9,605) 308,277
-------- ------- -------- ------- --------
Operating loss...................... (38,247) (6,100) (44,347) 9,605 (53,952)
-------- ------- -------- ------- --------
Interest income, net................ 3,463 451 3,914 3,914
-------- ------- -------- ------- --------
Loss Income before income tax
benefit........................... (34,784) (5,649) (40,433) (9,605) (50,038)
Income tax benefit.................. 13,565 -- 13,565 -- 13,565
-------- ------- -------- ------- --------
Net income (loss)................... $(21,219) $(5,649) $(26,868) $(9,605) $(36,473)
======== ======= ======== ======= ========
Shares:
Basic............................... 61,042 4,835 (c) 65,877
Diluted............................. 61,042 4,835 (c) 65,877
Earnings Per Share:
Basic............................... $ (0.35) $ (0.55)
======== ========
Diluted............................. $ (0.35) $ (0.55)
======== ========
</TABLE>
90
<PAGE>
MINDSPRING ENTERPRISES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NETCOM
DOMESTIC
MINDSPRING SPRY OPERATIONS SUBTOTAL ADJUSTMENTS(A) PRO FORMA
---------- -------- ---------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $114,673 $36,575 $143,669 $294,917 -- $ 294,917
-------- ------- -------- -------- ---------
Costs and expenses:
Selling, general and
administrative............ 57,324 17,314 99,570 174,208 -- 174,208
Cost of revenue............. 34,336 21,889 58,046 114,271 -- 114,271
Depreciation and
amortization.............. 15,227 3,856 31,878 50,961 $ 82,690 (b) 133,651
-------- ------- -------- -------- ---------- ---------
106,887 43,059 189,494 339,440 82,690 422,130
-------- ------- -------- -------- ---------- ---------
Operating income (loss)....... 7,786 (6,484) (45,825) (44,523) (82,690) (127,213)
Interest income (expense),
net......................... 1,214 (70) 3,463 4,607 -- 4,607
-------- ------- -------- -------- ---------- ---------
Income (loss) before income
tax benefit................. 9,000 (6,554) (42,362) (39,916) (82,690) (122,606)
Income tax benefit............ 1,544 -- -- 1,544 -- 1,544
-------- ------- -------- -------- ---------- ---------
Net income (loss)............. $ 10,544 $(6,554) $(42,362) $(38,372) $ (82,690) $(121,062)
======== ======= ======== ======== ========== =========
Shares:
Basic......................... 49,222 7,550 (c) 56,772
Diluted....................... 50,862 5,910 (c) 56,772
Earnings Per Share:
Basic......................... $ 0.21 $ (2.13)
======== =========
Diluted....................... $ 0.21 $ (2.13)
======== =========
</TABLE>
91
<PAGE>
MINDSPRING ENTERPRISES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MINDSPRING SPRY NETCOM SUBTOTAL ADJUSTMENTS(A) PROFORMA
---------- -------- -------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $75,139 $34,754 $106,767 $216,660 $ -- $ 216,660
------- ------- -------- -------- ---------- ---------
Costs and expenses:
Selling, general and
administrative............ 37,240 16,444 73,693 127,377 -- 127,377
Cost of revenue............. 22,167 20,792 42,550 85,509 -- 85,509
Depreciation................ 5,487 3,656 19,691 28,834 -- 28,834
Amortization................ 3,757 -- 2,248 6,005 62,018 (b) 68,023
------- ------- -------- -------- ---------- ---------
68,651 40,892 138,182 247,725 62,018 309,743
------- ------- -------- -------- ---------- ---------
Operating income (loss)....... 6,488 (6,138) (31,415) (31,065) (62,018) (93,083)
Interest income (expense),
net......................... 590 (70) 1,612 2,132 -- 2,132
------- ------- -------- -------- ---------- ---------
Income before income tax
expense..................... 7,078 (6,208) (29,803) (28,933) (62,018) (90,951)
Income tax expense............ (212) -- -- (212) -- (212)
------- ------- -------- -------- ---------- ---------
Net income.................... $ 6,866 $(6,208) $(29,803) $(29,145) $ (62,018) $ (91,163)
======= ======= ======== ======== ========== =========
Shares:
Primary..................... 48,086 5,663 (c) 53,749
Diluted..................... 50,862 2,887 (c) 53,749
Earnings Per Share:
Primary..................... $ 0.14 $ (1.70)
======= =========
Diluted..................... $ 0.13 $ (1.70)
======= =========
</TABLE>
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MINDSPRING ENTERPRISES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MINDSPRING SPRY SUBTOTAL ADJUSTMENTS (A) PRO FORMA
---------- -------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................ $52,557 $ 50,190 $102,747 -- $102,747
------- -------- -------- ------- --------
Costs and expenses:
Selling, general and
administrative.................. 30,784 29,279 60,063 -- 60,063
Cost of revenue................... 16,823 29,689 46,512 -- 46,512
Depreciation and amortization..... 8,695 4,191 12,886 $ 6,897 (b) 19,783
------- -------- -------- ------- --------
56,302 63,159 119,461 6,897 126,358
------- -------- -------- ------- --------
Operating loss...................... (3,745) (12,969) (16,714) (6,897) (23,611)
------- -------- -------- ------- --------
Interest income (expense), net...... (338) (8) (346) -- (346)
------- -------- -------- ------- --------
Net loss............................ $(4,083) $(12,977) $(17,060) $(6,897) $(23,957)
======= ======== ======== ======= ========
Shares:
Basic............................... 45,084 6,000 (c) 51,084
Diluted............................. 45,084 6,000 (c) 51,084
Earnings per share:
Basic............................... $ (0.09) $ (0.47)
======= ========
Diluted............................. $ (0.09) $ (0.47)
======= ========
</TABLE>
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NOTES TO MINDSPRING ENTERPRISES, INC. UNAUDITED PRO FORMA STATEMENTS OF
OPERATIONS
(a) Adjustments have not been made to cost of revenue or to selling, general and
administrative costs. However, cost of revenue and selling, general and
administrative costs incurred by Spry and the NETCOM Domestic Operations may
not be indicative of the cost of revenue and selling, general and
administrative costs that would have been incurred by MindSpring in relation
to the same assets. In connection with MindSpring's acquisition of the
NETCOM Domestic Operations, MindSpring and NETCOM (which has changed its
name to ICG Netahead) have entered into a network services agreement for one
year with an option for a second year on potentially different terms to be
negotiated and agreed to by the parties. MindSpring expects to use the
network services purchased under this agreement initially to provide service
to the subscribers acquired from NETCOM. MindSpring expects that the costs
it incurs for such network services will be different than the corresponding
historical costs reported by NETCOM. In this regard, cost of revenue and
selling, general and administrative costs incurred by MindSpring in future
periods may be materially different from the amounts reflected in the pro
forma financial statements.
(b) Represents additional amortization of the acquired subscriber base based on
preliminary purchase price allocation for the NETCOM Domestic Operations
(for both the nine months ended September 30, 1999 and 1998 and the year
ended December 31, 1998) and the acquisition of certain Spry assets (for the
nine months ended September 30, 1998 and the year ended December 31, 1998),
as follows:
<TABLE>
<CAPTION>
NETCOM SPRY
-------- --------
(IN MILLIONS)
<S> <C> <C>
Purchase price............................................. $245.0 $25.0
Accounts receivable........................................ 2.9 0.0
Other current assets....................................... 0.4 0.0
Property and equipment..................................... 17.2 0.6
Other long-term assets..................................... 0.2 0.0
Deferred revenue........................................... (3.8) 0.0
Accrued liabilities........................................ (2.4) 0.0
------ -----
Subscriber base............................................ $230.5 $24.4
====== =====
</TABLE>
The acquired subscriber base is amortized using a three-year period.
(c) For the year ended December 31, 1997, reflects 6 million shares of
MindSpring common stock issued in a public offering completed on May 29,
1998, as if it occurred on January 1, 1997. The year ended December 31, 1998
and the nine months ended September 30, 1998 reflect (i) 6 million shares of
MindSpring common stock issued in a public offering completed on May 29,
1998; (ii) 2.3 million shares of MindSpring common stock issued in a public
offering completed on December 14, 1998; and (iii) approximately 752,000
shares of MindSpring common stock issued to NETCOM On-Line Communication
Services, Inc. as part of the purchase price for the NETCOM Domestic
Operations assets (representing approximately $30 million, at $79.76 per
share) as if such shares were outstanding since January 1, 1998. For the
nine months ended September 30, 1999, includes 5.5 million shares of
MindSpring common stock issued in a public offering completed on April 6,
1999, as if those shares were outstanding since January 1, 1999. Also,
excludes the effect of stock options for purposes of the diluted earnings
per share calculation, since the effect for pro forma purposes is
antidilutive.
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<PAGE>
MARKET PRICES AND DIVIDENDS PAID
EarthLink common stock is listed and trades on The Nasdaq National Market
under the symbol "ELNK," and MindSpring common stock is listed and trades on The
Nasdaq National Market under the symbol "MSPG." As of December 20, 1999,
EarthLink common stock was held of record by approximately 412 persons, and
MindSpring common stock was held of record by approximately 1,154 persons. This
table sets forth for the indicated periods the high and low sales prices per
share, as reported as composite transactions in THE WALL STREET JOURNAL. Neither
EarthLink nor MindSpring has historically paid dividends to its common
stockholders.
<TABLE>
<CAPTION>
EARTHLINK MINDSPRING
COMMON STOCK COMMON STOCK
---------------------- ----------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
First Quarter............................................. $ 1 31/64(1) $ 1 5/16(1)
Second Quarter............................................ 2 11/64 1 5/16
Third Quarter............................................. 2 1/8 1 25/64
Fourth Quarter............................................ 1 61/64 7/8
YEAR ENDED DECEMBER 31, 1997
First Quarter............................................. $10 1/8(2) $ 5 1/6(2) 1 45/64 61/64
Second Quarter............................................ 6 3/4 4 5/6 1 57/64 1 7/64
Third Quarter............................................. 9 3/4 5 1/8 4 7/64 1 49/64
Fourth Quarter............................................ 12 7/8 8 5 49/64 3 3/64
YEAR ENDED DECEMBER 31, 1998
First Quarter............................................. 28 7/32 12 1/4 11 1/2 4 39/64
Second Quarter............................................ 38 3/8 25 17 3/8 8 5/64
Third Quarter............................................. 44 1/8 26 1/2 26 3/16 12 21/32
Fourth Quarter............................................ 71 7/8 33 7/8 39 1/2 11 9/16
YEAR ENDED DECEMBER 31, 1999
First Quarter............................................. 89 1/4 57 5/16 62 1/2 31 1/4
Second Quarter............................................ 90 1/2 37 1/4 66 1/2 27 15/16
Third Quarter............................................. 70 1/2 37 1/16 54 7/8 23
Fourth Quarter............................................ 63 39 40 7/16 23 7/8
YEAR ENDED DECEMBER 31, 2000
First Quarter (through January 4, 2000)................... 44 3/4 41 7/8 29 26
</TABLE>
- ------------------------
(1) From the date of MindSpring's initial public offering in March 1996.
(2) From the date of EarthLink's initial public offering in January 1997.
On September 22, 1999, the last full trading day prior to the public
announcement of execution of the reorganization agreement, the closing sale
price, as reported in THE WALL STREET JOURNAL, for EarthLink shares was $43 1/2,
and for MindSpring shares was $32 7/8. On January , 2000, the last full
trading day for which information was available prior to the printing of this
joint proxy statement/ prospectus, the closing sale price, as reported in THE
WALL STREET JOURNAL, for EarthLink shares was $ , and for MindSpring shares
was $ . The market prices of EarthLink and MindSpring shares are subject to
fluctuation. As a result, EarthLink and MindSpring stockholders are urged to
obtain current market quotations for EarthLink and MindSpring shares.
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<PAGE>
INFORMATION ABOUT EARTHLINK
BUSINESS
OVERVIEW
EarthLink is a leading Internet service provider, or ISP, providing reliable
nationwide Internet access and related value-added services to our individual
and business members. Our member base grew from approximately 420,000 members on
December 31, 1997 to approximately 1,556,000 paying members on September 30,
1999, making us one of the world's leading ISPs. We believe our growth has
resulted from our efforts to enhance our members' Internet experience through
simple, rapid and reliable access to the Internet, high quality service, and
member education and support. As a result, we believe we have a high member
retention rate for our industry. We receive significant benefits from the size
of our member base, including bargaining power with content providers, online
advertisers and retailers, and network providers.
We generate our members through a combination of innovative and
cost-conscious marketing programs. We market our services and products through
referrals, online advertising and magazine, radio and television advertisements.
Our affinity marketing and membership referral programs are also valuable
components of our marketing strategy. We have over 500 affinity marketing
partners, including prominent retailers, print publishers, and software and
hardware companies. Leading affinity marketing partners include Novus Service's
Discover Card, MacMillan Digital Publishing USA, SAM's Club, Sony Entertainment
and Warner Bros.
In June 1998, we entered into a strategic alliance with Sprint, which is
another important driver of our member growth. As a part of this alliance,
Sprint transferred approximately 130,000 members to us and is committed to
generating at least 150,000 new members for us during each of the next 5 years
through their channels. Additionally, we are now co-branded as Sprint's
exclusive consumer Internet access provider, and we have exclusive access to
certain dial-up modem ports in Sprint's network. We also have access to Sprint's
marketing and distribution channels and the right to use Sprint's widely
recognized brand name. As a result of this relationship, we recently added
Sprint PCS and Radio Shack as affinity partners.
In January 2000, we entered into a strategic alliance with Apple Computer,
which we expect to accelerate our member growth. In connection with this
alliance, we expanded our existing commercial relationship with Apple so that we
shall serve as the default ISP for Apple's Macintosh line of computers for a
minimum of two years and our overall commercial relationship has been extended
through January 4, 2005.
EarthLink provides highly reliable Internet access through a nationwide
telecommunications network of leased, high-speed, dedicated data lines and over
2,300 dial-up access sites, or POPs. We own and operate POPs in Southern
California and lease POPs from UUNET, Sprint, and PSINet nationwide. Over 90% of
the U.S. population can access our Internet service through a local telephone
call. We also provide Internet connections by cable, ADSL, ISDN, frame relay and
other high-speed access technologies.
Our standard $19.95 per month dial-up Internet service provides our members
with unlimited access to the Internet, email, a Web browser, six megabytes for a
personal web site, a Personal Start Page, bLink (our member news magazine),
toll-free 24-hour technical support and access to Internet newsgroups. We also
offer premium services to consumers and small businesses, including electronic
commerce solutions, Web hosting and high-speed Internet connections.
Our address is 3100 New York Drive, Pasadena, California 91107, and our
telephone number is (626) 296-2400.
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<PAGE>
RECENT DEVELOPMENT--STRATEGIC ALLIANCE WITH APPLE COMPUTER, INC.
On January 4, 2000, EarthLink and Apple Computer, Inc. entered into a
strategic alliance that expands the two companies' existing relationship. First
announced by Mr. Steve Jobs, Apple's chief executive officer, at the MacWorld
trade show, EarthLink and Apple have enhanced and extended the terms of their
existing commercial relationship and Apple has made a strategic equity
investment in EarthLink.
THE COMMERCIAL AGREEMENT
Although EarthLink is currently the default ISP in Apple's setup software on
its Macintosh branded line of computers, the new agreement extends the time of
the relationship until January 4, 2005. The new agreement also makes EarthLink
the exclusive default ISP for dial-up, ISDN and DSL services on Macintosh
computers sold in the United States for a minimum of two years during its five
year term. In return for EarthLink being the default ISP in Apple's setup
software on the Macintosh line, EarthLink pays Apple a one-time bounty for
customers who meet a miminum subscription requirement for each customer
registering through an Apple computing device.
TERMINATION OF EXCLUSIVITY. Apple has the right to terminate EarthLink's
exclusive default ISP position at any time for the following reasons:
(a) an uncured breach of the agreement by EarthLink;
(b) if companies that are engaged in the business of manufacturing,
marketing, selling or distributing computer hardware or Internet
connectivity devices, computer operating systems or related products or
providing Internet access acquire EarthLink stock (or acquire the right
to purchase EarthLink stock) in connection with an agreement with
EarthLink, referred to as a Triggering Investment;
(c) if EarthLink sells or leases all or substantially all of its business or
assets to a third party, or in the event of a merger or other transaction
after which EarthLink's stockholders that existed immediately prior to
the merger or other transaction no longer hold at least 50% of the equity
in the surviving business (except a transaction with Sprint under the
EarthLink-Sprint governance agreement) or if an entity (or related
entities) acquires 50% or more of EarthLink's voting stock as a result of
a tender offer or other transaction (except a transaction with Sprint
under the EarthLink-Sprint governance agreement), referred to as an
EarthLink Change in Control; or
(d) EarthLink's failure to meet certain service level commitments.
TERMINATION OF AGREEMENT. Apple and EarthLink each have the right to
terminate the commercial agreement at any time after January 4, 2002 and for any
uncured breach of the agreement or insolvency of the other party. Apple may also
terminate the agreement upon an EarthLink Change in Control (described above in
item (c)), or if EarthLink sells or leases all or substantially all of its
business or assets to a third party.
The commercial agreement will be binding on WWW Holdings after the
EarthLink-MindSpring reorganization is completed.
STRATEGIC EQUITY INVESTMENT
Also on January 4, 2000, Apple agreed to make a $200 million investment in
EarthLink purchasing 4,385,965 shares of a new series C class of EarthLink's
convertible preferred stock for a purchase price of $45.60 per share, which
equaled the 10-day trailing average closing price of a share of EarthLink's
common stock as of January 4, 2000. Apple's investment equals 8.1% of
EarthLink's stock on a fully diluted basis and will equal 4.6% of the stock of
WWW Holdings on a fully diluted basis (in each case assuming that Sprint does
not exercise its rights to maintain its ownership level in EarthLink or WWW
Holdings, as the case may be). The investment closed in escrow on January 4,
2000 pending the
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<PAGE>
expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act. In the event that the waiting period has not expired
or been terminated prior to March 31, 2000, the strategic equity investment may
be unwound. EarthLink intends to use the proceeds of this investment for general
working capital purposes, including marketing, member growth and network and
other systems infrastructure needs.
Apple also has the following rights:
VOTING RIGHTS. The series C convertible preferred stock will be non-voting
during the first year after the closing date of the investment (except for its
right to elect a member to EarthLink's board of directors as discussed below
under "Board Seat" below). After that, it will vote together with the common
stock, and not separately as a class.
"TOP-UP" RIGHTS. In the event that Sprint exercises its right to maintain
its ownership level in:
(a) EarthLink, as a result of Apple's investment, or
(b) WWW Holdings, Inc. at the same level it had in EarthLink prior to the
EarthLink-MindSpring reorganization,
by purchasing additional shares, Apple will have the right to likewise
purchase additional shares of series C convertible preferred stock of WWW
Holdings to maintain its ownership level.
BOARD SEAT. Following the expiration or early termination of any applicable
waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act, Apple
has the right to name a member to EarthLink's board of directors for so long as
EarthLink is Apple's exclusive default ISP in the setup software under the
commercial agreement, Apple holds series C convertible preferred stock and Apple
maintains a certain percentage ownership of the EarthLink securities it
purchased in the initial investment and subsequent top-ups. The required
ownership percentages are as follows:
(a) during the first year after the investment, Apple must maintain
ownership of 100% of the EarthLink securities it purchased;
(b) during the second and third years after the investment, Apple must
maintain ownership of at least 75% of the EarthLink securities it
purchased; and
(c) from the fourth year on, Apple must maintain ownership of at least 50%
of the EarthLink securities it purchased.
CONVERSION INTO COMMON STOCK. Each holder of the series C convertible
preferred stock will have the right, following the first year after the
investment, to convert its series C convertible preferred stock into shares of
EarthLink common stock. All shares of the series C convertible preferred stock
will automatically convert into shares of EarthLink common stock for the
following reasons:
(a) following the first year after the investment if the holders of more
than 66 2/3% of the series C preferred stock vote to convert all of the
series C convertible preferred stock into common stock; or
(b) if conversion is required to consummate any merger, reorganization,
business combination or other extraordinary transaction (other than the
EarthLink-MindSpring reorganization) approved by EarthLink's board of
directors.
After the EarthLink-MindSpring reorganization closes, the series C
convertible preferred stock will convert into series C convertible preferred
stock of WWW Holdings having the same terms as the series C convertible
preferred stock of EarthLink, and all other provisions of the agreements entered
into in connection with the strategic equity investment will be binding on WWW
Holdings.
STANDSTILL. Until the earlier of:
(a) two years from the closing date of the investment;
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(b) the expiration or termination of EarthLink's status as Apple's exclusive
default ISP under the commercial agreement; or
(c) certain third party attempts to acquire control of EarthLink,
Apple cannot acquire more then 19.9% of the voting power of EarthLink's
outstanding capital stock, or make or participate in any solicitation of proxies
or consents with respect to EarthLink's outstanding capital stock.
REGISTRATION RIGHTS. After one year from the closing date of the
investment, Apple will have certain rights to require EarthLink to register the
shares of common stock issuable upon conversion of the series C preferred stock
for resale to the public under the Securities Act.
RIGHT TO MAINTAIN. In the event of a Triggering Investment, Apple is
entitled to purchase up to a number of securities and on similar terms as were
sold in the Triggering Investment transaction.
STRATEGY
Our objectives are to be the leading nationwide ISP and to provide our
members with a high-quality Internet experience. Key elements of our strategy
include:
MAXIMIZE MEMBERS' OVERALL EXPERIENCE. We want to provide our members with a
superior online experience. The following points illustrate our efforts to do
so:
Superior Member Service. We believe that an integral part of the EarthLink
experience is fast, polite, and helpful member service. Accordingly, we invest
significant resources in supporting our members. We view member support as
another opportunity to interface directly with our members to educate them on
how to get the most out of the Internet. We have scaled our highly-trained
member support staff in line with member growth to minimize member hold times
and solve each individual problem in the most expeditious manner. Our member
care center is available seven days a week, 24 hours a day via a toll free call.
Reliable Access. We currently use UUNET, PSINet, Sprint and Level 3 as well
as our own facilities, to provide nationwide dial-up access and network
telecommunications services. Our members can access our service through over
2,300 POPs. As a result, our members are able to navigate the Internet with few
delays, timeouts and disruptions.
Easy to Use Solution. Users may encounter numerous difficulties using the
Internet because of its size and complexity. Therefore, we focus significant
resources on retaining members by providing them with reliable and easy to use
Internet access. We designed our TotalAccess software (which includes software
and documentation for both Windows and Macintosh users) to make it easy for
members to register and configure their system for Internet access. We
constantly work to develop new services, content and features to enhance that
user experience.
Personal Start Page. We provide a customizable personal start page user
interface that allows members to closely match their needs. Members may select
from a number of browsers, navigation engines and sources of news headlines.
Member sign-up. From marketing and promotional materials to registration and
access software, we have carefully crafted the sign-up process to be easy-to-use
and to engender loyalty.
Broad Service Offering. Our members receive six megabytes of space on our
Web server and special tools to create their own Web page. We recently
introduced a "Click-N-Build" Web construction tool, an e-commerce solution and
cable access. Going forward, we will continue to offer our members leading
Internet and communication products and services.
RAPIDLY EXPAND OUR MEMBER BASE. We believe that a key to our success in the
competitive ISP market is to rapidly expand our member base. This will allow us
to amortize our assets over a larger revenue base and enhance our ability to
enter into favorable arrangements with network service
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<PAGE>
providers, affinity marketing partners, online advertisers and content
providers. We have accelerated efforts and financial commitments to attract new
members, while continuing to provide high-quality service to ensure member
retention. Historically, we have capitalized on our reputation for high-quality
service and have obtained a significant portion of our new members from existing
member referrals. We have over 500 affinity partners plus numerous other channel
partners. We plan to continue to expand our marketing program, to maintain a
presence at national, regional and local trade shows, and to offer economic
incentives to members who refer new members. Our access to Sprint's high-speed
data network and marketing channels further enhances our ability to add new
members.
CAPITALIZE ON SPRINT AND APPLE ALLIANCES. We intend to continue to maximize
the opportunities presented by our alliances with Sprint and Apple to attract
new members nationwide and to further enhance our position as a leading ISP. We
believe that the substantial increase in members and other financial and
operational resources resulting from the Sprint alliance will enable us to
achieve our strategic objectives on a cost-effective and accelerated basis. We
also believe that new members will be generated by the Sprint relationship at a
lower cost than we would spend to add these members on our own. Therefore, we
intend to take full advantage of Sprint's recognized brand image, extensive
distribution channels (including Radio Shack and Sprint PCS) and approximately
16 million long-distance and local telephone customers. To that end, our brand
is jointly marketed with Sprint's widely-recognized brand in connection with
consumer Internet services. Additionally, we expect to further benefit from our
exclusive access to certain dial-up modem ports in Sprint's high-speed data
network.
INCREASE MARKETING AND EXPAND DISTRIBUTION. We continue to expand our
targeted marketing programs and distribution efforts to increase our member
base, nationwide presence and brand recognition. To achieve these objectives, we
continue to increase our investments in a wide-ranging marketing and
distribution program, including expanded affinity partners, print publications,
radio, television, billboards and direct mail. We closely monitor the results of
these marketing programs as part of our ongoing effort to increase the
cost-effectiveness of our marketing efforts.
LEVERAGE THIRD PARTY SERVICE PROVIDERS. We leverage the infrastructure of
others by leasing POP capacity from UUNET, PSINet, Sprint and Level 3. This
allows us to maintain focus on our members' needs while benefiting from the
continuing decrease in telecommunications services costs. Not only does this
approach lower our required capital expenditures, it also gives us flexibility
to rapidly expand service coverage. Moreover, access to multiple networks
provides members with increased service quality resulting from redundant network
access. We will continue pursuing this strategy so that we can devote our
principal resources to sales and marketing efforts and to improving members'
Internet experience.
DERIVE INCREMENTAL REVENUES. We leverage our growing member base and user
traffic to increase revenues from sources other than those that are access
related such as advertising and electronic commerce. Our Premiere Partnership
Program is the principal component of this strategy. Through the Premiere
Partnership Program we sell promotional packages that provide advertisers,
retailers and content providers with access to the multiple points of contact we
have with our members. We also sell advertising space on our various online
properties like the Personal Start Page and our news magazine, bLink. The
EarthLink Mall and branded Personal Start Pages are further sources of
incremental revenues.
MANAGE INFRASTRUCTURE TO MEET MEMBER GROWTH. Our membership has grown
rapidly since inception. To continue to effectively add new members and continue
to offer high-quality service, we have made significant capital investments,
including expansion of our network hub, accounting and billing systems and
customer care systems. We believe our current infrastructure is adequate to
manage a significant increase in our member base.
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SERVICES
We provide a wide variety of competitively priced Internet services. Our
TotalAccess software incorporates a telephone dialer and email program with
several leading third-party Internet access tools, including the latest browsers
from Netscape and Microsoft. This software provides a functional, easy-to-use
Internet access solution for Windows 3.1, Windows 95 and Macintosh platforms.
The TotalAccess software automatically installs these and other software
applications on member computers. The simple point-and-click functionality of
TotalAccess, combined with its easy-to-use multimedia registration system,
permits online credit card registration, allowing both our novice and
experienced members to quickly set up access to the Internet.
Our service offerings include:
<TABLE>
<S> <C>
STANDARD INTERNET SERVICES
- ------------------------------------------------
Email Publications
Web Browser Member and Technical Support
6MB Web Space for a Personal Web Site EarthLink Web Site
Personal Start Page Newsgroups
Nationwide POPs The EarthLink Online Mall
PREMIUM SERVICES
- ------------------------------------------------
Business Web Site Hosting Business Mailbox 5-Pack
National ISDN Domain Name Service
National LAN ISDN Mail Distribution Control Panel
National Frame Relay International Roaming Service
Totalaccess Gold 800 Service
Additional Mailboxes Digital Subscriber Line (DSL)
Electronic Commerce Solution
EMERGING ACCESS SERVICES
- ------------------------------------------------
Cable Fiber to Curb
ADSL Satellite/Wireless Access (in development)
</TABLE>
EARTHLINK'S STANDARD INTERNET SERVICES. We provide our members with a core
set of features through our standard Internet service. This standard service
allows unlimited access to the Internet and the World Wide Web as well as other
features and services for a monthly fee of $19.95 and a one-time set up fee
(which is frequently waived). We include the following features in our standard
Internet service:
EMAIL. Each member receives an electronic mailbox which enables members to
exchange an unlimited number of multimedia, text, graphics, audio and video
messages with other online and Internet users.
WEB BROWSER. We provide members with a free Web browser. Currently, we
offer Netscape Communicator or Microsoft Internet Explorer. Members may also use
any other browser of their choice.
6MB WEB SPACE FOR A PERSONAL WEB SITE. We provide each member with six free
megabytes of space on our Web server to create a personal Web site. We recently
introduced our "Click-N-Build" web site creation tool which enables members to
build their sites without having to learn complex programming languages. We also
provide tutorials and tools to help members develop their sites. This enables
members to participate in the Internet community by personally adding content to
the World Wide Web.
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PERSONAL START PAGE. Each member receives a Personal Start Page, an
enhanced default start page for members that first appears when they log on to
the EarthLink Network. Members can customize their start page. For example, a
member may select from a number of browsers, navigation engines and sources of
news headline. Members also have the option to view stock quotes, and weather
reports and are provided with 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. Our Premiere Partners on our member's Personal Start Page
include ABCNews.com, American Greetings, AccuWeather, CNN Interactive, Excite,
GoTo.com, Infoseek, Lycos, MiningCo.com, Snap, PC Quote, Travelscape.com and
Wired Digital.
NATIONWIDE POPS. EarthLink members can access their accounts through a
nationwide network of over 2,300 POPs.
PUBLICATIONS. We mail our bi-monthly printed news magazine, bLink, to each
member. bLink provides useful information, such as tips on how to search for
certain categories of information on the Internet, information regarding new
EarthLink service offerings, pointers to new Internet sites and other items of
interest. bLink is also available online on the EarthLink home page.
Additionally, we provide new members with an orientation booklet called "Getting
the Most Out of the Internet," written by our founder, Sky Dayton.
MEMBER AND TECHNICAL SUPPORT. We currently provide the following 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, we provide dedicated support
for business members through dedicated member care support personnel who are
specially trained for business products and services such as business Web sites
and local area network ISDN.
EARTHLINK WEB SITE. We maintain a Web site at www.earthlink.net that
contains content and links to third-party content and services. Our in-house
staff actively seeks out interesting content from across the World Wide Web and
organizes it into areas of interest on our Web site under topics such as
"Arts & Entertainment," "Sports," "Travel," "News," "Finance," and "Games." Our
Web site provides a road map to the abundant information and services available
on the Internet. The site also contains Web pages dedicated to online member
assistance including technical support, account maintenance and service updates.
NEWSGROUPS. "Newsgroups," one of the most popular areas of the Internet,
facilitate ongoing online discussions of specific areas of interest. EarthLink
aggregates and provides access to thousands of these newsgroups, enabling its
members to participate in realtime public discussions of a myriad of topics.
THE EARTHLINK ONLINE MALL. Our online electronic shopping mall provides
users with a one-stop gateway to some of the top retailers on the Web, using a
familiar mall map interface. Retailers such as The Disney Store,
BarnesandNoble.com and 1-800-FLOWERS "lease" space in the Mall.
EARTHLINK'S PREMIUM SERVICES. In addition to our standard service, we offer
a variety of premium services, including the following:
BUSINESS WEB SITE HOSTING. We provide 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 are
available for an extra fee. Additional charges may apply for excess site
traffic. We also offer an introductory service for small businesses,
StarterSite-TM-, which is a ten megabyte, unique-domain Web site priced at
$19.95 per month, plus a one-time set up fee of $25. And with StarterSite
Expansion Tools, EarthLink StarterSite members can add on more features as
needed for an extra fee: from
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additional disk space or bandwidth requirements to added security, RealMedia
streams, and secure e-commerce solution.
NATIONAL ISDN. Our nationwide high-speed ISDN access service provides
significantly higher access speeds than conventional analog modems. The monthly
charge for ISDN is $29.95 for unlimited channel hours, plus a one-time set up
fee of $49.95.
NATIONAL LAN ISDN. Small to medium-sized businesses can connect their
existing LAN to the Internet at ISDN speed with LAN ISDN. This nationwide
service costs $69.95 for unlimited channel hours and four email boxes. The set
up fee is $149.95.
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 1.5 Mbps. Frame relay connections, available nationwide, range from $240
to $1,460 per month depending on access speeds, data throughput, etc. One-time
set up fees range from $495 to $1,995.
TOTALACCESS GOLD. TotalAccess Gold is a value-added package, which includes
an additional email box, priority technical support with a guaranteed 5-minute
maximum wait time, and a quarterly CD-ROM containing software tools and
plug-ins. The package adds $9.95 to the monthly price of a standard dialup or
ISDN account.
ADDITIONAL MAILBOXES. Additional electronic mailboxes are available for a
per-mailbox fee of $4.95 per month and a $9.95 set up fee.
BUSINESS MAILBOX 5-PACK. A pack of 5 additional electronic mailboxes are
available for business members at for $7.00 per month with a $10.00 one-time set
up fee.
DOMAIN NAME SERVICE. We provide unique domain names for those members who
prefer an individualized address or plan to establish a business Web site. These
unique domain names allow consumers and businesses to customize their email and
Web site addresses. EarthLink assists members in establishing their unique
domain names with an Internet domain registration agency. Members pay an initial
set up fee of $70 and an annual renewal fee to the Internet domain registration
agency. An additional service we provide to members with these unique domain
names is Domain Email. Domain Email allows an unlimited choice of email
addresses (for example, "[email protected]" or "[email protected]") as all
email goes into a central mailbox, for easy processing to individual addresses
at the same domain.
MAIL DISTRIBUTION CONTROL PANEL. The Mail Distribution Control Panel is a
Web-based Virtual Mail-Server that allows EarthLink members to automate the
sorting and distribution of some or all of the mail in your domain email box to
an individual's personal mailbox anywhere on the Internet. The monthly fee is
$4.95 with a one-time set up fee of $10.00.
INTERNATIONAL ROAMING SERVICE. We offer international roaming services so
that members who travel outside the United States can access their EarthLink
accounts and the Internet. The fee for international roaming is $0.15 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.
ELECTRONIC COMMERCE SOLUTION. EarthLink's TotalCommerce-TM- packages are
completed integrated, end-to-end E-commerce packages for businesses. The
software components allow businesses to build and operate an online "storefront"
and process online credit card transactions. In conjunction with our hosting
services, businesses can conveniently establish their electronic commerce
presence. Monthly and one-time set up fees varies based on the features and size
of your TotalCommerce Packages.
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DIGITAL SUBSCRIBER LINE (DSL). We recently introduced our DSL services in
numerous markets. Our DSL access service provides up to 100 times faster access
speeds than with a standard modem. The advantages of DSL go beyond speed as DSL
offers a virtually instantaneous connection, with no lengthy dial-in process,
that allows members to use the phone while surfing the Net at the same time. We
charge members $49.95 per month for DSL services. Telephone carriers may charge
equipment and set-up fees in some areas.
EARTHLINK'S EMERGING ACCESS SERVICES. In response to feedback from our
members, we are developing the next generation of Internet access services
targeted at consumers and small businesses. These services offer access speeds
several times faster than ISDN connections utilizing a variety of emerging
connectivity technologies.
CABLE. We currently offer high-speed cable connections to the Internet for
consumers and small businesses in selected service areas, through partnerships
with cable providers such as Charter Communications.
ADSL. We are testing Asymetric Digital Subscriber Line, or ADSL, service
that provides a continuous high-speed connection through existing telephone
lines. This service is in the pilot phase and has not yet been priced.
FIBER TO THE CURB. We are conducting a technology trial utilizing "fiber to
the curb" technology, an emerging broadband-capable technology alternative to
both twisted pair copper lines and coaxial cable. This service is in the pilot
phase and has not yet been priced.
SATELLITE/WIRELESS ACCESS. EarthLink is currently evaluating opportunities
to offer Internet access service delivery through both satellite and
ground-based wireless technologies.
MEMBER AND TECHNICAL SUPPORT
We believe that reliable member and technical support is critical to
retaining existing members and attracting new members. We currently provide the
following 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, we
provide dedicated support for business members.
Our call center currently handles an average of over 130,000 member and
technical support calls a week. We also contract with call center services
vendors whose EarthLink-trained employees provide additional technical support
assistance. We believe the centers' technology and systems are scaleable to
accommodate call volume growth. We actively evaluate our call center facilities
in order to deliver more effective and efficient services to our members.
SALES AND MARKETING
Our sales and marketing efforts consist of the following programs:
ORIGINAL EQUIPMENT MANUFACTURER CHANNELS. EarthLink has marketing
arrangements with a number of leading hardware and software manufacturers to
include our TotalAccess software pre-installed on or included with their
products. Our OEM partners include, among numerous others, Apple, Packard Bell
and Gateway.
AFFINITY MARKETING PROGRAM. Affinity marketing partners typically bundle
our TotalAccess software with their own goods or services to create a package
that promotes EarthLink to potential members. Our affinity marketing partners
include, among numerous others:
DISCOVER CARD. EarthLink and NOVUS Services' Discover Card division
offer the Discover Connection, an Internet access package, with exclusive
features and awards for Discover Cardmembers.
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MACMILLAN DIGITAL PUBLISHING USA. EarthLink is the exclusive national
Internet access provider included in the Internet Starter Kit CD-Rom which
MacMillan publishes.
SAM'S CLUB. SAM's Club co-brands and co-offers TotalAccess software
through direct mail and catalog promotions to SAM's Club members.
SONY ENTERTAINMENT. Sony bundles TotalAccess software on its enhanced
music CDs.
SPRINT ALLIANCE. Our alliance with Sprint includes a marketing agreement
and distribution arrangement that provides us access to Sprint's branded
marketing and distribution channels in the United States, the right to use
Sprint's brand for a minimum of ten years and a five-year commitment from Sprint
to deliver a minimum of 150,000 new members annually through Sprint's channels.
Additionally, Sprint promotes EarthLink as Sprint's exclusive consumer Internet
access provider.
APPLE ALLIANCE. Although we have been the default ISP in Apple's setup
software on its Macintosh branded line of computers, our new January 5, 2000
Internet services agreement extends the time of our relationship through
January 4, 2005. This new agreement also makes us the exclusive default ISP for
dial-up, ISDN and DSL services on Macintosh computers sold in the United States
for a minimum of two years.
MEMBER REFERRAL PROGRAM. We believe that our existing members are among our
most important marketing tools. We currently waive one month of standard access
service fees for each member who refers a new member to our service. These
referrals generate a significant percentage of our new membership.
ADVERTISING. We advertise our services in print, electronic and broadcast
media. We also maintain a presence at national trade shows such as Internet
World and MacWorld, as well as numerous local and regional trade shows.
Additionally, we market through computer, Internet and related publications and
bundle our TotalAccess software with certain of these publications.
PREMIERE PARTNERSHIPS. As part of our strategy to generate incremental
revenue through third party electronic commerce, advertising and content, we
leverage our current properties (such as our Web site and Personal Start Page)
through our Premiere Partnership Program. The Premiere Partnership Program
focuses on third parties having a natural affinity to and benefit for our member
base. The program generates revenues through (1) sales of banner and other
online ads; (2) fees generated through revenue sharing arrangements with online
retailers who are accessed through our properties; and, (3) payments for placing
links from our properties to third-party content
TECHNICAL DEVELOPMENT AND SERVICE ENHANCEMENT
We place significant emphasis on expanding and refining our services to
enhance member Internet experience. Our technical staff is engaged in a variety
of technical development and service enhancement activities and continuously
reviews new third-party software products and technology for potential
incorporation into our systems and services. The redesigned and enhanced version
of TotalAccess, version 2.3, is a recent product of these efforts. 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. We also regularly update and expand the
online services provided through the EarthLink Web site, organize Web content
and develop online guides, help screens and other user services and resources.
POPS AND NETWORK INFRASTRUCTURE
We provide our members with Internet access primarily through third-party
network POPs. Our use of third parties to provide Internet connectivity enables
us to increase port capacity without the significant capital requirements
necessary to build and maintain a network. It also gives us the flexibility
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necessary to adapt to changing technology such as cables. Over 90% of the U.S.
population can access our Internet service through a local telephone call.
Members located in a geographic area not currently serviced by a local POP
can access the Internet through an 800 service. We have invested in measures to
minimize the effects of damage from fire, earthquake, power loss,
telecommunications failure, computer viruses, security breaches and similar
events or backup Internet services or backbone facilities or other redundant
computing or telecommunications facilities. We do not currently maintain
redundant network hub facilities.
COMPETITION
We operate in the Internet services market, which is extremely competitive.
Our current and prospective competitors include many large companies that have
substantially greater market presence, financial, technical, marketing and other
resources than we have. We compete directly or indirectly with the following
categories of companies:
- established online services, such as America Online, the Microsoft Network
and Prodigy;
- local, regional and national ISPs, such as MindSpring, Rocky Mountain
Internet and Internet America Inc.;
- national telecommunications companies, such as AT&T and GTE;
- regional Bell operating companies, such as BellSouth and SBC
Communications Corp; and
- online cable services, such as At Home and Roadrunner.
Our competition is likely to increase. We believe this will probably happen
as large diversified telecommunications and media companies acquire ISPs and as
ISPs consolidate into larger, more competitive companies. Diversified
competitors may bundle other services and products with Internet connectivity
services, potentially placing us at a significant competitive disadvantage. In
addition, competitors may charge less than we do for Internet services, causing
us to reduce (or preventing us from raising) our fees. As a result, our business
may suffer.
PROPRIETARY RIGHTS
GENERAL. We rely on a combination of copyright, trademark, patent and trade
secret laws and contractual restrictions to establish and protect our technology
and proprietary rights and information. We require employees and consultants
and, when possible, suppliers and distributors, to sign confidentiality
agreements. However, we cannot assure you that our steps will be sufficient to
prevent misappropriation of our technology and proprietary rights and
information or that our competitors will not independently develop technologies
that are substantially equivalent or superior to ours.
From time to time, third parties have alleged that certain of our trademarks
infringe their trademarks. None of these claims has had an adverse effect on our
ability to market and sell its services. However, we cannot assure you that
those claims will not have an adverse effect in the future or that others will
not assert infringement claims against us in the future.
LICENSES. We have licenses to distribute third-party software incorporated
in our TotalAccess software. Applications which we license for distribution
include Netscape Communicator (this license automatically renews each December
for additional one-year terms unless either party terminates the license on
120 days notice), Microsoft Internet Explorer (this license expires in
August 1999 and thereafter automatically renews for additional one-year terms,
although either party may terminate the license at any time on 30 days notice),
and MacTCP software from Apple (this license renews each December for additional
one-year terms unless either party terminates the license on twelve-month
notice). The only software in the TotalAccess package that we developed is the
front-end and installation/registration program. We intend to maintain or
negotiate renewals of existing software licenses and authorizations. We may also
want or need to license other applications in the future. Our
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inability to renew existing software licenses or to license additional
applications could have a material adverse effect on us.
EMPLOYEES
As of September 30, 1999, we employed 2,057 people, including 273 sales and
marketing personnel, 1,632 operations and member and technical support
representatives and 152 administrative personnel. None of our employees are
represented by a labor union, and we have no collective bargaining agreement.
PROPERTIES
Our current corporate headquarters and call center are located in a 98,000
square-foot facility in Pasadena, California. Base rent is currently $73,000 per
month. We have an option to extend this lease for an additional five years at
the then-prevailing market rate following its expiration in September 2007. Our
data center and primary data hub are housed in an 110,000 square foot facility
adjacent to our headquarters with rent of $92,000 per month, subject to yearly
increases. The lease for this facility expires February 2007, with an option to
extend for an additional ten year term. On November 15th, we signed a lease for
have a additional facility located less than a mile away that will house our
corporate headquarters, including executive, sales and finance staff. It is
projected to be ready for move in on June 1, 2000. This 125,000 square-foot
facility has a current base rent of $80,000-$200,556.80, based on step increases
in square foot usage over a period from 11/15/99 to 5/14/02 and subject to
annual increases until the year 2007. The lease for this facility expires on
September 30, 2007, with options to extend for an additional ten year term.
Finally, we added our first remote call center in Sacramento on September 1,
1999. This is a 95,000 square-feet facility with a base rent of $147,722.75,
with rent increases every twenty months. The lease for this space expires on
August 21, 2009, with options to extend for an additional ten year term.
LEGAL PROCEEDINGS
We are not currently involved in any legal proceedings that we believe could
have, either individually or in the aggregate, a materiel adverse effect on our
business or financial condition. There are proceedings pending before the FCC
that could adversely affect the ISP industry and the means by which ISPs conduct
business and the cost structure for ISP services. The Company is not a party to
these proceedings.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EarthLink believes its exposure to market rate fluctuations on its
investments is nominal due to the short-term nature of those investments.
EarthLink has no material future earnings or cash flow exposures with respect to
its outstanding capital leases, which are all at fixed rates. At present,
EarthLink has no plans to enter into any hedging arrangements with respect to
potential future borrowings.
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BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth information concerning (i) those persons
known by management of EarthLink to own beneficially more than 5% of its
outstanding Common Stock, (ii) the directors of EarthLink, (iii) the executives
officers named in the Summary Compensation Table included elsewhere herein, and
(iv) all directors and officers of EarthLink as a group. Except as otherwise
indicated in the footnotes below, such information is provided as of
November 30, 1999. 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.............................................. 2,894,572(3) 8.9%
Reed E. Slatkin............................................ 1,767,366(4) 5.3
Kevin M. O'Donnell......................................... 1,673,532(5) 5.0
Sidney Azeez............................................... 241,560(6) *
Charles G. Betty........................................... 522,234(7) *
Linwood A. Lacy, Jr........................................ 88,437(8) *
Robert M. Kavner........................................... 121,162(9) *
William T. Esrey........................................... 12,004,125(10) 28.8
Len J. Lauer............................................... 12,004,125(11) 28.8
Dr. Richard D. Edmiston.................................... 21,300(12) *
William S. Heys............................................ 32,350(13) *
Grayson L. Hoberg.......................................... 69,562(14) *
David R. Tommela........................................... 41,000(15) *
Brinton O.C. Young......................................... 138,750(16) *
Veronica Murdock........................................... 8,651(17) *
David Beckemeyer........................................... 152,260(18) *
Jon Irwin.................................................. 56,746(19) *
Sprint Corporation......................................... 12,004,125(20) 28.8
Gilder Gagnon Howe & Co, LLC............................... 3,153,856(21) 9.6
All directors and executive officers as a group (16
persons)................................................. 19,833,607(22) 46.5
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of EarthLink 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 owned, and (ii) the address of the named person is that of
EarthLink.
(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 subject to options or warrants exercisable within 60 days of
November 30, 1999 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 25,000 shares of common stock.
(4) Includes (i) warrants to purchase 365,000 shares of common stock and
(ii) 24,148 shares of common stock held in trust for Mr. Slatkin's minor
children.
(5) Includes (i) 15,076 shares of common stock by Mr. O'Donnell's son, and
(ii) warrants to purchase 365,000 shares of common stock. Mr. O'Donnell
disclaims beneficial ownership of the shares of
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common stock held by his son and the shares of common stock issuable upon
exercise of options held by his son.
(6) Includes 62,503 shares of common stock held by Mr. Azeez's family.
(7) Includes options to purchase 130,000 shares of common stock.
(8) Includes options to purchase 40,000 shares of common stock.
(9) Includes warrants to purchase 6,668 shares of common stock and options to
purchase 80,000 shares of common stock.
(10) Includes 3,192,088 shares of common stock, 4,102,941 shares of Series A
convertible preferred stock convertible into 8,205,882 shares of common
stock and 606,155 shares of Series B convertible preferred stock convertible
into 606,155 shares of common stock beneficially owned by Sprint and which
Mr. Esrey and Mr. Lauer may be deemed to beneficially own.
(11) Includes 3,192,088 shares of common stock, 4,102,941 shares of Series A
convertible preferred stock convertible into 8,205,882 shares of common
stock and 606,155 shares of Series B convertible preferred stock convertible
into 606,155 shares of common stock beneficially owned by Sprint and which
Mr. Esrey and Mr. Lauer may be deemed to beneficially own.
(12) Includes options to purchase 15,250 shares of common stock.
(13) Includes options to purchase 26,525 shares of common stock and warrants to
purchase 3,000 shares of common stock.
(14) Includes options to purchase 20,000 shares of common stock.
(15) Includes options to purchase 23,000 shares of common stock.
(16) Includes options to purchase 16,250 shares of common stock.
(17) Represents options to purchase 8,651 shares of common stock.
(18) Includes options to purchase 56,660 shares of common stock.
(19) Includes options to purchase 23,000 shares of common stock.
(20) Includes 3,192,088 shares of common stock, 4,102,941 shares of Series A
convertible preferred stock convertible into 8,205,882 shares of common
stock and 606,155 shares of Series B convertible preferred stock convertible
into 606,155 shares of common stock beneficially owned by Sprint and which
Mr. Esrey and Mr. Lauer may be deemed to beneficially own.
(21) Includes 2,792,756 shares held in customer accounts over which members
and/or employees of the named person have discretionary authority to dispose
of or direct the disposition of the shares, 348,900 shares held in accounts
owned by the members of the named person and their families and 12,200
shares held in the account of the profit sharing plan of the named person.
(22) Includes (i) options and warrants to purchase 904,004 shares of common
stock, (ii) 101,727 shares of common stock owned by family members or
affiliates of certain members of the group (iii) 4,102,941 shares of
Series A convertible preferred stock convertible into 8,205,882 shares of
common stock and (iv) 606,155 shares of Series B convertible preferred stock
convertible into 606,155 shares of common stock.
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 IN THIS REPORT JOINT PROXY
STATEMENT/PROSPECTUS.
OVERVIEW
In September 1999 EarthLink and MindSpring agreed to merge into a newly
formed public company, in a transaction to be accounted for as a pooling of
interests, with MindSpring stockholders receiving one share of the new company
stock for each share of MindSpring stock, and EarthLink stockholders receiving
1.615 shares of the new company stock in exchange for each share of EarthLink
stock. The combined company will be known as EarthLink and will trade under the
Nasdaq symbol
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"ELNK." Subject to several conditions, including regulatory approvals, approval
by both companies' shareholders, and certain third-party consents, the
transaction is expected to close in the first quarter 2000.
We are a leading Internet service provider, or ISP, providing reliable
nationwide Internet access and related value-added services to our individual
and business members. Our member base has grown rapidly from approximately
420,000 members on December 31, 1997 to approximately 1.6 million members on
September 30, 1999, making us one of the world's leading ISPs. We believe this
growth is the result of our efforts to enhance our members' Internet experience
through simple, rapid and reliable access to the Internet, high quality service
and member support and enhanced services. As a result of these efforts, we have
been able to limit average monthly cancellations of our service to industry low
rates of 6.1% in 1996, 5.0% in 1997 and 3.6% in 1998.
We provide our members with a core set of features through our standard
Internet service, which provides unlimited Internet access and several related
services for a $19.95 monthly fee. We also offer a variety of broadband and
premium services to both our individual and business members. Recurring
revenues, which are generally paid for in advance with credit cards, consist of
monthly fees charged to members for Internet access and other ongoing services
including business Web site hosting, national ISDN, LAN ISDN, DSL and frame
relay connections and, in certain areas, cable access. We derive incremental
revenues by leveraging the value of our member base and user traffic through
promotional and content partnerships, online advertising, and electronic
commerce. We recognize access fees and certain incremental revenues ratably over
the period services are provided. Other revenues generally represent
cancellation fees attributable to certain term marketing programs and one-time,
non-refundable set up fees. Other revenues are recorded as earned.
Cost of recurring revenues principally includes telecommunications costs and
depreciation expense on equipment used in network operations for ongoing member
services. Fees paid to third party providers for dial-up access to their
respective nationwide systems of POPs are included in telecommunications costs.
Cost of other revenues principally includes expenses associated with new member
registration and cost of products sold. Cost of incremental revenues is
immaterial and is included in cost of other revenues.
We believe that a key to our success in the competitive ISP market is to
rapidly expand our member base. This will allow us to amortize our assets over a
larger revenue base and enhance our ability to enter into favorable arrangements
with network service providers, affinity marketing partners, online advertisers
and content providers. While we have experienced a trend of continuing
improvement in our net loss and earnings before interest, taxes, depreciation
and amortization ("EBITDA") we anticipate investing heavily in obtaining new
members and expect to have negative EBITDA for the foreseeable future.
EBITDA is not determined in accordance with generally accepted accounting
principles and is not indicative of cash used by operating activities. You
should not consider EBITDA in isolation from, as an alternative to, or more
meaningful than measures of performance determined in accordance with generally
accepted accounting principles.
SPRINT TRANSACTION
On June 5, 1998, we entered into a very important strategic alliance with
Sprint in the area of consumer Internet access and related services. In
connection with the formation of that relationship, Sprint tendered for and
purchased 2.5 million shares of our common stock for $22.50 per share. At the
close of the tender offer, we issued Sprint approximately 4.1 million shares of
our newly created
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series A convertible preferred stock, convertible into approximately
8.2 million shares of our common stock (assuming the acceleration of certain
rights). In return, Sprint:
(a) transferred approximately 130,000 members to us;
(b) paid us approximately $24 million in cash; and
(c) granted us the exclusive right to use certain dial-up modem ports in
their high-speed data network for four years.
Additionally, we entered into a five-year marketing and distribution
agreement with Sprint. The following are highlights from that agreement:
(a) Sprint must deliver a minimum of 150,000 new members per year for five
years through its own marketing channels;
(b) we are Sprint's exclusive provider of consumer Internet access services
for at least ten years; and,
(c) we can use Sprint's brand and distribution network for at least ten
years.
Sprint also provided us with a $50 million line of credit (increasing to
$100 million over three years) in the form of convertible senior debt.
We also entered into a governance agreement with Sprint. This agreement
establishes certain terms and conditions concerning our corporate governance,
the acquisition and disposition of our equity securities by Sprint (including
certain preemptive rights in favor of Sprint), the rights of Sprint to make
offers to purchase all outstanding shares of our common stock and rights of our
Board of Directors to receive and entertain offers to effect certain business
combinations. EarthLink, and certain of our stockholders, have also entered into
an agreement with Sprint which obligates such stockholders, under certain terms
and conditions, to take action in support of our obligations to Sprint under the
governance agreement.
Sprint can appoint (1) one person to our Board of Directors so long as
Sprint owns at least 10% of our capital stock on a fully diluted basis, and
(2) an additional person to our Board of Directors so long as Sprint owns at
least 20% of our capital stock on a fully diluted basis.
As a result of these transactions, Sprint now owns approximately 27% of our
capital stock on a fully diluted basis (this assumes the conversion of Sprint's
convertible preferred stock into common stock and assumes acceleration of
certain dividend rights and the exercise by Sprint of certain preemptive
rights), of which approximately 10% is voting stock. Sprint has the right to
maintain (but not exceed) these ownership levels by purchasing from us
additional common stock equivalent shares, with up to 75% of these common stock
equivalents being in the form of convertible preferred stock.
The convertible preferred stock owned by Sprint accrues dividends for the
first five years by increasing its liquidation value at a rate of 3% annually.
Thereafter the convertible preferred stock will pay a cash dividend of 3% of the
liquidation value during years six through 20. The cash dividend will increase
to 8% in year 21 and increase to 12% by year 23.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly consolidated
financial data for the eight quarters ended December 31, 1998. In the opinion of
the Company's management, this unaudited information has been prepared on the
same basis as the audited consolidated 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 Consolidated
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Financial Statements and Notes thereto. The operating results for any quarter
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
MAR. 31 JUN. 30 SEPT. 30 DEC. 31 MAR. 31 JUN. 30 SEPT. 30 DEC. 31
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Recurring revenues...................... $14,540 $17,880 $19,450 $22,787 $27,856 $ 35,224 $ 46,877 $ 54,766
Other revenues.......................... 1,632 1,367 1,559 1,673 1,578 1,620 1,699 1,650
Incremental revenues(1)................. -- -- -- -- 392 1,146 1,248 1,885
------- ------- ------- ------- ------- -------- -------- --------
Total revenues........................ 16,172 19,247 21,009 24,460 29,826 37,990 49,824 58,301
Operating costs and expenses:
Cost of recurring revenues.............. 7,601 8,876 9,271 10,968 14,087 17,555 20,619 24,382
Cost of other revenues.................. 406 429 281 233 36 120 252 277
Sales and marketing..................... 6,261 6,125 6,756 6,829 7,566 8,281 10,644 16,241
General and administrative.............. 3,519 3,467 3,529 3,891 4,537 5,018 5,871 5,616
Operations and member support........... 6,422 7,791 7,970 8,717 9,540 11,630 15,078 18,195
Amortization and transaction costs(2)... -- -- -- -- -- 7,208 17,754 17,673
------- ------- ------- ------- ------- -------- -------- --------
Total operating costs and expenses:... 24,209 26,688 27,807 30,638 35,766 49,812 70,218 82,384
Loss from operations...................... (8,037) (7,441) (6,798) (6,178) (5,940) (11,822) (20,394) (24,083)
Interest expense.......................... (507) (444) (516) (632) (687) (621) (353) (306)
Interest income........................... 165 135 116 221 223 426 1,919 1,856
------- ------- ------- ------- ------- -------- -------- --------
Net loss................................ (8,379) (7,750) (7,198) (6,589) (6,404) (12,017) (18,828) (22,533)
Deductions for accretion dividends(3)..... -- -- -- -- -- (1,054) (3,276) (3,271)
------- ------- ------- ------- ------- -------- -------- --------
Net loss attributable to common
stockholders............................ $(8,379) $(7,750) $(7,198) $(6,589) $(6,404) $(13,071) $(22,104) $(25,804)
======= ======= ======= ======= ======= ======== ======== ========
Basic and diluted net loss per share(4)... $ (0.46) $ (0.40) $ (0.36) $ (0.29) $ (0.28) $ (0.53) $ (0.78) $ (0.89)
======= ======= ======= ======= ======= ======== ======== ========
Weighted average shares(4)................ 18,188 19,476 19,864 22,482 22,746 24,586 28,458 28,838
======= ======= ======= ======= ======= ======== ======== ========
</TABLE>
- ------------------------------
(1) We began reporting incremental revenues in the first quarter of 1998.
(2) Amortization and transaction costs represent $41,238,000 in amortization of
intangible assets acquired and a one time transaction cost, in June 1998, of
$1,397,000 resulting from the strategic alliance with Sprint.
(3) Represents the accretion of liquidation dividends on Series A convertible
preferred stock at 3% compounded quarterly and the accretion of a dividend
related to the beneficial conversion feature in accordance with EITF D-60.
(4) SFAS No. 128, Earnings per Share ("EPS"), and Staff Accounting Bulletin
No. 98 require companies, such as EarthLink, that incorporated the SAB 83
concept of "cheap stock" in determining pre-initial public offering EPS data
to restate EPS data to conform to SFAS No. 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.
112
<PAGE>
<TABLE>
<CAPTION>
MAR. 31 JUN. 30 SEPT. 30 DEC. 31 MAR. 31 JUN. 30 SEPT. 30 DEC. 31
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues:
Recurring revenues...................... 90% 93% 93% 93% 94% 93% 94% 94%
Other revenues.......................... 10 7 7 7 5 4 3 3
Incremental revenues(1)................. -- -- -- -- 1 3 3 3
--- --- --- --- --- --- --- ---
Total revenues........................ 100 100 100 100 100 100 100 100
Operating costs and expenses:
Cost of recurring revenues.............. 47 46 44 45 47 46 41 42
Cost of other revenues.................. 2 2 1 1 -- -- 1 --
Sales and marketing..................... 39 32 32 28 26 22 21 28
General and administrative.............. 22 18 17 16 15 13 12 10
Operations and member support........... 40 41 38 35 32 31 30 31
Amortization and transaction costs(2)... -- -- -- -- -- 19 36 30
--- --- --- --- --- --- --- ---
Total operating costs and expenses.... 150 139 132 125 120 131 141 141
Loss from operations...................... (50) (39) (32) (25) (20) (31) (41) (41)
Interest expense........................ (3) (2) (2) (3) (2) (2) (1) (1)
Interest income......................... 1 1 1 1 1 1 4 3
--- --- --- --- --- --- --- ---
Net loss.............................. (52) (40) (33) (27) (21) (32) (38) (39)
Deductions for accretion dividends(3)..... -- -- -- -- -- (2) (6) (5)
--- --- --- --- --- --- --- ---
Net loss attributable to common
stockholders............................ (52)% (40)% (33)% (27)% (21)% (34)% (44)% (44)%
=== === === === === === === ===
</TABLE>
- ------------------------------
(1) We began reporting incremental revenues in the first quarter of 1998.
(2) Amortization and transaction costs represent $41,238,000 in amortization of
intangible assets acquired and a one time transaction cost, in June 1998, of
$1,397,000 resulting from the strategic alliance with Sprint.
(3) Represents the accretion of liquidation dividends on Series A convertible
preferred stock at 3% compounded quarterly and the accretion of a dividend
related to the beneficial conversion feature in accordance with EITF D-60.
113
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998
The following table sets forth the percentage of total revenues represented
by certain items on the Company's statements of operations for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Recurring revenues........................................ 94% 95% 94% 95%
Other revenues............................................ 3 2 4 2
Incremental revenues...................................... 3 3 2 3
--- --- --- ---
Total revenues.............................................. 100% 100% 100% 100%
--- --- --- ---
Operating costs and expenses:
Cost of recurring revenues................................ 41 37 44 41
Cost of other revenues.................................... 1 -- -- --
Sales and marketing....................................... 21 43 23 34
General and administrative................................ 12 11 13 11
Operations and member support............................. 30 29 31 30
Amortization and transaction costs(1)..................... 36 20 21 22
--- --- --- ---
141 140 132 138
--- --- --- ---
Loss from operations........................................ (41) (40) (32) (38)
Interest income............................................. 3 5 -- 5
--- --- --- ---
Net loss.................................................... (38%) (35%) (32%) (33%)
--- --- --- ---
EBITDA(2)................................................... 2% (14%) (4%) (9%)
</TABLE>
- ------------------------
(1) Represents amortization expense for the periods ended September 30, 1999 and
1998 and a one time transaction cost of $1,397,000 resulting from the
June 1998 Sprint transaction.
(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 from an alternative to, or more meaningful than measures of
performance determined in accordance with generally accepted accounting
principles.
Recurring Revenues
The Company experienced substantial growth in revenues for the three and
nine month periods ended September 30, 1999 as compared to the corresponding
periods of 1998. The increase in recurring revenues of 80% from $46.9 million in
the quarter ended September 30, 1998 to $84.6 million in the quarter ended
September 30, 1999 was primarily due to an increase in the Company's member base
from 815,000 at September 30, 1998 to 1,566,000 at September 30, 1999.
114
<PAGE>
Other Revenues
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- INCREASE ------------------- INCREASE
1998 1999 DECREASE 1998 1999 DECREASE
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Dial-up set up fees....................... $ 771 $ 493 $(278) $2,310 $ 990 $(1,320)
Other fees................................ 928 1,438 510 2,587 3,500 913
------ ------ ----- ------ ------ -------
Total other revenues...................... $1,699 $1,931 $ 232 $4,897 $4,490 $ (407)
====== ====== ===== ====== ====== =======
</TABLE>
The decrease in dial-up set up fees was primarily due to the Company's
willingness to waive set up fees for dial-up members acquired through certain
marketing programs. The Company expects this trend to continue for dial-up set
up fees. The increase in other fees was due to an increase in the number of
premium services sold such as web-site hosting, broadband services and
cancellation fees attributable to certain term marketing programs.
Incremental Revenues
The Company continued to focus on deriving additional revenue from marketing
activities targeted to its active member base. Incremental revenues increased
131% from $1.3 million to $3.0 million and 161% from $2.8 million to
$7.3 million during the three and nine month periods ended September 30, 1999,
respectively, as compared to the corresponding periods of 1998. The principal
component of the Company's incremental revenue strategy is its Premier
Partnership Program through which the Company offers and sells promotional
packages that provide advertisers with access to the multiple points of contact
EarthLink has with its members. The Company also sells content space and
advertising on its various online properties such as the Personal Start Page and
its bi-monthly print magazine, "bLink".
Cost of Recurring Revenues
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------- ---------------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
RECURRING RECURRING RECURRING RECURRING
1998 REVENUES 1999 REVENUES 1998 REVENUES 1999 REVENUES
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Recurring revenues..... $46,877 100% $84,627 100% $109,957 100% $224,055 100%
Cost of recurring
revenues............. 20,619 44 33,398 39 52,261 48 95,494 43
</TABLE>
The decrease in the cost of recurring revenues as a percentage of recurring
revenues was primarily due to the Company's ability to negotiate more favorable
contracts with third party access providers and to effectively manage
communications costs per member.
Cost of Other Revenues
Cost of other revenues decreased 17% during the three months ended
September 30, 1999 as compared to the corresponding period of 1998 due to a
reduction in ISDN equipment sold to members and the price of ISDN service. Cost
of other revenues increased 93% during the nine months ended September 30, 1999
as compared to the corresponding period of 1998 due to increases in royalties
paid to software vendors and the costs of providing a electronic commerce.
115
<PAGE>
Sales and Marketing
Sales and marketing expenses consist primarily of advertising, direct
response mailings, sales compensation, bounties, communications costs related to
trial members, salaries and the cost of promotional material. Sales and
marketing expenses increased 260% from $10.6 million to $38.2 million during the
three month periods ended September 30, 1998 and 1999, respectively, and 200%
from $26.5 million to $79.6 million in the nine months ended September 30, 1999
as compared to the same period in 1998. The increase was primarily due to
management's increased emphasis on organic growth through marketing strategies
including expanding sales and marketing efforts, increased sales commissions and
increased marketing personnel headcount. Sales, marketing and other direct costs
associated with the acquisition of members are generally expensed as incurred.
Operations and Member Support
Operations and member support expenses consist primarily of costs associated
with technical support and member service, as well as costs associated with
operating the data center and MIS functions to maintain member accounts.
Operations and member support expenses increased 70% from $15.1 million to
$25.7 million during the three month periods ended September 30, 1998 and 1999,
respectively and 97% from $36.2 million to $71.3 million during the nine months
ended September 30, 1998 and 1999, respectively. These increases reflect
(1) the increase in members from 815,000 as of September 30, 1998 to 1,566,000
as of September 30, 1999, (2) the opening of the Company's two Sacramento call
centers in April 1999 and September 1999 and (3) management's focus on retaining
existing members by providing superior service and devoting significant
resources to expanding technical support staff and network operations
capabilities. The number of employees engaged in operations and member support
activities was 1,553 and 1,633 at September 30, 1998 and 1999, respectively.
General and Administrative
General and administrative expenses consist primarily of costs associated
with the accounting and human resources departments, professional expenses, bad
debt, credit card processing and executive compensation. General and
administrative expenses increased 66% from $5.9 million to $9.8 million during
the three months ended September 30, 1998 and 1999, and 66% from $15.4 million
to $25.5 million in the nine months ended September 30, 1999 as compared to the
same period in 1998. The increase was primarily due to increases in payroll,
depreciation expense and credit card processing fees. The rise in payroll costs
was primarily due to growth in headcount. In October 1998, the Company occupied
an additional 55,000 square feet of its data center facility, and monthly rent
increased from $66,000 to $92,000. The increase in depreciation expense was due
to the acquisition of office equipment and the build-out of leasehold
improvements. The increase in credit card processing fees was due to the
increase in the Company's member base and increases in fees charged by credit
card companies.
Intangible Assets And Amortization And Transaction Costs
In June 1998, the Company consummated its strategic alliance with Sprint
Corporation (the "Sprint Transaction"). Intangible assets acquired in the Sprint
Transaction are valued as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Member base................................................. $ 65,000
Marketing and Distribution Agreement........................ 20,000
Goodwill.................................................... 36,164
$121,164
========
</TABLE>
116
<PAGE>
The assets are being amortized on a straight-line basis over the estimated
useful lives as follows: member base amortized over 18 months, the Marketing and
Distribution Agreement amortized over 5 and 10 years, which are the life of the
portion of the contract related to Sprint's provision of additional customers
and the overall contract life relative to the co-branding feature, respectively,
and the excess of consideration over the fair value of net assets acquired
(goodwill) over 18 months. As such, the member base and goodwill will be fully
amortized by December 31, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1999 1998 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Member base............................................. $10,833 $10,833 $14,444 $32,500
Marketing and Distribution Agreement.................... 813 813 1,083 2,438
Goodwill................................................ 6,108 6,027 8,038 18,081
------- ------- ------- -------
Total................................................... $17,754 $17,673 $23,565 $53,019
======= ======= ======= =======
</TABLE>
In addition, a non-recurring Sprint Transaction cost of $1,397,000 was
recorded in June 1998.
Interest Income
Interest income increased from $1.9 million to $4.4 million and from
$2.6 million to $12.7 million during the three and nine months ended
September 30, 1998 and 1999, respectively. The increases were primarily due to
an increase in average cash balances available for investment.
Interest Expense
Interest expense decreased from $353,000 to $308,000 and from $1.7 million
to $1.0 million during the three months and nine months ended September 30, 1998
and 1999, respectively. The decreases were primarily due to the aging of capital
lease obligations. As capital lease obligations have aged, a greater portion of
lease payments has been attributed to principal payments rather than interest
expense. Furthermore, management has been able to obtain lower effective
interest rates on new lease obligations.
117
<PAGE>
1998 COMPARED TO 1997
The following table sets forth the percentage of total revenues represented
by certain items in our statements of operations for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Recuring revenues......................................... 83% 92% 93%
Other revenues............................................ 17 8 4
Incremental revenues...................................... -- -- 3
---- ---- ----
Total revenues.......................................... 100% 100% 100%
---- ---- ----
Operating costs and expenses:
Cost of recurring revenues................................ 53 46 44
Cost of other revenues.................................... 6 2 1
Sales and marketing....................................... 52 32 23
General and administrative................................ 32 18 13
Operations and member support............................. 48 38 31
Amortization and transaction costs (1).................... -- -- 23
---- ---- ----
Total operating costs and expenses...................... 191 136 135
Loss from operations........................................ (91) (36) (35)
Interest income............................................. -- 1 2
---- ---- ----
Interest expense............................................ (3) (3) (1)
---- ---- ----
Net loss................................................ (94%) (38%) (34%)
==== ==== ====
</TABLE>
- ------------------------
(1) Amortization and transaction costs represent $41,238,000 in amortization of
intangible assets acquired and a one time transaction cost, in June 1998, of
$1,397,000 resulting from the strategic alliance with Sprint.
Recurring Revenues
We experienced substantial growth in revenues during 1998. The increase in
recurring revenues of 120% from $74.7 million in 1997 to $164.7 million in 1998
was primarily due to an increase in our member base from approximately 420,000
at December 31, 1997 to approximately 1 million at December 31, 1998. In
June 1998 we acquired approximately 130,000 members and gained access to
Sprint's marketing and distribution channels as part of our strategic
relationship with Sprint. In addition to those channels, we aggressively
expanded into the OEM arena by securing relationships with Apple, Packard Bell,
NEC and Comp USA.
We also added several key affinity marketing partners, Sam's Club, Discover
Card and AAA of Southern California.
118
<PAGE>
Other Revenues
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 INCREASE/(DECREASE)
-------- -------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Dial-up set up fees......................................... $3,478 $2,853 $(625)
Non dial-up set up fees..................................... 2,753 3,694 941
Total other revenues........................................ $6,231 $6,547 $ 316
====== ====== =====
</TABLE>
The decrease in dial-up set up fees is primarily due to our increased
willingness to waive set up fees for dial-up members acquired through certain
marketing programs in response to competitive pressures. We expect this trend to
continue for dial-up set up fees. We have continued to expand our sales of
premium services such as business Web site hosting, national ISDN, LAN ISDN,
frame relay connections and cable connections. Set up fees for these services
are generally not waived, and, as such, one-time fees for the set up of
non-dial-up accounts has increased.
Incremental Revenues
In the first quarter of 1998 EarthLink began reporting incremental revenues
derived from advertising, content and electronic commerce fees that leverage the
value of our growing member base and user traffic. The principal component of
our strategy is our Premiere Partnership Program, through which we offer and
sell promotional packages that provide advertisers with access to the multiple
points of contact we have with our members. We also sell advertising and content
space on our various online properties, such as the Personal Start Page and the
Mall, and through our news magazine, bLink. We generally charge transaction fees
on electronic commerce activities we facilitate. Incremental revenues were
$4.7 million in 1998.
Cost of Recurring Revenues
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
PERCENT OF PERCENT OF
RECURRING RECURRING
1997 REVENUES 1998 REVENUES
-------- ----------- -------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Recurring revenues............................. $74,657 100% $164,723 100%
Cost of recurring revenues..................... 36,716 49 76,643 47
</TABLE>
Cost of recurring revenues increased 109% during 1998 as compared 1997,
primarily due to the increase in our member base. The decrease in the cost of
recurring revenues as a percentage of recurring revenues is attributable to:
(a) more effective management of our network, (b) the addition of Sprint to our
family of POP providers, and (c) our increasing ability to negotiate more
favorable commercial arrangements with our telecommunications service providers
as we leverage our growing member base.
119
<PAGE>
Cost of Other Revenues
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
PERCENT PERCENT
OF OTHER OF OTHER
1997 REVENUES 1998 REVENUES
-------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Royalties............................................... $ 930 15% $158 2%
Other................................................... 419 7 527 8
------ -- ---- --
Total cost of other revenues............................ $1,349 22% $685 10%
====== == ==== ==
</TABLE>
Cost of other revenues decreased 49% in 1998 as compared to 1997. The
decrease was primarily due to a reduction in royalty expense. The increase in
the remaining components of cost of other revenues is primarily due to the
increase in the rate of member growth during 1998.
Sales and Marketing
Sales and marketing expenses consist primarily of third-party bounties,
advertising, sales commissions, salaries, referral credits, direct communication
costs associated with trial accounts and the cost of promotional material. Sales
and marketing expenses increased from $26.0 million in 1997 to $42.7 million in
1998. The increase was primarily due to increased third-party bounty payments,
increased emphasis on marketing, including expanded sales and marketing efforts
on a nationwide basis, increased sales commissions and increased marketing
personnel headcount. We do not defer sales, marketing or other direct costs
associated with the acquisition of members. We expense these costs as incurred.
General and Administrative
General and administrative expenses consist primarily of costs associated
with the accounting and human resources departments, professional expenses,
rent, bad debt and compensation. General and administrative expenses increased
46% from $14.4 million in 1997 to $21.0 million in 1998. The increase was
primarily due to an increase in credit card processing fees and an increase in
bad debt expense. The increase in credit card processing fees was due to the
increase in our member base. As a percentage of total revenues, general and
administrative expenses decreased from 18% in 1997 to 13% in 1998.
Operations and Member Support
Operations and member support expenses consist primarily of costs associated
with technical support and member service, as well as customer information
systems. Operations and member support expenses increased 76% from
$30.9 million in 1997 to $54.4 million in 1998. However, as a percentage of
total revenues Operations and member support expenses decreased from 38% in 1997
to 31% in 1998. We focus on retaining existing members by providing superior
services and devoting significant resources to expanding technical support staff
and network operations capabilities. We had 565 employees engaged in operations
and member support activities on December 31, 1997 and 998 on December 31, 1998.
We continue to improve member service functions by investing in training
programs, hardware and software.
Interest Expense
Interest expense decreased from $2.1 million in 1997 to $2.0 million during
1998 due to repayment of approximately $4 million in notes payable, the
conversion of $5 million in debt to equity and a
120
<PAGE>
reduction in interest rates paid to lessors. The above was offset by the
increase in capitalized lease obligations.
Interest Income
Interest income increased from $637,000 in 1997 to $4.4 million 1998. The
increase was primarily due to an increase in average cash balances available for
investment as a result of our public follow on common stock offering completed
in June 1998.
1997 COMPARED TO 1996
Recurring Revenues
Recurring revenues increased $47.1 million or 171% from $27.6 million in
1996 to $74.7 million in 1997 due to the significant increase in our member base
during 1997.
Other Revenues
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
INCREASE
1996 1997 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Dial-up set up fees......................................... $4,563 $3,478 $(1,085)
Non dial-up set up fees..................................... 1,061 2,753 1,692
------ ------ -------
Total other revenues........................................ $5,624 $6,231 $ 607
====== ====== =======
</TABLE>
Other revenues increased $607,000 or 11% from 1996 to 1997. Due to
competitive pricing and other pressures, we waived set up fees for dial-up
members acquired through certain marketing partnerships. This caused a decrease
in dial-up set up fees earned during 1997. We expect this trend to continue for
dial-up set up fees. During 1997, we began to aggressively promote Web hosting
and nationwide high speed access services. The decline in dial-up set up fees
was offset by increases in the other set up fees and revenues attributable to
our Web hosting, high speed access services and cost of products sold.
Cost of Recurring Revenues
Cost of recurring revenues increased from $17.7 million in 1996 to
$36.7 million in 1997 because our member base increased, but decreased from 64%
of recurring revenues in 1996 to 49% of recurring revenues in 1997. The decrease
from 1996 to 1997 was primarily due to our ability to effectively manage
communications costs and economies of scale to reduce per member costs as the
total member base expanded. Until October 1996, we 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. Our network services agreement with UUNET
was amended as of October 1996 to change the cost basis from per member to peak
port hours. In June 1997, UUNET agreed to waive monthly revenue minimums, excess
hours fees and peak service user targets for the remaining six months of 1997.
In return, EarthLink agreed not to invoke its early termination right prior to
September 1998. If usage becomes more concentrated during peak times, the fees
we pay to UUNET will increase, thereby adversely affecting our operating
margins. Under our agreement with PSINet, we pay PSINet a fixed monthly fee for
each member accessing our services through a PSINet POP.
121
<PAGE>
Cost of Other Revenues
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
INCREASE
1996 1997 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Royalties................................................... $1,907 $ 930 $(977)
Other....................................................... 159 419 260
------ ------ -----
Total cost of other revenues................................ $2,066 $1,349 $(717)
====== ====== =====
</TABLE>
Cost of other revenues decreased $717,000 or 38% from $2.1 million in 1996
to $1.3 million in 1997. The decrease was due to the renewal of various
contracts under more favorable terms.
Sales and Marketing
Sales and marketing expenses increased $8.6 million or 49% from
$17.4 million in 1996 to $26.0 million 1997. The increase was primarily due to
our emphasis on marketing services, expanding sales and marketing efforts
nationwide, increased sales commissions, marketing personnel headcount,
third-party bounties and referral credits. We do not defer sales, marketing or
other direct costs associated with the acquisition of members; rather, we
expense these costs as they are incurred.
General and Administrative
General and administrative expenses increased $3.9 million or 37% from
$10.5 million in 1996 to $14.4 million in 1997 due to increases in bad debt,
payroll, rent, depreciation expenses and credit card fees. Bad debt expense was
$2.5 million or 7.5% of total revenues 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 4.3% of total revenues in 1997. Bad debt decreases were due to
our review and elimination of accounts with questionable payment history and the
compression of our collection cycle. The rise in payroll costs was primarily due
to growth in headcount. Personnel engaged in general and administrative
activities increased from 92 to 110 during 1997. Depreciation expense rose
because of the acquisition of office equipment and the build-out of leasehold
improvements. Credit card processing fees increased primarily because our member
base increased.
Operations and Member Support
Operations and member support expenses increased $15.1 million or 96% from
$15.8 million in 1996 to $30.9 million in 1997 reflecting our efforts to retain
existing members by devoting significant resources to expanding technical
support and network operations capabilities. Employees engaged in operations and
member support activities increased from 401 to 565 during 1997. During 1997, we
created a new call center and invested in training programs and hardware and
software to solve member problems.
Interest Expense
Interest expense increased from $1.0 million in 1996 to $2.1 million in 1997
primarily due to our increased borrowings and capital lease obligations to
finance our expansion of network infrastructure and capital equipment
acquisitions.
Interest Income
Interest income increased from $150,000 in 1996 to $637,000 in 1997
primarily because of the increase in average cash balances available for
investment.
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LIQUIDITY AND CAPITAL RESOURCES
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
Cash used by operating activities was $8.7 million and $8.0 million during
the three and nine month periods ended September 30, 1999, respectively. During
the three months ended September 30, 1999, the effect of the Company's net loss
of $31.4 million was offset by non-cash expenses, such as depreciation and
amortization expenses, of $23.1 million. During the nine months ended
September 30, 1999, the Company's net loss of $78.2 million was offset by
non-cash expenses, such as depreciation and amortization expenses of
$68.1 million.
Cash used in investing activities was $11.7 million and $33.7 million during
the three and nine month periods ended September 30, 1999, respectively. Capital
equipment purchases were $11.4 million and $33.6 million during the three and
nine month periods ended September 30, 1999, respectively. Cash proceeds from
sales of capital equipment were $1.2 million and $1.4 million during the three
and nine month periods ended September 30, 1999, respectively. In
September 1999 the Company made an initial investment in a limited partnership
of $1.5 million.
Cash provided by financing activities was approximately $6.4 million and
$239.2 million during the three and nine month periods ended September 30, 1999,
respectively. Proceeds from the exercise of stock options and warrants were
$6.2 million during the three months ended September 30, 1999. Proceeds and
principal payments under capital leases were $4.0 million and $3.8 million,
respectively, during the three months ended September 30, 1999. Sale leaseback
transactions are recorded at cost, which approximates the fair market value of
the property and, therefore, no gains or losses are recorded. The property
continues to be depreciated by the Company. A financing obligation representing
the proceeds is recorded and reduced based upon payments under the lease
agreement. Proceeds from the exercise of stock options and warrants were
$9.9 million during the nine months ended September 30, 1999. In January 1999,
the Company completed a follow on public offering of 2.4 million shares of its
Common Stock at $73.63 per share. In conjunction with the offering, Sprint
exercised its preemptive rights to maintain its existing ownership level in the
Company. Accordingly, Sprint purchased 808,000 shares of which 201,000 shares
were Common Stock and 607,000 shares were Series B Convertible Preferred Stock
(having the same rights and preferences as the Series A Convertible Preferred
Stock already held by Sprint). Net proceeds from the sale of Common Stock were
$183.1 million. Net proceeds from the sale of Series B Convertible Preferred
Stock to Sprint were approximately $42.6 million. Proceeds and principal
payments under capital leases were $11.8 million and $9.3 million, respectively,
during the nine months ended September 30, 1999.
As of September 30, 1999, the Company had cash and cash equivalents of
approximately $338.3 million. The Company believes that available cash will be
sufficient to meet the Company's operating expenses and capital requirements for
the next 12 months. EarthLink has available a $50 million credit facility from
Sprint in the form of convertible senior debt, increasing to $100 million by
June 5, 2001, at an interest rate of 6% per annum. 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
programs, information systems and research and development activities, the
availability of hardware and software provided by third-party vendors and other
factors.
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Our operating activities used $16.2 million and $21.3 million in cash during
the years ended December 31, 1996 and 1997, respectively. In all three years,
the Company's net loss was the primary component of cash used in operating
activities. In 1998, however, the Company's net loss was offset by significant
non-cash depreciation and amortization expenses relating to the Company's
network and
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intangible assets. Our operating activities provided $26.6 million of cash
during the year ended December 31, 1998, primarily because of the increase in
accounts payable and accrued liabilities of $31.7 million.
Our investing activities, used cash of approximately $18.4 million,
$16.1 million and $9.2 million in 1996, 1997 and 1998, respectively. Capital
equipment purchases were $18.8 million, $14.5 million and $24.3 million during
the three years then ended. During 1997, we purchased the rights to subscribers
and related assets of Internet in a Mall, Inc., a Tarzana, California based ISP,
at a cost of approximately $1.4 million. Net cash received in the Sprint
transaction of $23.8 million was partially offset by Sprint transaction costs of
$9.9 million for the year ended December 31, 1998.
Financing activities provided approximately $38.3 million, $49.8 million and
$107.1 million in cash during 1996, 1997 and 1998, respectively. We raised
$8.7 million and $15.4 million in private sales of equity securities during 1996
and 1997, respectively. In the first quarter of 1997, we sold 4.6 million shares
of common stock in our initial public offering and generated approximately
$26.2 million in net proceeds. We completed a follow on public offering in
June 1998 of 3.8 million shares of common stock. Our net proceeds were
approximately $106.3 million. During 1996, 1997 and 1998, we financed the
acquisition of data processing and office equipment amounting to approximately
$11.3 million, $10.5 million and $9.3 million, respectively, through equipment
leases and sale leaseback agreements. We record sale leaseback transactions at
cost, which approximates the fair market value of the property, and, therefore,
no gains or losses are recorded. We continue to depreciate the property and
record a financing obligation representing the proceeds based upon payments
under the lease agreement.
On December 31, 1998, we had approximately $140.9 million in cash and cash
equivalents. We believe our available cash is sufficient to meet our operating
expenses and capital requirements for the next 12 months. We also have a
$25 million credit facility from Sprint in the form of convertible senior debt,
increasing to $100 million over a three-year period, at an interest rate of 6%
per annum. Our capital requirements depend on numerous factors, including the
rate of market acceptance of our services, our ability to maintain and expand
our member base, the rate of expansion of our network infrastructure, the size
and types of acquisitions in which we may engage and the level of resources
required to expand our marketing and sales programs. We cannot accurately
predict the timing and amount of capital requirements. We may require additional
financing sooner than anticipated if capital requirements vary materially from
those currently planned. We have no commitments for any additional financing
other than the line of credit from Sprint, and we cannot be sure that we can
obtain additional commitments on favorable terms, if at all. Additional equity
financing may dilute our stockholders, and debt financing, if available, may
restrict our ability to declare and pay dividends and raise future capital. If
we are unable to obtain additional needed financing, we may be required to
reduce the scope of operations or anticipated expansion, which could materially
and adversely affect us.
YEAR 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing 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. We utilize software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year 2000
phenomenon. For example, we are dependent on the institutions involved in
processing our members' credit card payments for Internet services. We are also
dependent on telecommunications vendors and leased dial up access vendors to
maintain network reliability.
We have completed our assessment of the year 2000 readiness of our
third-party supplied software, computer technology and other services. Based
upon testing and vendor supplied documentation, we
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believe that all of our material third party providers are year 2000 compliant
and that all other providers are substantially ready. We tested our own
proprietary software and internal systems and determined them to be year 2000
compliant. We anticipate that our systems, including components thereof provided
by third-party vendors, will operate properly when the year 2000 event occurs.
The most reasonably likely worst-case year 2000 scenario would be for one or
more of our network service providers to fail thereby making it difficult or
impossible for members to dial-up and access the Internet; however, we maintain
agreements with several nationwide network service providers including UUNET,
Sprint, PSINet and Level 3, and have the ability to switch our members among the
networks of these providers. Therefore, should any of these providers be unable
to provide our members with Internet access as a result of year 2000 problems,
we believe our redundant network arrangements will adequately accommodate our
dial-up access needs. Total costs incurred in connection with our year 2000
readiness efforts have been and are expected to continue to be minimal.
SAFE HARBOR STATEMENT
The Management's Discussion and Analysis and other portions of this Report
include "forward looking" statements within the meaning of the federal
securities laws that are subject to future events, risks and uncertainties that
could cause actual results to differ materially from those expressed or implied.
Important factors that ether individually or in the aggregate could cause actual
results to differ materially from those expressed include, without limitation,
(1) that the Company will not retain or grow its member base, (2) that the
Company will fail to be competitive with existing and new competitors, (3) that
the Sprint alliance will not be as beneficial to the Company as management
anticipates, (4) that the Company will not be able to sustain its current
growth, (5) that the Company will not adequately respond to technological
developments impacting the Internet, (6) that needed financing will not be
available to the Company if and as needed, (7) that a significant change in the
growth rate of the overall U.S. economy will occur, such that consumer and
corporate spending are materially impacted, (8) that a significant reversal in
the trend toward increased usage of the Internet will occur, and (9) that the
Company or its vendors and suppliers may fail to timely achieve Year 2000
readiness such that there is a material adverse impact on the business,
operations or financial results of the Company, (10) that a drastic negative
change in the market conditions may occur, or (11) that some other unforeseen
difficulties may occur. This list is intended to identify only certain of the
principal factors that could cause actual results to differ materially from
those describe in the forward-looking statements included herein.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table presents certain information relating to various forms
of compensation awarded to, earned by or paid to EarthLink's Chief Executive
Officer and the six most highly compensated executive officers of EarthLink
other than the Chief Executive Officer who earned more than $100,000 during
fiscal 1998 and were serving at the end of fiscal 1998. Such executive officers
are referred to as the "EarthLink Named Executive Officers."
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<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 D. Dayton................................ 1998 $210,025 $45,042 -- --
Chairman of the Board of Directors (1) 1997 180,000 45,411 -- --
1996 153,036 70,006 -- --
Charles G. Betty............................. 1998 312,000 60,142 300,000 $ 22,435(2)
President and Chief Executive Officer 1997 240,000 60,621 -- 10,578(3)
1996 220,550 77,635 500,000 24,000(3)
Grayson L. Hoberg............................ 1998 150,017 -- -- 1,038(5)
Senior Vice President, Finance and 1997 8,654 -- 200,000 --
Administration and
Chief Financial Officer (4)
David R. Tommela............................. 1998 145,616 26,512 20,000 2,373(6)
Senior Vice President, Operations 1997 132,000 26,723 -- 1,218(6)
1996 130,392 34,439 25,000 --
Richard D. Edmiston.......................... 1998 185,021 18,253 20,000 2,636(9)
Vice President, Research and 1997 185,000 33,398(8) 55,000 1,423(9)
Development (7) 1996 -- -- -- --
Brinton O.C. Young........................... 1998 160,019 29,522 100,000 --
Senior Vice President, Marketing 1997 140,000 29,754 -- --
1996 73,681 18,409 225,000 --
William S. Heys.............................. 1998 156,158 -- 150,000 --
Senior Vice President, Sales (10)
</TABLE>
- ------------------------
(1) Mr. Dayton served as President until January 15, 1996, when Mr. Betty's
employment commenced. Mr. Dayton served as Chief Executive Officer until
May 7, 1996, when Mr. Betty was appointed to that position.
(2) Consists of reimbursement in 1998 of $19,042 in travel expenses pursuant to
Mr. Betty's employment agreement and $3,393 in matching contributions made
to Mr. Betty's account under our 401(k) Plan.
(3) Consists of reimbursement in 1997 of $8,363 in travel expenses pursuant to
Mr. Betty's employment agreement and $2,215 in matching contributions to
Mr. Betty's account under our 401(k) Plan, and reimbursement in 1996 of
$24,000 of such reimbursable expenses pursuant to Mr. Betty's employment
agreement.
(4) Mr. Hoberg's employment commenced on December 5, 1997.
(5) Consists of matching contributions made to Mr. Hoberg's account under our
401(k) Plan.
(6) Consists of matching contributions made to Mr. Tommela's account under our
401(k) Plan.
(7) Mr. Edmiston's employment commenced on January 16, 1997.
(8) Includes a signing bonus of $15,000 paid to Dr. Edmiston pursuant to his
employment agreement with EarthLink and a performance bonus of $18,398.
(9) Consists of matching contributions made to Dr. Edmiston's account under
EarthLink's 401(k) Plan.
(10) Mr. Heys' employment commenced on January 2, 1998.
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OPTION EXERCISES IN FISCAL 1998 AND FISCAL 1998 YEAR-END OPTION VALUES
The following table shows the number of shares of Common Stock subject to
exercisable and unexercisable stock options held by each of the EarthLink Named
Executive Officers as of December 31, 1998. The table also reflects the values
of such options based on the positive spread between the exercise price of such
options and $57.00, which was the closing sales price of a share of EarthLink's
Common Stock reported on the Nasdaq National Market on December 31, 1998.
<TABLE>
<CAPTION>
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE
- ---- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Sky D. Dayton.................................. 325,000 $9,522,384 25,000 150,000
Charles G. Betty............................... 225,000 7,034,000 215,000 360,000
Grayson Hoberg................................. 23,000 2,006,975 23,000 160,000
David R. Tommela............................... 48,500 1,128,591 12,000 59,500
Richard D. Edmiston............................ 11,000 190,438 11,250 52,750
Brinton O.C. Young............................. 42,500 2,006,975 85,000 197,500
William S. Heys................................ 5,000 137,813 21,700 135,300
</TABLE>
- ------------------------
(1) The value of "in-the-money" options represents the difference between the
exercise price of stock options and $57.00, the closing sales price reported
by the Nasdaq National Market of EarthLink's Common Stock for December 31,
1998.
CONVERTIBLE SECURITIES VESTING PLAN
In December 1997, EarthLink's 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 EarthLink. Generally, a change in
control includes the sale of all or substantially all of EarthLink'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 and the rules promulgated thereunder) of
25% or more of EarthLink's outstanding voting securities. In connection with the
Sprint Transaction, EarthLink amended this plan so that the Sprint transaction
would not constitute a change in control.
KEY EMPLOYEE COMPENSATION CONTINUATION PLAN
In January 1998, the EarthLink Board of Directors adopted a plan whereby
those employees identified as "key" or critical 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.
EarthLink adopted this plan to attract the highest quality individuals to become
key members of EarthLink's leadership team and to retain the high-quality
individuals who are presently members of its leadership team.
COMPENSATION OF DIRECTORS
Directors of EarthLink do not receive cash compensation for serving in that
capacity, but are reimbursed for the expenses they incur in attending meetings
of the Board of Directors or any committees thereof. Non-employee directors are
eligible to receive options to purchase EarthLink common stock awarded under its
Directors Stock Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the EarthLink'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 EarthLink
nor was formerly an officer of EarthLink. Members of
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the Compensation Committee did not have disclosable relationships with EarthLink
in 1998. However, the following disclosure regarding non-Compensation Committee
Board members is required:
Mr. Esrey serves as Chairman of the Board of Directors and Chief Executive
Officer of Sprint Corporation. Mr. Lauer serves as President of the Consumer
Services Group of Sprint. On June 5, 1998, EarthLink consummated a series of
transactions with Sprint which, among other things, resulted in Sprint
purchasing 2.5 million shares of EarthLink's Common Stock at $22.50 per share in
a tender offer and purchasing approximately 4.1 million shares of the
EarthLink's Series A Convertible Preferred Stock (which are convertible into
8.2 million shares of Common Stock), in exchange for certain commercial and
financial arrangements. Under the network services agreement that was
implemented in connection with the Sprint alliance, EarthLink paid Sprint
$3,192,637 during 1998.
EarthLink believes that the foregoing transactions were on terms no less
favorable to EarthLink than could be obtained from unaffiliated parties. It is
EarthLink's current policy that all transactions by EarthLink 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 EarthLink than could be obtained from unaffiliated parties.
CERTAIN RELATIONSHIPS AND INSIDER TRANSACTIONS
EarthLink has adopted a current policy that all transactions by EarthLink
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 EarthLink than could be obtained from
unaffiliated parties.
For a summary of certain transactions and relationships among EarthLink and
its associated entities, and among the directors and executive officers of
EarthLink and its associated entities, see "--Compensation Committee Interlocks
and Insider Participation."
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INFORMATION ABOUT MINDSPRING
BUSINESS
MindSpring is a leading national Internet service provider, or ISP, which
focuses on serving individuals and small businesses. Its primary service
offerings are dial-up Internet access and business services, which it offers in
various price and usage plans designed to meet the needs of its subscribers.
MindSpring's business services include Web hosting, which entails maintaining a
customer's Internet Web site; high-speed, dedicated Internet access; Web page
design and domain name registration. Web hosting, MindSpring's principal
business service, complements its Internet access business and is one of the
fastest growing segments of the Internet marketplace.
MindSpring offers subscribers complete Internet access and Web hosting
solutions, placing an emphasis on user-friendly and easy to install software,
network reliability, highly responsive customer service and superior technical
support. Through its nationwide network of MindSpring-owned and third-party
provider-owned points of presence, or POPs, MindSpring's subscribers are able to
access the Internet in the 48 contiguous U.S. states and the District of
Columbia via a local telephone call.
Over the past five years, MindSpring has rapidly increased its subscriber
base and revenues by:
- providing superior customer service and technical support;
- expanding its marketing and distribution activities;
- making strategic acquisitions; and
- creating additional revenue streams by offering value-added services, such
as Web hosting, that build on its basic operating capabilities and
services.
MindSpring's subscriber base has grown from approximately 12,000 subscribers
at December 31, 1995, to approximately 1.3 million subscribers at September 30,
1999, including approximately 61,000 Web hosting subscribers and approximately
3,000 dedicated Internet access accounts.
MindSpring was incorporated in Georgia in February 1994, and was
reincorporated in Delaware in December 1995. MindSpring's executive offices are
located at 1430 West Peachtree St., Suite 400, Atlanta, Georgia 30309 and its
telephone number at that address is (404) 815-0770. MindSpring also maintains an
Internet site on the World Wide Web at WWW.MINDSPRING.COM. Information on
MindSpring's Web site is not, and should not be deemed to be, a part of this
joint proxy statement/ prospectus.
RECENT ACQUISITIONS
In October 1998, MindSpring purchased substantially all of Spry, Inc.'s
subscriber base of individual dial-up Internet access customers in the United
States and Canada, including approximately 130,000 individual access accounts.
MindSpring also acquired various assets used in serving those customers,
including a leased customer support facility and a leased network operations
facility in Seattle, Washington and all rights to the "Sprynet" name. Spry was a
wholly-owned subsidiary of America Online, Inc. The purchase price for these
assets was approximately $32 million.
In February 1999, MindSpring purchased substantially all of NETCOM On-Line
Communication Services, Inc.'s subscriber accounts in the U.S., including
approximately 408,000 individual access accounts, approximately 25,000 dedicated
Internet access accounts and approximately 25,000 Web hosting accounts. NETCOM,
now known as ICG Netahead, Inc., is a wholly owned subsidiary of ICG
Communications, Inc. MindSpring also acquired assets used in serving those
customers, including leased operations facilities in San Jose, California and
Dallas, Texas and ICG Netahead's rights to the "NETCOM" name, except in Canada,
the United Kingdom and Brazil. ICG Netahead retained all of its assets used in
connection with its network operations. Under a separate network services
agreement
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with ICG Netahead, MindSpring purchases access to ICG Netahead's network.
MindSpring paid $245 million for the NETCOM assets, consisting of $215 million
in cash and $30 million in MindSpring common stock.
MINDSPRING SERVICES
MindSpring's services include dial-up Internet access and business services,
which consist of Web hosting and other services such as high-speed dedicated
Internet access for small to medium-sized businesses and Web page design.
MindSpring's primary service offerings, dial-up Internet access and Web hosting,
are offered in various price and usage plans designed to meet the needs of its
customers. MindSpring continuously evaluates the need to add additional product
offerings and modify its service features based upon market demands.
INTERNET ACCESS
DIAL-UP INTERNET ACCESS. MindSpring's primary service offering is dial-up
Internet access. As of September 30, 1999, approximately 87% of MindSpring's
total revenues were attributable to dial-up Internet access. The basic equipment
requirements for an individual dial-up subscriber are a Windows 3.1 or later
operating system or Macintosh computer with at least 8MB of RAM and a modem of
14.4 Kbps speed or faster. The subscriber's MindSpring connection is a direct,
point-to-point protocol, or "PPP," connection to the Internet. A direct PPP
connection enables a subscriber to use any standard Internet capable software
that will run on the subscriber's computer.
MindSpring currently offers the following five price plans for dial-up
subscription, taking account of demand for both heavy and light Internet usage.
Each plan requires a start-up fee of up to $25 (except for the COMMERCIAL plan,
which has a start-up fee of $50), which is waived in certain instances depending
upon the promotional method by which the subscriber is acquired.
THE WORKS. For $26.95 per month, individual subscribers receive unlimited
usage (not intended to be a full-time connection) as well as 10MB of Web space,
a personal Web page editor that permits subscribers to create and upload their
own Web pages, and five mailboxes.
UNLIMITED ACCESS. Individual subscribers pay $19.95 per month for unlimited
usage, 5MB of Web space, and three mailboxes. As with the Works Plan, the
subscriber must disconnect when not actively accessing the Internet. The
subscriber is not permitted, for example, to maintain a full-time computer
connection as a World Wide Web server.
STANDARD. Subscribers pay $14.95 per month for 20 hours of use and $1 per
hour for each additional hour. Subscribers also receive 5MB of Web space and one
mailbox.
LIGHT. Subscribers pay $6.95 per month for 5 hours of use and $2 per hour
for each additional hour. Subscribers also receive 5MB of Web space and one
mailbox.
COMMERCIAL. Designed for small businesses, subscribers pay a $50 start-up
fee and $99 per month thereafter in exchange for 160 hours of usage and $.75 for
each additional hour. Subscribers receive 10 mailboxes and are not charged for
simultaneous usage, which would permit several employees to be on-line at once
without paying additional fees.
Subscribers to each plan can also purchase additional features such as extra
mailboxes for specified fees.
Substantially all of MindSpring's subscribers are on month-to-month
subscriptions. MindSpring offers a 30-day money-back satisfaction guarantee for
new subscribers. Billing is monthly, with payments made by the majority of
subscribers by a monthly charge to the subscriber's credit card. Payment is made
at the beginning of each billing cycle, although some subscribers are invoiced
(for an
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extra charge). Subscribers, as well as MindSpring, may cancel an account at any
time, with the cancellation taking effect as of the first day of the following
billing month.
A subscriber who is within local dialing range of one of the MindSpring POPs
or a designated third-party provider POP can access the Internet with a local
telephone call. MindSpring also offers access to its services through an "800"
number for an additional charge. All dial-up subscribers can connect to the
MindSpring network, including the third-party provider POPs, via modem at speeds
up to 56 Kbps. In a majority of the cities that MindSpring serves, individual
subscribers, except subscribers to the UNLIMITED ACCESS and COMMERCIAL plans,
can also choose to connect via ISDN at 64 Kbps or 128 Kbps. There is a one-time
extra start-up fee of $25 for ISDN users who subscribe to the STANDARD and LIGHT
plans; otherwise, 64K ISDN pricing is the same as for modem subscribers, and
128K users pay a small surcharge. All dial-up subscribers also have the option
of using MindSpring servers to publish information on the Internet through the
World Wide Web or FTP. MindSpring subscribers may use the space made available
on MindSpring's servers to make World Wide Web pages or computer data files
available to the Internet.
MindSpring recently introduced high-speed cable modem Internet access on a
limited basis in Montgomery, Alabama, Columbus, Georgia, Augusta, Georgia,
Charleston, South Carolina, and Panama City, Florida. MindSpring provides this
service through an agreement with KNOLOGY Holdings, Inc., an affiliate of ITC
Holding Company, Inc., one of MindSpring's principal stockholders. MindSpring's
ability to expand its geographic offering of this service will depend on
KNOLOGY's enhancement and expansion of its network infrastructure and
MindSpring's access to other third-party cable and broadband networks.
MindSpring also recently introduced consumer DSL service on a limited basis
to eleven cities nationwide. This service provides MindSpring customers with an
"always on" connection to the Internet that features download speeds of up to
1.5 megabits per second and eliminates the need for a second analog phone line
for a modem since the connection uses the same wires as the member's primary
phone number. With DSL, members can make and receive phone calls or send faxes
while simultaneously maintaining the "always on" connection to the Internet.
BUSINESS SERVICES
MindSpring business services, which are provided by the company's MindSpring
Biz division, consist of:
- Web hosting, the business of maintaining a customer's Internet Web site;
- high-speed, dedicated Internet access;
- Web page design;
- domain name registration; and
- e-commerce services.
As of September 30, 1999, business services revenues, which were derived
almost entirely from Web hosting services, accounted for approximately 13% of
MindSpring's total revenues.
WEB HOSTING. MindSpring offers Web hosting accounts for companies and other
organizations that wish to create their own World Wide Web sites without
maintaining their own Web servers and high-speed Internet connections. Web
hosting subscribers can use their own domain names in their World Wide Web
addresses. This type of Web hosting is called "virtual hosting." Web hosting
subscribers create their Web sites themselves and then upload the pages to a
MindSpring Web server. MindSpring's Web hosting service features
state-of-the-art Web servers for high speed and reliability, a high-quality
connection to the Internet, specialized customer support, advanced services
features, such
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as secure transactions and VRML, or Virtual Reality Markup Language, a feature
used to make Web pages seem three-dimensional, and reporting on site usage.
MindSpring currently offers three price plans for Web hosting subscribers
ranging from $19.95 to $99.95 per month. As of September 30, 1999, MindSpring
had approximately 61,000 Web hosting subscribers.
WEB PAGE DESIGN. MindSpring's Web page design services consist of four
standard design packages from which a subscriber can choose or the subscriber
can create a custom Web package from scratch. The subscriber provides the text
for the Web site, and custom design work is available from MindSpring, including
logo design, additional HTML pages, and database integration.
E-COMMERCE. MindSpring's e-commerce hosting service enables even
unsophisticated subscribers to set up an Internet storefront in virtually
minutes. MindSpring offers merchants a complete suite of commercial hosting
options including:
- Web hosting;
- Web site or Web page design;
- domain name registration;
- store front and back office applications;
- customer-to-merchant e-mail services;
- search engine registration;
- encryption security certificates to assure confidentiality of
transactions; and
- credit card and on-line payment processing services.
DEDICATED ACCESS AND DOMAIN REGISTRATION. MindSpring offers domain
registration services and, in some markets, high-speed dedicated access
connections to the Internet. As of September 30, 1999, MindSpring had
approximately 3,000 dedicated access accounts.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
MindSpring believes that excellent customer services and technical support
is critical to its success in retaining and attracting new subscribers.
MindSpring currently provides customer service and technical support through its
call centers located in Atlanta, Georgia; Harrisburg, Pennsylvania; Phoenix,
Arizona; Seattle, Washington; San Jose, California; and Dallas, Texas. In 1999,
MindSpring received the highest ranking in overall customer satisfaction among
Internet service providers in the J.D. Power and Associates 1999 National ISP
Online Residential Customer Satisfaction Study.
MindSpring's customer service staff handles all questions regarding a
subscriber's account and are available from 9 a.m. to 9 p.m. eastern time seven
days a week, except for major holidays. As of September 30, 1999, MindSpring had
approximately 330 customer service employees.
MindSpring's technical support staff handles questions related to the
provision of its services such as questions regarding installation of
MindSpring's service, connection to its network and use of various software
applications. MindSpring's technical support staff is available 24 hours a day,
seven days a week, except for major holidays. As of September 30, 1999,
MindSpring had approximately 980 technical support employees.
Subscribers can call any of MindSpring's call center facilities for customer
service and technical support through a local telephone number, for those cities
local to a call center, or a toll-free "800" number. Subscribers can also e-mail
their questions directly to a customer service and technical support address at
MindSpring. In addition, MindSpring maintains MindSpring-specific newsgroups on
the
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Internet where subscribers can post requests for help and other subscribers, as
well as MindSpring support personnel, can respond.
SALES AND MARKETING
MindSpring believes that the market for individual Internet access is
heavily influenced by person-to-person referrals. Accordingly, MindSpring's
marketing efforts have been geared, among other things, toward generating
positive referrals and stimulating subscriber growth and retention by providing
exceptionally high-quality service to its existing subscribers. MindSpring also
offers a $20 credit to existing subscribers each time a new subscriber names the
existing subscriber as the referral source. A significant number of MindSpring's
new subscribers indicate that an existing subscriber referred them.
MindSpring also engages in targeted marketing and distribution efforts in
markets where there is the opportunity for substantial market penetration.
MindSpring believes that high geographic concentrations of subscribers improve
network economics and reduce subscriber acquisition costs, thereby resulting in
higher margins. While continuing to encourage referrals from existing
subscribers, MindSpring has recently increased its print publication, radio,
television and direct mail advertising in certain targeted major metropolitan
areas throughout the United States in order to achieve greater density in its
subscriber base.
In addition, MindSpring has pursued nationwide strategic alliances available
to it as a result of its nationwide access and reputation for reliability and
high quality. Such nationwide marketing opportunities may include, among others,
entering into large-scale bundling arrangements with complementary products,
such as computers, software products, multimedia books, and CD-ROM merchandise,
and seeking strategic alliances available with complementary businesses
operating in its service areas, such as Internet-oriented training organizations
and consulting firms, World Wide Web content developers, computer networking
firms, media companies, telecommunications companies, local area network and
World Wide Web consulting companies, and other Internet access companies that
specialize in providing dedicated connections. The nature and terms of these
alliances vary.
MindSpring intends to continue to expand its marketing and distribution
efforts. MindSpring will continue to closely monitor the results of its
marketing techniques as part of an ongoing effort to increase the
cost-effectiveness of its marketing efforts.
MindSpring has attempted to maintain a high degree of personal contact with
the communities that it serves, and has a staff of territory managers who are
responsible for generating interest in MindSpring in these communities.
MindSpring marketing personnel spend considerable time meeting with and making
presentations to groups representing potential subscribers, such as computer
user associations, high-technology business associations, and educational
institutions.
Sales are consummated by MindSpring's telephone sales force, which responds
to incoming subscription inquiries, as well as through an on-line sign-up
procedure. The on-line registration module, which is available in MindSpring's
retail software package, through MindSpring's Web site and through various
Original Equipment Manufacturer, or OEM, arrangements, enables a user to become
a MindSpring subscriber by selecting service plans and billing methods on-line,
without the need to speak to a MindSpring employee.
NETWORK INFRASTRUCTURE
GEOGRAPHIC COVERAGE. Through MindSpring's nationwide network of
MindSpring-owned and third-party provider-owned points of presence, or POPs,
MindSpring's subscribers are able to access the Internet in the 48 contiguous
U.S. states and the District of Columbia via a local telephone call. MindSpring
purchases access to third-party provider POPs through network services
agreements with
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PSINet, Worldcom Advanced Networks (formerly Gridnet International, L.L.C.), GTE
Internetworking Incorporated (formerly BBN Planet Corporation) and ICG Netahead.
MindSpring believes that using a combination of MindSpring-owned POPs and
POPs owned by third-party network providers enables it to provide Internet
access services on a nationwide basis while managing the timing and magnitude of
its capital expenditures. MindSpring employs a strategy of leasing POPs from
third-party providers in locations where it is more economical to do so. These
are typically geographic areas where MindSpring has lower market penetration
than areas it serves through MindSpring POPs. MindSpring periodically
reevaluates the economics of this strategy and, if warranted, may install a
MindSpring POP to replace or overlap with a leased POP.
MINDSPRING POPS. Each MindSpring POP typically consists of data
communications equipment such as 3Com-Registered Trademark- Total Control modem
chassis, 3Com-Registered Trademark- or Bay Networks switches and Cisco Systems
routers, the majority of which are currently co-located with a local
telecommunications or media company. The 3Com-Registered Trademark- modem
chassis employed by MindSpring support both ISDN and analog terminations.
MindSpring has upgraded all modem chassis to support the new international 56Kb
modem standard, V.90.
Each MindSpring POP is connected to MindSpring's Atlanta Network Data
Center. These connections consist of either a private line point-to-point
Internet Protocol, or "IP" connection, or a frame relay connection. In addition,
MindSpring uses private peering points to more efficiently manage its network
traffic. A private peering point is a point where MindSpring's network connects
to the network of one of its third-party network providers. This enables
MindSpring to route network traffic along the shortest path feasible.
MindSpring refers to some of its POPs as "super-POPs." A super-POP is a POP
where MindSpring co-locates its equipment with a competitive local exchange
carrier, or "CLEC". By co-locating with a CLEC, MindSpring is able to aggregate
Internet traffic from multiple local calling areas into a single modem pool via
local telephone numbers. This creates, in effect, a "super-POP," enabling
MindSpring to offer local dial-up access out of a single POP to areas that would
otherwise require co-location sites in each local dial-up area--that is,
multiple POPs--to accomplish the same task. As part of MindSpring's strategy, it
intends to open additional super-POPs where demand and other economic factors
warrant.
ATLANTA NETWORK HUB. MindSpring's Atlanta Network Data Center is connected
to Internet backbone providers such as GTE Internetworking via large leased
telecommunications lines called DS-3s. MindSpring's Atlanta Network Data Center
is supported by dual SONET rings provided by BellSouth Corporation and MediaOne.
The Data Center has a back-up generator for emergency use in the event of a
prolonged loss of electric power. In addition to dial-up subscribers, most of
MindSpring's Web hosting and Web-server co-location customers are served from
this location.
NETWORK OPERATIONS CENTER. MindSpring maintains a Network Operations Center
at its Atlanta headquarters through which its technical staff monitors network
traffic, service quality, and security, as well as equipment at individual POPs,
to ensure reliable Internet access. The Network Operations Center is staffed
24 hours a day, 7 days a week. MindSpring also monitors network operations
through its facilities in Seattle, Washington and Dallas, Texas. In the future,
MindSpring may use its other call center facilities to supplement or add
redundancy to this network monitoring capability. In addition, MindSpring
continues to invest in improved network monitoring software and hardware
systems.
MINDSPRING SOFTWARE
An important component of MindSpring's service offering for dial-up
subscribers is the MindSpring starter kit. The starter kit includes the
MindSpring installation program, front-end software and documentation, an
on-line registration module (retail version only), network software that enables
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a subscriber to connect to the Internet, and application programs. MindSpring's
subscribers acquired from Spry and NETCOM connect to the Internet using software
that MindSpring acquired in those acquisitions. Those subscribers may switch to
MindSpring software at their option at any time.
MindSpring's objectives in developing and providing the MindSpring starter
kit are to:
SIMPLIFY INSTALLATION. MindSpring's software package automatically
configures all the individual Internet access programs after one-time entry by
the user of a few required fields of information (name, user name, password,
etc.).
PROVIDE A CONVENIENT AND INTUITIVE STARTING PLACE FOR
SUBSCRIBERS. MindSpring's front-end software allows subscribers to connect and
disconnect, see any current messages from MindSpring, check their monthly usage,
see if they have any e-mail, and launch any of their Internet application
programs, all from one screen. "Help" files and the accompanying documentation
contain information on troubleshooting and things to do on the Internet. Links
to the most popular content sites are also provided.
ENHANCE EFFICIENCY OF MINDSPRING'S SUPPORT SERVICES. High-quality software
with which MindSpring's technical support representatives are familiar makes it
easier for MindSpring to provide fast and efficient customer service and
technical support. Software that is reliable and easy to install and use also
tends to reduce subscriber need for extensive customer service and technical
support services.
PROVIDE STATE-OF-THE-ART APPLICATIONS. MindSpring uses existing
applications developed by third parties in its software package. MindSpring
believes that this approach will enable it to include state-of-the-art software
in its package and to keep pace with technology developments by replacing
applications with newer or better programs as they become available without
diverting resources by attempting to develop new applications programs.
SUBSCRIBER APPLICATIONS
MindSpring subscribers use their accounts for, among other things,
communicating, retrieving information, and publishing information on the
Internet. In surveys of its subscribers, a substantial number of MindSpring's
individual subscribers report that they use their MindSpring accounts for
personal as well as business purposes. The subscriber's MindSpring connection is
a direct PPP connection, enabling subscribers to use any standard
Internet-capable software that will run on their computers. A complete set of
the most popular Internet applications are part of the MindSpring starter kit
software package, including:
ELECTRONIC MAIL. E-mail allows subscribers to exchange electronic messages
with anyone else who has an Internet e-mail address. These messages are usually
text only but can also include other kinds of computer files (such as images,
computer programs, or word processing documents), which are sent as attachments.
MindSpring's software package includes the Microsoft Outlook
Express-Registered Trademark- E-mail application.
THE WORLD WIDE WEB. The World Wide Web allows a multimedia presentation of
material (i.e., text, graphic, sound, and video). Users can move from one World
Wide Web site to another by clicking on hypertext links and can interact with
the World Wide Web information providers through typed input. The software
programs that allow users to explore the World Wide Web are known as "browsers."
The browser applications currently included in MindSpring's software package is
Microsoft's Internet Explorer.
NETWORK NEWS. Network News provides Internet-wide, subject-specific forums
on thousands of different subjects, where users can post information and review
posted information from other users.
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FTP. File transfer protocol, or FTP, is a standard Internet tool that
allows users to send and retrieve computer files. FTP is often used for
retrieving software from various archive sites on the Internet.
INTERNET RELAY CHAT. Internet Relay Chat allows users to participate in
chat sessions, in which typed comments from all participants appear on the
screen, allowing simultaneous multiperson real-time conversations.
MindSpring has obtained permission and, in certain cases, licenses from each
manufacturer of the software that MindSpring bundles in its front-end software
product for Windows and Macintosh subscribers.
BILLING AND MANAGEMENT INFORMATION SYSTEMS
A majority of MindSpring's individual subscribers pay their MindSpring fees
automatically by credit card each month. MindSpring generally sends monthly
invoices to commercial accounts with multiple users. Billing calculations and
payment transactions are managed on MindSpring's automated billing system.
MindSpring expects to continue to modify and upgrade its billing system as
needed in order to maintain its ability to bill and collect amounts due and to
be responsive to changes in the market.
PROPRIETARY RIGHTS
GENERAL. Although MindSpring believes that its success is more a function
of its technical expertise and customer service than its proprietary rights,
MindSpring's success and ability to compete depends in part upon its technology.
MindSpring relies on a combination of copyright, trademark and trade secret
laws, and contractual restrictions to establish and protect its technology. It
is MindSpring's policy to require employees and consultants and, when possible,
suppliers to execute confidentiality agreements upon the commencement of their
relationships with MindSpring. These agreements provide that confidential
information developed or made known during the course of a relationship with
MindSpring must be kept confidential and not disclosed to third parties except
in specific circumstances. MindSpring cannot provide any assurances that the
steps it has taken will be adequate to prevent misappropriation of its
technology or that its competitors will not independently develop technologies
that are substantially equivalent or superior to its technology.
LICENSES. MindSpring has obtained authorization to use the products of each
manufacturer of software that it bundles in its front-end software product for
Windows and Macintosh subscribers. The particular applications included in the
MindSpring starter-kit have, in some cases, been licensed. MindSpring currently
intends to maintain or negotiate renewals of, as the case may be, all existing
software licenses and authorizations as necessary. MindSpring may also want or
need to license other applications in the future. License fees charged to
MindSpring upon enrollment of additional subscribers are included in the cost of
subscriber start-up fees. Other applications included in the MindSpring starter
kit are shareware for which MindSpring has obtained permission to distribute or
which are from the public domain and are freely distributable. MindSpring
developed the front-end software programs in MindSpring's starter kit for
Windows 3.1, Windows 95, and Macintosh. MindSpring has acquired some software,
trademarks and other proprietary technology from Spry and NETCOM which it may
continue to use for acquired subscribers.
COMPETITION
The markets for the provision of Internet access and business services to
individuals and small businesses are extremely competitive and highly
fragmented. There are no substantial barriers to entry, and MindSpring expects
that competition will continue to intensify. MindSpring may not be able to
compete successfully against current or future competitors, many of whom may
have financial resources greater than MindSpring. Increased competition could
cause MindSpring to increase its selling and
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marketing expenses and related subscriber acquisition costs and could also
result in increased subscriber attrition. MindSpring may not be able to offset
the effects of these increased costs through an increase in the number of its
subscribers or higher revenue from enhanced services, and MindSpring may not
have the resources to continue to compete successfully. These developments could
adversely affect MindSpring's business, financial condition and results of
operations.
COMPETITIVE FACTORS. MindSpring believes that the primary competitive
factors determining success in the Internet access and business services markets
are a reputation for reliability and service, effective customer support,
pricing, easy-to-use software, and geographic coverage. Other important factors
include the timing of introductions of new products and services and industry
and general economic trends. MindSpring's current and prospective competitors
include many large companies that have substantially greater market presence and
financial, technical, marketing, and other resources. In addition, every local
market that MindSpring has entered or intend to enter is served by multiple
local ISPs.
MINDSPRING'S COMPETITORS. MindSpring currently competes or expects to
compete with the following types of companies:
- established on-line commercial information service providers, such as AOL
and Microsoft Network;
- national long-distance carriers, such as AT&T Corp. and MCI
WorldCom, Inc.;
- national commercial ISPs such as EarthLink;
- computer hardware and software and other technology companies, such as IBM
Corp.;
- numerous regional and local commercial ISPs which vary widely in quality,
service offerings, and pricing;
- national and regional Web hosting companies that focus primarily on
providing Web hosting services;
- cable operators and on-line cable services;
- local telephone companies and regional Bell operating companies; and
- nonprofit or educational ISPs.
MindSpring believes that new competitors, including large computer hardware
and software, media, and telecommunications companies, will continue to enter
the Internet access and business services markets. As consumer awareness of the
Internet grows, existing competitors are likely to further increase their
emphasis on their Internet access and business services, resulting in even
greater competition for MindSpring. In addition, telecommunications companies
may be able to offer customers reduced communications costs in connection with
these services, reducing the overall cost of their Internet access and business
services solutions and significantly increasing pricing pressures on MindSpring.
The ability of MindSpring's competitors to acquire other ISPs, to enter into
strategic alliances or joint ventures or to bundle other services and products
with Internet access or Web hosting could also put MindSpring at a significant
competitive disadvantage.
BROADBAND TECHNOLOGIES. MindSpring also faces competition from companies
that provide broadband connections to consumers' homes, including local and
long-distance telephone companies, cable television companies, electric utility
companies, and wireless communications companies. These companies may include
Internet access or business services such as Web hosting using broadband
technologies in their basic bundle of services or may offer Internet access or
business services for a nominal additional charge. Broadband technologies enable
consumers to transmit and receive print, video, voice and data in digital form
at significantly faster access speeds than existing dial-up modems.
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The companies that own these broadband networks could prevent MindSpring
from delivering Internet access through the wire and cable connections that they
own. Cable television companies are not currently required to allow ISPs to
access their broadband facilities and the availability and terms of ISP access
to broadband local telephone company networks are under regulatory review.
MindSpring's ability to compete with telephone and cable television companies
that are able to support broadband transmission, and to provide better Internet
services and products may depend on future governmental action to guarantee open
access to the broadband networks. However, in January 1999, the Federal
Communications Commission, or FCC, declined to take any action to mandate or
otherwise regulate access by ISPs to broadband cable facilities at this time.
Similarly, the FCC is considering proposals that could limit the right of ISPs
to connect with their customers over broadband local telephone lines. In
December, 1999, MindSpring and AT&T submitted a letter to the FCC outlining in
principle AT&T's commitment to allowing non-affiliated ISPs such as MindSpring
to negotiate access to AT&T's cable systems. This letter is non-binding and
would not take effect until expiration of current exclusive contractual
arrangements to which AT&T is a party. Certain local governmental authorities
have required "open access" as a condition of transfer of their local cable
franchises. However, it is unclear whether they will be successful in
establishing their authority to do so and whether and to what extent other local
and state regulatory agencies will take any similar initiatives. In addition to
competing directly in the ISP market, both cable and telephone facilities
operators are also aligning themselves with certain ISPs who would receive
preferential or exclusive use of broadband local connections to end users. If
high-speed, broadband facilities increasingly become the preferred mode by which
customers access the Internet and MindSpring is unable to gain access to these
facilities on reasonable terms, MindSpring's business, financial condition and
results of operations could be materially adversely affected.
NO INTERNATIONAL OPERATIONS. MindSpring does not currently compete
internationally, except MindSpring has a small number of Canadian subscribers
obtained in the Spry acquisition. If the ability to provide Internet access
internationally becomes a competitive advantage in the Internet access industry,
MindSpring may be at a competitive disadvantage relative to its competitors.
GOVERNMENT REGULATION
As an Internet service provider, MindSpring is not currently directly
regulated by the FCC or any other agency, other than regulations applicable to
businesses generally. In a report to Congress adopted on April 10, 1998, the FCC
reaffirmed that Internet service providers should be classified as unregulated
"information service providers" rather than regulated "telecommunications
providers" under the terms of the Telecommunications Act of 1996.
This finding is important because it means that regulations that apply to
telephone companies and similar carriers do not apply to MindSpring. MindSpring
also is not required to contribute a percentage of its gross revenues to support
"universal service" subsidies for local telephone services and other public
policy objectives, such as enhanced communications systems for schools,
libraries, and some health care providers. The FCC action is also likely to
discourage states from regulating Internet service providers as
telecommunications carriers or imposing similar subsidy obligations.
Nevertheless, Internet-related regulatory policies are continuing to
develop, and it is possible that MindSpring could be exposed to regulation in
the future. For example, in the same report to Congress, the FCC stated its
intention to consider whether to regulate voice and fax telephony services
provided over the Internet as "telecommunications" even though Internet access
itself would not be regulated. MindSpring cannot predict whether in the future
the FCC will modify its current policies against regulation of ISPs.
MindSpring also could be affected by any change in the ability of customers
to reach its network through a dial-up telephone call without any additional
charges. This practice has allowed ISPs to offer
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flat-rate, non-usage sensitive pricing, and has been an important reason for the
growth in Internet use. Recently, the FCC ruled that connections linking end
users to their ISPs are jurisdictionally interstate rather than local, but the
FCC did not subject such calling to the access charges that apply to traditional
telecommunications companies. Local telephone companies assess access charges to
long distance companies for the use of the local telephone network to originate
and terminate long distance calls, generally on a per-minute basis. MindSpring
could be adversely affected by any regulatory change that would result in
application of access charges to Internet service because this would
substantially increase the cost of using the Internet. However, the FCC Chairman
has stated that he opposes Internet-related access charges, and MindSpring
believes that this development is unlikely, with one possible exception that is
not currently relevant to MindSpring's business. Specifically, there is
substantial debate as to whether carrier access charges, or the universal
support obligations discussed above, should apply to Internet-based telephone
services that substitute for conventional telephony. MindSpring has no current
plans to install gateway equipment and offer telephony, and so MindSpring does
not believe it would be directly affected by these developments were they to
occur.
The law relating to the liability of Internet service providers and on-line
services companies for information carried on, stored on, or disseminated
through their network is unsettled, even with the recent enactment of the
Digital Millennium Copyright Act. While no one has ever filed a claim against
MindSpring relating to information carried on, stored on, or disseminated
through its network, someone may file a claim of that type in the future and may
be successful in imposing liability on MindSpring. If that happens, MindSpring
may have to spend significant amounts of money to defend itself against these
claims and, if MindSpring is not successful in its defense, the amount of
damages that MindSpring will have to pay may be significant. Any costs that
MindSpring incurs as a result of defending these claims or the amount of
liability that MindSpring may suffer if its defense is not successful could
materially adversely affect its business, financial condition and results of
operations.
If, as the law in this area develops, MindSpring becomes liable for
information carried on, stored on, or disseminated through its network,
MindSpring may decide to take actions to reduce its exposure to this type of
liability. This may require MindSpring to spend significant amounts of money for
new equipment and may also require it to discontinue offering some of its
products or services.
Due to the increasing popularity and 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, privacy, access to some types of
content by minors, pricing, bulk e-mail or "spam," encryption standards,
consumer protection, electronic commerce, taxation, copyright infringement, and
other intellectual property issues. MindSpring cannot predict the impact, if
any, that any future regulatory changes or developments may have on its
business, financial condition, and results of operations. Changes in the
regulatory environment relating to the Internet access industry, including
regulatory changes that directly or indirectly affect telecommunication costs or
increase the likelihood or scope of competition from regional telephone
companies or others, could have a material adverse effect on MindSpring's
business, financial condition and results of operations.
EMPLOYEES
As of September 30, 1999, MindSpring had approximately 2,050 employees. None
of MindSpring's current employees is represented by a labor organization, and
MindSpring considers its relations with its employees to be good.
PROPERTIES
MindSpring's corporate headquarters are located in Atlanta, Georgia. The
leases for this space expire on March 31, 2001 and July 14, 2002. MindSpring
also leases additional office space in the vicinity of its Atlanta headquarters
in order to meet MindSpring's existing and anticipated space
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requirements. The lease for this additional office space expires on March 31,
2002. In December 1999, MindSpring signed a new lease for a new
headquarters/call-center in Atlanta. This new Atlanta lease expires July 31,
2007. MindSpring has the option to extend this lease for two successive five
year terms.
Equipment for POPs other than the Atlanta POP site is generally co-located
with and in space leased from other companies operating in the area of the
particular POP.
MindSpring also maintains call center and/or network operations facilities
in the following locations:
Harrisburg, Pennsylvania--The lease for this facility has been extended
until April 30, 2000. MindSpring has the option to extend this lease for one
additional year. MindSpring is currently negotiating a subsequent lease for a
total of five years on another building.
Phoenix, Arizona--The lease for this facility expires on October 31, 2004.
MindSpring has the option to extend this lease for two successive five-year
terms.
Seattle, Washington--The lease for this facility expires on February 29,
2000. MindSpring is currently negotiating with the landlord/owner for a one to
five year extension.
Bellevue, Washington--The lease for this facility expires on December 31,
2000. MindSpring has the option to extend this lease for one five-year term.
Dallas, Texas--The lease for this facility expires on September 30, 2004.
MindSpring has the option to extend this lease for one five-year term.
San Jose, California--The lease for this facility expires on December 1,
2004. MindSpring has the option to extend this lease for two successive
five-year terms.
LEGAL PROCEEDINGS
Except as described below, MindSpring is not currently involved in any
pending legal proceedings that are likely to have a material impact on
MindSpring.
MindSpring has been named as a defendant in a suit filed on November 4, 1999
in the Superior Court of Gwinnett County, Georgia, by Neal Horsley, a former
subscriber of MindSpring's Web hosting services. Mr. Horsley alleges that
MindSpring breached its contract with him when it shut down his anti-abortion
website, known as the Nuremburg Files, on February 4, 1999. MindSpring shut the
site down pursuant to its Appropriate Use Policy and Service Agreement with
Mr. Horsley after a federal court in Oregon determined that Mr. Horsley's
website represented a "blatant and illegal communication of true threats to
kill" one or more physicians. Mr. Horsley seeks $107 million in damages for the
various claims he has brought against MindSpring. MindSpring intends to defend
itself vigorously in this matter, and, while it cannot predict the outcome of
this litigation, it is nonetheless optimistic that it will prevail. A previous
suit filed by Mr. Horsley on June 8, 1999 in which he made substantially the
same claims was voluntarily dismissed.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
MindSpring believes its exposure to market rate fluctuations on its
investments is nominal due to the short-term nature of those investments.
MindSpring has no material future earnings or cash flow exposures with respect
to its outstanding capital leases, which are all at fixed rates. MindSpring has
no material earnings or cash flow exposure with respect to its outstanding
convertible notes, which are all at fixed rates. To the extent MindSpring has
borrowings outstanding under the credit facility, MindSpring will have market
risk relating to those amounts because the interest rates under the credit
facility are variable. At present, MindSpring has no plans to enter into any
hedging arrangements with respect to potential future borrowings.
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BENEFICIAL OWNERSHIP OF STOCK
The following table provides information as of November 30, 1999 concerning
beneficial ownership of MindSpring common stock by (1) each person or entity
known by MindSpring to beneficially own more than 5% of the outstanding
MindSpring common stock, (2) each director of MindSpring, (3) each executive
officer of MindSpring, and (4) all directors and executive officers of
MindSpring as a group. The information as to beneficial ownership has been
furnished by the respective stockholders, directors and executive officers of
MindSpring, and, unless otherwise indicated, each of the stockholders has sole
voting and investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF COMMON
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) STOCK OUTSTANDING
- ------------------------ ------------------------ -----------------
<S> <C> <C>
ITC Service Company, Inc. (2)(3)....................... 10,648,134 16.7%
Charles M. Brewer (4).................................. 4,647,320 7.3%
Samuel R. DeSimone, Jr................................. 0 *
O. Gene Gabbard (5)(6)................................. 40,000 *
Campbell B. Lanier, III (6)(7)......................... 30,000 *
Michael S. McQuary (8)................................. 736,928 1.1%
Juliet Reising......................................... 0 *
William H. Scott, III (6)(9)........................... 40,000 *
Gregory J. Stromberg (10).............................. 67,884 *
Lance Weatherby (11)................................... 59,882 *
All executive officers and directors as a group
(9 persons) (12)..................................... 5,622,014 8.8%
</TABLE>
- ------------------------
* Less than one percent.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner, for purposes of this table, of
any shares of common stock if such person has or shares voting power or
investment power with respect to such security, or has the right to acquire
beneficial ownership at any time within 60 days from November 30, 1999. As
used herein, "voting power" is the power to vote or direct the voting of
shares and "investment power" is the power to dispose or direct the
disposition of shares.
(2) ITC Holding Company, Inc. indirectly owns these shares through its indirect,
wholly owned subsidiary, ITC Service Company. The address of both ITC
Holding Company, Inc. and ITC Service Company is 1239 O.G. Skinner Drive,
West Point, Georgia 31833.
(3) ITC Holding has pledged all of its stock in MindSpring to certain lenders in
connection with a credit agreement dated October 20, 1997.
(4) The address for Charles M. Brewer is MindSpring Enterprises, Inc., 1430 West
Peachtree Street, Suite 400, Atlanta, Georgia 30309. Includes 7,314 shares
of MindSpring common stock that Mr. Brewer has the right to purchase within
60 days from November 30, 1999 pursuant to options.
(5) Includes 30,000 shares of MindSpring common stock that Mr. Gabbard has the
right to purchase within 60 days from November 30, 1999 pursuant to options.
(6) Mr. Lanier is Chairman of the Board, Chief Executive Officer and an owner of
approximately 18% of the common stock of ITC Holding (as of October 5,
1999). Mr. Scott is the President and a director of ITC Holding and is an
owner of less than 1.0% of its common stock (as of October 5, 1999).
Mr. Gabbard is a director of ITC Holding and an owner of less than 1.0% of
its common stock (as of October 5, 1999). Each of Messrs. Lanier, Scott and
Gabbard disclaims beneficial ownership of the shares of MindSpring's common
stock held by ITC Holding.
(7) Includes 30,000 shares of MindSpring common stock that Mr. Lanier has the
right to purchase within 60 days from November 30, 1999 pursuant to options.
(8) Includes 480,408 shares of MindSpring common stock that Mr. McQuary has the
right to purchase within 60 days from November 30, 1999 pursuant to options.
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(9) Includes 30,000 shares of MindSpring common stock that Mr. Scott has the
right to purchase within 60 days from November 30, 1999 pursuant to options.
Mr. Scott's beneficial ownership of MindSpring includes 2,000 shares of
MindSpring common stock held in trust for Mr. Scott's minor daughter, of
which Mr. Scott's wife is trustee.
(10) Includes 50,684 shares of MindSpring common stock that Mr. Stromberg has
the right to purchase within 60 days from November 30, 1999 pursuant to
options.
(11) Includes 27,090 shares of MindSpring common stock that Mr. Weatherby has
the right to purchase within 60 days from November 30, 1999 pursuant to
options.
(12) Includes 655,496 shares of MindSpring common stock that such persons have
the right to purchase within 60 days from November 30, 1999 pursuant to
options.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. ALL STATEMENTS REGARDING OUR EXPECTED FINANCIAL POSITION
AND OPERATING RESULTS, OUR BUSINESS STRATEGY AND OUR FINANCING PLANS ARE
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS CAN SOMETIMES BE IDENTIFIED BY OUR
USE OF FORWARD-LOOKING WORDS SUCH AS "MAY," "WILL," "ANTICIPATE," "ESTIMATE,"
"EXPECT," OR "INTEND." KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS
COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY
THESE STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE OUR ABILITY TO RETAIN AND
GROW OUR SUBSCRIBER BASE, OUR ABILITY TO SUCCESSFULLY INTEGRATE NEW SUBSCRIBERS
AND/OR ASSETS OBTAINED THROUGH ACQUISITIONS, THE HIGHLY COMPETITIVE MARKETS IN
WHICH WE OPERATE AND OUR ABILITY TO RESPOND TO TECHNOLOGICAL DEVELOPMENTS
AFFECTING THE INTERNET. MINDSPRING'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1998, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON MARCH 30, 1999, DISCUSSES SOME ADDITIONAL IMPORTANT FACTORS THAT COULD CAUSE
MINDSPRING'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH
FORWARD-LOOKING STATEMENTS.
ALL COMMON STOCK NUMBERS AND PER SHARE AMOUNTS IN THIS REPORT GIVE EFFECT TO
A 3-FOR-1 STOCK SPLIT EFFECTED BY MINDSPRING IN JULY 1998 AND A 2-FOR-1 STOCK
SPLIT EFFECTED BY MINDSPRING IN JUNE 1999.
OVERVIEW
MindSpring is a leading national Internet service provider, or ISP. On
September 23, 1999, MindSpring announced that it had entered into an Agreement
and Plan of Reorganization, dated September 22, 1999, with EarthLink
Network, Inc. This merger agreement with EarthLink sets forth the terms and
conditions of the proposed merger of MindSpring and EarthLink into a new
company. The merger of MindSpring and EarthLink is structured to be a
stock-for-stock merger of equals. Pursuant to the merger agreement, each share
of common stock of MindSpring will be converted into one share of common stock
of the new company, and each share of common stock of EarthLink will be
converted into 1.615 shares of common stock of the new company. Other
outstanding securities of the two companies will be converted on the same basis.
Upon consummation of the merger, the new company will be renamed
EarthLink, Inc. The parties intend for the merger to be treated as a tax-free
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended, and as a "pooling-of-interests" for accounting purposes. Subject to
several conditions, including receipt of required regulatory approvals, approval
by both companies' shareholders, and certain third-party consents, the
transaction is expected to close in the first quarter of 2000.
MindSpring focuses on serving individuals and small businesses. Our
subscribers use their MindSpring accounts to, among other things, communicate,
retrieve information, and publish information on the Internet. Our primary
service offerings are dial-up Internet access and business services which we
offer in various price and usage plans designed to meet the needs of our
subscribers. Our business services include Web hosting, which entails
maintaining a customer's Web site; high-speed,
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dedicated Internet access; Web page design; and domain name registration. Web
hosting, our principal business service, complements our Internet access
business and is one of the fastest growing segments of the Internet marketplace.
We offer our subscribers:
- user-friendly and easy to install software, containing a complete set of
the most popular Internet applications including electronic mail, World
Wide Web access, Network News, File Transfer Protocol and Internet Relay
Chat;
- highly responsive customer service, and technical support which is
available 24 hours a day, seven days a week; and
- a reliable nationwide network that enables subscribers in the 48
contiguous United States and the District of Columbia to access the
Internet via a local telephone call.
Our nationwide network consists of MindSpring-owned points of presence, or
"POPs," and POPs that are owned by other companies with which we have service
agreements. Through these service agreements, we have the flexibility to offer
Internet access in a particular market through a MindSpring-owned POP, a third
party network provider's POP or a combination of the two. As part of our efforts
to control quality and cost, we typically seek to increase the number of
MindSpring-owned POPs in markets where we have higher numbers of subscribers.
MindSpring has grown rapidly by:
- providing superior customer service and technical support;
- expanding marketing and distribution activities;
- making strategic acquisitions; and
- creating additional revenue streams by offering value-added services such
as Web hosting that build on our basic operating capabilities and
services.
We have increased our subscriber base from approximately 12,000 subscribers
at December 31, 1995 to approximately 1,297,000 subscribers at September 30,
1999, including approximately 61,000 Web hosting subscribers and approximately
3,000 Dedicated Internet access subscribers. In addition, by providing superior
customer service and technical support, we have been successful in limiting our
average monthly subscriber cancellation percentage, calculated as the number of
cancellations in a month divided by the beginning subscriber base for that
month, to 3.8% in 1996 and 1997, 3.3% in 1998 and 5.2% for the nine months ended
September 30, 1999.
We have also rapidly increased revenues. From our inception in
February 1994 through 1997, we experienced annual net operating losses as a
result of efforts to build our network infrastructure and internal staffing,
develop our systems, and expand into new markets. During 1997, we generated
positive cash flows from operations, with EBITDA of approximately $5 million. We
had our first year of profitability in 1998, with net income of approximately
$8.8 million, excluding a one-time tax benefit of approximately $1.7 million.
Including the one-time tax benefit, our net income for 1998 was approximately
$10.5 million. In the third quarter of 1999, in an effort to continue to build
our subscriber base, we increased our sales and marketing expenditures from
traditional levels. This, along with the amortization charges related to our
acquisitions of subscriber bases in the fourth quarter of 1998 and the first
quarter of 1999, had a direct impact on our EBITDA and net income. For the nine
months ended September 30, 1999, we had revenues of approximately
$235.5 million, EBITDA of approximately $35.8 million, a net loss of
approximately $(21.2) million and net loss per share of $(0.35). Excluding
tax-effected amortization expense related to our acquisitions of subscriber
bases, net income for the nine months ended September 30, 1999 was approximately
$15.6 million. EPS+A for this period was $0.24 per diluted share.
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We expect to continue to focus on increasing our subscriber base. Increases
in our subscriber base will cause our revenues to increase but will also cause
our costs of revenue, selling, general and administrative expenses, capital
expenditures, and depreciation and amortization to increase. Our purchases of
subscriber bases such as the Spry and NETCOM acquisitions, described below,
cause an immediate increase in our amortization expense. We generally amortize
subscriber acquisitions over a three-year period. We expect that annual
amortization expense attributable to these transactions will be between
approximately $85 and $90 million per year through 2001. To the extent we
continue to expand our subscriber base through acquisitions such as the Spry and
NETCOM acquisitions, we will continue to experience increased amortization
expense.
We plan to continue to increase our subscriber base through other means in
addition to subscriber base acquisitions. In July 1999, we announced an
accelerated organic growth marketing effort in which we would increase our sales
and marketing expenditures in both the fourth quarter of 1999 and the first
quarter of 2000. We stated that we would focus a large portion of the additional
expenditures on a national branding campaign, primarily involving television
advertisements, which began in September 1999. The branding campaign was an
integral part of the accelerated growth initiative. We expected that these
incremental sales and marketing expenditures would result in increased
subscriber growth beginning in the fourth quarter of 1999 and continue into the
first quarter of 2000. Under the proposed merger with EarthLink, the combined
company is expected to conduct business under the EarthLink brand name.
Therefore, we have made adjustments to our existing marketing plans to focus
less on branding initiatives and more on direct subscriber acquisition channels
in the fourth quarter of 1999. Overall, we expect our sales and marketing
expenditures in the fourth quarter of 1999 to be significantly higher than our
historical levels, but less than anticipated in our original announcement of the
accelerated organic growth marketing effort.
We expect to incur negative EBITDA for the fourth quarter of 1999 and the
first quarter of 2000, primarily as a result of increased sales and marketing
expenditures, and we expect to incur net losses through 2000, primarily as a
result of the amortization expense associated with the Spry and NETCOM
acquisitions and the increased sales and marketing expenditures.
SPRY AND NETCOM ACQUISITIONS. On October 15, 1998, we completed our
acquisition of the customer base and certain related assets of Spry, Inc. The
total purchase price for the Spry acquisition was approximately $32 million. On
February 17, 1999, we completed the purchase of certain assets used in
connection with the United States Internet access and web hosting business
operated by NETCOM On-Line Communication Services for approximately
$245 million, consisting of $215 million in cash and $30 million in MindSpring
common stock (752,232 shares, at a price per share of $39.88).
CREDIT FACILITY. On February 17, 1999, we entered into a credit agreement
with First Union National Bank and several other lenders. The credit agreement
provides for a $100 million revolving credit facility that may be increased at
our option to $200 million with the approval of First Union and the other
lenders under the credit agreement. The credit facility will mature on
February 17, 2002. The credit facility is to be used to fund working capital and
for general corporate purposes, including permitted acquisitions. Our
obligations under the credit facility are secured by substantially all of
MindSpring's assets. On February 17, 1999, we borrowed approximately
$80 million under the credit facility to finance the NETCOM acquisition. We
repaid all amounts outstanding under the credit facility with a portion of the
net proceeds from our April 1999 offering of 5,520,000 shares of common stock,
and we amended the credit facility to permit the issuance of notes, the payment
of interest thereon, and certain redemptions thereof. For a more detailed
description of our secured credit facility, see our Current Report on form 8-K
filed with the Securities and Exchange Commission on February 25, 1999.
SECURITIES OFFERINGS DURING 1999. In March 1999, we filed a universal shelf
registration statement with the Securities and Exchange Commission for the
public offering from time to time of up to
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$800 million of debt and equity securities. In April 1999, we completed two
public offerings of securities under this shelf registration statement. We sold
5,520,000 shares of common stock, raising net proceeds of approximately
$263.2 million, out of which we repaid all amounts outstanding under the secured
credit facility. We also sold $179,975,000 aggregate principal amount of 5%
Convertible Subordinated Notes due 2006, raising net proceeds of approximately
$174.1 million. The remaining proceeds from these offerings will be used for
expansion of our business, as additional working capital for general corporate
purposes, and for strategic acquisitions of subscriber accounts and
complementary businesses.
REVENUES. MindSpring derives revenue primarily by providing individuals
with dialup access to the Internet. Monthly subscription fees vary by billing
plan. Under MindSpring's current pricing plans, customers have a choice of
several "flat rate" plans (The Works and Unlimited Access, e.g.) and several
"usage sensitive" plans (Standard and Light, e.g.). MindSpring also has a
prepayment plan available to all dial-up subscribers which allows subscribers to
prepay their access fees for either one or two years at a discounted rate. For
the nine months ended September 30, 1999, the average monthly recurring revenue
per dialup subscriber was approximately $20.
In addition, MindSpring earns revenue by providing Web hosting, full-time
dedicated access connections to the Internet, and other value-added services
such as Web page design and domain registration. MindSpring's Web hosting
services allow a business or individual to post information on the World Wide
Web so that the information is available to anyone who has access to the
Internet. MindSpring currently offers price plans for Web hosting subscribers
ranging from $19.95 to $99.95 per month. MindSpring had approximately 61,000 Web
hosting subscribers as of September 30, 1999. Through our domain registration
services, MindSpring offers subscribers the ability to personalize electronic
mail addresses and URLs (Uniform Resource Locators). The revenue from the
services described in this paragraph have been classified as business services
in MindSpring's statements of operations and in the "Results of Operations"
table shown below.
COSTS. MindSpring's costs include (1) costs of revenue that are primarily
related to the number of subscribers; (2) selling, general and administrative
expenses that are associated more generally with operations; and
(3) depreciation and amortization, which are related to the number and amount of
MindSpring-owned POPs and other equipment, and the deferred costs associated
with acquired customer bases.
Costs of revenue that are primarily related to the number of subscribers
consist primarily of the costs of telecommunications facilities necessary to
provide service to subscribers. Telecommunications facilities costs include
(1) the costs of providing local telephone lines into each MindSpring-owned POP;
(2) costs related to the use of third party networks; and (3) costs associated
with leased lines connecting each MindSpring-owned POP and third party network
to MindSpring's hub and connecting MindSpring's hub to the Internet backbone.
Selling, general and administrative costs are incurred in the areas of sales
and marketing, customer service and technical support, network operations and
maintenance, engineering, accounting and administration. Selling, general and
administrative costs will increase over time as MindSpring's scope of operations
increases. As noted above, we have significantly increased the level of
marketing activity beginning in the third quarter of 1999 to increase the rate
of subscriber growth. Our new marketing strategy is expected to have a
short-term negative impact on net income. We believe that these increased costs
will result in greater subscriber growth; however, there can be no assurance
that these additional sales and marketing expenditures will result in
significantly greater subscriber growth. MindSpring does not defer any sales or
marketing expenses.
As MindSpring expands into new markets, both costs of revenue and selling,
general and administrative expenses will increase. To the extent MindSpring
opens MindSpring POPs in new markets, these costs and expenses may also increase
as a percentage of revenue in the short term for
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the period immediately after a new MindSpring POP is opened. Many of the fixed
costs of providing service in a new market through a new MindSpring POP are
incurred before significant revenue can be expected from that market. However,
to the extent that we expand into new markets by using third party POPs instead
of opening our own POPs, MindSpring's incremental monthly recurring costs will
consist primarily of the fees to be paid to third parties under network services
agreements. In general, the margins on those subscribers will initially be
higher than if we had opened our own POP in new markets. When a market matures,
if the market is served through purchased, third party network services rather
than MindSpring-owned POPs, costs of revenue as a percentage of revenue will
tend to be higher, and therefore, margins on subscribers will tend to be lower.
This is because the full costs of using third party networks is included in
costs of revenue, as compared to the costs of using MindSpring-owned POPs, a
portion of which is included in depreciation. In addition, in more mature
markets where we have greater concentrations of subscribers, we often can
provide services at a lower cost per subscriber through MindSpring-owned POPs
after the initial period when related expenses are higher. This depends in part
on how much we must pay for local area telecommunications charges and the cost
of available alternative third party providers.
In connection with the NETCOM acquisition, ICG Netahead retained the network
assets that they formerly used to serve the customers we acquired. We purchase
access to that network under a network services agreement with a term of one
year and an option for a second year on potentially different terms to be agreed
upon by the parties. During the first year of the network services agreement
with ICG Netahead, we will pay for use of ICG Netahead's POPs at rates that are
generally comparable to the costs of using MindSpring POPs.
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RESULTS OF OPERATIONS
The following table shows financial data for the years ended December 31,
1998, 1997, and 1996 and the nine months ended September 30, 1998 and 1999.
Operating results shown for 1998 do not reflect the NETCOM acquisition.
Operating results for any period are not necessarily indicative of results for
any future period. Dollar amounts (except per share data) are shown in
thousands.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 SEPTEMBER 30, 1998
------------------- ------------------- ------------------- -------------------
% OF % OF % OF % OF
(000'S) REVENUE (000'S) REVENUE (000'S) REVENUE (000'S) REVENUE
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Access............................. $ 99,938 87 $ 44,845 85 $ 15,846 87 $ 64,795 86
Business services.................. 14,735 13 7,711 15 2,286 13 10,344 14
-------- --- -------- --- -------- --- -------- ---
Total revenue...................... $114,673 100 $ 52,556 100 $ 18,132 100 75,139 100
COST AND EXPENSES:
Cost of revenues................... $ 34,336 30 $ 16,822 32 $ 8,208 45 22,167 30
General, and administrative........ 38,443 34 22,265 43 10,072 56 25,505 34
Selling............................ 18,881 16 8,519 16 4,089 22 11,735 15
-------- --- -------- --- -------- --- -------- ---
Customer base amortization......... $ 7,048 6 $ 4,210 8 $ 1,521 8 3,548 5
Depreciation....................... 8,179 7 4,485 9 1,764 10 5,696 8
-------- --- -------- --- -------- --- -------- ---
Operating income (loss)............ 7,786 7 (3,745) (7) (7,522) (42) 6,488 8
Interest income (expense), net..... 1,214 1 (338) (1) (90) (1) 590 1
-------- --- -------- --- -------- --- -------- ---
Pre tax income (loss).............. 9,000 8 (4,083) (8) (7,612) (42) 7,078 9
Provision for income taxes......... 1,544 1 -- -- -- -- (212) (0)
-------- --- -------- --- -------- --- -------- ---
Net income (loss).................. $ 10,544 9 $ (4,083) (8) $ (7,612) (42) $ 6,866 9
======== ======== ======== ========
PER SHARE DATA:
Diluted net income (loss) per
share............................ $ 0.21 $ (0.09) $ (0.24) $ 0.13
Weighted average common shares
outstanding...................... 50,862 45,084 31,516 50,892
OPERATING DATA:
Approximate number of subscribers
at end of year................... 693,000 278,300 121,794 455,000
Number of MindSpring employees at
end of year...................... 977 502 321 732
EBITDA (1)......................... $ 23,013 20 $ 4,950 9 $ (4,237) (23) 15,732 21
-------- --- -------- --- -------- --- -------- ---
CASH FLOW DATA:
Cash Flow (used in) from
operations....................... $ 35,501 $ 11,354 $ (2,005) 18,318
Cash flow (used in) from investing
activities....................... $(47,647) $ (9,002) $(21,336) (11,934)
Cash flow (used in) from financing
activities....................... $170,503 $ (2,619) $ 32,569 46,728
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
---------------------
% OF
(000'S) REVENUE
---------- --------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Access............................. $ 196,645 84
Business services.................. 38,823 16
---------- ---
Total revenue...................... 235,468 100
COST AND EXPENSES:
Cost of revenues................... 78,882 33
General, and administrative........ 74,253 32
Selling............................ 46,503 20
---------- ---
Customer base amortization......... 60,345 26
Depreciation....................... 13,732 6
---------- ---
Operating income (loss)............ (38,247) (16)
Interest income (expense), net..... 3,463 1
---------- ---
Pre tax income (loss).............. (34,784) (15)
Provision for income taxes......... 13,565 6
---------- ---
Net income (loss).................. $ (21,219) (9)
==========
PER SHARE DATA:
Diluted net income (loss) per
share............................ $ (0.35)
Weighted average common shares
outstanding...................... 61,042
OPERATING DATA:
Approximate number of subscribers
at end of year................... 1,297,000
Number of MindSpring employees at
end of year...................... 2,051
EBITDA (1)......................... 35,830 15
---------- ---
CASH FLOW DATA:
Cash Flow (used in) from
operations....................... 54,416
Cash flow (used in) from investing
activities....................... (269,479)
Cash flow (used in) from financing
activities....................... 434,153
</TABLE>
- ----------------------------------
(1) EBITDA represents operating income (loss) plus depreciation and
amortization. EBITDA is provided because it is a measure commonly used by
investors to analyze and compare companies on the basis of operating
performance. EBITDA is not a measurement of financial performance under
generally accepted accounting principles and should not be construed as a
substitute for operating income, net income or cash flows from operating
activities for purposes of analyzing MindSpring's operating performance,
financial position and cash flows. EBITDA is not necessarily comparable with
similarly titled measures for other companies.
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NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUE. Revenues for the nine months ended September 30, 1999 totaled
approximately $235,468,000 as compared to approximately $75,139,000 for the nine
months ended September 30, 1998. This approximately 213% increase in period
revenues resulted primarily from a 185% increase in total subscribers. The
increase in subscribers is due to the acquisition of the NETCOM subscribers in
February 1999, the acquisition of Spry subscribers in October 1998 and organic
growth. Revenues from dial-up access to the Internet, which include start-up
fees and advertising revenues, represented approximately 84% of total revenue
for the nine months ended September 30, 1999 compared to 86% for the nine months
ended September 30, 1998. Business services revenue, consisting primarily of
Web-hosting and dedicated Internet access, grew to 16% of total revenue for the
nine months ended September 30, 1999 from 14% for the nine months ended
September 30, 1998. This increase in business service revenue as a percentage of
total revenue for the nine months ended September 30, 1999 as compared to the
nine months ended September 30, 1998 can be attributed to the growth in our
business services customer base.
COSTS OF REVENUES. For the nine months ended September 30, 1999, cost of
revenues increased to approximately 33% of total revenue, compared to
approximately 30% of total revenue for the nine months ended September 30, 1998.
Cost of revenues increased as a percentage of total revenues as a result of a
greater percentage of our subscribers being served through the use of third
party networks rather than MindSpring POPs due to the Spry and NETCOM
acquisitions. Cost of revenues for subscribers being serviced by MindSpring
POP's does not include depreciation for these POPs and other related equipment.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses were approximately 52% of revenue for the nine months
ended September 30, 1999, compared to approximately 49% of revenue for the nine
months ended September 30, 1998. This increase was due to sales and marketing
costs increasing to 20% of revenue for the nine months ended September 30, 1999
from 15% for the nine months ended September 30, 1999. Selling costs increased
due primarily to higher advertising expenditures related to MindSpring's
accelerated growth program initiated in September 1999 offset by general and
administrative costs declining to 32% of revenue for the nine months ended
September 30, 1999 from 34% for the nine months ended September 30, 1998.
General and administrative costs decreased due to efficiencies gained primarily
through economies of scale.
EBITDA MARGIN. EBITDA margin refers to EBITDA as a percentage of revenues.
EBITDA margin decreased to 15% of revenues for the nine months ended
September 30, 1999 from 21% of revenues for the nine months ended September 30,
1998. This decrease is primarily attributable to the increased sales and
marketing expenditures and to costs of revenue being relatively higher in 1999.
DEPRECIATION AND AMORTIZATION. Customer base amortization expense increased
significantly from 5% of revenues for the nine months ended September 30, 1998
to 26% for the nine months ended September 30, 1999 due to the acquisitions of
the Spry and NETCOM customer bases, which are being amortized over three years.
Depreciation expense decreased from 8% of revenues for the nine months ended
September 30, 1998 to 6% of revenues for the nine months ended September 30,
1999 due to a smaller percentage of our subscriber base being served by the
company-owned network.
INTEREST INCOME, NET. Interest income (expense), net was approximately
$3,463,000 for the nine months ended September 30, 1999 compared to
approximately $590,000 for the nine months ended September 30, 1998. This
increase in interest income (expense), net for the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998 was
primarily due to interest income increasing as a result of the increase in cash
available for investment purposes, net of interest expense increasing, resulting
from equity offerings in December 1998 and April 1999 and a convertible debt
offering completed in April 1999. The offerings raised net proceeds of
approximately
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$562 million from which we repaid $80 million outstanding under a secured credit
facility. Interest expense includes interest on our 5% Convertible Subordinated
Notes due 2006 and fees related to our unused credit facility as well as
amortization of deferred financing costs incurred in conjunction with both.
INCOME TAX BENEFIT (PROVISION). For the nine months ended September 30,
1999, MindSpring recorded an income tax benefit of $13,565,000 for an effective
tax rate of 39%, compared to an income tax provision of $212,000, for an
effective tax rate of 3% for the nine months ended September 30, 1998.
NET (LOSS) INCOME AND (LOSS) INCOME PER SHARE. As discussed above, and
primarily as a result of the increase in sales and marketing expenditures and in
acquired customer base amortization, MindSpring had a net loss for the nine
months ended September 30, 1999 of ($21,219,000) or $(0.35) per basic and
diluted share. MindSpring's net income for the nine months ended September 30,
1998 was $6,866,000 or $0.13 per diluted share. Excluding tax-effected customer
based amortization expense, MindSpring recorded earnings of $15,591,000 or $0.24
per diluted share ("EPS+A") for the nine months ended September 30, 1999 and
earnings of $9,030,000 or $0.18 per diluted share for the nine months ended
September 30, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenue for the year ended December 31, 1998 totaled
approximately $114.7 million, as compared to approximately $52.6 million for the
year ended December 31, 1997. This approximately 118% increase in period
revenues resulted primarily from an approximately 150% increase in subscribers.
The greater proportional increase in subscribers was principally due to the
acquisition of Spry subscribers from AOL during the fourth quarter of 1998.
Revenues from dial-up access to the Internet for the year ended December 31,
1998 represented approximately 87% of the revenue, compared to approximately 85%
for the year ended December 31, 1997. Business services revenue decreased as a
percentage of revenue to approximately 13% for the year ended December 31, 1998,
compared to approximately 15% for the year ended December 31, 1997. This
decrease is primarily attributable to the large amount of dial-up customers
added through acquisitions in 1998.
COST OF REVENUES. For the year ended December 31, 1998, cost of revenues
decreased to approximately 30% of total revenue, compared to approximately 32%
of total revenue for the year ended December 31, 1997. Cost of revenues also
decreased as a percentage of dial-up access revenue to approximately 34% for the
year ended December 31, 1998 from approximately 38% for the year ended
December 31, 1997. Not taking into account approximately $2 million in discounts
we received in 1998 under our network services agreement with PSINet, Inc., cost
of revenues would have been approximately 34% of total dial-up access revenue.
Not taking into account approximately $2.1 million in discounts we received in
1997 under the network services agreement with PSINet, Inc., cost of
revenues-recurring would have been approximately 43% of total dial-up access
revenue. The discounts earned under the network services agreement with PSINet
ended in October 1998. This decrease of cost of revenues as a percentage of
total revenue and as a percentage of dial-up access revenue resulted primarily
from increased efficiency and reduced network costs associated with MindSpring-
owned POPs.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses were approximately 50% of revenue for the year ended
December 31, 1998, compared to approximately 59% of revenue for the year ended
December 31, 1997. The decrease in selling, general, and administrative expenses
as a percentage of revenue resulted from economies of scale with respect to
costs such as payroll that do not increase in direct proportion to increases in
revenue and from cost control efforts implemented by MindSpring's management.
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EBITDA MARGIN. EBITDA margin refers to EBITDA as a percentage of revenues.
EBITDA margin increased to approximately 20% for the year ended December 31,
1998, compared to 9% for the year ended December 31, 1997. The increase is
attributable to the significant revenue growth outpacing the related cost
increases principally as a result of economies of scale related to selling,
general, and administrative expenses as well as efficiencies and economies of
scale associated with MindSpring-owned POPs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
decreased to approximately 13% of revenues for the year ended December 31, 1998,
compared to approximately 17% of revenues for the year ended December 31, 1997.
Amortization expense declined slightly to 6% of total revenues for the year
ended December 31, 1998, compared to approximately 8% for the year ended
December 31, 1997. Amortization expense resulted solely from acquired subscriber
bases, which are being amortized over three years. Depreciation expense was
approximately 7% of total revenues for the year ended December 31, 1998,
compared to approximately 9% for the year ended December 31, 1997. The decrease
in depreciation expense as a percentage of total revenues resulted from adding
capacity through increased use of network services purchased from third-party
providers, as opposed to increasing capacity by building additional
MindSpring-owned POPs, and from reductions in the cost of new equipment and
improved operating efficiencies within MindSpring's network. MindSpring
anticipates amortization expense to increase as a percentage of revenues as a
result of the Spry and NETCOM acquisitions.
INTEREST INCOME (EXPENSE). The following table details the increase in
interest income in 1998 compared to 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Interest on capital leases............................ $ (754,000) $(473,000)
Interest on PSINet notes.............................. (136,000) (276,000)
Interest income--other................................ 2,104,000 411,000
---------- ---------
Interest income (expense) net......................... $1,214,000 $(338,000)
========== =========
</TABLE>
Interest on capital leases increased for the year ended December 31, 1998,
compared to the year ended December 31, 1997, because MindSpring entered into
several new capital leases for equipment at the end of 1997. Interest income
increased in 1998 due to the increase in outstanding cash balances available for
investment as a result of positive operating cash flows and two public equity
offerings completed during the year. See "--Liquidity and Capital Resources".
INCOME TAX PROVISION. For the year ended December 31, 1998 MindSpring
recorded a benefit for income taxes due to a one time benefit taken in the
fourth quarter of the year as a result of the removal of the valuation allowance
associated with MindSpring's deferred tax assets. MindSpring is continually
assessing its income tax situation and management believes that it is "more
likely than not" that the deferred tax assets will be realized in the future. In
the future, MindSpring expects to report taxable earnings, even though we expect
to be incurring net losses at the same time. This is principally due to the
requirement that, for tax purposes, subscriber acquisition costs must be
amortized over 15 years, compared to the three-year period applied for
accounting purposes. For the year ended December 31, 1997, no income tax benefit
was recognized as MindSpring had a net taxable loss for the year.
NET INCOME (LOSS) AND INCOME (LOSS) PER SHARE. As a result of the factors
discussed above, MindSpring's net income for the year ended December 31, 1998
was $10.5 million, or $0.21 income per diluted share, compared to a net loss of
$4.1 million, or $0.09 basic and diluted loss per share, for the year ended
December 31, 1997.
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues for the year ended December 31, 1997 totaled
approximately $52.6 million, as compared to approximately $18.1 million for the
year ended December 31, 1996. The approximately 190% increase in revenues
resulted primarily from an approximately 129% increase in subscribers. Revenues
increased in a greater proportion than subscribers due to the subscribers
acquired from PSINet Inc. during the fourth quarter of 1996. Revenues from
dial-up access to the Internet for the year ended December 31, 1997 represented
approximately 85% of the revenue, compared to approximately 87% for the year
ended December 31, 1996. Business services revenue increased slightly to
approximately 15% of revenues for the year ended December 31, 1997, compared to
approximately 13% for the year ended December 31, 1996. This increase is
primarily attributable to the increase in the number of MindSpring's Web hosting
customers.
COST OF REVENUES. For the year ended December 31, 1997, cost of revenues
decreased to approximately 32% of total revenues, compared to approximately 45%
of total revenues for the year ended December 31, 1996. Cost of revenues also
decreased as a percentage of dial-up access revenue from approximately 52% for
the year ended December 31, 1996 to approximately 38% for the year ended
December 31, 1997. Not taking into account approximately $2.1 million in
discounts we received in 1997 under the PSINet Services Agreement, cost of
revenues would have been approximately 43% of total dial-up revenue for the year
ended December 31, 1997, compared to approximately 52% for the year ended
December 31, 1996. This decrease in cost of revenues as a percentage of total
revenues and as a percentage of dial-up access revenues resulted primarily from
increased efficiency and reduced network costs associated with MindSpring-owned
POPs.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses were approximately 59% of revenues for the year ended
December 31, 1997, compared to approximately 78% of revenues for the year ended
December 31, 1996. The decrease in selling, general, and administrative expenses
as a percentage of revenues resulted from economies of scale with respect to
costs such as payroll that do not increase in direct proportion to increases in
revenue and to cost control efforts implemented by MindSpring's management.
EBITDA MARGIN. EBITDA margin increased to approximately 9% for the year
ended December 31, 1997, compared to (23)% for the year ended December 31, 1996.
The increase is attributable to the significant revenue growth outpacing the
related cost increases principally as a result of economies of scale related to
selling, general, and administrative expenses, as well as efficiencies and
economies of scale associated with MindSpring-owned POPs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
decreased to approximately 16% of revenues for the year ended December 31, 1997,
compared to approximately 18% of revenues for the year ended December 31, 1996.
Amortization expense remained steady at approximately 8% of revenue for both the
years ended December 31, 1997 and December 31, 1996. Amortization expense
resulted primarily from acquired customer bases which are being amortized over
three years. Depreciation expense was approximately 8% of total revenues for the
year ended December 31, 1997, compared to approximately 10% for the year ended
December 31, 1996. The decrease in depreciation expense as a percentage of total
revenues resulted from adding capacity through increased use of network services
purchased from third-party providers, as opposed to increasing capacity by
building additional MindSpring-owned POPs, and from reductions in cost of new
equipment and improved operating efficiencies within MindSpring's network.
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<PAGE>
INTEREST INCOME (EXPENSE). The following table details the increase in
interest expense in 1997 compared to 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Interest on capital leases............................ $(473,000) $ (91,000)
Interest on PSINet notes.............................. (276,000) (324,000)
Interest income--other................................ 411,000 325,000
--------- ---------
Interest expense, net................................. $(338,000) $ (90,000)
========= =========
</TABLE>
Interest on capital leases increased for the year ended December 31, 1997,
compared to the year ended December 31, 1996, because MindSpring entered into
several new capital leases for equipment. Interest income increased in 1997 due
to the increase in outstanding cash balances available for investment as a
result of positive operating cash flows.
INCOME TAX PROVISION. For the years ended December 31, 1997 and 1996, no
income tax benefit was recognized because MindSpring had a net taxable loss for
the year.
NET INCOME (LOSS) AND INCOME (LOSS) PER SHARE. As a result of the factors
discussed above, MindSpring's net loss for the year ended December 31, 1997 was
$4.1 million, or $(0.09) basic and diluted loss per share, compared to a net
loss of $7.6 million, or $(0.24) basic and diluted loss per share, for the year
ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, MindSpring generated net cash
from operations of approximately $54.4 million, compared to $18.3 million for
the nine months ended September 30, 1998, an increase of approximately 197%.
During the first nine months of 1999, we spent a total of approximately
$43.2 million primarily related to purchases of telecommunications equipment
necessary for the provision of service to subscribers. We did not enter into any
capital lease agreements in the first nine months of 1999. On February 17, 1999,
we paid $215 million in cash to ICG in connection with the closing of the NETCOM
acquisition, approximately $80 million of which we borrowed under our
$100 million secured revolving credit facility, which we repaid as discussed
below, and the remainder from our available cash.
As of September 30, 1999, we had approximately $386.8 million of cash. In
March 1999, we filed a universal shelf registration statement with the
Securities and Exchange Commission for the public offering from time to time of
up to $800 million of debt and equity securities. In April 1999, we completed
two public offerings of securities under this shelf registration statement. We
sold 5,520,000 shares of our common stock raising net proceeds of approximately
$263.2 million, from which we repaid approximately $80 million of principal and
interest outstanding under our secured credit facility. We also sold
$179,975,000 aggregate principal amount of our 5% Convertible Subordinated Notes
due 2006, raising net proceeds of approximately $174.1 million. Net of expenses
and repayment of debt, MindSpring raised an aggregate of approximately
$357.3 million in these offerings.
MindSpring's future capital requirements depend on various factors
including, without limitation:
- the rate of market acceptance of MindSpring's services;
- our ability to maintain and expand our subscriber base;
- the rate of expansion of MindSpring's network infrastructure;
- the resources required to expand our marketing and sales efforts; and
- the availability of hardware and software provided by third party vendors.
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If the merger of MindSpring and EarthLink is consummated, the holders of
MindSpring's 5% Convertible Subordinated Notes due 2006 will have the option to
require the new company to repurchase the notes. Pursuant to the merger
agreement between MindSpring and EarthLink, the repurchase price for the notes
will be paid in cash at a repurchase price of 100% of the principal amount plus
accrued interest to the date of repurchase.
We currently estimate that our cash and financing needs for the remainder of
1999 and 2000 can be met by cash on hand, amounts available under our credit
facility, additional capital financing arrangements, and cash flow from
operations. If our credit facility is unavailable or if our expectations change
regarding our capital needs due to market conditions, strategic opportunities or
otherwise, then our capital requirements may vary materially from those
currently anticipated. We do not currently have any commitments for any
additional financing, and there can be no assurance that if and when we need
additional capital it will be available on terms that are acceptable to us, if
at all. If additional capital financing arrangements, including public or
private sales of debt or equity securities, or additional borrowings from
commercial banks are insufficient or unavailable, or if we experience shortfalls
in anticipated revenues or increases in anticipated expenses, we will be
required to modify our growth and operating plans to match available funding.
Any additional equity financing may be on terms that are dilutive or potentially
dilutive to MindSpring's stockholders. Debt financing, if available, may involve
restrictive covenants with respect to dividends, raising future capital and
other financial and operational matters and incurring additional debt may
further limit MindSpring's ability to raise additional capital. In addition, our
credit facility contains restrictions on our ability to incur additional debt
and to issue some types of convertible or redeemable capital stock.
MindSpring frequently engages in discussions involving potential business
combinations. Depending on the circumstances, MindSpring may not disclose
material transactions until completion of a definitive agreement. MindSpring may
determine to raise additional debt or equity capital to finance potential
acquisitions and/or to fund accelerated growth. Any significant acquisitions or
increases in MindSpring's growth rate could materially affect MindSpring's
operating and financial expectations and results, liquidity and capital
resources.
YEAR 2000
INTRODUCTION. The term "Year 2000 issue" is a general term used to describe
the various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from dates in the "1900's." These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.
STATE OF READINESS. We have established a Year 2000 program office to
coordinate appropriate activity and report to the Board of Directors on a
continuing basis with regard to the Year 2000 issue. Our Year 2000 program
office has developed and implemented a comprehensive Year 2000 program for us to
become Year 2000 ready. The Year 2000 program consists of six phases:
(1) project planning and inventory of our assets, (2) assessment of remediation
requirements, (3) remediation (whether by upgrade or replacement), (4) testing
and validation of selected critical assets, (5) implementation and (6) creation
of contingency plans in the event of year 2000 failures.
The Year 2000 program covers the following: (1) internally developed
software products which we provide to our customers, (2) our information
technology systems, (3) our network elements, (4) our operational support
systems, and (5) certain non-information technology systems, including embedded
technology. In addition, the program calls for us to identify and assess the
systems and services of our third party suppliers, such as major vendors, third
party network service providers and other material
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service providers, and take appropriate remedial actions and develop contingency
plans where appropriate in connection with such third party suppliers.
We provide our customers with a software package which, among other things,
allows our customers to access our services. The software package consists of
internally developed software (e.g., the MindSpring Internet software) which is
bundled with third party software. We have conducted operational testing and
believe that the current shipping version of the MindSpring Internet software is
Year 2000 ready. In addition, we have completed the inventory, assessment,
remediation and testing and validation phases of the Year 2000 program. We have
not and do not intend to test our USENET news service which is heavily dependent
on external news feeds.
We have performed a technical review of many of the more critical third
party systems and have surveyed the publicly available statements issued by the
vendors of those systems, in an effort to assess their Year 2000 readiness
status. Additionally, we have contacted our significant providers of third party
systems requesting information regarding their vulnerability to Year 2000 issues
and whether the products and services purchased from those entities are Year
2000 ready. We are evaluating these responses for their accuracy and adequacy,
and are continuously updating appropriate contingency plans for any material
supplier that does not provide an adequate response.
We have not deferred any specific information technology project due to the
Year 2000 program. We engaged a consulting firm to assist us in completing the
inventory, assessment and testing phases of our Year 2000 program, and to assist
us in our Year 2000 program management.
COSTS. We have incurred expenses of approximately $600,000 in connection
with the implementation of the Year 2000 Program Office and Year 2000 program.
These costs were expensed as incurred. We estimate that we will incur minimal
expenses through the remainder of the Year 2000 program. The costs and estimates
provided include our estimate of the cost of internal resources directly
attributable to the Year 2000 program. We have funded, and anticipate that we
will continue funding, the costs of the Year 2000 program from cash flows. The
estimates for the costs of the Year 2000 program are based upon management's
best estimates and may be updated or revised as additional information becomes
available. We currently believe these costs will not have a material effect on
our financial condition, liquidity or results of operations.
RISKS. Our failure to correct a material Year 2000 problem could result in
an interruption in, or a failure of, normal business activities or operations.
Presently, however, we perceive that our most reasonably likely worst case
scenario related to the Year 2000 is associated with potential concerns with
third party services or products.
Specifically, we are heavily dependent on a significant number of third
party vendors to provide both network services and equipment. A significant Year
2000-related disruption of the network services or equipment provided to us by
third party vendors could cause customers to consider seeking alternate
providers or cause an unmanageable burden on customer service and technical
support, which in turn could materially and adversely affect our results of
operations, liquidity and financial condition. We are not presently aware of any
vendor related Year 2000 issue that is likely to result in this type of
disruption.
Furthermore, our business depends on the continued operation of, and
widespread access to, the Internet. To the extent that the normal operation of
the Internet is disrupted by the Year 2000 issue, our results of operations,
liquidity and financial condition could be materially and adversely affected.
CONTINGENCY PLANS. We developed contingency plans for our primary business
operations. We will continue to monitor our third party suppliers and will
adjust any appropriate contingency plans accordingly.
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The estimates and conclusions included in this discussion contain
forward-looking statements and are based on management's best estimates of
future events. Our expectations about risks, future costs and the timely
completion of its Year 2000 modifications may turn out to be incorrect and any
variance from these expectations could cause actual results to differ materially
from what has been discussed above. Factors that could influence risks, amount
of future costs and the effective timing of remediation efforts include our
success in identifying and correcting potential Year 2000 issues and the ability
of third parties to appropriately address their Year 2000 issues. The foregoing
Year 2000 discussion and the information contained herein is provided as a "Year
2000 Readiness Disclosure" as defined in the Year 2000 Information and Readiness
Disclosure Act of 1998 (Public Law 105-271, 112 Stat. 2386) enacted on
October 19, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued Statement No 133, Accounting for Derivative Instruments
and Hedging Activities, which must be adopted by the year 2000. In June 1999,
the FASB issued Statement No. 137, Accounting for Derivative Instruments and
Hedging Activities- Amendment of thE Effective Date of FASB No. 133, which
amends Statement No. 133 to be effective for all fiscal quarters and for all
fiscal years beginning after June 15, 2000 (that is, January 1, 2001 for
companies with calendar-year fiscal years). This statement establishes
accounting and reporting standards for derivative instruments-including certain
derivative instruments embedded in other contracts--and for hedging activities.
Adoption of this statement is not expected to have a material impact on
MindSpring's financial statements.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid during the periods
indicated to the Chief Executive Officer of MindSpring and to each of the four
other most highly compensated executive officers of MindSpring during the fiscal
year ended December 31, 1998. Such executive officers are referred to as the
MindSpring Named Executive Officers. All common stock numbers and per share
amounts set forth below give effect to a 3-for-1 stock split effected by
MindSpring in July 1998 and a 2-for-1 stock split effected by MindSpring in
June 1999.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL ---------------
COMPENSATION SECURITIES
------------ UNDERLYING
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS (1) OPTIONS (1)
- ---------------------------- -------- ------------ --------- ---------------
<S> <C> <C> <C> <C>
Charles M. Brewer (2)......................... 1998 $163,750 $107,032 35,682
Chairman and Chief Executive Officer 1997 150,000 65,550 14,628
1996 84,000 20,000 --
Michael S. McQuary (3)........................ 1998 $136,458 $ 71,355 34,734
President and Chief Operating Officer 1997 125,000 43,700 14,628
1996 84,000 36,035 232,476
Michael G. Misikoff (4)....................... 1998 $114,625 $ 37,461 --
Executive Vice President, Chief Financial 1997 105,000 22,943 6,144
Officer, Secretary and Treasurer 1996 84,000 6,300 --
James T. Markle (5)........................... 1998 $104,800 $ 41,100 5,000
Executive Vice President 1997 96,000 20,976 5,616
1996 96,000 6,030 --
Gregory J. Stromberg (6)...................... 1998 $ 91,700 $ 35,963 26,696
Executive Vice President 1997 82,250 18,354 4,920
1996 62,500 6,150 12,000
</TABLE>
- ------------------------
(1) A portion of the bonuses paid to MindSpring Named Executive Officers may be
paid or awarded in the first quarter of the fiscal year following the year
in which the bonus was earned.
(2) Mr. Brewer was granted options to purchase 35,682 shares of MindSpring's
common stock in January 1999 for services performed in 1998 and options to
purchase 14,628 shares of MindSpring's common stock in January 1998 for
services performed in 1997.
(3) Mr. McQuary was granted options to purchase 34,734 shares of MindSpring's
common stock in January 1999 for services performed in 1998, options to
purchase 14,628 shares of MindSpring's common stock in January 1998 for
services performed in 1997 and options to purchase 77,427 shares of
MindSpring's common stock in February 1997 for services performed in 1996.
(4) Mr. Misikoff was granted options to purchase 6,144 shares of MindSpring's
common stock in January 1998 for services performed in 1997. Mr. Misikoff
resigned his positions as director and executive officer of MindSpring
effective February 19, 1999.
(5) Mr. Markle was granted options to purchase 5,616 shares of MindSpring's
common stock in January 1998 for services performed in 1997. Mr. Markle
resigned his position as executive officer of MindSpring effective
February 28, 1999.
(6) Mr. Stromberg was granted options to purchase a total of 26,696 shares of
MindSpring's common stock in December 1998 and February 1999 for services
performed in 1998 and options to purchase 4,920 shares of MindSpring's
common stock in January 1998 for services performed in 1997.
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STOCK OPTION GRANTS IN FISCAL YEAR 1998
The following table sets forth information with respect to grants of stock
options to each of the MindSpring Named Executive Officers during the year ended
December 31, 1998. All such grants were made under MindSpring's 1995 Stock
Option Plan. All common stock numbers and per share amounts set forth below give
effect to a 3-for-1 stock split effected by MindSpring in July 1998 and a
2-for-1 stock split effected by MindSpring in June 1999.
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED
UNDERLYING TO
OPTIONS EMPLOYEES
GRANTED IN FISCAL EXERCISE EXPIRATION
NAME (1) YEAR PRICE GRANT DATE DATE 5% 10%
- ---- ---------- ---------- -------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles M. Brewer................... 14,628 .8% $5.47 1/27/98 1/27/08 $50,321 $127,524
Michael S. McQuary.................. 14,628 .8% 5.47 1/27/98 1/27/08 50,321 127,524
Michael G. Misikoff................. 6,144 .4% 5.47 1/27/98 1/27/08 21,136 53,562
James T. Markle..................... 5,616 .3% 5.47 1/27/98 1/27/08 19,319 48,959
5,000 .3% 30.35 12/18/98 12/18/08 95,419 241,811
Gregory J. Stromberg................ 4,920 .3% 5.47 1/27/98 1/27/08 16,925 42,891
5,000 .3% 30.35 12/18/98 12/18/08 95,419 241,811
</TABLE>
- ------------------------
(1) All options represent shares of MindSpring common stock. These options
become exercisable as follows: (i) 50% of the options become exercisable two
years after the date of grant, (ii) an additional 25% of the options become
exercisable three years after the date of grant, and (iii) the remaining 25%
of the options become exercisable four years after the date of grant.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information with respect to the MindSpring
Named Executive Officers concerning the exercise of options during the fiscal
year ended December 31, 1998, the number of securities underlying unexercised
options at 1998 year-end and the year-end value of all unexercised in-the-money
options held by such individuals. All common stock numbers and per share amounts
set forth below give effect to a 3-for-1 stock split effected by MindSpring in
July 1998 and a 2-for-1 stock split effected by MindSpring in June 1999.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT
OPTIONS AT DECEMBER 31,
SHARES DECEMBER 31, 1998 1998(2)(3)
ACQUIRED ON VALUE ----------------- ------------
EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ----------- ----------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Charles M. Brewer........ -- -- -- 14,628 -- $ 446,615
Michael S. McQuary....... 25,000 $ 203,913 294,912 247,074 $8,847,633 7,225,694
Michael G. Misikoff...... 77,474 1,323,450 -- 83,614 -- 2,511,119
James T. Markle.......... 13,800 330,801 102,402 49,352 3,115,719 1,320,279
Gregory J. Stromberg..... 25,000 425,125 28,980 32,914 862,685 807,720
</TABLE>
- ------------------------
(1) Represents the difference between the exercise price and the closing price
of MindSpring common stock on the Nasdaq National Market upon the date of
exercise.
(2) Represents the difference between the exercise price and the closing price
of MindSpring common stock on the Nasdaq National Market at December 31,
1998.
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(3) Based on a per share price of $30.532 on December 31, 1998.
DIRECTOR COMPENSATION
Since MindSpring's inception, members of its board of directors have not
received any compensation for their service on the board of directors except
pursuant to MindSpring's Directors Stock Option Plan. Under the Directors Plan,
420,000 shares of common stock are authorized for issuance to non-employee
directors, in the form of grants of 60,000 options per director, upon their
initial election or appointment to the board, or, in the case of
Messrs. Lanier, Scott and Gabbard, who joined the board prior to the creation of
the Directors Plan, upon the adoption of the Directors Plan by the board.
Options are exercisable at the fair market value of the common stock, as
determined by the board, on the date of grant. The Directors Plan was amended in
1998 to provide for discretionary option grants. Upon adoption of this
amendment, each of Messrs. Lanier, Scott and Gabbard received a grant of 30,000
options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee for the year ended December 31,
1998 were Messrs. Gabbard, Lanier and Scott.
ITC Holding Company, Inc. beneficially owned approximately 18.5% of the
outstanding capital stock of MindSpring as of December 31, 1998 and owned
approximately 16.7% of MindSpring as of November 30, 1999. Both Messrs. Lanier
and Scott have served since at least 1998 as executive officers and directors of
ITC Holding. Mr. Gabbard has also served since at least 1998 as a director of
ITC Holding. As of December 31, 1998 and October 5, 1999, Messrs. Lanier, Scott
and Gabbard owned approximately 18%, less than 1.0% and less than 1.0%,
respectively, of the common stock of ITC Holding. As of December 31, 1998 and
October 5, 1999, Mr. Brewer owned less than 1.0% of the common stock of ITC
Holding.
MindSpring has entered into certain business relationships with subsidiaries
and affiliates of ITC Holding. MindSpring leases T-1 telecommunications lines
for data transport for some of its points of presence and purchases long
distance telephone services, maintenance and installation services and wide area
network transport service from ITC^DeltaCom, which until October 20, 1997 was
owned by ITC Holding and is now owned by substantially the same stockholders as
ITC Holding. MindSpring paid ITC^DeltaCom approximately $254,000 per month in
1998 and approximately $975,000 per month in 1999 for these services.
MindSpring leases telephone lines from, and has contracts for maintenance
and installation with, Interstate Telephone Company, Inc., a wholly owned
subsidiary of ITC Holding. MindSpring paid Interstate Telephone approximately
$18,000 per month in 1998 and approximately $50,000 per month in 1999 for these
leased telephone lines.
MindSpring also provides high-speed cable modem Internet access through an
agreement with KNOLOGY Holdings, Inc., an affiliate of ITC Holding. MindSpring
pays KNOLOGY approximately $80,000 per year for these services.
CERTAIN RELATIONSHIPS AND INSIDERS TRANSACTIONS
MindSpring has adopted a policy requiring that any material transactions
between MindSpring and persons or entities affiliated with officers, directors
or principal stockholders of MindSpring be on terms no less favorable to
MindSpring than reasonably could have been obtained in arms' length transactions
with independent third parties.
For a summary of certain transactions and relationships among MindSpring and
its associated entities, and among the directors, executive officers and
stockholders of MindSpring and its associated entities, see "--Compensation
Committee Interlocks and Insider Participation."
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INFORMATION ABOUT WWW HOLDINGS
WWW Holdings is a newly formed Delaware corporation that has not, to date,
conducted any activities other than those incident to its formation, its
execution of the reorganization agreement and related agreements, and its
participation in the preparation of this joint proxy statement/prospectus. The
financial statements of WWW Holdings are omitted because WWW Holdings has
nominal assets, no liabilities as well as no operations to date. There are also
no contingent assets or liabilities.
As a result of the mergers of EarthLink and MindSpring into WWW Holdings,
the business of WWW Holdings will be the businesses currently conducted by
EarthLink and MindSpring. As a result of the reorganization, WWW Holdings will
change its name to EarthLink, Inc., its headquarters will be at 1430 West
Peachtree Street, N.W., Suite 400, Atlanta, Georgia 30309 and its telephone
number at that address will be (404) 815-0770.
DESCRIPTION OF WWW HOLDINGS CAPITAL STOCK
GENERAL
The following is a summary of the characteristics of WWW Holdings' capital
stock.
Presently the authorized capital stock of WWW Holdings consists of 10,000
shares of WWW Holdings common stock. There are 10 shares of WWW Holdings common
stock outstanding, all of which are owned by the incorporator of WWW Holdings.
These shares will be canceled in the merger of EarthLink into WWW Holdings. No
shares of WWW Holdings preferred stock are outstanding. At or before the
effective time of the merger of EarthLink into WWW Holdings, WWW Holdings will
amend and restate its certificate of incorporation, which amendment and
restatement will, among other things, authorize 300 million shares of common
stock and 100,000,000 shares of preferred stock. The description below assumes
that the certificate of incorporation has been amended and restated.
Based on December 20, 1999 data and assuming that Apple's $200 million
investment in EarthLink had occurred on December 20, 1999, immediately following
the effective time of the mergers of EarthLink and MindSpring into WWW Holdings,
former holders of EarthLink common stock and EarthLink preferred stock
collectively will hold approximately 53.3% of the outstanding shares of WWW
Holdings common stock on a fully diluted basis; and former holders of MindSpring
common stock collectively will hold approximately 46.7% of the outstanding
shares of WWW Holdings common stock on a fully diluted basis.
COMMON STOCK
Each share of WWW Holdings common stock entitles its holder to one vote on
all matters required or permitted to be voted on by WWW Holdings. The terms of
the WWW Holdings common stock do not contain any conversion or redemption rights
or rights to subscribe for more securities of WWW Holdings. Holders of WWW
Holdings common stock have no right to cumulate votes in the election of
directors. Holders of WWW Holdings common stock are entitled to receive
dividends if declared by the WWW Holdings board of directors out of funds
legally available for distribution. Upon the liquidation of WWW Holdings, WWW
Holdings common stockholders will be entitled, subject to the rights of the
holders of any outstanding WWW Holdings preferred stock, to receive pro rata all
assets, if any, of WWW Holdings available for distribution after the payment of
expenses and all prior claims.
WWW Holdings will apply to have its common stock listed on The Nasdaq
National Market under the trading symbol "ELNK."
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WWW HOLDINGS PREFERRED STOCK IN GENERAL
The preferred stock of WWW Holdings may be issued in one or more series, and
the WWW Holdings board of directors, acting without the approval of the
stockholders, is authorized to fix the dividend rights and terms, redemption
rights and terms, liquidation preferences, conversion rights, voting rights and
sinking fund provisions applicable to any series of preferred stock.
WWW HOLDINGS SERIES A CONVERTIBLE PREFERRED STOCK
Prior to the consummation of the merger of EarthLink into WWW Holdings, the
WWW Holdings board of directors will create a series A convertible preferred
stock, with the same terms and conditions as the EarthLink series A convertible
preferred stock. The material terms and conditions of the WWW Holdings series A
convertible preferred stock are as follows:
GENERAL; DIVIDEND RIGHTS
Sprint will own all of the issued and outstanding shares of WWW Holdings
series A preferred stock and we may originally issue shares of series A
preferred only to Sprint. The series A preferred stockholders are entitled to
receive dividends at a rate per annum of 3% of the liquidation value of their
shares, which is used to determine the cash dividends that the series A
preferred stockholders are entitled to receive, the number of shares of common
stock into which the series A preferred stock may be converted and the amount of
money the series A preferred stockholder will be entitled to receive if the
series A preferred stock is redeemed or WWW Holdings is liquidated, which
dividends will be compounded quarterly. For a period of five years from the
initial issuance date of the series A preferred stock, these dividends are
payable "in kind" by way of an increase in the liquidation value of the shares
and after the end of the five year period are payable in cash. Moreover, upon
WWW Holdings' optional redemption of the series A preferred stock or the
consummation of a merger, share exchange or other extraordinary business
combination during the initial five year period, the holders of the series A
preferred stock will be entitled to receive an accelerated "in kind" dividend
for the entire initial five year period. Beginning on the sixth year after the
initial issuance date of the series A preferred stock, holders of series A
preferred stock will be entitled to receive cumulative quarterly cash dividends
of 3% annually. Beginning on the twenty-first year after the initial issuance
date of the series A preferred stock, holders of the series A preferred stock
will be entitled to cumulative quarterly cash dividends of 8% of the liquidation
value per share, increasing annually to a maximum rate of 12%.
LIQUIDATION RIGHTS
The holders of WWW Holdings series A preferred stock will receive, prior to
any payment or distribution in respect of other shares of WWW Holdings' capital
stock, an amount per share equal to the average market value of the WWW
Holdings' common stock measured over the thirty day period ending on the initial
issuance date of the series A preferred stock, plus all accrued and unpaid
dividends on the shares, whether in cash or in kind.
CONVERSION RIGHTS
Beginning on the first anniversary of the initial issuance date of the
series A preferred stock, each share of WWW Holdings series A preferred stock is
convertible into the number of shares of common stock as is determined by
dividing the liquidation value of the shares by a number equal to the average
market value of the WWW Holdings stock measured by the thirty day period ending
on the initial issuance date of the series A preferred stock multiplied by
116.118%. After a period of five years from the initial issuance of the
series A preferred stock, the number by which the liquidation value is divided
will be increased annually by 6%, accruing quarterly. That number is also
subject to adjustment based on changes in capitalization of the WWW Holdings
common stock such as stock splits, stock dividends
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and the like. Although conversion of the series A preferred stock is at the
holder's option, conversion is required in the event WWW Holdings consummates a
merger, share exchange or other extraordinary business combination.
OPTIONAL REDEMPTION BY WWW HOLDINGS
Beginning on the third anniversary of the initial issuance date of the WWW
Holdings series A preferred stock, WWW Holdings may elect to redeem the
outstanding shares of series A preferred stock at a redemption price per share
equal to the liquidation value of the shares of series A preferred stock
assuming the acceleration of various dividends, multiplied by a specified
percentage. The specified percentage is initially equal to 103%, and will be
reduced by 1% annually in each of the subsequent three years, after which it
will be equal to 100%.
VOTING RIGHTS
The WWW Holdings series A preferred stockholders do not possess general
voting rights. However, the WWW Holdings series A preferred stockholders are
separately entitled to elect two of WWW Holdings' directors. This right
terminates as to one of the directors if the WWW Holdings series A preferred
stockholders fail to maintain at least a 20% equity interest in WWW Holdings on
a fully diluted basis, subject to adjustment, for any three consecutive months,
and will terminate as to both of the directors if the WWW Holdings series A
preferred stockholders fail to maintain at least a 10% equity interest over the
same period. A separate vote of 66 2/3% of the then-outstanding shares of WWW
Holdings series A preferred stock is required in limited situations, including
WWW Holdings' liquidation, dissolution or winding up, or WWW Holdings' taking
specified actions that would adversely affect the rights of the holders of the
WWW Holdings series A preferred stock as a class.
WWW HOLDINGS SERIES B CONVERTIBLE PREFERRED STOCK
Prior to the consummation of the merger of EarthLink into WWW Holdings, the
WWW Holdings board of directors will create a series B convertible preferred
stock with the same terms and conditions as the EarthLink series B convertible
preferred stock. The terms and conditions of the WWW Holdings series B
convertible preferred stock will identical to the terms and conditions of the
WWW Holdings series A convertible preferred stock, except as follows:
- The WWW Holdings series B convertible preferred stock is immediately
junior to the WWW Holdings series A convertible preferred stock, but
senior to the WWW Holdings common stock and to all other classes or series
of WWW Holdings preferred stock, other than the series A convertible
preferred stock, with respect to dividends and rights upon liquidation,
winding up or dissolution.
- The series B preferred stockholders, by virtue of their status, have no
right to elect any directors of WWW Holdings.
WWW HOLDINGS SERIES C CONVERTIBLE PREFERRED STOCK
Prior to consummation of the merger of EarthLink into WWW Holdings, the WWW
Holdings board of directors will create a series C convertible preferred stock,
with the same terms and conditions as the EarthLink series C convertible
preferred stock. The material terms and conditions of the WWW Holdings series C
convertible preferred stock are as follows:
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GENERAL; DIVIDEND RIGHTS
Apple will own all of the issued and outstanding shares of WWW Holdings
series C preferred stock. The series C preferred stockholders are entitled to
receive dividends on an equal basis with the common stockholders.
LIQUIDATION RIGHTS
The holders of WWW Holdings series C preferred stock will receive, after any
payment of distribution in respect to the series A and B convertible preferred
stock of WWW Holdings, but prior to any payment or distribution in respect of
other shares of WWW Holdings' capital stock, an amount per share equal to the
price paid for the series C preferred stock, plus all accrued and unpaid
dividends on the shares, if any.
CONVERSION RIGHTS
Each holder of the series C preferred stock will have the right, after
January 4, 2001, to convert its series C preferred stock shares into common
stock. All shares of the series C preferred stock will automatically convert
into shares of common stock for the following reasons:
(a) following January 4, 2001, if the holders of more than 66 2/3% of the
series C preferred stock vote to convert all of the series C preferred
stock into common stock; or
(b) if conversion is required to consummate any merger, reorganization,
business combination or other extraordinary transaction (other than the
EarthLink-MindSpring reorganization) approved by WWW Holdings' board of
directors.
VOTING RIGHTS
The series C preferred stock will be non-voting until January 4, 2001
(except for its right to elect a member to the board of directors as discussed
below under "Board Seat"). After that, it will vote together with the common
stock, and not separately as a class.
BOARD SEAT
Following the expiration or early termination of any applicable waiting
periods under the Hart-Scott-Rodino Antitrust Improvements Act applicable to
Apple's investment, Apple has the right to name a member to WWW Holdings' board
of directors for so long as WWW Holdings is Apple's exclusive default ISP in the
setup software under the WWW Holdings-Apple Internet services agreement, Apple
holds series C preferred stock and Apple maintains a certain percentage
ownership of the WWW Holdings securities it purchased in its initial investment
in EarthLink and subsequent top-ups. The required ownership percentages are:
(a) during the first year after January 4, 2000, Apple must maintain
ownership of 100% of the securities it purchased;
(b) during the second and third years after January 4, 2000, Apple must
maintain ownership of at least 75% of the securities it purchased; and
(c) from the fourth year after January 4, 2000, Apple must maintain
ownership of at least 50% of the securities it purchased.
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COMPARISON OF STOCKHOLDERS' RIGHTS
Each of EarthLink, MindSpring and WWW Holdings is a Delaware corporation
subject to the provisions of Delaware law. Because each of EarthLink, MindSpring
and WWW Holdings is a Delaware corporation, the stockholders of each corporation
are treated the same under Delaware law. However, because of different
provisions in the companies' certificates of incorporation and bylaws, the
rights of the stockholders of the companies will differ in some instances.
Set forth below are comparisons between the rights of EarthLink
stockholders, MindSpring stockholders and WWW Holdings stockholders under their
respective certificates of incorporation and bylaws. This description summarizes
the material differences that may affect the rights of stockholders of
EarthLink, MindSpring and WWW Holdings, but does not purport to be a complete
statement of all such differences. Stockholders should read the relevant
provisions of the laws and documents discussed below. The description set forth
below also assumes that the certificate of incorporation and bylaws of WWW
Holdings have been amended and restated and that the board of directors of WWW
Holdings has created the series A convertible preferred stock and series B
convertible preferred stock, all of which are required by the reorganization
agreement to take place before the consummation of the reorganization.
LIMITATION OF DIRECTOR LIABILITY
WWW HOLDINGS AND EARTHLINK. The certificates of incorporation of WWW
Holdings and EarthLink contain provisions that limit the liability of the
directors of WWW Holdings and EarthLink to the fullest extent permitted under
Delaware law. The provisions eliminate the liability of the WWW Holdings and
EarthLink directors to WWW Holdings and EarthLink and to their respective
stockholders for monetary damages relating to breaches of the directors'
fiduciary duties in their capacity as directors, except for specific breaches
and acts or omissions for which the law of Delaware expressly provides that no
limitation of liability may be effective. Delaware law does not permit
indemnification in the following circumstances:
- for breach of a director's duty of loyalty to a corporation or its
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of the law;
- for unlawful distributions; and
- in respect of any transaction from which a director received an improper
personal benefit.
Pursuant to the certificates of incorporation of WWW Holdings and EarthLink,
limitation of liability of directors will not be limited or eliminated by any
amendment or modification of the certificates of incorporation.
MINDSPRING. MindSpring's certificate of incorporation provides that no
director of MindSpring will be liable to MindSpring or its stockholders for
monetary damages for a breach of the director's fiduciary duty, except that a
director's liability will not be limited for:
- any breach of the director's duty of loyalty to MindSpring or its
stockholders,
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- the unlawful payment of dividends, or
- any transaction from which the director derived an improper personal
benefit.
Under the certificate of incorporation of MindSpring, limitation of
liability of directors may not be retroactively limited or eliminated by any
amendment or modification of MindSpring's certificate of
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incorporation. The MindSpring certificate of incorporation further instructs the
corporation to indemnify directors, officers and agents of MindSpring to the
fullest extent permitted by the Delaware corporation law for claims or
proceedings arising from such individual's relationship with MindSpring.
AUTHORIZED CAPITAL
WWW HOLDINGS. WWW Holdings authorized capital is described under
"Description of WWW Holdings Capital Stock," on page .
EARTHLINK. The total number of authorized shares of capital stock of
EarthLink is 225,625,000 shares, consisting of 200,000,000 shares of common
stock, 25,000,000 shares of series A convertible preferred stock and 625,000
shares of series B convertible preferred stock.
MINDSPRING. The total number of authorized shares of capital stock of
MindSpring is 401,000,000 shares, consisting of 400,000,000 shares of common
stock and 1,000,000 shares of preferred stock.
SPECIAL MEETINGS OF STOCKHOLDERS
Under Delaware law, unless provided in the certificate of incorporation or
bylaws of a corporation, stockholders of a public corporation do not have the
right to call a special meeting of stockholders.
WWW HOLDINGS. The WWW Holdings bylaws provide that a special meeting of WWW
Holdings stockholders may be called at any time by the chairman of the board of
directors or by a majority of the board of directors.
EARTHLINK. The EarthLink bylaws provide that a special meeting of EarthLink
stockholders may be called at any time by the chairman of the board of
directors, by a majority of the board of directors or by the holders of at least
10% of all the shares of stock entitled to vote on the issue proposed to be
considered at the meeting.
MINDSPRING. The MindSpring bylaws provide that a special meeting of
MindSpring's stockholders may be called at any time by the MindSpring board of
directors or MindSpring's chairperson or president.
VOTING; ELECTION OF DIRECTORS
WWW HOLDINGS. Each WWW Holdings stockholder is entitled to one vote for
each share of common stock on all matters required or permitted to be voted on
by stockholders of WWW Holdings. Cumulative voting is not permitted under WWW
Holdings' certificate of incorporation. In all elections of directors, directors
are elected by an affirmative vote of the holders of the plurality of the votes
of the shares present, in person or by proxy at the meeting and entitled to vote
on the election of directors. The vote of a majority of shares represented at a
meeting and entitled to vote at a meeting at which a quorum exists is generally
required to approve other actions requiring stockholder approval. The rights and
preferences of the WWW Holdings common stock and preferred stock are described
in the section entitled "Description of WWW Holdings Capital Stock" beginning on
page __.
EARTHLINK. Each EarthLink stockholder is entitled to one vote for each
share of common stock on all matters required or permitted to be voted on by
stockholders of EarthLink. Cumulative voting is not permitted under EarthLink's
certificate of incorporation. In all elections of directors, directors are
elected by an affirmative vote of the holders of the plurality of the votes of
the shares present, in person or by proxy at the meeting and entitled to vote in
the election of directors. The vote of a majority of shares represented at a
meeting and entitled to vote at a meeting at which a quorum exists is generally
necessary to approve other actions requiring stockholder approval.
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Although the EarthLink preferred stockholder generally does not have the
right to vote its shares, the series A preferred stockholder does have the right
to elect two directors so long as its ownership of capital stock does not fall
below 20% of the outstanding capital stock of EarthLink on a fully diluted basis
for three consecutive months and it can elect one director so long as its
ownership does not fall below 10% of the outstanding capital stock of EarthLink
on a fully diluted basis for three consecutive months. Apple, the series C
preferred stockholder, has the right to elect a member to EarthLink's board of
directors for so long as EarthLink is Apple's exclusive default ISP in the setup
software under the EarthLink-Apple Internet services agreement, Apple holds
series C preferred stock and Apple maintains a certain percentage ownership of
the EarthLink securities it purchased in the initial investment and subsequent
top-ups. The required ownership percentages are:
(a) during the first year after January 4, 2000, Apple must maintain
ownership of 100% of the EarthLink securities it purchased;
(b) during the second and third years after January 4, 2000, Apple must
maintain ownership of at least 75% of the EarthLink securities it purchased;
and
(c) from the fourth year after January 4, 2000, Apple must maintain
ownership of at least 50% of the EarthLink securities it purchased.
In addition, the approval of 66 2/3% of the shares of EarthLink series A
convertible preferred stock, voting as a class, or the series B convertible
preferred stock voting as a class, is required to:
- change the rights, preferences or privileges of the shares of the series
of preferred stock;
- increase the number of the authorized shares of the series of preferred
stock;
- create any new series of stock or securities convertible into equity
securities having a preference over or being on par with the series of
preferred stock with respect to voting, dividends, distributions of assets
upon liquidation conversions rights;
- amend the organizational documents of EarthLink or take any action or
enter into any agreements that conflict with EarthLink's obligation to the
holders of the series of preferred stock; or
- liquidate EarthLink.
MINDSPRING. Each MindSpring stockholder is entitled to one vote for each
share of common stock upon any matter properly considered and acted on by the
stockholders of MindSpring. In all elections of directors, directors are elected
by an affirmative vote of the holders of the plurality of the votes of the
shares present, in person or by proxy at the meeting and entitled to vote in the
election of directors. The vote of a majority of shares represented at a meeting
and entitled to vote at a meeting at which a quorum exists is generally
necessary to approve other actions requiring stockholder approval.
MERGERS, SHARE EXCHANGES AND SALES OF ASSETS
EARTHLINK, MINDSPRING AND WWW HOLDINGS. Delaware law generally requires
that any merger, share exchange or sale of all or substantially all the assets
of a corporation not in the ordinary course of business be approved by the
affirmative vote of the majority of the issued and outstanding shares of each
voting group entitled to vote, unless a different vote is required by the
certificate of incorporation or bylaws. The certificates of incorporation and
bylaws of EarthLink, MindSpring and WWW Holdings do not specifically address
mergers, share exchanges or sales of assets; therefore, an affirmative vote of
the majority of the outstanding shares of common stock entitled to vote is
required.
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ANTI-TAKEOVER STATUTES
EARTHLINK, MINDSPRING AND WWW HOLDINGS. Delaware law contains a number of
provisions that may have the effect of delaying or discovering a hostile
takeover. Delaware law prohibits a Delaware corporation from entering into a
business combination with the beneficial owner of 15% or more of the
corporation's outstanding voting stock, or its affiliates, for a period of three
years after the 15% beneficial owner achieved this level of ownership. Delaware
law permits a business combination with a 15% beneficial owner if: (A) prior to
the date the stockholder becomes a 15% beneficial owner, the board of directors
of the corporation approve either the business combination or the transaction
that will result in the person or entity becoming 15% beneficial owner; (B) the
interested stockholder acquires at least 85% of the corporation's outstanding
voting stock, excluding shares owned by persons who are directors, officers and
by various employee stock plans, in the same transaction in which the
stockholder becomes a 15% beneficial owner; or (C) on or subsequent to the date
of the transaction by which the stockholder becomes a 15% beneficial owner, the
board of directors approves the business combination and by a vote of the
holders of two-thirds of the corporation's outstanding voting stock, not
including shares owned by the 15% beneficial owners. In general, a Delaware
corporation must specifically elect, through an amendment to its bylaws or
certificate of incorporation, not to be governed by these provisions. None of
EarthLink, MindSpring or WWW Holdings has made an election not to be governed by
these provisions and, therefore, each of them is currently subject to these
provisions of the Delaware law.
AMENDMENTS TO CERTIFICATES OF INCORPORATION
Delaware law provides generally that a Delaware corporation's certificate of
incorporation may be amended by the affirmative vote of the holders of a
majority of the outstanding shares entitled to vote on the matter.
WWW HOLDINGS. In addition to the standard Delaware requirement, WWW
Holdings' certificate of incorporation provides that any amendment to the
articles in the certificate of incorporation that govern the board of directors,
indemnification or the amendment of the certificate of incorporation and the
bylaws must be approved by at least two-thirds of the shares entitled to vote on
the amendment and by a majority of the members of the entire board of directors.
The holders of the WWW Holdings preferred stock must approve any amendment to
the certificate of incorporation that would affect the terms of the preferred
stock. See "WWW Holdings Preferred Stock in General" beginning on page .
EARTHLINK. In addition to the standard Delaware requirement, EarthLink's
certificate of incorporation requires the affirmative vote of a majority of the
votes entitled to be cast by the holders of all of the outstanding shares of
capital stock, voting together as a single class to amend the certificate of
incorporation or bylaws in any manner that is inconsistent with the current
article in the certificate of incorporation governing the board of directors.
The holders of the EarthLink preferred stock must approve any amendment to the
certificate of incorporation that would affect the terms of the preferred stock.
See "Voting; Election of Directors" on page .
MINDSPRING. MindSpring's certificate of incorporation may be amended in any
manner provided for by law, except that the affirmative vote of the holders of
at least two-thirds of the voting power of all outstanding shares of the capital
stock of MindSpring entitled to vote and the affirmative vote of the majority of
the board of directors are required to amend the provisions of MindSpring's
certificate of incorporation relating to the election of the board of directors,
the limitation of liability and indemnification of officers and directors of
MindSpring and amendment of the certificate of incorporation of MindSpring.
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AMENDMENTS TO BYLAWS
WWW HOLDINGS. The WWW Holdings certificate of incorporation and bylaws
provide that the bylaws may be amended by stockholders holding a majority of the
number of shares of stock present and entitled to vote at a meeting or by a
majority vote of the directors then in office or except for the provisions
requiring that actions, if taken, be taken by more than a majority of the
directors, which may be amended or repealed by the stockholders in the manner
described above or by the number of directors who are required to act pursuant
to the provision.
EARTHLINK. The EarthLink certificate of incorporation and bylaws provide
that the bylaws may be amended by the majority vote of the directors then in
office by stockholders holding a majority of the number of shares of stock
present and entitled to vote at the meeting at which the amendment is to be
voted upon.
MINDSPRING. In addition to the right of stockholders to amend MindSpring's
bylaws pursuant to Delaware law, MindSpring's certificate of incorporation
authorizes the board of directors to amend MindSpring's bylaws.
STOCKHOLDER ACTION BY WRITTEN CONSENT
WWW HOLDINGS AND EARTHLINK. The stockholders may take any action required
to be taken or that may be taken at any annual or special meeting of
stockholders by written consent without a meeting if the consent is signed by
stockholders who would have had the votes necessary to approve the action at a
meeting at which all shares entitled to vote on the action were present and if
the consent is properly delivered to the company.
MINDSPRING. MindSpring's bylaws provide that any action required or
permitted to be taken at a stockholders' meeting may be taken without a meeting
if the action is taken by a unanimous vote of persons who would be entitled to
vote with respect to the action at a meeting. The action must be evidenced by
one or more written consents describing the action taken, signed by all of the
stockholders who would be entitled to vote with respect to the action at a
meeting, and delivered to MindSpring.
BOARD OF DIRECTORS
WWW HOLDINGS. WWW Holdings' certificate of incorporation requires that
there be at least two and no more than seventeen directors, with the exact
number of directors to be set by a majority of the board of directors or by the
affirmative vote of the holders of at least a majority of all outstanding shares
entitled to vote in the election of directors, voting as a single class. At the
effective time of the mergers of EarthLink and MindSpring into WWW Holdings, the
board will have thirteen directors. Four directors will be chosen by EarthLink,
four will be chosen by MindSpring, two will be chosen by Sprint, as the
series A preferred stockholder, one will be chosen by Apple, as the series C
preferred stockholder, and the remaining two will be chosen by a committee
selected from among the appointed directors. The board of directors will be a
classified board in which approximately one-third of its directors will stand
for election each year. The initial term of the class I directors will expire at
the annual meeting of stockholders in 2000, the term of the class II directors
will expire at the annual meeting of stockholders in 2001, and the term of the
class III directors will expire at the annual meeting of stockholders in 2002.
In all cases a director will serve until his or her successor is elected and
qualifies, or until he or she resigns, is removed, dies or is incapacitated.
At each annual meeting of WWW Holdings stockholders the successors to the
class of directors whose term then expires will be elected to hold office for a
term expiring at the third succeeding annual meeting and until their successors
are elected and qualify, except with respect to vacancies and newly created
directorships. Directors will be elected by a plurality of the votes of the
shares of
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common stock present in person or represented by proxy at the meeting and
entitled to vote in the election of directors.
If the number of directors is changed by resolution of the board, any
increase or decrease will be apportioned among the classes so as to keep the
number of directors in each class as nearly equal as possible. No decrease in
the number of directors will shorten the term of an incumbent director.
Nominations for the election of directors may be made by the board of
directors or a committee appointed by the board. Also, any stockholder of record
who is entitled to vote in the election of directors may nominate persons for
election as directors at a meeting, but only if the stockholder gives written
notice of his intent to make nominations, either personally or by the United
States mail, postage prepaid, to the Secretary of WWW Holdings at least 90 days
before the annual meeting of stockholders, if that is where the nominees are to
be voted upon, or, if the election is to be held at a special meeting, the close
of business on the seventh day following the date that notice of the meeting is
first given to stockholders. Each notice must state:
- the name and address of the stockholder of record who intends to make the
nominations and of the persons to be nominated;
- a representation that the stockholder is a holder of record of shares of
WWW Holdings entitled to vote at the meeting and intends to appear in
person or by proxy at the meeting to nominate the persons specified in the
notice;
- a description of all arrangements between the stockholder as would be
required to be included in a proxy statement filed under the then-current
proxy rules of the Securities and Exchange Commission if the nominees were
to be nominated by the board of directors; and
- the consent of each nominee to serve as a director of WWW Holdings if he
or she is elected.
Any vacancy on the board of directors that results from an increase in the
number of directors or from a director's death, resignation, retirement,
disqualification or removal from office may be filled by a majority of the board
of directors then in office, even if less than a quorum, or by the stockholders
if the board of directors has not filled the vacancy. Any director elected to
fill a vacancy will have the same remaining term as the director's predecessor.
At any meeting of stockholders with respect to which notice of the intent to
propose directors has been given, the entire board of directors or any
individual director may be removed, with or without cause, by the affirmative
vote of the holders of a majority of all outstanding shares entitled to be voted
at an election of directors, but if less than the entire board of directors is
to be removed, no director may be removed without cause if the votes cast
against his removal would have been sufficient to elect him if they had been
cumulatively voted at an election of the entire board of directors.
Whenever the holders of any one or more classes or series of preferred stock
issued by WWW Holdings have the right to elect directors, the election, term of
office, filling of vacancies and other features of those directorships will be
governed by the terms of the certificate of incorporation and the resolutions of
the board of directors creating the class or series. As of the effective time of
the mergers and for so long as its percentage ownership of capital stock does
not fall below 20% of the outstanding capital stock of WWW Holdings on a fully
diluted basis for three consecutive months, the holders of the series A
convertible preferred stock will have the right to elect two directors. So long
as the series A preferred stockholder's percentage ownership does not fall below
10% of the outstanding capital stock of WWW Holdings on a fully diluted basis
for three consecutive months the series A preferred stockholder has the right to
elect one director. The holder of the series C convertible preferred stock will
have the right to elect a director, so long as the stockholder maintains certain
stock ownership levels.
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<PAGE>
EARTHLINK. The certificate of incorporation requires that there be at least
two and no more than thirteen directors. The EarthLink board of directors
currently consists of ten directors, eight of whom are voted upon by the holders
of EarthLink common stock and two of whom are selected by the series A preferred
stockholder. In connection with its ownership of series C preferred stock, Apple
will have the right to elect one director to the EarthLink board, which right
becomes effective upon closing of such transaction. A director of EarthLink
holds his office for a period of one year and until his successor is elected and
qualifies, or until he dies, resigns, retires, is disqualified or is removed.
EarthLink's procedures for nominations of directors by stockholders are the
same as WWW Holdings' procedures.
MINDSPRING. MindSpring's certificate of incorporation provides that its
board of directors will be comprised of three classes as nearly equal in number
as possible, with each class elected for a term of three years, so that a
different class of directors stands for election each year. The MindSpring
bylaws provide that the number of directors may not be less than three nor more
than fifteen. The MindSpring board of directors currently consists of five
directors. A director of MindSpring holds his office until such his successor is
elected and qualified or until his earlier death, resignation or removal.
At each annual meeting of MindSpring stockholders the successors to the
class of directors whose term then expires will be elected to hold office for a
term expiring at the third succeeding annual meeting and until their successors
are elected and qualify, except with respect to vacancies and newly created
directorships. Directors will be elected by a plurality of the votes of the
shares of common stock present in person or represented by proxy at the meeting
and entitled to vote in the election of directors.
If the number of directors is changed by resolution of the board, any
increase or decrease will be apportioned among the classes so as to keep the
number of directors in each class as nearly equal as possible. No decrease in
the number of directors will shorten the term of an incumbent director.
MindSpring's certificate of incorporation provides that if a vacancy occurs
on the MindSpring board, the vacancy may be filled by a majority vote of the
directors then in office, even if they constitute less than a quorum, or by the
sole remaining director. Whenever the holders of any class or classes of
MindSpring stock or series of MindSpring stock are entitled to elect one or more
directors by the provisions of MindSpring's certificate of incorporation,
vacancies and newly created directorships of such class or series may be filled
by a majority of the directors elected by such class or series or by a sole
remaining director elected by such class or series. In the event that one or
more MindSpring directors resigns from the MindSpring board effective at a
future date, a majority of the directors then in office, including those who
have so resigned, may fill such vacancy or vacancies.
MindSpring's board of directors nominates candidates to stand for election
as directors. Candidates may also be nominated by any MindSpring stockholder,
provided such nominations are submitted in writing to MindSpring no later than
90 days prior to the meeting of stockholders at which such directors are to be
elected, together with the identity of the stockholder making the nomination and
the number of shares of MindSpring stock owned, directly or indirectly, by the
stockholder.
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<PAGE>
MANAGEMENT AND OPERATION OF WWW HOLDINGS AFTER THE
REORGANIZATION
WWW HOLDINGS BOARD OF DIRECTORS
Upon completion of the reorganization, the WWW Holdings board of directors
will consist of the thirteen individuals listed below. The board will be divided
into three classes, as nearly equal in number as possible, with the initial term
of office of the first, second and third classes of directors expiring at the
first, second and third annual meetings of the stockholders of WWW Holdings.
<TABLE>
<CAPTION>
NAME AGE CLASS DESIGNEE OF:
- ---- -------- -------- ------------
<S> <C> <C> <C>
Charles M. Brewer, Chairman................................. 41 III MindSpring
Sky D. Dayton............................................... 28 III EarthLink
Charles G. Betty............................................ 42 III EarthLink
Campbell B. Lanier, III..................................... 49 III MindSpring
William S. Esrey............................................ 59 III Sprint
William H. Scott, III....................................... 52 II MindSpring
Michael S. McQuary.......................................... 40 II MindSpring
Linwood A. Lacy, Jr......................................... 54 II EarthLink
Reed E. Slatkin............................................. 50 II EarthLink
Len J. Lauer................................................ 42 I Sprint
TBD*........................................................ I Outside
TBD*........................................................ I Outside
TBD*........................................................ I Outside
</TABLE>
- ------------------------
*To be determined at a later date. In connection with EarthLink's proposed
transaction, Apple will have the right to appoint one director to EarthLink's
board, which right becomes effective when regulatory approvals are secured and
the transaction is consummated. Assuming EarthLink and MindSpring close the
reorganization, Apple's board right will convert into the right to appoint a
director to the WWW Holdings board. Please refer to "Information about
EarthLink--Business--Recent Development--Strategic Alliance with Apple Computer,
Inc." for more information.
CHARLES M. BREWER will be the chairman of WWW Holdings. Mr. Brewer founded
MindSpring and has served as chief executive officer and a director of
MindSpring since its inception in February 1994 and as chairman since
March 1996. He also served as the president of MindSpring from its inception
until March 1996 and as the secretary and treasurer of MindSpring from its
inception until January 1995. From May 1993 to January 1994, Mr. Brewer
developed the concept for MindSpring and evaluated its prospects. Prior to
starting MindSpring, he served as chief executive officer of AudioFax, Inc., a
software company providing fax server software from May 1992 to April 1993, and
was the chief financial officer of AudioFax, Inc. from May 1989 to April 1992.
SKY D. DAYTON will be a director of WWW Holdings. Mr. Dayton, EarthLink's
founder, has served as chairman of the board of directors of EarthLink since its
inception in May 1994 and served as its chief executive officer from May 1994
until May 1996. From 1992 to 1993, he was 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 software company. 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 will be the chief executive officer and a director of WWW
Holdings. Mr. Betty has served as president and as a director of EarthLink since
January 1996, and in May 1996 was named chief executive officer. From
February 1994 to January 1996, Mr. Betty was a strategic planning consultant,
advising Reply Corp., Perot Systems Corporation and Microdyne, Inc. From
September 1989
170
<PAGE>
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. Mr. Betty is a member of the board of directors of DBT
ONLINE, Inc.
CAMPBELL B. LANIER, III will be a director of WWW Holdings. Mr. Lanier has
served as a director of MindSpring since November 1994. Mr. Lanier has served as
chairman of the board and chief executive officer of ITC Holding Company, Inc.
(or its predecessors), MindSpring's largest stockholder, since its inception in
1985. In addition, Mr. Lanier is an officer and director of several ITC Holding
subsidiaries. He is also the chairman of ITC^DeltaCom, Inc., a carriers' carrier
and retail telecommunications company, is a director of ITC^DeltaCom, KNOLOGY
Holdings, Inc., a broadband telecommunications services company formerly known
as CyberNet Holding, Inc., Vista EyeCare, Inc., a full service optical retailer,
K&G Men's Centers, a discount retailer of men's clothing, Innotrac Corporation,
which provides customized, technology-based marketing support services, and is
chairman of the board of Powertel, Inc., a wireless telecommunications company
formerly known as InterCel, Inc. Mr. Lanier has served as a managing director of
South Atlantic Private Equity Fund IV, Limited Partnership since 1997.
WILLIAM S. ESREY will be a director of WWW Holdings. Mr. Esrey has served as
the chairman of Sprint since 1990 and as its chief executive officer and a
director since 1985. Mr. Esrey is a director of Duke Energy Corporation, General
Mills, Inc. and Exxon Corporation.
WILLIAM H. SCOTT, III will be a director of WWW Holdings. Mr. Scott has been
a director of MindSpring since November 1994. Mr. Scott has served as president
of ITC Holding (or its predecessors) since December 1991 and has been a director
of ITC Holding (or its predecessors) since May 1989. He is also an officer and
director of several ITC Holding subsidiaries. Mr. Scott is a director of
ITC^DeltaCom, KNOLOGY, Powertel and Innotrac.
MICHAEL S. MCQUARY will be the president and a director of WWW Holdings.
Mr. McQuary has been the president of MindSpring since March 1996, the chief
operating officer of MindSpring since September 1995, and a director of
MindSpring since December 1995. He also served as MindSpring's executive vice
president from October 1995 to March 1996 and MindSpring's executive vice
president of sales and marketing from July 1995 to September 1995. Prior to
joining MindSpring, Mr. McQuary served in a variety of management positions with
Mobil Chemical Co., a petrochemical company, from August 1984 to June 1995,
including regional sales manager from April 1991 to February 1994 and manager of
operations (reengineering) from February 1994 to June 1995.
LINWOOD A. LACY, JR. will be a director of WWW Holdings. Mr. Lacy has been a
director of EarthLink since June 1996. From October 1996 to October 1997, he
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 chief executive officer of Ingram
Industries Inc., and from April 1996 to May 1996 served as its vice chairman.
Mr. Lacy serves as a director of Ingram Industries Inc., Entex Information
Services, Inc., PcOrder.com and Modus Media International.
REED E. SLATKIN will be a director of WWW Holdings. Mr. Slatkin, one of
EarthLink's co-founders, has been a director of EarthLink 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.
LEN J. LAUER will be a director of WWW Holdings. Mr. Lauer has been a
director of Sprint since April 1999. Mr. Lauer has served as president of the
consumer services group of Sprint since March 1999. Mr. Lauer joined Sprint in
April 1998 as senior vice president of brand management and
171
<PAGE>
public relations. Before joining Sprint, Mr. Lauer spent more than five years
with Bell Atlantic Corporation, first as vice president, sales and service in
the large business services unit and, starting in November 1995, as president
and chief executive officer of Bell Atlantic--New Jersey. He is a board member
of Maplewood Partners and a member of the Business Council Steering Committee of
the Nelson-Atkins Museum of Art.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of WWW Holdings will establish compensation and audit
committees of the Board of Directors after completion of the reorganization, and
may establish other committees such as an executive committee from time to time.
MANAGEMENT
The principal officers of WWW Holdings upon completion of the reorganization
will be as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- -------- -----------------------
<S> <C> <C>
Charles M. Brewer........................................... 41 Chairman
Charles G. Betty............................................ 42 Chief Executive Officer
Michael S. McQuary.......................................... 40 President
</TABLE>
Additional officers will be elected by the WWW Holdings board after
completion of the reorganization.
EXECUTIVE COMPENSATION
COMPENSATION OF OFFICERS
The Board of Directors and the Compensation Committee thereof will establish
the compensation packages for WWW Holdings' executive officers promptly after
completion of the reorganization.
COMPENSATION OF DIRECTORS
WWW Holdings currently does not intend to pay cash compensation to its
Directors for serving in that capacity, but may do so in the future. Directors
will be reimbursed for the expenses they incur in attending meetings of the
Board of Directors or any committees thereof. Non-employee directors are
eligible to receive options to purchase common stock awarded under its Directors
Stock Option Plan.
CERTAIN RELATIONSHIPS AND INSIDER TRANSACTIONS
We expect the Board of Directors of WWW Holdings to adopt a policy
pertaining to transactions with affiliates similar to that of EarthLink's
current policy, described in "Information About EarthLink--Executive
Compensation--Certain Relationships and Insider Transactions."
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<PAGE>
STOCKHOLDER PROPOSALS
EarthLink will hold an annual meeting in the year 2000 only if the
reorganization has not already been completed. If such meeting is held, any
proposals of stockholders intended to be presented at the 2000 annual meeting
must have been received by the Secretary of EarthLink no later than
in order to be considered for inclusion in the EarthLink proxy materials
relating to such meeting. Any notice of a proposal for which a stockholder will
conduct his or her own solicitation must be received by the Secretary of
EarthLink no later than , 2000.
MindSpring will hold an annual meeting in the year 2000 only if the
reorganization has not already been completed. If such meeting is held, any
proposals of stockholders intended to be presented at the 2000 annual meeting
must have been received by the Secretary of MindSpring no later than
December 25, 1999 in order to be considered for inclusion in the MindSpring
proxy materials relating to such meeting. Any notice of a proposal for which a
stockholder will conduct his or her own solicitation must be received by the
Secretary of MindSpring no later than March 8, 2000.
LEGAL MATTERS
Hunton & Williams will provide an opinion as to the validity of the WWW
Holdings common stock to be issued in connection with the reorganization.
Hunton & Williams, as counsel for EarthLink, has provided an opinion under the
reorganization agreement as to the qualification of the merger of EarthLink into
WWW Holdings as a reorganization within the meaning of the federal income tax
laws.
Hogan & Hartson L.L.P., as counsel for MindSpring, has provided an opinion
under the reorganization agreement as to the qualification of the merger of
MindSpring into WWW Holdings as a reorganization within the meaning of the
federal income tax laws.
EXPERTS
The consolidated financial statements of EarthLink Network, Inc. as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 and the statement of assets acquired and liabilities assumed
of the Sprint Internet Passport Business acquired by EarthLink Network, Inc. as
of June 5, 1998 included in this joint proxy statement/prospectus have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of PricewaterhouseCoopers LLP as experts in
auditing and accounting.
Ernst & Young LLP, independent auditors, have audited the Statement of
Revenues and Direct Expenses of the Consumer Internet Access Services of Sprint
for the year ended December 31, 1997 as set forth in their report. The Statement
of Revenues and Direct Expenses of the Consumer Internet Access Services of
Sprint is included in this joint proxy statement/prospectus and the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
Representatives of PricewaterhouseCoopers LLP are expected to be present at
the EarthLink special meeting. Representatives of that firm will have the
opportunity to make a statement if they desire to do so and are expected to be
available to respond to appropriate questions.
The financial statements and the related financial statement schedules for
MindSpring as of and for the years ended December 31, 1997 and 1998 in this
joint proxy statement/prospectus, the financial statements of Spry, Inc. as of
April 30, 1997 and January 31, 1998, and for the years ended April 30, 1996 and
1997 and the nine months ended January 31, 1998, and the financial statements of
NETCOM On-Line Communication Services, Inc. Domestic subscriber operations as of
December 31, 1997 and 1998, and for the three years ended December 31, 1998,
have been audited by Arthur Andersen LLP, independent public accountants, as
stated in their reports, which have been included herein in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
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<PAGE>
Representatives of Arthur Andersen are expected to be present at the
MindSpring special meeting. Representatives of that firm will have the
opportunity to make a statement if they so desire and are expected to be
available to respond to appropriate questions.
OTHER MATTERS
Neither of the boards of directors of EarthLink or MindSpring currently
intends to bring before either EarthLink's or MindSpring's special meeting any
matters other than those specified in the notices of the special meetings and
neither board has knowledge of any other matters that may be brought up by other
persons. However, if any other matters properly come before either company's
special meeting or any adjournment or postponement of either company's special
meeting, and are voted upon, the enclosed proxies will be deemed to confer
discretionary authority on the persons named as proxies to vote the shares
represented by those proxies as to those other matters. Those persons named as
EarthLink proxies intend to vote or not vote in accordance with the
recommendation of the management of EarthLink. Those persons named as proxies in
the MindSpring proxies intend to vote or not vote in accordance with the
recommendation of the management of MindSpring.
WHERE YOU CAN FIND MORE INFORMATION
EarthLink and MindSpring file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
WWW Holdings also has filed with the Securities and Exchange Commission a
Registration Statement on Form S-4 (333- ) under the Securities Act, with
respect to the WWW Holdings common stock to be issued in the reorganization.
This joint proxy statement/prospectus is part of that registration statement and
constitutes a prospectus of WWW Holdings.
The Securities and Exchange Commission allows us to "incorporate by
reference" the information we file with it. We are not incorporating by
reference any information into this joint proxy/prospectus other than from the
Annexes attached hereto. Any such information incorporated by reference is an
important part of this joint proxy statement/prospectus.
You should rely only on the information provided in this joint proxy
statement/prospectus, dated January , 2000. You should not assume that the
information in this joint proxy statement/prospectus is accurate as of any date
other than that date.
WHERE TO OBTAIN DOCUMENTS. Securities and Exchange Commission filings are
available to the public over the Internet at the Securities and Exchange
Commission's web site at http://www.sec.gov. You may also read and copy any
documents that are filed at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C.; 7 World Trade
Center, Suite 1300, New York, New York; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the public reference
rooms. You may also obtain filed documents from commercial document retrieval
services (some of which also provide on-line delivery).
Documents filed with the SEC by EarthLink and MindSpring are available from
the companies without charge by first class mail or equally prompt means within
one business day of receipt of your request, excluding exhibits unless the
exhibit has been specifically incorporated by reference into the information
that this joint proxy statement/prospectus incorporates. If you want to receive
a copy of any
174
<PAGE>
document incorporated by reference, please make your request in writing or by
telephone from the appropriate company at the following addresses:
<TABLE>
<S> <C>
EARTHLINK NETWORK, INC. MINDSPRING ENTERPRISES, INC.
3100 New York Drive 1430 West Peachtree Street, NW, Suite 1400
Pasadena, California 91107 Atlanta, Georgia 30309
Attention: Investor Relations Attention: Director of Investor Relations
Telephone: (626) 296-2400 Telephone: (404) 815-0770
</TABLE>
WHAT INFORMATION YOU SHOULD RELY ON
WE HAVE NOT AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION THAT DIFFERS FROM, OR ADDS TO, THE INFORMATION DISCUSSED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS OR IN THE APPENDICES ATTACHED HERETO WHICH ARE
SPECIFICALLY INCORPORATED BY REFERENCE. THEREFORE, IF ANYONE GIVES YOU DIFFERENT
OR ADDITIONAL INFORMATION, YOU SHOULD NOT RELY ON IT.
THE INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS SPEAKS
ONLY AS OF ITS DATE UNLESS THE INFORMATION SPECIFICALLY INDICATES THAT ANOTHER
DATE APPLIES. THIS JOINT PROXY STATEMENT/ PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO EXCHANGE OR SELL, OR A SOLICITATION OF AN OFFER TO EXCHANGE OR
PURCHASE, EARTHLINK, MINDSPRING OR WWW HOLDINGS COMMON STOCK OR TO ASK FOR
PROXIES, TO OR FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO DIRECT THESE
ACTIVITIES.
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<PAGE>
MASTER INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Index to Financial Statements of EarthLink Network, Inc..... F-2
Index to Financial Statements of Consumer Internet Access
Services of Sprint Corporation............................ F-2
Index to Financial Statements of Mindspring Enterprises,
Inc....................................................... F-40
Index to Financial Statements of Spry, Inc.................. F-40
Index to Financial Statements of NETCOM On-Line
Communication Services, Inc. Domestic Operation........... F-40
</TABLE>
F-1
<PAGE>
INDEX TO EARTHLINK NETWORK, INC. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
EARTHLINK NETWORK, INC.
Report of Independent Accountants........................... F-3
Consolidated Balance Sheet as of December 31, 1997 and
1998...................................................... F-4
Consolidated Statement of Operations for the years ended
December 31, 1996, 1997 and 1998.......................... F-5
Consolidated Statement of Stockholders' Equity (Deficit) for
the years ended December 31, 1996, 1997 and 1998.......... F-6
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
EARTHLINK NETWORK, INC.
Condensed Consolidated Balance Sheet at December 31, 1998
and September 30, 1999 (unaudited)........................ F-23
Condensed Consolidated Statement of Operations for the three
and nine months ended September 30, 1998 and 1999
(unaudited)............................................... F-24
Condensed Consolidated Statement of Cash Flows for the three
and nine months ended September 30, 1998 and 1999
(unaudited)............................................... F-25
Notes to Condensed Consolidated Financial Statements........ F-26
CONSUMER INTERNET ACCESS SERVICES OF SPRINT CORPORATION
Report of Independent Auditors.............................. F-29
Statements of Revenues and Direct Expenses.................. F-30
Note to Statements of Revenues and Direct Expenses.......... F-31
EARTHLINK NETWORK, INC.
Report of Independent Accountants........................... F-33
Statement of Assets Acquired and Liabilities Assumed of the
Sprint Internet Passport Business as of June 5, 1998...... F-34
Note to Statement of Assets Acquired and Liabilities
Assumed................................................... F-35
EARTHLINK NETWORK, INC.
Pro Forma Financial Information............................. F-36
Pro Forma Combined Statement of Operations for the year
ended December 31, 1998 (unaudited)....................... F-37
Notes to Pro Forma Combined Statement of Operations......... F-38
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of EarthLink Network, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
EarthLink Network, Inc. and its subsidiary (the "Company") at December 31, 1997
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
Century City, California
February 16, 1999, except as to Note 14, which is as of
February 24, 1999
F-3
<PAGE>
EARTHLINK NETWORK, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 16,450 $ 140,864
Restricted short-term investment.......................... 1,250 --
Accounts receivable, net of allowance of $165,000 and
$405,000 at
December 31, 1997 and 1998, respectively................ 2,520 4,779
Prepaid expenses.......................................... 1,109 4,147
Other assets.............................................. 753 775
-------- ---------
Total current assets.................................... 22,082 150,565
Other long-term assets...................................... 449 564
Property and equipment, net (Notes 1 and 3)................. 23,398 35,206
Intangibles, net (Note 4)................................... 958 80,006
-------- ---------
$ 46,887 $ 266,341
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 6,472 $ 14,818
Accrued payroll and related expenses...................... 2,316 8,934
Other accounts payable and accrued liabilities............ 3,717 20,372
Current portion of capital lease obligations (Note 11).... 7,112 8,341
Notes payable (Note 5).................................... 9,387 --
Deferred revenue.......................................... 3,590 8,831
-------- ---------
Total current liabilities............................... 32,594 61,296
Long-term debt (Note 11).................................... 8,218 7,701
-------- ---------
Total liabilities....................................... 40,812 68,997
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, $0.01 par value, 25,000,000 shares
authorized, nil and 4,102,941 shares issued and
oustanding as Series A convertible preferred stock at
December 31, 1997 and 1998, respectively (Note 7)....... -- 41
Common stock, $0.01 par value, 50,000,000 shares
authorized, 22,500,744 and 29,069,827 shares issued and
outstanding at December 31, 1997 and 1998,
respectively............................................ 225 291
Stock subscriptions receivable............................ -- (1,041)
Additional paid-in capital................................ 70,829 330,911
Warrants to purchase common stock (Note 9)................ 1,093 597
Accumulated deficit....................................... (66,072) (133,455)
-------- ---------
Total stockholders' equity.............................. 6,075 197,344
-------- ---------
$ 46,887 $ 266,341
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
EARTHLINK NETWORK, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Recurring revenues........................................ $ 27,606 $ 74,657 $ 164,723
Other revenues............................................ 5,624 6,231 6,547
Incremental revenues...................................... -- -- 4,671
--------- --------- ---------
Total revenues...................................... 33,230 80,888 175,941
Operating costs and expenses:
Cost of recurring revenues................................ 17,717 36,716 76,643
Cost of other revenues.................................... 2,066 1,349 685
Sales and marketing....................................... 17,363 25,971 42,732
General and administrative................................ 10,534 14,406 21,042
Operations and member support............................. 15,808 30,900 54,443
Amortization and transaction expenses (Note 4)............ -- -- 42,635
--------- --------- ---------
Total operating costs and expenses.................. 63,488 109,342 238,180
--------- --------- ---------
Loss from operations........................................ (30,258) (28,454) (62,239)
Interest income............................................. 150 637 4,424
Interest expense............................................ (1,041) (2,099) (1,967)
--------- --------- ---------
Net loss............................................ (31,149) (29,916) (59,782)
Deductions for accretion dividends (Note 8)................. -- -- (7,601)
--------- --------- ---------
Net loss attributable to common stockholders................ $(31,149 ) $ (29,916) $ (67,383)
========= ========= =========
Basic and diluted net loss per share........................ $ (2.57) $ (1.50) $ (2.58)
========= ========= =========
Weighted average shares..................................... 12,138 20,002 26,157
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
EARTHLINK NETWORK, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK STOCK ADDITIONAL
------------------- ------------------- SUBSCRIPTIONS PAID-IN WARRANTS
SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL ISSUED
-------- -------- -------- -------- ------------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... 10,114 $101 $ 5,072 $ 124
Issuance of common stock........... 1,846 18 8,642 --
Issuance of common stock for
services......................... 85 1 462 --
Warrants issued in connection with
equipment leases and other
financings (Note 9).............. -- -- -- 475
Net loss........................... -- -- -- --
----- --- ------ ---- ------- -------- ------
Balance at December 31, 1996....... 12,045 120 14,176 599
Initial public offering, net of
expenses......................... 4,570 46 26,180 --
Conversion of redeemable preferred
stock into common stock.......... 2,727 27 13,986 --
Conversion of debt to common
stock............................ 112 1 724 --
Issuance of common stock in
connection with private
placement........................ 2,920 30 15,379 --
Issuance of common stock pursuant
to exercise of stock options..... 127 1 384 --
Warrants issued in exchange for
services (Note 9)................ -- -- -- 494
Net loss........................... -- -- -- --
----- --- ------ ---- ------- -------- ------
Balance at December 31, 1997....... 22,501 225 70,829 1,093
Issuance of preferred stock........ 4,103 $41 -- -- 134,959 --
Accretion of convertible preferred
stock............................ -- -- 7,601 --
Follow on offering, net of expenses
(Note 6)......................... -- -- 3,763 38 106,271
Conversion of debt to common
stock............................ -- -- 783 8 5,035 --
Notes receivable from stock
sales............................ 18 $(1,041) 1,041 --
Issuance of common stock for
services......................... 20 -- 130 --
Issuance of common stock pursuant
to exercise of stock options..... -- -- 1,224 12 3,647 --
Warrants issued in conjunction with
marketing agreement.............. 91
Warrants issued in exchange for
services......................... -- -- -- -- 60
Issuance of common stock pursuant
to exercise of warrants.......... 761 8 1,398 (647)
Net loss........................... -- -- -- -- -- --
----- --- ------ ---- ------- -------- ------
Balance at December 31, 1998....... 4,103 $41 29,070 $291 $(1,041) $330,911 $ 597
===== === ====== ==== ======= ======== ======
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY (DEFICIT)
------------ ----------------
(IN THOUSANDS)
<S> <C> <C>
Balance at December 31, 1995....... $ (5,007) $ 290
Issuance of common stock........... -- 8,660
Issuance of common stock for
services......................... -- 463
Warrants issued in connection with
equipment leases and other
financings (Note 9).............. -- 475
Net loss........................... (31,149) (31,149)
--------- --------
Balance at December 31, 1996....... (36,156) (21,261)
Initial public offering, net of
expenses......................... -- 26,226
Conversion of redeemable preferred
stock into common stock.......... -- 14,013
Conversion of debt to common
stock............................ -- 725
Issuance of common stock in
connection with private
placement........................ -- 15,409
Issuance of common stock pursuant
to exercise of stock options..... -- 385
Warrants issued in exchange for
services (Note 9)................ -- 494
Net loss........................... (29,916) (29,916)
--------- --------
Balance at December 31, 1997....... (66,072) 6,075
Issuance of preferred stock........ -- 135,000
Accretion of convertible preferred
stock............................ (7,601) --
Follow on offering, net of expenses
(Note 6)......................... 106,309
Conversion of debt to common
stock............................ -- 5,043
Notes receivable from stock
sales............................ -- --
Issuance of common stock for
services......................... -- 130
Issuance of common stock pursuant
to exercise of stock options..... -- 3,659
Warrants issued in conjunction with
marketing agreement.............. 91
Warrants issued in exchange for
services......................... -- 60
Issuance of common stock pursuant
to exercise of warrants.......... 759
Net loss........................... (59,782) (59,782)
--------- --------
Balance at December 31, 1998....... $(133,455) $197,344
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
EARTHLINK NETWORK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(31,149) $(29,916) $ (59,782)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities, net of effect from
acquisition:
Depreciation and amortization........................... 4,153 9,377 54,726
Issuance of common stock in exchange for professional
services.............................................. 50 -- 130
Issuance of common stock in exchange for termination of
consulting agreement.................................. 413 -- --
Issuance of warrants in exchange for professional
services.............................................. -- 494 60
Increase in net accounts receivable..................... (1,507) (180) (2,260)
Increase in prepaid expenses and other assets........... (2,353) (413) (3,176)
Increase (decrease) in accounts payable and accrued
liabilities........................................... 12,373 (2,232) 31,658
Increase in deferred revenue............................ 1,798 1,580 5,241
-------- -------- ---------
Net cash provided by (used in) operating activities......... (16,222) (21,290) 26,597
-------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................... (18,774) (14,528) (24,316)
Purchases of intangible assets............................ -- (1,404) (9)
Transaction costs......................................... -- -- (9,914)
Cash acquired from acquisition............................ -- -- 23,750
Purchase of restricted short-term investment.............. (1,087) (200) --
Liquidation of restricted short-term investment........... 1,500 37 1,250
-------- -------- ---------
Net cash used in investing activities................... (18,361) (16,095) (9,239)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable................... 7,950 4,387 200
Repayment of notes payable................................ (1,494) (2,225) (4,583)
Proceeds from capital lease obligations................... 11,348 10,544 9,275
Principal payments under capital lease obligations........ (2,191) (4,884) (8,563)
Proceeds from issuance of mandatorily redeemable preferred
stock (Note 6).......................................... 14,013 -- --
Proceeds from private placements of common stock.......... 8,660 15,409 --
Proceeds from public stock offerings...................... -- 26,226 106,309
Proceeds from warrants exercised.......................... -- -- 759
Proceeds from stock options exercised..................... -- 385 3,659
-------- -------- ---------
Net cash provided by financing activities............... 38,286 49,842 107,056
-------- -------- ---------
Net increase in cash and cash equivalents................... 3,703 12,457 124,414
Cash and cash equivalents, beginning of year................ 290 3,993 16,450
-------- -------- ---------
Cash and cash equivalents, end of year...................... $ 3,993 $ 16,450 $ 140,864
======== ======== =========
Acquisition, net of cash acquired (Note 2):
Issuance of convertible preferred stock................... $ 135,000
Transaction costs......................................... 9,914
Intangible assets......................................... (121,164)
---------
Cash acquired from acquisition............................ $ 23,750
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
EarthLink Network, Inc. ("EarthLink" or 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.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of EarthLink
Network, Inc. and its wholly-owned subsidiary EarthLink Operations, Inc.
(Note 2). All intercompany transactions and balances have been eliminated in the
consolidated financial statements.
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. Incremental revenues are derived
from advertising, content and electronic commerce fees that leverage the value
of the Company's member base and user traffic. Such revenues are recorded as
earned.
CASH AND CASH EQUIVALENTS
All short-term, 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
The Company bills 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
F-8
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 rights to customer lists, long-term
marketing agreements, goodwill, deferred financing and other items. 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 ten 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
$3.2 million, $5.1 million and $8.8 million in 1996, 1997 and 1998,
respectively.
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 did not
include potential common stock in the calculation of EPS since inception as such
inclusion would have an anti-dilutive effect.
F-9
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMMON STOCK BASED COMPENSATION
The Company continues to account for its employee stock based compensation
using the intrinsic value method in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and provides pro forma disclosures in the notes to the consolidated
financial statements (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.
STOCK SPLIT
In July 1998 the Company effected a two-for-one stock split. The
accompanying consolidated financial statements and related notes have been
retroactively adjusted to give effect to the stock split.
2. STRATEGIC ALLIANCE WITH SPRINT CORPORATION
On February 10, 1998, EarthLink entered into certain agreements to establish
a broad strategic relationship (the "Strategic Alliance") with Sprint
Corporation ("Sprint") in the area of consumer Internet access and related
services. In connection with the Strategic Alliance, on June 5, 1998, Sprint
consummated a tender offer for 2.5 million shares of the Company's common stock
at a price per share of $22.50 in cash to each tendering stockholder (the
"Offer"). Immediately following the closing of the Offer, Sprint received
approximately 4.1 million shares of the Company's Series A convertible preferred
stock which has been valued at $135 million, in exchange for (i) transfer to the
Company of Sprint's approximately 130,000 Sprint Internet Passport subscribers,
(ii) aggregate cash consideration of approximately $24 million and (iii) the
exclusive right to use certain ports within Sprint's high-speed data network for
four years. EarthLink and Sprint also entered into a Marketing and Distribution
Agreement which includes a commitment by Sprint to deliver a minimum of 150,000
new subscribers per year for five years through its own channels, EarthLink's
right to be Sprint's exclusive provider of consumer Internet access services for
at least ten years and the right to use Sprint's brand and distribution network
for at least ten years. Sprint has also provided EarthLink with a credit
facility of up to $25 million (increasing to $100 million over three years) in
the form of convertible senior debt. Collectively, the above is referenced to as
the "Sprint Transaction".
In connection with the Sprint Transaction, a newly-formed subsidiary of the
Company was merged with and into the former EarthLink Network, Inc. (the
"Merger"), pursuant to which (i) the former EarthLink became a wholly-owned
subsidiary of the Company and (ii) each outstanding share of former EarthLink
common stock was converted into one share of common stock of the Company.
F-10
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STRATEGIC ALLIANCE WITH SPRINT CORPORATION (CONTINUED)
EarthLink Operations, Inc. ("EarthLink Operations"), the corporation surviving
the Merger, is now a wholly-owned subsidiary of the Company. All references in
these financial statements to EarthLink or the Company related, collectively, to
both EarthLink Network, Inc. and EarthLink Operations, Inc.
The Company accounted for the acquisition of the Sprint Internet Passport
business ("SIP") as a purchase and, accordingly, the results of operations of
SIP for the period from June 5, 1998 are included in the accompanying
consolidated financial statements. Intangible assets acquired in the Sprint
Transaction are valued as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Member base........................................... $ 65,000
Marketing and distribution agreement.................. 20,000
Goodwill.............................................. 36,164
--------
$121,164
========
</TABLE>
The assets are being amortized on a straight-line basis over the estimated
useful lives as follows: member base amortized over 18 months, the Marketing and
Distribution Agreement amortized over 5 and 10 years, which are the life of the
portion of the contract related to Sprint's provision of additional customers
and the overall contract life relative to the co-branding feature, respectively,
and the excess of consideration over the fair value of net asserts acquired
(goodwill) over 18 months. As such, the member base and goodwill will be fully
amortized by December 31, 1999.
The following unaudited pro forma consolidated results of operations for the
two years ended December 31 1998, assume the acquisition occurred on January 1,
1997 and 1998, respectivley. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations that actually would have resulted had the acquisition occurred on the
date indicated, or which may result in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues........................................ $ 95,377 $ 187,063
Net loss.............................................. (153,935) (99,348)
Deductions for accretion dividends (Note 8)........... (13,099) (13,099)
Net loss attributable to common stockholders.......... (167,034) (112,447)
Basic and diluted net loss per share.................. $ (8.35) $ (4.30)
</TABLE>
F-11
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Data communications equipment........................... $ 17,056 $ 29,274
Office and other equipment.............................. 12,196 21,863
Leasehold improvements.................................. 5,013 8,771
Construction in progress................................ 1,901 541
-------- --------
36,166 60,449
Less accumulated depreciation and amortization.......... (12,768) (25,243)
-------- --------
$ 23,398 $ 35,206
======== ========
</TABLE>
Property under capital lease, primarily data communications equipment
included above, aggregated $22.5 million and $31.7 million at December 31, 1997
and 1998, respectively. Included in accumulated depreciation and amortization
are amounts related to property under capital lease of $8.5 million and
$15.7 million at December 31, 1997 and 1998, respectively. Depreciation expense
charged to operations was $3.9 million, $8.5 million and $12.5 million in 1996,
1997, and 1998, respectively, and included $2.8 million, $5.6 million and
$7.1 million, respectively, pertaining to property under capital lease.
4. INTANGIBLE ASSETS
Intangible assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Member base.............................................. $ -- $ 65,000
Marketing and distribution agreement..................... -- 20,000
Goodwill................................................. -- 36,164
Rights to client lists................................... 1,414 10
Other.................................................... 618 245
------- --------
2,032 121,419
Less accumulated amortization............................ (1,074) (41,413)
------- --------
$ 958 $ 80,006
======= ========
</TABLE>
5. 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
F-12
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE (CONTINUED)
the 10% Promissory Notes converted their indebtedness into 111,534 shares of
Common Stock. In January 1997, the Company repaid the $2,225,000 balance
remaining on the 10% Promissory Notes.
On March 31, 1998, the Company's $5.0 million Convertible Note payable to
UUNET Technologies Inc., and related accrued interest, were converted into
783,030 shares of Common Stock at a conversion price of $6.44 per share. The
Company's note payable to PSINet, $4.4 million at December 31, 1997, was also
paid off during 1998.
6. CAPITAL STOCK AND MANDATORILY REDEEMABLE EQUITY SECURITIES
INITIAL PUBLIC OFFERING
On January 22, 1997 the Company commenced its initial public offering. The
offering consisted of 4,000,000 shares of common stock issued at $6.50 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
redeemable convertible preferred stock were converted to 2,727,248 shares of
common stock. In February 1997, the Underwriter exercised its over-allotment
option and purchased 569,500 shares at the initial public offering price of
$6.50. Net proceeds to the Company were approximately $3.4 million.
CONVERSION OF 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 million. Stock issuance costs of $987,000 have been charged to redeemable
convertible preferred stock. Each two shares of the Series A redeemable
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.
COMMON STOCK
On September 19, 1997, the Company closed a private placement of 2,919,518
shares of its unregistered restricted common stock. Net proceeds from the
offering were approximately $15.4 million.
FOLLOW ON PUBLIC OFFERING
In June 1998 the Company completed a follow on public offering of
3.8 million shares of its common stock at $30 per share. The offering consisted
of 3.0 million shares, including 490,000 shares sold to Sprint in accordance
with its preemptive rights under the Sprint Alliance, and an underwriter's
over-allotment of 720,000 shares. Net proceeds to the Company were approximately
$106.3 million.
COMMON STOCK ISSUANCES FOR OTHER THAN CASH
In May 1996, the Company issued 10,244 shares of common stock at $4.88 per
share, to a sub-contractor in lieu of cash for services provided to the Company.
In September 1996, the Company issued 75,000 shares of common stock at $5.50 per
share as consideration for the termination of a consulting agreement.
F-13
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL STOCK AND MANDATORILY REDEEMABLE EQUITY SECURITIES (CONTINUED)
In January 1998, the Company issued 20,000 shares of its common stock to a
Consultant in lieu of cash for services provided pursuant to a consulting
agreement. The fair value of the shares was recorded as prepaid professional
services and amortized ratably over the term of the contract. Under this
agreement the Company issued 20,000 additional shares of its common stock in
January 1999.
7. CONVERTIBLE PREFERRED STOCK
All issued and outstanding shares of Series A convertible preferred stock
are held by Sprint (Note 2).
The Series A convertible preferred stockholders receive dividends at a rate
per annum of 3% of the Liquidation Value (as defined below), compounded
quarterly. For a period of five years from June 1998, such dividends are payable
"in kind" by way of an increase in the Liquidation Value of the shares.
Beginning in June 2003, holders of Series A convertible preferred stock will
receive cumulative quarterly cash dividends of 3% annually. Beginning in
June 2018, holders of the Series A convertible preferred stock are entitled to
cumulative quarterly cash dividends of 8% of the Liquidation Value per share,
increasing annually to a maximum rate of 12%.
The holders of Series A convertible preferred stock will receive, prior to
any payment or distribution in respect of other shares of the Company's capital
stock, an amount per share equal to the average market value of the common stock
measured over the thirty day period ended June 5, 1998 (the "Average Stock
Price"), plus all accrued and unpaid dividends on such share, whether in cash or
in kind (such amount, the "Liquidation Value").
Beginning in June 1999, each share of Series A convertible preferred stock
is convertible into such number of shares of common stock as is determined by
dividing the Liquidation Value by the "Conversion Price" in effect at such time.
For the five year period following June 1998, the Conversion Price is equal to
the Average Stock Price multiplied by 116.118%. Thereafter, the Conversion Price
is increased annually by 6%, accruable quarterly. The Conversion Price is also
subject to adjustment based on changes in capitalization of the common stock.
Although conversion of the Series A convertible preferred stock is at the
holder's option, conversion is required in the event the Company consummates
certain business combination transactions.
Beginning in June 2001, the Company may elect to redeem the outstanding
shares of Series A convertible preferred stock at a redemption price per share
equal to the Liquidation Value of such shares, including the acceleration of
certain dividends, multiplied by a specified percentage. The specified
percentage is initially equal to 103%, and will be reduced by 1% annually in
each of the subsequent three years, and thereafter will be equal to 100%.
The Series A convertible preferred stockholders do not possess general
voting rights together with holders of common stock. However, the Series A
convertible preferred stockholders are separately entitled to elect two of the
Company's directors. This right terminates as to one of the directors if Sprint
fails to maintain at least a 20% equity interest in EarthLink (on a fully
diluted basis, subject to adjustment) for any three consecutive months, and will
terminate as to both of the directors if Sprint fails to maintain at least a 10%
equity interest over the same period. A separate vote of 66.67% of the
then-outstanding shares of Series A convertible preferred stock is required in
certain limited situations, including liquidation, dissolution or winding up of
the Company, or taking certain actions which would adversely affect the rights
of the holders of the Series A convertible preferred stock as a class.
F-14
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEDUCTIONS FOR DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
Dividends on convertible preferred stock are reflected as an increase to net
loss attributable to common stockholders. This adjustment reflects the
liquidation dividend of $4.3 million based on a 3% dividend (Note 7) and the
accretion of a $3.3 million dividend related to the beneficial conversion
feature of the Series A convertible preferred stock in accordance with EITF
Topic No. D-60 based upon the rate at which the preferred stock becomes
convertible.
9. STOCK OPTIONS AND WARRANTS
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 shares of common stock to employees of the Company and
non-qualified stock options to employees, officers, directors and consultants of
the Company. During 1998, the Plan was amended to increase the number of
available options from 2,500,000 to 5,700,000. The Plan is administered by a
committee appointed by the Board of Directors which determines the terms of the
options granted, including the exercise price, the number of shares subject to
option, and the option vesting period. The exercise price of all options granted
under the plan must be at least 100% of the fair market value on the date of
grant. Options generally have a maximum term of ten years and vest in equal
quarterly increments over a five year period. As of December 31, 1998, there
were 1,493,176 shares available for issuance under the 1995 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 an aggregate of
125,000 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
20,000 and 5,000 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 have a maximum term of ten years and vest in equal quarterly
increments over a five year period. As of December 31, 1998, there were no
outstanding options to purchase shares of common stock 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.
F-15
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998
--------- ---------
<S> <C> <C>
Annual dividends..................................... zero zero
Expected volatility.................................. 69% 83%
Risk free interest rate.............................. 6.49% 5.28%
Expected life........................................ 6.6 years 6.6 years
</TABLE>
For 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.
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,
---------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net loss attributable to common stockholders
As reported................................... $31,149 $29,916 $ 67,383
======= ======= ========
Pro forma..................................... $31,477 $30,737 $104,577
======= ======= ========
Basic and diluted net loss per share
As reported................................... $ 2.57 $ 1.50 $ 2.58
======= ======= ========
Pro forma..................................... $ 2.60 $ 1.54 $ 4.00
======= ======= ========
</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 January 1996, certain stockholders guaranteed a $1.5 million lease for
networking equipment. The Company issued warrants to purchase 200,000 shares of
common stock at $2.42 per share. The fair value of the warrants has been
included in intangible assets. These warrants expire January 11, 2001.
In January 1996, the Company issued warrants to purchase 200,000 shares of
common stock at $2.42 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 No. 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
$1.5 million lease line for equipment. The Company issued warrants to LINC to
purchase 100,000 shares of common stock at
F-16
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
$2.42 per share. The fair value of the warrants has been included in intangible
assets. 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 10,000 shares of common stock at $4.88 per share.
The fair value of the warrants has been included in intangible assets. These
warrants expire February 15, 2006.
In May 1996, the Company issued warrants to purchase 90,954 shares of common
stock at $4.88 per share to various lessors in return for lease lines and other
services to the Company. The fair value of the warrants has been included in
intangible assets. 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 20,000 shares of
common stock at an exercise price of $10.00 per share. The fair value of the
warrants has been included in intangible assets.
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 196,680 shares of common stock at an exercise price of $5.50 per share, as
adjusted. The fair value of the warrants has been included in intangible assets.
In connection with the execution of the PSINet, Inc. ("PSINet") agreement in
July 1996 (Note 11), the Company issued warrants to purchase 200,000 shares of
Common Stock at an exercise price of $10.00 per share. The fair value of the
warrants has been included in intangible assets.
In connection with the private placement of Series A redeemable convertible
preferred stock, described in Note 6, the Company granted to certain purchasers
of the convertible preferred stock warrants to purchase 200,000 shares of common
stock at $5.50 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 100,000 shares of common stock, having an exercise price of $4.88
per share. In September 1997, the parties orally agreed to rescind the
agreement. The rescission agreement included the return of the 100,000 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 value of the warrants, $76,000, has been recorded as
prepaid advertising and will be expensed upon airing of the infomercials.
In January 1997 and October 1997, the Company issued warrants to purchase
12,000 and 50,000 shares, respectively, of the Company's common stock to certain
consultants. The respective exercise prices of the warrants were $6.50 and
$8.88. 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 15,000 shares of
the Company's common stock at $5.50 per share to each of the three members of
the Company's Technology Advisory
F-17
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
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.
In March 1997 and October 1997, the Company issued warrants to purchase
15,000 shares of the Company's c common stock to each of two new members of the
Company's Technology Advisory Council. The warrants have an exercise price of
$5.25 per share and $8.88 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, 1998:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON STOCK
------------------------------------- WEIGHTED
INCENTIVE NON-QUALIFIED AVERAGE
STOCK STOCK EXERCISE
OPTIONS OPTIONS WARRANTS PRICE
--------- ------------- --------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1995...................... 465,000 729,582 520,660 $ 1.50
Granted........................................... 1,612,500 350,000 1,182,634 $ 4.58
Forfeited......................................... (21,000) -- -- $ 4.88
--------- --------- --------- ------
Balance at December 31, 1996...................... 2,056,500 1,079,582 1,703,294 $ 3.45
Granted........................................... 691,250 100,000 92,000 $ 6.92
Exercised......................................... (97,914) (29,582) -- $ 2.82
Forfeited......................................... (422,614) -- -- $ 4.51
--------- --------- --------- ------
Balance at December 31, 1997...................... 2,227,222 1,150,000 1,795,294 $ 4.01
Granted........................................... 1,817,400 -- 7,306 $26.35
Exercised......................................... (774,720) (494,034) (712,392) $ 2.82
Forfeited......................................... (85,712) -- -- $14.79
Surrendered in cashless exercise.................. -- (7,966) (148,776) $ 8.77
--------- --------- --------- ------
Balance at December 31, 1998...................... 3,184,190 648,000 941,432 $12.14
========= ========= ========= ======
Exercisable at December 31, 1996.................. 168,312 194,584 1,538,294
========= ========= =========
Exercisable at December 31, 1997.................. 598,710 417,500 1,673,840
========= ========= =========
Exercisable at December 31, 1998.................. 583,497 145,500 874,257
========= ========= =========
</TABLE>
The weighted average fair values of the options granted during the three
years ended December 31, 1998, were $1.01, $4.98 and $20.47, respectively. The
weighted average fair values of warrants granted during the three years ended
December 31, 1998 were $0.86, $6.46 and $22.56, respectively.
F-18
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
Following is a summary of stock options and warrants outstanding as of
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
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>
$ 0.91 $ 0.91 615,000 6.23 $ 0.91 435,000 $ 0.91
$ 2.42 $ 2.42 964,910 6.97 $ 2.42 454,410 $ 2.42
$ 4.88 $ 5.75 1,004,128 7.67 $ 5.24 373,865 $ 5.23
$ 6.50 $16.06 1,080,734 8.85 $12.29 135,699 $11.99
$22.38 $39.19 1,108,850 9.56 $32.94 204,280 $23.84
--------- ---- ------ --------- ------
$ 0.91 $39.19 4,773,622 8.05 $12.14 1,603,254 $ 6.21
========= ==== ====== ========= ======
</TABLE>
10. INCOME TAXES
At December 31, 1997 and 1998, the Company had net operating loss
carryforwards for federal income tax purposes totaling approximately
$61.0 million, and $106.8 million, respectively, which begin to expire in 2010.
At December 31, 1997 and 1998, the Company had net operating loss carryforwards
for California income tax purposes totaling approximately $48.0 million and
$70.0 million, respectively, which begin to expire in 2001. 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. The net operating loss includes $24.0 million related to
the exercise of employee stock options. Any benefit resulting from the
utilization of this portion of the net operating loss will be credited directly
to equity.
Deferred tax assets and liabilities include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax liabilities:
Member base........................................... $ -- $(17,414)
Other................................................. -- (819)
-------- --------
-- (18,233)
-------- --------
Gross deferred tax assets:
Net operating loss carryforwards...................... 24,584 42,625
Other................................................. 642 948
-------- --------
25,226 43,573
-------- --------
Valuation allowance..................................... (25,226) (25,340)
-------- --------
$ -- $ --
======== ========
</TABLE>
F-19
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Because management believes sufficient uncertainty exists regarding
realizability, a full valuation allowance has been established.
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Federal income tax (benefit) at statutory rate.......... $(10,171) $(20,923)
Nondeductible goodwill.................................. -- 4,922
Nondeductible expenses.................................. -- 54
Net valuation allowance................................. 10,171 15,947
-------- --------
$ -- $ --
======== ========
</TABLE>
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
1996, 1997 and 1998 for all operating leases amounted to $914,000, $1.9 million
and $2.4 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.
During the three years ended December 31, 1998, the Company financed the
acquisition of data processing and office equipment amounting to approximately
$11.3 million, $10.5 million and $9.3 million, respectively, by entering into a
number of leases and 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.
The Company's corporate headquarters and call center are located in a 93,000
square-foot facility in Pasadena, California. Base rent is currently $73,000 per
month. The Company has an option to extend this lease for an additional five
years at the then-prevailing market rate following its expiration in
September 2007. The data center and primary data hub are housed in a 110,000
square foot facility adjacent to the headquarters with rent of $92,000 per
month, subject to yearly increases. The lease for this space expires
February 2007, with an option to extend for an additional ten year term.
F-20
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Minimum lease commitments under non-cancelable leases at December 31, 1998
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- ------------ -------- ---------
(IN THOUSANDS)
<S> <C> <C>
1999..................................................... $10,048 $ 2,606
2000..................................................... 7,109 2,967
2001..................................................... 2,287 2,740
2002..................................................... 183 2,865
2003..................................................... 38 2,881
Thereafter............................................... 8 10,312
------- -------
Total minimum lease payments............................. 19,673 $24,371
=======
Less amount representing interest........................ (3,631)
-------
Present value of future lease payments................... 16,042
Less current portion..................................... (8,341)
-------
$ 7,701
=======
</TABLE>
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. At December 31, 1998, $4.0 million and $4.1 million in amounts due
to UUNET were recorded in accounts payable and other accrued liabilities,
respectively, and $4.7 million in amounts due PSINet were recorded in other
accrued liabilities.
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>
1999........................................................ $ 36.0
2000........................................................ 40.8
2001........................................................ 43.0
2002........................................................ 47.0
------
Total....................................................... $166.8
======
</TABLE>
EarthLink 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 this browser software under conditions acceptable to
EarthLink, is probable.
F-21
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. 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 and 1998 were $84,000
and $285,000, respectively.
13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year for interest...................... $1,041 $1,965 $2,101
Cash paid during the year for income taxes.................. 1 1 1
Non cash transactions related to the conversion of notes
payable to equity......................................... -- 725 5,043
Common stock subscription................................... -- -- 1,041
Non cash adjustments related to accretion dividends of
Series A convertible preferred stock...................... -- -- 7,601
</TABLE>
14. SUBSEQUENT EVENTS
In January 1999 the Company completed a follow on public offering of
2.4 million shares of its common stock at $73.63 per share. The offering
consisted of 2.3 million shares and an underwriter's over-allotment of 99,000
shares exercised in February 1999. Net proceeds to the Company were
approximately $170 million. In conjunction with the offering, Sprint exercised
its preemptive rights to maintain its existing ownership level in the Company.
Accordingly, Sprint purchased 770,000 shares of which 192,000 were common stock
and 578,000 were Series B convertible preferred stock. Series B convertible
preferred stock has the same rights and privileges as Series A convertible
preferred stock, as described in Note 7, except that each Series B share is
convertible into only one share of the Company's common stock. Proceeds from the
sale of shares to Sprint were $54.1 million.
In February 1999, Sprint exercised its preemptive rights to maintain its
ownership in the Company after the exercise of the underwriter's over-allotment
granted in connection with the aforementioned follow on public offering.
Accordingly, Sprint purchased 38,000 shares of which 9,000 were common stock and
29,000 were Series B convertible preferred stock. Proceeds from the sale of
stock to Sprint were $2.7 million.
F-22
<PAGE>
EARTHLINK NETWORK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(AUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 140,864 $ 338,315
Accounts receivable, net.................................. 4,779 10,385
Prepaid expenses.......................................... 4,147 5,785
Other assets.............................................. 775 6,960
--------- ---------
Total current assets.................................... 150,565 361,445
Other long-term assets...................................... 564 2,995
Property and equipment, net................................. 35,206 52,139
Intangibles, net (Note 4)................................... 80,006 26,933
--------- ---------
$ 266,341 $ 443,512
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 14,818 $ 22,299
Accrued payroll and related expenses...................... 8,934 9,274
Other accounts payable and accrued liabilities............ 20,372 23,690
Current portion of capital lease obligations.............. 8,341 9,337
Deferred revenue.......................................... 8,831 13,826
--------- ---------
Total current liabilities............................... 61,296 78,426
Long-term debt.............................................. 7,701 9,201
--------- ---------
Total liabilities....................................... 68,997 87,627
Stockholders' equity:
Preferred stock........................................... 41 47
Common stock.............................................. 291 326
Stock subscriptions receivable............................ (1,041) --
Additional paid-in capital................................ 330,911 577,202
Warrants to purchase common stock......................... 597 597
Accumulated deficit....................................... (133,455) (222,287)
--------- ---------
Total stockholders' equity.............................. 197,344 355,885
--------- ---------
$ 266,341 $ 443,512
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-23
<PAGE>
EARTHLINK NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1998 1999 1998 1999
-------- -------- -------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Recurring revenues.................................. $ 46,877 $ 84,627 $109,957 $ 224,055
Other revenues...................................... 1,699 1,931 4,897 4,490
Incremental revenues................................ 1,248 3,016 2,786 7,273
-------- -------- -------- ---------
Total revenues.................................... 49,824 89,574 117,640 235,818
Cost of recurring revenues.......................... 20,619 33,398 52,261 95,494
Cost of other revenues.............................. 252 210 408 786
Sales and marketing................................. 10,644 38,255 26,491 79,577
General and administrative.......................... 5,871 9,781 15,426 25,456
Operations and member support....................... 15,078 25,748 36,248 71,282
Amortization and transaction costs (Note 4)......... 17,754 17,673 24,962 53,019
-------- -------- -------- ---------
Total operating costs and expenses................ 70,218 125,065 155,796 325,614
-------- -------- -------- ---------
Loss from operations................................ (20,394) (35,491) (38,156) (89,796)
Interest income..................................... 1,919 4,434 2,568 12,681
Interest expense.................................... (353) (308) (1,661) (1,040)
-------- -------- -------- ---------
Net loss.......................................... (18,828) (31,365) (37,249) (78,155)
Deductions for accretion dividends (Note 5)......... (3,276) (3,404) (4,330) (10,677)
-------- -------- -------- ---------
Net loss attributable to common stockholders........ $(22,104) $(34,769) $(41,579) $ (88,832)
======== ======== ======== =========
Basic and diluted net loss per share (Note 3)....... $ (0.78) $ (1.07) $ (1.64) $ (2.78)
======== ======== ======== =========
Weighted average shares............................. 28,458 32,383 25,292 31,925
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-24
<PAGE>
EARTHLINK NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1998 1999 1998 1999
-------- -------- --------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities....................................... $ 2,462 $ (8,746) $ 14,398 $ (8,034)
-------- -------- --------- --------
Cash flows from investing activities:
Purchases of property and equipment.............. (4,381) (11,422) (15,911) (33,625)
Proceeds from sale of property and equipment..... -- 1,195 -- 1,416
Purchase of investment........................... -- (1,500) -- (1,500)
Purchase of intangible assets.................... -- -- (9) --
Transaction costs................................ (449) -- (8,861) --
Net cash acquired from acquisition............... -- -- 23,750 --
-------- -------- --------- --------
Net cash used in investing activities........ (4,830) (11,727) (1,031) (33,709)
-------- -------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable.......... -- -- 200 --
Repayment of notes payable....................... (120) -- (4,507) --
Proceeds from capital lease obligations.......... 576 3,990 6,212 11,752
Principal payments under capital lease
obligations.................................... (2,380) (3,801) (6,269) (9,257)
Proceeds from issuance of common stock, net...... -- -- 105,329 183,099
Proceeds from stock options and warrants
exercised...................................... 976 6,227 3,615 9,937
Proceeds from sale of redeemable preferred
stock.......................................... -- -- -- 42,622
Proceeds from liquidation of subscription
receivable..................................... -- -- -- 1,041
-------- -------- --------- --------
Net cash (used in) provided by financing
activities................................. (948) 6,416 104,580 239,194
-------- -------- --------- --------
Net (decrease) increase in cash and cash
equivalents...................................... (3,316) (14,057) 117,947 197,451
Cash and cash equivalents, beginning of period..... 137,713 352,372 16,450 140,864
-------- -------- --------- --------
Cash and cash equivalents, end of period........... $134,397 $338,315 $ 134,397 $338,315
======== ======== ========= ========
Acquisition, net of cash acquired (Note 4):
Issuance of convertible preferred stock.......... $ 135,000
Transaction costs................................ 9,914
Intangible assets................................ (121,164)
---------
Net cash acquired from acquisition............... $ 23,750
=========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-25
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of EarthLink Network, Inc.,
which include the accounts of its wholly owned subsidiary, EarthLink Operations,
Inc., (collectively, "EarthLink" or the "Company") for the three and nine month
periods ended September 30, 1999 and the related footnote information are
unaudited and have been prepared on a basis substantially consistent with the
Company's audited financial statements as of December 31, 1998 contained in the
Company's Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission (the "Annual Report"). All significant intercompany transactions have
been eliminated. These financial statements should be read in conjunction with
the audited consolidated financial statements and the related notes thereto
contained in the Company's Annual Report. In the opinion of management, the
accompanying unaudited financial statements contain all adjustments (consisting
of normal recurring adjustments) which management considers necessary to present
fairly the financial position of the Company at September 30, 1999 and the
results of operations and of cash flows for the three month and nine month
periods ended September 30, 1999. The results of operations for the three and
nine month periods ended September 30, 1999 are not necessarily indicative of
the results for the entire year ending December 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results may differ from those estimates.
2. RECLASSIFICATIONS
Certain amounts in prior period financial statements have been reclassified
to conform to the current period presentation.
3. NET LOSS PER SHARE
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share" ("EPS"). SFAS No. 128 requires a dual presentation
of basic and diluted EPS. Basic EPS represents the weighted average number of
shares outstanding divided into net income attributable to common stockholders
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 as such inclusion would have an
anti-dilutive effect.
4. INTANGIBLE ASSETS AND AMORTIZATION AND TRANSACTION COSTS
In June 1998, the Company consummated its strategic alliance with Sprint
Corporation (the "Sprint Transaction"). Intangible assets acquired in the Sprint
Transaction are valued as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Member base................................................. $ 65,000
Marketing and distribution agreement........................ 20,000
Goodwill.................................................... 36,164
--------
$121,164
========
</TABLE>
F-26
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INTANGIBLE ASSETS AND AMORTIZATION AND TRANSACTION COSTS (CONTINUED)
The assets are being amortized on a straight-line basis over the estimated
useful lives as follows: member base amortized over 18 months, the Marketing and
Distribution Agreement amortized over 5 and 10 years, which are the life of the
portion of the contract related to Sprint's provision of additional customers
and the overall contract life relative to the co-branding feature, respectively,
and the excess of consideration over the fair value of net assets acquired
(goodwill) over 18 months. As such, the member base and goodwill will be fully
amortized by December 31, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1999 1998 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Member base............................................. $10,833 $10,833 $14,444 $32,500
Marketing and distribution agreement.................... 813 813 1,083 2,438
Goodwill................................................ 6,108 6,027 8,038 18,081
------- ------- ------- -------
Total............................................... $17,754 $17,673 $23,565 $53,019
======= ======= ======= =======
</TABLE>
In addition, a non-recurring Sprint Transaction cost of $1,397,000 was
recorded in June 1998.
5. DEDUCTIONS FOR ACCRETION DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
The Convertible Preferred Stock issued to Sprint pays liquidation dividends
for the first five years in the form of increases in its Liquidation Value. The
adjustments of $3.4 million and $10.7 million recorded during the three and nine
month periods ended September 30, 1999, respectively, represent liquidation
dividends of $2.2 million and $6.5 million, based on a 3% dividend and accretion
dividends of $1.2 million and $4.2 million, respectively, related to the
beneficial conversion feature of the Convertible Preferred Stock.
6. AGREEMENT TO MERGE WITH MINDSPRING ENTERPRISES
In September 1999 EarthLink and MindSpring Enterprises Inc. agreed to merge
into a newly formed public company, in a transaction to be accounted for as a
pooling of interests, with MindSpring stockholders receiving one share of the
new company stock for each share of MindSpring stock, and EarthLink stockholders
receiving 1.615 shares of the new company stock in exchange for each share of
EarthLink stock. The combined company will be known as EarthLink and will trade
under the Nasdaq symbol "ELNK." Subject to certain conditions, including
regulatory approvals and approval by both companies' stockholders, the
transaction is expected to close in the first quarter 2000.
7. INVESTMENTS
In July 1999, the Company committed to invest in eCompanies Venture Group,
LP, ("EVG"), a limited partnership formed to invest in domestic emerging growth
companies, and eCompanies LLC a partnership formed to create, develop and invest
in Internet related ventures. EarthLink Founder and Chairman, Sky Dayton is a
founding partner in both partnerships. In July 1999 EarthLink invested $1.5
million in EVG and has committed to invest an additional $8.5 million and $2.0
million in EVG and eCompanies, respectively. The investments are accounted for
under the cost method of accounting as
F-27
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENTS (CONTINUED)
the Company does not have the ability to exercise significant influence over the
partnerships' operating or financial policies. Any distributions of earnings
from the partnerships, will be recorded as income when declared.
8. SACRAMENTO CALL CENTER
In September 1999, the Company entered into a ten year lease for a facility
to house its permanent Sacramento Call Center. Rent commitments for the 95,000
square feet of space are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, IN THOUSANDS
- ------------------------ ------------
<S> <C>
1999 (from September 1, 1999)............................... $ 591
2000........................................................ 1,773
2001........................................................ 1,963
2002........................................................ 2,059
2003........................................................ 2,116
2004........................................................ 2,135
Thereafter.................................................. 10,426
-------
$21,063
=======
</TABLE>
F-28
<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-1 of EarthLink Network, 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 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 direct 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-29
<PAGE>
CONSUMER INTERNET ACCESS SERVICES OF SPRINT CORPORATION
STATEMENTS OF REVENUES AND DIRECT EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
1997 MARCH 31, 1998(UNAUDITED)
----------------------- -------------------------
(IN THOUSANDS)
<S> <C> <C>
Net operating revenues............................ $ 14,489 $ 6,259
Direct expenses:
Cost of services................................ 51,313 9,813
Selling, general and administrative............. 13,099 2,155
Depreciation.................................... 6,070 2,146
Other........................................... 3,404 198
-------- -------
Total direct expenses............................. 73,886 14,312
-------- -------
Direct expenses in excess of revenues............. $(59,397) $(8,053)
======== =======
</TABLE>
SEE ACCOMPANYING NOTE.
F-30
<PAGE>
CONSUMER INTERNET ACCESS SERVICES OF SPRINT CORPORATION
NOTE TO STATEMENTS OF REVENUES AND DIRECT EXPENSES
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF PRESENTATION
The statements of revenues and direct expenses represent the activities
related to the Consumer Internet Access Services of Sprint Corporation and have
been prepared in connection with the transaction between EarthLink
Network, Inc. and Sprint Corporation. The statements of revenues and direct
expenses are 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 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 statements of revenues and direct expenses are 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.
UNAUDITED FINANCIAL INFORMATION
The statement of revenues and direct expenses for the three months ended
March 31, 1998 is unaudited. Sprint Corporation believes that such information
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the revenues and direct expenses related to the
Consumer Internet Access Services of Sprint Corporation.
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 and the three months
ended March 31, 1998 was $723,000 and $471,000 (unaudited), respectively.
F-31
<PAGE>
CONSUMER INTERNET ACCESS SERVICES OF SPRINT CORPORATION
NOTE TO STATEMENTS OF REVENUES AND DIRECT EXPENSES (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998)
DEPRECIATION
The cost of property, plant and equipment is depreciated on a straight-line
basis over estimated economic useful lives.
USE OF ESTIMATES
The statements of revenues and direct expenses are 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-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of EarthLink Network, Inc.
We have audited the accompanying statement of assets acquired and
liabilities assumed of the Sprint Internet Passport Business acquired by
EarthLink Network, Inc. as of June 5, 1998. This statement of assets acquired
and liabilities assumed is the responsibility of the Company's management; our
responsibility is to express an opinion on the statement of assets acquired and
liabilities assumed 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 statement of assets acquired and
liabilities assumed is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statement of assets acquired and liabilities assumed. An audit also
includes, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
statement of assets acquired and liabilities assumed. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement of assets acquired and liabilities assumed was
prepared for inclusion in the Registration Statement on Form S-1 of EarthLink
Network, 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 of Regulation S-X for the transaction between EarthLink
Network, Inc. and Sprint Corporation.
In our opinion, the accompanying statement of assets acquired and
liabilities assumed presents fairly, in all material respects, the assets
acquired and liabilities assumed as described in the note to the statement of
assets acquired and liabilities assumed of the Sprint Internet Passport Business
by EarthLink Network, Inc. as of June 5, 1998, in conformity with generally
accepted accounting principles.
PRICE WATERHOUSE LLP
Costa Mesa, California
June 16, 1998
F-33
<PAGE>
EARTHLINK NETWORK, INC.
STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
OF THE SPRINT INTERNET PASSPORT BUSINESS
<TABLE>
<CAPTION>
JUNE 5, 1998
--------------
(IN THOUSANDS)
<S> <C>
Current assets:
Cash...................................................... $ 23,750
--------
Total current assets...................................... 23,750
Intangible assets........................................... 119,718
--------
143,468
Current liabilities:
Other accounts payable and accrued liabilities............ (8,468)
--------
Total current liabilities................................. (8,468)
--------
Net assets acquired......................................... $135,000
========
</TABLE>
See accompany note to this financial statement.
F-34
<PAGE>
EARTHLINK NETWORK, INC.
NOTE TO STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
OF THE SPRINT INTERNET PASSPORT BUSINESS
JUNE 5, 1998
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF PRESENTATION
The statement of assets acquired and liabilities assumed represents the
acquisition by EarthLink Network, Inc. (the "Company") of the Sprint Internet
Passport business ("SIP") of Sprint Corporation ("Sprint") in a transaction
accounted for as a purchase. The purchase price paid by the Company consisted of
approximately 4.1 million shares of Series A Convertible Preferred Stock, which
has been valued at $135,000,000. In exchange for the Series A Convertible
Preferred Stock, the Company obtained SIP's customer base, cash and access to
Sprint's high-speed data network. Sprint has further provided the Company access
to up to $100 million in convertible debt financing, and has entered into a
Marketing and Distribution Agreement with the Company.
Sprint Corporation began offering Internet access in the fourth quarter of
1996. Sprint 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 Sprint Internet Passport business 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
Sprint Internet Passport 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, the Company
has included this statement of assets acquired and liabilities assumed in order
to comply with Rule 3-05 of Regulation S-X.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of the statement of assets acquired and liabilities assumed
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 statement. Actual results could differ from those estimates.
PURCHASE PRICE ALLOCATION
The purchase price was allocated to the fair value of assets acquired,
consisting of cash and intangible assets related to a customer base, Sprint's
provision of additional customers and the co-branding feature of the Marketing
and Distribution Agreement and the excess of consideration over the fair value
of net assets acquired.
INTANGIBLE ASSETS
The intangible assets are amortized on a straight-line basis over the
estimated useful lives as follows: customer base amortized over 18 months, the
Marketing and Distribution Agreement amortized over 5 and 10 years, which are
the life of the portion of the contract related to Sprint's provision of
additional customers and the overall contract life relative to the co-branding
feature, respectively, and the excess of consideration over the fair value of
net assets acquired over 18 months. 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
intangible assets.
OTHER ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The liabilities consist of accrued expenses for incremental acquisition
costs directly attributable to the acquisition, primarily investment banking,
legal and accounting professional fees.
F-35
<PAGE>
EARTHLINK NETWORK,INC.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
give effect to the acquisition by the Company of the Sprint Internet Passport
business ("SIP") of Sprint in a transaction accounted for as a purchase. The
unaudited statements of operations are based on the statements of operations of
the Company and the statements of revenues and direct expenses of SIP appearing
elsewhere in this Prospectus, and combine the results of operations of the
Company and of SIP for the year ended December 31, 1998 and the nine months
ended September 30, 1998 as if the acquisition occurred on January 1, 1998.
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 the historical financial statements and notes thereto of the Company,
both included elsewhere in this Prospectus. The historical statement of revenues
and direct expenses of SIP are 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
the Company.
The purchase price paid by the Company consisted of approximately
4.1 million shares of Series A Convertible Preferred Stock, which has been
valued at $135,000,000. In exchange for the Series A Convertible Preferred
Stock, the Company obtained SIP's customer base of approximately 130,000
members, cash of $23,750,000 and access to Sprint's high-speed data network.
Sprint has further provided the Company access to $25 million (increasing to
$100 million over a three year period) in convertible debt financing, and has
entered into a Marketing and Distribution Agreement with the Company. The
Company acquired no other assets of SIP or Sprint. Accordingly, the purchase
price was allocated to the cash and intangible assets acquired. The excess of
the purchase price over the fair value of the assets acquired was allocated to
goodwill. The final allocation may differ from that used in the unaudited pro
forma condensed combined financial statements. The acquisition was accounted for
using the purchase method.
Sprint began offering Internet access in the fourth quarter of 1996 and
reported this operation within its Emerging Businesses Segment (the "Group").
Sprint maintained the financial information relative to the Internet subscribers
in the financial statements for the Group. Sprint maintained 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. Sprint, however, did not
separately maintain and account for other costs and expenses to operate this
business. The Company is unable to determine or estimate these costs on a
historical and pro forma basis. In addition, Sprint did 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.
F-36
<PAGE>
EARTHLINK NETWORK, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
EARTHLINK SPRINT INTERNET
NETWORK, INC. PASSPORT PRO FORMA PRO FORMA
HISTORICAL HISTORICAL(A) ADJUSTMENTS COMBINED
------------- --------------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues............................. $ 175,941 $ 11,122 $ 187,063
Operating costs and expenses:
Cost of revenues......................... 70,467 17,881 88,348
Selling, general and administrative and
member support......................... 112,570 3,423 115,993
Depreciation............................. 12,508 3,655 $ (3,655)(b) 12,508
Amortization and transaction expenses.... 42,635 28,058 (c) 70,693
--------- -------- -------- ---------
Total operating costs and expenses..... 238,180 24,959 24,403 287,542
--------- -------- -------- ---------
Loss from operations....................... (62,239) (13,837) (24,403) (100,479)
Interest income, net....................... 2,457 2,457
--------- -------- -------- ---------
Net loss............................... (59,782) (13,837) (24,403) (98,022)
Deductions for accretion dividends......... (7,601) (5,525)(d) (13,126)
--------- -------- -------- ---------
Net loss attributable to common
stockholders......................... $ (67,383) $(13,837) $(29,928) $(111,148)
========= ======== ======== =========
Basic and diluted net loss per share..... $ (2.58) $ (4.25)
========= =========
Weighted average shares outstanding...... 26,157 26,157 (e)
========= =========
</TABLE>
F-37
<PAGE>
EARTHLINK NETWORK, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
EARTHLINK
NETWORK, INC. SPRINT INTERNET PRO FORMA PRO FORMA
HISTORICAL PASSPORT HISTORICAL(A) ADJUSTMENTS COMBINED
------------- ---------------------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues.......................... $117,640 $ 11,122 $128,762
Operating costs and expenses:
Cost of revenues...................... 47,649 17,881 65,530
Selling, general and administrative
and member support.................. 73,353 3,423 76,776
Depreciation.......................... 9,832 3,655 $ (3,655)(b) 9,832
Amortization and transaction
expenses............................ 24,962 11,198 (c) 36,160
-------- -------- -------- --------
Total operating costs and
expenses.......................... 155,796 24,959 7,543 188,298
-------- -------- -------- --------
Loss from operations.................... (38,156) (13,837) (7,543) (59,536)
Interest income, net.................... 907 907
-------- -------- -------- --------
Net loss............................ (37,249) (13,837) (7,543) (58,629)
Deductions for accretion dividends...... (4,330) (4,616)(d) (8,946)
-------- -------- -------- --------
Net loss attributable to common
stockholders...................... $(41,579) $(13,837) $(12,159) $(67,575)
======== ======== ======== ========
Basic and diluted net loss per share.... $ (1.64) $ (2.67)
======== ========
Weighted average shares outstanding..... 25,292 25,292 (e)
======== ========
</TABLE>
F-38
<PAGE>
EARTHLINK NETWORK, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS (CONTINUED)
(UNAUDITED)
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
Pro Forma adjustments are as follows:
a. The historical SIP revenues and expenses include results from
January 1, 1998 through June 5, 1998 (the date of acquisition).
b. The Company acquired no depreciable assets of SIP. This adjustment
eliminates the depreciation expense recorded by SIP.
c. This entry reflects the amortization of intangible assets as follows:
customer base amortized over 18 months, the Marketing and Distribution
Agreement amortized over five and ten years, which are the lives of the
portion of the contract related to Sprint's provision of customers and
the overall contract period relative to the co-branding feature,
respectively, and 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.
d. This adjustment reflects the Liquidation Dividends based upon a 3%
Liquidation Value accretion dividend 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.
e. Pro forma 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, 1998, but excludes any
shares purchased by Sprint in the Offer. The Company's common stock
equivalents have been excluded from the calculation as their effect is
antidilutive.
F-39
<PAGE>
INDEX TO MINDSPRING ENTERPRISES, INC. FINANCIAL STATEMENTS
MINDSPRING ENTERPRISES, INC.
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Public Accountants.................... F-41
Balance Sheets as of December 31, 1998 and 1997............. F-42
Statement of Operations for the years ended December 31,
1998, 1997 and 1996....................................... F-43
Statement of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996.......................... F-44
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996....................................... F-45
Notes to Financial Statements............................... F-46
MINDSPRING ENTERPRISES, INC.
Balance Sheets as of September 30, 1999 (unaudited) and
December 31, 1998......................................... F-59
Statement of Operations for the nine months ended
September 30, 1999 (unaudited) and 1998 (unaudited)....... F-60
Statement of Cash Flows for the nine months ended
September 30, 1999 (unaudited) and 1998 (unaudited)....... F-61
Condensed Notes to Financial Statements..................... F-62
</TABLE>
<TABLE>
<S> <C>
SPRY, INC.
Report of Independent Public Accountants.................... F-65
Balance Sheets as of April 30, 1997, January 31, 1998 and
July 31, 1998 (unaudited)................................. F-66
Statement of Operations for the years ended April 30, 1996
and 1997, the nine months ended January 31, 1998 and the
six months ended July 31, 1997 (unaudited) and 1998
(unaudited)............................................... F-67
Statement of Shareholders' (Deficit) Equity for the years
ended April 30, 1995, 1996 and 1997 and January 31,
1998...................................................... F-68
Statements of Cash Flows for the years ended April 30, 1996
and 1997, the nine months ended January 31, 1998 and the
six months ended July 31, 1997 (unaudited) and 1998
(unaudited)............................................... F-69
Notes to Financial Statements............................... F-70
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
NETCOM ON-LINE COMMUNICATION SERVICES, INC. DOMESTIC
OPERATION
Report of Independent Public Accountants.................... F-80
Balance Sheets as of December 31, 1998 and 1997............. F-81
Statement of Operations for the years ended December 31,
1998, 1997 and 1996....................................... F-82
Statement of Accumulated Deficit for the years ended
December 31, 1998, 1997 and 1996.......................... F-83
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996....................................... F-84
Notes to Financial Statements............................... F-85
</TABLE>
F-40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MindSpring Enterprises, Inc.:
We have audited the accompanying balance sheets of MINDSPRING
ENTERPRISES, INC. (a Delaware corporation) as of December 31, 1998 and 1997 and
the related statements of operations, stockholders' equity, and cash flows for
the three years ended December 31, 1998, 1997 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MindSpring
Enterprises, Inc. as of December 31, 1998 and 1997 and the results of its
operations and its cash flows for the three years ended December 31, 1998, 1997
and 1996 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 17, 1999
F-41
<PAGE>
MINDSPRING ENTERPRISES, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $167,743 $ 9,386
Trade receivables, net of allowance for doubtful accounts of
$1,224 and $751 at December 31, 1998 and 1997,
respectively.............................................. 3,278 2,002
Deferred income taxes (Note 8).............................. 3,421 --
Prepaids and other current assets........................... 758 1,042
-------- -------
Total current assets.................................... 175,200 12,430
-------- -------
PROPERTY AND EQUIPMENT:
Computer and telecommunications equipment................... 35,580 18,050
Assets under capital lease.................................. 9,546 9,916
Other....................................................... 4,821 1,805
-------- -------
49,947 29,771
Less: accumulated depreciation.............................. (14,106) (6,133)
-------- -------
Property and equipment, net............................. 35,841 23,638
-------- -------
OTHER ASSETS:
Acquired customer base, net (Notes 1 and 2)................. 34,742 7,478
Deferred income taxes (Note 8).............................. 1,123 --
Other....................................................... 693 740
-------- -------
Total other assets...................................... 36,558 8,218
-------- -------
$247,599 $44,286
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable...................................... $ 3,462 $ 4,306
Current portion of capital lease liability (Note 7)......... 2,695 2,607
Telecommunications costs payable............................ 2,831 2,233
Deferred revenue (Note 1)............................... 7,443 2,198
Current portion of notes payable (Note 6)................... -- 2,043
Other accrued expenses...................................... 5,105 1,776
Due to America Online, Inc. (Note 2)........................ 7,000 --
Accrued compensation expense................................ 2,550 1,404
Income tax payable.......................................... 2,566 --
Network services payable.................................... 4,442 1,216
-------- -------
Total current liabilities............................... 38,094 17,783
-------- -------
LONG-TERM LIABILITIES:
Capital lease liability (Note 7)........................ 2,424 5,090
-------- -------
Total long-term liabilities............................. 2,424 5,090
-------- -------
Total liabilities....................................... 40,518 22,873
-------- -------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Note 3):
Common stock, $.01 par value; 60,000 and 45,000 shares
authorized at December 31, 1998 and 1997 and 28,284 and
22,603 issued and outstanding at December 31, 1998 and
1997, respectively........................................ 283 226
Additional paid-in capital.................................. 209,983 34,916
-------- -------
Accumulated deficit......................................... (3,185) (13,729)
-------- -------
Total stockholders' equity.............................. 207,081 21,413
-------- -------
$247,599 $44,286
======== =======
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-42
<PAGE>
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Access...................................................... $95,852 $40,925 $13,420
Business services........................................... 14,735 7,711 2,286
Subscriber start-up fees.................................... 4,086 3,920 2,426
------- ------- -------
Total revenues............................................ 114,673 52,556 18,132
------- ------- -------
COST AND EXPENSES:
Cost of revenues--recurring................................. 31,724 15,203 6,332
Cost of subscriber start-up fees............................ 2,612 1,619 1,876
General and administrative.................................. 38,443 22,265 10,072
Selling..................................................... 18,881 8,519 4,089
Depreciation and amortization............................... 15,227 8,695 3,285
------- ------- -------
Total operating expenses.................................. 106,887 56,301 25,654
------- ------- -------
OPERATING INCOME (LOSS)..................................... 7,786 (3,745) (7,522)
INTEREST INCOME (EXPENSE), NET.............................. 1,214 (338) (90)
------- ------- -------
INCOME (LOSS) BEFORE TAXES.................................. $ 9,000 $(4,083) $(7,612)
------- ------- -------
INCOME TAX BENEFIT...................................... 1,544 -- --
------- ------- -------
NET INCOME (LOSS)........................................... $10,544 $(4,083) $(7,612)
======= ======= =======
NET INCOME (LOSS) PER SHARE:
Basic....................................................... $ 0.43 $ (0.18) $ (0.48)
======= ======= =======
Diluted..................................................... $ 0.41 $ (0.18) $ (0.48)
======= ======= =======
SHARES USED FOR COMPUTING NET INCOME (LOSS) PER SHARE:
Basic....................................................... 24,611 22,542 15,758
======= ======= =======
Diluted..................................................... 25,431 22,542 15,758
======= ======= =======
</TABLE>
The accompanying Notes to Financial Statements are
an integral part of these statements.
F-43
<PAGE>
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL PREFERRED STOCK TOTAL
------------------- PAIDIN ------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT EQUITY
-------- -------- ---------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995......... 3,802 $ 38 $ 95 1,933 $2,383 $ (2,034) $ 482
Conversion of Class A preferred
stock to common.................. 3,563 36 709 (1,188) (745) -- --
Conversion of Class B preferred
stock to common.................. 1,937 19 981 (645) (1,000) -- --
Issuance of additional common
stock, net of related offering
expenses......................... 6,075 60 14,089 -- -- -- 14,149
Conversion of Class C preferred
stock to common.................. 300 3 635 (100) (638) -- --
Issuance of additional common
stock, net of related offering
expenses......................... 6,750 68 18,319 -- -- -- 18,387
Issuance of common stock pursuant
to exercise of options........... 4 -- 1 -- -- -- 1
Net loss......................... -- -- -- -- -- (7,612) (7,612)
------ ---- -------- ------ ------ -------- --------
Balance, December 31, 1996......... 22,431 $224 $ 34,829 -- $ -- $ (9,646) $ 25,407
Issuance of common stock pursuant
to exercise of options........... 172 2 87 -- -- -- 89
Net loss......................... -- -- -- -- -- (4,083) (4,083)
------ ---- -------- ------ ------ -------- --------
Balance, December 31, 1997......... 22,603 $226 $ 34,916 -- $ -- $(13,729) $ 21,413
Issuance of additional common
stock, net of related offering
expenses......................... 3,000 30 49,726 -- -- -- 49,756
Issuance of additional common
stock, net of related offering
expenses......................... 2,300 23 124,761 -- -- -- 124,784
Issuance of common stock pursuant
to exercise of options........... 381 4 580 -- -- -- 584
Net income....................... -- -- -- -- -- 10,544 10,544
------ ---- -------- ------ ------ -------- --------
Balance, December 31, 1998......... 28,284 $283 $209,983 -- $ -- $ (3,185) $207,081
====== ==== ======== ====== ====== ======== ========
</TABLE>
The accompanying Notes to Financial Statements
are an integral part of these statements.
F-44
<PAGE>
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 10,544 $(4,083) $ (7,612)
-------- ------- --------
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................... 15,227 8,695 3,285
Deferred income taxes....................................... (4,544)
Changes in operating assets and liabilities:
Trade receivables......................................... (1,276) (5) (1,477)
Other current assets...................................... 284 (565) (158)
Trade accounts payable.................................... (844) 2,352 1,106
Telecommunications cost payable........................... 598 1,332 700
Deferred revenue.......................................... 5,245 1,782 80
Other accrued expenses.................................... 3,329 1,166 246
Accrued compensation expense.............................. 1,146 769 520
Income taxes payable...................................... 2,566
Network services payable.................................. 3,226 (89) 1,305
-------- ------- --------
Total adjustments..................................... 24,957 15,437 5,607
-------- ------- --------
Net Cash Provided By (Used In) Operating Activities......... 35,501 11,354 (2,005)
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (20,176) (8,042) (8,298)
Purchase of customer base................................... (27,312) (960) (12,249)
Other....................................................... (159) -- (789)
-------- ------- --------
Net Cash Used In Investing Activities................. (47,647) (9,002) (21,336)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of loan from preferred stockholder................. -- -- 1,000
Payments of loan from preferred stockholder........... -- -- (3,500)
Proceeds from notes payable................................. -- -- 11,488
Payments of notes payable................................... (2,043) (624) (8,822)
Payments of capital lease obligations....................... (2,578) (2,084) (134)
Issuance of common stock.................................... 175,124 89 32,537
-------- ------- --------
Net Cash Provided By (Used In) Financing Activities... 170,503 (2,619) 32,569
-------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 158,357 (267) 9,228
CASH AND CASH EQUIVALENTS, beginning of year................ 9,386 9,653 425
-------- ------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $167,743 $ 9,386 $ 9,653
======== ======= ========
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Interest paid............................................... $ 890 $ 749 $ 402
======== ======= ========
Income taxes paid........................................... $ 434 $ -- $ --
======== ======= ========
SUPPLEMENTAL NONCASH DISCLOSURES:
Assets acquired under capital lease......................... $ -- $ 8,443 $ 1,473
======== ======= ========
Noncash accrual for acquired subscriber base................ $ 7,000 $ -- $ --
======== ======= ========
</TABLE>
The accompanying Notes to Financial Statements
are an integral part of these statements.
F-45
<PAGE>
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. ORGANIZATION AND NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
MindSpring Enterprises, Inc. ("MindSpring" or the "Company") is a national
provider of Internet access. The Company was incorporated in Georgia on
February 24, 1994 and began marketing its services in June 1994. The Company
reincorporated in Delaware and effected a recapitalization in December 1995.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
PRESENTATION
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
SOURCES OF SUPPLIES
The Company relies on third-party networks, local telephone companies, and
other companies to provide data communications capacity. Although management
feels alternative telecommunications facilities could be found in a timely
manner, any disruption of these services could have an adverse effect on
operating results.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with an
original maturity date of three months or less to be cash equivalents. Cash and
cash equivalents are stated at cost, which approximates fair value.
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services, the use of
preapproved charges to customer credit cards, and the ability to terminate
access on delinquent accounts. In addition, the concentration of credit risk is
mitigated by the large number of customers comprising the customer base. The
carrying amount of the Company's receivables approximates their fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided for using the straight-line method over the estimated useful lives of
the assets, commencing when assets are installed or placed in service. The
estimated useful life for all assets is five years or, for leasehold
improvements, the life of the lease, if shorter.
F-46
<PAGE>
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
EQUIPMENT UNDER CAPITAL LEASE
The Company leases certain of its data communication and other equipment
under lease agreements accounted for as capital. The assets and liabilities
under capital leases 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 depreciated over their estimated useful lives of five years, which are
longer than the terms of the leases.
ACQUIRED CUSTOMER BASE
The Company capitalizes specific costs incurred for the purchase of customer
bases from other Internet Service Providers ("ISPs"). The customer acquisition
costs include the actual fee paid to the selling ISP, as well as legal and other
expenses specifically related to the transactions. Subscriber acquisition costs
capitalized at December 31, 1998 and 1997 were $47,521,000 and $13,209,000,
respectively. Amortization is provided using the straight-line method over three
years commencing when the customer base is received. Amortization expense for
the years ended December 31, 1998, 1997, and 1996 was $7,048,000, $4,210,000,
and $1,521,000, respectively. See Note 2 for further discussion.
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment and acquired customer bases, to determine whether
any impairments are other than temporary. Management reviews the undiscounted
projected cash flows related to such assets and compares them to the carrying
values of the assets to determine if an impairment has occurred. If an asset is
deemed to be impaired, the Company records the difference between the projected
cash flows on a discounted basis or the fair market value (whichever is more
appropriate) and the carrying value as an asset impairment charge in the period
incurred. There are no such impairments in the periods presented. Management
believes that the long-lived assets in the accompanying balance sheets are
appropriately valued.
INCOME TAXES
Deferred income taxes are recorded using enacted tax laws and rates for the
years in which the taxes are expected to be paid. Deferred income taxes are
provided for items when there is a temporary difference in recording such items
for financial reporting and income tax reporting.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." The disclosure option of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" requires that
companies which do not choose to account for stock-based compensation as
prescribed by this statement shall disclose the pro forma effects on earnings
and earnings per share as if SFAS No. 123 had been adopted.
F-47
<PAGE>
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
REVENUE RECOGNITION
The Company recognizes revenue when services are provided. Services are
generally billed one month in advance. During 1998, the Company began offering
prepaid services. Advance billings including prepaid services and collections
relating to future access services are recorded as deferred revenue and
recognized as revenue when earned.
BARTER TRANSACTIONS
The Company engages in certain exchanges of services for advertising and
promotional services. The Company records these transactions at the market value
of the services provided. Such transactions are not material for the periods
presented.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred.
NET INCOME (LOSS) PER SHARE
The Company calculates net income (loss) per share as required by SFAS
No. 128, "Earnings Per Share." Basic earnings (loss) per common share ("EPS")
was computed by dividing net income (loss) by the weighted average number of
shares of common stock outstanding for the year ended. The effect of the
Company's stock options (using the treasury stock method) was included in the
computation of diluted EPS for the year ended December 31, 1998. For the years
ended December 31, 1997 and 1996, the effect of the options is excluded as their
effect is anti-dilutive. The following table summarizes the shares used in the
calculations:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Weighted average shares Outstanding-basic........... 24,611 22,542 15,758
Effect of dilutive stock options.................... 820 -- --
------ ------ ------
Shares used for diluted earnings per share.......... 25,431 22,542 15,758
====== ====== ======
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Company was subject to the provisions of Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income" and
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information." Neither statement had
any impact on the Company's financial statements as the Company does not have
any "comprehensive income" type earnings (losses) and its financial statements
reflect how the "key operating decisions maker" views the business. The Company
will continue to review these statements over time, in particular SFAS 131, to
determine if any additional disclosures are necessary based on evolving
circumstances.
F-48
<PAGE>
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
2. CUSTOMER BASE ACQUISITIONS
On June 28, 1996, the Company entered into a purchase agreement (as amended
on January 27, 1997, the "Purchase Agreement") with PSINet Inc. ("PSINet"),
pursuant to which the Company agreed to acquire certain of the tangible and
intangible assets and rights related to the consumer dial-up Internet access
services provided by PSINet in the United States, including (i) certain of
PSINet's individual subscriber accounts and (ii) the lease for a customer
support call center near Harrisburg, Pennsylvania (the "Harrisburg Facility"),
and all related telephone switches and other equipment (the "Assets") for
$12,929,000 (excluding accrued interest and increases in principal amount under
the First and Second PSINet Notes previously paid by the Company) (the "Purchase
Price"). In connection with fixing the aggregate amount of the Purchase Price,
the Company and PSINet amended the Second PSINet Note to, among other things,
reduce the principal amount owed thereunder to $3,078,000, an amount equal to
the remaining balance of the Purchase Price as of January 24, 1997. As amended,
the Second PSINet Note no longer accrued interest, was payable over a two-year
period, and was discounted for financial statement purposes using the same rate
of interest (Prime + 3%) as the prior PSINet Notes. The Company accreted the
difference between the principal and total payable amount of $3,078,000 over the
two years of the note.
In connection with the PSINet transaction, the parties also entered into a
network services agreement (as amended, the "Services Agreement") which enables
MindSpring to offer nationwide Internet access through PSINet's network of over
200 points of presence ("POPs"). The term of the Services Agreement is 5 years
commencing on June 28, 1996 and is automatically renewable annually thereafter
unless either party notifies the other in writing not less than 12 months prior
to the end of such 5-year period or any 12-month extension thereof. Either party
may terminate the Services Agreement at any time upon 60 days' written notice
without penalty. The Company and PSINet amended the Services Agreement effective
January 1, 1997 to provide for certain discounts to the monthly service fees
which otherwise would have been payable by the Company to PSINet. The Company
earned credits of $2,000,000 and $2,050,000 during 1998 and 1997, respectively,
and the discounts are reflected as reductions of cost of revenue. This
arrangement ended in October 1998.
On September 10, 1998, MindSpring entered into an Asset Purchase Agreement
with America Online, Inc. ("AOL") and Spry, Inc. ("Spry"), a wholly owned
subsidiary of AOL, to purchase certain assets used in connection with the
consumer dial-up Internet access business operated by Spry (the "Spry
Agreement"). Pursuant to the Spry Agreement, MindSpring acquired Spry's
subscriber base of individual Internet access customers in the United States and
Canada as well as various assets used in serving those customers, including a
customer support facility and a network operations facility in Seattle,
Washington. MindSpring also acquired all rights held by Spry to the "Spry" name.
The acquisition was closed on October 15, 1998 and in accordance with the
agreement MindSpring paid the initial payment of $25,000,000 in cash to AOL The
ultimate purchase price for these assets was based primarily upon the number of
acquired subscribers who remain active with MindSpring as continuing users in
good standing as of December 31, 1998. The Company has calculated the final
purchase price to be approximately $32,000,000 and has accordingly accrued an
additional $7,000,000 in the accompanying balance sheet. The transaction is
being accounted for as a purchase. See Note 10 for further discussion.
F-49
<PAGE>
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
3. STOCKHOLDERS' EQUITY
At the annual meeting of stockholders in May 1998 the Company voted to
approve and adopt an amendment to Article 4 of the Company's Amended and
Restated Certificate of Incorporation to increase the number of authorized
shares of $.01 par value common stock from 15,000,000 to 60,000,000 and to
eliminate the Company's Class C Preferred Stock.
STOCK SPLIT
On June 24, 1998 the Company effected a three-for-one stock split of the
outstanding shares of common stock in the form of a stock dividend. Accordingly,
all data shown in the accompanying financial statements and notes has been
retroactively adjusted to reflect the stock split.
COMMON STOCK
In June 1998, the Company issued 3,000,000 shares at a public offering price
of $17.67. The total proceeds of the offering, net of underwriting discounts and
offering expenses, were approximately $49,756,000.
In December 1998, the Company issued 2,300,000 shares at a public offering
price of $57.00. The total proceeds of the offering, net of underwriting
discounts and offering expenses, were approximately $124,784,000.
4. STOCK-BASED COMPENSATION PLANS
EMPLOYEE STOCK OPTION PLAN
Under the Company's 1995 Stock Option Plan, as amended (the "Stock Option
Plan"), 3,000,000 shares of common stock are reserved and authorized for
issuance upon the exercise of options. All employees of the Company are eligible
to receive options under the Stock Option Plan. The compensation committee of
the Board of Directors administers the Stock Option Plan. Options granted under
the Stock Option Plan are intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended. Options generally
become exercisable as follows: (i) 50% of the options become exercisable two
years after the date of grant or, in certain cases, the commencement date of the
holder's employment; (ii) an additional 25% of the options become exercisable
three years after the date of grant or, in certain cases, the commencement date
of the holder's employment; and (iii) the remaining 25% of the options become
exercisable four years after the date of grant or, in certain cases, the
commencement date of the holder's employment. Except as noted in the next
sentence, all options were granted at an exercise price equal to the estimated
fair value of the common stock on the dates of grant as determined by the Board
of Directors based on equity transactions and other analyses. Options granted to
holders of 10% or more of the outstanding common stock were granted at an
exercise price equal to 110% of the estimated fair value of the common stock on
the dates of grant as determined by the Board of Directors based on equity
transactions and other analyses. The options expire ten years from the date of
grant or, in certain circumstances, the commencement date of the option holder's
employment.
F-50
<PAGE>
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
DIRECTORS' STOCK OPTION PLAN
Under the Company's Directors' Stock Option Plan (the "Directors' Plan"),
adopted in December 1995, 210,000 shares of common stock are authorized for
issuance to nonemployee directors (in the form of 30,000 options per director)
upon their initial election or appointment to the board or, in the case of
directors who joined the board prior to the creation of the Directors' Plan,
upon the adoption of the Directors' Plan by the Board of Directors. The
Directors' Plan, as amended by the Board of Directors on March 25, 1998 and
approved by the stockholders on May 20, 1998, provides for discretionary option
grants. Options become exercisable as follows: (i) 50% of the options become
exercisable two years after the date of grant, (ii) an additional 25% of the
options become exercisable three years after the date of grant, and (iii) the
remaining 25% of the options become exercisable four years after the date of
grant. All options were granted at an exercise price equal to the estimated fair
value of the common stock at the dates of grant as determined by the Board of
Directors based upon equity transactions and other analyses. The options expire
ten years from the date of grant.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
which defines a fair value-based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt that
method of accounting for all of their employee stock-based compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans using the method of accounting prescribed by APB No. 25. Entities
electing to remain with the accounting in APB No. 25 must make pro forma
disclosures of net income and, if presented, earnings per share as if the fair
value-based method of accounting defined in this statement had been applied.
The Company has elected to account for its stock-based compensation plans
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1998, 1997, and 1996 using the
Black-Scholes option-pricing model as prescribed by SFAS No. 123 using the
following weighted average assumptions used for grants in 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate..................................... 5.3% 6.4% 6.4%
Expected dividend yield..................................... 0% 0% 0%
Expected lives.............................................. 3.5 years 3.5 years 3.5 years
Expected volatility......................................... 95.0% 58.4% 69.3%
</TABLE>
The total value of options granted during 1998, 1997, and 1996 was computed
as approximately $38,679,000, $3,735,000 and $601,000, respectively, which would
be amortized on a pro forma basis over the four-year vesting period of the
options. If the Company had accounted for these plans in
F-51
<PAGE>
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
accordance with SFAS No. 123, the Company's net income (loss) and pro forma net
income (loss) per share for the years ended December 31, 1998, 1997 and 1996
would have been as follows:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- ---------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
1996
Net loss.................................................... $(7,612) $(7,836)
Net loss per share.......................................... $ (0.48) $ (0.50)
1997
Net loss.................................................... $(4,083) $(5,402)
Net loss per share.......................................... $ (0.18) $ (0.24)
1998
Net income.................................................. $10,544 $ 2,291
Net income per diluted share................................ $ 0.41 $ 0.09
</TABLE>
A summary of the status of the Company's two stock options plans at
December 31, 1998, 1997 and 1996 and changes during the years then ended are
presented in the following table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
SHARES SHARE
-------------- ---------
(IN THOUSANDS)
<S> <C> <C>
December 31, 1995..................................... 1,071 $0.62
Grants................................................ 756 2.87
Exercised............................................. (3) 0.21
Forfeitures........................................... (90) 2.01
----- -----
December 31, 1996..................................... 1,734 1.53
Grants................................................ 453 4.21
Exercised............................................. (171) 0.29
Forfeitures........................................... (174) 3.12
----- -----
December 31, 1997..................................... 1,842 2.15
Grants................................................ 861 37.53
Exercised............................................. (382) 1.53
Forfeitures........................................... (198) 7.96
----- -----
December 31, 1998..................................... 2,123 16.10
===== =====
Weighted average fair value of options granted in
1998................................................ $ 45
=====
</TABLE>
F-52
<PAGE>
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
The following table summarizes the number of options outstanding by year of
grant:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
YEAR NUMBER EXERCISE WEIGHTED REMAINING
OF OF PRICE AVERAGE CONTRACTUAL
GRANT SHARES RANGE PRICE LIFE
- ----------------------------- -------------- ------------ -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998......................... 808 $10.94-60.69 $38.59 9.6 years
1997......................... 341 2.33--9.71 4.40 8.4
1996......................... 388 2.13-4.13 2.79 7.6
1995......................... 586 0.21-2.13 0.67 6.5
</TABLE>
The following table summarizes the options exercisable as of December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER WEIGHTED REMAINING
OF AVERAGE CONTRACTUAL
AS OF SHARES PRICE LIFE
----- -------------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Dec. 31, 1998............................ 537 $ 1.16 6.8 years
Dec. 31, 1997............................ 366 $ 0.73 7.5
Dec. 31, 1996............................ 210 0.21 8.1
</TABLE>
EMPLOYEE BENEFIT PLAN
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
Annually, the Company determines whether to make a discretionary matching
contribution equal to a percentage, determined by the Company, of the employee's
deferred compensation contribution. The Company has not made any matching
contributions to the Savings Plan.
5. RELATED-PARTY TRANSACTIONS
The Company has entered into certain business relationships with several
subsidiaries and affiliates of ITC Holding Company, Inc. ("ITC Holding"). Except
as noted below, none of these transactions were material for the periods
presented.
The Company purchases long-distance telephone services and wide area network
transport service from ITC^DeltaCom, Inc. ("ITC^DeltaCom"), a related party
through relationships with ITC Holding. Long-distance charges from ITC^DeltaCom
totaled approximately $3,672,000, $1,942,000 and $677,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
F-53
<PAGE>
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
6. DEBT
The Company's only debt obligation for the periods presented is a promissory
note issued in connection with the PSINet transaction. The final payment on this
note was made in December 1998.
<TABLE>
<CAPTION>
1998 1997
--------- --------
(IN THOUSANDS)
<S> <C> <C>
PSINet Note, due October, 1998........................ $ -- $ 2,043
Less current maturities............................... -- (2,043)
========= =======
Long-term obligations................................. $ -- $ --
========= =======
</TABLE>
The carrying value of the PSINet Note approximated the market value as of
December 31, 1997.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain equipment under agreements, which are classified
as capital leases. These leases have original terms of three years or less and
contain bargain purchase options at the end of the original lease terms. The
Company also has operating leases, which relate to the lease of office and
equipment space. Rental expense attributable to these operating leases was
approximately $1,953,000, $1,420,000 and $519,000 for the year ended
December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company's capital lease obligations and minimum
rental commitments under noncancelable operating leases with initial or
remaining terms of more than one year were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
1999.................................................. $ 3,103 $ 3,385
2000.................................................. 2,595 3,392
2001.................................................. -- 1,441
2002.................................................. -- 829
2003 and thereafter................................... -- 963
------- -------
Total minimum lease payments........................ 5,698 $10,010
=======
Amounts representing interest......................... (579)
-------
Present value of net minimum payments................. 5,119
Current portion..................................... (2,695)
-------
Long-term capitalized lease obligations............... $ 2,424
=======
</TABLE>
LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. As of December 31, 1998, management is not aware of
any asserted or pending litigation or
F-54
<PAGE>
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
claims against the Company that would have a material adverse effect on the
Company's financial condition, results of operations or liquidity.
8. INCOME TAXES
The provision for income taxes is attributable to:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current............................................... $ 3,000 $ -- $ --
Deferred.............................................. 654 (1,574) (2,915)
Increase in (reversal of) valuation allowance......... (5,198) 1,574 2,915
------- ------ ------
Income tax provision (benefit)........................ $(1,544) $ -- $ --
======= ====== ======
</TABLE>
A reconciliation of the income tax provision (benefit) computed at statutory
tax rates to the income tax benefit for the year ended December 31, 1998, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income tax benefit at statutory rate.................... 34% (34)% (34)%
State income taxes, net of federal benefit.............. 4 (4) (4)
Other................................................... 2 0 0
Valuation allowance..................................... (57) 38 38
--- --- ---
Total income tax provision (benefit).................. (17)% 0% 0%
=== === ===
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-55
<PAGE>
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
purposes. The significant components of the Company's deferred tax assets and
liabilities as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $ -- $3,866
Acquired customer base.............................. 3,902 1,742
Deferred revenue.................................... 2,221 835
Allowance for doubtful accounts..................... 465 285
Prepaid revenue..................................... 608 --
Accrued vacation.................................... 371 --
Other accrued liabilities........................... -- 126
------- ------
Total deferred tax assets......................... 7,567 6,854
------- ------
Deferred tax liabilities:
Depreciation........................................ (2,779) (1,608)
Other............................................... (244) (48)
------- ------
Total deferred tax liabilities.................... (3,023) (1,656)
------- ------
Net deferred tax asset................................ 4,544 5,198
Valuation allowance for deferred tax assets........... -- (5,198)
------- ------
Net deferred taxes.................................... $ 4,544 $ --
======= ======
</TABLE>
The Company's net operating loss carryforwards will expire between 2009 and
2012 unless utilized. Due to the fact that prior to 1998 the Company incurred
losses since inception, the Company did not recognize the income tax benefit of
the net operating loss carryforwards. Management provided a 100% valuation
reserve against its net deferred tax asset, consisting primarily of net
operating loss carryforwards. Management reviewed this position based on the net
income generated in 1998 as well as the projections of future income and
determined that it was more likely than not that the deferred tax assets would
be realized. Accordingly, the Company reversed its entire valuation allowance in
1998. In addition, the Company's ability to recognize the benefit from the net
operating loss carryforwards could be limited under Section 382 of the Internal
Revenue Code if ownership of the Company changes by more than 50%, as defined.
F-56
<PAGE>
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results for 1998,
1997, and 1996:
<TABLE>
<CAPTION>
NET INCOME
OPERATING NET (LOSS) PER
QUARTER ENDED REVENUE INCOME (LOSS) INCOME (LOSS) SHARE
- ------------- -------- ------------- ------------- -------------------
BASIC DILUTED
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
December 31, 1998........................... $39,534 $ 1,299 $ 3,679 $ .14 $ .13
September 30, 1998.......................... 28,695 3,440 3,985 .15 .15
June 30, 1998............................... 25,060 1,994 2,020 .09 .08
March 31, 1998.............................. 21,384 1,053 860 .04 .04
December 31, 1997........................... $17,209 $ 646 $ 498 $ .02 $ .02
September 30, 1997.......................... 13,967 (465) (626) (.03) (.03)
June 30, 1997............................... 11,600 (1,421) (1,430) (.06) (.06)
March 31, 1997.............................. 9,780 (2,505) (2,525) (.11) (.11)
December 31, 1996........................... $ 8,524 $(2,378) $(2,411) $(.11) $(.11)
September 30, 1996.......................... 5,301 (2,601) (2,702) (.18) (.18)
June 30, 1996............................... 2,495 (1,577) (1,460) (.10) (.10)
March 31, 1996.............................. 1,812 (966) (1,039) (.10) (.10)
</TABLE>
See Note 1 for a discussion of earnings per share.
10. SUBSEQUENT EVENT
ACQUISITION
On February 17, 1999, MindSpring acquired certain tangible and intangible
assets and rights used in connection with the Internet services business
operated in the United States by NETCOM On-Line Communication Services, Inc.
("NETCOM"), a Delaware corporation and an indirect wholly owned subsidiary of
ICG Communications, Inc., including (i) approximately 400,000 of NETCOM's
individual Internet access accounts; (ii) approximately 3,000 dedicated Internet
access accounts; (iii) approximately 18,000 Web hosting accounts; and
(iv) various assets used in serving those subscribers, including leased
operations facilities in San Jose, California and Dallas, Texas and all of
NETCOM's rights to the "NETCOM" name (except in Brazil, Canada and the United
Kingdom). The acquisition was effected pursuant to an Asset Purchase Agreement
dated January 5, 1999 between MindSpring and NETCOM. MindSpring paid NETCOM
approximately $245,000,000, including $215,000,000 in cash and $30,000,000 in
MindSpring stock.
The NETCOM operations outside the United States are not included in this
transaction. In addition, NETCOM (which will change its name in the near future)
will retain all of the assets used in connection with its network operations.
Under a separate network services agreement, NETCOM (operating under a new
corporate name) will sell MindSpring wholesale access to its network. The
agreement has an initial term of one year with an option for a second year on
potentially different terms to be negotiated and accepted by both parties.
F-57
<PAGE>
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
The transaction will be accounted for as a purchase. The purchase price will
be allocated to the underlying assets purchased and liabilities assumed based on
their fair market values at the acquisition date.
The following table summarizes the net assets purchased in connection with
the NETCOM and Spry acquisitions and the amount attributable to cost in excess
of net assets acquired in millions:
<TABLE>
<CAPTION>
NETCOM SPRY
-------- --------
<S> <C> <C>
Working capital............................................ $ (3.0) $ --
Property and equipment..................................... 17.2 --
Other assets............................................... 0.2 --
Acquired customer base..................................... 230.6 32.0
</TABLE>
The preliminary estimate of net assets represents management's best estimate
based on currently available information; however, such estimate may be revised
up to one year from the acquisition date. Acquired subscriber bases are
amortized over 3 years.
The following unaudited pro forma condensed statements of operations (in
millions) assumes the NETCOM and Spry acquisitions occurred on January 1, 1997.
In the opinion of management, all adjustments necessary to present fairly such
unaudited pro forma condensed statements of operations have been made.
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Revenue................................................... $ 294.9 $ 250.3
Net Loss.................................................. (101.5) (101.0)
Net Loss per share........................................ (3.57) (3.58)
</TABLE>
CREDIT FACILITY
Subsequent to year end, the Company obtained a $100 million secured
revolving credit facility from First Union National Bank and certain other
lenders. The credit facility may be increased to $200 million with the approval
of 51% of the lenders. The credit facility has an interest rate of either the
bank rate plus 25 to 100 basis points (defined as the banks prime rate or the
overnight federal funds rate plus 50 basis points) or LIBOR plus 125-200 basis
points depending upon the ratio of total debt to EBITDA. The facility is
available for 36 months and contains certain restrictive covenants including
certain financial ratios. Additionally, borrowings are secured by all assets and
properties. To complete the NETCOM acquisition, the Company borrowed
$80 million under this facility. The proceeds from any future debt issuances and
certain sales of assets and insurance proceeds must be used to repay any
outstanding borrowings.
F-58
<PAGE>
MINDSPRING ENTERPRISES, INC.
BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $386,833 $167,743
Trade receivables, net...................................... 5,179 3,278
Deferred income taxes....................................... 6,452 3,421
Prepaids and other current assets........................... 5,221 758
-------- --------
Total current assets...................................... 403,685 175,200
-------- --------
PROPERTY AND EQUIPMENT:
Computer and telecommunications equipment................... 83,065 35,580
Assets under capital lease.................................. 8,886 9,546
Other....................................................... 14,400 4,821
-------- --------
106,351 49,947
Less: accumulated depreciation.............................. (27,789) (14,106)
-------- --------
Total property and equipment, net......................... 78,562 35,841
-------- --------
OTHER ASSETS:
Acquired customer base, net................................. 212,441 34,742
Deferred debt costs......................................... 7,302 --
Deferred income taxes....................................... 17,207 1,123
Other....................................................... 346 693
-------- --------
Total other assets........................................ 237,296 36,558
-------- --------
$719,543 $247,599
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable...................................... $ 3,361 $ 4,990
Current portion of capital lease liability.................. 2,608 2,695
Deferred revenue............................................ 10,710 7,443
Accrued telecommunications costs............................ 11,868 2,831
Other accrued expenses...................................... 30,564 20,135
-------- --------
Total current liabilities................................. 59,111 38,094
-------- --------
LONG-TERM LIABILITIES:
Convertible notes........................................... 179,975 --
-------- --------
Capital lease obligations................................... 526 2,424
-------- --------
Total long-term liabilities............................... 180,501 2,424
-------- --------
Total liabilities......................................... 239,612 40,518
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 400,000 authorized And 63,575
and 56,568 issued and outstanding at September 30, 1999
and December 31, 1998, respectively....................... 635 566
Additional paid-in-capital.................................. 503,700 209,700
Accumulated deficit......................................... (24,404) (3,185)
-------- --------
Total stockholders' equity................................ 479,931 207,081
-------- --------
$719,543 $247,599
======== ========
</TABLE>
The accompanying condensed notes to financial statements are an integral part of
these balance sheets.
F-59
<PAGE>
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
-------------- --------------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES:
Access.................................................... $196,645 $64,795
Business services......................................... 38,823 10,344
-------- -------
Total revenues.......................................... 235,468 75,139
-------- -------
COST AND EXPENSES:
Cost of revenues.......................................... $ 78,882 $22,167
General and administrative................................ 74,253 25,505
Selling................................................... 46,503 11,735
Depreciation.............................................. 13,732 5,696
Acquired customer base amortization....................... 60,345 3,548
-------- -------
Total operating expenses.............................. 273,715 68,651
-------- -------
OPERATING (LOSS) INCOME..................................... (38,247) 6,488
INTEREST INCOME, NET........................................ 3,463 590
-------- -------
(LOSS) INCOME BEFORE TAXES.................................. (34,784) 7,078
Income tax benefit (provision)............................ 13,565 (212)
-------- -------
NET (LOSS) INCOME........................................... $(21,219) $ 6,866
======== =======
NET (LOSS) INCOME PER SHARE:
Basic..................................................... $ (0.35) $ 0.14
======== =======
Diluted................................................... $ (0.35) $ 0.13
======== =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic..................................................... 61,042 48,086
======== =======
Diluted................................................... 61,042 50,892
======== =======
</TABLE>
The accompanying condensed notes to financial statements are an integral part of
these statements
F-60
<PAGE>
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $ (21,219) $ 6,866
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Deferred income taxes....................................... (19,115) --
Depreciation and amortization............................... 74,077 9,244
Changes in operating assets and liabilities:
Other..................................................... 604 --
Trade receivables......................................... (3,572) (368)
Other current assets.................................... (4,463) 441
Trade accounts payable.................................... (1,629) (3,689)
Other accrued expenses.................................... 26,466 3,061
Deferred revenue.......................................... 3,267 2,763
--------- --------
Total adjustments....................................... 75,635 11,452
--------- --------
Net Cash Provided by Operating Activities................. 54,416 18,318
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (43,207) (10,282)
Cash paid in conjunction with acquisitions.................. (226,569) (1,350)
Other....................................................... 297 (302)
--------- --------
Net Cash Used in Investing Activities..................... (269,479) (11,934)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable................................... -- (1,450)
Cash provided by credit line, net of issuance costs......... 77,987 --
Repayment of credit line.................................... (80,000) --
Payments of capital lease obligations....................... (1,985) (1,906)
Proceeds from issuance of convertible debt.................. 174,082 --
Issuance of common stock, net of issuance costs............. 264,069 50,084
--------- --------
Net Cash Provided by Financing Activities................. 434,153 46,728
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 219,090 53,112
CASH AND CASH EQUIVALENTS, beginning of period.............. 167,743 9,386
--------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 386,833 $ 62,498
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 1,510 $ 718
========= ========
Cash paid for income taxes.................................. $ 8,425 $ 226
========= ========
SUPPLEMENTAL NONCASH DISCLOSURES:
Stock issued in conjunction with acquisition................ $ 30,000 $ --
========= ========
</TABLE>
The accompanying condensed notes to financial statements
are an integral part of these statements.
F-61
<PAGE>
MINDSPRING ENTERPRISES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
1. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Article 10 of
Regulation SX of the Securities and Exchange Commission. The accompanying
unaudited condensed financial statements reflect, in the opinion of
management, all adjustments necessary to achieve a fair statement of the
Company's financial position and results for the interim periods presented.
All such adjustments are of a normal and recurring nature. These condensed
financial statements should be read in conjunction with the financial
statements and notes thereto included elsewhere in this joint proxy
statement.
On May 25, 1999, the Company declared a two-for-one stock split in the form
of a stock dividend which was paid on June 25, 1999 to shareholders of
record on June 11, 1999. Accordingly, the stock split has been recognized in
these financial statements by reclassifying approximately $317,000, the par
value of the additional shares issued as a result of the split, from
additional paid in capital to common stock. For all periods presented, all
shares outstanding and per share amounts have been restated to reflect the
stock split.
1. Basic (loss) earnings per common share ("EPS") was computed by dividing net
(loss) income by the weighted average number of shares of common stock
outstanding for the period then ended. The effect of the Company's stock
options (using the treasury stock method) was included in the computation of
diluted EPS for the three and nine months ended September 30, 1998. For the
nine months ended September 30, 1999, the effect of the options is excluded,
as it is anti-dilutive. The effect of the potential conversion of the
Company's 5% Convertible Subordinated Notes due 2006 is anti-dilutive and as
such is excluded from diluted earnings per share for the nine months ended
September 30, 1999. The following table summarizes the shares used in the
calculations:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1999 1998
--------- ---------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Weighted average shares Outstanding-basic................. 61,042 48,086
Effect of dilutive stock options.......................... -- 2,806
-------- ------
Shares used for diluted earnings per share................ 61,042 50,892
======== ======
Net (loss) income......................................... $(21,219) $6,866
-------- ------
Basic (loss) earnings per share........................... $ (0.35) $ 0.14
-------- ------
Diluted (loss) earnings per share......................... $ (0.35) $ 0.13
-------- ------
</TABLE>
1. On February 17, 1999, the Company completed its acquisition of certain
assets used in connection with the United States Internet access and Web
hosting business operated by NETCOM On-Line Communication Services Inc.,
which subsequently changed its name to ICG Netahead, Inc. and is a wholly
owned subsidiary of ICG Communications, Inc. In this transaction, the
Company acquired NETCOM's subscriber base of approximately 408,000
individual Internet access accounts, 25,000 Web hosting accounts and 3,000
dedicated Internet access accounts in the United States. The Company paid
NETCOM approximately $245 million, consisting of $215 million in cash and
$30 million in MindSpring common stock (752,232 shares, at a price per share
of $38.88). The Company also incurred expenses of approximately
$4.2 million in connection with this acquisition.
F-62
<PAGE>
MINDSPRING ENTERPRISES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
The following table summarizes the net assets purchased in connection
with this acquisition and the amount attributable to intangibles (in
thousands):
<TABLE>
<S> <C>
Working Capital............................................. $ (1,672)
Property and Equipment...................................... 13,200
Acquired subscriber base.................................... 237,695
</TABLE>
The preliminary estimate of net assets acquired represents management's
best estimate based on currently available information; however, such
estimate may be revised up to one year from the acquisition date. The
Company is amortizing the acquired customer base over three years.
1. In March 1999, the Company filed a universal shelf registration statement
with the Securities and Exchange Commission for the public offering from
time to time of up to $800 million of debt and equity securities. In
April 1999, the Company completed two public offerings of securities under
this shelf regis tration statement. The Company sold 5,520,000 shares of
common stock, raising net proceeds of approximately $263.2 million, out of
which the Company repaid all amounts outstanding under its secured credit
facility. The Company also sold $179,975,000 aggregate principal amount of
5% Convertible Subordinated Notes due 2006, raising net proceeds of
approximately $174.1 million. The remaining proceeds from these offerings
will be used for expansion of our business, as additional working capital
for general corporate purposes, and for strategic acquisitions of subscriber
accounts and complementary businesses.
The notes may be converted into shares of common stock of the Company at any
time before their maturity or their redemption by the Company at a rate of
16 shares per each $1,000 principal amount of notes, or $62.50 per share,
subject to adjustment in circumstances. Interest is payable semiannually on
April 15 and October 15 of each year beginning October 15, 1999. The notes
are subordinated in right of payment to all senior debt of MindSpring.
The Company may redeem the notes before April 15, 2002, in whole or in part,
at a redemption price equal to principal amount of the note plus accrued and
unpaid interest, if any, to the redemption date, if the closing price for
MindSpring's common stock has exceeded 150% of the conversion price for at
least 20 trading days within a period of 30 consecutive trading days ending
on the trading prior to the date of the mailing of the notice of redemption.
The Company will make an additional payment of cash with respect to the
notes called for redemption of $200 per $1,000 note, less the amount of
interest actually paid on such note prior to the call for redemption.
Further the Company may redeem the notes on or after April 15, 2002 at
102.86% of the principal amount declining to 100% by April 15, 2006.
Noteholders have the option, subject to certain conditions, to require the
Company to repurchase any notes held in the event of a "Change in Control,"
at a price equal to 100% of the principal amount of the notes, plus accrued
interest to the date of repurchase.
1. On September 23, 1999, the Company announced that it had entered into an
Agreement and Plan of Reorganization, dated September 22, 1999 (the "Merger
Agreement"), with Earthlink Network, Inc. ("Earthlink"). The Merger
Agreement sets forth the terms and conditions of the proposed Merger of
MindSpring and Earthlink into a new company (the "Merger"). The Merger is
structured to be a stock-for-stock Merger of equals. Pursuant to the Merger
Agreement, each share of common stock of MindSpring will be converted into
one share of common stock of the new company, and each share of common stock
of Earthlink will be converted into 1.615 shares of
F-63
<PAGE>
MINDSPRING ENTERPRISES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
common stock of the new company. Other outstanding securities of the two
companies will be converted on the same basis. Upon consummation of the
Merger, the new company will be renamed Earthlink, Inc. The parties intend
for the Merger to be treated as a tax-free reorganization under Section 368
of the Internal Revenue Code of 1986, as amended, and as a
"pooling-of-interests" for accounting purposes. Subject to several
conditions, including receipt of required regulatory approvals, approval by
both companies' shareholders, and certain third-party consents, the Merger
is expected to close in the first quarter of 2000. For a more detailed
discussion of the Merger, see MindSpring's Current Report on Form 8-K filed
with the Securities and Exchange Commission on September 30, 1999 and the
amendment to such report on Form 8-K/A filed on October 12, 1999.
F-64
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Spry, Inc.:
We have audited the accompanying balance sheets of SPRY, INC. (a Washington
corporation) as of April 30, 1997 and January 31, 1998 and the related
statements of operations, shareholders' (deficit) equity, and cash flows for the
years ended April 30, 1996 and 1997 and the nine months ended January 31, 1998.
These financial statements are the responsibility of Spry's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Spry, Inc. as of April 30,
1997 and January 31, 1998 and the results of its operations and its cash flows
for the years ended April 30, 1996 and 1997 and the nine months ended
January 31, 1998 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
November 6, 1998
F-65
<PAGE>
SPRY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31, JULY 31,
1997 1998 1998
--------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 337 $ 110 $ 0
Accounts receivable, net of allowance for doubtful
accounts of $1,370, $2,047, and $1,115 at April 30,
1997, January 31, 1998, and July 31, 1998,
respectively........................................... 2,545 3,802 3,345
Due from parent.......................................... 0 0 2,102
Inventory................................................ 167 185 0
Prepaid expenses and other assets........................ 137 74 272
--------- --------- -------
Total current assets................................... 3,186 4,171 5,719
--------- --------- -------
PROPERTY AND EQUIPMENT, NET................................ 3,353 2,302 1,896
--------- --------- -------
OTHER ASSETS
Goodwill, net of accumulated amortization of $2,774,
$3,699, and $1,868 at April 30, 1997, January 31, 1998,
and July 31, 1998, respectively 9,557 8,632 35,494
Other, net of accumulated amortization of $210, $313, and
$63 at April 30, 1997, January 31, 1998 and July 31,
1998, respectively..................................... 180 190 156
--------- --------- -------
Total other assets..................................... 9,737 8,822 35,650
--------- --------- -------
Total assets........................................... $ 16,276 $ 15,295 $43,265
========= ========= =======
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 716 $ 344 $ 740
Accrued expenses......................................... 3,707 6,181 9,161
Due to parent............................................ 30,454 35,328 0
--------- --------- -------
Total current liabilities.............................. 34,877 41,853 9,901
--------- --------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
SHAREHOLDERS' (DEFICIT) EQUITY:
Non-voting delayed convertible preferred stock, no par
value, 500,000 shares authorized, 403,864, 403,864, and
0 issued and outstanding at April 30, 1997,
January 31, 1998, and July 31, 1998, respectively...... 102,735 102,735 0
Common stock, no par value, 1,000 shares authorized, 100
shares issued and outstanding at April 30, 1997,
January 31, 1998, and July 31, 1998, respectively...... 0 0 0
Additional paid-in capital............................... 0 0 37,500
Accumulated deficit...................................... (121,336) (129,293) (4,136)
--------- --------- -------
Total shareholders' (deficit) equity................... (18,601) (26,558) 33,364
--------- --------- -------
Total liabilities and shareholders' (deficit) equity... $ 16,276 $ 15,295 $43,265
========= ========= =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-66
<PAGE>
SPRY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS SIX MONTHS SIX MONTHS
APRIL 30, APRIL 30, ENDED ENDED ENDED
1996 1997 JANUARY 31, 1998 JULY 31, 1997 JULY 31, 1998
---------- ---------- ---------------- ------------- -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Internet service revenues...... $ 9,379 $ 32,575 $38,410 $ 23,559 $23,607
Software revenues.............. 16,781 2,995 0 0 0
-------- -------- ------- -------- -------
Total revenues............... 26,160 35,570 38,410 23,559 23,607
-------- -------- ------- -------- -------
COSTS AND EXPENSES:
Costs of revenues.............. 11,432 20,261 22,762 13,853 14,093
Selling, general, and
administrative............... 39,473 33,122 20,407 17,743 11,139
Depreciation and
amortization................. 2,807 3,866 3,163 2,056 2,449
-------- -------- ------- -------- -------
Total costs and expenses..... 53,712 57,249 46,332 33,652 27,681
-------- -------- ------- -------- -------
OPERATING LOSS................... (27,552) (21,679) (7,922) (10,093) (4,074)
OTHER INCOME (EXPENSE)........... 2,377 957 (35) 54 (62)
-------- -------- ------- -------- -------
NET LOSS BEFORE INCOME TAX
BENEFIT........................ (25,175) (20,722) (7,957) (10,039) (4,136)
INCOME TAX BENEFIT............... 7,693 0 0 0 0
-------- -------- ------- -------- -------
NET LOSS......................... $(17,482) $(20,722) $(7,957) $(10,039) $(4,136)
======== ======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-67
<PAGE>
SPRY, INC.
STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
NON-VOTING
DELAYED
COMMON STOCK CONVERTIBLE STOCK
------------------- ------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
-------- -------- -------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 30, 1995....................... 0 $ 0 404 $102,735 $ (83,132) $ 19,603
Net loss.................................... 0 0 0 0 (17,482) (17,482)
-- ---- --- -------- --------- --------
BALANCE, APRIL 30, 1996....................... 0 0 404 102,735 (100,614) 2,121
Net loss.................................... 0 0 0 0 (20,722) (20,722)
-- ---- --- -------- --------- --------
BALANCE, APRIL 30, 1997....................... 0 0 404 102,735 (121,336) (18,601)
Net loss.................................... 0 0 0 0 (7,957) (7,957)
-- ---- --- -------- --------- --------
BALANCE, JANUARY 31, 1998..................... 0 $ 0 404 $102,735 $(129,293) $(26,558)
== ==== === ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-68
<PAGE>
SPRY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR YEAR NINE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED ENDED
APRIL 30, APRIL 30, JANUARY 31, JULY 31, JULY 31,
1996 1997 1998 1997 1998
--------- --------- ----------- ---------- ----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................. $(17,482) $(20,722) $(7,957) $(10,039) $(4,136)
-------- -------- ------- -------- -------
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Depreciation and amortization....... 2,807 3,866 3,163 2,056 2,449
Loss on disposal of equipment....... 97 121 72 33 62
Changes in operating assets and
liabilities:
Accounts receivable, net............ 5,884 (1,733) (1,257) 843 457
Other current assets................ (232) 515 45 111 (13)
Accounts payable.................... 3,006 (3,893) (372) 385 396
Accrued expenses.................... (1,155) 1,834 2,474 771 2,980
Other assets........................ 619 788 (113) (16) (29)
-------- -------- ------- -------- -------
Total adjustments............... 11,026 1,498 4,012 4,183 6,302
-------- -------- ------- -------- -------
Net cash (used in) provided by
operating activities.......... (6,456) (19,224) (3,945) (5,856) 2,166
-------- -------- ------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment,
net of retirements.................. (5,024) (1,494) (1,156) (563) (174)
-------- -------- ------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in due to/from parent.......... 11,838 19,863 4,874 7,731 (2,102)
-------- -------- ------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTSV.......................... 358 (855) (227) 1,312 (110)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................ 834 1,192 337 358 110
-------- -------- ------- -------- -------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................ $ 1,192 $ 337 $ 110 $ 1,670 $ 0
======== ======== ======= ======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest................ $ 0 $ 0 $ 0 $ 0 $ 0
======== ======== ======= ======== =======
Cash paid for taxes................... $ 0 $ 0 $ 0 $ 0 $ 0
======== ======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-69
<PAGE>
SPRY, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1996 AND 1997, JANUARY 31, 1998,
AND JULY 31, 1997 AND 1998 (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND NATURE OF BUSINESS
Spry, Inc. ("Spry" or the "Company") was organized in February 1989 and over
the periods has been engaged in providing Internet access and services and
selling Internet software. On February 4, 1995, H&R Block, Inc. ("H&R") issued
an aggregate of approximately 404,000 shares of its non-voting delayed
convertible preferred stock, options for an additional 52,000 shares thereof,
and $41,800 in cash to the shareholders of Spry in exchange for all of the
outstanding common stock, preferred stock, and stock options of Spry. This
acquisition was accounted for as a purchase. On January 30, 1996, H&R dividended
Spry to CompuServe Corporation. This was accounted for as a transfer of assets
under common control so carryover basis was employed. On January 31, 1998,
America Online, Inc. ("AOL") acquired the worldwide interactive services
division of CompuServe Corporation ("CompuServe"), including CompuServe's
wholly-owned subsidiary, Spry, in a transaction accounted for as a purchase
(Note 10). Collectively, H&R, CompuServe, and AOL are herein referred to as the
"Parent Corporation."
The Company initially sold prepackaged software to connect to the Internet
principally utilizing its "Internet in a Box" and "Mosaic in a Box" products. As
access to the Internet became increasingly prevalent, the Company switched its
focus to being a subscriber based Internet service provider. Beginning in
mid-1997, the Parent Corporation began an effort to dispose of Spry, and
advertising and marketing efforts were significantly reduced. Accordingly,
selling, general, and administrative costs decreased while subscriber growth
slowed and eventually began to decline.
The financial statements and related footnotes contained herein reflect the
operations of Spry's customer base of individual Internet access subscribers,
principally in the United States, which includes subscribers to Spry's "Internet
in a Box" family of products, and other service revenue. A portion of Spry's
assets including its subscriber base, intellectual property and facilities are
being acquired in a transaction accounted for as a purchase by MindSpring
Enterprises, Inc. ("MindSpring") (Note 10).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION
The financial statements of Spry have been derived from the consolidated
financial statements of its Parent Corporations and have been prepared to
present the Company's financial position, results of operations, and cash flows
on a stand-alone basis. Accordingly, the accompanying financial statements
include certain costs and expenses which have been allocated to Spry from its
Parent Corporations (Note 8). These costs have been allocated on a pro rata
basis based on a variety of factors, including revenues, and represent
management's best estimates of what such expenses would have been had Spry been
operated as a separate entity.
QUARTERLY INFORMATION
The balance sheet as of July 31, 1998 and the statements of operations and
cash flows for the six months ended July 31, 1998 and 1997 are unaudited and
have been prepared by management of the Company in accordance with the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the statements contain all adjustments (consisting of only normal
recurring
F-70
<PAGE>
SPRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996 AND 1997, JANUARY 31, 1998,
AND JULY 31, 1997 AND 1998 (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
items) necessary for the fair presentation of the financial position and results
of operations for the interim periods. The results of operations for the six
months ended July 31, 1998 are not necessarily indicative of the results to be
expected for the entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, Spry considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents. The cash and cash equivalents reflected in the accompanying balance
sheets represent specific accounts associated with Spry.
Certain other cash accounts are commingled with Parent Corporation funds and
Spry's portion is reflected in Due to Parent in accordance with the accompanying
balance sheets.
REVENUE RECOGNITION
Spry recognizes revenues when Internet services are provided. Spry bills in
arrears so accounts receivable includes certain services that have not yet been
billed.
Spry recognizes revenues on the sale of prepackaged software when products
are shipped, net of an allowance for potential returns based on historical
patterns.
CREDIT RISK
Spry's accounts receivable potentially subject it to credit risk, as
collateral is not generally required. Spry's risk of loss is limited due to the
use of preapproved charges to customer credit cards and the ability to terminate
access on delinquent accounts. The concentration of credit risk is mitigated by
the large number of customers comprising the customer base. The carrying amount
of Spry's receivables approximates their fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of three to five years.
In conjunction with the AOL acquisition, the carrying value of property and
equipment was adjusted to its fair market value which approximated book value.
F-71
<PAGE>
SPRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996 AND 1997, JANUARY 31, 1998,
AND JULY 31, 1997 AND 1998 (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Spry capitalizes costs incurred for the production of computer software used
in the sale of its services, including direct labor and related overhead. All
costs in the software development process that are classified as research and
development are expensed as incurred until technological feasibility has been
established. For all periods presented, research and development costs were not
material. Once technological feasibility has been established, such costs are
capitalized until the software is commercially available. Amortization is
provided over three years. It is reasonably possible that the estimates of
anticipated future revenues, the remaining estimated economic life of the
product, or both will be reduced significantly in the near term due to
competitive pressures.
LONG-LIVED ASSETS
Spry periodically reviews the values assigned to long-lived assets, such as
property and equipment, software development costs, and goodwill and other
intangibles to determine whether any impairments are other than temporary.
Management believes that the long-lived assets in the accompanying consolidated
balance sheets are appropriately valued.
GOODWILL
Goodwill, which is being amortized over 10 years, relates to the pushdown of
the new accounting basis resulting from the acquisition of the Company by H&R,
and subsequently by AOL.
DUE TO/FROM PARENT
Spry either advances funds to or borrows funds from its Parent Corporations.
Funds advanced to Spry are used to cover fixed asset expansion, acquisitions,
and working capital requirements. The advances and borrowings are netted and are
reflected in Due to/from Parent in the accompanying balance sheets. The advances
are not evidenced by any written agreement, and are non-interest bearing.
ADVERTISING COSTS
Spry expenses all advertising costs as incurred.
INCOME TAXES
The income tax returns of its Parent Corporations have included the
operations of Spry. For purposes of these financial statements, income taxes
related to Spry have been computed and recorded on a separate return basis based
on the statutory rates in effect (Note 6).
Deferred income taxes are recorded using enacted tax laws and rates for the
years in which the taxes are expected to be paid. Deferred income taxes are
provided for items when there is a temporary difference in recording such items
for financial reporting and income tax reporting.
F-72
<PAGE>
SPRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996 AND 1997, JANUARY 31, 1998,
AND JULY 31, 1997 AND 1998 (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOURCES OF SUPPLIES
Spry is dependent on related parties (Note 8) and third-party suppliers for
its Internet access. Certain of these suppliers are or may become competitors of
Spry, are or have been affiliates of Spry, and such suppliers are not subject to
any restrictions upon their ability to compete with Spry. To the extent that
these suppliers change their pricing structures, Spry may be adversely affected.
Regulatory proposals are pending that may affect the prices charged by certain
suppliers to Spry. Although management feels alternative telecommunications
facilities could be found in a timely manner, any disruption of these services
could have an adverse effect on operating results.
Spry is also dependent on certain third-party suppliers of hardware
components. Although Spry attempts to maintain a minimum of two vendors for each
required product, certain components used by Spry in providing its networking
services are currently acquired or available from only one source. A failure by
a supplier to deliver quality products on a timely basis, or the inability to
develop alternative sources if and as required, could result in delays which
could materially adversely affect Spry. As Spry's suppliers revise and upgrade
their equipment technology, Spry may encounter difficulties in integrating the
new technology into its network.
3. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on the
straight-line method over the estimated useful lives of the assets, which range
from three to five years, and consist of the following:
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1997 1998
--------- -----------
<S> <C> <C>
Computer hardware....................................... $ 4,951 $ 5,819
Leasehold improvements.................................. 1,392 1,402
Furniture and fixtures.................................. 1,117 1,128
Office equipment........................................ 554 562
------- -------
8,014 8,911
Less accumulated depreciation........................... (4,661) (6,609)
------- -------
Property and equipment, net............................. $ 3,353 $ 2,302
======= =======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
LEASES
Spry leases office space and certain equipment under agreements which are
classified as operating leases. The following is a schedule by years of future
minimum rental payments under these operating
F-73
<PAGE>
SPRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996 AND 1997, JANUARY 31, 1998,
AND JULY 31, 1997 AND 1998 (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
leases that have initial or remaining non-cancelable lease terms in excess of
one year as of January 31, 1998:
<TABLE>
<S> <C>
1999*....................................................... $1,741
2000*....................................................... 1,706
2001*....................................................... 1,596
------
Total minimum payments required........................... $5,043
======
</TABLE>
- ------------------------
* Minimum payments have not been reduced by minimum sublease rentals which are
due in future periods under noncancellable subleases.
Total rental expense net of sublease rentals for the years ended April 30,
1996 and 1997 and the nine months ended January 31, 1998 were $1,554, $1,338,
and $1,090, respectively.
LEGAL PROCEEDINGS
Spry is subject to legal proceedings and claims which arise in the ordinary
course of business. There are no pending legal proceedings to which Spry is a
party which management believes are material.
5. STOCK OPTION PLANS
SPRY STOCK OPTION PLAN
Under the Company's 1995 stock option plan (the "Spry 1995 Plan"), as
adopted on February 13, 1995 and subsequently amended in April 1995 upon H&R's
purchase of Spry, selected employees, directors, officers, agents, consultants,
advisors, and independent contractors of the company were eligible to receive
options under the Spry 1995 Plan. The Company's board of directors is
responsible for administering the Spry 1995 Plan. The options become exercisable
at a rate of 20% per year from the grant date of the options based upon the
optionee's continuous relationship with the Company. All options granted were at
a price not less that the fair market value per share of the common stock at the
time the option was granted. Upon acquisition by H&R, all options outstanding
under the Spry 1995 Plan were converted to options to purchase shares of H&R
Block delayed convertible preferred stock at a ratio of 2.09 for 1. All options
granted expire ten years from the original date they were granted.
H&R BLOCK INCENTIVE STOCK OPTION PLAN
Under H&R's 1995 Incentive Stock Option Plan (the "H&R Plan"), as adopted on
August 8, 1995, H&R authorized 100,000 options on H&R Block Common Shares.
Employees eligible were H&R's Internet division ("Internet Division") employees
employed prior to April 4, 1995, and were determined at the discretion of the
Internet Division executive management. The H&R Plan options
F-74
<PAGE>
SPRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996 AND 1997, JANUARY 31, 1998,
AND JULY 31, 1997 AND 1998 (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. STOCK OPTION PLANS (CONTINUED)
become exercisable in equal installments at the end of each of the three years
beginning on June 30, 1996.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company has elected to account for its stock-based compensation plans
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during the year ended April 30, 1996
using the Black-Scholes option-pricing model as prescribed by SFAS No. 123 using
the following weighted average assumptions:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 5.89%
Expected dividend yield..................................... 0%
Expected lives.............................................. Three years
Expected volatility......................................... 35.32%
</TABLE>
There were no grants in the periods ended April 30, 1997 or January 31,
1998.
The total value of options granted during the year ended April 30, 1996 was
computed as approximately $2,356, which would be amortized on a pro forma basis
over the vesting period of the options. Additionally, there was approximately
$678 remaining unamortized compensation on grants prior to April 30, 1995. If
the Company had accounted for these plans in accordance with SFAS No. 123, the
Company's net loss and pro forma net loss for the years ended April 30, 1996 and
1997 and the nine months ended January 31, 1998 would have been as follows:
<TABLE>
<CAPTION>
AS PRO
REPORTED FORMA
-------- --------
<S> <C> <C>
April 30, 1996.......................................... $(17,482) $(18,179)
April 30, 1997.......................................... (20,722) (21,025)
January 31, 1998........................................ (7,957) (8,149)
</TABLE>
F-75
<PAGE>
SPRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996 AND 1997, JANUARY 31, 1998,
AND JULY 31, 1997 AND 1998 (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. STOCK OPTION PLANS (CONTINUED)
A summary of the status of the Company's stock options plans at April 30,
1996 and 1997 and January 31, 1998 and changes during the years then ended are
presented in the following table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
SHARES SHARE
-------- ---------
<S> <C> <C>
April 30, 1995............................................ 51,826 $34.11
Grants.................................................. 122,700 44.13
Forfeitures............................................. (24,237) 42.75
------- ------
April 30, 1996............................................ 150,289 40.90
Exercised............................................... (4,840) 33.63
Forfeitures............................................. (84,893) 42.87
------- ------
April 30, 1997............................................ 60,556 38.71
Exercised............................................... (8,116) 34.59
Forfeitures............................................. (10,190) 43.62
------- ------
January 31, 1998.......................................... 42,250 $38.31
======= ======
</TABLE>
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by plan as of
January 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE WEIGHTED REMAINING
OF PRICE AVERAGE CONTRACTUAL
SHARES RANGE PRICE LIFE
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
1993 Grants............................. 17,292 $35.66 $35.66 5.3 years
1994 Grants............................. 8,244 32.65 32.65 6.3 years
H&R Plan................................ 16,714 44.13 44.13 7.3 years
</TABLE>
The following table summarizes the options exercisable as of April 1996 and
1997 and January 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER WEIGHTED REMAINING
OF AVERAGE CONTRACTUAL
SHARES PRICE LIFE
-------- -------- -----------
<S> <C> <C> <C>
As of:
April 30, 1996................................ 24,338 $34.45 8.0 years
April 30, 1997................................ 40,319 38.30 7.0 years
January 31, 1998.............................. 36,451 38.27 6.3 years
</TABLE>
F-76
<PAGE>
SPRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996 AND 1997, JANUARY 31, 1998,
AND JULY 31, 1997 AND 1998 (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. INCOME TAXES
The income tax returns of its Parent Corporations have included the
operations of Spry. For purposes of these financial statements, income taxes
related to Spry have been computed and recorded on a separate return basis based
on the statutory rates in effect.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of April 30,
1997 and January 31, 1998 are as follows:
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1997 1998
--------- -----------
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards...................... $ 6,323 $ 8,465
Allowance for doubtful accounts....................... 466 682
Other, net............................................ 22 45
------- -------
Net deferred tax assets................................. 6,811 9,192
Valuation allowance for deferred tax assets............. (6,811) (9,192)
------- -------
Net deferred taxes...................................... $ 0 $ 0
======= =======
</TABLE>
The company's net operating loss carryforwards (approximately $24,896 as of
January 31, 1998) will expire between 2011 and 2013 unless utilized. For the
period ended April 30, 1996, the Company's federal income tax benefit was
utilized by its Parent Corporation through a tax sharing arrangement. For all
other periods, the Company has not recognized the income tax benefit of the net
operating loss carryforwards due to the fact that its Parent Corporation was
also in a net taxable loss position and unable to utilize them. Accordingly,
management has provided a 100% valuation reserve against its net deferred tax
asset, consisting primarily of net operating loss carryforwards. In addition,
the Company's ability to recognize the benefit from the net operating loss
carryforwards could be limited under Section 382 of the Internal Revenue Code if
ownership of the Company changes more than 50%, as defined.
A reconciliation of the income tax provision computed at statutory tax rates
to the income tax provision for the years ended April 30, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
APRIL 30
----------------------- JANUARY 31,
1996 1997 1998
-------- -------- -----------
<S> <C> <C> <C>
Income tax benefit at statutory rate............. (34)% (34)% (34)%
Nondeductible intangibles........................ 2 2 4
Other, net....................................... 1 0 0
Deferred tax asset valuation allowance........... 1 32 30
--- --- ---
Total income tax provision................... (30)% 0% 0%
=== === ===
</TABLE>
F-77
<PAGE>
SPRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996 AND 1997, JANUARY 31, 1998,
AND JULY 31, 1997 AND 1998 (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. EMPLOYEE BENEFIT PLAN
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
Annually, the Company determines whether to make a discretionary matching
contribution equal to a percentage, determined by the Company, of the employee's
deferred compensation contribution. The Company has not made any material
matching contributions to the Savings Plan for the related periods.
8. RELATED-PARTY TRANSACTIONS
Transactions of Spry are performed and certain management and administrative
services are executed by its Parent Corporations for the periods ending
April 30, 1996 and 1997 and January 31, 1998 respectively. Services provided to
the Company include support in major functional areas such as accounting, human
resources, legal, risk management, payroll, sales and marketing, and taxes.
Costs attributable to these support functions are included in selling, general,
and administrative expenses. These costs are allocated to Spry based on various
factors which management believes represent relative cost streams. The costs
allocated to Spry were approximately $375, $1,650, and $1,238 for the years
ended April 30, 1996 and 1997 and nine months ended January 31, 1998,
respectively.
Spry operates under the network agreements of its Parent Corporations and
the cost of revenues for Internet services in the accompanying statement of
operations represent management's best estimate of the amounts that would have
been allocated to Spry for such services if it were a standalone entity.
As discussed in Note 6, the Company recognized an income tax benefit of
approximately $7,693 through a tax sharing arrangement with its Parent
Corporation. This amount is reflected as a reduction in Due to/from Parent on
the accompanying balance sheet.
9. SHAREHOLDERS' (DEFICIT) EQUITY
The Company has authorized 1,000 shares of no par value common shares, of
which 100 were outstanding for all periods.
Prior to the AOL acquisition, Spry had outstanding 403,864 shares of
non-voting delayed convertible preferred stock (no par value), which were
convertible into shares of common stock at a ratio of four shares of common
stock to one share of preferred stock. In conjunction with the AOL acquisition
(Note 10), all such shares were retired.
10. SUBSEQUENT EVENTS (UNAUDITED)
As discussed in Note 1, AOL acquired Spry as part of its acquisition of
CompuServe on January 31, 1998. The effect of the transaction has been pushed
down to the financial statements of the Company based upon AOL's initial
allocation of its purchase price of CompuServe and the Company.
F-78
<PAGE>
SPRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996 AND 1997, JANUARY 31, 1998,
AND JULY 31, 1997 AND 1998 (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
The following table summarizes the net assets allocated to the acquisition and
the amount allocated to intangibles:
<TABLE>
<S> <C>
Purchase price.............................................. $37,500
Tangible assets acquired.................................... (6,663)
Liabilities assumed......................................... 6,525
Intangibles................................................. 37,638
</TABLE>
This reflects a preliminary estimate of the purchase price allocations based
on management's best estimate given currently available information; however,
such information may be revised up to one year from the acquisition date.
On September 10, 1998, MindSpring entered into an Asset Purchase Agreement
with Spry and AOL, pursuant to which, MindSpring agreed to acquire certain of
the tangible and intangible assets and rights in connection with the consumer
dial-up Internet access business currently operated by Spry as well as the
domestic and Canadian subscriber base.
The transaction was consummated on October 15, 1998 with MindSpring paying
$25 million in cash to AOL. The final purchase price is estimated to be between
$35 million and $45 million based on final subscriber totals on various
measurement dates.
THE TRANSACTION WILL BE COMPLETED IN THE FIRST QUARTER OF 1999, SUBJECT TO
CERTAIN CUSTOMARY CLOSING CONDITIONS.
F-79
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NETCOM On-Line
Communication Services, Inc.:
We have audited the accompanying balance sheets of NETCOM ON-LINE
COMMUNICATION SERVICES, INC. DOMESTIC SUBSCRIBER OPERATIONS (an unincorporated
division of NETCOM On-Line Communication Services, Inc.) as of December 31, 1998
and 1997 and the related statements of operations, accumulated deficit, and cash
flows for the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NETCOM On-Line Communication
Services, Inc. Domestic Subscriber Operations as of December 31, 1998 and 1997
and the results of its operations and its cash flows for the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
January 27, 1999
F-80
<PAGE>
NETCOM ON-LINE COMMUNICATION SERVICES, INC.
DOMESTIC SUBSCRIBER OPERATIONS
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 0 $ 62,248
Accounts receivable, net of allowance for doubtful
accounts of $1,147
and $774 at December 31, 1998 and 1997, respectively.... 2,913 2,032
Inventory................................................. 410 334
Prepaid expenses and other current assets................. 1,863 1,309
--------- --------
Total current assets.................................... 5,186 65,923
--------- --------
PROPERTY AND EQUIPMENT, NET................................. 55,104 63,824
--------- --------
OTHER ASSETS:
Subscriber acquisition costs.............................. 4,729 2,637
Other assets.............................................. 482 674
--------- --------
Total other assets...................................... 5,211 3,311
--------- --------
Total assets............................................ $ 65,501 $133,058
========= ========
LIABILITIES AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 8,901 $ 6,622
Accrued payroll........................................... 5,207 5,483
Accrued liabilities....................................... 7,729 7,519
Due to parent............................................. 142,508 168,582
Deferred revenues......................................... 3,869 4,461
Short-term capital lease obligations...................... 2,731 2,247
--------- --------
Total current liabilities............................... 170,945 194,914
LONG-TERM CAPITAL LEASE OBLIGATIONS......................... 2,061 3,287
--------- --------
Total liabilities....................................... 173,006 198,201
--------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
ACCUMULATED DEFICIT......................................... (107,505) (65,143)
--------- --------
Total liabilities and accumulated deficit............... $ 65,501 $133,058
========= ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-81
<PAGE>
NETCOM ON-LINE COMMUNICATION SERVICES, INC.
DOMESTIC SUBSCRIBER OPERATIONS
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES.................................................... $143,669 $147,517 $116,713
-------- -------- --------
COSTS AND EXPENSES:
Costs of revenues......................................... 58,046 51,203 36,722
Selling, general, and administrative...................... 99,570 96,280 97,687
Depreciation and amortization............................. 31,878 23,438 16,108
-------- -------- --------
Total costs and expenses................................ 189,494 170,921 150,517
-------- -------- --------
OPERATING LOSS.............................................. (45,825) (23,404) (33,804)
INTEREST INCOME, NET........................................ 3,463 4,703 6,050
OTHER EXPENSE............................................... 0 (764) (1,550)
-------- -------- --------
NET LOSS.................................................... $(42,362) $(19,465) $(29,304)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-82
<PAGE>
NETCOM ON-LINE COMMUNICATION SERVICES, INC.
DOMESTIC SUBSCRIBER OPERATIONS
STATEMENTS OF ACCUMULATED DEFICIT
FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
BALANCE, December 31, 1995.................................. $ (16,374)
Net loss.................................................... (29,304)
---------
BALANCE, December 31, 1996.................................. (45,678)
Net loss.................................................... (19,465)
---------
BALANCE, December 31, 1997.................................. (65,143)
Net loss.................................................... (42,362)
---------
BALANCE, December 31, 1998.................................. $(107,505)
=========
</TABLE>
The accompanying notes are an integral part of these statements.
F-83
<PAGE>
NETCOM ON-LINE COMMUNICATION SERVICES, INC.
DOMESTIC SUBSCRIBER OPERATIONS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(42,362) $(19,465) $(29,304)
-------- -------- --------
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization............................. 31,878 23,438 16,108
Changes in operating assets and liabilities:
Accounts receivable, net................................ (881) (767) 116
Other current assets.................................... (630) 187 (234)
Accounts payable........................................ 2,279 2,184 (4,693)
Deferred revenues....................................... (592) 1,643 1,568
Accrued expenses........................................ (66) 1,276 6,697
Other assets............................................ (1,900) 2,096 (902)
-------- -------- --------
Total adjustments..................................... 30,088 30,057 18,660
-------- -------- --------
Net cash (used in) provided by operating activities... (12,274) 10,592 (10,644)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net of retirements..... (20,030) (5,866) (44,234)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in due to parent company............................. (26,074) (10,232) (19,672)
Payments of capital lease obligations....................... (3,870) (1,843) 0
-------- -------- --------
Net cash used in financing activities................. (29,944) (12,075) (19,672)
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (62,248) (7,349) (74,550)
CASH AND CASH EQUIVALENTS, beginning of year................ 62,248 69,597 144,147
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $ 0 $ 62,248 $ 69,597
======== ======== ========
SUPPLEMENTAL NONCASH DISCLOSURE:
Assets acquired under capital lease......................... $ 3,128 $ 7,377 $ 0
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-84
<PAGE>
NETCOM ON-LINE COMMUNICATION SERVICES, INC.
DOMESTIC SUBSCRIBER OPERATIONS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. ORGANIZATION
NETCOM On-Line Communication Services, Inc. ("NETCOM" or the "Company") was
incorporated in the state of California in August 1992. In October 1994, the
Company reincorporated in the state of Delaware. In January 1998, in a
transaction accounted for as a pooling of interests, the Company became a wholly
owned subsidiary of ICG Services, Inc., a Delaware corporation, which is a
wholly owned subsidiary of ICG Communications, Inc. ("ICG"), and ceased to exist
as an independent entity. The Company provides Internet solutions to subscribers
in the United States, the United Kingdom, and Canada.
The financial statements and related footnotes contained herein reflect the
operations of NETCOM's customer base of individual Internet access subscribers
in the United States (the "Domestic Subscriber Operations"). These amounts
exclude the results of NETCOM's operations in Canada and the United Kingdom as
well as its capital stock. A portion of the Domestic Subscriber Operations'
assets, including its subscriber base, intellectual property and facilities, is
being acquired in a transaction accounted for as a purchase by MindSpring
Enterprises, Inc. ("MindSpring"). The assets not being acquired will continue to
be utilized to provide services to MindSpring via a Network Operating Agreement
(Note 8).
The Domestic Operations has experienced operating losses since inception as
a result of efforts to build its network infrastructure, development of its
systems, and expansion into new markets. The Domestic Operations expects to
continue to focus on increasing its subscriber base which could potentially have
a negative effect on near term results. There can be no assurance that the
Domestic Operations growth in revenue and subscriber base will continue or
exceed costs growth or that it will achieve profitability or positive cash flow.
The Domestic Operations have been funded to date by NETCOM and will be funded by
MindSpring subsequent to the acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION
The financial statements of the Domestic Subscriber Operations have been
derived from the consolidated financial statements of NETCOM and have been
prepared to present its financial position, results of operations, and cash
flows on a stand-alone basis. Accordingly, the accompanying financial statements
for 1998 only include certain administrative costs and expenses, which have been
allocated to the Domestic Subscriber Operations by NETCOM and its parent, ICG
(Note 7). These costs have been allocated on a pro rata basis based on a variety
of factors, primarily employee headcount, and represent management's best
estimates of what such expenses would have been had the Domestic Subscriber
Operations been operated as a separate entity.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-85
<PAGE>
NETCOM ON-LINE COMMUNICATION SERVICES, INC.
DOMESTIC SUBSCRIBER OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DUE TO PARENT
NETCOM either advances or borrows funds from the Domestic Operations. Funds
advanced to the Domestic operations are used to cover fixed asset expansion and
working capital requirements. The source of these funds is principally the
proceeds from sales of capital stock by NETCOM. The advances and borrowings are
netted and are reflected in Due to Parent in the accompanying balance sheet.
REVENUE RECOGNITION
Monthly subscription service revenue is recognized over the period services
are provided. Subscription service and equipment revenues, which require the use
of company-provided installation of equipment at a subscriber's location, are
recognized when the service is commenced.
CASH AND CASH EQUIVALENTS
The Domestic Subscriber Operations considers all highly liquid investments
with an original maturity (at the date of purchase) of three months or less and
insignificant interest rate risk to be the equivalent of cash for the purposes
of the balance sheet presentation and statements of cash flows.
The Domestic Subscriber Operations has classified all investments as
available-for-sale and included them in cash and cash equivalents.
Available-for-sale securities are carried at fair market value based on quoted
market prices with unrealized gains and losses reported in other income.
Interest on securities classified as available-for-sale is included in other
income. The following is a summary of available-for-sale securities at
December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Commercial paper............................................ $0 $55,480
Money market instruments, net of overdrafts................. 0 1,108
-- -------
Included in cash and cash equivalents....................... $0 $56,588
== =======
</TABLE>
At December 31, 1997, the estimated fair value of the commercial paper and
money market instruments approximated cost, and the amount of gross unrealized
gains and losses was not significant.
ACCOUNTS RECEIVABLE AND DEFERRED REVENUE
The Domestic Subscriber Operations generally bills for subscription
services, including network and dial-up connection services and initial one-time
setup fees, on the first day of each month for which service is provided.
Deferred revenue consists primarily of prepaid monthly subscriptions and also,
to a lesser extent, billings to customers for equipment shipped that has not
been installed at customer locations.
F-86
<PAGE>
NETCOM ON-LINE COMMUNICATION SERVICES, INC.
DOMESTIC SUBSCRIBER OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory consists of purchased goods and is stated at the lower of cost or
market on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and are depreciated or amortized
using the straight-line method over the estimated useful life of the assets,
which are generally three to five years. Leasehold improvements are amortized
using the straight-line method over the shorter of their estimated useful lives
or the term of the related lease, whichever is shorter.
LONG-LIVED ASSETS
The Domestic Subscriber Operations periodically reviews the values assigned
to long-lived assets, such as property and equipment, subscriber acquisition
costs, and other long-term assets, to determine whether any impairments are
other than temporary. Management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
SUBSCRIBER ACQUISITION COSTS
The Domestic Subscriber Operations expenses the costs of advertising as
incurred, except direct response advertising, which are included in subscriber
acquisition costs. These costs relate directly to subscriber solicitations and
principally include the printing, production, and shipping of starter packages
and the costs of obtaining qualified prospects by various targeted direct
marketing programs. No indirect costs are included in subscriber acquisition
costs. To date, all subscriber acquisition costs have been incurred for the
solicitation of specifically identified prospects. Subscriber acquisition costs
are deferred and amortized over a period determined by calculating the ratio of
current revenues related to the direct response advertising versus the total
expected revenues or 12 months, whichever is shorter. It is possible that these
estimates of anticipated future gross revenues could be reduced in the future.
The Domestic Subscriber Operations' management is constantly evaluating the
estimates used. As a result, the amortization period of the subscriber
acquisition costs related directly to subscriber solicitations may be reduced.
Subscriber acquisition costs, which relate directly to potential
subscribers, are recorded separately from ordinary operating costs. Deferred
subscriber acquisition costs capitalized during fiscal years 1998 and 1997 were
$16,469 and $5,252, respectively. Amortization and write-offs for fiscal years
1998, 1997, and 1996 were $14,377, $7,189, and $11,410, respectively.
Advertising expenses included in selling, general, and administrative
expenses were $8,268, $3,786, and $5,567 in 1998, 1997, and 1996, respectively.
F-87
<PAGE>
NETCOM ON-LINE COMMUNICATION SERVICES, INC.
DOMESTIC SUBSCRIBER OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER INCOME
In June 1995, the Domestic Subscriber Operations acquired common stock in
the McKinley Group, Inc. ("McKinley") in exchange for $1,200 in cash and $300 of
common stock. In 1996, Excite, Inc. ("Excite") acquired all of the outstanding
shares of McKinley and the Domestic Subscriber Operations received shares of
Excite in exchange for its investment in McKinley. The Domestic Subscriber
Operations recorded a loss of $1,200 in 1996 to reflect the estimated value of
the shares received. During 1997, the Domestic Subscriber Operations sold the
Excite shares for a net gain of $1,274.
SEGMENTAL DISCLOSURES
The Domestic Subscriber Operations adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, "Segmental Disclosures," effective December 31,
1998. The standard had no effect, as the Domestic Subscriber Operations operates
in one segment.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Domestic Subscriber
Operations to concentrations of credit risk consist principally of cash
investments and trade receivables. The Domestic Subscriber Operations' cash
investment policies limit investments to short-term, low-risk instruments.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Domestic Subscriber Operations'
customer base.
SOURCES OF SUPPLIES
The Domestic Subscriber Operations relies on local telephone companies and
other companies to provide data communications capacity. Although management
feels that alternative telecommunications facilities could be found in a timely
manner, disruption of these services, for more than a brief period, would have
an adverse effect on operating results.
Although the Domestic Subscriber Operations attempts to maintain multiple
vendors for each required product, its property and equipment, which are
important components of its operations, are each currently acquired from only a
few sources. In addition, some of the Domestic Subscriber Operations' suppliers
have limited resources and production capacity. If the suppliers are unable to
meet the Domestic Subscriber Operations' needs as it builds out its network
infrastructure and sells services, then delays and increased costs in the
expansion of the Domestic Subscriber Operations' network infrastructure or
losses of potential customers could result, which would adversely affect
operating results.
INCOME TAXES
The Domestic Operations is not a separate taxable entity. The income tax
returns of NETCOM include the Domestic Operations. For purposes of these
financial statements, income taxes allocated to
F-88
<PAGE>
NETCOM ON-LINE COMMUNICATION SERVICES, INC.
DOMESTIC SUBSCRIBER OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the Domestic Operations have been computed and recorded on a separate return
basis based on the statutory rates in effect (Note 6).
Income taxes are accounted for under SFAS No. 109, "Accounting for Income
Taxes." Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases 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.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1998 and
1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Equipment............................................... $107,257 $ 90,830
Leasehold improvements.................................. 7,969 7,388
Furniture, fixtures, and other.......................... 5,079 4,442
Construction in process................................. 676 5
Assets under capital leases............................. 10,505 7,377
-------- --------
131,486 110,042
Less accumulated depreciation and amortization.......... (76,382) (46,218)
-------- --------
Net property and equipment.............................. $ 55,104 $ 63,824
======== ========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that have arisen in
the ordinary course of its business related to the Domestic Subscriber
Operations. In the opinion of management, settlement of these actions when
ultimately concluded will not have a material adverse effect on trends in
results of operations or the financial condition of the Company or the Domestic
Subscriber Operations. This conclusion is based on current facts and
circumstances, however, and it is possible that a change in the facts and
circumstances relating to such legal proceedings and claims could result in a
development that would have a material adverse effect on the results of
operations or financial condition of the Domestic Subscriber Operations.
The Domestic Subscriber Operations has been allocated leases on certain
equipment under agreements that are classified as capital leases. These leases
have original terms of three years or less and contain bargain purchase options
at the end of the original lease terms. The Domestic Subscriber Operations also
has operating leases which relate to the lease of office and equipment space.
Rental expense attributable to these operating leases was approximately $5,569,
$5,291, and $4,237 for the
F-89
<PAGE>
NETCOM ON-LINE COMMUNICATION SERVICES, INC.
DOMESTIC SUBSCRIBER OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
years ended December 31, 1998, 1997, and 1996, respectively. At December 31,
1998, the Domestic Subscriber Operations' capital lease obligations and minimum
rental commitments under noncancelable operating leases with initial or
remaining terms of more than one year were as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1999...................................................... $ 3,066 $4,521
2000...................................................... 1,844 1,337
2001...................................................... 386 939
2002...................................................... 0 932
2003 and thereafter....................................... 0 308
------- ------
Total minimum lease payments.............................. 5,296 $8,037
======
Amounts representing interest............................. (504)
-------
Present value of net minimum payments..................... 4,792
Current portion........................................... (2,731)
-------
Long-term capitalized lease obligations................... $ 2,061
=======
</TABLE>
5. EMPLOYEE BENEFIT PLANS
1993 STOCK OPTION PLAN
In 1993, the Company approved and adopted its 1993 Non-qualified Stock
Option Plan (the "Plan"). The Plan is administered by the stock option committee
of the board of directors. The Plan provides for the granting of options to
purchase common stock to eligible employees, directors, and consultants of the
Company. A total of 3,153,571 shares of common stock may be issued pursuant to
options granted under the Plan. The options generally vest over three- to
five-year periods and are exercisable for up to ten years following the date of
grant.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The option plans and 401(k) plan of NETCOM include the Domestic Operations.
For purposes of these financial statements, all option information related to
the Domestic Operations has been computed and recorded on a separate entity
basis.
The Domestic Operations has elected to account for its stock-based
compensation plans under Accounting Principles Board Opinion No. 25 ("APB 25");
however, the Domestic Operations has computed for pro forma disclosure purposes
the value of all options granted during the years ended
F-90
<PAGE>
NETCOM ON-LINE COMMUNICATION SERVICES, INC.
DOMESTIC SUBSCRIBER OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
December 31, 1998, 1997, and 1996 using the Black-Scholes option pricing model
as prescribed by SFAS No. 123 using the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate....................... 6% 6% 6%
Expected dividend yield....................... 0% 0% 0%
Expected lives................................ 1.6 years 1.6 years 1.6 years
Expected volatility........................... 80% 80% 80%
</TABLE>
The total value of options granted during the years ended December 31, 1998,
1997, and 1996 was computed as approximately $21,527, $39,132, and $14,199,
respectively, which would be amortized on a pro forma basis over the vesting
period of the options. If the Domestic Operations had accounted for these plans
in accordance with SFAS No. 123, the Domestic Operations net loss and pro forma
net loss for the years ended December 31, 1998, 1997, and 1996 would have been
as follows (in thousands):
<TABLE>
<CAPTION>
AS PRO
REPORTED FORMA
-------- --------
<S> <C> <C>
December 31, 1996....................................... $(29,304) $(41,182)
December 31, 1997....................................... (19,465) (24,335)
December 31, 1998....................................... (42,362) (47,777)
</TABLE>
A summary of the status of the Domestic Operations' stock options at
December 31, 1998, 1997, and 1996 and changes during the years then ended are
presented in the following table (in thousands except per share information):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
SHARES SHARE
-------- ---------
<S> <C> <C>
December 31, 1995.......................................... 1,454 $28.46
Granted.................................................. 732 30.08
Exercised................................................ (167) 7.05
Forfeited................................................ (388) 33.26
------ ------
December 31, 1996.......................................... 1,631 30.24
Granted.................................................. 1,831 16.11
Exercised................................................ (77) 12.96
Forfeited................................................ (1,744) 29.84
------ ------
December 31, 1997.......................................... 1,641 15.67
Granted.................................................. 1,661 23.04
Exercised................................................ (706) 14.90
Forfeited................................................ (1,282) 25.04
------ ------
December 31, 1998.......................................... 1,314 $16.27
====== ======
</TABLE>
F-91
<PAGE>
NETCOM ON-LINE COMMUNICATION SERVICES, INC.
DOMESTIC SUBSCRIBER OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes the information about the Domestic
Operations' stock options outstanding at December 31, 1998 (in thousands except
per share information):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 5.20--14.05 152 8.31 $12.20 77 $11.99
$ 14.50--15.51 26 8.45 15.20 8 15.31
$15.65 251 8.34 15.65 227 15.65
$ 15.73--16.88 804 9.20 16.77 95 16.22
$ 17.63--46.65 81 8.93 21.18 35 20.28
----- ---- ------ --- ------
1,314 442
===== ===
</TABLE>
During 1996 and early in 1997, certain outstanding options were exchanged at
the election of the option holder. In September 1996, 67,408 shares were
exchanged and repriced for 39,995 shares, and in January 1997, 457,846 shares
were exchanged and repriced for 272,084 shares on the effective date of the
trade-in. Eligible options were issued at a lower price than the traded-in
options and at a price higher than the market value. The trade-in ratio was set
such that the number of old options times their option price approximates the
new number of options times their exercise price. This program was offered to
all employees, excluding members of the board of directors and officers of the
Company. However, option holders participating in the first exchange were not
eligible for the second program.
The following table summarizes the options exercisable as of December 31,
1998, 1997, and 1996 (in thousands except per share information):
<TABLE>
<CAPTION>
WEIGHTED
NUMBER WEIGHTED AVERAGE
OF AVERAGE REMAINING
SHARES PRICE CONTRACTUAL
-------- -------- -----------
<S> <C> <C> <C>
As of:
December 31, 1996............................. 588 $22.74 8.77
December 31, 1997............................. 573 12.83 9.17
December 31, 1998............................. 442 15.89 8.65
</TABLE>
ICG PLAN
The Company's 1993 Stock Option Plan was assumed by ICG at the time of the
merger (Note 1), and approved by ICG's Board of Directors as an incentive and
non-qualified stock option plan which provides for the granting of options to
certain directors, officers and employees to purchase 2,720,901 shares of ICG
Common Stock. A total of 4,380,099 options were granted under this plan at
exercise prices ranging from $0.65 to $92.14, none of which were less than 100%
of the estimated fair market value of the shares underlying the options on the
date of grant, and accordingly, no compensation
F-92
<PAGE>
NETCOM ON-LINE COMMUNICATION SERVICES, INC.
DOMESTIC SUBSCRIBER OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
expense was recorded for these options under APB 25. The options granted under
this plan are subject to various vesting requirements, generally three years and
five years, and expire within ten years from the date of grant.
In order to continue to provide non-cash inventive and retain key employees,
all employee stock options outstanding on September 18, 1998 with exercise
prices at or in excess of $22.00 were canceled by the Stock Option Committee of
ICG's Board of Directos and regranted with an exercise price of $16.88. A total
of 757,058 of the Company's options, with original exercise prices ranging from
$22.02 to $35.75 where canceled and regranted.
During fiscal 1994, Company's Board of Directors approved and adopted an
Employee Stock Purchase Plan which was dissolved upon the merger with ICG.
Shares purchased under this plan were converted into an estimated 119,000 shares
of ICG Common Stock
EMPLOYEE SAVINGS PLAN
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings up to the Internal Revenue Service annual contribution limit.
The Company matches 50% of each employee's contribution up to a maximum of 6% of
the employee's eligible earnings. Company matches vest over four years. The
Company has not made any material matching contributions to the Savings Plan for
the related periods.
6. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As discussed in Note 2,
the Domestic Operations is not a separate legal entity, but is included in the
consolidated return of NETCOM. No tax-sharing arrangement exists between NETCOM
and the Domestic Operations, as the Domestic Operations is not a separate legal
entity. Significant components of the Domestic Subscriber Operations' allocated
deferred tax assets and
F-93
<PAGE>
NETCOM ON-LINE COMMUNICATION SERVICES, INC.
DOMESTIC SUBSCRIBER OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
6. INCOME TAXES (CONTINUED)
liabilities for federal and state income taxes as of December 31, 1998 and 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward....................... $ 51,115 $ 33,621
Other, net............................................ 5,572 4,809
-------- --------
Total deferred tax assets........................... 56,687 38,430
Valuation allowance................................... (53,281) (35,203)
-------- --------
$ 3,406 $ 3,227
======== ========
Deferred tax liabilities:
Deferred subscriber acquisition costs................. $ 2,022 $ 939
Accelerated depreciation and amortization............. 1,384 2,288
-------- --------
$ 3,406 $ 3,227
======== ========
</TABLE>
Realization of deferred tax assets is dependent on future earnings, the
timing and amount of which are uncertain. Accordingly, a valuation allowance, in
an amount equal to the net deferred tax assets as of December 31, 1998 and 1997,
has been established to reflect these uncertainties. The change in the valuation
allowance was a net increase of $18,078 and $8,150 in 1998 and 1997,
respectively.
As of December 31, 1998 and 1997, the Domestic Subscriber Operations portion
of NETCOM's federal and state net operating loss carryforwards was approximately
$174,678 and $125,763, respectively, which will expire in the years 1999 through
2011. In addition, the Company's ability to recognize the Domestic Subscriber
Operations' portion of the benefit from the net operating loss carryforwards
will be limited under Section 382 of the Internal Revenue Code, as the ownership
of the Company has changed more than 50%, as defined.
A reconciliation of the income tax provision computed at statutory tax rates
to the income tax provision for the years ended December 31, 1998, 1997, and
1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income tax benefit at statutory rate....................... (34)% (34)% (34)%
State and local income taxes............................... (9) (9) (9)
Other, net................................................. 1 1 3
Deferred tax asset valuation allowance..................... 42 42 40
--- --- ---
Total income tax provision............................... 0% 0% 0%
=== === ===
</TABLE>
In addition, the Domestic Subscriber Operations has realized the benefit of
non-qualified stock compensation expense for tax purposes in excess of stock
compensation expense for book purposes of $8.2 million, $0.3 million, and
$7.6 million for the years ended December 31, 1998, 1997, and 1996,
F-94
<PAGE>
NETCOM ON-LINE COMMUNICATION SERVICES, INC.
DOMESTIC SUBSCRIBER OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
6. INCOME TAXES (CONTINUED)
respectively. These amounts have been credited directly against due to parent,
net of a full valuation allowance.
7. RELATED-PARTY TRANSACTIONS
Prior to the ICG merger, the Domestic Subscriber Operations' only
related-party transactions were certain cash advances to the international
operations of NETCOM. The amount of these advances at December 31, 1998 and 1997
were $38,125 and $32,352 and is included in due to parent.
Subsequent to the merger, ICG assumed the treasury function, so that all of
the Domestic Subscriber Operations' cash at December 31, 1998 is netted in due
to parent. Additionally, ICG provided services in the area of risk management
and benefits. Estimated costs attributable to these support functions are
included in selling, general, and administrative expenses. These costs are
allocated to the Domestic Subscriber Operations based on various factors that
management believes represent relative cost streams and fair market value. The
costs allocated to the Domestic Subscriber Operations were approximately $957
for the year ended December 31, 1998.
Following the merger, the Domestic Subscriber Operations began using certain
telecommunications services of ICG. Such amounts were $2,170 for the year ended
December 31, 1998 and are included in cost of revenue. Similarly, the Domestic
Subscriber Operations provided certain technical services to ICG. Such amounts
were $1,678 for the year ended December 31, 1998 and are included in revenues.
The rates charged for such services approximate market value in management's
opinion.
8. SUBSEQUENT EVENTS (UNAUDITED)
On January 6, 1999, MindSpring entered into an Asset Purchase Agreement with
ICG for $215 million in cash and $30 million in MindSpring stock, pursuant to
which MindSpring agreed to acquire certain of the tangible and intangible assets
and rights in connection with the consumer dial-up Internet access business
currently operated by NETCOM as well as the Domestic Subscriber Operations'
domestic subscriber base. This agreement also contains a Network Services
Agreement for one year with an option for a second year whereby ICG will provide
MindSpring subscribers access through its points-of-presence. This transaction
will be accounted for as a purchase and is expected to be completed in the first
quarter of 1999, subject to certain customary closing conditions.
F-95
<PAGE>
ANNEX A
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
dated as of
SEPTEMBER 22, 1999
among
EARTHLINK NETWORK, INC.,
MINDSPRING ENTERPRISES, INC.
and
WWW HOLDINGS, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
ARTICLE I DEFINITIONS............................................................. 2
Section 1.1. DEFINITIONS................................................. 2
ARTICLE II THE MERGERS............................................................ 7
Section 2.1. THE EARTHLINK MERGER........................................ 7
Section 2.2. THE MINDSPRING MERGER....................................... 8
Section 2.3. CANCELLATION OF NEWCO COMMON STOCK.......................... 8
Section 2.4. EXCHANGE OF CERTIFICATES.................................... 8
ARTICLE III STOCKHOLDER APPROVAL; CLOSING......................................... 10
Section 3.1. STOCKHOLDER APPROVAL........................................ 10
Section 3.2. TIME AND PLACE OF CLOSING................................... 10
ARTICLE IV NEWCO.................................................................. 10
Section 4.1. NO CONDUCT OF BUSINESS BY NEWCO; RESTATED ARTICLES AND
BYLAWS...................................................... 10
Section 4.2. BOARD OF DIRECTORS.......................................... 11
Section 4.3. MANAGEMENT.................................................. 11
Section 4.4. HEADQUARTERS OF NEWCO....................................... 11
Section 4.5. INDEMNIFICATION AND INSURANCE............................... 11
Section 4.7. MINDSPRING NOTES............................................ 12
ARTICLE V REPRESENTATIONS AND WARRANTIES OF EARTHLINK............................. 12
Section 5.1. CORPORATE EXISTENCE AND POWER............................... 12
Section 5.2. CORPORATE AUTHORIZATION..................................... 12
Section 5.3. GOVERNMENTAL AUTHORIZATION.................................. 13
Section 5.4. NON-CONTRAVENTION........................................... 13
Section 5.5. CAPITALIZATION.............................................. 13
Section 5.6. SUBSIDIARIES................................................ 14
Section 5.7. EARTHLINK SEC DOCUMENTS..................................... 14
Section 5.8. FINANCIAL STATEMENTS, NO MATERIAL UNDISCLOSED LIABILITIES... 15
Section 5.9. INFORMATION TO BE SUPPLIED.................................. 15
Section 5.10. ABSENCE OF CERTAIN CHANGES.................................. 15
Section 5.11. LITIGATION.................................................. 16
Section 5.12. TAXES....................................................... 16
Section 5.13. EMPLOYEE BENEFITS........................................... 16
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
Section 5.14. COMPLIANCE WITH LAWS; LICENSES, PERMITS AND REGISTRATIONS... 18
Section 5.15. TITLE TO PROPERTIES......................................... 18
Section 5.16. INTELLECTUAL PROPERTY....................................... 18
Section 5.17. ENVIRONMENTAL MATTERS....................................... 18
Section 5.18. FINDERS' FEES; OPINIONS OF FINANCIAL ADVISOR................ 19
Section 5.19. REQUIRED VOTE, BOARD APPROVAL............................... 19
Section 5.20. STATE TAKEOVER STATUTES..................................... 19
Section 5.21. POOLING MATTERS; TAX TREATMENT.............................. 19
Section 5.22. CERTAIN AGREEMENTS.......................................... 20
Section 5.23. YEAR 2000 COMPLIANCE........................................ 20
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF MINDSPRING........................... 20
Section 6.1. CORPORATE EXISTENCE AND POWER............................... 20
Section 6.2. CORPORATE AUTHORIZATION..................................... 20
Section 6.3. GOVERNMENTAL AUTHORIZATION.................................. 21
Section 6.4. NON-CONTRAVENTION........................................... 21
Section 6.5. CAPITALIZATION.............................................. 21
Section 6.6. SUBSIDIARIES................................................ 22
Section 6.7. MINDSPRING SEC DOCUMENTS.................................... 22
Section 6.8. FINANCIAL STATEMENTS, NO MATERIAL UNDISCLOSED LIABILITIES... 22
Section 6.9. INFORMATION TO BE SUPPLIED.................................. 23
Section 6.10. ABSENCE OF CERTAIN CHANGES.................................. 23
Section 6.11. LITIGATION.................................................. 23
Section 6.12. TAXES....................................................... 23
Section 6.13. EMPLOYEE BENEFITS........................................... 24
Section 6.14. COMPLIANCE WITH LAWS; LICENSES, PERMITS AND REGISTRATIONS... 25
Section 6.15. TITLE TO PROPERTIES......................................... 25
Section 6.16. INTELLECTUAL PROPERTY....................................... 26
Section 6.17. ENVIRONMENTAL MATTERS....................................... 26
Section 6.18. FINDERS' FEES; OPINIONS OF FINANCIAL ADVISOR................ 26
Section 6.19. REQUIRED VOTE, BOARD APPROVAL............................... 26
Section 6.20. STATE TAKEOVER STATUTES..................................... 26
Section 6.21. POOLING MATTERS; TAX TREATMENT.............................. 27
Section 6.22. CERTAIN AGREEMENTS.......................................... 27
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
Section 6.23. YEAR 2000 COMPLIANCE........................................ 27
ARTICLE VII COVENANTS OF EARTHLINK................................................ 28
Section 7.1. EARTHLINK INTERIM OPERATIONS................................ 28
Section 7.2. ACQUISITION PROPOSALS; BOARD RECOMMENDATION................. 30
ARTICLE VIII COVENANTS OF MINDSPRING.............................................. 31
Section 8.1. MINDSPRING INTERIM OPERATIONS............................... 31
Section 8.2. ACQUISITION PROPOSALS; BOARD RECOMMENDATION................. 33
ARTICLE IX COVENANTS OF MINDSPRING, NEWCO AND EARTHLINK........................... 35
Section 9.1. REASONABLE BEST EFFORTS..................................... 35
Section 9.2. CERTAIN FILINGS; COOPERATION IN RECEIPT OF CONSENTS;
LISTING..................................................... 35
Section 9.3. PUBLIC ANNOUNCEMENTS........................................ 36
Section 9.4. ACCESS TO INFORMATION, NOTIFICATION OF CERTAIN MATTERS...... 36
Section 9.5. FURTHER ASSURANCES.......................................... 36
Section 9.6. TAX AND ACCOUNTING TREATMENT................................ 37
Section 9.7. AFFILIATE LETTERS........................................... 37
Section 9.8. CONFIDENTIALITY............................................. 37
Section 9.9. MINDSPRING STANDSTILL....................................... 38
Section 9.10. EARTHLINK STANDSTILL........................................ 40
Section 9.11. ASR 135..................................................... 41
Section 9.12. BENEFIT MATTERS............................................. 41
Section 9.13. ANTITRUST MATTERS........................................... 41
Section 9.14. EXEMPTION FROM LIABILITY UNDER SECTION 16(B)................ 42
ARTICLE X CONDITIONS TO THE MERGERS............................................... 43
Section 10.1. CONDITIONS TO THE OBLIGATIONS OF EACH PARTY................. 43
Section 10.2. CONDITIONS TO THE OBLIGATIONS OF EARTHLINK.................. 43
Section 10.3. CONDITIONS TO THE OBLIGATIONS OF MINDSPRING................. 44
ARTICLE XI TERMINATION............................................................ 45
Section 11.1. TERMINATION................................................. 45
Section 11.2. EFFECT OF TERMINATION....................................... 46
Section 11.3. FEES AND EXPENSES........................................... 46
ARTICLE XII MISCELLANEOUS......................................................... 47
Section 12.1. NOTICES..................................................... 47
Section 12.2. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS AFTER
THE
EFFECTIVE TIME.............................................. 47
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
Section 12.3. AMENDMENTS: NO WAIVERS...................................... 47
Section 12.4. SUCCESSORS AND ASSIGNS...................................... 48
Section 12.5. GOVERNING LAW............................................... 48
Section 12.6. COUNTERPARTS; EFFECTIVENESS; THIRD PARTY BENEFICIARIES...... 48
Section 12.7. JURISDICTION................................................ 48
Section 12.8. WAIVER OF JURY TRIAL........................................ 48
Section 12.9. ENFORCEMENT................................................. 48
Section 12.10. ENTIRE AGREEMENT............................................ 49
Section 12.11. SEVERABILITY................................................ 49
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit 1. Stock Option Agreements
Exhibit 2. Stockholders Agreements
Exhibit 3. EarthLink Certificate of Merger
Exhibit 4. MindSpring Certificate of Merger
Exhibit 5. Restated Certificate of Incorporation of Newco
Exhibit 6. Bylaws of Newco
Exhibit 7. Nominating Committee
Exhibit 8. Director Designees
Exhibit 9. Principal Officers of Newco
Exhibit 10. Indemnification Agreements
Exhibit 11-A. Form of EarthLink Affiliate Letter
Exhibit 11-B. Form of MindSpring Affiliate Letter
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of September 22, 1999, by and
among WWW HOLDINGS, INC., a Delaware corporation ("NEWCO"), EARTHLINK
NETWORK, INC., a Delaware corporation ("EARTHLINK"), and MINDSPRING
ENTERPRISES, INC., a Delaware corporation ("MINDSPRING").
RECITALS
WHEREAS, the respective Boards of Directors of EarthLink and MindSpring have
determined that a combination of the business and operations of EarthLink and
MindSpring is advisable and in the best interests of their respective
stockholders and presents an opportunity for their respective companies to
achieve long-term strategic and financial benefits; and
WHEREAS, the respective Boards of Directors of EarthLink and MindSpring have
determined that the combination should be effected by causing EarthLink and
MindSpring to be merged with and into Newco; and
WHEREAS, pursuant to the EarthLink Merger (as hereinafter defined), each
outstanding share of EarthLink Common Stock (as hereinafter defined) will be
converted into 1.615 shares of Newco Common Stock (as hereinafter defined) each
outstanding share of EarthLink Series A Preferred (as hereinafter defined) shall
be converted into 1.615 shares of Newco Series A Preferred (as hereinafter
defined) and each outstanding share of EarthLink Series B Preferred (as
hereinafter defined) shall be converted into 1.615 shares of Newco Series B
Preferred (as hereinafter defined); and pursuant to the MindSpring Merger (as
hereinafter defined) each outstanding share of MindSpring Common Stock (as
hereinafter defined) will be converted into one (1) share of Newco Common Stock;
and
WHEREAS, for Federal income tax purposes, it is intended that the
transactions contemplated by this Agreement shall constitute transactions
described in section 368 of the Internal Revenue Code of 1986, as amended (a
"368 REORGANIZATION"), and the regulations thereunder; and
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to EarthLink's and MindSpring's willingness to
enter into this Agreement, EarthLink and MindSpring have entered into stock
option agreements of even date herewith (collectively, the "STOCK OPTION
AGREEMENTS", in the form attached as EXHIBIT 1 hereto) providing for the
granting: (i) by EarthLink to MindSpring of an option to purchase from EarthLink
up to 19.9% of the outstanding shares of EarthLink Common Stock, subject to the
terms and conditions set forth therein and (ii) by MindSpring to EarthLink of an
option to purchase from MindSpring up to 19.9% of the outstanding shares of
MindSpring Common Stock, subject to the terms and conditions set forth therein;
and
WHEREAS, simultaneously with the execution and delivery of this Agreement:
(iii) MindSpring has entered into an agreement (the "EARTHLINK STOCKHOLDERS
AGREEMENT") with certain stockholders of EarthLink pursuant to which such
EarthLink stockholders have agreed to vote the shares of EarthLink Common Stock
owned by them in favor of the EarthLink Merger under certain circumstances; and
(iv) EarthLink has entered into an agreement (the "MINDSPRING STOCKHOLDERS
AGREEMENT" and, together with the EarthLink Stockholders Agreement, the
"STOCKHOLDERS AGREEMENTS," each in the form attached as EXHIBIT 2 hereto) with
certain stockholders of MindSpring pursuant to which such MindSpring
stockholders have agreed to vote the shares of MindSpring Common Stock owned by
them in favor of the MindSpring Merger under certain circumstances.
NOW, THEREFORE, in consideration of the premises, which are incorporated
into and made part of this Agreement, and of the mutual representations,
warranties, covenants, agreements and
<PAGE>
conditions set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. DEFINITIONS.
(a) As used herein, the following terms have the following meanings:
"ACQUISITION PROPOSAL FOR EARTHLINK" means any offer or proposal for, or
indication of interest in, a merger, consolidation, share exchange, business
combination, reorganization, recapitalization, liquidation, dissolution, tender
offer or exchange offer or other similar transaction involving, or any purchase
of 10% or more of the assets or any class of equity securities of, EarthLink or
any Significant Subsidiary of EarthLink, other than the transactions
contemplated by this Agreement or by Sprint or the Affiliated Equity Holders as
defined in and pursuant to Sections 3.01, 4.02 and 4.03 of the Sprint Governance
Agreement.
"ACQUISITION PROPOSAL FOR MINDSPRING" means any offer or proposal for, or
indication of interest in, a merger, consolidation, share exchange, business
combination, reorganization, recapitalization, liquidation, dissolution, tender
offer or exchange offer or other similar transaction involving, or any purchase
of 10% or more of the assets or any class of equity securities of, MindSpring or
any Significant Subsidiary of MindSpring, other than the transactions
contemplated by this Agreement.
"AFFILIATE" means, with respect to any Person, any other Person, directly or
indirectly, controlling, controlled by, or under common control with, such
Person. For purposes of this definition, the term "control" (including the
correlative terms "CONTROLLING", "CONTROLLED BY" and "UNDER COMMON CONTROL
WITH,") means the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of a Person, whether through
the ownership of voting securities, by contract, or otherwise.
"BUSINESS DAY" means any day other than a Saturday, Sunday or one on which
banks are authorized by law to close in New York, New York.
"CERTIFICATES OF MERGER" means the EarthLink Certificate of Merger and the
MindSpring Certificate of Merger.
"CLOSING" means the conference held pursuant to Section 3.2.
"CLOSING DATE" means the date on which the Closing occurs.
"CODE" means the Internal Revenue Code of 1986, as amended.
"DGCL" means the Delaware General Corporation Law, as amended.
"EARTHLINK BALANCE SHEET" means EarthLink's consolidated balance sheet
included in the EarthLink 10-K relating to its fiscal year ended on
December 31, 1998.
"EARTHLINK CERTIFICATE OF MERGER" means the certificate of merger of
EarthLink with and into Newco, in substantially the form attached hereto as
EXHIBIT 3.
"EARTHLINK COMMON STOCK" means the common stock of EarthLink, par value
$0.01 per share.
"EARTHLINK EXCHANGE RATIO" means, collectively, the conversion formulas
described in SECTION 2.1(C) and 2.1(F) hereof.
"EARTHLINK PREFERRED STOCK" means the EarthLink Series A Preferred and the
EarthLink Series B Preferred.
2
<PAGE>
"EARTHLINK SEC DOCUMENTS" means (i) EarthLink's annual report on Form 10-K
for its fiscal year ended December 31, 1998 (the "EARTHLINK 10-K"),
(ii) EarthLink's quarterly report on Form 10-Q (the "EARTHLINK 10-Q") for its
fiscal quarter ended June 30, 1999, (iii) EarthLink's proxy or information
statements relating to meetings of, or actions taken without a meeting by,
EarthLink's stockholders held since December 31, 1998, and (iv) all other
reports, filings, registration statements and other documents filed by it with
the SEC since December 31, 1998.
"EARTHLINK SERIES A PREFERRED" means the Series A Convertible Preferred
Stock of EarthLink, par value $0.01 per share.
"EARTHLINK SERIES B PREFERRED" means the Series B Convertible Preferred
Stock of EarthLink, par value $0.01 per share.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"EXCHANGE AGENT" means the agent to be agreed upon by EarthLink and
MindSpring and engaged by Newco to effect the exchange of the Certificates
pursuant to SECTION 2.4 of this Agreement.
"GOVERNMENTAL ENTITY" means any federal, state or local governmental
authority, any transgovernmental authority or any court, administrative or
regulatory agency or commission or other governmental authority or agency,
domestic or foreign.
"JOINT PROXY STATEMENT/PROSPECTUS" means the joint proxy statement/
prospectus included in the Registration Statement relating to the Special
Meetings, together with any amendments or supplements thereto.
"KNOWLEDGE" means, with respect to the matter in question, if any of the
executive officers of EarthLink or MindSpring, as the case may be, has actual
knowledge of such matter.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, PROVIDED,
HOWEVER, that the term "Lien" shall not include (i) liens for water and sewer
charges and current taxes not yet due and payable or being contested in good
faith and (ii) mechanics', carriers', workers', repairers', materialmen's,
warehousemen's and other similar liens arising or incurred in the ordinary
course of business.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the financial
condition, business or results of operations of a Person and its Subsidiaries,
taken as a whole, but shall exclude any material adverse effect arising out of
any change or development relating to (i) U.S. or global economic or industry
conditions (including, without limitation, conditions applicable generally to
the Internet service business), (ii) changes in U.S. or global financial markets
or conditions, (iii) any generally applicable change in law, rule or regulation
or GAAP or interpretation of any thereof, (iv) the announcement of this
Agreement or the transactions contemplated hereby, (v) a change in market price
or trading volume of any securities of EarthLink or MindSpring and/or
(vi) stockholder litigation arising in connection with this Agreement.
"EARTHLINK MATERIAL ADVERSE EFFECT" means a Material Adverse Effect in respect
of EarthLink and "MINDSPRING MATERIAL ADVERSE EFFECT" means a Material Adverse
Effect in respect of MindSpring and "NEWCO MATERIAL ADVERSE EFFECT" means a
Material Adverse Effect in respect of Newco.
"MERGERS" means the EarthLink Merger and the MindSpring Merger.
"MINDSPRING BALANCE SHEET" means MindSpring's balance sheet included in the
MindSpring 10-K relating to its fiscal year ended on December 31, 1998.
"MINDSPRING CERTIFICATE OF MERGER" means the certificate of merger of
MindSpring with and into Newco, in substantially the form attached hereto as
EXHIBIT 4.
3
<PAGE>
"MINDSPRING COMMON STOCK" means the common stock of MindSpring, $0.01 par
value per share.
"MINDSPRING EXCHANGE RATIO" means the conversion formula described in
SECTION 2.2(C) hereof.
"MINDSPRING INDENTURE" means, collectively, the Indenture, as supplemented
by the First Supplemental Indenture, each dated as of April 14, 1999, between
MindSpring and United States Trust Company of New York as Trustee, pursuant to
which the MindSpring Notes were issued.
"MINDSPRING NOTES" means the 5% Convertible Subordinated Notes due 2006 of
MindSpring.
"MINDSPRING PREFERRED STOCK" means the Serial Preferred Stock of MindSpring,
$0.01 par value per share.
"MINDSPRING SEC DOCUMENTS" means (i) the annual report on Form 10-K of
MindSpring (the "MINDSPRING 10-K") for its fiscal year ended December 31, 1998,
(ii) the quarterly report on Form 10-Q of MindSpring (the "MINDSPRING 10-Q") for
its fiscal quarter ended June 30, 1999, (iii) MindSpring's proxy or information
statements relating to meetings of, or actions taken without a meeting by, the
MindSpring stockholders, held since December 31, 1998, and (iv) all other
reports filings, registration statements and other documents filed by MindSpring
with the SEC since December 31, 1998.
"NEWCO COMMON STOCK" means the common stock of Newco, $0.01 par value per
share.
"NEWCO PREFERRED STOCK" means the Newco Series A Preferred and the Newco
Series B Preferred.
"NEWCO SERIES A PREFERRED" means the Series A Convertible Preferred Stock of
Newco, par value $0.01 per share.
"NEWCO SERIES B PREFERRED" means the Series B Convertible Preferred Stock of
Newco, par value $0.01 per share.
"PERSON" means an individual, a corporation, a limited liability company, a
partnership, an association, a trust or any other entity or organization,
including any Governmental Entity.
"REGISTRATION STATEMENT" means the Registration Statement on Form S-4
registering under the Securities Act the Newco Common Stock issuable in
connection with the Mergers.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that constitutes a
"significant subsidiary" of such Person within the meaning of Rule 1-02 of
Regulation S-X of the Exchange Act.
"SPRINT" means Sprint Corporation, a Kansas corporation.
"SPRINT CREDIT AGREEMENT" means the Credit Agreement, dated as of
February 10, 1998, by and among EarthLink, Sprint and Dolphin, Inc.
"SPRINT GOVERNANCE AGREEMENT" means the governance agreement, dated as of
February 10, 1998, by and among EarthLink, Sprint, Sprint L.P. and
Dolphin, Inc.
"SUBSIDIARY" means, with respect to any Person, any corporation or other
entity of which securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other Persons performing
similar functions are directly or indirectly owned by such Person. "EARTHLINK
SUBSIDIARY" means a Subsidiary of EarthLink and "MINDSPRING SUBSIDIARY" means a
Subsidiary of MindSpring.
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"TAX" or "TAXES" means any federal, state, county, local or foreign taxes,
charges, levies, imposts, duties, other assessments or similar charges of any
kind whatsoever, including any interest, penalties and addition imposed thereon
or with respect thereto.
(b) Each of the following terms is defined in the Section set forth opposite
such term:
<TABLE>
<CAPTION>
TERMS SECTION
- ----- ----------
<S> <C>
Acquisition Proposal for EarthLink 1.1(a)
Acquisition Proposal for MindSpring 1.1(a)
Affiliate 1.1(a)
Business Day 1.1(a)
Certificates 2.4(a)
Closing 1.1(a)
Closing Date 1.1(a)
Code 1.1(a)
Confidential Material 9.8(a)
DGCL 1.1(a)
Delivering Company 9.8(a)
EarthLink Preamble
EarthLink 10-K 1.1(a)
EarthLink 10-Q 1.1(a)
EarthLink Balance Sheet 1.1(a)
EarthLink Certificate of Merger 1.1(a)
EarthLink Common Stock 1.1(a)
EarthLink Counter Proposal 8.2(c)
EarthLink Designees 4.2
EarthLink Employee Plans 5.13(a)
EarthLink Equity Securities 7.2(e)
EarthLink Exchange Ratio 1.1(a)
EarthLink Insider 9.14(d)
EarthLink Intellectual Property 5.16
EarthLink Material Adverse Effect 1.1(a)
EarthLink Merger 2.1(b)
EarthLink Preferred Stock 1.1(a)
EarthLink Recommendation 3.1
EarthLink Returns 5.12
EarthLink SEC Documents 1.1(a)
EarthLink Securities 5.5(b)
EarthLink Series A Preferred 1.1(a)
EarthLink Series B Preferred 1.1(a)
EarthLink Stockholders Agreement Recitals
EarthLink Stockholder Approval 5.19(a)
EarthLink Subsequent Alternate Transaction 11.3(b)
EarthLink Subsidiary 1.1(a)
EarthLink Superior Proposal 7.2(d)
Effective Time 3.1
End Date 11.1(b)(i)
Environmental Laws 5.17(b)
ERISA 5.13(a)
ERISA Affiliate 5.13(a)
Exchange Act 1.1(a)
</TABLE>
5
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<TABLE>
<CAPTION>
TERMS SECTION
- ----- ----------
<S> <C>
Exchange Agent 1.1(a)
GAAP 5.8(a)
Governmental Entity 1.1(a)
HSR Act 5.3
Joint Proxy Statement/Prospectus 1.1(a)
Knowledge 1.1(a)
Lien 1.1(a)
Material Adverse Effect 1.1(a)
Mergers 1.1(a)
MindSpring Preamble
MindSpring 10-K 1.1(a)
MindSpring 10-Q 1.1(a)
MindSpring Balance Sheet 1.1(a)
MindSpring Certificate of Merger 1.1(a)
MindSpring Common Stock 1.1(a)
MindSpring Counter Proposal 7.2(c)
MindSpring Designees 4.2(a)
MindSpring Employee Plans 6.13(a)
MindSpring Equity Securities 8.2(e)
MindSpring Exchange Ratio 1.1(a)
MindSpring Indenture 1.1(a)
MindSpring Insider 9.14(d)
MindSpring Intellectual Property 6.16
MindSpring Material Adverse Effect 1.1(a)
MindSpring Merger 2.2(b)
MindSpring Notes 1.1(a)
MindSpring Preferred Stock 1.1(a)
MindSpring Recommendation 3.1
MindSpring Returns 6.12
MindSpring SEC Documents 1.1(a)
MindSpring Securities 6.5(b)
MindSpring Stockholders Agreement Recitals
MindSpring Stockholder Approval 6.19
MindSpring Subsequent Alternate Transaction 11.3(b)
MindSpring Subsidiary 1.1(a)
MindSpring Superior Proposal 8.2(d)
Multiemployer Plan 5.13(b)
Newco Preamble
Newco Common Stock 1.1(a)
Newco Material Adverse Effect 1.1(a)
Newco Preferred Stock 1.1(a)
Newco Series A Preferred 1.1(a)
Newco Series B Preferred 1.1(a)
Person 1.1(a)
Registration Statement 1.1(a)
Receiving Company 9.8(a)
Representatives 9.8(a)
Retirement Plan 5.13(b)
SEC 1.1(a)
Section 16 Information 9.14(c)
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
TERMS SECTION
- ----- ----------
<S> <C>
Securities Act 1.1(a)
Significant Subsidiary 1.1(a)
Special Meetings 3.1
Sprint 1.1(a)
Sprint Credit Agreement 1.1(a)
Spring Designees 4.2(a)
Sprint Governance Agreement 1.1(a)
Stock Option Agreements Recitals
Stockholders Agreements Recitals
Subsidiary 1.1(a)
Taxes 1.1(a)
Termination Fee 11.3(b)
368 Reorganization Recitals
Year 2000 Problem 5.23
</TABLE>
ARTICLE II
THE MERGERS
Section 2.1. THE EARTHLINK MERGER.
(a) EarthLink agrees to submit this Agreement to its stockholders for
approval in accordance with SECTION 3.1 hereof.
(b) Subject to the terms and conditions of this Agreement and the EarthLink
Certificate of Merger, at the Effective Time, immediately prior to the
MindSpring Merger (as hereinafter defined), EarthLink shall be merged with and
into Newco in accordance with the provisions of, and with the effects provided
in, Subchapter IX of the DGCL (the "EARTHLINK MERGER"). Newco shall be the
surviving corporation resulting from the EarthLink Merger, shall continue to be
governed by the laws of the State of Delaware, shall at the Effective Time amend
Article I of its Certificate of Incorporation to change its name to "EarthLink
Network, Inc.," and shall adopt the Nasdaq ticker symbol "ELNK."
(c) Pursuant to the EarthLink Merger, each share of EarthLink Common Stock
outstanding immediately prior to the Effective Time shall be converted into and
become 1.615 shares of Newco Common Stock, and each outstanding option, warrant
and other right to purchase, or which is convertible into, EarthLink Common
Stock shall be converted into an option, warrant or other right, as the case may
be, to purchase or be convertible into a number of shares of Newco Common Stock
equal to the number of shares of EarthLink Common Stock subject to such option,
warrant or other right multiplied by 1.615 and otherwise having substantially
identical terms and conditions, except that the exercise or purchase price shall
be divided by 1.615.
(d) Each share of EarthLink Common Stock held by EarthLink as treasury stock
or owned by MindSpring immediately prior to the Effective Time shall be
canceled.
(e) No fraction of a share of Newco Common Stock shall be issued in
connection with the conversion of EarthLink Common Stock in the EarthLink Merger
and the distribution of Newco Common Stock in respect thereof, but in lieu of
such fraction, the Exchange Agent shall make a cash payment (without interest
and subject to the payment of any applicable withholding Taxes) equal to the
same fraction of the market value of a full share of Newco Common Stock,
computed on the basis of the mean of the high and low sales prices of Newco
Common Stock as reported on NASDAQ on the first full day on which the Newco
Common Stock is traded on the Nasdaq Stock Market after the Effective Time.
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(f) Each share of EarthLink Series A Preferred and each share of EarthLink
Series B Preferred shall be converted into 1.615 shares of newly created Newco
Series A Preferred and 1.615 shares of newly created Newco Series B Preferred,
having terms, conditions, rights, preferences and designations substantially
similar to the EarthLink Series A Preferred and the EarthLink Series B
Preferred, respectively.
(g) EarthLink agrees to use its best efforts to cause the EarthLink Merger
to be consummated in accordance with the terms of this Agreement and the
EarthLink Certificate of Merger.
Section 2.2. THE MINDSPRING MERGER.
(a) MindSpring agrees to submit this Agreement to its stockholders for
approval in accordance with SECTION 3.1 hereof.
(b) Subject to the terms and conditions of this Agreement and the MindSpring
Certificate of Merger, at the Effective Time, immediately following the
EarthLink Merger, MindSpring shall be merged with and into Newco in accordance
with the provisions of, and with the effects provided in, Subchapter IX of the
DGCL (the "MINDSPRING MERGER"). Newco shall be the surviving corporation
resulting from the MindSpring Merger and shall continue to be governed by the
laws of the State of Delaware.
(c) Pursuant to the MindSpring Merger, each share of MindSpring Common Stock
outstanding immediately prior to the Effective Time shall be converted into and
become one (1) share of Newco Common Stock, and each outstanding option, warrant
and other right to purchase, or which is convertible into, MindSpring Common
Stock shall be converted into an option, warrant or right, as the case may be,
to purchase or be convertible into a number shares of Newco Common Stock equal
to the number of shares of Newco Common Stock subject to such option, warrant or
other right multiplied by one (1) and otherwise having substantially identical
terms and conditions, except that the exercise or purchase price shall be
divided by one (1).
(d) Each share of MindSpring Common Stock held by MindSpring as treasury
stock or owned by EarthLink immediately prior to the Effective Time shall be
canceled.
(e) The parties will take such action as may be necessary to cause Newco,
and Newco agrees, to execute a supplemental indenture to the MindSpring
Indenture, which shall comply with the requirements of the MindSpring Indenture,
for the purpose of assuming all of MindSpring's obligations with respect to the
MindSpring Notes, and to reserve out of its authorized Newco Common Stock a
sufficient number of shares of Newco Common Stock to permit conversion of the
MindSpring Notes on or after the Effective Time pursuant to the terms thereof
and the MindSpring Indenture.
(f) MindSpring agrees to use its best efforts to cause the MindSpring Merger
to be consummated in accordance with the terms this Agreement of the MindSpring
Certificate of Merger.
Section 2.3. CANCELLATION OF NEWCO COMMON STOCK.
Pursuant to the Mergers, the shares of Newco Common Stock held by EarthLink
and MindSpring, respectively, immediately prior to the Mergers will be canceled
in the Mergers.
Section 2.4. EXCHANGE OF CERTIFICATES.
(a) Prior to the Effective Time, EarthLink and MindSpring shall cause Newco,
and Newco agrees, to appoint the Exchange Agent to act as the exchange agent in
connection with the Mergers. Except as otherwise provided in SECTION 2.1 and
SECTION 2.2, from and after the Effective Time, each holder of a certificate
that immediately prior to the Effective Time represented outstanding shares of
MindSpring Common Stock or EarthLink Common Stock (the "CERTIFICATES") shall be
entitled to receive in exchange therefor, upon surrender thereof to the Exchange
Agent, a certificate or certificates representing the number of whole shares of
Newco Common Stock into which such holder's shares
8
<PAGE>
were converted in the MindSpring Merger or the EarthLink Merger, as the case may
be. Immediately prior to the Effective Time, Newco will deliver to the Exchange
Agent, in trust for the benefit of the holders of EarthLink Common Stock and
MindSpring Common Stock, (i) certificates representing shares of Newco Common
Stock and (ii) cash in an amount sufficient for payment in lieu of fractional
shares necessary to make the exchanges contemplated by SECTION 2.1 and SECTION
2.2 hereof on a timely basis.
(b) Promptly after the Effective Time, the Exchange Agent shall mail to each
record holder of EarthLink Common Stock and MindSpring Common Stock as of the
Effective Time, a letter of transmittal (which shall specify that delivery shall
be effected, and risk of loss and title to Certificates shall pass, only upon
proper delivery of the Certificates to the Exchange Agent) and instructions for
use in effecting the surrender of Certificates in exchange for certificates
representing shares of Newco Common Stock. Upon surrender to the Exchange Agent
of a Certificate, together with such letter of transmittal duly executed, and
any other required documents, the holder of such Certificate shall be entitled
to receive in exchange therefor certificates representing shares of Newco Common
Stock as set forth in this ARTICLE II, and such Certificate shall forthwith be
canceled. No holder of a Certificate or Certificates shall be entitled to
receive any dividend or other distribution from Newco until the surrender of
such holder's Certificate for a certificate or certificates representing shares
of Newco Common Stock. Upon such surrender, there shall be paid to the holder
the amount of any dividends or other distributions (without interest) that
theretofore became payable, but that were not paid by reason of the foregoing,
with respect to the number of whole shares of Newco Common Stock represented by
the certificates issued upon surrender, which amount shall be delivered to the
Exchange Agent by Newco from time to time as such dividends or other
distributions are declared. If delivery of certificates representing shares of
Newco Common Stock is to be made to a person other than the person in whose name
the Certificate surrendered is registered or if any certificate for shares of
Newco Common Stock is to be issued in a name other than that in which the
Certificate surrendered therefor is registered, it shall be a condition of such
delivery or issuance that the Certificate so surrendered shall be properly
endorsed or otherwise in proper form for transfer and that the person requesting
such delivery or issuance shall pay any transfer or other Taxes required by
reason of such delivery or issuance to a person other than the registered holder
of the Certificate surrendered or establish to the satisfaction of Newco that
such Tax has been paid or is not applicable. Until surrendered in accordance
with the provisions of this SECTION 2.4, each Certificate shall represent for
all purposes only the right to receive shares of Newco Common Stock (and cash in
lieu of fractional shares) as provided in SECTION 2.1, and SECTION 2.2 hereto,
without any interest thereon.
(c) After the Effective Time, there shall be no transfers on the stock
transfer books of Newco, as the surviving corporation in the Mergers, of the
shares of EarthLink Common Stock or MindSpring Common Stock that were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to Newco for transfer, they shall be canceled
and exchanged for shares of Newco Common Stock as provided in SECTION 2.1 and
SECTION 2.2 hereof, in accordance with the procedures set forth in this SECTION
2.4.
(d) Any shares of Newco Common Stock (and any accrued dividends and
distributions thereon), and any cash held by the Exchange Agent for payment in
lieu of fractional shares, that remains unclaimed by the former stockholders of
EarthLink or MindSpring on the first anniversary of the Effective Time shall be
delivered by the Exchange Agent to Newco. Any former stockholders of EarthLink
or MindSpring who have not theretofore complied with this SECTION 2.4 shall
thereafter look only to Newco for satisfaction of their claim for the
consideration set forth in this ARTICLE II, without any interest thereon.
Notwithstanding the foregoing, Newco shall not be liable to any holder of shares
of MindSpring Common Stock or EarthLink Common Stock for any shares of Newco
Common Stock (or dividends or distributions with respect thereto) delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
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<PAGE>
(e) Upon delivery of certificates representing shares of EarthLink Preferred
Stock to Newco by Sprint Communications Company L.P. after the Effective Time,
Newco shall deliver promptly to Sprint Communications Company L.P. certificates
representing shares of Newco Preferred Stock in appropriate denominations.
ARTICLE III
STOCKHOLDER APPROVAL; CLOSING
Section 3.1. STOCKHOLDER APPROVAL.
This Agreement shall be submitted for consideration and approval to the
holders of shares of MindSpring Common Stock at a special meeting of
stockholders duly held for such purpose by MindSpring, and this Agreement shall
be submitted for consideration and approval to the holders of shares of
EarthLink Common Stock at a special meeting of stockholders duly held for such
purpose by EarthLink (collectively, the "SPECIAL MEETINGS"). MindSpring and
EarthLink shall coordinate and cooperate with respect to the timing of the
Special Meetings and shall endeavor to hold the Special Meetings on the same day
and as soon as practicable after the date hereof. MindSpring and EarthLink shall
each recommend that their respective stockholders approve this Agreement and the
transactions contemplated hereby, and such recommendations shall be contained in
the Joint Proxy Statement/ Prospectus (the "EARTHLINK RECOMMENDATION" and the
"MINDSPRING RECOMMENDATION," respectively). On the first business day on or by
which (a) this Agreement has been duly approved by the requisite vote of the
holders of shares of MindSpring Common Stock, and (b) this Agreement has been
duly approved by the requisite vote of the holders of shares of EarthLink Common
Stock and (c) the Closing of the transactions contemplated by this Agreement
shall have occurred, or such later date as shall be agreed upon by MindSpring
and EarthLink, the Certificates of Merger shall be filed in accordance with the
DGCL, and the Mergers shall become effective in accordance with the terms of
this Agreement and the Certificates of Merger at the time and date contemplated
therein (such time and date being referred to herein as the "EFFECTIVE TIME").
Section 3.2. TIME AND PLACE OF CLOSING.
The Closing of the transactions contemplated by this Agreement will take
place at 11:00 A.M. on a date mutually agreed upon by the parties hereto, which
shall be no later than the third business day following the date on which all of
the conditions to the obligations of the parties hereunder set forth in
ARTICLE X hereof have been satisfied or waived. The place of Closing shall be at
such place as may be mutually agreed upon by the parties hereto.
ARTICLE IV
NEWCO
Section 4.1. NO CONDUCT OF BUSINESS BY NEWCO; RESTATED ARTICLES AND BYLAWS.
(a) Prior to the Effective Time, Newco shall not (i) conduct any business
operations whatsoever or (ii) enter into any contract or agreement of any kind
or acquire any assets or incur any liability, except as may be specifically
contemplated by this Agreement or as the parties may otherwise agree. In the
event this Agreement is terminated prior to the Effective Time, Newco shall be
dissolved.
(b) MindSpring and EarthLink shall cause Newco, and Newco agrees, to file,
immediately prior to the filing of the Certificates of Merger pursuant to
SECTION 3.1 hereof, a Restated Certificate of Incorporation of Newco,
substantially in the form attached hereto as EXHIBIT 5. MindSpring and EarthLink
shall cause Newco, and Newco agrees, to adopt effective as of the Effective
Time, By-laws substantially in the form attached hereto as EXHIBIT 6.
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Section 4.2. BOARD OF DIRECTORS.
At the Effective Time, the Board of Directors of Newco shall consist of
thirteen (13) persons. Of the thirteen persons initially elected to the Board of
Directors of Newco, four (4) (the "EARTHLINK DESIGNEES") shall be persons named
by the Board of Directors of EarthLink, four (4) (the "MINDSPRING DESIGNEES")
shall be persons named by the Board of Directors of MindSpring, two (2) (the
"SPRINT DESIGNEES") shall be the persons named by the Board of Directors of
Sprint, three (3) (the "OUTSIDE DIRECTORS") shall be nominated by the nominating
committee to be comprised of the persons named on EXHIBIT 7 attached hereto and
in accordance with the terms set forth thereon prior to Closing (the "NOMINATING
COMMITTEE") and subsequently elected by the Newco Board of Directors; provided,
however, the number of Outside Directors shall be reduced to two (2) in the
event that Sprint fails to exercise its rights to maintain its Higher Threshold
as defined in and as pursuant to the Sprint Governance Agreement and, as a
result thereof and in accordance with section 7(b) of the Certificates of
Designation for each of the Series A Preferred Stock and Series B Preferred
Stock, and section 2.01(d) of the Sprint Governance Agreement, as the case may
be, the number of Sprint Designees sitting on the Board of Directors is reduced
to one(1). In the event the number of Outside Directors and Sprint Designees is
reduced as described in the immediately preceding sentence, the size of the
Board of Directors of Newco shall be reduced by two (2) members. The Board of
Directors of Newco shall be divided into three classes, with the initial terms
of office of the first, second and third classes expiring at the first, second
and third annual meetings of the stockholders of Newco, respectively. The
EarthLink Designees, the MindSpring Designees and the Sprint Designees are each
listed by class on EXHIBIT 8 attached hereto. If, prior to the Effective Time,
(i) any of the individuals named by EarthLink, MindSpring or Sprint to serve on
the Board of Directors of Newco following the Effective Time resigns, retires or
otherwise ceases to serve as a director of EarthLink, MindSpring or Sprint, as
the case may be, or otherwise becomes unable or unwilling to serve as a director
of Newco, or (ii) EarthLink, MindSpring or Sprint shall determine to replace an
individual named by such party to serve on the Board of Directors of Newco, the
party that designated such individual may name a replacement to become a
director of Newco. Any such replacement of an EarthLink Designee or a MindSpring
Designee shall be subject to the approval of the Chief Executive Officer of
Newco, which approval shall not be unreasonably withheld, conditioned or
delayed.
(a) The persons named as members of the Board of Directors of Newco
pursuant to SECTION 4.2 shall be named in the Joint Proxy Statement/Prospectus
and the Registration Statement, subject to receipt of the consent of such
individuals to be so named.
Section 4.3. MANAGEMENT.
The principal officers of Newco at the Effective Time shall be as listed on
EXHIBIT 9. All other management positions of Newco shall be determined by
Newco's Chief Executive Officer and President.
Section 4.4. HEADQUARTERS OF NEWCO.
The headquarters of Newco shall be located in Atlanta, Georgia.
Section 4.5. INDEMNIFICATION AND INSURANCE.
(a) Newco agrees to assume the agreements listed in EXHIBIT 10, which
agreements will survive the Mergers and will continue in full force and effect
for a period of not less than six (6) years from the Effective Time. In the
event any claim is asserted or made within such six-year period, all rights to
indemnification in respect of any such claim will continue until final
disposition thereof. An "INDEMNIFIED PARTY" shall mean any Person who is at the
Effective Time or prior thereto has been an employee, agent, director or officer
of either MindSpring or EarthLink as provided in their respective charters,
Bylaws or resolutions.
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(b) From and after the Effective Time, Newco shall indemnify all
Indemnified Parties to the fullest extent permitted by the DGCL with respect to
all acts and omissions arising out of such individuals' services as officers,
directors, employees or agents of either MindSpring or EarthLink or as trustees
or fiduciaries of any plan for the benefit of employees, or otherwise on behalf
of, either MindSpring or EarthLink, occurring at or prior to the Effective Time,
including the transactions contemplated by this Agreement. In the event any
Indemnified Party is or becomes involved in any capacity in any action,
proceeding or investigation in connection with any such matter occurring at or
prior to the Effective Time, Newco will pay as incurred such Indemnified Party's
legal and other expenses (including the cost of any investigation and
preparation) incurred in connection therewith. Newco will pay all expenses,
including attorneys' fees, that may be incurred by any Indemnified Party in
enforcing the indemnity and other obligations provided for in this SECTION 4.5.
(c) Newco will cause to be maintained in effect for not less than six
(6) years from the Effective Time directors' and officers' liability insurance
covering the directors and officers of MindSpring and EarthLink similar in scope
and coverage to the directors' and officers' liability insurance maintained by
MindSpring and EarthLink for their directors and officers.
(d) The provisions of this SECTION 4.5 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party, his or her heirs and
his or her personal representatives and shall be binding on all successors and
assigns of Newco.
Section 4.6. [Intentionally Omitted]
Section 4.7. MINDSPRING NOTES.
Newco shall redeem in cash only any MindSpring Notes presented for
redemption as a result of the Merger.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF EARTHLINK
Except as disclosed in (i) the EarthLink Disclosure Schedule delivered to
MindSpring separately prior to, or contemporaneously with, the date hereof
(which disclosure schedule shall make a specific reference to the particular
Section or subsection of this Agreement to which exception is being taken but
once made shall be deemed made for all purposes of the EarthLink Disclosure
Schedule) or (ii) (except with respect to the third sentence of SECTION 5.5(B)
hereof) the EarthLink SEC Documents filed or made prior to the date hereof,
EarthLink represents and warrants to MindSpring that:
Section 5.1. CORPORATE EXISTENCE AND POWER.
EarthLink is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware, and has all corporate powers
required to carry on its business as now conducted. EarthLink is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction where the character of the property owned or leased by it or the
nature of its activities makes such qualification necessary, except where the
failure to be so qualified, individually or in the aggregate, would not be
reasonably likely to have an EarthLink Material Adverse Effect. EarthLink has
heretofore made available to MindSpring true and complete copies of EarthLink's
certificate of incorporation and bylaws as currently in effect.
Section 5.2. CORPORATE AUTHORIZATION.
The execution, delivery and performance by EarthLink of this Agreement and
the consummation by EarthLink of the transactions contemplated hereby are within
EarthLink's corporate powers and, except for the EarthLink Stockholder Approval
(as defined herein), have been duly authorized by all necessary corporate
action. Assuming that this Agreement constitutes the valid and binding
obligation
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of MindSpring and Newco, this Agreement constitutes a valid and binding
agreement of EarthLink, enforceable in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium and similar laws, now or
hereafter in effect, relating to or affecting creditors' rights and remedies and
to general principles of equity.
Section 5.3. GOVERNMENTAL AUTHORIZATION.
The execution, delivery and performance by EarthLink of this Agreement and
the consummation by EarthLink of the transactions contemplated hereby require no
action by or in respect of, or filing with, any Governmental Entity other than
(a) the filing of (i) a certificate of merger in accordance with the DGCL and
(ii) appropriate documents with the relevant authorities of other states or
jurisdictions in which EarthLink or any EarthLink Subsidiary is qualified to do
business; (b) compliance with any applicable requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR ACT");
(c) compliance with any applicable requirements of the Securities Act and the
Exchange Act; (d) such as may be required under any applicable state securities
or blue sky laws; and (e) such other consents, approvals, actions, orders,
authorizations, registrations, declarations and filings that, if not obtained or
made, would not, individually or in the aggregate, (x) be reasonably likely to
have an EarthLink Material Adverse Effect or (assuming for this purpose that the
Effective Time had occurred) a Newco Material Adverse Effect, or (y) prevent or
materially impair the ability of EarthLink to consummate the transactions
contemplated by this Agreement.
Section 5.4. NON-CONTRAVENTION.
The execution, delivery and performance by EarthLink of this Agreement and
the consummation by EarthLink of the transactions contemplated hereby do not and
will not (a) contravene or conflict with EarthLink's certificate of
incorporation or bylaws, (b) assuming compliance with the matters referred to in
SECTION 5.3, contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgment, injunction, order or decree binding
upon or applicable to EarthLink or any EarthLink Subsidiary, (c) constitute a
default under or give rise to a right of termination, cancellation or
acceleration of any right or obligation of EarthLink or any EarthLink Subsidiary
or to a loss of any benefit or status to which EarthLink or any EarthLink
Subsidiary is entitled under any provision of any agreement, contract or other
instrument binding upon EarthLink or any EarthLink Subsidiary or any license,
franchise, permit or other similar authorization held by EarthLink or any
EarthLink Subsidiary, or (d) result in the creation or imposition of any Lien on
any asset of EarthLink or any EarthLink Subsidiary other than, in the case of
each of (b), (c) and (d), any such items that would not, individually or in the
aggregate (x) be reasonably likely to have an EarthLink Material Adverse Effect
or (y) prevent or materially impair the ability of EarthLink to consummate the
transactions contemplated by this Agreement.
Section 5.5. CAPITALIZATION.
(a) The authorized capital stock of EarthLink consists of 200,000,000
shares of EarthLink Common Stock, 25,000,000 shares of EarthLink Series A
Preferred and 625,000 shares of EarthLink Series B Preferred. As of
September 21, 1999, there were outstanding (w) 32,554,382 shares of EarthLink
Common Stock, (x) 4,102,941 shares of EarthLink Series A Preferred, (y) 606,155
shares of EarthLink Series B Preferred and (z) stock options and warrants to
purchase an aggregate of 4,853,377 shares of EarthLink Common Stock (of which
options and warrants to purchase an aggregate of 1,465,629 shares of EarthLink
Common Stock were exercisable). All outstanding shares of capital stock of
EarthLink have been duly authorized and validly issued and are fully paid and
nonassessable.
(b) As of the date hereof, except (i) as set forth in this SECTION 5.5, and
(ii) for changes since September 21, 1999, resulting from the exercise of stock
options or warrants outstanding on such date, there are no outstanding
(x) shares of capital stock or other voting securities of EarthLink,
(y) securities of EarthLink convertible into or exchangeable for shares of
capital stock or voting
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securities of EarthLink, or (z) options or other rights to acquire from
EarthLink, and no obligation of EarthLink to issue, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of EarthLink (the items in clauses (x), (y) and (z) being
referred to collectively as the "EARTHLINK SECURITIES"). There are no
outstanding obligations of EarthLink or any EarthLink Subsidiary to repurchase,
redeem or otherwise acquire any EarthLink Securities. If fully converted as of
the date hereof, assuming that all conditions or limitations to such conversion
have been satisfied or waived, EarthLink Series A Preferred and the EarthLink
Series B Preferred would be convertible into 7,335,833 shares of EarthLink
Common Stock and 541,886 shares of EarthLink Common Stock, respectively. There
are no outstanding contractual obligations of EarthLink to provide funds to, or
make any investment (in the form of a loan, capital contribution or otherwise)
in, any other Person other than in the ordinary course of business consistent
with past practice. There are no stockholder agreements, voting trusts or other
agreements or understandings to which EarthLink is a party, or of which
EarthLink is aware, relating to voting, registration or disposition of any
shares of capital stock of EarthLink or granting to any person or group of
persons the right to elect, or to designate or nominate for election, a director
to the board of directors of EarthLink.
Section 5.6. SUBSIDIARIES.
(a) Each Significant Subsidiary of EarthLink is a corporation duly
incorporated or an entity duly organized, and is validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization,
has all powers and authority and all material governmental licenses,
authorizations, consents and approvals required to carry on its business as now
conducted and is duly qualified to do business as a foreign entity and is in
good standing in each jurisdiction where the character of the property owned or
leased by it or the nature of its activities makes such qualification necessary,
in each case with such exceptions as, individually or in the aggregate, would
not be reasonably likely to have, an EarthLink Material Adverse Effect.
EarthLink Operations, Inc., the only Significant Subsidiary of EarthLink, is
incorporated in Delaware and is a wholly-owned subsidiary of EarthLink.
(b) All of the outstanding shares of capital stock of, or other ownership
interest in, each Significant Subsidiary of EarthLink has been validly issued
and is fully paid and nonassessable. All of the outstanding capital stock of, or
other ownership interest in, each of EarthLink's Significant Subsidiaries, that
is owned, directly or indirectly, by EarthLink, is owned free and clear of any
Lien and free of any other limitation or restriction (including any limitation
or restriction on the right to vote, sell or otherwise dispose of such capital
stock or other ownership interests) with such exceptions as, individually or in
the aggregate, would not be reasonably likely to have, an EarthLink Material
Adverse Effect. There are no outstanding (i) securities of EarthLink or any of
its Significant Subsidiaries convertible into or exchangeable or exercisable for
shares of capital stock or other voting securities or ownership interests in any
of its Significant Subsidiaries, (ii) options, warrants or other rights to
acquire from EarthLink or any of its Significant Subsidiaries, and no other
obligation of EarthLink or any of its Significant Subsidiaries to issue, any
capital stock, voting securities or other ownership interests in, or any
securities convertible into or exchangeable or exercisable for any capital
stock, voting securities or ownership interests in, any of its Significant
Subsidiaries or (iii) obligations of EarthLink or any of its Significant
Subsidiaries to repurchase, redeem or otherwise acquire any outstanding
securities of any of its Significant Subsidiaries or any capital stock of, or
other ownership interests in, any of its Significant Subsidiaries.
Section 5.7. EARTHLINK SEC DOCUMENTS.
(a) EarthLink has made available to MindSpring the EarthLink SEC Documents.
EarthLink has filed all reports, filings, registration statements and other
documents required to be filed by it with the SEC since December 31, 1997. No
EarthLink Subsidiary is required to file any form, report, registration
statement or prospectus or other document with the SEC.
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(b) As of its filing date, each EarthLink SEC Document complied as to form
in all material respects with the applicable requirements of the Securities Act
and/or the Exchange Act, as the case may be.
(c) No EarthLink SEC Document filed pursuant to the Exchange Act contained,
as of its filing date, any untrue statement of a material fact or omitted to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading. No
EarthLink SEC Document, as amended or supplemented, if applicable, filed
pursuant to the Securities Act contained, as of the date such document or
amendment became effective, any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading.
Section 5.8. FINANCIAL STATEMENTS, NO MATERIAL UNDISCLOSED LIABILITIES.
(a) The audited consolidated financial statements and unaudited
consolidated interim financial statements of EarthLink included in the EarthLink
10-K and the EarthLink 10-Q fairly present in all material respects, in
conformity with generally accepted accounting principles applied on a consistent
basis ("GAAP") (except as may be indicated in the notes thereto and except that
financial statements on Form 10-Q do not contain all GAAP notes to such
financial statements), the consolidated financial position of EarthLink and its
consolidated Subsidiaries as of the dates thereof and their consolidated results
of operations and changes in financial position for the periods then ended
(subject to normal year-end adjustments in the case of any unaudited interim
financial statements).
(b) There are no liabilities of EarthLink or any EarthLink Subsidiary of
any kind whatsoever, whether accrued, contingent, absolute, determined,
determinable or otherwise, in each case, that are required by GAAP to be set
forth on a consolidated balance sheet of EarthLink, other than:
(i) liabilities or obligations disclosed or provided for in the
EarthLink Balance Sheet or disclosed in the notes thereto;
(ii) liabilities or obligations under this Agreement or incurred in
connection with the transactions contemplated hereby; and
(iii) other liabilities or obligations that individually or in the
aggregate, would not be reasonably likely to have an EarthLink Material
Adverse Effect.
Section 5.9. INFORMATION TO BE SUPPLIED.
(a) The information to be supplied by EarthLink expressly for inclusion or
incorporation by reference in the Joint Proxy Statement/Prospectus will (i) in
the case of the Registration Statement, at the time it becomes effective, 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 not misleading and (ii) in the case of the remainder of the Joint Proxy
Statement/Prospectus, at the time of the mailing thereof, and at the time of the
Special Meetings, 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 are
made, not misleading. The Joint Proxy Statement/Prospectus will comply (with
respect to information relating to EarthLink) as to form in all material
respects with the provisions of the Securities Act and the Exchange Act.
(b) Notwithstanding the foregoing, EarthLink makes no representation or
warranty with respect to any statements made or incorporated by reference in the
Joint Proxy Statement/Prospectus based on information supplied by MindSpring or
Newco.
Section 5.10. ABSENCE OF CERTAIN CHANGES.
Since December 31, 1998, except as otherwise expressly contemplated by this
Agreement, EarthLink and the EarthLink Subsidiaries have conducted their
business in the ordinary course
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consistent with past practice and there has not been (a) any damage, destruction
or other casualty loss (whether or not covered by insurance) affecting the
business or assets of EarthLink or any EarthLink Subsidiary that, individually
or in the aggregate, has had or would be reasonably likely to have an EarthLink
Material Adverse Effect, (b) any action, event, occurrence, development or state
of circumstances or facts that, individually or in the aggregate, has had or
would be reasonably likely to have an EarthLink Material Adverse Effect or
(c) any incurrence, assumption or guarantee by EarthLink of any material
indebtedness for borrowed money other than in the ordinary course and in amounts
and on terms consistent with past practices.
Section 5.11. LITIGATION.
There is no action, suit, investigation, arbitration or proceeding pending
against, or to the Knowledge of EarthLink threatened against, EarthLink or any
EarthLink Subsidiary or any of their respective assets or properties before any
arbitrator or Governmental Entity that, individually or in the aggregate, would
be reasonably likely to have, an EarthLink Material Adverse Effect. There are no
outstanding judgments, decrees, injunctions, awards or orders against EarthLink
that would be reasonably likely to have, individually or in the aggregate, an
EarthLink Material Adverse Effect.
Section 5.12. TAXES.
(a) All Tax returns, statements, reports and forms (collectively, the
"EARTHLINK RETURNS") required to be filed with any taxing authority by, or with
respect to, EarthLink and the EarthLink Subsidiaries have been filed in
substantial compliance with all applicable laws.
(b) EarthLink and the EarthLink Subsidiaries have timely paid all Taxes
shown as due and payable on the EarthLink Returns that have been so filed, and
all other Taxes not subject to reporting obligations, and, as of the time of
filing, the EarthLink Returns correctly reflected the facts regarding the
income, business, assets, operations, activities and the status of EarthLink and
the EarthLink Subsidiaries (other than Taxes that are being contested in good
faith and for which adequate reserves are reflected on the EarthLink Balance
Sheet).
(c) EarthLink and the EarthLink Subsidiaries have made provision for all
Taxes payable by them for which no EarthLink Return has yet been filed.
(d) The charges, accruals and reserves for Taxes with respect to EarthLink
and the EarthLink Subsidiaries reflected on the EarthLink Balance Sheet are
adequate under GAAP to cover the tax liabilities accruing through the date
thereof.
(e) There is no action, suit, proceeding, audit or claim now proposed or
pending against or with respect to EarthLink or any of the EarthLink
Subsidiaries in respect of any Tax that would be reasonably likely to have an
EarthLink Material Adverse Effect
(f) Neither EarthLink nor any of the EarthLink Subsidiaries has been a
member of an affiliated, consolidated, combined or unitary group other than one
of which EarthLink was the common parent.
(g) Neither EarthLink nor any of the EarthLink Subsidiaries holds any asset
subject to a consent under Section 341(f) of the Code.
Section 5.13. EMPLOYEE BENEFITS.
(a) SECTION 5.13(A) of the EarthLink Disclosure Schedule contains a correct
and complete list identifying each material "employee benefit plan", as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974
("ERISA"), each employment, severance or similar contract, plan, arrangement or
policy and each other plan or arrangement (written or oral) providing for
compensation, bonuses, profit-sharing, stock option or other stock related
rights or other forms of incentive or deferred compensation, vacation benefits,
insurance coverage (including any self-insured arrangements), health or medical
benefits, disability benefits, workers' compensation, supplemental
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unemployment benefits, severance benefits and post-employment or retirement
benefits (including compensation, pension, health, medical or life insurance
benefits) that is maintained, administered or contributed to by EarthLink or any
ERISA Affiliate (as defined below) and covers any employee or former employee of
EarthLink or any EarthLink Subsidiary. Copies of such plans (and, if applicable,
related trust agreements) and all amendments thereto and written interpretations
thereof have been furnished, or will be made available upon request, to
MindSpring together with the most recent annual report (Form 5500 including, if
applicable, Schedule B thereto) prepared in connection with any such plan. Such
plans are referred to collectively herein as the "EARTHLINK EMPLOYEE PLANS". For
purposes of this SECTION 5.13, "ERISA AFFILIATE" of any Person means any other
Person which, together with such Person, would be treated as a single employer
under Section 414 of the Code.
(b) SCHEDULE 5.13(B) of the EarthLink Disclosure Schedule separately
identifies each EarthLink Employee Plan that constitutes a "multiemployer plan",
as defined in Section 3(37) of ERISA (a "MULTIEMPLOYER PLAN"), or any other plan
subject to Title IV of ERISA (a "RETIREMENT PLAN"). No "accumulated funding
deficiency", as defined in Section 412 of the Code, has been incurred with
respect to any EarthLink Employee Plan that is a Retirement Plan, whether or not
waived. To the Knowledge of EarthLink, no condition exists and no event has
occurred that would be reasonably likely to constitute grounds for termination
of any EarthLink Employee Plan that is a Retirement Plan or, with respect to any
EarthLink Employee Plan that is a Multiemployer Plan, presents a material risk
of a complete or partial withdrawal under Title IV of ERISA and neither
EarthLink nor any of its ERISA Affiliates has incurred any liability under Title
IV of ERISA arising in connection with the termination of, or complete or
partial withdrawal from, any plan covered or previously covered by Title IV of
ERISA that would be reasonably likely to have an EarthLink Material Adverse
Effect. To the Knowledge of EarthLink, nothing has been done or omitted to be
done and no transaction or holding of any asset under or in connection with any
EarthLink Employee Plan has occurred that will make EarthLink or any EarthLink
Subsidiary, or any officer or director of EarthLink or any EarthLink Subsidiary,
subject to any liability under Title I of ERISA or liable for any tax pursuant
to Section 4975 of the Code (assuming the taxable period of any such transaction
expired as of the date hereof) that would be reasonably likely to have an
EarthLink Material Adverse Effect.
(c) Each EarthLink Employee Plan that is intended to be qualified under
Section 401 (a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and each trust forming a part thereof is
exempt from tax pursuant to Section 501(a) of the Code. EarthLink has furnished,
or will make available upon request, to MindSpring copies of the most recent
Internal Revenue Service determination letters with respect to each such
EarthLink Employee Plan. Each EarthLink Employee Plan has been maintained in
substantial compliance with its terms and with the requirements prescribed by
any and all statutes, orders, rules and regulations, including but not limited
to ERISA and the Code, which are applicable to such EarthLink Employee Plan.
(d) There is no contract, agreement, plan or arrangement that, as a result
of the EarthLink Merger, would be reasonably likely to obligate EarthLink to
make any payment of any amount that would not be deductible pursuant to the
terms of Section 162(m) or Section 280G of the Code.
(e) Except as disclosed in writing to MindSpring prior to the date hereof,
there has been no amendment to, written interpretation or announcement (whether
or not written) relating to, or change in employee participation or coverage
under, any EarthLink Employee Plan that would increase materially the expense of
maintaining such EarthLink Employee Plan above the level of the expense incurred
in respect thereof for the fiscal year ended December 31, 1998.
(f) No EarthLink Employee Plan promises or provides post-retirement
medical, life insurance or other benefits due now or in the future to current,
former or retired employees of EarthLink or any subsidiary.
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Section 5.14. COMPLIANCE WITH LAWS; LICENSES, PERMITS AND REGISTRATIONS.
(a) To the Knowledge of EarthLink, neither EarthLink nor any EarthLink
Subsidiary is in violation of, or has violated, any applicable provisions of any
laws, statutes, ordinances, regulations, judgments, injunctions, orders or
consent decrees, except for any such violations that, individually or in the
aggregate, would not be reasonably likely to have an EarthLink Material Adverse
Effect.
(b) Each of EarthLink and the EarthLink Subsidiaries has all permits,
licenses, approvals, authorizations of and registrations with and under all
federal, state, local and foreign laws, and from all Governmental Entities
required by EarthLink and the EarthLink Subsidiaries to carry on their
respective businesses as currently conducted, except where the failure to have
any such permits, licenses, approvals, authorizations or registrations,
individually or in the aggregate, would not be reasonably likely to have an
EarthLink Material Adverse Effect.
Section 5.15. TITLE TO PROPERTIES.
(a) EarthLink and each EarthLink Subsidiary have good and marketable title
to, or valid leasehold interests in, all their properties and assets except for
such as are no longer used or useful in the conduct of their businesses or as
have been disposed of in the ordinary course of business and except for defects
in title, easements, restrictive covenants and similar Liens, encumbrances or
impediments that, in the aggregate, do not materially interfere with the ability
of EarthLink and its Subsidiaries to conduct their business, taken as a whole,
as currently conducted. All such assets and properties, other than assets and
properties in which EarthLink or any EarthLink Subsidiary has leasehold
interests, are free and clear of all Liens, except for Liens that, in the
aggregate, do not and will not materially interfere with the ability of
EarthLink and the EarthLink Subsidiaries to conduct their business, taken as a
whole, as currently conducted.
(b) Except as would not be reasonably likely, individually or in the
aggregate, to have an EarthLink Material Adverse Effect, (i) EarthLink and each
EarthLink Subsidiary are in compliance with the terms of all leases to which
they are a party and under which they are in occupancy, and all such leases are
in full force and effect and (ii) EarthLink and each EarthLink Subsidiary enjoy
peaceful and undisturbed possession under all such leases.
Section 5.16. INTELLECTUAL PROPERTY.
Except as would not be reasonably likely to have an EarthLink Material
Adverse Effect or a Newco Material Adverse Effect, individually or in the
aggregate, EarthLink and the EarthLink Subsidiaries own or have a valid license
to use each trademark, service mark, trade name, mask work, invention, patent,
trade secret, copyright, know-how (including any registrations or applications
for registration of any of the foregoing) or any other similar type of
proprietary intellectual property right (collectively, the "EARTHLINK
INTELLECTUAL PROPERTY") necessary to carry on the business of EarthLink and the
EarthLink Subsidiaries, taken as a whole, as currently conducted or as proposed
to be conducted by Newco. Neither EarthLink nor any EarthLink Subsidiary has
received any written notice of infringement of or challenge to, and there are no
claims pending or, to EarthLink's Knowledge, threatened with respect to the
rights of others to the use of, any EarthLink Intellectual Property that, in any
such case, individually or in the aggregate, would be reasonably likely to have
an EarthLink Material Adverse Effect or a Newco Material Adverse Effect.
Section 5.17. ENVIRONMENTAL MATTERS.
(a) With such exceptions as, individually or in the aggregate, would not be
reasonably likely to have an EarthLink Material Adverse Effect, to the Knowledge
of EarthLink, (i) no written notice, notification, demand, request for
information, citation, summons, complaint or order has been received by, and no
investigation, action, claim, suit, proceeding or review is pending or
threatened by any Person against EarthLink or any EarthLink Subsidiary with
respect to any applicable Environmental
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Law and (ii) EarthLink and the EarthLink Subsidiaries are and have been in
compliance with all applicable Environmental Laws.
(b) For purposes of this SECTION 5.17 and SECTION 6.17, the term
"ENVIRONMENTAL LAWS" means any federal, state, local and foreign statutes, laws
(including, without limitation, common law), judicial decisions, regulations,
ordinances, rules, judgments, orders, codes, injunctions, permits or
governmental agreements relating to human health and safety, the environment or
to pollutants, contaminants, wastes, or chemicals.
Section 5.18. FINDERS' FEES; OPINIONS OF FINANCIAL ADVISOR.
(a) Except for Credit Suisse First Boston Corporation, there is no
investment banker, broker, finder or other intermediary that has been retained
by, or is authorized to act on behalf of, EarthLink or any EarthLink Subsidiary
who might be entitled to any fee or commission from MindSpring or any of its
Affiliates upon consummation of the transactions contemplated by this Agreement.
(b) EarthLink has received the opinion of Credit Suisse First Boston
Corporation, dated as of the date hereof, to the effect that, as of such date,
the EarthLink Exchange Ratio is fair, from a financial point of view, to the
holders of shares of EarthLink Common Stock and EarthLink Preferred Stock (other
than MindSpring and any MindSpring Subsidiary).
Section 5.19. REQUIRED VOTE, BOARD APPROVAL.
(a) The only votes of the holders of any class or series of capital stock
of EarthLink required by law, rule or regulation to approve this Agreement
and/or any of the other transactions contemplated hereby are the affirmative
vote of the holders of more than fifty percent of the outstanding EarthLink
Common Stock (the "EARTHLINK STOCKHOLDER APPROVAL").
(b) EarthLink's Board of Directors has unanimously (i) determined that this
Agreement and the transactions contemplated hereby, including the EarthLink
Merger, are advisable and in the best interests of EarthLink and its
stockholders, (ii) approved this Agreement and the transactions contemplated
hereby and (iii) resolved to recommend to such stockholders that they vote in
favor of adopting and approving this Agreement in accordance with the terms
hereof.
Section 5.20. STATE TAKEOVER STATUTES.
EarthLink has taken all actions required to be taken by it in order to
exempt this Agreement and the transactions contemplated hereby from the
provisions of Section 203 of the DGCL, and accordingly, such Sections do not
apply to the EarthLink Merger or any of such transactions. No other "control
share acquisition," "fair price" or other anti-takeover laws or regulations
enacted under state or federal laws in the United States apply to this Agreement
or any of the transactions contemplated hereby.
Section 5.21. POOLING MATTERS; TAX TREATMENT.
(a) EarthLink intends that the EarthLink Merger be accounted for under the
"pooling of interests" method under the requirements of Opinion No. 16 (Business
Combinations) of the Accounting Principles Board of the American Institute of
Certified Public Accountants, the Financial Accounting Standards Board, and the
rules and regulations of the SEC. EarthLink will request a letter addressed to
it from PricewaterhouseCoopers LLP dated as of the Closing Date, and (if and
when obtained) a copy of it will be delivered to MindSpring. Such letter (which
may contain customary qualifications and assumptions) shall state that
PricewaterhouseCoopers LLP concurs with EarthLink's management's conclusion that
no conditions exist that would preclude Newco from accounting for the Mergers as
a "pooling of interests," as described in the first sentence of this
SECTION 5.21(A).
(b) Neither EarthLink nor any of its Affiliates has taken or agreed to
take, or will take, any action or is aware of any fact or circumstance that
would prevent the EarthLink Merger from qualifying (i) for "pooling of
interests" accounting treatment as described in SECTION 5.21(A) above or
(ii) as a 368 Reorganization.
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Section 5.22. CERTAIN AGREEMENTS.
None of EarthLink, any EarthLink Subsidiary or any of their respective
Affiliates (i) are parties to or otherwise bound by any agreement or arrangement
that limits or otherwise restricts EarthLink, any EarthLink Subsidiary or Newco
or any of their respective Affiliates from engaging or competing in any line of
business or in any locations, which agreement or arrangement is material to the
business of EarthLink and the EarthLink Subsidiaries or would be material to the
business of Newco (assuming the Mergers had taken place), in either case taken
as a whole and (ii) except in the ordinary course of business, have amended,
modified or terminated any material contract, agreement or arrangement of
EarthLink or any EarthLink Subsidiary or otherwise waived, released or assigned
any material rights, claims or benefits of EarthLink or any EarthLink Subsidiary
thereunder.
Section 5.23. YEAR 2000 COMPLIANCE.
EarthLink has reviewed its operations and has made reasonable inquiries of
any third parties with which EarthLink has a material relationship to evaluate
the extent to which the business or operations of EarthLink will be affected by
the Year 2000 Problem. As a result of such review, except as otherwise described
in the EarthLink SEC documents, EarthLink has no reason to believe, and does not
believe, that the Year 2000 Problem will have an EarthLink Material Adverse
Effect or result in any material loss or interference with EarthLink's business
or operations. The "Year 2000 Problem" as used herein means any significant risk
that computer hardware or software used in the receipt, transmission,
processing, manipulation, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical systems of
any kind will not, in the case of dates or time periods occurring after
December 31, 1999, function at least as effectively as in the case of dates or
time periods occurring prior to January 1, 2000.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF MINDSPRING
Except as disclosed in (i) the MindSpring Disclosure Schedule delivered to
EarthLink separately prior to, or contemporaneously with, the date hereof (which
disclosure schedule shall make a specific reference to the particular Section or
subsection of this Agreement to which exception is being taken but once made
shall be deemed made for all purposes of the MindSpring Disclosure Schedule) or
(ii) the MindSpring SEC Documents filed or made prior to the date hereof,
MindSpring represents and warrants to EarthLink that:
Section 6.1. CORPORATE EXISTENCE AND POWER.
MindSpring is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware, and has all corporate powers
required to carry on its business as now conducted. MindSpring is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction where the character of the property owned or leased by it or the
nature of its activities makes such qualification necessary, except where the
failure to be so qualified, individually or in the aggregate, would not be
reasonably likely to have an MindSpring Material Adverse Effect. MindSpring has
heretofore made available to EarthLink true and complete copies of MindSpring's
certificate of incorporation and bylaws as currently in effect.
Section 6.2. CORPORATE AUTHORIZATION.
The execution, delivery and performance by MindSpring of this Agreement and
the consummation by MindSpring of the transactions contemplated hereby are
within MindSpring's corporate powers and, except for the MindSpring Stockholder
Approval (as defined herein), have been duly authorized by all necessary
corporate action. Assuming that this Agreement constitutes the valid and binding
obligation of EarthLink and Newco, this Agreement constitutes a valid and
binding agreement of MindSpring,
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enforceable in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium and similar laws, now or hereafter in effect,
relating to or affecting creditors' rights and remedies and to general
principles of equity.
Section 6.3. GOVERNMENTAL AUTHORIZATION.
The execution, delivery and performance by MindSpring of this Agreement and
the consummation by MindSpring of the transactions contemplated hereby require
no action by or in respect of, or filing with, any Governmental Entity other
than (a) the filing of (i) a certificate of merger in accordance with the DGCL
and (ii) appropriate documents with the relevant authorities of other states or
jurisdictions in which MindSpring or any MindSpring Subsidiary is qualified to
do business; (b) compliance with any applicable requirements of the HSR Act;
(c) compliance with any applicable requirements of the Securities Act and the
Exchange Act; (d) such as may be required under any applicable state securities
or blue sky laws; and (e) such other consents, approvals, actions, orders,
authorizations, registrations, declarations and filings that, if not obtained or
made, would not, individually or in the aggregate, (x) be reasonably likely to
have a MindSpring Material Adverse Effect or (assuming for this purpose that the
Effective Time had occurred) an EarthLink Material Adverse Effect, or
(y) prevent or materially impair the ability of MindSpring to consummate the
transactions contemplated by this Agreement.
Section 6.4. NON-CONTRAVENTION.
The execution, delivery and performance by MindSpring of this Agreement and
the consummation by MindSpring of the transactions contemplated hereby do not
and will not (a) contravene or conflict with MindSpring's certificate of
incorporation or bylaws, (b) assuming compliance with the matters referred to in
SECTION 6.3, contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgment, injunction, order or decree binding
upon or applicable to MindSpring or any MindSpring Subsidiary, (c) constitute a
default under or give rise to a right of termination, cancellation or
acceleration of any right or obligation of MindSpring or any MindSpring
Subsidiary or to a loss of any benefit or status to which MindSpring or any
MindSpring Subsidiary is entitled under any provision of any agreement, contract
or other instrument binding upon MindSpring or any MindSpring Subsidiary or any
license, franchise, permit or other similar authorization held by MindSpring or
any MindSpring Subsidiary, or (d) result in the creation or imposition of any
Lien on any asset of MindSpring or any MindSpring Subsidiary other than, in the
case of each of (b), (c) and (d), any such items that would not, individually or
in the aggregate (x) be reasonably likely to have a MindSpring Material Adverse
Effect or (y) prevent or materially impair the ability of MindSpring to
consummate the transactions contemplated by this Agreement.
Section 6.5. CAPITALIZATION.
(a) The authorized capital stock of MindSpring consists of 400,000,000
shares of MindSpring Common Stock and 1,000,000 shares of MindSpring Preferred
Stock. As of September 21, 1999, there were outstanding (x) 63,504,352 shares of
MindSpring Common Stock, (y) no shares of MindSpring Preferred Stock and
(z) stock options to purchase an aggregate of 5,542,579 shares of MindSpring
Common Stock (of which options to purchase an aggregate of 1,054,346 MindSpring
Common Stock were exercisable). All outstanding shares of capital stock of
MindSpring have been duly authorized and validly issued and are fully paid and
nonassessable.
(b) As of the date hereof, except (i) as set forth in this SECTION 6.5,
(ii) the MindSpring Notes and (iii) for changes since September 21, 1999,
resulting from the exercise of stock options outstanding on such date, there are
no outstanding (x) shares of capital stock or other voting securities of
MindSpring, (y) securities of MindSpring convertible into or exchangeable for
shares of capital stock or voting securities of MindSpring, or (z) options or
other rights to acquire from MindSpring, and no obligation of MindSpring to
issue, any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of MindSpring (the items in
clauses (x), (y) and (z) being referred
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to collectively as the "MINDSPRING SECURITIES"). If a Change of Control, as
defined in the MindSpring Indenture, had occurred as of September 21, 1999, the
MindSpring Notes would have been convertible into 2,879,600 shares o MindSpring
Common Stock. There are no outstanding obligations of MindSpring or any
MindSpring Subsidiary to repurchase, redeem or otherwise acquire any MindSpring
Securities. There are no outstanding contractual obligations of MindSpring to
provide funds to, or make any investment (in the form of a loan, capital
contribution or otherwise) in, any other Person other than in the ordinary
course of business consistent with past practice. There are no stockholder
agreements, voting trusts or other agreements or understandings to which
MindSpring is a party, or of which MindSpring is aware, relating to voting,
registration or disposition of any shares of capital stock of MindSpring or
granting to any person or group of persons the right to elect, or to designate
or nominate for election, a director to the board of directors of MindSpring.
Section 6.6. SUBSIDIARIES.
There are no MindSpring Subsidiaries.
Section 6.7. MINDSPRING SEC DOCUMENTS.
(a) MindSpring has made available to EarthLink the MindSpring SEC Documents.
MindSpring has filed all reports, filings, registration statements and other
documents required to be filed by it with the SEC since December 31, 1997. No
MindSpring Subsidiary is required to file any form, report, registration
statement or prospectus or other document with the SEC.
(b) As of its filing date, each MindSpring SEC Document complied as to form
in all material respects with the applicable requirements of the Securities Act
and/or the Exchange Act, as the case may be.
(c) No MindSpring SEC Document filed pursuant to the Exchange Act contained,
as of its filing date, any untrue statement of a material fact or omitted to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading. No
MindSpring SEC Document, as amended or supplemented, if applicable, filed
pursuant to the Securities Act contained, as of the date such document or
amendment became effective, any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading.
Section 6.8. FINANCIAL STATEMENTS, NO MATERIAL UNDISCLOSED LIABILITIES.
(a) The audited financial statements and unaudited interim financial
statements of MindSpring included in the MindSpring 10-K and the MindSpring 10-Q
fairly present in all material respects, in conformity with GAAP (except as may
be indicated in the notes thereto and except that financial statements on
Form 10-Q do not contain all GAAP notes to such financial statements), the
financial position of MindSpring and its Subsidiaries as of the dates thereof
and their results of operations and changes in financial position for the
periods then ended (subject to normal year-end adjustments in the case of any
unaudited interim financial statements).
(b) There are no liabilities of MindSpring or any MindSpring Subsidiary of
any kind whatsoever, whether accrued, contingent, absolute, determined,
determinable or otherwise, in each case, that are required by GAAP to be set
forth on a balance sheet of MindSpring, other than:
(i) liabilities or obligations disclosed or provided for in the
MindSpring Balance Sheet or disclosed in the notes thereto;
(ii) liabilities or obligations under this Agreement or incurred in
connection with the transactions contemplated hereby; and
(iii) other liabilities or obligations that individually or in the
aggregate, would not be reasonably likely to have a MindSpring Material
Adverse Effect.
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Section 6.9. INFORMATION TO BE SUPPLIED.
(a) The information to be supplied by MindSpring expressly for inclusion or
incorporation by reference in the Joint Proxy Statement/Prospectus will (i) in
the case of the Registration Statement, at the time it becomes effective, 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 not misleading and (ii) in the case of the remainder of the Joint Proxy
Statement/Prospectus, at the time of the mailing thereof, and at the time of the
Special Meetings, 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 are
made, not misleading. The Joint Proxy Statement/Prospectus will comply (with
respect to information relating to MindSpring) as to form in all material
respects with the provisions of the Securities Act and the Exchange Act.
(b) Notwithstanding the foregoing, MindSpring makes no representation or
warranty with respect to any statements made or incorporated by reference in the
Joint Proxy Statement/Prospectus based on information supplied by EarthLink or
Newco.
Section 6.10. ABSENCE OF CERTAIN CHANGES.
Since December 31, 1998, except as otherwise expressly contemplated by this
Agreement, MindSpring and the MindSpring Subsidiaries have conducted their
business in the ordinary course consistent with past practice and there has not
been (a) any damage, destruction or other casualty loss (whether or not covered
by insurance) affecting the business or assets of MindSpring or any MindSpring
Subsidiary that, individually or in the aggregate, has had or would be
reasonably likely to have a MindSpring Material Adverse Effect, (b) any action,
event, occurrence, development or state of circumstances or facts that,
individually or in the aggregate, has had or would be reasonably likely to have
a MindSpring Material Adverse Effect or (c) any incurrence, assumption or
guarantee by MindSpring of any material indebtedness for borrowed money other
than in the ordinary course and in amounts and on terms consistent with past
practices.
Section 6.11. LITIGATION.
There is no action, suit, investigation, arbitration or proceeding pending
against, or to the Knowledge of MindSpring threatened against, MindSpring or any
MindSpring Subsidiary or any of their respective assets or properties before any
arbitrator or Governmental Entity that, individually or in the aggregate, would
be reasonably likely to have a MindSpring Material Adverse Effect. There are no
outstanding judgments, decrees, injunctions, awards or orders against MindSpring
that would be reasonably likely to have, individually or in the aggregate, a
MindSpring Material Adverse Effect.
Section 6.12. TAXES.
(a) All Tax returns, statements, reports and forms (collectively, the
"MINDSPRING RETURNS") required to be filed with any taxing authority by, or with
respect to, MindSpring and the MindSpring Subsidiaries have been filed in
substantial compliance with all applicable laws.
(b) MindSpring and the MindSpring Subsidiaries have timely paid all Taxes
shown as due and payable on the MindSpring Returns that have been so filed, and
all other Taxes not subject to reporting obligations, and as of the time of
filing, the MindSpring Returns correctly reflected the facts regarding the
income, business, assets, operations, activities and the status of MindSpring
and the MindSpring Subsidiaries (other than Taxes that are being contested in
good faith and for which adequate reserves are reflected on the MindSpring
Balance Sheet).
(c) MindSpring and the MindSpring Subsidiaries have made provision for all
Taxes payable by them for which no MindSpring Return has yet been filed.
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(d) The charges, accruals and reserves for Taxes with respect to MindSpring
and its Subsidiaries reflected on the MindSpring Balance Sheet are adequate
under GAAP to cover the Tax liabilities accruing through the date thereof.
(e) There is no action, suit, proceeding, audit or claim now proposed or
pending against or with respect to MindSpring or any of the MindSpring
Subsidiaries in respect of any Tax that would be reasonably likely to have a
MindSpring Material Adverse Effect.
(f) Neither MindSpring nor any of the MindSpring Subsidiaries has been a
member of an affiliated, consolidated, combined or unitary group other than one
of which MindSpring was the common parent.
(g) Neither MindSpring nor any of the MindSpring Subsidiaries holds any
asset subject to a consent under Section 341(f) of the Code.
Section 6.13. EMPLOYEE BENEFITS.
(a) SECTION 6.13(A) of the MindSpring Disclosure Schedule contains a correct
and complete list identifying each material "employee benefit plan", as defined
in Section 3(3) of the ERISA, each employment, severance or similar contract,
plan, arrangement or policy and each other plan or arrangement (written or oral)
providing for compensation, bonuses, profit-sharing, stock option or other stock
related rights or other forms of incentive or deferred compensation, vacation
benefits, insurance coverage (including any self-insured arrangements), health
or medical benefits, disability benefits, workers' compensation, supplemental
unemployment benefits, severance benefits and post-employment or retirement
benefits (including compensation, pension, health, medical or life insurance
benefits) that is maintained, administered or contributed to by MindSpring or
any ERISA Affiliate and covers any employee or former employee of MindSpring or
any MindSpring Subsidiary. Copies of such plans (and, if applicable, related
trust agreements) and all amendments thereto and written interpretations thereof
have been furnished, or will be made available upon request, to EarthLink
together with the most recent annual report (Form 5500 including, if applicable,
Schedule B thereto) prepared in connection with any such plan. Such plans are
referred to collectively herein as the "MINDSPRING EMPLOYEE PLANS".
(b) SECTION 6.13(B) of the MindSpring Disclosure Schedule separately
identifies each MindSpring Employee Plan that constitutes a Multiemployer Plan
or a Retirement Plan. No "accumulated funding deficiency", as defined in
Section 412 of the Code, has been incurred with respect to any MindSpring
Employee Plan that is a Retirement Plan, whether or not waived. To the Knowledge
of MindSpring, no condition exists and no event has occurred that would be
reasonably likely to constitute grounds for termination of any MindSpring
Employee Plan that is a Retirement Plan or, with respect to any MindSpring
Employee Plan that is a Multiemployer Plan, presents a material risk of a
complete or partial withdrawal under Title IV of ERISA and neither MindSpring
nor any of its ERISA Affiliates has incurred any liability under Title IV of
ERISA arising in connection with the termination of, or complete or partial
withdrawal from, any plan covered or previously covered by Title IV of ERISA
that would be reasonably likely to have a MindSpring Material Adverse Effect. To
the Knowledge of MindSpring, nothing has been done or omitted to be done and no
transaction or holding of any asset under or in connection with any MindSpring
Employee Plan has occurred that will make MindSpring or any MindSpring
Subsidiary, or any officer or director of MindSpring or any MindSpring
Subsidiary, subject to any liability under Title I of ERISA or liable for any
tax pursuant to Section 4975 of the Code (assuming the taxable period of any
such transaction expired as of the date hereof) that would be reasonably likely
to have a MindSpring Material Adverse Effect.
(c) Each MindSpring Employee Plan that is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and each trust forming a part thereof is
exempt from tax pursuant to Section 501(a) of the Code. MindSpring
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has furnished, or will make available upon request, to EarthLink copies of the
most recent Internal Revenue Service determination letters with respect to each
such MindSpring Employee Plan. Each MindSpring Employee Plan has been maintained
in substantial compliance with its terms and with the requirements prescribed by
any and all statutes, orders, rules and regulations, including but not limited
to ERISA and the Code, which are applicable to such MindSpring Employee Plan.
(d) There is no contract, agreement, plan or arrangement that, as a result
of the MindSpring Merger, would be reasonably likely to obligate MindSpring to
make any payment of any amount that would not be deductible pursuant to the
terms of Section 162(m) or Section 280G of the Code.
(e) Except as disclosed in writing to EarthLink prior to the date hereof,
there has been no amendment to, written interpretation or announcement (whether
or not written) relating to, or change in employee participation or coverage
under, any MindSpring Employee Plan that would increase materially the expense
of maintaining such MindSpring Employee Plan above the level of the expense
incurred in respect thereof for the fiscal year ended December 31, 1998.
(f) No MindSpring Employee Plan promises or provides post-retirement
medical, life insurance or other benefits due now or in the future to current,
former or retired employees of MindSpring or any subsidiary.
Section 6.14. COMPLIANCE WITH LAWS; LICENSES, PERMITS AND REGISTRATIONS.
(a) To the Knowledge of MindSpring, neither MindSpring nor any MindSpring
Subsidiary is in violation of, or has violated, any applicable provisions of any
laws, statutes, ordinances, regulations, judgments, injunctions, orders or
consent decrees, except for any such violations that, individually or in the
aggregate, would not be reasonably likely to have a MindSpring Material Adverse
Effect.
(b) Each of MindSpring and the MindSpring Subsidiaries has all permits,
licenses, approvals, authorizations of and registrations with and under all
federal, state, local and foreign laws, and from all Governmental Entities
required by MindSpring and the MindSpring Subsidiaries to carry on their
respective businesses as currently conducted, except where the failure to have
any such permits, licenses, approvals, authorizations or registrations,
individually or in the aggregate, would not be reasonably likely to have a
MindSpring Material Adverse Effect.
Section 6.15. TITLE TO PROPERTIES.
(a) MindSpring and each MindSpring Subsidiary have good and marketable title
to, or valid leasehold interests in, all their properties and assets except for
such as are no longer used or useful in the conduct of their businesses or as
have been disposed of in the ordinary course of business and except for defects
in title, easements, restrictive covenants and similar Liens, encumbrances or
impediments that, in the aggregate, do not materially interfere with the ability
of MindSpring and its Subsidiaries to conduct their business, taken as a whole,
as currently conducted. All such assets and properties, other than assets and
properties in which MindSpring or any MindSpring Subsidiary has leasehold
interests, are free and clear of all Liens, except for Liens that, in the
aggregate, do not and will not materially interfere with the ability of
MindSpring and the MindSpring Subsidiaries to conduct their business, taken as a
whole, as currently conducted.
(b) Except as would not be reasonably likely, individually or in the
aggregate, to have a MindSpring Material Adverse Effect, (i) MindSpring and each
MindSpring Subsidiary are in compliance with the terms of all leases to which
they are a party and under which they are in occupancy, and all such leases are
in full force and effect and (ii) MindSpring and each MindSpring Subsidiary
enjoy peaceful and undisturbed possession under all such leases.
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Section 6.16. INTELLECTUAL PROPERTY.
Except as would not be reasonably likely to have a MindSpring Material
Adverse Effect or a Newco Material Adverse Effect, individually or in the
aggregate, MindSpring and the MindSpring Subsidiaries own or have a valid
license to use each trademark, service mark, trade name, mask work, invention,
patent, trade secret, copyright, know-how (including any registrations or
applications for registration of any of the foregoing) or any other similar type
of proprietary intellectual property right (collectively, the "MINDSPRING
INTELLECTUAL PROPERTY") necessary to carry on the business of MindSpring and the
MindSpring Subsidiaries, taken as a whole, as currently conducted or as proposed
to be conducted by Newco. Neither MindSpring nor any MindSpring Subsidiary has
received any written notice of infringement of or challenge to, and there are no
claims pending or, to MindSpring's Knowledge, threatened with respect to the
rights of others to the use of, any MindSpring Intellectual Property that, in
any such case, individually or in the aggregate, would be reasonably likely to
have a MindSpring Material Adverse Effect or a Newco Material Adverse Effect.
Section 6.17. ENVIRONMENTAL MATTERS.
With such exceptions as, individually or in the aggregate, would not be
reasonably likely to have a MindSpring Material Adverse Effect, to the Knowledge
of MindSpring, (i) no written notice, notification, demand, request for
information, citation, summons, complaint or order has been received by, and no
investigation, action, claim, suit, proceeding or review is pending or
threatened by any Person against, MindSpring or any MindSpring Subsidiary, with
respect to any applicable Environmental Law and (ii) MindSpring and the
MindSpring Subsidiaries are and have been in compliance with all applicable
Environmental Laws.
Section 6.18. FINDERS' FEES; OPINIONS OF FINANCIAL ADVISOR.
(a) Except for Donaldson, Lufkin & Jenrette Securities Corporation, there is
no investment banker, broker, finder or other intermediary that has been
retained by, or is authorized to act on behalf of, MindSpring or any MindSpring
Subsidiary who might be entitled to any fee or commission from EarthLink or any
of its Affiliates upon consummation of the transactions contemplated by this
Agreement.
(b) MindSpring has received the opinion of Donaldson, Lufkin & Jenrette
Securities Corporation, dated as of the date hereof, to the effect that, as of
such date, the MindSpring Exchange Ratio is fair, from a financial point of
view, to the holders of shares of MindSpring Common Stock (other than EarthLink
and any EarthLink Subsidiary).
Section 6.19. REQUIRED VOTE, BOARD APPROVAL.
(a) The only vote of the holders of any class or series of capital stock of
MindSpring required by law, rule or regulation to approve this Agreement and/or
any of the other transactions contemplated hereby is the affirmative vote (the
"MINDSPRING STOCKHOLDER APPROVAL") of the holders of more than fifty percent of
the outstanding shares of MindSpring Common Stock in favor of the adoption of
this Agreement.
(b) MindSpring's Board of Directors has unanimously (i) determined that this
Agreement and the transactions contemplated hereby, including the MindSpring
Merger, are advisable and in the best interests of MindSpring and its
stockholders, (ii) approved this Agreement and the transactions contemplated
hereby and (iii) resolved to recommend to such stockholders that they vote in
favor of adopting and approving this Agreement in accordance with the terms
hereof.
Section 6.20. STATE TAKEOVER STATUTES.
MindSpring has taken all actions required to be taken by it in order to
exempt this Agreement and the transactions contemplated hereby from the
provisions of Section 203 of the DGCL, and
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accordingly, such Sections do not apply to the Merger or any of such
transactions. No other "control share acquisition," "fair price" or other
anti-takeover laws or regulations enacted under state or federal laws in the
United States apply to this Agreement or any of the transactions contemplated
hereby.
Section 6.21. POOLING MATTERS; TAX TREATMENT.
(a) MindSpring intends that the MindSpring Merger be accounted for under the
"pooling of interests" method under the requirements of Opinion No. 16 (Business
Combinations) of the Accounting Principles Board of the American Institute of
Certified Public Accountants, the Financial Accounting Standards Board, and the
rules and regulations of the SEC. MindSpring will request a letter addressed to
it from Arthur Andersen LLP dated as of the Closing Date, and (if and when
obtained) a copy of it will be delivered to EarthLink. Such letter (which may
contain customary qualifications and assumptions) shall state that Arthur
Andersen LLP concurs with MindSpring's management's conclusion that no
conditions exist with respect to MindSpring that would preclude Newco from
accounting for the Mergers as a "pooling of interests" as described in the first
sentence of SECTION 6.21(A).
(b) Neither MindSpring nor any of its Affiliates has taken or agreed to
take, or will take, any action or is aware of any fact or circumstance that
would prevent the MindSpring Merger from qualifying (i) for "pooling of
interests" accounting treatment as described in SECTION 6.21(A) above or
(ii) as a 368 Reorganization.
Section 6.22. CERTAIN AGREEMENTS.
None of MindSpring, any MindSpring Subsidiary or any of their respective
Affiliates (i) are parties to or otherwise bound by any agreement or arrangement
that limits or otherwise restricts MindSpring, any MindSpring Subsidiary or
Newco or any of their respective Affiliates from engaging or competing in any
line of business or in any locations, which agreement or arrangement is material
to the business of MindSpring and the MindSpring Subsidiaries or would be
material to the business of Newco (assuming the Mergers had taken place), in
either case taken as a whole and (ii) except in the ordinary course of business,
have amended, modified or terminated any material contract, agreement or
arrangement of MindSpring or any MindSpring Subsidiary or otherwise waived,
released or assigned any material rights, claims or benefits of MindSpring or
any MindSpring Subsidiary thereunder.
Section 6.23. YEAR 2000 COMPLIANCE.
MindSpring has reviewed its operations and has made reasonable inquiries of
any third parties with which MindSpring has a material relationship to evaluate
the extent to which the business or operations of MindSpring will be affected by
the Year 2000 Problem. As a result of such review, except as otherwise described
in the MindSpring SEC documents, MindSpring has no reason to believe, and does
not believe, that the Year 2000 Problem will have an MindSpring Material Adverse
Effect or result in any material loss or interference with MindSpring's business
or operations.
ARTICLE VII
COVENANTS OF EARTHLINK
EarthLink agrees that:
Section 7.1. EARTHLINK INTERIM OPERATIONS.
Except as set forth in the EarthLink Disclosure Schedule or as otherwise
expressly contemplated hereby, without the prior consent of MindSpring (which
consent shall not be unreasonably withheld or delayed), from the date hereof
until the Effective Time, EarthLink shall, and shall cause each of the EarthLink
Subsidiaries to, conduct their business in all material respects in the ordinary
course consistent with past practice and shall use commercially reasonable
efforts to (i) preserve intact its
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present business organization, (ii) maintain in effect all material foreign,
federal, state and local licenses, approvals and authorizations, including,
without limitation, all material licenses and permits that are required for
EarthLink or any EarthLink Subsidiary to carry on its business and
(iii) preserve existing relationships with its material customers, lenders,
suppliers and others having material business relationships with it. Without
limiting the generality of the foregoing, except as set forth in the EarthLink
Disclosure Schedule or as otherwise expressly contemplated by this Agreement,
from the date hereof until the Effective Time, without the prior consent of
MindSpring (which consent shall not be unreasonably withheld or delayed),
EarthLink shall not, nor shall it permit any EarthLink Subsidiary to:
(a) amend its certificate of incorporation or by-laws;
(b) split, combine or reclassify any shares of capital stock of EarthLink or
any less-than-wholly-owned EarthLink Subsidiary or declare, set aside or pay any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock, or redeem, repurchase or
otherwise acquire or offer to redeem, repurchase, or otherwise acquire any of
its securities or any securities of any EarthLink Subsidiary;
(c) (i) issue, deliver or sell, or authorize the issuance, delivery or sale
of, any shares of its capital stock of any class or any securities convertible
into or exercisable for, or any rights, warrants or options to acquire, any such
capital stock or any such convertible securities, other than (A) options to
purchase up to an aggregate of 500,000 shares of its capital stock, plus an
additional number of shares of capital stock equal to that number of shares
underlying options forfeited prior to the Closing by former EarthLink employees,
pursuant to the EarthLink Employee Plans; (B) EarthLink Common Stock upon the
exercise of stock options or warrants in accordance with their present terms or
upon exercise of options issued pursuant to clause (A) above of this
SECTION 7.1(C)(I); or (C) EarthLink Common Stock upon the conversion of the
EarthLink Preferred Stock or in accordance with the Sprint Governance Agreement,
all in accordance with the present terms of such instruments and agreements; or
(ii) amend in any material respect any material term of any outstanding security
of EarthLink or any EarthLink Subsidiary;
(d) other than in connection with transactions not prohibited by
SECTION 7.1(E), incur any capital expenditures or any obligations or liabilities
in respect thereof, except for those (i) contemplated by the capital expenditure
budgets for EarthLink and the EarthLink Subsidiaries made available to
MindSpring, or (ii) incurred in the ordinary course of business of EarthLink and
the EarthLink Subsidiaries;
(e) acquire (whether pursuant to cash merger, stock or asset purchase or
otherwise) in one transaction or series of related transactions (i) any assets
(including any equity interests) having a fair market value in excess of
$5 million (which amount shall exclude any amounts for such transactions set
forth in the capital expenditure budget described in SECTION 7.1(D) hereof), or
(ii) all or substantially all of the equity interests of any Person or any
business or division of any Person having a fair market value in excess of
$5 million (which amount shall exclude any amounts for such transactions set
forth in the capital expenditure budget described in SECTION 7.1(D) hereof);
(f) sell, lease, encumber or otherwise dispose of any assets, other than
(i) sales in the ordinary course of business consistent with past practice,
(ii) equipment and property no longer used in the operation of EarthLink's
business and (iii) assets related to discontinued operations of EarthLink or any
EarthLink Subsidiary;
(g) incur (which shall not be deemed to include entering into credit
agreements, lines of credit or similar arrangements until EarthLink or any
EarthLink Subsidiary becomes liable with respect to any indebtedness for
borrowed money or guarantees thereof under such arrangements) any indebtedness
for borrowed money or guarantee any such indebtedness or issue or sell any debt
securities or warrants
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or rights to acquire any debt securities of EarthLink or any EarthLink
Subsidiary or guarantee any debt securities of others, except in the ordinary
course of business consistent with past practice (which shall include, without
limitation, borrowings under EarthLink's existing credit agreements and
overnight borrowings); PROVIDED, HOWEVER, that, notwithstanding the foregoing
neither EarthLink nor any EarthLink Subsidiary shall incur any borrowings
whatsoever under the Credit Agreement dated as of February 10, 1998, between
EarthLink, as borrower, and Sprint, as lender;
(h) (i) enter into any agreement or arrangement that limits or otherwise
restricts EarthLink, any EarthLink Subsidiary or any of their respective
Affiliates or any successor thereto or that would, after the Effective Time,
limit or restrict EarthLink, any EarthLink Subsidiary or Newco, or any of their
respective Affiliates, from engaging or competing in any line of business or in
any location, which agreement or arrangement would be material to the business
of EarthLink and the EarthLink Subsidiaries or the business of Newco (assuming
the Mergers had taken place), in either case taken as a whole or (ii) except in
the ordinary course of business, amend, modify or terminate any material
contract, agreement or arrangement of EarthLink or any EarthLink Subsidiary or
otherwise waive, release or assign any material rights, claims or benefits of
EarthLink or any EarthLink Subsidiary thereunder;
(i) (i) except in the ordinary course of business consistent with past
practice or as required by law or an existing agreement, increase the amount of
compensation of any director or executive officer or make any increase in or
commitment to increase any employee benefits, (ii) except as required by law, an
agreement existing on the date hereof or an EarthLink severance policy as of the
date hereof, grant any severance or termination pay to any director, officer or
employee of EarthLink or any EarthLink Subsidiary, (iii) adopt any additional
employee benefit plan or, except in the ordinary course of business, make any
contribution to any such existing plan or (iv) except as may be required by law,
amend in any material respect any EarthLink Employee Plan;
(j) change EarthLink's (x) methods of accounting in effect at December 31,
1998, except as required by changes in GAAP or by Regulation S-X of the Exchange
Act, as concurred with by its independent public accountants or (y) fiscal year;
(k) (i) settle, or propose to settle, any litigation, investigation,
arbitration, proceeding or other claim that is material to the business of
EarthLink and the EarthLink Subsidiaries, taken as a whole, other than the
payment, discharge or satisfaction, in the ordinary course of business
consistent with past practice of liabilities (x) recognized or disclosed in the
most recent consolidated financial statements (or the notes thereto) of
EarthLink included in the EarthLink SEC Documents or (y) incurred since the date
of such financial statements in the ordinary course of business consistent with
past practice, or (ii) other than in the ordinary course of business consistent
with past practice, make any tax election or enter into any settlement or
compromise of any tax liability that in either case is material to the business
of EarthLink and the EarthLink Subsidiaries, taken as a whole; or
(l) agree, resolve or commit to do any of the foregoing.
Section 7.2. ACQUISITION PROPOSALS; BOARD RECOMMENDATION.
(a) EarthLink agrees that it shall not, nor shall it permit any EarthLink
Subsidiary to, nor shall it authorize or knowingly permit any officer, director,
employee, investment banker, attorney, accountant, agent or other advisor or
representative of EarthLink or any EarthLink Subsidiary, directly or indirectly,
to (i) solicit, initiate or knowingly facilitate or encourage the submission of
any Acquisition Proposal for EarthLink, (ii) participate in any discussions or
negotiations regarding, or furnish to any Person any information with respect to
or take any other action knowingly to facilitate any inquiries or the making of
any proposal that constitutes an Acquisition Proposal for EarthLink,
(iii) grant any waiver or release under any standstill or similar agreement with
respect to any class of EarthLink's equity securities or (iv) enter into any
agreement with respect to an Acquisition Proposal for
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EarthLink. Without limiting the foregoing, it is understood that any violation
of the restrictions set forth in the preceding sentence by any officer,
director, investment banker, attorney, accountant, agent or other advisor or
representative of EarthLink or any EarthLink Subsidiary, whether or not such
individual is purporting to act on behalf of EarthLink or any EarthLink
Subsidiary or otherwise, shall be deemed to be a breach of this SECTION 7.2 by
EarthLink. EarthLink shall cease and cause to be terminated immediately all
existing discussions or negotiations with any Persons conducted heretofore with
respect to, or that could be reasonably expected to lead to, any Acquisition
Proposal for EarthLink.
(b) Notwithstanding the foregoing, nothing contained in this SECTION 7.2
shall prohibit the Board of Directors of EarthLink from (i) to the extent
applicable, complying with Rules 14d-9 and 14e-2 promulgated under the Exchange
Act with regard to an Acquisition Proposal for EarthLink; and (ii) prior to the
EarthLink Special Meeting, furnishing information to or entering into
discussions or negotiations with, any Person that makes a BONA FIDE proposal or
offer with respect to EarthLink that constitutes an Acquisition Proposal for
EarthLink, if (A) the Board of Directors of EarthLink determines in good faith,
taking into account the advice of outside counsel, that such action is
reasonably likely to be required for the Board of Directors to comply with its
fiduciary duties to stockholders under applicable law; (B) prior to furnishing
such information to, or entering into discussions or negotiations with, such
Person, EarthLink provides written notice to MindSpring of the identity of the
Person making the Acquisition Proposal for EarthLink and that it intends to
furnish information to, or intends to enter into discussions or negotiations
with, such Person; (C) EarthLink enters into a confidentiality agreement with
such Person on terms in the aggregate not more favorable to such Person than the
terms of the letter agreement, dated August 17, 1999, between EarthLink and
MindSpring; (D) EarthLink keeps MindSpring informed on a timely basis of the
status of such negotiations and all material terms and conditions thereof and
promptly provides MindSpring with copies of any and all written inquiries or
proposals relating thereto; and (E) such Acquisition Proposal was not solicited
in violation of SECTION 7.2(A) hereof.
(c) Notwithstanding any other provision of this Agreement, in the event that
an Acquisition Proposal for EarthLink constitutes an EarthLink Superior Proposal
(as defined below), the Board of Directors of EarthLink may withdraw its
recommendation of this Agreement as required under SECTION 3.1 hereof and
recommend such EarthLink Superior Proposal to its stockholders (i) if, but only
if, EarthLink (A) complies fully with this SECTION 7.2 and (B) provides
MindSpring with at least four (4) Business Days' prior written notice of its
intent to withdraw its recommendation of this Agreement and (ii) if, in the
event that during such four (4) Business Days MindSpring makes a counter
proposal to such EarthLink Superior Proposal (the "MINDSPRING COUNTER
PROPOSAL"), the EarthLink Board of Directors in good faith, taking into account
the advice of its outside financial advisors, determines that the MindSpring
Counter Proposal is not at least as favorable to EarthLink's stockholders as the
EarthLink Superior Proposal (taking into account all financial and strategic
considerations and other relevant factors, including relevant legal, financial,
regulatory and other aspects of such proposals, and the conditions, prospects
and time required for completion of such proposal).
(d) For the purposes of this Agreement, an "EARTHLINK SUPERIOR PROPOSAL"
means a BONA FIDE Acquisition Proposal, having no financing contingency, for
more than seventy-five percent (75%) of the aggregate voting power of the
EarthLink Equity Securities and made by a Person other than an affiliate of
EarthLink that the Board of Directors of EarthLink believes in good faith,
(x) taking into account the advice of its outside financial advisors, to be
superior, from a financial point of view, to the stockholders of EarthLink than
the proposal set forth in this Agreement and (y) to be more favorable generally
to the stockholders of EarthLink (taking into account all financial and
strategic considerations and other relevant factors, including relevant legal,
financial, regulatory and other aspects of such proposals, and the conditions,
prospects and time required for completion of such proposal); PROVIDED THAT the
Board of Directors of EarthLink has determined in good faith, taking into
account the advice
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of its outside legal counsel, that it is reasonably likely to be required to
recommend such proposal to the EarthLink stockholders to comply with its
fiduciary duties to stockholders under applicable law.
(e) For the purposes of this Agreement, "EARTHLINK EQUITY SECURITIES" means
(i) any EarthLink common stock; (ii) any EarthLink preferred stock; (iii) any
debt or equity securities of EarthLink convertible into or exchangeable for
EarthLink common stock or preferred stock (on a fully-converted basis); and
(iv) any options, warrants or rights (or any other similar securities) issued by
EarthLink to acquire EarthLink common stock or preferred stock (on a
fully-converted basis).
(f) Nothing in this SECTION 7.2 shall (i) permit EarthLink to terminate this
Agreement (except as specifically provided in ARTICLE XI hereof) or (ii) affect
any other obligation of EarthLink under this Agreement.
ARTICLE VIII
COVENANTS OF MINDSPRING
MindSpring agrees that:
Section 8.1. MINDSPRING INTERIM OPERATIONS.
Except as set forth in the MindSpring Disclosure Schedule or as otherwise
expressly contemplated hereby, without the prior consent of EarthLink (which
consent shall not be unreasonably withheld or delayed), from the date hereof
until the Effective Time, MindSpring shall and shall cause each of the
MindSpring Subsidiaries to, conduct their business in all material respects in
the ordinary course consistent with past practice and shall use commercially
reasonable efforts to (i) preserve intact its present business organization,
(ii) maintain in effect all material foreign, federal, state and local licenses,
approvals and authorizations, including, without limitation, all material
licenses and permits that are required for MindSpring or any MindSpring
Subsidiary to carry on its business and (iii) preserve existing relationships
with its material customers, lenders, suppliers and others having material
business relationships with it. Without limiting the generality of the
foregoing, except as otherwise expressly contemplated by this Agreement, from
the date hereof until the Effective Time, without the prior consent of EarthLink
(which consent shall not be unreasonably withheld or delayed), MindSpring shall
not, not shall it permit any MindSpring Subsidiary to:
(a) amend its certificate of incorporation or by-laws;
(b) split, combine or reclassify any shares of capital stock of MindSpring
or any less-than-wholly-owned MindSpring Subsidiary or declare, set aside or pay
any dividend or other distribution (whether in cash, stock or property, or any
combination thereof) in respect of its capital stock or redeem, repurchase or
otherwise acquire or offer to redeem, repurchase, or otherwise acquire any of
its securities or any securities of any MindSpring Subsidiary;
(c) (i) issue, deliver or sell, or authorize the issuance, delivery or sale
of, any shares of its capital stock of any class or any securities convertible
into or exercisable for, or any rights, warrants or options to acquire, any such
capital stock or any such convertible securities, other than (A) options to
purchase up to an aggregate of 500,000 shares of its capital stock, plus an
additional number of shares of capital stock equal to that number of shares
underlying options forfeited prior to the Closing by former MindSpring
employees, pursuant to the MindSpring Employee Plans, (B) MindSpring Common
Stock upon the exercise of stock options or warrants in accordance with their
present terms or upon exercise of options issued pursuant to clause (A) of this
SECTION 8.1(C)(I); or (C) MindSpring Common Stock upon the conversion of the
MindSpring Notes; or (ii) amend in any material respect any material term of any
outstanding security of MindSpring or any MindSpring Subsidiary;
(d) other than in connection with transactions not prohibited by
SECTION 8.1(E), incur any capital expenditures or any obligations or liabilities
in respect thereof, except for those (i) contemplated by the
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capital expenditure budgets for MindSpring and the MindSpring Subsidiaries made
available to EarthLink, or (ii) incurred in the ordinary course of business of
MindSpring and the MindSpring Subsidiaries;
(e) acquire (whether pursuant to cash merger, stock or asset purchase or
otherwise) in one transaction or series of related transactions (i) any assets
(including any equity interests) having a fair market value in excess of
$5 million (which amount shall exclude any amounts for such transactions set
forth in the capital expenditure budget described in SECTION 8.1(D) hereof), or
(ii) all or substantially all of the equity interests of any Person or any
business or division of any Person having a fair market value in excess of
$5 million (which amount shall exclude any amounts for such transactions set
forth in the capital expenditure budget described in SECTION 8.1(D) hereof);
(f) sell, lease, encumber or otherwise dispose of any assets, other than
(i) sales in the ordinary course of business consistent with past practice,
(ii) equipment and property no longer used in the operation of MindSpring's
business and (iii) assets related to discontinued operations of MindSpring or
any MindSpring Subsidiary;
(g) incur (which shall not be deemed to include entering into credit
agreements, lines of credit or similar arrangements until MindSpring or any
MindSpring Subsidiary becomes liable with respect to any indebtedness for
borrowed money or guarantees thereof under such arrangements) any indebtedness
for borrowed money or guarantee any such indebtedness or issue or sell any debt
securities or warrants or rights to acquire any debt securities of MindSpring or
any MindSpring Subsidiary or guarantee any debt securities of others, except in
the ordinary course of business consistent with past practice (which shall
include, without limitation, borrowings under MindSpring's existing credit
agreements and overnight borrowings).
(h) (i) enter into any agreement or arrangement that limits or otherwise
restricts MindSpring, any MindSpring Subsidiary or any of their respective
Affiliates or any successor thereto or that would, after the Effective Time,
limit or restrict MindSpring, any MindSpring Subsidiary or Newco, or any of
their respective Affiliates, from engaging or competing in any line of business
or in any location, which agreement or arrangement would be material to the
business of MindSpring and the MindSpring Subsidiaries or the business of Newco
(assuming the Mergers had taken place), in either case taken as a whole or
(ii) except in the ordinary course of business, amend, modify or terminate any
material contract, agreement or arrangement of MindSpring or any MindSpring
Subsidiary or otherwise waive, release or assign any material rights, claims or
benefits of MindSpring or any MindSpring Subsidiary thereunder;
(i) (i) except in the ordinary course of business consistent with past
practice or as required by law or an existing agreement, increase the amount of
compensation of any director or executive officer or make any increase in or
commitment to increase any employee benefits, (ii) except as required by law, an
agreement existing on the date hereof or MindSpring severance policy as of the
date hereof, grant any severance or termination pay to any director, officer or
employee of MindSpring or any MindSpring Subsidiary, (iii) adopt any additional
employee benefit plan or, except in the ordinary course of business, make any
contribution to any existing such plan or (iv) except as may be required by law,
amend in any material respect any MindSpring Employee Plan;
(j) change MindSpring's (x) methods of accounting in effect at December 31,
1998, except as required by changes in GAAP or by Regulations S-X of the
Exchange Act, as concurred with by its independent public accountants or
(y) fiscal year;
(k) (i) settle, or propose to settle, any litigation, investigation,
arbitration, proceeding or other claim that is material to the business of
MindSpring and the MindSpring Subsidiaries, taken as a whole, other than the
payment, discharge or satisfaction, in the ordinary course of business
consistent with past practice of liabilities (x) recognized or disclosed in the
most recent consolidated financial
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statements (or the notes thereto) of MindSpring included in the MindSpring SEC
Documents or (y) incurred since the date of such financial statements in the
ordinary course of business consistent with past practice, or (ii) other than in
the ordinary course of business consistent with past practice, make any tax
election or enter into any settlement or compromise of any tax liability that in
either case is material to the business of MindSpring and the MindSpring
Subsidiaries, taken as a whole; or
(l) agree, resolve or commit to do any of the foregoing.
Section 8.2. ACQUISITION PROPOSALS; BOARD RECOMMENDATION.
(a) MindSpring agrees that it shall not, nor shall it permit any MindSpring
Subsidiary to, nor shall it authorize or knowingly permit any officer, director,
employee, investment banker, attorney, accountant, agent or other advisor or
representative of MindSpring or any MindSpring Subsidiary, directly or
indirectly, to (i) solicit, initiate or knowingly facilitate or encourage the
submission of any Acquisition Proposal for MindSpring, (ii) participate in any
discussions or negotiations regarding, or furnish to any Person any information
with respect to, or take any other action knowingly to facilitate any inquiries
or the making of any proposal that constitutes an Acquisition Proposal for
MindSpring, (iii) grant any waiver or release under any standstill or similar
agreement with respect to any class of MindSpring equity securities or
(iv) enter into any agreement with respect to any Acquisition Proposal for
MindSpring. Without limiting the foregoing, it is understood that any violation
of the restrictions set forth in the preceding sentence by any officer,
director, investment banker, attorney, accountant, agent or other advisor or
representative of MindSpring or any MindSpring Subsidiary, whether or not such
individual is purporting to act on behalf of MindSpring or any MindSpring
Subsidiary, or otherwise, shall be deemed to be a breach of this SECTION 8.2 by
MindSpring. MindSpring shall cease and cause to be terminated immediately all
existing discussions or negotiations with any Persons conducted heretofore with
respect to, or that could be reasonably expected to lead to, any Acquisition
Proposal for MindSpring.
(b) Notwithstanding the foregoing, nothing contained in this SECTION 8.2
shall prohibit the Board of Directors of MindSpring from (i) to the extent
applicable, complying with Rules 14d-9 and 14e-2 promulgated under the Exchange
Act with regard to an Acquisition Proposal for MindSpring; and (ii) prior to the
MindSpring Special Meeting, furnishing information to or entering into
discussions or negotiations with, any Person that makes a bona fide proposal or
offer with respect to MindSpring that constitutes an Acquisition Proposal for
MindSpring, if: (A) the Board of Directors of MindSpring determines in good
faith, taking into account the advice of outside counsel, that such action is
reasonably likely to be required for the Board of Directors to comply with its
fiduciary duties to stockholders under applicable law; (B) prior to furnishing
such information to, or entering into discussions or negotiations with, such
Person, MindSpring provides written notice to EarthLink of the identity of the
Person making the Acquisition Proposal for MindSpring and that it intends to
furnish information to, or intends to enter into discussions or negotiations
with, such Person; (C) MindSpring enters into a confidentiality agreement with
such Person on terms in the aggregate not more favorable to such Person than the
terms of the letter agreement, dated August 17, 1999, between MindSpring and
EarthLink; (D) MindSpring keeps EarthLink informed on a timely basis of the
status of such negotiations and all material terms and conditions thereof and
promptly provides EarthLink with copies of any and all written inquiries or
proposals relating thereto; and (E) such Acquisition Proposal was not solicited
in violation of SECTION 8.2(A).
(c) Notwithstanding any other provision of this Agreement, in the event that
an Acquisition Proposal for MindSpring constitutes a MindSpring Superior
Proposal (as defined below), the Board of Directors of MindSpring may withdraw
its recommendation of this Agreement as required under SECTION 3.1 hereof and
recommend such MindSpring Superior Proposal to its stockholders (i) if, but only
if, MindSpring (A) complies fully with this SECTION 8.2 and (B) provides
EarthLink with at least four (4) Business Days' prior written notice of its
intent to withdraw its recommendation of this
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Agreement and (ii) if, in the event that during such four (4) Business Days
EarthLink makes a counter proposal to such MindSpring Superior Proposal (the
"EARTHLINK COUNTER PROPOSAL"), the MindSpring Board of Directors in good faith,
taking into account the advice of its outside financial advisors, determines
that the EarthLink Counter Proposal is not at least as favorable to MindSpring's
stockholders as the MindSpring Superior Proposal (taking into account all
financial and strategic considerations and other relevant factors, including
relevant legal, financial, regulatory and other aspects of such proposals, and
the conditions, prospects and time required for completion of such proposal).
(d) For the purposes of this Agreement, a "MINDSPRING SUPERIOR PROPOSAL"
means a BONA FIDE Acquisition Proposal, having no financing contingency, for
more than seventy-five percent (75%) of the aggregate voting power of the
MindSpring Equity Securities and made by a Person other than an affiliate of
MindSpring that the Board of Directors of MindSpring believes in good faith,
(x) taking into account the advice of its outside financial advisors, to be
superior, from a financial point of view, to the stockholders of MindSpring than
the proposal set forth in this Agreement and (y) to be more favorable generally
to the stockholders of MindSpring (taking into account all financial and
strategic considerations and other relevant factors, including relevant legal,
financial, regulatory and other aspects of such proposals, and the conditions,
prospects and time required for completion of such proposal); PROVIDED THAT the
Board of Directors of MindSpring has determined in good faith, taking into
account the advice of its outside legal counsel, that it is reasonably likely to
be required to recommend such proposal to the MindSpring stockholders to comply
with its fiduciary duties to stockholders under applicable law.
(e) For the purposes of this Agreement, "MINDSPRING EQUITY SECURITIES"
means: (i) any MindSpring common stock; (ii) any MindSpring preferred stock;
(iii) any debt or equity securities of MindSpring convertible into or
exchangeable for MindSpring common stock or preferred stock (on a
fully-converted basis); and (iv) any options, warrants or rights (or any other
similar securities) issued by MindSpring to acquire MindSpring common stock or
preferred stock (on a fully-converted basis).
(f) Nothing in this SECTION 8.2 shall (i) permit MindSpring to terminate
this Agreement (except as specifically provided in ARTICLE XI hereof) or
(ii) affect any other obligation of MindSpring under this Agreement.
ARTICLE IX
COVENANTS OF MINDSPRING, NEWCO AND EARTHLINK
The parties hereto agree that:
Section 9.1. REASONABLE BEST EFFORTS.
Subject to the terms and conditions hereof, each party will use reasonable
best efforts to take, or cause to be taken, all actions and to do, or cause to
be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate the transactions contemplated by this Agreement as
promptly as practicable. In furtherance of the parties' undertakings pursuant to
this SECTION 9.1, the parties shall cooperate in good faith to take such actions
as they deem necessary to satisfy the closing conditions set forth in
SECTION 10.2(D) hereof.
Section 9.2. CERTAIN FILINGS; COOPERATION IN RECEIPT OF CONSENTS; LISTING.
Promptly after the date hereof, MindSpring, EarthLink and Newco shall
prepare and Newco shall file with the SEC the Registration Statement, in which
the Joint Proxy Statement/Prospectus will be included as Newco's prospectus.
Each of MindSpring and EarthLink shall use all reasonable efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing and to keep the Registration Statement
effective as long as is necessary to consummate
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the Mergers. Each of MindSpring and EarthLink shall mail the Joint Proxy
Statement/Prospectus to their respective stockholders as promptly as practicable
after the Registration Statement is declared effective under the Securities Act
and, if necessary, after the Joint Proxy Statement/Prospectus shall have been so
mailed, promptly circulate amended, supplemental or supplemented proxy material,
and, if required in connection therewith, resolicit proxies. EarthLink and
MindSpring shall cause Newco to take any action required to be taken under any
applicable state securities or blue sky laws in connection with the issuance of
shares of Newco Common Stock in the Mergers.
(a) No amendment or supplement to the Joint Proxy Statement/Prospectus will
be made by Newco, MindSpring or EarthLink without the approval of the other
parties, which will not be unreasonably withheld or delayed. Each party will
advise the other parties, promptly after it receives notice thereof, of (i) the
time when the Registration Statement has become effective or any supplement or
amendment has been filed, (ii) the issuance of any stop order, (iii) the
suspension of the qualification of the shares of Newco Common Stock issuable in
connection with the Mergers for offering or sale in any jurisdiction, or
(iv) any request by the SEC for amendment of the Joint Proxy
Statement/Prospectus or comments thereon and responses thereto or requests by
the SEC for additional information. If at any time prior to the Effective Time,
MindSpring or EarthLink discovers any information relating to either party, or
any of their respective Affiliates, officers or directors, that should be set
forth in an amendment or supplement to the Joint Proxy Statement/Prospectus, so
that such document would not include any misstatement of a material fact or omit
to state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, the party that
discovers such information shall promptly notify the other parties hereto and an
appropriate amendment or supplement describing such information shall be
promptly filed with the SEC and, to the extent required by law or regulation,
disseminated to the stockholders of MindSpring or EarthLink.
(b) MindSpring and EarthLink shall cooperate with one another in
(i) determining whether any other action by or in respect of, or filing with,
any Governmental Entity is required, or any actions, consents, approvals or
waivers are required to be obtained from parties to any material contracts, in
connection with the consummation of the transactions contemplated hereby,
(ii) seeking any such other actions, consents, approvals or waivers or making
any such filings, furnishing information required in connection therewith and
seeking promptly to obtain any such actions, consents, approvals or waivers and
(iii) setting a mutually acceptable date for the Special Meetings, so as to
enable them to occur, to the extent practicable, on the same date. Each party
shall permit the other party to review any communication given by it to, and
consult with each other in advance of any meeting or conference with, any
Governmental Entity or, in connection with any proceeding by a private party,
with any other Person, and to the extent permitted by the applicable
Governmental Entity or other Person, give the other party the opportunity to
attend and participate in such meetings and conferences, in each case in
connection with the transactions contemplated hereby.
(c) Newco, EarthLink and MindSpring agree to use their respective reasonable
best efforts to cause the shares of Newco Common Stock to be issued upon
conversion of shares of EarthLink Common Stock and MindSpring Common Stock in
accordance with this Agreement and the Certificates of Merger to be approved for
listing upon issuance on the Nasdaq Stock Market with the ticker symbol "ELNK."
Section 9.3. PUBLIC ANNOUNCEMENTS.
The parties shall consult with each other before issuing any press release
or making any public statement with respect to this Agreement and the
transactions contemplated hereby and, except as may be required by applicable
law or any listing agreement with any national securities exchange association,
will not issue any such press release or make any such public statement prior to
such consultation.
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Section 9.4. ACCESS TO INFORMATION, NOTIFICATION OF CERTAIN MATTERS.
(a) From the date hereof until the Effective Time and subject to applicable
law, MindSpring and EarthLink shall (i) give to the other party, its counsel,
financial advisors, auditors and other authorized representatives reasonable
access to the offices, properties, books and records of such party,
(ii) furnish or make available to the other party, its counsel, financial
advisors, auditors and other authorized representatives such financial and
operating data and other information as such Persons may reasonably request and
(iii) instruct its employees, counsel, financial advisors, auditors and other
authorized representatives to cooperate with the reasonable requests of the
other party in its investigation. Any investigation pursuant to this
SECTION 9.4 shall be conducted in such manner as not to interfere unreasonably
with the conduct of the business of the other party. Unless otherwise required
by law, each of EarthLink and MindSpring will hold, and will cause its
respective officers, employees, counsel, financial advisors, auditors and other
authorized representatives to hold, any nonpublic information obtained in any
such investigation in confidence in accordance with SECTION 9.8. No information
or knowledge obtained in any investigation pursuant to this SECTION 9.4 shall
affect or be deemed to modify any representation or warranty made by any party
hereunder.
(b) Each party hereto shall give prompt notice to each other party hereto
of:
(i) any communication received by such party from, or given by such
party to, any Governmental Entity in connection with any of the transactions
contemplated hereby; and
(ii) any actions, suits, claims, investigations or proceedings commenced
or, to its Knowledge, threatened against, relating to or involving or
otherwise affecting such party or any of its Subsidiaries that, if pending
on the date of this Agreement, would have been required to have been
disclosed pursuant to this Agreement or that relate to the consummation of
the transactions contemplated by this Agreement
PROVIDED, HOWEVER, that the delivery of any notice pursuant to this
SECTION 9.4(B) shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
Section 9.5. FURTHER ASSURANCES.
At and after the Effective Time, the officers and directors of Newco will be
authorized to execute and deliver, in the name and on behalf of EarthLink or
MindSpring, any deeds, bills of sale, assignments or assurances and to take and
do, in the name and on behalf of EarthLink or MindSpring, any other actions and
things to vest, perfect or confirm of record or otherwise in Newco any and all
right, title and interest in, to and under any of the rights, properties or
assets of MindSpring or EarthLink acquired or to be acquired by Newco as a
result of, or in connection with the Mergers.
Section 9.6. TAX AND ACCOUNTING TREATMENT.
(a) Prior to the Effective Time, each party shall use its best efforts to
cause each of the Mergers to qualify as a 368 Reorganization, and will not take
any action reasonably likely to cause the Mergers not so to qualify. Newco shall
not take any action after the Effective Time reasonably likely to cause either
of the Mergers not to qualify as a 368 Reorganization.
(b) Each party will use its best efforts to cause the Mergers to qualify for
"pooling of interest" accounting treatment as described in SECTION 5.21 and
SECTION 6.21, and will not take any action reasonably likely to cause the
Mergers not so to qualify.
(c) Each party shall use its best efforts to obtain the opinions referred to
in SECTION 10.1(F).
Section 9.7. AFFILIATE LETTERS.
(a) Within 30 days following the date hereof, EarthLink shall cause to be
delivered to Newco a letter identifying, to the best of EarthLink's Knowledge,
all Persons who may be deemed to be
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"affiliates" of EarthLink for purposes of Rule 145(c) under the Securities Act.
EarthLink shall use commercially reasonable efforts to cause each such Person
who is so identified to deliver to Newco on or prior to the Effective Time a
letter agreement substantially in the form of EXHIBIT 11-A to this Agreement.
(b) Within 30 days following the date hereof, MindSpring shall cause to be
delivered to Newco a letter identifying, to the best of MindSpring's Knowledge,
all Persons who may be deemed to be "affiliates" of MindSpring for purposes of
Rule 145(c) under the Securities Act. MindSpring shall use commercially
reasonable efforts to cause each such Person who is so identified to deliver to
Newco on or prior to the Effective Time a letter agreement substantially in the
form of EXHIBIT 11-B to this Agreement.
Section 9.8. CONFIDENTIALITY.
(a) Prior to the Effective Time and after any termination of this Agreement
each party hereto will hold, and will use its best efforts to cause its
officers, directors, employees, accountants, counsel, consultants, advisors,
affiliates (as such term is used in Rule 12b-2 under the Exchange Act) and
representatives (collectively, the "REPRESENTATIVES"), to hold, in confidence
all confidential documents and information concerning the other parties hereto
and the Subsidiaries furnished to such party in connection with the transactions
contemplated by this Agreement, including, without limitation, all analyses,
compilations, studies or records prepared by the party receiving the information
or by such party's Representatives, that contain or otherwise reflect or are
generated from such information (collectively, the "CONFIDENTIAL MATERIAL"). The
party furnishing any Confidential Material is herein referred to as the
"DELIVERING COMPANY" and the party receiving any Confidential Material is herein
referred to as the "RECEIVING COMPANY."
(b) The Receiving Company agrees that the Confidential Material will not be
used other than for the purpose of the transaction contemplated by this
Agreement, and that such information will be kept confidential by the Receiving
Company and its Representatives; provided, however, that (i) any of such
information may be disclosed to the Representatives who need to know such
information for the purpose described above (it being understood that (a) each
such Representative shall be informed by the Receiving Company of the
confidential nature of such information, shall be directed by the Receiving
Company to treat such information confidentially and not to use it other than
for the purpose described above and shall agree to be bound by the terms of this
SECTION 9.8, and (b) in any event, the Receiving Company shall be responsible
for any breach of this Agreement by any of its Representatives), and (ii) any
other disclosure of such information may be made if the Delivering Company has,
in advance, consented to such disclosure in writing. The Receiving Company will
make all reasonable, necessary and appropriate efforts to safeguard the
Confidential Material from disclosure to anyone other than as permitted hereby.
(c) Notwithstanding the foregoing, if the Receiving Company or any of its
Representatives is requested or required (by oral question or request for
information or documents in legal proceedings, interrogatories, subpoena, civil
investigative demand or similar process) to disclose any Confidential Material,
the Receiving Company will promptly notify the Delivering Company of such
request or requirement so that the Delivering Company may seek an appropriate
protective order and/or waive the Receiving Company's compliance with the
provisions or this Agreement. If, in the absence of a protective order or the
receipt of a waiver hereunder, the Receiving Company or any of its
Representatives is nonetheless, in the reasonable written opinion of the
Receiving Company's counsel, compelled to disclose Confidential Material to any
tribunal, the Receiving Company or such Representative, after notice to the
Delivering Company, may disclose such information to such tribunal. The
Receiving Party shall exercise reasonable efforts to obtain reliable assurance
that confidential treatment will be accorded the Confidential Material so
disclosed. The Receiving Company or such Representative shall not be liable for
the disclosure of Confidential Material hereunder to a tribunal
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compelling such disclosure unless such disclosure to such tribunal was caused by
or resulted from a previous disclosure by the Receiving Company or any of its
Representatives not permitted by this Agreement.
(d) This SECTION 9.8 shall be inoperative as to particular portions of the
Confidential Material if such information (i) is or becomes generally available
to the public other than as a result of a disclosure by the Receiving Company or
its Representatives, (ii) was available to the Receiving Company on a
non-confidential basis prior to its disclosure to the Receiving Company by the
Delivering Company or the Delivering Company's Representatives, or
(iii) becomes available to the Receiving Company on a non-confidential basis
from a source other than the Delivering Company or the Delivering Company's
Representatives, provided that such source is not known by the Receiving
Company, after reasonable inquiry, to be bound by a confidentiality agreement
with the Delivering Company or the Delivering Company's Representatives and is
not otherwise prohibited from transmitting the information to the Receiving
Company by a contractual, legal or fiduciary obligation. The fact that
information included in the Confidential Material is or becomes otherwise
available to the Receiving Company or its Representatives under clauses
(i) through (iii) above shall not relieve the Receiving Company or its
Representatives of the prohibitions of the confidentiality provisions of this
SECTION 9.8 with respect to the balance of the Confidential Material.
(e) If this Agreement is terminated, each party hereto will, and will use
its best efforts to cause its officers, directors, employees, accountants,
counsel, consultants, advisors and agents to, destroy or deliver to the party
from whom such Confidential Material was obtained, upon request, all documents
and other materials, and all copies thereof, obtained by such party or on its
behalf from any such other parties in connection with this Agreement that are
subject to such confidence.
Section 9.9. MINDSPRING STANDSTILL.
If this Agreement is terminated, then, for two years after the date of such
termination, MindSpring and each of its successors or assigns will not, and will
cause its Affiliates not to:
(i) except pursuant to a Stock Option Agreement, acquire, offer or
propose or otherwise seek to acquire, or agree to acquire, directly or
indirectly, by merger, purchase or otherwise, beneficial ownership of any
assets or in excess of 5% of any class of securities of EarthLink or its
Affiliates or any direct rights or options to acquire (through purchase,
exchange, conversion or otherwise) any assets or in excess of 5% of any
class of securities of EarthLink or its Affiliates;
(ii) make, or in any way participate in, directly or indirectly, any
"solicitation" of "proxies" (as such terms are defined in Rule 14a-1 of
Regulation 14A promulgated by the SEC as of the date hereof, disregarding
clause (iv) of Rule 14a-1(1)(2), but including any solicitation exempted
pursuant to Rule 14a-2(b)(1) to vote (including by the execution of actions
by written consent)), or seek to advise, encourage or influence any person
or entity with respect to the voting of, any voting securities of EarthLink;
(iii) call, or in any way participate in a call for, any meeting of
stockholders of EarthLink (or take any action with respect to stockholders
acting by written consent);
(iv) form, join or in any way participate in a "GROUP" (within the
meaning of Section 13(d)(3) of the Exchange Act) with respect to any voting
securities of EarthLink;
(v) effect or seek, offer or propose (whether publicly or otherwise) to
effect, cause or participate in or in any way assist any other Person to
effect or seek, offer or propose (whether publicly or otherwise) to effect
or participate in any tender or exchange offer or merger or other business
combination involving EarthLink or any EarthLink Subsidiary; or
(vi) otherwise act, alone or in concert, to control or influence, or
seek to control or influence, EarthLink or the management, Board of
Directors, policies or affairs of EarthLink, including
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without limitation, (A) making any offer or proposal to acquire any
securities or assets of EarthLink or any of its Affiliates or soliciting or
proposing to effect or negotiate any form of business combination,
restructuring, recapitalization or other extraordinary transaction involving
EarthLink, its Affiliates or any of their respective securities or assets,
(B) seeking board representation or the removal of any directors or a change
in the composition or size of the Board of Directors of EarthLink,
(C) making any request to amend or waive any provision of this SECTION 9.9,
including, without limitation, this SUBSECTION (C), (D) disclosing any
intent, purpose, plan or proposal with respect to matters covered by this
SECTION 9.9 or EarthLink, its Affiliates or the boards of directors,
management, policies or affairs or securities or assets of EarthLink or its
Affiliates that is inconsistent with this SECTION 9.9, including an intent,
purpose, plan or proposal that is conditioned on, or would require, waiver,
amendment, nullification or invalidation of any provision of this
SECTION 9.9; or take any action that could require EarthLink or any of its
Affiliates to make any public disclosure relating to any such intent,
purpose, plan, proposal or condition, or (E) assisting, advising or
encouraging any person with respect to, or seeking to do, any of the
foregoing;
PROVIDED, HOWEVER, that this SECTION 9.9 shall not apply if EarthLink does not
pay any portion of the Termination Fee when due or if MindSpring terminates this
Agreement as a result of a willful breach of this Agreement by EarthLink;
PROVIDED, FURTHER, that, if this SECTION 9.9 is effective against MindSpring
(and each of its successors and their respective Affiliates) during any such
two-year period after the date of any such termination, and either
(x) EarthLink shall have entered into an agreement with respect to any
transaction that constitutes an Acquisition Proposal for EarthLink (assuming for
this purpose that this Agreement had been effective at such time) for at least a
majority of either the voting securities of EarthLink then outstanding or the
assets of EarthLink and the EarthLink Subsidiaries, taken as a whole, or
(y) any Person or "GROUP" (as defined in Section 13(d)(3) of the Exchange Act)
(other than EarthLink or any of its Affiliates, excluding, for this purpose,
EarthLink's management acting independently of EarthLink)) shall have commenced
any tender or exchange offer that constitutes an Acquisition Proposal for
EarthLink (assuming for this purpose that this Agreement had been effective at
such time) for at least a majority of the voting securities of EarthLink then
outstanding which offer is recommended by EarthLink's Board of Directors to its
stockholders, then at the time of the public announcement of such agreement or
of the commencement of such offer, as applicable, this SECTION 9.9 shall
terminate and have no further force or effect and there shall be no rights,
liabilities or obligations under this SECTION 9.9 on the part of MindSpring,
EarthLink, Newco or any of their respective officers, directors, stockholders,
agents or Affiliates.
Section 9.10. EARTHLINK STANDSTILL.
If this Agreement is terminated, then, for two years after the date of such
termination, EarthLink and each of its successors or assigns will not, and will
cause its Affiliates not to:
(i) except pursuant to a Stock Option Agreement, acquire, offer or
propose or otherwise seek to acquire, or agree to acquire, directly or
indirectly, by merger, purchase or otherwise, beneficial ownership of any
assets or in excess of 5% of any class of securities of MindSpring or its
Affiliates or any direct rights or options to acquire (through purchase,
exchange, conversion or otherwise) any assets or in excess of 5% of any
class of securities of MindSpring or its Affiliates;
(ii) make, or in any way participate in, directly or indirectly, any
"solicitation" of "proxies" (as such terms are defined in Rule 14a-1 of
Regulation 14A promulgated by the SEC as of the date hereof, disregarding
clause (iv) of Rule 14a-1(1)(2), but including any solicitation exempted
pursuant to Rule 14a-2(b)(1) to vote (including by the execution of actions
by written consent)), or seek to advise, encourage or influence any person
or entity with respect to the voting of, any voting securities of
MindSpring;
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(iii) call, or in any way participate in a call for, any meeting of
stockholders of MindSpring (or take any action with respect to stockholders
acting by written consent);
(iv) form, join or in any way participate in a "GROUP" (within the
meaning of Section 13(d)(3) of the Exchange Act) with respect to any voting
securities of MindSpring;
(v) effect or seek, offer or propose (whether publicly or otherwise) to
effect, cause or participate in or in any way assist any other Person to
effect or seek, offer or propose (whether publicly or otherwise) to effect
or participate in any tender or exchange offer or merger or other business
combination involving MindSpring or any MindSpring Subsidiary; or
(vi) otherwise act, alone or in concert, to control or influence, or
seek to control or influence, MindSpring or the management, Board of
Directors, policies or affairs of MindSpring, including without limitation,
(A) making any offer or proposal to acquire any securities or assets of
MindSpring or any of its Affiliates or soliciting or proposing to effect or
negotiate any form of business combination, restructuring, recapitalization
or other extraordinary transaction involving MindSpring, its Affiliates or
any of their respective securities or assets, (B) seeking board
representation or the removal of any directors or a change in the
composition or size of the Board of Directors of MindSpring, (C) making any
request to amend or waive any provision of this SECTION 9.10, including,
without limitation, this SUBSECTION (C), (D) disclosing any intent, purpose,
plan or proposal with respect to matters covered by this SECTION 9.10 or
MindSpring, its Affiliates or the boards of directors, management, policies
or affairs or securities or assets of MindSpring or its Affiliates that is
inconsistent with this SECTION 9.10, including an intent, purpose, plan or
proposal that is conditioned on, or would require, waiver, amendment,
nullification or invalidation of any provision of this SECTION 9.10, or take
any action that could require MindSpring or any of its Affiliates to make
any public disclosure relating to any such intent, purpose, plan, proposal
or condition, or (E) assisting, advising or encouraging any person with
respect to, or seeking to do, any of the foregoing;
PROVIDED, HOWEVER, that this SECTION 9.10 shall not apply if MindSpring does not
pay any portion of the Termination Fee when due or if EarthLink terminates this
Agreement as a result of a willful breach of this Agreement by MindSpring;
PROVIDED, FURTHER, that, if this SECTION 9.10 is effective against EarthLink
(and each of its successors and their respective Affiliates) during any such
two-year period after the date of any such termination, and either
(x) MindSpring shall have entered into an agreement with respect to any
transaction that constitutes an Acquisition Proposal for MindSpring (assuming
for this purpose that this Agreement had been effective at such time) for at
least a majority of either the voting securities of MindSpring then outstanding
or the assets of MindSpring and the MindSpring Subsidiaries, taken as a whole,
or (y) any Person or "GROUP" (as defined in Section 13(d)(3) of the Exchange
Act) (other than MindSpring or any of its Affiliates, excluding, for this
purpose, MindSpring's management acting independently of MindSpring)) shall have
commenced any tender or exchange offer that constitutes an Acquisition Proposal
of MindSpring (assuming for this purpose that this Agreement had been effective
at such time) for at least a majority of the voting securities of MindSpring
then outstanding which offer is recommended by MindSpring's Board of Directors
to its stockholders, then at the time of the public announcement of such
agreement or of the commencement of such offer, as applicable, this
SECTION 9.10 shall terminate and have no further force or effect and there shall
be no rights, liabilities or obligations under this SECTION 9.10 on the part of
EarthLink, MindSpring, Newco or any of their respective officers, directors,
stockholders, agents or Affiliates.
Section 9.11. ASR 135.
Newco shall use its best efforts to publish as promptly as reasonably
practical, but in no event later than 90 days after the end of the first month
after the Effective Time in which there are at least 30 days of post-Mergers
combined operations (which month may be the month in which the Effective
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Time occurs), combined sales and net income figures as contemplated by and in
accordance with the terms of SEC Accounting Series Release No. 135.
Section 9.12. BENEFIT MATTERS.
EarthLink and MindSpring will work together to design benefit plans to be
adopted by Newco for the benefit of its employees as soon as practicable
following the Mergers. Until such adoption, Newco shall cause all EarthLink
Employee Plans and all MindSpring Employee Plans to be maintained in full force
and effect.
Section 9.13. ANTITRUST MATTERS.
(a) The parties hereto promptly will complete all documents required to be
filed with the Federal Trade Commission and the Department of Justice in order
to comply with the HSR Act and, together with the Persons who are required to
join in such filings, will file the same with the appropriate Governmental
Entities. The parties hereto promptly will furnish all materials thereafter
required by any of the Governmental Entities having jurisdiction over such
filings and will take all reasonable actions and file and use all reasonable
efforts to have declared effective or approved all documents and notifications
with any such Governmental Entities, as may be required under the HSR Act for
the consummation of the Mergers.
(b) The parties hereto will use their best efforts to resolve such
objections, if any, as may be asserted with respect to the transactions
contemplated by this Agreement under any antitrust, competition or trade
regulatory laws, rules or regulations of any domestic or foreign Governmental
Entity ("ANTITRUST LAWS"). If any suit is threatened or instituted challenging
the Mergers as violating any Antitrust Law, the parties hereto will take such
action as may be required (i) by the applicable Governmental Entity in order to
resolve such objections as such Governmental Entity may have to such
transactions under such Antitrust Law or (ii) by any domestic or foreign court
or similar tribunal, in any suit brought by a private party or governmental
authority challenging the Mergers as violating any Antitrust Law, in order to
avoid the entry of, or to effect the dissolution of, any injunction, temporary
restraining order or other order that has the effect of preventing the
consummation of the Mergers. The entry by a court, in any suit brought by a
private party or Governmental Entity challenging the Mergers as violating any
Antitrust Law, of an order or decree permitting the Mergers but requiring that
any of the businesses or assets of any party hereto be divested or held separate
by Newco, or that would otherwise limit Newco's freedom of action with respect
to, or its ability to retain, both MindSpring and EarthLink or any portion
thereof, will not be deemed a failure to satisfy the conditions specified in
SECTION 10.1(E).
(c) Each party promptly will inform the others of any material communication
from the Federal Trade Commission, the Department of Justice, the FCC or any
other domestic or foreign Governmental Entity regarding any of the transactions
contemplated by this Agreement. If any party or any Affiliate thereof receives a
request for additional information or documentary material from any such
government or authority with respect to the transactions contemplated by this
Agreement, such party will endeavor in good faith to make, as soon as reasonably
practicable and after consultation with the other parties, an appropriate
response to such request. Each party hereto promptly will advise the other
parties hereto in respect of any understandings, undertakings or agreements
which the advising party proposes to make or enter into with the Federal Trade
Commission, the Department of Justice or any other domestic or foreign
Governmental Entity in connection with the transactions contemplated by this
Agreement.
Section 9.14. EXEMPTION FROM LIABILITY UNDER SECTION 16(B).
(a) Provided that MindSpring delivers to Newco the Section 16 Information
with respect to MindSpring prior to the Effective Time, the Board of Directors
of Newco, or a committee of Non-Employee Directors thereof (as such term is
defined for purposes of Rule 16b-3(d) under the
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Exchange Act), shall adopt a resolution in advance of the Effective Time
providing that the receipt by the MindSpring Insiders of Newco Common Stock in
exchange for shares of MindSpring Common Stock, and of options to purchase Newco
Common Stock upon assumption and conversion by Newco of options to purchase
MindSpring Common Stock, in each case pursuant to the transactions contemplated
hereby and to the extent such securities are listed in the Section 16
Information, are intended to be exempt from liability pursuant to Rule 16b-3
under the Exchange Act.
(b) Provided that EarthLink delivers to Newco the Section 16 Information
with respect to EarthLink prior to the Effective Time, the Board of Directors of
Newco, or a committee of Non-Employee Directors thereof (as such term is defined
for purposes of Rule 16b-3(d) under the Exchange Act), shall adopt a resolution
in advance of the Effective Time of the Mergers providing that the receipt by
the EarthLink Insiders of Newco Common Stock in exchange for shares of EarthLink
Common Stock, and of options to purchase Newco Common Stock upon assumption and
conversion by Newco of options to purchase EarthLink Common Stock, in each case
pursuant to the transactions contemplated hereby and to the extent such
securities are listed in the Section 16 Information, are intended to be exempt
from liability pursuant to Rule 16b-3 under the Exchange Act.
(c) "Section 16 Information" shall mean (i) information accurate in all
respects regarding the MindSpring Insiders, the number of shares of MindSpring
Common Stock or other MindSpring equity securities deemed to be beneficially
owned by each such MindSpring Insider and expected to be exchanged for Newco
Common Stock in connection with the Merger, and (ii) information accurate in all
respects regarding the EarthLink Insiders, the number of shares of EarthLink
Common Stock or other EarthLink equity securities deemed to be beneficially
owned by each such EarthLink Insider and expected to be exchanged for Newco
Common Stock in connection with the Merger.
(d) "MindSpring Insiders" shall mean those officers and directors of
MindSpring who are subject to the reporting requirements of Section 16(a) of the
Exchange Act who are listed in the Section 16 Information. "EarthLink Insiders"
shall mean those officers and directors of EarthLink who are subject to the
reporting requirements of Section 16(a) of the Exchange Act who are listed in
the Section 16 Information.
ARTICLE X
CONDITIONS TO THE MERGERS
Section 10.1. CONDITIONS TO THE OBLIGATIONS OF EACH PARTY.
The obligations of MindSpring and EarthLink to consummate the Mergers are
subject to the satisfaction of the following conditions:
(a) each of the EarthLink Stockholder Approval and the MindSpring
Stockholder Approval shall have been obtained;
(b) (i) the Joint Proxy Statement/Prospectus shall have become effective in
accordance with the provisions of the Securities Act, no stop order suspending
the effectiveness of the Joint Proxy Statement/Prospectus shall have been issued
by the SEC and no proceedings for that purpose shall have been initiated by the
SEC and not concluded or withdrawn and (ii) all state securities or blue sky
authorizations necessary to carry out the transactions contemplated hereby shall
have been obtained and be in effect;
(c) the shares of Newco Common Stock to be issued in the Mergers shall have
been approved for listing upon issuance on the Nasdaq Stock Market;
(d) (i) any applicable waiting period under the HSR Act relating to each of
the Mergers shall have expired or been earlier terminated and (ii) if required
by applicable law, the parties shall have received a decision from the European
Commission under Regulation 4064/89 that the proposed Mergers and
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any matters arising therefrom fall within either Article 6.l(a) or Article 6.
l(b) of such Regulation and that, in any event, neither of the Mergers will be
referred to any competent authority or dealt with by the European Commission
pursuant to Article 9.3 of such Regulation;
(e) no Governmental Entity of competent authority or jurisdiction shall have
issued any order, injunction or decree, or taken any other action, which
permanently restrains, enjoins or otherwise prohibits the consummation of either
of the Mergers; and
(f) (i) EarthLink shall have received a letter (which may contain customary
qualifications and assumptions) from PricewaterhouseCoopers LLP dated as of the
Closing Date and addressed to EarthLink, stating that PricewaterhouseCoopers LLP
concurs with EarthLink's management's conclusion that no conditions exist that
would preclude Newco from accounting for the Mergers as a "pooling of interests"
in conformity with GAAP as described in Accounting Principles Board Opinion
No. 16 and applicable rules and regulations of the SEC and such letter shall not
have been withdrawn or modified in any material respect and (ii) MindSpring
shall have received a letter (which may contain customary qualifications and
assumption) from Arthur Andersen LLP dated as of the Closing Date and addressed
to MindSpring, stating that Arthur Andersen LLP concurs with MindSpring's
management's conclusion that no conditions exist with respect to MindSpring that
would preclude Newco from accounting for the Mergers as a "pooling of interests"
in conformity with GAAP as described in Accounting Principles Board Opinion
No. 16 and applicable rules and regulations of the SEC and such letter shall not
have been withdrawn or modified in any material respect.
Section 10.2. CONDITIONS TO THE OBLIGATIONS OF EARTHLINK.
The obligations of EarthLink to consummate the EarthLink Merger are subject
to the satisfaction of the following further conditions:
(a) (i) MindSpring shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the time of
the filing of the Certificate of Merger; (ii) the representations and warranties
of MindSpring in this Agreement that are qualified as to materiality shall be
accurate, and any such representations and warranties that are not so qualified
shall be accurate, in all material respects, as of the date of this Agreement
and as of the Effective Time (except for representations and warranties that
address matters only as of a specific date that shall have been true and correct
as of such date); PROVIDED, that for purposes of this SECTION 10.2(A), such
representations and warranties shall be deemed to be accurate unless all such
inaccuracies, taken as a whole, have a MindSpring Material Adverse Effect; and
(iii) EarthLink shall have received a certificate signed by the Chief Executive
Officer or Chief Financial Officer of MindSpring to the foregoing effect;
(b) EarthLink shall have received an opinion of Hunton & Williams in form
and substance reasonably satisfactory to EarthLink, on the basis of certain
facts, representations and assumptions set forth in such opinion, dated as of
the date of the filing of the Certificate of Merger, to the effect that the
EarthLink Merger will qualify for federal income tax purposes as a 368
Reorganization and that each of EarthLink, Newco and MindSpring will be a party
to the reorganization within the meaning of Section 368(b) of the Code. In
rendering such opinion, such counsel shall be entitled to rely upon
representations of officers of EarthLink and MindSpring;
(c) the parties shall have obtained or made all consents, approvals,
actions, orders, authorizations, registrations, declarations, announcements and
filings contemplated by SECTION 5.3 and SECTION 6.3 which if not obtained or
made (i) would render consummation of the EarthLink Merger illegal or
(ii) (assuming the Effective Time had occurred) would be reasonably likely to
have a Newco Material Adverse Effect; and
(d) the EarthLink Exchange Ratio and the MindSpring Exchange Ratio shall
result in the former stockholders of MindSpring owning less than 50% of the
outstanding Equity Securities of Newco on a Fully-Diluted Basis (as defined in
the Sprint Governance Agreement) at the Effective Time.
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Section 10.3. CONDITIONS TO THE OBLIGATIONS OF MINDSPRING.
The obligations of MindSpring to consummate the MindSpring Merger are
subject to the satisfaction of the following further conditions:
(a) (i) EarthLink shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the time of
the filing of the Certificate of Merger; (ii) the representations and warranties
of EarthLink in this Agreement that are qualified as to materiality shall be
accurate, and any such representations and warranties that are not so qualified
shall be accurate, in all material respects, as of the date of this Agreement
and as of the Effective Time (except for representations and warranties which
address matters only as of a specific date that shall have been true and correct
as of such date); PROVIDED, that for purposes of this Section 10.3(a), such
representations and warranties shall be deemed to be accurate unless all such
inaccuracies, taken as a whole, have an EarthLink Material Adverse Effect; and
(iii) MindSpring shall have received a certificate signed by the Chief Executive
Officer or Chief Financial Officer of EarthLink to the foregoing effect;
(b) MindSpring shall have received an opinion of Hogan & Hartson LLP in form
and substance reasonably satisfactory to MindSpring, on the basis of certain
facts, representations and assumptions set forth in such opinion, dated as of
the date of the filing of the Certificate of Merger, to the effect that the
MindSpring Merger will qualify for federal income tax purposes as a 368
Reorganization and that each of EarthLink, Newco and MindSpring will be a party
to the reorganization within the meaning of Section 368(b) of the Code. In
rendering such opinion, such counsel shall be entitled to rely upon
representations of officers of EarthLink and MindSpring; and
(c) the parties shall have obtained or made all consents, approvals,
actions, orders, authorizations, registrations, declarations, announcements and
filings contemplated by SECTION 5.3 and SECTION 6.3 which if not obtained or
made (i) would render consummation of the MindSpring Merger illegal or
(ii) (assuming the Effective Time had occurred) would be reasonably likely to
have a Newco Material Adverse Effect.
ARTICLE XI
TERMINATION
Section 11.1. TERMINATION.
This Agreement may be terminated at any time prior to the Effective Time by
written notice by the terminating party to the other party (except if such
termination is pursuant to SECTION 11.1(A)), notwithstanding approval thereof by
the respective stockholders of EarthLink and MindSpring:
(a) by mutual written agreement of EarthLink and MindSpring;
(b) by either MindSpring or EarthLink, if
(i) the Mergers shall not have been consummated by March 31, 2000 (the
"END DATE"); PROVIDED, HOWEVER, that the right to terminate this Agreement
under this SECTION 11.1(B)(I) shall not be available to any party whose
breach of any provision of this Agreement has resulted in the failure of
either of the Mergers to occur on or before the End Date;
(ii) there shall be any law or regulation that makes consummation of the
Mergers illegal or otherwise prohibited or any judgment, injunction, order
or decree of any Governmental Entity having competent jurisdiction enjoining
EarthLink, MindSpring or Newco from consummating either of the Mergers is
entered and such judgment, injunction, judgment or order shall have become
final and nonappealable and, prior to such termination, the parties shall
have used
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reasonable best efforts to resist, resolve or lift, as applicable, such law,
regulation, judgment, injunction, order or decree;
(iii) the holders of EarthLink Common Stock do not approve this
Agreement; or
(iv) the holders of MindSpring Common Stock do not approve this
Agreement;
(c) by EarthLink, (i) if MindSpring's Board of Directors shall have
(A) amended, modified, withdrawn, conditioned or qualified the MindSpring
Recommendation in a manner adverse to EarthLink or (B) recommended any
Acquisition Proposal for MindSpring to MindSpring's stockholders; (ii) if there
shall have occurred a willful and material breach of SECTION 8.2 by MindSpring,
any MindSpring Subsidiary or any of their respective officers, directors,
employees, advisors or agents; or (iii) if a breach of any representation,
warranty, covenant or agreement on the part of MindSpring set forth in this
Agreement shall have occurred that would cause the condition set forth in
SECTION 10.2(A) not to be satisfied, and such condition shall be incapable of
being satisfied by the End Date;
(d) by EarthLink if EarthLink's Board of Directors shall have withdrawn its
recommendation of this Agreement pursuant to SECTION 7.2(C);
(e) by MindSpring, (i) if EarthLink's Board of Directors shall have
(A) amended, modified, withdrawn, conditioned or qualified the EarthLink
Recommendation in a manner adverse to MindSpring or (B) recommended any
Acquisition Proposal for EarthLink to EarthLink's stockholders; (ii) if there
shall have occurred a willful and material breach of SECTION 7.2 by EarthLink,
any EarthLink Subsidiary or any of their respective officers, directors,
employees, advisors or agents; or (iii) if a breach of any representation,
warranty, covenant or agreement on the part of EarthLink set forth in this
Agreement shall have occurred that would cause the condition set forth in
SECTION 10.3(A) not to be satisfied, and such condition is incapable of being
satisfied by the End Date;
(f) by MindSpring if MindSpring's Board of Directors shall have withdrawn
its recommendation of this Agreement pursuant to SECTION 8.2(C); and
(g) automatically if the transactions contemplated herein are enjoined by a
court of competent jurisdiction for a period extending beyond March 31, 2000.
Section 11.2. EFFECT OF TERMINATION.
If this Agreement is terminated pursuant to SECTION 11.1, the provisions of
SECTIONS 9.8, 9.9, (except as noted therein), 9.10 (except as noted therein),
11.2, 11.3, 12.1, 12.4, 12.5, 12.7, 12.8 and 12.10 of this Agreement shall
remain in full force and effect and survive any termination of this Agreement.
Nothing herein shall release any party from liability for a breach of this
Agreement.
Section 11.3. FEES AND EXPENSES.
(a) Except as set forth in this SECTION 11.3, all fees and expenses incurred
in connection herewith and the transactions contemplated hereby shall be paid by
the party incurring such expenses, whether or not the Mergers are consummated.
(b) If this Agreement is terminated pursuant to SECTION 11.1(B)(I) or (III)
or 11.1(E)(I) (but only if EarthLink or its stockholders have received in
writing, or there shall have been publicly disclosed, an Acquisition Proposal
for EarthLink on or before the date of such termination and an agreement or
agreements to effect a transaction is entered into within nine months of such
termination pursuant to an Acquisition Proposal (an "EARTHLINK SUBSEQUENT
ALTERNATE TRANSACTION")), EarthLink shall pay to MindSpring a termination fee
equal to $70 million (the "TERMINATION FEE").
(c) If this Agreement is terminated pursuant to SECTIONS 11.1(B)(I) or (IV)
or 11.1(C)(I) (but only if MindSpring or its stockholders have received in
writing, or there shall have been publicly disclosed, an Acquisition Proposal
for MindSpring on or before the date of such termination and an agreement or
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agreements to effect a transaction is entered into within nine months of such
termination pursuant to an Acquisition Proposal(a "MINDSPRING SUBSEQUENT
ALTERNATE TRANSACTION")), MindSpring shall pay to EarthLink the Termination Fee.
(d) If this Agreement is terminated pursuant to SECTION 11.1(D), EarthLink
shall pay to MindSpring the Termination Fee.
(e) If this Agreement is terminated pursuant to SECTION 11.1(F), MindSpring
shall pay to EarthLink the Termination Fee.
(f) Any payment of the Termination Fee pursuant to SECTION 11.3(B) or (C)
shall be made within one Business Day after entering into the EarthLink
Subsequent Alternate Transaction or the MindSpring Alternate Transaction, as the
case may be (or as otherwise expressly set forth in this Agreement). Any payment
of the Termination Fee pursuant to SECTIONS 11.3(D) or (E) hereof shall be made
one Business Day after termination of this Agreement pursuant to SECTIONS
11.1(D) or 11.1(F), respectively. If one party fails to pay to the other
promptly any fee or expense due hereunder (including the Termination Fee), the
defaulting party shall pay the costs and expenses (including legal fees and
expenses) in connection with any action, including the filing of any lawsuit or
other legal action, taken to collect payment, together with interest on the
amount of any unpaid fee and/or expense at the publicly announced prime rate of
Citibank, N.A. from the date such fee was required to be paid to the date it is
paid.
(g) The remedies provided for in this SECTION 11.3 shall not be exclusive of
any rights at law or in equity that any party may have in the event of a
termination of this Agreement.
46
<PAGE>
ARTICLE XII
MISCELLANEOUS
Section 12.1. NOTICES.
Except as otherwise expressly set forth in SECTION 7.2(C) or 8.2(C), all
notices, requests and other communications to any party hereunder shall be in
writing, given by registered or certified mail or recognized national overnight
delivery service and shall be given,
if to Newco, to the addressed set forth below for EarthLink and
MindSpring, including copies;
if to EarthLink, to:
EarthLink Network, Inc.
3100 New York Drive
Pasadena, California 91107
Attention: Charles G. Betty
with a copy to:
Hunton & Williams
Bank of America Plaza
600 Peachtree Street, Suite 4100
Atlanta, Georgia 30308
Attention: Scott M. Hobby and
W. Tinley Anderson, III
if to MindSpring to:
MindSpring Enterprises, Inc.
1430 West Peachtree Street, NW
Suite 400
Atlanta, Georgia 30309
Attn: Charles M. Brewer
with a copy to:
Hogan & Hartson LLP
8300 Greensboro Drive
McLean, Virginia 22102
Attn: Richard K. A. Becker
or such other address as such party may hereafter specify for the purpose by
notice to the other parties hereto. Each such notice, request or other
communication shall be effective when delivered at the address specified in this
Section.
Section 12.2. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS AFTER
THE EFFECTIVE TIME.
The representations and warranties contained herein and in any certificate
or other writing delivered pursuant hereto shall not survive the Effective Time
or the termination of this Agreement. The covenants contained in Articles II and
III and SECTION 4.5 shall survive the Effective Time.
Section 12.3. AMENDMENTS: NO WAIVERS.
(a) Any provision of this Agreement may be amended or waived prior to the
Effective Time if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by EarthLink, MindSpring and Newco or in
the case of a waiver, by the party against whom the waiver is to be effective;
PROVIDED that (i) after the EarthLink Stockholder Approval, no such amendment or
47
<PAGE>
waiver shall, without the further approval of such stockholders, be made that
would require such approval under any applicable law, rule or regulation and
(ii) after the MindSpring Stockholder Approval, no such amendment or waiver
shall, without the further approval of such stockholders, be made that would
require such approval under any applicable law, rule or regulation.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
Section 12.4. SUCCESSORS AND ASSIGNS.
The provisions of this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns,
PROVIDED that no party may assign, delegate or otherwise transfer any of its
rights or obligations under this Agreement without the consent of the other
parties hereto. Any purported assignment in violation hereof shall be null and
void.
Section 12.5. GOVERNING LAW.
This Agreement shall be construed in accordance with and governed by the
internal laws of the State of Delaware without regard to any principles of
Delaware conflicts of law.
Section 12.6. COUNTERPARTS; EFFECTIVENESS; THIRD PARTY BENEFICIARIES.
This Agreement may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument. This Agreement shall become effective when
each party hereto shall have received counterparts hereof signed by all of the
other parties hereto. Except as set forth in SECTION 4.5, no provision of this
Agreement is intended to confer upon any Person other than the parties hereto
any rights or remedies hereunder.
Section 12.7. JURISDICTION.
Except as otherwise expressly provided in this Agreement, the parties hereto
agree that any suit, action or proceeding seeking to enforce any provision of,
or based on any matter arising out of or in connection with, this Agreement or
the transactions contemplated hereby shall be brought in the United States
District Court for the District of Delaware or any other Delaware State court
sitting in Wilmington, Delaware, and each of the parties hereby consents to the
exclusive jurisdiction of such courts (and of the appropriate appellate courts
therefrom) in any such suit, action or proceeding and irrevocably waives, to the
fullest extent permitted by law, any objection which it may now or hereafter
have to the laying of the venue of any such suit, action or proceeding in any
such court or that any such suit, action or proceeding which is brought in any
such court has been brought in an inconvenient forum. Process in any such suit,
action or proceeding may be served on any party anywhere in the world, whether
within or without the jurisdiction of any such court. Without limiting the
foregoing, each party agrees that service of process on such party as provided
in SECTION 12.1 shall be deemed effective service of process on such party.
Section 12.8. WAIVER OF JURY TRIAL.
EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
Section 12.9. ENFORCEMENT.
The parties agree that irreparable damage would occur in the event that any
of the provisions of this Agreement were not performed in accordance with their
specific terms. It is accordingly agreed
48
<PAGE>
that the parties shall be entitled to specific performance of the terms hereof,
this being in addition to any other remedy to which they are entitled at law or
in equity.
Section 12.10. ENTIRE AGREEMENT.
This Agreement (together with the exhibits and schedules hereto) constitutes
the entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior agreements and understandings, both oral and
written, between the parties with respect to the subject matter hereof
(including, without limitation, the Confidentiality Agreement, dated as of
August 17, 1999, by and between EarthLink and MindSpring).
Section 12.11. SEVERABILITY.
If any term, provision, covenant or restriction set forth in this Agreement
is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth in this Agreement shall remain in full force and effect
and shall in no way be affected, impaired or invalidated so long as the economic
or legal substance of the transactions contemplated hereby is not deemed by a
party (acting reasonably and in good faith) to be materially adverse to that
party. Upon such a determination, the parties shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner in order that the transactions
contemplated hereby may be consummated as originally contemplated to the fullest
extent possible.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.
<TABLE>
<S> <C> <C>
EARTHLINK NETWORK, INC.
By: /s/ CHARLES G. BETTY
-----------------------------------------
Name: Charles G. Betty
Title: Chief Executive Officer
MINDSPRING ENTERPRISES, INC.
By: /s/ CHARLES M. BREWER
-----------------------------------------
Name: Charles M. Brewer
Title: Chief Executive Officer
WWW HOLDINGS, INC.
By: /s/ CHARLES G. BETTY
-----------------------------------------
Name: Charles G. Betty
Title: Chief Executive Officer
</TABLE>
49
<PAGE>
AMENDMENT NUMBER 1 TO
AGREEMENT AND PLAN OF REORGANIZATION
This Amendment Number 1 to Agreement and Plan of Reorganization (the
"Amendment") is entered into this 9th day of October, 1999 ("Effective Date"),
among EarthLink Network, Inc., MindSpring Enterprises, Inc. and WWW Holdings,
Inc.
The parties hereto are also parties to that certain Agreement and Plan of
Reorganization dated September 22, 1999 (the "Agreement"). At the time of
signing the Agreement, the parties wished for WWW Holdings, Inc. to be renamed
"EarthLink Network, Inc." upon consummation of the transactions contemplated by
the Agreement. Having further considered and discussed this matter, the parties
now desire that WWW Holdings, Inc. be renamed as "EarthLink, Inc.," upon
consummation of the transactions contemplated by the Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
Section 2.1(b) of the Agreement is hereby amended by replacing the phrase
"EarthLink Network, Inc." with "EarthLink, Inc."
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the Effective Date.
<TABLE>
<S> <C> <C>
EARTHLINK NETWORK, INC.
By: /s/ CHARLES G. BETTY
-----------------------------------------
Charles G. Betty
President and Chief Executive Officer
MINDSPRING ENTERPRISES, INC.
By: /s/ CHARLES M. BREWER
-----------------------------------------
Charles M. Brewer
Chairman and Chief Executive Officer
WWW HOLDINGS, INC.
By: /s/ CHARLES G. BETTY
-----------------------------------------
Charles G. Betty
Chief Executive Officer
</TABLE>
<PAGE>
AMENDMENT NUMBER 2 TO
AGREEMENT AND PLAN OF REORGANIZATION
This Amendment Number 2 to Agreement and Plan of Reorganization (the
"Amendment") is entered as of January 4, 2000 ("Effective Date"), among
EarthLink Network, Inc., MindSpring Enterprises, Inc. and WWW Holdings, Inc.
Capitalized terms used herein and not otherwise defined herein shall have the
meaning ascribed to such terms in the Agreement.
The parties hereto are also parties to that certain Agreement and Plan of
Reorganization dated September 22, 1999, as amended (the "Agreement"). The
parties believe that it is in the interest of each of the parties and beneficial
to the shareholders of each of the parties for EarthLink to enter into a
Strategic Alliance with Apple Computer, Inc. and Apple Computer, Inc. Limited
(collectively "Apple") as described in all material respects in Exhibits A
through E hereto (the "Apple Transaction").
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:
1. MindSpring hereby consents to, and approves, in each and every aspect the
Apple Transaction, as described in Exhibits A through E hereto, and all actions
that are necessary by EarthLink to consummate such transaction.
2. Each of EarthLink and MindSpring hereby waives any representation,
warranties and covenants in the Agreement to the extent (but only to the extent)
necessary to allow EarthLink to negotiate the Apple Transaction and to enter
into a definitive agreement with respect to, and to consummate, the Apple
Transaction. Each of EarthLink and MindSpring waives the conditions precedent
set forth in Sections 10.2(a) and 10.3(a) of the Agreement, respectively, to the
extent (but only to the extent) that such conditions would not be satisfied as a
result of EarthLink negotiating and entering into a definitive agreement with
respect to, and consummating, the Apple Transaction.
3. Section 2.1(f) of the Agreement is amended by adding the following
sentence to the end thereof: "Each share of EarthLink Series C Preferred shall
be converted into 1.615 shares of newly created Newco Series C Preferred, having
terms, conditions, rights, preferences and designations substantially similar to
the EarthLink Series C Preferred."
4. The following additional definitions are added to Section 1.1(a) of the
Agreement: "EarthLink Series C Preferred" shall mean the Series C Convertible
Preferred Stock of EarthLink, par value $0.01 per share; and "Newco Series C
Preferred" shall mean the Series C Convertible Preferred Stock of Newco, par
value $0.01, per share.
5. The definitions of "EarthLink Preferred Stock" and "Newco Preferred
Stock" set forth in Section 1.1(a) of the Agreement are amended to include the
"EarthLink Series C Preferred" and "Newco Series C Preferred" referred to above,
respectively, and the definition of "Acquisition Proposal for EarthLink" set
forth in Section 1.1(a) of the Agreement is amended by adding "or the Apple
Transaction" to the end of the sentence.
6. EarthLink, MindSpring and Newco each agree that the Apple Transaction,
including all rights, obligations and conditions (including all rights,
obligations and conditions pursuant to the agreements set forth in Exhibits A
through E hereto, and any other agreement executed in connection therewith) is,
and will be, binding on and inure to the benefit of Newco upon the Mergers, and
will be enforceable against Newco by Apple in accordance with their respective
terms.
7. Notwithstanding any reduction in the size of the Board of Directors of
Newco, EarthLink, MindSpring and Newco shall cause the Nominating Committee (as
defined in Section 4.2 of the Agreement) to nominate the person selected by the
holders of the EarthLink Series C Preferred as an Outside Director, according to
the rights granted such holders in the Apple Transaction. EarthLink, MindSpring
and Newco shall also cause such person to be elected to the Board of Directors
of Newco. Notwithstanding the above, the person selected by the holders of the
EarthLink Series C Preferred as
<PAGE>
an Outside Director will be selected as the second Outside Director by the
Nominating Committee. The person selected by the holders of the EarthLink
Series C Preferred as an Outside Director shall be indemnified and covered by
directors' and officers' liability insurance to the same extent as each other
nonemployee director of Newco is so indemnified and insured.
8. EarthLink, MindSpring and Newco shall cause the Certificate of Merger,
Restated Certificate of Incorporation of Newco and Bylaws of Newco to be revised
to reflect the rights, obligations and conditions of the Apple Transaction
(including all rights, obligations and conditions pursuant to the agreements set
forth in Exhibits A through E hereto, and any other agreement executed in
connection therewith).
9. Section 5.5(a) of the Agreement is amended by replacing the first
sentence of Section 5.5(a) with the following: "The authorized capital stock of
EarthLink consists of 200,000,000 shares of EarthLink Common Stock, 10,000,000
shares of EarthLink Series A Preferred, 625,000 shares of EarthLink Series B
Preferred, and 4,385,965 shares of EarthLink Series C Preferred."
10. Except as specifically amended and modified by the Amendment, the
Agreement shall remain in full force and effect and is hereby ratified and
affirmed by EarthLink, MindSpring and Newco.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed by their respective authorized officers as of the Effective Date.
<TABLE>
<S> <C> <C>
EARTHLINK NETWORK, INC.
By: /s/ CHARLES G. BETTY
-----------------------------------------
Charles G. Betty
President and Chief Executive Officer
MINDSPRING ENTERPRISES, INC.
By: /s/ MICHAEL S. MCQUARY
-----------------------------------------
Michael S. McQuary
President and Chief Operating Officer
WWW HOLDINGS, INC.
By: /s/ CHARLES G. BETTY
-----------------------------------------
Charles G. Betty
Chief Executive Officer
</TABLE>
[SIGNATURE PAGE TO AMENDMENT NO. 2 TO AGREEMENT AND PLAN OF REORGANIZATION]
<PAGE>
ANNEX B
<PAGE>
September 22, 1999
Board of Directors
EarthLink Network, Inc.
3100 New York Drive
Pasadena, California 91107
Dear Sirs:
You have asked us to advise you with respect to the fairness from a
financial point of view of the Common Stock Exchange Ratio to the Common
Stockholders, the Series A Exchange Ratio to the Series A Stockholders and the
Series B Exchange Ratio to the Series B Stockholders (as such terms are defined
below) as provided by the Agreement and Plan of Reorganization (the
"Reorganization Agreement"), dated as of September 22, 1999, among EarthLink
Network, Inc. ("EarthLink"), MindSpring Enterprises, Inc. ("MindSpring"), and
WWW Holdings, Inc., a newly formed corporation owned equally by EarthLink and
MindSpring ("Newco"). The Reorganization Agreement provides for, among other
things, (i) the merger (the "Merger") of EarthLink with and into Newco with
(A) each outstanding share of common stock, par value $0.01 per share (the
"EarthLink Common Stock"), of EarthLink being converted into 1.615 (the "Common
Stock Exchange Ratio") shares of common stock, par value $0.01 per share ("Newco
Common Stock"), of Newco, (B) each share of Series A convertible preferred
stock, par value $0.01 per share (the "Series A Preferred Stock"), of EarthLink
being converted into 1.615 (the "Series A Exchange Ratio") shares of Series A
convertible preferred stock, par value $0.01 per share (the "Newco Series A
Preferred Stock"), of Newco, and (C) each share of Series B convertible
preferred stock, par value $0.01 per share (the "Series B Preferred Stock"), of
EarthLink being converted into 1.615 (the "Series B Exchange Ratio") shares of
Series B convertible preferred stock, par value $0.01 per share (the "Newco
Series B Preferred Stock"), of Newco and (ii) the merger (the "MindSpring
Merger", and together with the Merger, the "Transaction") of MindSpring with and
into Newco with each outstanding share of common stock, par value $0.01 per
share, of MindSpring being converted into one (1) share of Newco Common Stock.
For purposes of this opinion, "Common Stock Stockholders" shall mean the holders
of the EarthLink Common Stock, other than MindSpring and its affiliates,
"Series A Stockholders" shall mean the holders of the Series A Preferred Stock,
and "Series B Stockholders" shall mean the holders of the Series B Preferred
Stock.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to EarthLink and MindSpring, as well
as the Reorganization Agreement. We have reviewed certain other information,
including financial forecasts, provided to us by EarthLink and MindSpring, and
have met with the managements of EarthLink and MindSpring to discuss the
business and prospects of EarthLink and MindSpring, respectively. We have also
relied upon the views of EarthLink's and MindSpring's management concerning the
business, operational and strategic benefits and implications of the
Transaction, including financial information provided to us by EarthLink and
MindSpring relating to the synergistic values and operating cost savings
expected to be achieved through the combination of the operations of EarthLink
and MindSpring. We have also considered certain financial and stock market data
of EarthLink and MindSpring, and we have compared that data with similar data
for other publicly held companies in businesses we deemed to be similar to those
of EarthLink and MindSpring and we have considered the financial terms, to the
extent publicly available, of certain other business combinations and other
transactions which have recently been effected. We also considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
it being complete and accurate in all material respects. We have assumed that
any estimates or information used in our analysis have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of the
managements of EarthLink and MindSpring as to the future financial performance
of EarthLink and MindSpring,
<PAGE>
Board of Directors
EarthLink Network, Inc.
September 22, 1999
Page 2
respectively, and, upon consummation of the Transaction, Newco. In addition, we
have not made an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of EarthLink or MindSpring, nor have we
been furnished with any such evaluations or appraisals. Our opinion is
necessarily based upon financial, economic, market and other conditions as they
exist and can be evaluated on the date hereof.
We are not expressing any opinion as to the value of the Newco Common Stock,
Newco Series A Preferred Stock or Newco Series B Preferred Stock when issued to
EarthLink's stockholders pursuant to the Merger or the prices at which Newco
Common Stock, Newco Series A Preferred Stock or Newco Series B Preferred Stock
will trade subsequent to the Transaction. With your consent, we have not
considered, and this opinion does not in any manner address, the impact of the
Transaction on any governance rights or other rights or interests that holders
of Series A Preferred Stock or Series B Preferred Stock may have with respect to
EarthLink under the terms of such securities or pursuant to agreements with
EarthLink and / or any third parties.
We have acted as financial advisor to EarthLink in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Merger. In the past, we have
performed certain investment banking services for EarthLink and have received
customary fees for such services.
In the ordinary course of our business, we and our affiliates may actively
trade the debt and equity securities of both EarthLink and MindSpring for our
and such affiliates' own accounts and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
It is understood that this letter is for the information of Board of
Directors of EarthLink in connection with its consideration of the Merger, does
not constitute a recommendation to any stockholder as to how such stockholder
should vote on the proposed Merger and is not to be quoted or referred to, in
whole or in part, in any registration statement, prospectus or proxy statement,
or in any other document used in connection with the offering or sale of
securities, nor shall this letter be used for any other purposes, without our
prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Common Stock Exchange Ratio is fair from a financial point of
view to the Common Stockholders, the Series A Exchange Ratio is fair from a
financial point of view to the Series A Stockholders and the Series B Exchange
Ratio is fair from a financial point of view to the Series B Stockholders.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
By: /S/ ETHAN TOPPER
----------------------------------------------
Ethan Topper
Managing Director
<PAGE>
ANNEX C
<PAGE>
September 22, 1999
Board of Directors
MindSpring Enterprises, Inc.
1430 West Peachtree St. NW
Suite 400
Atlanta, GA 30309
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the stockholders of MindSpring Enterprises, Inc. (the "Company") of the
Exchange Ratio (as defined below) pursuant to the terms of the Agreement and
Plan of Reorganization, dated as of September 22, 1999 (the "Agreement"), by and
among WWW Holdings, Inc., a Delaware corporation ("Newco"), EarthLink
Network, Inc., a Delaware corporation ("EarthLink") and the Company pursuant to
which EarthLink and the Company will be merged (the "Merger") with and into
Newco.
Pursuant to the Agreement, each share of common stock of the Company will be
converted into 1.0 share of Newco common stock (the "Exchange Ratio") and each
share of common stock of EarthLink will be converted into 1.615 shares of Newco
common stock.
In arriving at our opinion, we have reviewed (i) the draft dated
September 21, 1999 of the Agreement and the exhibits thereto; (ii) financial and
other information that was publicly available or furnished to us by the Company
and EarthLink including information provided during discussions with their
respective managements; (iii) certain financial projections of the Company,
EarthLink and on a pro forma basis, for the combined company provided during
discussions with the respective managements; (iv) certain financial and
securities data of the Company and EarthLink compared with various other
companies whose securities are traded in public markets; and (v) the historical
stock prices of the common stock of the Company and EarthLink. In addition, we
have conducted such other financial studies, analyses and investigations as we
deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company and EarthLink or
their representatives, or that was otherwise reviewed by us. In particular, we
have relied upon the estimates of the management of the Company of the operating
synergies achievable as a result of the Merger and upon our discussion of such
synergies with the management of EarthLink. With respect to the financial
projections supplied to us, we have relied on representations that they have
been reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the management of the Company and EarthLink as to the
future operating and financial performance of the Company, EarthLink and the pro
forma combined company. We have not assumed any responsibility for making an
independent evaluation of any assets or liabilities or for making any
independent verification of any of the information reviewed by us. We have
relied as to certain legal matters on advice of counsel to the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
prices at which Newco common stock will actually trade at any time. Our opinion
does not address the terms and conditions of the Agreement and the exhibits
thereto, other than the Exchange Ratio. In addition, our opinion does not
address the relative merits of the Merger and the other business strategies
considered by the Company's Board of Directors, nor does it address the Board's
decision to proceed with the Merger. Our opinion does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed transaction.
<PAGE>
MindSpring Enterprises, Inc.
Page 2 September 22, 1999
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. DLJ has performed investment
banking and other services for the Company in the past and has received
customary compensation for such services. Such services consisted of acting as
lead manager of the Company's May 29, 1998 equity offering, a co-manager of the
Company's December 14, 1998 equity offering and a co-manager of the Company's
April 7, 1999 concurrent equity and convertible debt offerings.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Exchange Ratio is fair to the stockholders of the
Company from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /S/ WILLIAM S. OGLESBY
-----------------------------------
William S. Oglesby
Managing Director
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 6 of the Company's Amended and Restated Certificate of Incorporation
(the "Charter") provides that the directors of the Company shall be protected
from personal liability, through indemnification or otherwise, to the fullest
extent permitted under the Delaware General Corporation Law (the "DGCL") as from
time to time in effect and any other provisions of Delaware law. Article 6 of
the Charter further provides that the Company shall indemnify each officer and
director to the fullest extent permitted by applicable law, except as otherwise
provided in the Company's By-Laws.
Accordingly, as permitted by the DGCL, the Charter eliminates personal
liability of the Company's directors to the Company or its stockholders for
monetary damages for breach of fiduciary duty except for (i) any breach of the
director's duty of loyalty to the Company or its shareholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) any transaction from which the director derived an
improper personal benefit; or (iv) under Section 174 of the DGCL, relating to
unlawful dividends or distributions or stock repurchases or redemptions. As a
result of these provisions, the Company and its stockholders may be unable to
obtain monetary damages from a director for breach of the duty of care.
Additionally, the Company's By-Laws grant the Company the power to indemnify
directors and officers to the extent permitted under the DGCL. As permitted by
the DGCL, the By-Laws provide for indemnification of the Company's directors and
officers against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person(s) in
connection with such action, suit or proceeding if such person(s) acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful.
The Company's By-Laws permit the Company to purchase and maintain insurance
on behalf of any person who is or was a director or officer against any
liability asserted against such person or incurred by such person in any such
capacity, or arising out of such person's status as such, and related expenses,
whether or not the Company would have the power to indemnify such person against
such liability under the provisions of DGCL.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or controlling persons of the Company pursuant
to the Company's Charter, Bylaws and the DGCL, the Company is aware that it is
the opinion of the SEC that such indemnification is against public policy as
expressed in such Act and is therefore unenforceable.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<C> <C> <S>
2.1 -- Agreement and Plan of Reorganization, dated September 22,
1999, by and among EarthLink Network, Inc., MindSpring
Enterprises, Inc. and WWW Holdings, Inc., as amended
(included as Annex A to the Proxy Statement/Prospectus
contained in Part I of this Registration Statement).
2.2 -- Stock Option Agreement, dated September 22, 1999, between
MindSpring Enterprises, Inc. and EarthLink Network, Inc.
(incorporated by reference to Exhibit 2.2 of EarthLink
Network Inc.'s Form 8-K, dated September 22, 1999, File No.
0-20799).
2.3 -- Stock Option Agreement, dated September 22, 1999, between
EarthLink Network, Inc. and MindSpring Enterprises, Inc.
(incorporated by reference to Exhibit 2.3 of EarthLink
Network Inc.'s Form 8-K, dated September 22, 1999, File No.
0-20799).
2.4 -- Form of EarthLink Stockholder Agreement, dated September 22,
1999, between certain stockholders and EarthLink Network,
Inc. (incorporated by reference to Exhibit 2.4 of EarthLink
Network, Inc.'s Form 8-K, dated September 22, 1999, File No.
0-20799).
2.5 -- Form of MindSpring Stockholder Agreement, dated September
22, 1999, between certain stockholders and MindSpring
Enterprises, Inc. (incorporated by reference to Exhibit 2.5
of EarthLink Network, Inc.'s Form 8-K, dated September 22,
1999, File No. 0-20799).
2.6* -- Preferred Stock Purchase Agreement, dated January 4, 2000,
between EarthLink Network, Inc. and Apple Computer, Inc.
Limited.
2.7* -- Investor Rights Agreement dated January 4, 2000, between
EarthLink Network, Inc. and Apple Computer, Inc. Limited.
3.1* -- Certificate of Incorporation of WWW Holdings, Inc.
3.2* -- Form of Amended and Restated Certificate of Incorporation of
WWW Holdings, Inc.
3.3* -- By-laws of WWW Holdings, Inc.
3.4* -- Form of Certificate of Designation, Preferences and Rights
of Series A Convertible Preferred Stock.
3.5* -- Form of Certificate of Designation, Preferences and Rights
of Series B Convertible Preferred Stock and amendment
thereto.
3.6* -- Form of Certificate of Designation, Preferences and Rights
of Series C Convertible Preferred Stock.
3.7* -- Form of Common Stock Certificate
5* -- Opinion of Hunton & Williams regarding the validity of the
shares of common stock of WWW Holdings, Inc.
8.1* -- Tax Opinion of Hunton & Williams.
8.2* -- Tax Opinion of Hogan & Hartson L.L.P.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<C> <C> <S>
10.1 -- 1995 Stock Option Plan and form of Stock Option Agreement
(incorporated by reference to Exhibit 10.1 to EarthLink
Network's Registration Statement on Form S-1--File No.
333-15781).
10.2 -- Amended and Restated Stock Option Plan for Directors
(incorporated by reference to Exhibit 10.2 to EarthLink
Network's Registration Statement on Form S-1--File No.
333-15781).
10.3 -- (a) Netscape Communications Corporation Internet Service
Provider Navigator Distribution Agreement, dated May 31,
1996, between EarthLink Network, Inc. and Netscape
Communications Corporation (incorporated by reference to
Exhibit 10.6 to EarthLink Network's Registration
Statement on Form S-1--File No. 333-15781).
(b) Amendment No. 1 to Netscape Communications Corporation
Internet Service Provider Agreement (incorporated by
reference to Exhibit 10.6(a) to EarthLink Network's
Registration Statement on Form S-1--File No. 333-15781).
(c) Amendment No. 2 to Netscape Communications Corporation
Internet Service Provider Agreement (incorporated by
reference to Exhibit 10.6(b) to EarthLink Network's
Registration Statement on Form S-1--File No. 333-15781).
10.4 -- (a) Network Services Agreement, dated May 31, 1996, between
EarthLink Network, Inc. and UUNET Technologies, Inc.
(incorporated by reference to Exhibit 10.7 to EarthLink
Network's Registration Statement on Form S-1--File No.
333-15781).
(b) Addendum No. 1 to Network Services Agreement
(incorporated by reference to Exhibit 10.7 (a) to EarthLink
Network's Registration Statement on Form S-1--File No.
333-15781).
10.5 -- Software Distribution Agreement (MacTCP), dated October 2,
1995, between EarthLink Network, Inc. and Apple Computer,
Inc. (incorporated by reference to Exhibit 10.8 to EarthLink
Network's Registration Statement on Form S-1--File No.
333-15781).
10.6 -- Amended and Restated Employment Agreement (incorporated by
reference to Exhibit 10.8(d) to EarthLink Network's
Registration Statement on Form S-1--File No. 333-53063).
10.7 -- Standard Industrial/Commercial Multi-Tenant Lease, dated
December 1, 1995, between EarthLink Network, Inc. and Becton
Dickinson and Company (incorporated by reference to Exhibit
10.12 to EarthLink Network's Registration Statement on Form
S-1--File No. 333-15781).
10.8 -- Internet Wizard Sign-Up Agreement, between EarthLink
Network, Inc. and Microsoft Corporation, dated August 16,
1996 (incorporated by reference to Exhibit 10.19 to
EarthLink Network's Registration Statement on Form S-1--File
No. 333-15781).
10.9 -- Network Access Agreement, between EarthLink Network, Inc.
and PSINet, Inc., dated July 22, 1996 and Amendment No. 1 to
Network Access Agreement (incorporated by reference to
Exhibit 10.20 to EarthLink Network's Registration Statement
on Form S-1--File No. 333-15781).
10 .10 -- (a) Office Lease by and between The Mutual Life Insurance
Company of New York, and EarthLink Network, Inc., dated
September 20, 1996 (incorporated by
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<C> <C> <S>
reference to Exhibit 10.21 to EarthLink Network's
Registration Statement on Form S-1--File No. 333-15781).
(b) Third Amendment to the lease agreement between WHMNY
Real Estate Limited Partnership and EarthLink Network, Inc.
(incorporated by reference to Exhibit 10.1 to EarthLink
Network's Form 10-Q filed on November 16, 1998--File No.
0-20799).
10.11 -- Amended and Restated Convertible Securities Vesting Plan
(incorporated by reference to Exhibit 10.18 to EarthLink
Network's Report on Form 10-K for the fiscal year ended
December 31, 1997--File No. 0-20799).
10.12 -- (a) Key Employee Compensation Continuation Plan
(incorporated by reference to Exhibit 10.19 to EarthLink
Network's Report on Form 10-K for the fiscal year ended
December 31, 1997--File No. 0-20799).
(b) Amendment to Key Employee Compensation Continuation Plan
(incorporated by reference to Exhibit 10.19(a) to EarthLink
Network's Report on Form 10-K for the fiscal year ended
December 31, 1997--File No. 0-20799).
10.13 -- Governance Agreement, dated as of February 10, 1998,
(incorporated by reference to Exhibit 10.1 to EarthLink
Network's Form 8-K filed on February 10, 1998--File No.
0-20799).
10.14 -- Credit Agreement, dated as of February 10, 1998, with Sprint
Corporation as the Lender (incorporated by reference to
Exhibit 10.3 to EarthLink Network's Form 8-K filed on
February 10, 1998--File No. 0-20799).
10.15 -- Registration Rights Agreement, dated as of February 10,
1998, with Sprint Corporation, and Sprint Communications
Company L.P. (incorporated by reference to Exhibit 99.1 to
EarthLink Network's Form 8-K filed on February 10,
1998--File No. 0-20799).
10.16 -- Stockholders Agreement, dated as of February 10, 1998, among
EarthLink Network, Inc., Sprint Corporation, Sprint
Communications Company L.P., and the persons identified on
Schedule 1 thereto (incorporated by reference to Exhibit
99.2 to EarthLink Network's Form 8-K filed on February 10,
1998--File No. 0-20799).
10.17 -- Agreement to Vote Stock, dated as of February 10, 1998,
among the Granting Stockholders named on Schedule A thereto,
Sprint Corporation and Sprint Communications Company L.P.
(incorporated by reference to Exhibit 99.3 to EarthLink
Network's Form 8-K filed on February 10, 1998--File No.
0-20799).
10.18 -- Agreement to Vote and Tender Stock, dated as of February 10,
1998, among the Granting Stockholders named on Schedule A
thereto, Sprint Corporation, and Sprint Communications
Company L.P. (incorporated by reference to Exhibit 99.4 to
EarthLink Network's Form 8-K filed on February 10,
1998--File No. 0-20799).
10.19 -- Marketing and Distribution Agreement, dated as of February
10, 1998, Sprint Corporation, and Sprint Communications
Company L.P. (incorporated by reference to Exhibit 10.26 of
EarthLink Network's Registration Statement on Form S-4 filed
May 13, 1998, File No. 333-52507).
10.20 -- Lease Agreement, between EarthLink Network Inc. and Prentiss
Properties Natomas, L.P. (incorporated by reference to
Exhibit 10.1 to EarthLink Network's Form 10-Q
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<C> <C> <S>
filed on September 30, 1999--File No. 0-20799).
10.22 -- Lease Agreement, between Park West E-3 Associates and NETCOM
On-Line Communication Services, Inc., dated February 23,
1996 (incorporated by reference to Exhibit 10.2 to
MindSpring's Form 10-K for the fiscal year ended December
31, 1998--File No. 0-27890).
10.23 -- Credit Agreement, dated as of February 17, 1999 by and among
MindSpring Enterprises, Inc., as Borrower, the Lenders
referred to herein, First Union Capital Markets Corp., as
Arranger and First Union National Bank, as Administrative
Agent (incorporated by reference to Exhibit 10.1 to
MindSpring's Form 8-K dated February 25, 1999--File No.
0-27890).
10.24 -- Guaranty and Collateral Agreement made by MindSpring
Enterprises, Inc. and the other Grantors party hereto in
favor of First Union National Bank, as Administrative Agent
(incorporated by reference to Exhibit 10.2 to MindSpring's
Form 8-K dated February 25, 1999--File No. 0-27890).
10.25 -- First Amendment, Waiver and Consent Agreement, dated as of
April 7, 1999, by and among MindSpring Enterprises, Inc.,
certain Lenders identified therein, First Union Capital
Markets Corp., as Arranger, and First Union National Bank,
as Administrative Agent (incorporated by reference to
Exhibit 10.1 to MindSpring's Form 8-K dated April 7,
1999--File No. 0-27890).
10.26 -- Lease Agreement, commencing on November 1, 1995, between
West Peachtree Point Partners, L.P. and MindSpring
Enterprises, Inc. (incorporated by reference to Exhibit
10(j) to MindSpring's Registration Statement on Form
S-1--File No. 333-108).
10.27 -- First Amendment dated February 6, 1996 to Lease Agreement
dated November 1, 1995 between John Marshall Law School,
Inc. (assignee of West Peachtree Point Partners, L.P.) and
MindSpring Enterprises, Inc. (incorporated by reference to
Exhibit 10(cc) to MindSpring's Registration Statement on
Form S-1--File No. 333-108).
10.28 -- MindSpring Enterprises, Inc. 1995 Stock Option Plan, as
amended (incorporated by reference to Exhibit 10.7 to
MindSpring's Form 10-K for the fiscal year ended December
31, 1998--File No. 0-27890).
10.29 -- Form of Stock Option Agreement (incorporated by reference to
Exhibit 10(v) to MindSpring's Registration Statement on Form
S-1--File No. 333-108).
10.30 -- MindSpring Enterprises, Inc. 1995 Directors Stock Option
Plan, as amended (incorporated by reference to Exhibit 10.9
to MindSpring's Form 10-K for the fiscal year ended December
31, 1998--File No. 0-27890).
10.31 -- Form of Director Stock Option Agreement, as amended
(incorporated by reference to Exhibit 10(x) to MindSpring's
Registration Statement on Form S-1--File No. 333-108).
10.32 -- Form of MindSpring Director or Officer Indemnity Agreement
(incorporated by reference to Exhibit 10(dd) to MindSpring's
Registration Statement on Form S-1--File No. 333-108).
10.33 -- Master Services Agreement, dated July 15, 1996, between
BellSouth Telecommunications, Inc. and MindSpring
Enterprises, Inc. (incorporated by reference to Exhibit
10(cc) to MindSpring's Form S-1--File No. 333-10779).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<C> <C> <S>
10.34 -- Office Building Lease Agreement, commencing December 15,
1997, between Pennsylvania Dental Service Corporation, a
Pennsylvania corporation d/b/a Delta Dental of Pennsylvania,
and MindSpring Enterprises, Inc. (incorporated by reference
to Exhibit 10.13 to MindSpring's Form 10-K for the fiscal
year ended December 31, 1998--File No. 0-27890).
10.35 -- Lease Agreement effective as of January 1, 1997 by and
between CMS Peachtree, L.P. and MindSpring Enterprises, Inc.
(incorporated by reference to Exhibit 10(hh) to MindSpring's
Form 10-K for the fiscal year ended December 31, 1996--File
No. 0-27890).
10.36 -- Amendment dated June 6, 1997 to Master Services Agreement,
dated July 15, 1996, between BellSouth Telecommunications,
Inc. and MindSpring Enterprises, Inc. (incorporated by
reference to Exhibit 10.1 to MindSpring's Form 10-Q for the
quarter ended June 30, 1997--File No. 0-27890).
10.37 -- Special Service Arrangement Agreement, dated June 1997,
between BellSouth Telecommunications, Inc. and MindSpring
Enterprises, Inc. (a substantially identical contract has
been executed for each of Alabama, Florida, Kentucky, North
Carolina, South Carolina and Tennessee) (incorporated by
reference to Exhibit 10.2 to MindSpring's Form 10-Q for the
quarter ended June 30, 1997--File No. 0-27890).
10.38* -- Lease Agreement dated November 16, 1999, between Kingston
Atlanta Partners, L.P. and MindSpring Enterprises, Inc.
10.39* -- First Amendment to Lease, dated October 1, 1999, between
Park West E-3 Associates and NETCOM On-line Communication
Services, Inc.
10.40* -- Lease Agreement, dated June 30, 1998, between Ryan Southbank
II, L.L.C. and MindSpring Enterprises, Inc.
10.41* -- Sublease, dated September 14, 1999, between International
Business Machines Corporation and MindSpring
Enterprises, Inc.
10.42* -- Fourth Amendment dated June 24, 1998, to Lease Agreement
dated August 11, 1995 by and among 1430 L.L.C. and
MindSpring Enterprises, Inc.
10.43* -- Fifth Amendment dated October 26, 1999 to Lease Agreement
dated August 11, 1995 by and among 1430 L.L.C. and
MindSpring Enterprises, Inc.
10.44* -- Amendment dated December 20, 1999, to Office Building Lease
Agreement dated December 15, 1997, between Pennsylvania
Dental Service Corporation and MindSpring Enterprises, Inc.
10.45* -- EarthLink Centre Standard Modified Gross Office Lease, dated
October 5, 1999, by and between Limar Realty Corp. #6 and
Earthlink Network, Inc.
12 * -- Statement of MindSpring Enterprises, Inc. regarding
Computation of Ratio of Earnings to Fixed Charges.
23.1* -- Consent of PricewaterhouseCoopers LLP.
23.2* -- Consent of Ernst & Young LLP.
23.3* -- Consent of Authur Andersen LLP.
23.4* -- Consent of Hunton & Williams (included in Exhibits 5 and
8.1).
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<C> <C> <S>
23.5* -- Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.2).
24* -- Power of Attorney is contained on the signature page of this
Registration Statement.
99.1* -- Consent of Credit Suisse First Boston Corporation.
99.2* -- Consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
99.3* -- Consent of Sky D. Dayton to be named a director.
99.4* -- Consent of Campbell B. Lanier, III to be named a director.
99.5* -- Consent of William H. Scott, III to be named a director.
99.6* -- Consent of Len J. Lauer to be named a director.
99.7* -- Consent of William T. Esrey to be named a director.
99.8* -- Consent of Michael S. McQuary to be named a director.
99.9* -- Consent of Linwood A. Lacy, Jr. to be named a director.
99.10* -- Consent of Reed E. Slatkin to be named a director.
99.11* -- Form of EarthLink Network, Inc. proxy card.
99.12* -- Form of MindSpring Enterprises, Inc. proxy card.
</TABLE>
- ------------------------
* filed herewith.
II-7
<PAGE>
ITEM 22. UNDERTAKINGS.
A. The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in the volume of securities offered (if
the total dollar value of the securities offered would not exceed
that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement.
2. That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
B. 1. The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use
of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters,
in addition to the information called for by the other items of the
applicable form.
2. The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph B.1. immediately preceding, or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Securities Act of
1933 and is used in connection with an offering of securities subject to
Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and
that, for purposes of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
C. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
II-8
<PAGE>
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
D. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt
of such request, and to send the incorporated documents by first class mail
or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of this Registration
Statement through the date of responding to the request.
E. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pasadena, State of
California, on the 6th day of January, 2000.
<TABLE>
<S> <C> <C>
WWW HOLDINGS, INC.
/S/ CHARLES G. BETTY
---------------------------------------------
Charles G. Betty,
Chief Executive Officer
</TABLE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Charles G. Betty and Charles M. Brewer and each
of them (with full power to act alone) as true and lawful attorneys-in-fact, and
stead, in any and all capacities, to sign any amendments to this registration
statement and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact, or their substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chief Executive Officer
/s/ CHARLES G. BETTY (principal executive
------------------------------------------- officer and principal January 6, 2000
Charles G. Betty financial officer) and
Director
/s/ CHARLES M. BREWER Chairman of the Board
------------------------------------------- January 6, 2000
Charles M. Brewer
</TABLE>
II-10
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<S> <C> <C>
2.1 -- Agreement and Plan of Reorganization, dated September 22,
1999, by and among EarthLink Network, Inc., MindSpring
Enterprises, Inc. and WWW Holdings, Inc., as amended
(included as Annex A to the Proxy Statement/Prospectus
contained in Part I of this Registration Statement).
2.2 -- Stock Option Agreement, dated September 22, 1999, between
MindSpring Enterprises, Inc. and EarthLink Network, Inc.
(incorporated by reference to Exhibit 2.2 of EarthLink
Network Inc.'s Form 8-K, dated September 22, 1999, File No.
0-20799).
2.3 -- Stock Option Agreement, dated September 22, 1999, between
EarthLink Network, Inc. and MindSpring Enterprises, Inc.
(incorporated by reference to Exhibit 2.3 of EarthLink
Network Inc.'s Form 8-K, dated September 22, 1999, File No.
0-20799).
2.4 -- Form of EarthLink Stockholder Agreement, dated September 22,
1999, between certain stockholders and EarthLink Network,
Inc. (incorporated by reference to Exhibit 2.4 of EarthLink
Network, Inc.'s Form 8-K, dated September 22, 1999, File No.
0-20799).
2.5 -- Form of MindSpring Stockholder Agreement, dated September
22, 1999, between certain stockholders and MindSpring
Enterprises, Inc. (incorporated by reference to Exhibit 2.5
of EarthLink Network, Inc.'s Form 8-K, dated September 22,
1999, File No. 0-20799).
2.6 -- Form of Preferred Stock Purchase Agreement, dated January 4,
2000, between EarthLink Network, Inc. and Apple Computer,
Inc. Limited.
2.7 -- Form of Investor Rights Agreement dated January 4, 2000,
between EarthLink Network, Inc. and Apple Computer, Inc.
Limited.
3.1* -- Certificate of Incorporation of WWW Holdings, Inc.
3.2* -- Form of Amended and Restated Certificate of Incorporation of
WWW Holdings, Inc.
3.3* -- By-laws of WWW Holdings, Inc.
3.4* -- Form of Certificate of Designation, Preferences and Rights
of Series A Convertible Preferred Stock.
3.5* -- Form of Certificate of Designation, Preferences and Rights
of Series B Convertible Preferred Stock and amendment
thereto.
3.6* -- Form of Certificate of Designation, Preferences and Rights
of Series C Convertible Preferred Stock.
3.7* Form of Common Stock Certificate
5* -- Opinion of Hunton & Williams regarding the validity of the
shares of common stock of WWW Holdings, Inc.
8.1* -- Tax Opinion of Hunton & Williams.
8.2* -- Tax Opinion of Hogan & Hartson L.L.P.
10.1 -- 1995 Stock Option Plan and form of Stock Option Agreement
(incorporated by reference to Exhibit 10.1 to EarthLink
Network's Registration Statement on Form S-1--File No.
333-15781).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<S> <C> <C>
10.2 -- Amended and Restated Stock Option Plan for Directors
(incorporated by reference to Exhibit 10.2 to EarthLink
Network's Registration Statement on Form S-1--File No.
333-15781).
10.3 -- (a) Netscape Communications Corporation Internet Service
Provider Navigator Distribution Agreement, dated May 31,
1996, between EarthLink Network, Inc. and Netscape
Communications Corporation (incorporated by reference to
Exhibit 10.6 to EarthLink Network's Registration
Statement on Form S-1--File No. 333-15781).
(b) Amendment No. 1 to Netscape Communications Corporation
Internet Service Provider Agreement (incorporated by
reference to Exhibit 10.6(a) to EarthLink Network's
Registration Statement on Form S-1--File No. 333-15781).
(c) Amendment No. 2 to Netscape Communications Corporation
Internet Service Provider Agreement (incorporated by
reference to Exhibit 10.6(b) to EarthLink Network's
Registration Statement on Form S-1--File No. 333-15781).
10.4 -- (a) Network Services Agreement, dated May 31, 1996, between
EarthLink Network, Inc. and UUNET Technologies, Inc.
(incorporated by reference to Exhibit 10.7 to EarthLink
Network's Registration Statement on Form S-1--File No.
333-15781).
(b) Addendum No. 1 to Network Services Agreement
(incorporated by reference to Exhibit 10.7 (a) to EarthLink
Network's Registration Statement on Form S-1--File No.
333-15781).
10.5 -- Software Distribution Agreement (MacTCP), dated October 2,
1995, between EarthLink Network, Inc. and Apple Computer,
Inc. (incorporated by reference to Exhibit 10.8 to EarthLink
Network's Registration Statement on Form S-1--File No.
333-15781).
10.6 -- Amended and Restated Employment Agreement (incorporated by
reference to Exhibit 10.8(d) to EarthLink Network's
Registration Statement on Form S-1--File No. 333-53063).
10.7 -- Standard Industrial/Commercial Multi-Tenant Lease, dated
December 1, 1995, between EarthLink Network, Inc. and Becton
Dickinson and Company (incorporated by reference to Exhibit
10.12 to EarthLink Network's Registration Statement on Form
S-1--File No. 333-15781).
10.8 -- Internet Wizard Sign-Up Agreement, between EarthLink
Network, Inc. and Microsoft Corporation, dated August 16,
1996 (incorporated by reference to Exhibit 10.19 to
EarthLink Network's Registration Statement on Form S-1--File
No. 333-15781).
10.9 -- Network Access Agreement, between EarthLink Network, Inc.
and PSINet, Inc., dated July 22, 1996 and Amendment No. 1 to
Network Access Agreement (incorporated by reference to
Exhibit 10.20 to EarthLink Network's Registration Statement
on Form S-1--File No. 333-15781).
10.10 -- (a) Office Lease by and between The Mutual Life Insurance
Company of New York, and EarthLink Network, Inc., dated
September 20, 1996 (incorporated by reference to Exhibit
10.21 to EarthLink Network's Registration Statement on
Form S-1--File No. 333-15781).
(b) Third Amendment to the lease agreement between WHMNY
Real Estate Limited Partnership and EarthLink Network, Inc.
(incorporated by reference to Exhibit 10.1 to EarthLink
Network's Form 10-Q filed on November 16, 1998--File No.
0-20799).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<S> <C> <C>
10.11 -- Amended and Restated Convertible Securities Vesting Plan
(incorporated by reference to Exhibit 10.18 to EarthLink
Network's Report on Form 10-K for the fiscal year ended
December 31, 1997--File No. 0-20799).
10.12 -- (a) Key Employee Compensation Continuation Plan
(incorporated by reference to Exhibit 10.19 to EarthLink
Network's Report on Form 10-K for the fiscal year ended
December 31, 1997--File No. 0-20799).
(b) Amendment to Key Employee Compensation Continuation Plan
(incorporated by reference to Exhibit 10.19(a) to EarthLink
Network's Report on Form 10-K for the fiscal year ended
December 31, 1997--File No. 0-20799).
10.13 -- Governance Agreement, dated as of February 10, 1998,
(incorporated by reference to Exhibit 10.1 to EarthLink
Network's Form 8-K filed on February 10, 1998--File No.
0-20799).
10.14 -- Credit Agreement, dated as of February 10, 1998, with Sprint
Corporation as the Lender (incorporated by reference to
Exhibit 10.3 to EarthLink Network's Form 8-K filed on
February 10, 1998--File No. 0-20799).
10.15 -- Registration Rights Agreement, dated as of February 10,
1998, with Sprint Corporation, and Sprint Communications
Company L.P. (incorporated by reference to Exhibit 99.1 to
EarthLink Network's Form 8-K filed on February 10,
1998--File No. 0-20799).
10.16 -- Stockholders Agreement, dated as of February 10, 1998, among
EarthLink Network, Inc., Sprint Corporation, Sprint
Communications Company L.P., and the persons identified on
Schedule 1 thereto (incorporated by reference to Exhibit
99.2 to EarthLink Network's Form 8-K filed on February 10,
1998--File No. 0-20799).
10.17 -- Agreement to Vote Stock, dated as of February 10, 1998,
among the Granting Stockholders named on Schedule A thereto,
Sprint Corporation and Sprint Communications Company L.P.
(incorporated by reference to Exhibit 99.3 to EarthLink
Network's Form 8-K filed on February 10, 1998--File No.
0-20799).
10.18 -- Agreement to Vote and Tender Stock, dated as of February 10,
1998, among the Granting Stockholders named on Schedule A
thereto, Sprint Corporation, and Sprint Communications
Company L.P. (incorporated by reference to Exhibit 99.4 to
EarthLink Network's Form 8-K filed on February 10,
1998--File No. 0-20799).
10.19 -- Marketing and Distribution Agreement, dated as of February
10, 1998, Sprint Corporation, and Sprint Communications
Company L.P. (incorporated by reference to Exhibit 10.26 of
EarthLink Network's Registration Statement on Form S-4 filed
May 13, 1998, File No. 333-52507).
10.20 -- Lease Agreement, between EarthLink Network Inc. and Prentiss
Properties Natomas, L.P. (incorporated by reference to
Exhibit 10.1 to EarthLink Network's Form 10-Q filed on
September 30, 1999--File No. 0-20799).
10.22 -- Lease Agreement, between Park West E-3 Associates and NETCOM
On-Line Communication Services, Inc., dated February 23,
1996 (incorporated by reference to Exhibit 10.2 to
MindSpring's Form 10-K for the fiscal year ended December
31, 1998--File No. 0-27890).
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<S> <C> <C>
10.23 -- Credit Agreement, dated as of February 17, 1999 by and among
MindSpring Enterprises, Inc., as Borrower, the Lenders
referred to herein, First Union Capital Markets Corp., as
Arranger and First Union National Bank, as Administrative
Agent (incorporated by reference to Exhibit 10.1 to
MindSpring's Form 8-K dated February 25, 1999--File No.
0-27890).
10.24 -- Guaranty and Collateral Agreement made by MindSpring
Enterprises, Inc. and the other Grantors party hereto in
favor of First Union National Bank, as Administrative Agent
(incorporated by reference to Exhibit 10.2 to MindSpring's
Form 8-K dated February 25, 1999--File No. 0-27890).
10.25 -- First Amendment, Waiver and Consent Agreement, dated as of
April 7, 1999, by and among MindSpring Enterprises, Inc.,
certain Lenders identified therein, First Union Capital
Markets Corp., as Arranger, and First Union National Bank,
as Administrative Agent (incorporated by reference to
Exhibit 10.1 to MindSpring's Form 8-K dated April 7,
1999--File No. 0-27890).
10.26 -- Lease Agreement, commencing on November 1, 1995, between
West Peachtree Point Partners, L.P. and MindSpring
Enterprises, Inc. (incorporated by reference to Exhibit
10(j) to MindSpring's Registration Statement on Form
S-1--File No. 333-108).
10.27 -- First Amendment dated February 6, 1996 to Lease Agreement
dated November 1, 1995 between John Marshall Law School,
Inc. (assignee of West Peachtree Point Partners, L.P.) and
MindSpring Enterprises, Inc. (incorporated by reference to
Exhibit 10(cc) to MindSpring's Registration Statement on
Form S-1--File No. 333-108).
10.28 -- MindSpring Enterprises, Inc. 1995 Stock Option Plan, as
amended (incorporated by reference to Exhibit 10.7 to
MindSpring's Form 10-K for the fiscal year ended December
31, 1998--File No. 0-27890).
10.29 -- Form of Stock Option Agreement (incorporated by reference to
Exhibit 10(v) to MindSpring's Registration Statement on Form
S-1--File No. 333-108).
10.30 -- MindSpring Enterprises, Inc. 1995 Directors Stock Option
Plan, as amended (incorporated by reference to Exhibit 10.9
to MindSpring's Form 10-K for the fiscal year ended December
31, 1998--File No. 0-27890).
10.31 -- Form of Director Stock Option Agreement, as amended
(incorporated by reference to Exhibit 10(x) to MindSpring's
Registration Statement on Form S-1--File No. 333-108).
10.32 -- Form of MindSpring Director or Officer Indemnity Agreement
(incorporated by reference to Exhibit 10(dd) to MindSpring's
Registration Statement on Form S-1--File No. 333-108).
10.33 -- Master Services Agreement, dated July 15, 1996, between
BellSouth Telecommunications, Inc. and MindSpring
Enterprises, Inc. (incorporated by reference to Exhibit
10(cc) to MindSpring's Form S-1--File No. 333-10779).
10.34 -- Office Building Lease Agreement, commencing December 15,
1997, between Pennsylvania Dental Service Corporation, a
Pennsylvania corporation d/b/a Delta Dental of Pennsylvania,
and MindSpring Enterprises, Inc. (incorporated by reference
to Exhibit 10.13 to MindSpring's Form 10-K for the fiscal
year ended December 31, 1998--File No. 0-27890).
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<S> <C> <C>
10.35 -- Lease Agreement effective as of January 1, 1997 by and
between CMS Peachtree, L.P. and MindSpring Enterprises, Inc.
(incorporated by reference to Exhibit 10(hh) to MindSpring's
Form 10-K for the fiscal year ended December 31, 1996--File
No. 0-27890).
10.36 -- Amendment dated June 6, 1997 to Master Services Agreement,
dated July 15, 1996, between BellSouth Telecommunications,
Inc. and MindSpring Enterprises, Inc. (incorporated by
reference to Exhibit 10.1 to MindSpring's Form 10-Q for the
quarter ended June 30, 1997--File No. 0-27890).
10.37 -- Special Service Arrangement Agreement, dated June 1997,
between BellSouth Telecommunications, Inc. and MindSpring
Enterprises, Inc. (a substantially identical contract has
been executed for each of Alabama, Florida, Kentucky, North
Carolina, South Carolina and Tennessee) (incorporated by
reference to Exhibit 10.2 to MindSpring's Form 10-Q for the
quarter ended June 30, 1997--File No. 0-27890).
10.38* -- Lease Agreement, dated November 16, 1999, between Kingston
Atlanta Partners, L.P. and MindSpring Enterprises, Inc.
10.39* -- First Amendment to Lease, dated October 1, 1999, between
Park West E-3 Associates and NETCOM On-Line Communication
Services, Inc.
10.40* -- Lease Agreement, dated June 30, 1998, between Ryan Southbank
II, L.L.C. and MindSpring Enterprises, Inc.
10.41* -- Sublease, dated September 14, 1999, between International
Business Machines Corporation and MindSpring
Enterprises, Inc.
10.42* -- Fourth Amendment dated June 24, 1998 to Lease Agreement
dated August 11, 1995, by and among 1430 L.L.C. and
MindSpring Enterprises, Inc.
10.43* -- Fifth Amendment dated October 26, 1999 to Lease Agreement
dated August 11, 1995, by and among 1430 L.L.C. and
MindSpring Enterprises, Inc.
10.44* -- Amendment dated December 20, 1999 to Office Building Lease
Agreement dated December 15, 1997 between Pennsylvania
Dental Service Corporation and MindSpring Enterprises, Inc.
10.45* -- EarthLink Centre Standard Modified Gross Office Lease, dated
October 5, 1999, by and between Limar Realty Corp. #6 and
Earthlink Network, Inc.
12* -- Statement of MindSpring Enterprises, Inc. regarding
Computation of Ratio of Earnings to Fixed Charges.
23.1* -- Consent of PricewaterhouseCoopers LLP.
23.2* -- Consent of Ernst & Young LLP.
23.3* -- Consent of Authur Andersen LLP.
23.4* -- Consent of Hunton & Williams (included in Exhibits 5 and
8.1).
23.5* -- Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.2).
24* -- Power of Attorney is contained on the signature page of this
Registration Statement.
99.1* -- Consent of Credit Suisse First Boston Corporation.
99.2* -- Consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
99.3* -- Consent of Sky D. Dayton to be named a director.
99.4* -- Consent of Campbell B. Lanier, III to be named a director.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<S> <C> <C>
99.5* -- Consent of William H. Scott, III to be named a director.
99.6* -- Consent of Len J. Lauer to be named a director.
99.7* -- Consent of William T. Esrey to be named a director.
99.8* -- Consent of Michael S. McQuary to be named a director.
99.9* -- Consent of Linwood A. Lacy, Jr. to be named a director.
99.10* -- Consent of Reed E. Slatkin to be named a director.
99.11* -- Form of EarthLink Network, Inc. proxy card.
99.12* -- Form of MindSpring Enterprises, Inc. proxy card.
</TABLE>
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* Filed herewith.
<PAGE>
EXHIBIT 2.6
PREFERRED STOCK PURCHASE AGREEMENT
DATED AS OF JANUARY 4, 2000
BETWEEN
EARTHLINK NETWORK, INC.
AND
APPLE COMPUTER, INC. LIMITED
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
SECTION 1 AGREEMENT TO PURCHASE AND SELL PREFERRED STOCK..............................................................1
1.1 Agreement to Purchase and Sell Preferred Stock......................................................1
1.2 Per Share Purchase Price............................................................................1
SECTION 2 CLOSING DATE; DELIVERY; ESCROW..............................................................................2
2.1 Closing Date........................................................................................2
2.2 Delivery............................................................................................2
2.3 Escrow..............................................................................................2
SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY...............................................................3
3.1 Organization........................................................................................3
3.2 Authorization.......................................................................................3
3.3 No Conflict.........................................................................................3
3.4 SEC Documents; Absence of Undisclosed Liabilities...................................................4
3.5 Absence of Certain Changes or Events................................................................4
3.6 Governmental Consent, etc...........................................................................5
3.7 Litigation..........................................................................................5
3.8 Capitalization......................................................................................5
3.9 Subsidiaries........................................................................................6
3.10 Compliance With Laws, Licenses, Permits and Registrations...........................................6
3.11 Title to Properties.................................................................................7
3.12 Intellectual Property...............................................................................7
3.13 Year 2000 Compliance................................................................................8
3.14 Successors..........................................................................................8
3.15 Finders' Fees.......................................................................................8
SECTION 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.............................................................8
4.1 Organization........................................................................................8
4.2 Authority...........................................................................................8
4.3 Investment..........................................................................................9
4.4 Disclosure of Information...........................................................................9
4.5 Investment Experience...............................................................................9
4.6 Accredited Investor Status..........................................................................9
4.7 Restricted Securities...............................................................................9
</TABLE>
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<CAPTION>
TABLE OF CONTENTS
(CONTINUED) PAGE
<S> <C> <C>
SECTION 5 CONDITIONS TO OBLIGATION OF THE PURCHASER..................................................................10
5.1 Representations and Warranties.....................................................................10
5.2 Covenants..........................................................................................10
5.3 No Order Pending...................................................................................10
5.4 No Law Prohibiting or Restricting Sale of the Shares...............................................10
5.5 Investor Rights Agreement..........................................................................10
5.6 Internet Services Agreement........................................................................10
5.7 Nasdaq Listing.....................................................................................10
5.8 Escrow Agreement...................................................................................10
SECTION 6 CONDITIONS TO OBLIGATION OF THE COMPANY....................................................................11
6.1 Representations and Warranties.....................................................................11
6.2 Covenants..........................................................................................11
6.3 No Order Pending...................................................................................11
6.4 No Law Prohibiting or Restricting the Sale of the Shares...........................................11
6.5 Investor Rights Agreement..........................................................................11
6.6 Internet Services Agreement........................................................................11
6.7 Escrow Agreement...................................................................................11
SECTION 7 COVENANTS..................................................................................................11
7.1 Compliance with HSR Requirements...................................................................11
SECTION 8 MISCELLANEOUS..............................................................................................12
8.1 Best Efforts.......................................................................................12
8.2 Governing Law......................................................................................12
8.3 Survival...........................................................................................12
8.4 Successors and Assigns.............................................................................12
8.5 Entire Agreement; Amendment........................................................................12
8.6 Notices............................................................................................13
8.7 Brokers............................................................................................13
8.8 Fees, Costs and Expenses...........................................................................14
8.9 Severability.......................................................................................14
8.10 Initial Public Announcement........................................................................14
</TABLE>
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<CAPTION>
<S> <C>
Exhibit A Investor Rights Agreement
Exhibit B Certificate of Designations
</TABLE>
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<CAPTION>
TABLE OF CONTENTS
(CONTINUED) PAGE
<S> <C>
Exhibit C Escrow Agreement
</TABLE>
--
<PAGE>
PREFERRED STOCK PURCHASE AGREEMENT
This PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is made as
of this 4th day of January, 2000, between Earthlink Network, Inc., a Delaware
corporation (the "Company"), and Apple Computer, Inc. Limited, a corporation
organized under the laws of the Republic of Ireland (the "Purchaser").
RECITALS
WHEREAS, the Company desires to sell to the Purchaser, and the
Purchaser desires to purchase from the Company, shares of the Company's Series C
Convertible Preferred Stock, par value $0.01 per share (the "Preferred Stock"),
convertible into the Company's common stock, par value $0.01 per share (the
"Common Stock"), on the terms and conditions set forth in this Agreement;
WHEREAS, concurrently with this Agreement, the Company and Apple
Computer, Inc., a California corporation and the parent company of Purchaser,
are entering into an Internet Services Agreement (the "Internet Services
Agreement").
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
SECTION 1
AGREEMENT TO PURCHASE AND SELL PREFERRED STOCK
1.1 AGREEMENT TO PURCHASE AND SELL PREFERRED STOCK.
Upon the terms and subject to the conditions of this Agreement, the Company
hereby agrees to sell to the Purchaser at the Closing (as defined below), and
the Purchaser agrees to purchase from the Company at the Closing, $200,000,000
aggregate purchase price of Preferred Stock having the terms and conditions set
forth in the Certificate of Designation, Preferences and Rights of Series C
Convertible Preferred Stock (the "Certificate) in the form attached hereto as
Exhibit B (the "Shares") at a price per share (the "Per Share Purchase Price")
set forth in Section 1.2 below.
1.2 PER SHARE PURCHASE PRICE.
The Per Share Purchase Price shall be $45.60 (which is equal to the average of
the closing prices of the Common Stock on the Nasdaq Stock Market for the ten
(10) trading days immediately preceding the date hereof).
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<PAGE>
SECTION 2
CLOSING DATE; DELIVERY; ESCROW
2.1 CLOSING DATE.
The Closing of the purchase and sale of the Shares hereunder (the "Closing")
shall be held at the offices of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, 650 Page Mill Road, Palo Alto, California, at 10:00 a.m. (Pacific
time), on a date mutually agreed on by the parties hereto, which shall be no
later than the second business day after the satisfaction or waiver of the
conditions to the obligations of the parties set forth in Sections 5 and 6
hereof (the date of the Closing being hereinafter referred to as the "Closing
Date").
2.2 DELIVERY.
At the Closing, the Company will deliver to the Escrow Agent (as defined below)
a certificate or certificates representing the 4,385,965 Shares against payment
of the aggregate purchase price of $200,000,000 (the "Aggregate Purchase Price")
by wire transfer of immediately available funds to an account designated by the
Escrow Agent. The certificate or certificates representing the Shares and the
shares of Common Stock issuable upon conversion of the Shares shall be subject
to a legend restricting transfer under the Securities Act of 1933, as amended
(the "Securities Act"), and referring to restrictions on transfer herein, such
legend to be substantially as follows:
"The shares represented by this certificate have been acquired for
investment and have not been registered under the Securities Act of 1933, as
amended. Such shares may not be sold or transferred in the absence of such
registration or an opinion of counsel reasonably satisfactory to the Company as
to the availability of an exemption from registration."
The Company agrees to remove the legend set forth in the preceding
paragraph upon receipt of an opinion of counsel in form and substance reasonably
satisfactory to the Company that the Shares and the shares of Common Stock
issuable upon conversion of the Shares are eligible for transfer without
registration under the Securities Act.
2.3 ESCROW.
The Shares and the Aggregate Purchase Price will be held in escrow for the
benefit of the Company and the Purchaser by U.S. Bank Trust, N.A., acting as
escrow agent (the "Escrow Agent") pursuant to the terms of the Escrow Agreement
in the form attached hereto as Exhibit C, between the Company, the Purchaser and
the Escrow Agent. Upon the expiration or early termination of the applicable
waiting periods under the HSR Act (as defined below), the Escrow Agent will (i)
release the Aggregate Purchase Price, with interest earned thereon, by wire
transfer of immediately available funds to an account designated by the Company
and (ii) deliver the Shares to the Purchaser, as provided in the Escrow
Agreement. In the event that the expiration or early termination of the
--
<PAGE>
applicable waiting periods under the HSR Act shall not have occurred for any
reason prior to 5:00 p.m., Eastern time, on March 31, 2000, the Escrow Agent
will (i) return the Aggregate Purchase Price, with interest earned thereon, by
wire transfer of immediately available funds to an account designated by the
Purchaser and (ii) return the Shares to the Company, as provided in the Escrow
Agreement.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser as follows:
3.1 ORGANIZATION.
The Company is a corporation duly organized and validly existing under the
laws of the State of Delaware and is in good standing under such laws. The
Company has the requisite corporate power and authority to own and operate
its properties and assets, and to carry on its business as presently
conducted and as proposed to be conducted. The Company is qualified to do
business as a foreign corporation in each jurisdiction in which the ownership
of its property or the nature of its business requires such qualification,
except where the failure to be so qualified would not have a materially
adverse effect on the Company and its subsidiaries, taken as a whole.
3.2 AUTHORIZATION.
All corporate action on the part of the Company necessary for the authorization,
execution, delivery and performance of this Agreement and the Investor Rights
Agreement by the Company, the authorization, sale, issuance and delivery of the
Shares hereunder, the issuance and delivery of the shares of Common Stock
issuable upon conversion of the Shares and the performance of the Company's
obligations hereunder and under the Investor Rights Agreement has been taken.
This Agreement and the Investor Rights Agreement (as defined below) constitute
legal, valid and binding obligations of the Company enforceable in accordance
with their respective terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies, and to
limitations of public policy as they may apply to Section 4.5 of the Investor
Rights Agreement. The Preferred Stock has the terms and conditions set forth in
the Certificate. Upon their issuance and delivery pursuant to this Agreement the
Shares will be, and upon their issuance and delivery upon conversion of the
Shares pursuant to the Certificate the shares of Common Stock issuable upon
conversion of the Shares will be, validly issued, fully paid and nonassessable.
The issuance and sale of the Shares and the issuance of the shares of Common
Stock upon conversion of the Shares will not give rise to any preemptive rights
or rights of first refusal on behalf of any person in existence on the date
hereof, except for the rights of the "Affiliated Equity Holders" (as defined in
the Governance Agreement referred to in this sentence) pursuant to Article III
of that certain Governance Agreement, dated as of February 10, 1998, among
Sprint Corporation, Sprint Communications Company L.P., the Company and
Earthlink Operations, Inc. (the "Governance Agreement").
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<PAGE>
3.3 NO CONFLICT.
Subject to compliance with the HSR Act, the execution and delivery of this
Agreement and the Investor Rights Agreement do not, and the consummation of the
transactions contemplated hereby and thereby will not, conflict with, or result
in any violation of, or default (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or to a loss of a material benefit under, any provision of the
Certificate of Incorporation or By-laws of the Company or any mortgage,
indenture, lease or other agreement (including the Governance Agreement and the
Agreement and Plan of Reorganization dated September 22, 1999, by and among WWW
Holdings, Inc., a Delaware corporation, Earthlink Network, Inc., a Delaware
corporation, and Mindspring Enterprises, Inc., a Delaware corporation (as
amended, the "Merger Agreement")), or instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company, its properties or assets, the effect of which could
have a material adverse effect on the Company and its subsidiaries, taken as a
whole, or materially impair or restrict the Company's power to perform its
obligations as contemplated under said Agreements.
3.4 SEC DOCUMENTS; ABSENCE OF UNDISCLOSED LIABILITIES.
The Company has filed all required reports, schedules, forms, statements and
other documents with the Securities and Exchange Commission (the "SEC") since
January 21, 1997 including the preliminary proxy materials filed with the SEC on
October 14, 1999, as amended December 15, 1999 in connection with the proposed
transactions contemplated by the Merger Agreement (the "SEC Documents"). As of
their respective dates, the SEC Documents complied in all material respects with
requirements of the Securities Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as the case may be, and the rules and regulations
of the SEC promulgated thereunder 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 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 U.S. generally accepted
accounting principles ("GAAP") (except, in the case of unaudited statements as
permitted by Form 10-Q of the SEC) applied on a consistent basis during the
periods involved (except as may be indicted in the notes thereto) and fairly
present the consolidated financial position of the Company and its consolidated
subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended in accordance with GAAP
(subject, in the case of the unaudited statements, to normal year-end audit
adjustments). Except as set forth in the SEC Documents, neither the Company nor
any of its subsidiaries has any liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) required by GAAP to be set
forth on a consolidated balance sheet of the Company and its consolidated
subsidiaries or in the notes thereto and which could reasonably be expected to
have a material adverse effect on the Company and its subsidiaries taken as a
whole.
--
<PAGE>
3.5 ABSENCE OF CERTAIN CHANGES OR EVENTS.
Except as disclosed in the SEC Documents since the date of the most recent
audited financial statements included in the SEC Documents, there has not been
(i) any declaration, setting aside or payment of any dividend or distribution
(whether in cash, stock or property) with respect to any of the Company's
capital stock, (ii) any split, combination or reclassification of any of its
capital stock or any issuance or the authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, (iii) any damage, destruction or loss of property, whether or not
covered by insurance, that has or could reasonably be expected to have a
material adverse effect on the Company and its subsidiaries taken as a whole,
(iv) any change in accounting methods, principles or practices by the Company
materially affecting its assets, liabilities, or business, except insofar as may
have been required by a change in GAAP, (v) any incurrence, assumption or
guarantee by the Company of any material indebtedness for borrowed money other
than in the ordinary course and in amounts and on terms consistent with past
practices, or (vi) any action, event, occurrence, development or state of
circumstances or facts that, individually or in the aggregate, has had or would
be reasonably likely to have a material adverse effect on the financial
condition, business or results of operations of the Company and its
subsidiaries, taken as a whole.
3.6 GOVERNMENTAL CONSENT, ETC.
No consent, approval or authorization of or designation, declaration or filing
with any governmental authority on the part of the Company is required in
connection with the valid execution and delivery of this Agreement, or the
offer, sale or issuance of the Shares, the issuance of the shares of Common
Stock upon conversion of the Shares, or the consummation of any other
transaction contemplated hereby, except the filing of such forms as shall be
required by the HSR Act and the expiration of any waiting periods thereunder and
such filings as may be required to be made with the SEC, the Securities
Regulation Division - Department of Corporations of the State of California and
the National Association of Securities Dealers, Inc., and the filing of the
Certificate in the office of the Secretary of State of Delaware.
3.7 LITIGATION.
Except as is disclosed in the SEC Documents, there is no suit, action or
proceeding pending or affecting the Company or any of its subsidiaries that,
individually or in the aggregate, could (i) have a material adverse effect on
the Company and its subsidiaries taken as a whole, (ii) impair the ability of
the Company to perform its obligations under this Agreement, the Investor Rights
Agreement or any other agreement that is material to the Company, or (iii)
prevent the consummation of any of the transactions contemplated by said
Agreements, nor is there any judgment, decree, injunction, rule or order of any
governmental entity or arbitrator outstanding against the Company or any of its
subsidiaries having, or which could reasonably be expected to have, any such
effect.
3.8 CAPITALIZATION.
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<PAGE>
(a) The authorized capital stock of the Company consists of 200,000,000
shares of Common Stock and 25,000,000 shares of preferred stock, including
10,000,000 shares of Series A Convertible Preferred Stock, 625,000 shares of
Series B Convertible Preferred Stock, and 4,385,965 shares of Series C
Convertible Preferred Stock. As of December 31, 1999, there were outstanding
(v) 32,929,992 shares of Common Stock, (w) 4,102,941 shares of Series A
Convertible Preferred Stock, (x) 606,155 shares of Series B Convertible
Preferred Stock, (y) no shares of Preferred Stock and (z) stock options and
warrants to purchase an aggregate of 4,972,772 shares of Common Stock (of
which options and warrants to purchase an aggregate of 1,402,632 shares of
Common Stock were exercisable). All outstanding shares of capital stock of
the Company have been duly authorized and validly issued and are fully paid
and nonassessable.
(a) As of the date hereof, except (i) as set forth in this Section 3.8,
(ii) for changes since December 31, 1999, resulting from the exercise of
stock options or warrants outstanding on such date, and (iii) the obligations
set forth in the Governance Agreement, there are no outstanding (x) shares of
capital stock or other voting securities of the Company, (y) securities of
the Company convertible into or exchangeable for shares of capital stock or
voting securities of the Company, or (z) options or other rights to acquire
from the Company, and no obligation of the Company to issue, any capital
stock, voting securities or securities convertible into or exchangeable for
capital stock or voting securities of the Company (the items in clauses (x),
(y) and (z) being referred to collectively as the "Company Securities").
There are no outstanding obligations of the Company or any of its
subsidiaries to repurchase, redeem or otherwise acquire any Company
Securities. If fully converted as of the date hereof, assuming that all
conditions or limitations to such conversion have been satisfied or waived
and that certain accretion dividends have not been accelerated, the Series A
Convertible Preferred Stock and the Series B Convertible Preferred Stock
would be convertible into 7,390,852 shares of Common Stock and 545,951 shares
of Common Stock, respectively. There are no outstanding contractual
obligations of the Company to provide funds to, or make any investment (in
the form of a loan, capital contribution or otherwise) in, any other person
or entity other than in the ordinary course of business consistent with past
practice. Other than the Governance Agreement, there are no stockholder
agreements, voting trusts or other agreements or understandings to which the
Company is a party, or of which the Company is aware, relating to voting,
registration or disposition of any shares of capital stock of the Company or
granting to any person or group of persons the right to elect, or to
designate or nominate for election, a director to the board of directors of
the Company.
3.9 SUBSIDIARIES.
The Company has no subsidiaries other than Earthlink Operations, Inc. Each of
the Company's subsidiaries is a corporation duly incorporated or an entity duly
organized, and is validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization, has all powers and authority and
all material governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted and is duly qualified to do
business as a foreign entity and is in good standing in each jurisdiction where
the character of the property owned or leased by it or the nature of its
activities makes such qualification necessary, in each case with such exceptions
as, individually or in the aggregate, would not be reasonably likely to have, a
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material adverse effect on the Company and its subsidiaries, taken as a whole.
All of the outstanding shares of capital stock of, or other ownership interest
in, each of the Company's subsidiaries has been validly issued and is fully paid
and nonassessable. All of the outstanding capital stock of, or other ownership
interest in, each of the Company's subsidiaries, that is owned, directly or
indirectly, by the Company, is owned free and clear of any Lien and free of any
other limitation or restriction (including any limitation or restriction on the
right to vote, sell or otherwise dispose of such capital stock or other
ownership interests) with such exceptions as, individually or in the aggregate,
would not be reasonably likely to have, a material adverse effect on the Company
and its subsidiaries, taken as a whole. There are no outstanding (i) securities
of the Company or any of its subsidiaries convertible into or exchangeable or
exercisable for shares of capital stock or other voting securities or ownership
interests in any of its subsidiaries, (ii) options, warrants or other rights to
acquire from the Company or any of its subsidiaries, and no other obligation of
the Company or any of its subsidiaries to issue, any capital stock, voting
securities or other ownership interests in, or any securities convertible into
or exchangeable or exercisable for any capital stock, voting securities or
ownership interests in, any of its subsidiaries or (iii) obligations of the
Company or any of its subsidiaries to repurchase, redeem or otherwise acquire
any outstanding securities of any of its subsidiaries or any capital stock of,
or other ownership interests in, any of its subsidiaries.
3.10 COMPLIANCE WITH LAWS, LICENSES, PERMITS AND REGISTRATIONS.
To the knowledge of the Company, neither the Company nor any of its subsidiaries
is in violation of, or has violated, any applicable provisions of any laws,
statutes, ordinances, regulations, judgments, injunctions, orders or consent
decrees, except for any such violations that, individually or in the aggregate,
would not be reasonably likely to have a material adverse effect on the Company
and its subsidiaries, taken as a whole. Each of the Company and its subsidiaries
has all permits, licenses, approvals, authorizations of and registrations with
and under all federal, state, local and foreign laws, and from each federal,
state or local governmental authority, transgovernmental authority or court,
administrative or regulatory agency or commission or other governmental
authority or agency, domestic or foreign, required by the Company and its
subsidiaries to carry on their respective businesses as currently conducted,
except where the failure to have any such permits, licenses, approvals,
authorizations or registrations, individually or in the aggregate, would not be
reasonably likely to have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
3.11 TITLE TO PROPERTIES.
(a) The Company and each of its subsidiaries have good and marketable
title to, or valid leasehold or license interests in, all of their properties
and assets except for such as are no longer used or useful in the conduct of
their businesses or as have been disposed of in the ordinary course of
business and except for defects in title, easements, restrictive covenants
and any mortgage, lien, pledge, charge, security interest or encumbrance of
any kind (collectively, "Liens") that, in the aggregate, do not materially
interfere with the ability of the Company and its subsidiaries to conduct
their business, taken as a whole, as currently conducted. All such assets and
properties, other than assets and properties in which the Company or any of
its subsidiaries has leasehold interests, are free and clear of all Liens,
except for Liens that, in the aggregate, do not and will not materially
interfere
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with the ability of the Company and its subsidiaries to conduct their business,
taken as a whole, as currently conducted.
(b) Except as would not be reasonably likely, individually or in the
aggregate, to have a material adverse effect on the Company and its
subsidiaries, taken as a whole, (i) the Company and each of its subsidiaries is
in compliance with the terms of all leases to which they are a party and under
which they are in occupancy, and all such leases are in full force and effect
and (ii) the Company and each of its subsidiaries enjoy peaceful and undisturbed
possession under all such leases.
3.12 INTELLECTUAL PROPERTY.
Except as would not be reasonably likely to have a material adverse effect on
the Company and its subsidiaries, taken as a whole, the Company and its
subsidiaries own or have a valid license to use each trademark, service mark,
trade name, mask work, invention, patent, trade secret, copyright, know-how
(including any registrations or applications for registration of any of the
foregoing) or any other similar type of proprietary intellectual property right
(collectively, the "Company Intellectual Property") necessary to carry on the
business of the Company and its subsidiaries, taken as a whole, as currently
conducted or as proposed to be conducted. Neither the Company nor any of its
subsidiaries has received any written notice of infringement of or challenge to,
and there are no claims pending or, to the Company's knowledge, threatened with
respect to the rights of others to the use of, any the Company Intellectual
Property that, in any such case, individually or in the aggregate, would be
reasonably likely to have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
3.13 YEAR 2000 COMPLIANCE.
The Company has reviewed its operations and has made reasonable inquiries of any
third parties with which the Company has a material relationship to evaluate the
extent to which the business or operations of the Company will be affected by
the Year 2000 Problem (as defined below). As a result of such review, except as
otherwise described in the SEC Documents, the Company has no reason to believe,
and does not believe, that the Year 2000 Problem will have a material adverse
effect on the Company and its subsidiaries, taken as a whole or result in any
material loss or interference with the Company's business or operations. The
"Year 2000 Problem" as used herein means any significant risk that computer
hardware or software used in the receipt, transmission, processing,
manipulation, storage, retrieval, retransmission or other utilization of data or
in the operation of mechanical or electrical systems of any kind will not, in
the case of dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring prior to
January 1, 2000.
3.14 DISCLOSURE.
The Company has fully provided Purchaser with all the information that Purchaser
has requested for deciding whether to purchase the Preferred Stock. To the best
of its knowledge, neither this Agreement nor any other statements, documents or
certificates made or delivered in connection
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herewith or therewith (when read together) contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
herein or therein not misleading.
3.15 FINDERS' FEES.
There is no investment banker, broker, finder or other intermediary that has
been retained by, or is authorized to act on behalf of, the Company or any its
subsidiaries who might be entitled to any fee or commission from the Purchaser
or any of its affiliates upon consummation of the transactions contemplated by
this Agreement.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Company as follows:
4.1 ORGANIZATION.
The Purchaser is a corporation duly organized and validly existing and in good
standing under the laws of the State of California, with all requisite corporate
power and authority to own, lease and operate its properties and to conduct its
business as now being conducted.
4.2 AUTHORITY.
All corporate action on the part for the Purchaser necessary of the
authorization, execution, delivery and performance of this Agreement and the
Investor Rights Agreement by the Purchaser has been taken. This Agreement and
the Investor Rights Agreement have been duly executed and delivered by the
Purchaser and constitute legal, valid and binding obligations of the Purchaser,
enforceable in accordance with their respective terms, subject to laws of
general application relating to bankruptcy, insolvency and the relief of debtors
and rules of law governing specific performance, injunctive relief or other
equitable remedies, and to limitations of public policy as they may apply to
Section 4.5 of the Investor Rights Agreement. Subject to compliance with the HSR
Act, the execution and delivery of said Agreements do not, and the consummation
of the transactions contemplated hereby and thereby will not, conflict with or
result in any violation of any obligation under any provision of the Articles of
Incorporation or By-laws of the Purchaser or any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to the Purchaser.
4.3 INVESTMENT.
The Purchaser is acquiring the Shares for investment for its own account, not as
a nominee or agent, and not with a view to, or for resale in connection with,
any distribution thereof. The Purchaser understands that the Shares have not
been registered under the Securities Act by reason of a specific exemption from
the registration provisions of the Securities Act which depends upon, among
other things, the bona fide nature of the investment intent and the accuracy of
the Purchaser's representations and warranties contained herein.
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4.4 DISCLOSURE OF INFORMATION.
The Purchaser has had full access to all information it considers necessary or
appropriate to make an informed investment decision with respect to the Shares
to be purchased by the Purchaser under this Agreement. The Purchaser further has
had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Shares and to obtain
additional information necessary to verify any information furnished to the
Purchaser or to which the Purchaser had access.
4.5 INVESTMENT EXPERIENCE.
The Purchaser understands that the purchase of the Shares involves substantial
risk. The Purchaser has experience as an investor in securities of companies and
acknowledges that it is able to fend for itself, can bear the economic risk of
its investment in the Shares and has such knowledge and experience in financial
or business matters that it is capable of evaluating the merits and risks of
this investment in the Shares and protecting its own interests in connection
with this investment.
4.6 ACCREDITED INVESTOR STATUS.
The Purchaser is an "accredited investor" within the meaning of Regulation D
promulgated under the Securities Act.
4.7 RESTRICTED SECURITIES.
The Purchaser understands that the Shares to be purchased by the Purchaser
hereunder are characterized as "restricted securities" under the Securities Act
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under the Securities Act and applicable
regulations thereunder such securities may be resold without registration under
the Securities Act only in certain limited circumstances. The Purchaser is
familiar with Rule 144 of the SEC, as presently in effect, and understands the
resale limitations imposed thereby and by the Securities Act. The Purchaser
understands that the Company is under no obligation to register any of the
Shares sold hereunder except as provided in the Investor Rights Agreement.
4.8 IRISH SECURITIES LAWS.
The purchase of the Shares by Purchaser is not subject to, and will not cause
the Company to become subject to, any applicable securities laws of the Republic
of Ireland requiring any action by or on behalf of the Company.
SECTION 5
CONDITIONS TO OBLIGATION OF THE PURCHASER
The Purchaser's obligation to purchase the Shares at the Closing is, at
the option of the
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Purchaser, which may waive any such conditions, subject to the fulfillment on or
prior to the Closing Date of the following conditions:
5.1 REPRESENTATIONS AND WARRANTIES.
Each of the representations and warranties of the Company contained in Section 3
will be true and correct on and as of the date hereof and on and as of the
Closing Date with the same effect as though such representations and warranties
had been made as of the Closing Date. The Purchaser shall have received a
certificate signed by an officer of the Company to such effect on the Closing
Date.
5.2 COVENANTS.
All covenants, agreements and conditions contained in this Agreement to be
performed by the Company on or prior to the Closing Date shall have been
performed or complied with in all material respects. The Purchaser shall have
received a certificate signed by an officer of the Company to such effect on the
Closing Date.
5.3 NO ORDER PENDING.
There shall not then be in effect any order enjoining or restraining the
transactions contemplated by this Agreement.
5.4 NO LAW PROHIBITING OR RESTRICTING SALE OF THE SHARES.
There shall not be in effect any law, rule or regulation prohibiting or
restricting the sale of the Shares, or requiring any consent or approval of any
Person which shall not have been obtained to issue the Shares with full benefits
afforded the Preferred Stock or the Common Stock into which the Preferred Stock
is convertible (except as otherwise provided in this Agreement).
5.5 INVESTOR RIGHTS AGREEMENT.
The Company shall have executed and delivered the Investor Rights Agreement
substantially in the form attached hereto as Exhibit A (the "Investor Rights
Agreement").
5.6 INTERNET SERVICES AGREEMENT.
The Internet Services Agreement shall have been executed and delivered by the
Company and shall be in full force and effect.
5.7 NASDAQ LISTING.
The shares of Common Stock issuable upon conversion of the Shares shall have
been approved for listing upon issuance on the Nasdaq Stock Market.
5.8 ESCROW AGREEMENT.
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The Company, the Purchaser and the Escrow Agent shall have signed the Escrow
Agreement substantially in the form attached hereto as EXHIBIT C.
SECTION 6
CONDITIONS TO OBLIGATION OF THE COMPANY
The Company's obligation to sell and issue the Shares at the Closing
is, at the option of the Company, which may waive any such conditions, subject
to the fulfillment on or prior to the Closing Date of the following conditions:
6.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Purchaser contained in Section 4 will
be true and correct on and as of the date hereof and on and as of the Closing
Date with the same effect as though such representations and warranties had been
made as of the Closing Date. The Company shall have received a certificate
signed on behalf of the Purchaser by an officer of the Purchaser to such effect
on the Closing Date.
6.2 COVENANTS.
All covenants, agreements and conditions contained in this Agreement to be
performed by the Purchaser on or prior to the Closing Date shall have been
performed or complied with in all material respects. The Company shall have
received a certificate signed on behalf of the Purchaser by an officer of the
Purchaser to such effect on the Closing Date.
6.3 NO ORDER PENDING.
There shall not then be in effect any order enjoining or restraining the
transactions contemplated by this Agreement.
6.4 NO LAW PROHIBITING OR RESTRICTING THE SALE OF THE SHARES.
There shall not be in effect any law, rule or regulation prohibiting or
restricting the sale of the Shares, or requiring any consent or approval of any
person which shall not have been obtained to issue the Shares with full benefits
afforded the Preferred Stock or the Common Stock into which the Preferred Stock
is convertible (except as otherwise provided in this Agreement).
6.5 INVESTOR RIGHTS AGREEMENT.
The Purchaser shall have executed and delivered the Investor Rights Agreement
substantially in the form attached hereto as Exhibit A.
6.6 INTERNET SERVICES AGREEMENT.
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The Internet Services Agreement shall have been executed and delivered by the
Purchaser and shall be in full force and effect.
6.7 ESCROW AGREEMENT.
The Company, the Purchaser and the Escrow Agent shall have signed the Escrow
Agreement substantially in the form attached hereto as EXHIBIT C.
SECTION 7
COVENANTS
7.1 COMPLIANCE WITH HSR REQUIREMENTS.
Promptly after the Closing Date, the Company and the Purchaser shall each
complete and file their respective premerger notification report forms under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). After the filing thereof, the Company and the Purchaser shall use their
best efforts to comply with the requirements of the HSR Act in order to permit
the release of the Aggregate Purchase Price, plus accrued interest, to the
Company and the delivery of the Shares to the Purchaser, as provided in the
Escrow Agreement, as soon as practicable following the Closing Date.
Notwithstanding the foregoing, in connection with the HSR Act neither the
Company nor the Purchaser shall be obligated to comply with any request by, or
any requirement of, the Federal Trade Commission, or the Department of Justice,
(i) to disclose information that the Company or the Purchaser, as the case may
be, considers to be confidential and the disclosure of which may likely have a
material adverse effect on the disclosing party, (ii) to dispose of any assets
or operations, or (iii) to comply with any restrictions on the manner in which
they conduct their respective operations.
SECTION 8
MISCELLANEOUS
8.1 BEST EFFORTS.
Each of the Company and the Purchaser shall use its best efforts to take all
actions required under the HSR Act and under any other applicable law, rule or
regulation to ensure that the conditions to the Closing set forth herein are
satisfied on or before the Closing Date.
8.2 GOVERNING LAW.
This Agreement shall be governed in all respects by the internal laws of the
State of California as applied to contracts entered into solely between
residents of, and to be performed entirely within, such state, and without
reference to principles of conflicts of laws or choice of laws.
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8.3 SURVIVAL.
The representations and warranties in Sections 3 and 4 of this Agreement shall
not survive the Closing except for the representations and warranties in
Sections 4.3 and 4.7 hereof which shall continue to survive.
8.4 SUCCESSORS AND ASSIGNS.
This Agreement, the Investor Rights Agreement and the Certificate shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns, including without limitation successors by
merger. The Purchaser may assign any or all of its rights or obligations
hereunder in whole or in part to any of its domestic or foreign subsidiaries or
parent companies.
8.5 ENTIRE AGREEMENT; AMENDMENT.
This Agreement, the Certificate and the Investor Rights Agreement constitute the
full and entire understanding and agreement between the parties with regard to
the subject matter hereof and thereof and supersede all prior agreements and
understandings among the parties relating to the subject matter hereof. Neither
this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
8.6 NOTICES.
All notices, requests, demands or other communications which are required or may
be given pursuant to the terms of this Agreement shall be in writing and shall
be deemed to have been duly given: (i) on the date of delivery if delivered by
hand, (ii) upon the third day after such notice is (a) deposited in the United
States mail, if mailed by registered or certified mail, postage prepaid, return
receipt requested, or (b) sent by a nationally recognized overnight express
courier, or (iii) by facsimile upon written confirmation (other than the
automatic confirmation that is received from the recipient's facsimile machine)
of receipt by the recipient of such notice:
(a) if to the Company, to it at:
Earthlink Network, Inc.
3100 New York Drive
Pasadena, CA 91107
Attention: Charles G. Betty, CEO
with a copy addressed as set forth above but to the attention
of Director of Legal Affairs;
with a copy to:
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W. Tinley Anderson, III
Hunton & Williams
NationsBank Plaza, Suite 4100
600 Peachtree Street, NE
Atlanta, Georgia 30308
(b) if to the Purchaser, to it at:
Apple Computer, Inc. Limited
1 Infinite Loop
Cupertino, CA 95014
Attention: Nancy Heinen, Senior Vice President,
General Counsel and Secretary
with a copy to:
Larry W. Sonsini
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304
8.7 BROKERS.
(a) the Company has not engaged, consented to or authorized any broker,
finder or intermediary to act on its behalf, directly or indirectly, as a
broker, finder or intermediary in connection with the transactions
contemplated by this Agreement. The Company hereby agrees to indemnify and
hold harmless the Purchaser from and against all fees, commissions or other
payments owing to any party acting on behalf of the Company hereunder.
(b) The Purchaser has not engaged, consented to or authorized any broker,
finder or intermediary to act on its behalf, directly or indirectly, as a
broker, finder or intermediary in connection with the transactions
contemplated by this Agreement. The Purchaser hereby agrees to indemnify and
hold harmless the Company from and against all fees, commissions or other
payments owing to any party acting on behalf of the Purchaser hereunder.
8.8 FEES, COSTS AND EXPENSES.
All fees, costs and expenses (including attorneys' fees and expenses) incurred
by either party hereto in connection with the preparation, negotiation and
execution of this Agreement and the Investor Rights Agreement and the
consummation of the transactions contemplated hereby and thereby, shall be the
sole and exclusive responsibility of such party; PROVIDED, HOWEVER, that the
parties shall share equally all fees and expenses, other than attorneys' and
accountants' fees and
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expenses, incurred in connection with the premerger notification and report
forms under the HSR Act.
8.9 SEVERABILITY.
If any term, provision, covenant or restriction of this Agreement is held by a
court of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restriction of this Agreement
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated.
8.10 INITIAL PUBLIC ANNOUNCEMENT.
The Company and the Purchaser shall agree on the form and content of the initial
public announcement which shall be made concerning this Agreement and the
transactions contemplated hereby, and neither the Company nor the Purchaser
shall make such public announcement without the consent of the other, except as
required by law.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective authorized officers as of the date set forth above.
EARTHLINK NETWORK, INC.
By: /s/ Charles G. Betty
Name: Charles G. Betty
Title: President & Chief
Executive Officer
APPLE COMPUTER, INC. LIMITED
By: /s/ Fred D. Anderson
Name: Fred D. Anderson
Title: Executive V.P. and Chief
Financial Officer
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EXHIBIT 2.7
INVESTOR RIGHTS AGREEMENT
DATED AS OF JANUARY 4, 2000
BETWEEN
APPLE COMPUTER, INC. LIMITED
AND
EARTHLINK NETWORK, INC.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
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TABLE OF CONTENTS
PAGE
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SECTION I DEFINITIONS.................................................................................................1
1.1 CERTAIN DEFINITIONS.................................................................................1
SECTION II STANDSTILL AND RELATED COVENANTS...........................................................................4
2.1 STANDSTILL PROVISIONS...............................................................................4
2.2 SOLICITATION OF PROXIES.............................................................................4
2.3 TERMINATION.........................................................................................5
SECTION III RESTRICTIONS ON TRANSFER OF SECURITIES; COMPLIANCE WITH SECURITIES LAWS...................................5
3.1 RESTRICTIONS ON TRANSFER OF VOTING SECURITIES OF THE COMPANY........................................5
3.2 RESTRICTIVE LEGENDS.................................................................................6
3.3 COVENANT REGARDING EXCHANGE ACT FILINGS.............................................................6
SECTION IV REGISTRATION RIGHTS........................................................................................7
4.1 DEMAND REGISTRATION.................................................................................7
4.2 PIGGYBACK REGISTRATION..............................................................................7
4.3 DEMAND REGISTRATION PROCEDURES, RIGHTS AND OBLIGATIONS..............................................9
4.4 EXPENSES...........................................................................................13
4.5 INDEMNIFICATION....................................................................................13
4.6 ISSUANCES BY THE COMPANY OR OTHER HOLDERS..........................................................15
4.7 INFORMATION BY PURCHASER...........................................................................15
4.8 ASSIGNMENT.........................................................................................15
4.9 TERMINATION........................................................................................15
SECTION V BOARD REPRESENTATION.......................................................................................16
5.1 BOARD OF DIRECTORS.................................................................................16
5.2 CERTIFICATE OF INCORPORATION AND BY-LAWS...........................................................16
5.3 TERMINATION........................................................................................16
SECTION VI -RIGHTS TO ACQUIRE ADDITIONAL STOCK.......................................................................17
6.1 RIGHT TO MAINTAIN..................................................................................17
6.2 RIGHT TO PURCHASE ADDITIONAL SHARES ON STRATEGIC FINANCINGS........................................18
6.3 ISSUANCE AND DELIVERY OF ADDITIONAL STOCK..........................................................18
</TABLE>
<TABLE>
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PAGE
<S> <C>
SECTION VII -MISCELLANEOUS...........................................................................................18
7.1 EFFECTIVE DATE.....................................................................................18
7.2 NOTICES............................................................................................18
7.3 GOVERNING LAW......................................................................................19
7.4 ENTIRE AGREEMENT; AMENDMENTS.......................................................................19
7.5 SUCCESSORS AND ASSIGNS.............................................................................20
7.6 SEVERABILITY.......................................................................................20
</TABLE>
<PAGE>
INVESTOR RIGHTS AGREEMENT
This INVESTOR RIGHTS AGREEMENT (this "AGREEMENT") is entered into as of
January 4, 2000, by and between Apple Computer, Inc. Limited, a corporation
organized under the laws of the Republic of Ireland ("PURCHASER"), and Earthlink
Network, Inc., a Delaware corporation (the "COMPANY").
WHEREAS, Purchaser intends to purchase shares of Series C Preferred
Stock, par value $0.01 per share, of the Company (the "PREFERRED STOCK")
pursuant to the terms and conditions of a Preferred Stock Purchase Agreement
dated as of January 4, 2000 (the "PURCHASE AGREEMENT") between the Company and
Purchaser;
WHEREAS, the Purchase Agreement requires that the Company enter into
this Agreement with Purchaser;
WHEREAS, this Agreement is not intended to be effective until the date
of release of the shares of Preferred Stock from escrow pursuant to Section 2.3
of the Purchase Agreement (the "EFFECTIVE DATE").
NOW, THEREFORE, in consideration of the foregoing, the parties to this
Agreement hereby agree as follows:
SECTION I
DEFINITIONS
1.1 CERTAIN DEFINITIONS. As used in this Agreement:
(a) "AFFILIATE" means, with respect to any Person, any Person directly
or indirectly controlling, controlled by, or under common control with, such
other Person. For purposes of this definition, "CONTROL" when 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 the ownership of voting securities, by contract or otherwise;
the terms "CONTROLLING" and "CONTROLLED" have meanings correlative to the
foregoing.
(b) "BENEFICIAL OWNERSHIP" or "beneficial owner" has the meaning
provided in Rule 13d-3 promulgated under the Exchange Act. References to
ownership of Voting Securities hereunder mean beneficial ownership unless
otherwise specified.
(c) "CHANGE IN CONTROL OF THE COMPANY" shall mean any transaction or
series of related transactions (other than the exercise by Sprint of its
subscription rights under Section 3.01 of that certain Governance Agreement
dated February 10, 1998 between Sprint Corporation, Sprint Communications
Company L.P., Earthlink Operations, Inc., and the Company (the "GOVERNANCE
<PAGE>
AGREEMENT")) that would occasion: (i) the Company's sale or lease of all or
substantially all of its business or assets relating to the provision of
Internet access services to a third party; (ii) any merger, consolidation, share
exchange, recapitalization, business combination or other transaction resulting
in the exchange of the outstanding shares of the Company for securities or
consideration issued, or caused to be issued, by the acquiring corporation or
its subsidiary, unless the stockholders of the Company as of the date prior to
the closing date of such transaction (or series of related transactions) hold at
least 50% of the voting power of the surviving corporation in such transaction;
(iii) any tender offer or exchange offer for 50% or more of the outstanding
voting securities of the Company or the filing of a registration statement under
the United States Securities Act of 1933 in connection therewith; (iv) any
person having acquired beneficial ownership or the right to acquire beneficial
ownership of, or any "group" (as such term is defined under Section 13(d) of the
United States Securities Exchange Act of 1934) having been formed that
beneficially owns or has the right to acquire beneficial ownership of, 50% or
more of the outstanding voting securities of the Company.
(d) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(e) "GROUP" or "GROUP" shall have the meaning provided in Section
13(d)(3) of the Exchange Act and the rules and regulations promulgated
thereunder.
(f) "HEDGING TRANSACTIONS" means engaging in short sales and the
purchase and sale of puts and calls and other derivative securities, so long as
Purchaser retains beneficial ownership of the Shares.
(g) "PERSON" shall mean any person, individual, corporation,
partnership, trust or other nongovernmental entity or any governmental agency,
court, authority or other body (whether foreign, federal, state, local or
otherwise).
(h) "REGISTER," "REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
(i) "REGISTRABLE SECURITIES" means (i) all the Shares (including all
the shares of Preferred Stock acquired by Purchaser pursuant to Section 6.1
below) and (ii) any shares of Common Stock of the Company issued as (or issuable
upon the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of the Preferred Stock or the Shares. Notwithstanding the
foregoing, Registrable Securities shall exclude any Registrable Securities sold
by a Person in a transaction in which rights under Section 4 hereof are not
assigned in accordance with this Agreement or any Registrable Securities sold to
a Person who receives such securities free of all transfer restrictions under
applicable federal and state securities laws, whether sold pursuant to Rule 144
promulgated under the Securities Act, in a registered public offering, or
otherwise.
(j) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(k) "SEC" means the Securities and Exchange Commission or any other
federal
<PAGE>
agency at the time administering the Securities Act.
(l) "SHARES" means the shares of Common Stock of the Company issued or
issuable upon conversion of the Preferred Stock.
(m) "SPRINT" means, collectively, Sprint Corporation and Sprint
Communications Company L.P.
(n) "SUBSIDIARY" shall mean a corporation or other Person at least 50%
of the outstanding Voting Securities of which are owned, directly or indirectly,
by Purchaser.
(o) "TRANSACTION RELATED SECURITIES" means (i) Shares, (ii) shares of
Preferred Stock, and (iii) shares of Common Stock and other securities of the
Company issued as (or issuable upon conversion or exercise of any warrant, right
or other security as) a dividend or other distribution with respect to or in
exchange for or in replacement of, or upon conversion or exercise of any such
securities; provided that Transaction Related Securities shall not include any
securities acquired by Purchaser pursuant to Section 6.2 hereof.
(p) "TRIGGERING INVESTMENT" means any of the following companies
engaged in the business of manufacturing, marketing, selling or distributing
computer hardware or Internet connectivity devices, computer operating systems
or related products or providing Internet access has acquired or become the
beneficial owner of any voting securities or securities convertible into or
exchangeable or exercisable for voting securities of the Company, or has
obtained the right to do so, pursuant to or in connection with any agreement
entered into between such company and the Company (whether such securities are
purchased directly from the Company or otherwise): Compaq Computer Corp.,
Hewlett Packard Company, Dell Computer Corporation, Gateway, Inc., Sony Corp.,
Sun Microsystems, Inc., Intel Corporation, Microsoft Corporation, America
Online, Inc., AT&T Corporation, and eMachines Inc., and any Affiliates of any of
the foregoing.
(q) "VOTING SECURITIES" means all securities of the Company, entitled,
in the ordinary course, to vote in the election of directors of the Company
generally. Voting Securities shall not include stockholder rights or other
comparable securities having Voting Power only upon the happening of a trigger
event or comparable contingency and which can only be transferred together with
the Voting Securities to which they attach or the right to vote for a class
director only. References herein to meetings of holders of Voting Securities
shall include meetings of any class or type thereof.
(r) "VOTING POWER" or "TOTAL VOTING POWER" of the Company refer to the
votes or total number of votes which at the time of calculation may be cast in
the election of directors of the Company at any meeting of stockholders of the
Company if all securities entitled to vote in the election of directors of the
Company generally were present and voted at such meeting; provided that for
purposes of references herein made to any Person's "Voting Power" or percentage
beneficial ownership of "Total Voting Power," any rights (other than rights
referred to in any rights plan of the Company or a successor to such rights plan
so long as such rights can only be transferred together with the Voting
Securities to which they attach) of such Person to acquire Voting Securities
which
<PAGE>
are then exercisable or could potentially become exercisable within 60 days of
the date of such calculation (whether or not the exercise of any such right
shall be conditioned upon the passage of any contingency) shall be deemed to
have been exercised in full.
SECTION II
STANDSTILL AND RELATED COVENANTS
2.1 STANDSTILL PROVISIONS.
(a) Purchaser shall not acquire, directly or indirectly, and shall not
cause or permit any Affiliate of Purchaser to acquire, directly or indirectly
(through market purchases or otherwise), record or beneficial ownership of any
Voting Securities of the Company representing, when taken together with all
securities owned by such Persons, in excess of a percentage greater than
nineteen and nine tenths (19.9%) (the "STANDSTILL PERCENTAGE") of the Total
Voting Power of the Company without the prior written consent of the Company's
Board of Directors; provided, however, that the prior written consent of the
Board of Directors of the Company shall not be required for the acquisition of
any Voting Securities of the Company pursuant to the conversion of any of the
shares of Preferred Stock or resulting from a stock split, stock dividend or
similar recapitalization by the Company or for the acquisition of any Voting
Securities of the Company pursuant to Section VI hereof. Nothing contained in
this Section 2.1 shall adversely affect any right of Purchaser to acquire record
or beneficial ownership of Voting Securities of the Company pursuant to any
rights plan instituted by the Company. Ownership of Voting Securities by
employee benefit plans or pension plans shall not be beneficial ownership by
Purchaser for purposes of this Section 2.1, provided that the investment
decisions of such plans are not directed, directly or indirectly, by the
Purchaser or any of its Affiliates.
(b) Purchaser and its Affiliates will not be obliged to dispose of any
Voting Securities to the extent that the aggregate percentage of the Total
Voting Power of the Company represented by Voting Securities beneficially owned
by Purchaser and its Affiliates or which Purchaser and its Affiliates has a
right to acquire is increased beyond the Standstill Percentage (i) as a result
of a recapitalization of the Company or a repurchase or exchange of securities
by the Company or its Affiliates; (ii) by way of stock dividends or other
distributions or rights or offerings made available to holders of shares of
Voting Securities generally; or (iii) with the prior written consent of the
Company's Board of Directors.
2.2 SOLICITATION OF PROXIES. Without the prior written consent of
the Company's Board of Directors, Purchaser shall not, and shall not cause or
permit any Affiliate of Purchaser to, directly or indirectly (i) initiate,
propose or otherwise solicit the Company's stockholders for the approval of
one or more stockholder proposals with respect to the Company or induce or
attempt to induce any other Person to initiate any such stockholder proposal,
(ii) make, or in any way participate in, any "SOLICITATION" of "PROXIES" (as
such terms are defined or used in Regulation 14a-1 under the Exchange Act)
with respect to any Voting Securities of the Company, or become a
"PARTICIPANT" in any "ELECTION CONTEST" (as such terms are used in Rule
14a-11 of Regulation 14A under the
<PAGE>
Exchange Act), with respect to the Company or (iii) call or seek to have called
any meeting of the holders of Voting Securities of the Company.
2.3 TERMINATION. The provisions of this Section 2 shall terminate
upon the earlier to occur of: (i) the two-year anniversary of the Closing
Date (as defined in the Purchase Agreement); (ii) the expiration or
termination of the exclusivity provisions set forth in Section 3 of the
Internet Services Agreement, dated January 4, 2000, by and among Purchaser
and the Company (the "INTERNET SERVICES AGREEMENT"); or (iii) the
announcement of an offer by any party other than Purchaser or an Affiliate of
Purchaser (including Sprint or any of its Affiliates) to enter into a
transaction the effect of which would effect, or a definitive agreement or
agreement in principle between the Company and any third party to effect, a
Change in Control of the Company.
SECTION III
RESTRICTIONS ON TRANSFER OF
SECURITIES; COMPLIANCE WITH SECURITIES LAWS
3.1 RESTRICTIONS ON TRANSFER OF VOTING SECURITIES OF THE COMPANY.
Purchaser shall not, and shall not cause or permit any Affiliate of Purchaser
to, directly or indirectly, offer to sell, contract to sell, make any short
sale of, or otherwise sell, dispose of, loan, gift, pledge or grant any
options or rights with respect to, any Transaction Related Securities of the
Company, now or hereafter acquired, or with respect to which Purchaser (or
any Affiliate of Purchaser) has or hereafter acquires the power of
disposition (or enter into any agreement or understanding with respect to the
foregoing), except:
(a) to the Company, or any Person or group approved in writing in
advance by the Company;
(b) to any Subsidiary of Purchaser, so long as such Subsidiary agrees
in writing to hold such Voting Securities of the Company subject to all the
provisions of this Agreement;
(c) pursuant to a public offering of Purchaser's Voting Securities of
the Company registered under the Securities Act;
(d) through a sale of Voting Securities of the Company in a
transaction exempt from registration under the Securities Act, including
pursuant to Rule 144 under the Securities Act;
(e) pursuant to any private sale of Voting Securities of the Company
exempt from the registration requirements under the Securities Act, provided
that, if such securities are "restricted securities" as defined in Rule 144, any
such purchaser (and any transferee of such purchaser) shall agree to take and
hold such securities subject to the provisions and upon the conditions specified
in this Section 3, and it will be a condition precedent to the effectiveness of
any such transfer that Purchaser shall have delivered to the Company a written
agreement of such purchaser to that effect
<PAGE>
in form and substance reasonably satisfactory to the Company for purposes of
compliance with the applicable requirements of this Section 3.1(e));
Nothing in this Section 3.1 shall be construed to prohibit
Hedging Transactions with respect to securities of the Company provided that
such transactions do not result in non-compliance with the foregoing
restrictions insofar such provisions relate to, and are limited in their
application to, the Transaction Related Securities.
3.2 RESTRICTIVE LEGENDS. The certificate or certificates
representing the (i) the Shares, (ii) the shares of Preferred Stock and (iii)
any securities issued in respect of the foregoing as a result of any stock
split, stock dividend, recapitalization, reclassification or similar
transaction (collectively, the "RESTRICTED SECURITIES") shall be stamped or
otherwise imprinted with legends substantially in the following form (in
addition to any legend required under applicable state securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL
SATISFACTORY TO THE ISSUER AS TO THE AVAILABILITY OF AN EXEMPTION FROM
REGISTRATION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE TERMS AND CONDITIONS (INCLUDING TRANSFERABILITY RESTRICTIONS) SET
FORTH IN THAT CERTAIN INVESTOR RIGHTS AGREEMENT BETWEEN THE ISSUER AND
APPLE COMPUTER, INC. LIMITED DATED JANUARY 4, 2000.
The Company agrees to remove the legends set forth in the preceding
paragraph upon receipt of an opinion of counsel in form and substance reasonably
satisfactory to the Company that the Shares or the Shares of Preferred Stock are
eligible for transfer without registration under the Securities Act, and upon
termination of this Agreement, respectively. .
3.3 COVENANT REGARDING EXCHANGE ACT FILINGS. With a view to making
available to Purchaser the benefits of Rule 144 promulgated under the
Securities Act, and any other rules or regulations of the SEC which may at
any time permit Purchaser to sell any Restricted Securities without
registration, until the date of termination of this Agreement, the Company
agrees to use commercially reasonable efforts to file with the SEC in a
timely manner all reports and other documents required to be filed under the
Exchange Act.
SECTION IV
REGISTRATION RIGHTS
<PAGE>
4.1 DEMAND REGISTRATION.
(a) If at any time after the one-year anniversary of the Closing Date,
the Company shall receive from Purchaser a written request (a "DEMAND REQUEST")
that the Company register on Form S-3 under the Securities Act (or if such form
is not available, any registration statement form then available to the Company)
Registrable Securities having an anticipated aggregate offering price, net of
underwriting discounts and commissions, of at least $50 million, then the
Company shall use commercially reasonable efforts to cause the Registrable
Securities specified in such Demand Request (THE "DEMAND REGISTRABLE
SECURITIES") to be registered as soon as reasonably practicable so as to permit
the offering and sale thereof and, in connection therewith, shall prepare and
file with the SEC as soon as practicable after receipt of such Demand Request, a
registration statement (a "DEMAND REGISTRATION STATEMENT") to effect such
registration; provided, however, that each such Demand Request shall: (i)
specify the number of Demand Registrable Securities intended to be offered and
sold by Purchaser pursuant thereto (which number of Demand Registrable
Securities shall have an anticipated aggregate offering price, net of
underwriting discounts and commissions, of at least $50 million); (ii) express
the present intention of Purchaser to offer or cause the offering of such Demand
Registrable Securities pursuant to such Demand Registration Statement; (iii)
describe the nature or method of distribution of such Demand Registrable
Securities pursuant to such Demand Registration Statement (including, in
particular, whether Purchaser plans to effect such distribution by means of an
underwritten offering or other method); and (iv) contain the undertaking of
Purchaser to provide all such information and materials and take all such
actions as may be required in order to permit the Company to comply with all
applicable requirements of the Securities Act, the Exchange Act and the rules
and regulations of the SEC thereunder, and to obtain any desired acceleration of
the effective date of such Demand Registration Statement.
(b) The procedures to be followed by the Company and Purchaser, and
the respective rights and obligations of the Company and Purchaser, with respect
to the preparation, filing and effectiveness of Demand Registration Statements
and the distribution of Demand Registrable Securities pursuant to Demand
Registration Statements under this Section 4.1 are set forth in Section 4.3
hereof.
4.2 PIGGYBACK REGISTRATION.
(a) If at any time after the one-year anniversary of the Closing Date,
the Company shall determine to register any of its equity or equity-linked
securities (other than registration statements relating to (i) employee,
consultant or distributor compensation or incentive arrangements (including
employee benefit plans), or (ii) acquisitions or any transaction or transactions
under Rule 145 under the Securities Act (or any successor rule with similar
effect)), then the Company will promptly give Purchaser written notice thereof
and include in such registration statement (a "PIGGYBACK REGISTRATION
STATEMENT"), and in any underwriting involved therein, all Registrable
Securities (the "PIGGYBACK REGISTRABLE SECURITIES") specified in a written
request made by Purchaser (a "PIGGYBACK REQUEST") within ten (10) business days
after receipt of such written notice from the Company; provided, however, that
nothing in this Section 4.2(a), or any other provision of this Agreement, shall
be construed to limit the absolute right of the Company, for any reason and in
<PAGE>
its sole discretion: (i) to delay, suspend or terminate the filing of any
Piggyback Registration Statement; (ii) to delay the effectiveness of any
Piggyback Registration Statement; (iii) to terminate or reduce the number of
Piggyback Registrable Securities to be distributed pursuant to any Piggyback
Registration Statement (including, without limitation, pursuant to Section
4.2(c) hereof); or (iv) to withdraw such Piggyback Registration Statement.
(b) If the Piggyback Registration Statement of which the Company gives
notice is for an underwritten offering, the Company shall so advise Purchaser as
a part of the written notice given pursuant to Section 4.2(a). In such event,
the right of Purchaser to registration pursuant to this Section 4.2 shall be
conditioned upon the agreement of Purchaser to participate in such underwriting
and in the inclusion of such Piggyback Registrable Securities in the
underwriting to the extent provided herein. Purchaser shall (together with the
Company and any other holders distributing securities in such Piggyback
Registration Statement, if any) enter into an underwriting agreement (the
"PIGGYBACK UNDERWRITING AGREEMENT") in customary form with the underwriter or
underwriters selected for such underwriting by the Company.
(c) Notwithstanding any other provision of this Agreement, if the
managing underwriters of any underwritten offering pursuant to a Piggyback
Request determine, in their sole discretion that, after including all the shares
to be offered by the Company and all the shares of any other Persons entitled to
registration rights with respect to such Piggyback Registration Statement
(pursuant to other agreements with the Company), marketing factors require a
limitation of the number of Piggyback Registrable Securities to be underwritten,
the managing underwriters of such offering may exclude any and all of the
Piggyback Registrable Securities, provided that such cut-back is made pro rata
(other than with respect to any securities proposed to be sold by Sprint
pursuant to a registration effected pursuant to the demand registration rights
of Sprint as in effect on the date hereof) with respect to any other securities
proposed to be included in such registration statement pursuant to "piggy-back"
registration rights (a "PIGGYBACK MARKET CUT-BACK"). If Purchaser disapproves of
the terms of any such underwriting, it may elect to withdraw therefrom by
written notice to the Company and the managing underwriters. Any Piggyback
Registrable Securities excluded or withdrawn from such underwriting shall be
withdrawn from such Piggyback Registration Statement.
(d) Except to the extent specifically provided in this Section 4.2
hereof, the procedures to be followed by the Company and Purchaser, and the
respective rights and obligations of the Company and Purchaser, with respect to
the distribution of any Piggyback Registrable Securities by Purchaser pursuant
to any Piggyback Registration Statement filed by the Company shall be as set
forth in the Piggyback Underwriting Agreement, or any other agreement or
agreements governing the distribution of such Piggyback Registrable Securities
pursuant to such Piggyback Registration Statement.
4.3 DEMAND REGISTRATION PROCEDURES, RIGHTS AND OBLIGATIONS. The
procedures to be followed by the Company and Purchaser, and the respective
rights and obligations of the Company and Purchaser, with respect to the
preparation, filing and effectiveness of Demand Registration Statements and
the distribution of Demand Registrable Securities pursuant thereto, are as
follows:
<PAGE>
(a) Purchaser shall not be entitled to make more than one Demand
Request during any twelve-month period (the "12-MONTH LIMITATION") and in any
event, no more than a total of two Demand Requests; provided, however, that (i)
any Demand Request that: (A) does not result in the corresponding Demand
Registration Statement being declared effective by the SEC; (B) is withdrawn by
Purchaser following the imposition of a stop order by the SEC with respect to
the corresponding Demand Registration Statement; (C) is withdrawn by Purchaser
as a result of the exercise by the Company of its suspension rights pursuant to
Sections 4.3(e) or (f) hereof; or (D) is withdrawn by Purchaser as a result of a
Demand Market Cut-Back (as defined in Section 4.3(d) hereof) shall not count for
the purposes of determining compliance with the 12-Month Limitation and shall
not be included as one of the two Demand Requests to which Purchaser is
entitled. Any Demand Request that is withdrawn by Purchaser for any reason other
than as set forth in the previous sentence shall count for purposes of
determining compliance with the 12-Month Limitation. Piggyback Requests shall
not count for purposes of determining compliance with the 12-Month Limitation
and shall not be counted as one of the two Demand Requests to which Purchaser is
entitled, regardless of whether a Piggyback Registration Statement is filed,
declared effective or withdrawn or whether any distribution of Piggyback
Registrable Securities is effected, terminated or cut-back (pursuant to Section
4.2(c) hereof, or otherwise). Purchaser shall not be entitled to offer or sell
any securities pursuant to a Demand Registration Statement unless and until,
following a Demand Request, the Company has made all required filings with the
SEC with respect to the distribution of Registrable Securities contemplated by
such Demand Request such filings have become effective and the Company has
notified Purchaser of the foregoing and that no Suspension Condition then
exists.
(b) The Company shall use commercially reasonable efforts to cause
each Demand Registration Statement to be declared effective promptly and to keep
such Demand Registration Statement continuously effective until the earlier to
occur of: (i) the sale or other disposition of the Registrable Securities so
registered; (ii) (X) in the case of a firmly committed, underwritten offering,
sixty (60) days after the effective date of any Demand Registration Statement,
and (Y) in the case of all other plans of distribution, fifteen (15) business
days after the effective date of such Demand Registration Statement; and (iii)
the termination of Purchaser's registration rights pursuant to Section 4.9
hereof. The Company shall prepare and file with the SEC such amendments and
supplements to each Demand Registration Statement and each prospectus used in
connection therewith as may be necessary to make and to keep such Demand
Registration Statement effective and to comply with the provisions of the
Securities Act with respect to the sale or other disposition of all Registrable
Securities proposed to be distributed pursuant to such Demand Registration
Statement until the earlier to occur of: (i) the sale or other disposition of
the Registrable Securities so registered; (ii) (X) in the case of a firmly
committed, underwritten offering, sixty (60) days after the effective date of
any Demand Registration Statement, and (Y) in the case of all other plans of
distribution, fifteen (15) business days after the effective date of such Demand
Registration Statement; and (iii) the termination of Purchaser's registration
rights pursuant to Section 4.9 hereof.
(c) In connection with any underwritten offering pursuant to a Demand
Registration Statement which Purchaser has requested be underwritten, the
Company, on the one hand, and Purchaser, on the other hand, shall each select
one investment banking firm to serve as co-manager
<PAGE>
of such offering. The co-manager selected by the Company shall be subject to the
prior approval of Purchaser, which approval shall not be unreasonably withheld,
and the co-manager selected by Purchaser shall be subject to the prior approval
of the Company, which approval shall not be unreasonably withheld. Each of the
co-managers so selected by the Company and Purchaser are hereinafter
collectively referred to as the "DEMAND MANAGING UNDERWRITERS." The Demand
Underwriter selected by Purchaser shall be the lead Demand Managing Underwriter,
whose responsibilities shall include running the "books" for any offering. The
Company shall, together with Purchaser, enter into an underwriting agreement
with the Demand Managing Underwriters, which agreement shall contain
representations, warranties, indemnities and agreements then customarily
included by an issuer in underwriting agreements with respect to secondary
distributions under demand registration statements or shelf registration
statements, as the case may be, and shall stipulate that the Demand Managing
Underwriters will receive equal commissions and fees and other remuneration in
connection with the distribution of any Demand Registrable Securities
thereunder.
(d) Notwithstanding any other provision of this Agreement, in
connection with any underwritten offering, the number of Demand Registrable
Securities proposed to be distributed by Purchaser pursuant to any Demand
Request may be limited by the Demand Managing Underwriters if such Demand
Managing Underwriters determine that the sale of such Demand Registrable
Securities would significantly and adversely affect the market price of the
Common Stock (a "DEMAND MARKET CUT-BACK"). If Purchaser disapproves of the terms
of any proposed underwritten offering under a Demand Registration Statement
(including, without limitation, any reduction in the number of Demand
Registrable Securities to be sold by Purchaser thereunder pursuant to this
Section 4.4(d)), Purchaser may elect to withdraw therefrom by written notice to
the Company and the Demand Managing Underwriters. Any Demand Registrable
Securities excluded or withdrawn from such underwriting shall also be withdrawn
from any applicable Demand Registration Statement.
(e) Notwithstanding any other provisions of this Agreement, in the
event that the Company receives a Demand Request, at a time when the Company (i)
shall have filed, or has a bona fide intention to file, a registration statement
with respect to a proposed public offering of equity or equity-linked securities
or (ii) has commenced, or has a bona fide intention to commence, a public
offering of equity or equity-linked securities pursuant to an existing effective
shelf or other registration statement, then the Company shall be entitled to
suspend, for an aggregate period of up to sixty (60) days after the receipt by
the Company of such Demand Request, the filing of any Demand Registration
Statement.
(f) Notwithstanding any other provision of this Agreement, in the
event that the Company's Board of Directors determines that: (i) non-public
material information regarding the Company exists, the immediate disclosure of
which would be significantly disadvantageous to the Company; (ii) the prospectus
constituting a part of any Demand Registration Statement covering the
distribution of any Demand Registrable Securities contains an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; or (iii) an offering
of Demand Registrable Securities would materially interfere with any proposed
material acquisition, disposition or other similar corporate transaction or
event involving the Company (each of the events or conditions referred to in
clauses (i), (ii) and (iii) of this sentence is hereinafter referred to as a
<PAGE>
"SUSPENSION CONDITION"), then the Company shall have the right to suspend the
filing or effectiveness of any Demand Registration Statement or to suspend any
distribution of Demand Registrable Securities pursuant to any effective Demand
Registration Statement for so long as such Suspension Condition exists. The
Company will as promptly as practicable provide written notice to Purchaser when
a Suspension Condition arises and when it ceases to exist. Upon receipt of
notice from the Company of the existence of any Suspension Condition, Purchaser
shall forthwith discontinue efforts to: (i) file or cause any Demand
Registration Statement to be declared effective by the SEC (in the event that
such Demand Registration Statement has not been filed, or has been filed but not
declared effective, at the time Purchaser receives notice that a Suspension
Condition has arisen); or (ii) offer or sell Demand Registrable Securities (in
the event that such Demand Registration Statement has been declared effective at
the time Purchaser receives notice that a Suspension Condition has arisen). In
the event that Purchaser had previously commenced or was about to commence the
distribution of Demand Registrable Securities pursuant to a prospectus under an
effective Demand Registration Statement, then the Company shall, as promptly as
practicable after the Suspension Condition ceases to exist, make available to
Purchaser (and to each underwriter, if any, participating in such distribution)
an amendment or supplement to such prospectus. If so directed by the Company,
Purchaser shall deliver to the Company all copies, other than permanent file
copies then in Purchaser's possession, of the most recent prospectus covering
such Demand Registrable Securities at the time of receipt of such notice.
(g) Notwithstanding any other provision of this Agreement, the Company
shall not be permitted to postpone (i) the filing or effectiveness of any Demand
Registration Statement or (ii) the distribution of any Demand Registrable
Securities pursuant to an effective Demand Registration Statement pursuant to
Sections 4.3(e), 4.3(f) or 4.8(a) hereof for an aggregate of more than sixty
(60) days in any three hundred sixty-five day (365) day period (including any
market standoff periods applicable to Purchaser pursuant to Section 4.8(a)
hereof).
(h) The Company shall promptly notify Purchaser of any stop order
issued or, to the Company's knowledge, threatened to be issued by the SEC with
respect to any Demand Registration Statement, and will use its best efforts to
prevent the entry of such stop order or to remove it if entered at the earliest
possible date.
(i) The Company shall furnish to Purchaser (and any underwriters in
connection with any underwritten offering) such number of copies of any
prospectus (including any preliminary prospectus and any amended or supplemented
prospectus), in conformity with the requirements of the Securities Act, as
Purchaser (and such underwriters) shall reasonably request in order to effect
the offering and sale of any Demand Registrable Securities to be offered and
sold, but only while the Company shall be required under the provisions hereof
to cause the Demand Registration Statement pursuant to which such Demand
Registrable Securities are intended to be distributed to remain current.
(j) The Company shall use commercially reasonable efforts to register
or qualify the Demand Registrable Securities covered by each Demand Registration
Statement under the state securities or "blue sky" laws of such states as
Purchaser shall reasonably request, maintain any such registration or
qualification current, until the earlier to occur of: (i) the sale or other
disposition of the
<PAGE>
Registrable Securities so registered; (ii) (X) in the case of a firmly
committed, underwritten offering, sixty (60) days after the effective date of
any Demand Registration Statement, and (Y) in the case of all other plans of
distribution, fifteen (15) business days after the effective date of such Demand
Registration Statement; and (iii) the termination of Purchaser's registration
rights pursuant to Section 4.10 hereof; provided, however, that the Company
shall not be required to take any action that would subject it to the general
jurisdiction of the courts of any jurisdiction in which it is not so subject or
to qualify as a foreign corporation in any jurisdiction where the Company is not
so qualified.
(k) The Company shall furnish to Purchaser and to each underwriter
engaged in an underwritten offering of Demand Registrable Securities, a signed
counterpart, addressed to Purchaser or such underwriter, of (i) an opinion or
opinions of counsel to the Company (with respect to the Company and securities
law compliance by the Company) and (ii) a comfort letter or comfort letters from
the Company's independent public accountants, each in customary form and
covering such matters of the type customarily covered by opinions or comfort
letters, as the case may be, as Purchaser or the managing underwriters may
reasonably request.
(l) The Company shall use commercially reasonable efforts to make
appropriate members of its management reasonably available for due diligence
purposes, "road show" presentations and analyst presentations in connection with
any distributions of Demand Registrable Securities pursuant to a Demand
Registration Statement.
(m) The Company shall use commercially reasonable efforts to cause all
Demand Registrable Securities to be listed on each securities exchange on which
similar securities of the Company are then listed.
(n) The Company shall make generally available to its securityholders,
as soon as reasonably practicable, an earnings statement covering a period of
twelve (12) months, beginning three months after the effective date of any
Demand Registration Statement relating to the distribution of Demand Registrable
Securities, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act.
(o) The Company shall take all such other actions either reasonably
necessary or desirable to permit the Registrable Securities held by Purchaser to
be registered and disposed of in accordance with the methods of disposition
described herein.
4.4 EXPENSES. The Company shall pay all fees and expenses incurred
in connection with the performance of its obligations under Sections 4.1 and
4.2 hereof, including, without limitation, all SEC and blue sky registration
and filing fees, printing expenses, transfer agents' and registrars' fees,
the reasonable fees and disbursements of the Company's outside counsel and
independent accountants, and the reasonable fees and disbursements of one
outside counsel to Purchaser incurred in connection with the preparation,
filing and amendment of any registration statement authorized by this
Agreement (but excluding underwriters' and brokers' discounts and commissions
which shall be paid by the holders).
<PAGE>
4.5 INDEMNIFICATION.
(a) In the case of any offering registered pursuant to this Section 4,
the Company hereby indemnifies and agrees to hold harmless Purchaser (and its
officers and directors), any underwriter (as defined in the Securities Act) of
Registrable Securities offered by Purchaser, and each Person, if any, who
controls Purchaser or any such underwriter within the meaning of Section 15 of
the Securities Act against any losses, claims, damages or liabilities, joint or
several, to which any such Persons may be subject, under the Securities Act or
otherwise, and to reimburse any of such Persons for any legal or other expenses
reasonably incurred by them in connection with investigating any claims or
defending against any actions, insofar as such losses, claims, damages or
liabilities arise out of or are based upon (a) any untrue statement or alleged
untrue statement of a material fact contained in the registration statement
under which such Registrable Securities were registered under the Securities Act
pursuant to this Section 4, the prospectus contained therein (during the period
that the Company is required to keep such prospectus current), or any amendment
or supplement thereto, or the omission or alleged omission to state therein (if
so used) a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances in which they were made,
not misleading or (b) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any federal or state securities law or any
rule or regulation promulgated under the Securities Act, the Exchange Act or any
federal or state securities law in connection with the offering covered by such
registration statement, except insofar as such losses, claims, damages or
liabilities arise out of or are (i) based upon any such untrue statement or
omission or alleged untrue statement or omission made in reliance upon
information furnished to the Company in writing by Purchaser or any underwriter
for Purchaser specifically for use therein, or (ii) made in any preliminary
prospectus, and the prospectus contained in the registration statement as
declared effective or in the form filed by the Company with the SEC pursuant to
Rule 424 under the Securities Act shall have corrected such statement or
omission and a copy of such prospectus shall not have been sent or otherwise
delivered to such Person at or prior to the confirmation of such sale to such
Person.
(b) By requesting registration under this Section 4, Purchaser agrees,
if Registrable Securities held by Purchaser are included in the securities as to
which such registration is being effected, and each underwriter shall agree, in
substantially the same manner and to substantially the same extent as set forth
in the preceding paragraph, to indemnify and to hold harmless the Company and
its directors and officers and each Person, if any, who controls the Company
within the meaning of the Securities Act against any losses, claims, damages or
liabilities, joint or several, to which any of such Persons may be subject under
the Securities Act or otherwise, and to reimburse any of such Persons for any
legal or other expenses incurred in connection with investigating or defending
against any such losses, claims, damages or liabilities, but only to the extent
it arises out of or is based upon (a) an untrue statement or alleged untrue
statement or omission or alleged omission of a material fact in any registration
statement under which the Registrable Securities were registered under the
Securities Act pursuant to this Section 4, any prospectus contained therein, or
any amendment or supplement thereto, which was based upon and made in conformity
with information furnished to the Company in writing by Purchaser or such
underwriter expressly for use therein or (b) any violation or alleged violation
by Purchaser of the Securities Act, the Exchange Act, any
<PAGE>
federal or state securities law or any rule or regulation promulgated under the
Securities Act, the Exchange Act or any federal or state securities law in
connection with the offering covered by such registration statement.
(c) Each party entitled to indemnification under this Section 4.5 (the
"INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at its own
expense, provided, that that an Indemnified Party shall have the right to retain
its own counsel, with the fees and expenses to be paid by the Indemnifying
Party, to the extent that representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would be inappropriate due to actual
or potential conflict of interests between such Indemnified Party and any other
party represented by such counsel in such proceeding, and provided further that
the failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Section 4 unless
such failure resulted in actual material detriment to the Indemnifying Party. No
Indemnifying Party, (i) in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, which consent shall not be
unreasonably withheld, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation, or (ii) shall be liable for
amounts paid in any settlement if such settlement is effected without the
consent of the Indemnifying Party, which consent shall not be unreasonably
withheld.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act or the Exchange Act in any case in which
either (i) any Person exercising rights under this Agreement, or any controlling
person of any such Person, makes a claim for indemnification pursuant to this
Section 4 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 4 provides for
indemnification in such case, or (ii) contribution under the Securities Act or
the Exchange Act may be required on the part of any such selling Person or any
such controlling Person in circumstances for which indemnification is provided
under this Section 4; then, and in each such case, the Company and such Person
will contribute to the aggregate losses, claims, damages or liabilities to which
they may be subject (after contribution from others) in such proportion so that
such Person is responsible for the portion represented by the percentage that
the public offering price of its Registrable Securities offered by and sold
under the registration statement bears to the public offering price of all
securities offered by and sold under such registration statement, and the
Company and other selling Persons are responsible for the remaining portion;
PROVIDED, HOWEVER, that, in any such case: (A) no such Person will be required
to contribute any amount in excess of the public offering price of all such
Registrable Securities offered and sold by such Person pursuant to such
registration statement; and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to
<PAGE>
contribution from any person or entity who was not guilty of such fraudulent
misrepresentation.
4.6 ISSUANCES BY THE COMPANY OR OTHER HOLDERS. As to each
registration or distribution referred to in Section 4.1, additional shares of
the Common Stock to be sold for the account of the Company or other holders
may be included therein, provided that the inclusion of such securities in
such registration or distribution may be conditioned or restricted if, in the
opinion of the Demand Managing Underwriters, marketing factors require a
limitation of the number of shares to be underwritten; provided, that in no
event shall the Demand Registrable Securities of Purchaser be limited or cut
back unless all of the additional shares proposed to be sold for the account
of the Company or other holders shall have first been excluded from such
registration or distribution.
4.7 INFORMATION BY PURCHASER. Purchaser shall furnish to the Company
such information regarding Purchaser in the distribution of Registrable
Securities proposed by Purchaser as the Company may reasonably request in
writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 4.
4.8 ASSIGNMENT.
The registration rights set forth in this Agreement may be
transferable or assignable by Purchaser to any transferee or assignee of
Registrable Securities from Purchaser, provided that each such transferee agrees
in writing to be subject to the terms and conditions of this Agreement.
4.9 TERMINATION. The provisions of this Section 4 (other than
Sections 4.4 and 4.5) shall terminate upon the earlier to occur of: (i) the
fifth anniversary of the Closing Date, and (ii) in the case of Sections 4.1
through 4.3, Section 4.6, Section 4.7 and Section 4.9, such time as Purchaser
or its permitted assignees no longer hold any Registrable Securities.
SECTION V
BOARD REPRESENTATION
5.1 BOARD OF DIRECTORS.
(a) Beginning on the Effective Date, pursuant to the rights granted
under Section 7(b) of the Certificate of Designation, Preferences and Rights of
Series C Convertible Preferred Stock of the Company (the "CERTIFICATE"), the
Board of Directors of the Company shall consist of at least one (1) director
designated by the holders of the Preferred Stock (the "INVESTOR DIRECTOR"). The
initial Investor Director elected by Purchaser shall be mutually agreed upon
between the Company and Purchaser.
(b) Beginning on the Effective Date, if the Company 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 when the holders of Preferred Stock
shall have a right to designate an Investor Director hereunder, the Investor
Director shall be appointed to each such committee. If there is no such
committee, the Investor Director shall
<PAGE>
have a reasonable opportunity to review and discuss the Company's strategic and
business plans and financing plans with management of the Company prior to the
submission of any such plans to the Board of the Company. The Investor Director
shall be appointed to each of the other committees of the Board. The Investor
Director shall receive copies of all information and materials provided to the
directors of the Company or to committee members at the time such information
and materials are provided to such directors.
5.2 CERTIFICATE OF INCORPORATION AND BY-LAWS.
The Company shall take or cause to be taken all lawful action
necessary to ensure at all times that the Company's Certificate of Incorporation
and Bylaws are not at any time inconsistent with the provisions of this
Agreement. At the request of the holders of a majority of the Preferred Stock,
the Board of Directors shall adopt (and if necessary submit and recommend for
approval by stockholders) other amendments to the Company's Certificate of
Incorporation or Bylaws 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.
5.3 TERMINATION. This Section 5 shall terminate concurrently with the
termination of Purchaser's right to elect a director under 7(b) of the
Certificate.
SECTION VI - RIGHTS TO ACQUIRE ADDITIONAL STOCK
6.1 RIGHT TO MAINTAIN.
(a) In the event that Sprint, shall exercise its rights (the "SPRINT
TOP-UP RIGHTS") to purchase capital stock of the Company pursuant to its rights
under Section 3.01 of the Governance Agreement, with respect to the issuance of
capital stock of the Company to Purchaser, and/or with respect to the merger of
the Company and Mindspring Enterprises, Inc. with WWW Holdings, Inc. (the
"COMPANY MERGER") pursuant to the Agreement and Plan of Reorganization dated
September 22, 1999, by and among the Company, Mindspring Enterprises, Inc. and
WWW Holdings, Inc., Purchaser shall have the right to purchase (a "PURCHASER
TOP-UP"), at a per share purchase price equal to the lesser of (i) the average
of the closing prices of the Company Common Stock on the Nasdaq National Market
(or the principal or market on which the Company Common Stock is then listed or
quoted) for the ten (10) trading days preceding the date of closing of the
exercise of such Purchaser Top-Up, or (ii) the per share price paid by Sprint in
connection with the most recent exercise of its Sprint Top-Up Rights, an
additional number of shares (the "TOP-UP SHARES") of Preferred Stock of the
Company such that following such purchase Purchaser will beneficially own the
same percentage of the fully-diluted capital stock of the Company as Purchaser
owned prior to the exercise of such Sprint Top-Up Rights by Sprint; provided
that, in the event Purchaser fails to elect to purchase such shares to which it
is entitled pursuant to this Section 6.1
<PAGE>
within forty-eight (48) hours of notice of the exercise of the Sprint Top-Up
Rights, such per share price shall be equal to the average of the closing prices
of the Company Common Stock on the Nasdaq National Market (or the principal or
market on which the Company Common Stock is then listed or quoted) for the ten
(10) trading days preceding the date of closing of such purchase. The Company
shall promptly provide (and in no event later than the next business day) notice
to Purchaser of the exercise of the Sprint Top-Up Rights by Sprint. Purchaser
shall have five (5) days from the receipt of such notice to elect to purchase
all or any of the shares which it is entitled to purchase pursuant to this
Section 6.1. The closing of any such purchase shall take place at a time and
location mutually agreed to by Purchaser and the Company which shall be no less
than 2 days or greater than 5 days from the date of such election. Any shares of
Preferred Stock of the Company acquired by Purchaser pursuant to this Section
6.1 shall be deemed "Preferred Stock" for purposes of this Agreement.
(b) Purchaser shall have the right to purchase additional shares in
accordance with Section 6.1(a) in response to the exercise by Sprint of the
Sprint Top-Up Rights in response to Purchaser's purchase of additional shares
under Section 6.1(a); provided that the per share price with respect to such
additional shares shall equal the lesser of (i) the average of the closing
prices of the Company Common Stock on the Nasdaq National Market (or the
principal or market on which the Company Common Stock is then listed or quoted)
for the ten (10) trading days preceding the date of closing of the exercise of
such right to purchase additional shares, or (ii) the per share price paid by
Sprint in connection with the most recent exercise of its Sprint Top-Up Rights;
provided further, that, in the event Purchaser fails to elect to purchase such
additional shares to which it is entitled pursuant to this Section 6.1(b) within
forty-eight (48) hours of notice of the exercise of such responsive Sprint
Top-Up Rights, such per share price shall be equal to the average of the closing
prices of the Company Common Stock on the Nasdaq National Market (or the
principal or market on which the Company Common Stock is then listed or quoted)
for the ten (10) trading days preceding the date of closing of such purchase.
Purchaser may elect to purchase additional shares pursuant to this Section
6.1(b) only in response to the first two exercises by Sprint of the Sprint
Top-Up Rights.
6.2 RIGHT TO PURCHASE ADDITIONAL SHARES ON STRATEGIC FINANCINGS.
In the event of a Triggering Investment, Purchaser shall be entitled
to purchase up to that number of shares, on similar terms (including price and
registration and voting rights), as are acquired (including on an as-converted
and as-exercised basis) in connection with such Triggering Investment.
6.3 ISSUANCE AND DELIVERY OF ADDITIONAL STOCK.
The Company represents, warrants and covenants to Purchaser that (i)
upon issuance, all of the shares of the Company capital stock sold to Purchaser
pursuant to Sections 6.1 and 6.2 hereof shall be duly authorized, validly
issued, fully paid and nonassessable and will be approved (if outstanding
securities of the Company 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 the Company 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
<PAGE>
nature and shall not be subject to any preemptive right of any stockholder of
the Company or any other rights to purchase or vote such shares or any power of
attorney with respect thereto.
SECTION VII - MISCELLANEOUS
7.1 EFFECTIVE DATE.
The rights and obligations of the parties to this Agreement shall not
be effective until the Effective Date; provided that if the purchase of the
shares of Preferred Stock by Purchaser is unwound pursuant to Section 2.3 of the
Purchase Agreement, this Agreement shall be terminated and shall be deemed to be
of no further force or effect.
7.2 NOTICES.
Any notice or other communication given under this Agreement shall be
sufficient if in writing and sent by registered or certified mail, return
receipt requested, postage prepaid, to a party at its address set forth below
(or at such other address as shall be designated for such purpose by such party
in a written notice to the other party hereto):
(a) if to the Purchaser, to it at:
Apple Computer, Inc.
1 Infinite Loop
Cupertino, CA 95014
Attention: Nancy Heinen, Senior Vice President, General
Counsel and Secretary
with a copy to:
Larry W. Sonsini
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94306
(b) if to the Company, to it at:
Earthlink Network, Inc.
3100 New York Drive
Pasadena, CA 91107
Attn: Charles G. Betty, CEO
with a copy to:
<PAGE>
W. Tinley Anderson, III
Hunton & Williams
Nationsbank Plaza, Suite 4100
600 Peachtree Street, NE
Atlanta, GA 30308
All such notices and communications shall be effective when received by the
addressee.
7.3 GOVERNING LAW.
This Agreement shall be governed in all respects by the internal laws
of the State of California as applied to contracts entered into solely between
residents of, and to be performed entirely within, such state, and without
reference to principles of conflicts of laws or choice of laws.
7.4 ENTIRE AGREEMENT; AMENDMENTS.
This Agreement constitutes the full and entire understanding and
agreement between the parties with regard to the subject matter hereof and
supersedes all prior agreements and understandings among the parties relating to
the subject matter hereof. Neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by the party against whom enforcement of any such amendment, waiver,
discharge or termination is sought.
7.5 SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns, including
without limitation successors by merger. The Purchaser may assign any or all of
its rights or obligations hereunder in whole or in part to any of its domestic
or foreign subsidiaries or parent companies.
7.6 SEVERABILITY.
If any term, provision, covenant or restriction of this Agreement is
held by a court of competent jurisdiction to be invalid, void or unenforceable,
the remainder of the terms, provisions, covenants and restriction of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective authorized officers as of the date set forth above.
APPLE COMPUTER, INC. LIMITED
By: /s/ FRED D. ANDERSON
-----------------------------
Name: FRED D. ANDERSON
Title: EXECUTIVE V.P. AND CHIEF
FINANCIAL OFFICER
EARTHLINK NETWORK, INC.
By: /s/ CHARLES G. BETTY
-----------------------------
Name: CHARLES G. BETTY
Title: PRESIDENT AND CHIEF
EXECUTIVE OFFICER
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
WWW HOLDINGS, INC.
ARTICLE I
The name of the corporation is "WWW Holdings, Inc." (the "Corporation").
ARTICLE II
The registered office of the Corporation in Delaware will be located at
Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County,
Delaware, and the name of the registered agent will be "The Corporation Trust
Company."
ARTICLE III
The Corporation shall be permitted to engage in any lawful act or
activity for which corporations may be organized under the General
Corporation Law of Delaware ("DGCL").
ARTICLE IV
The Corporation shall have the authority to issue a total of Ten
Thousand (10,000) shares of common stock, $.01 par value per share (the
"Common Stock"). The holders of the shares of Common Stock shall have one
vote per share.
ARTICLE V
The name and address of the sole incorporator is: W. Tinley Anderson,
Esq., Hunton & Williams, 600 Peachtree St., Suite 4100, Atlanta, Georgia 30308
ARTICLE VI
In furtherance and not in limitation of the powers conferred by law, the
Board of Directors of the Corporation is expressly authorized to adopt, amend
or repeal the bylaws of the Corporation. Election of directors need not be by
written ballot unless the Bylaws of the Corporation shall so provide.
ARTICLE VII
The directors of the Corporation shall be protected from personal
liability, through indemnification or otherwise, to the
<PAGE>
fullest extent permitted under the General Corporation Law of Delaware as
from time to time in effect. A director of the Corporation shall under no
circumstances have any personal liability to the Corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except for those specific breaches and acts or omissions with respect to
which the DGCL expressly provides that this provision shall not eliminate or
limit such personal liability of directors. The modification or repeal of
this paragraph of ARTICLE VII shall not adversely affect the restriction
hereunder of a director's personal liability for any act or omission
occurring prior to such modification or repeal. The Corporation shall
indemnify each director and officer of the Corporation to the fullest extent
permitted by applicable law, except as may be otherwise provided in the
Corporation's bylaws. The modification or repeal of this paragraph of ARTICLE
VII shall not adversely affect the right of indemnification of any director
or officer hereunder with respect to any act or omission occurring prior to
such modification or repeal.
ARTICLE VIII
The Corporation reserves the right to alter, amend or repeal any
provision contained in this Certificate of Incorporation in the manner now or
hereafter prescribed by the laws of the State of Delaware. All rights herein
conferred are granted subject to the foregoing reservation.
<PAGE>
I, THE UNDERSIGNED, being the sole incorporator hereinbefore named, for
the purpose of forming a corporation pursuant to the General Corporation Law
of Delaware, do make, file and record this Certificate of Incorporation,
hereby declaring and certifying that this is my act and deed and the facts
herein stated are true, and accordingly have hereunto set my hand this 21st
day of September, 1999.
/s/ W. Tinley Anderson
- -------------------------------------
W. Tinley Anderson,
Incorporator
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
WWW HOLDINGS, INC.
WWW Holdings, Inc. (the "Corporation"), a corporation duly organized
and existing under the laws of the State of Delaware, hereby certifies as
follows:
1. Its original Certificate of Incorporation was filed with the
Secretary of State of Delaware on September 21, 1999.
2. The Corporation hereby certifies that this Amended and Restated
Certificate of Incorporation was duly adopted by the Board of Directors of the
Corporation in accordance with the provisions of Section 141 of the General
Corporation Law of the State of Delaware (the "DGCL").
3. Holders of at least a majority of the outstanding shares of capital
stock of the Corporation, in accordance with the Bylaws of the Corporation and
Section 228 of the DGCL, duly approved the Amended and Restated Certificate of
Incorporation in the form hereof.
4. Having been duly adopted pursuant to Sections 242 and 245 of the
DGCL, this Amended and Restated Certificate of Incorporation restates and
integrates and further amends the provisions previously filed with the Secretary
of State of the State of Delaware on September 21, 1999.
5. The text of the Certificate of Incorporation of the Corporation
hereby is amended and restated to read in its entirety as follows:
ARTICLE 1. NAME
The name of the Corporation is WWW HOLDINGS, INC. (the "Corporation").
ARTICLE 2. REGISTERED OFFICE AND AGENT
The address of the Corporation's registered office in the State of
Delaware is to be located at Corporation Trust Center, 1209 Orange Street,
Wilmington, New Castle County, Delaware 19801. The name of the Corporation's
registered agent at such address is The Corporation Trust Company.
<PAGE>
ARTICLE 3. PURPOSES AND POWERS
The purposes for which the Corporation is formed are to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware ("DGCL") and to possess and exercise
all of the powers and privileges granted by such law.
ARTICLE 4. CAPITAL STOCK
The total number of shares of capital stock that the Corporation is
authorized to issue is four hundred million (400,000,000), divided into two
classes as follows:
(a) three hundred million (300,000,000) shares of common stock, $.01
par value per share ("Common Stock"); and
(b) one hundred million (100,000,000) shares of preferred stock, $.01
par value per share ("Preferred Stock").
COMMON STOCK. The holders of Common Stock shall be entitled to one vote
for each share on all matters required or permitted to be voted on by
stockholders of the Corporation under the DGCL. The Common Stock shall be
subject to all of the rights, privileges, preferences and priorities of the
Preferred Stock as set forth herein.
PREFERRED STOCK. The Board of Directors is authorized, subject to
limitations prescribed by law and the provisions of this Amended and Restated
Certificate of Incorporation, to provide for the issuance, without stockholder
approval, of shares of Preferred Stock in series, and by filing a certificate
pursuant to the DGCL, 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.
The authority of the Board of Directors with respect to each series of
Preferred Stock shall include, but not be limited to, determination of the
following:
(1) The number of shares constituting that series and the distinctive
designation of that series; and
(2) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that series;
and
(3) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights; and
(4) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for adjustment
of the conversion rate in such events as the Board of Directors shall determine;
and
2
<PAGE>
(5) Whether or not the shares of that series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per share payable
in case of redemption, which amount may vary under different conditions and at
different redemption dates; and
(6) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series and, if so, the terms and amount of such
sinking fund; and
(7) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation, and
the relative rights of priority, if any, of payment of shares of that series;
and
(8) Any other relative rights, preferences and limitations of that
series.
ARTICLE 5. BOARD OF DIRECTORS
The following persons, having the following mailing address and class
designations, shall serve as the initial Board of Director of the Corporation
until the first Annual Meeting of Stockholders or until his successor is elected
and qualified is:
<TABLE>
<CAPTION>
Name Mailing Address Class
- ---- --------------- -----
<S> <C> <C>
Charles M. Brewer Mindspring Enterprises, Inc. 3
1430 West Peachtree Street, NW
Suite 400
Atlanta, Georgia 30309
Sky D. Dayton EarthLink Network, Inc. 3
3100 New York Drive
Pasadena, California 31107
Charles G. Betty EarthLink Network, Inc. 3
3100 New York Drive, Suite 201
Pasadena, California 91107
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Campbell B. Lanier, III MindSpring Enterprises, Inc. 3
1430 West Peachtree Street, NW
Suite 400
Atlanta, Georgia 30309
William T. Esrey Sprint Corporation 3
2330 Shawnee Mission Parkway
Westwood, Kansas 66205
William H. Scott, III MindSpring Enterprises, Inc. 2
1430 West Peachtree Street, NW
Suite 1430
Atlanta, Georgia 30309
Michael S. McQuary MindSpring Enterprises, Inc. 2
1430 West Peachtree Street, NW
Suite 1430
Atlanta, Georgia 30309
Linwood A. Lacy, Jr. EarthLink Network, Inc. 2
3100 New York Drive, Suite 201
Pasadena, California 91107
Reed E. Slatkin EarthLink Network, Inc. 2
3100 New York Drive, Suite 201
Pasadena, California 91107
Len J. Lauer Sprint Corporation 1
8140 Ward Parkway
Mail Stop MOKCMP0505
Kansas City, Missouri 64114
</TABLE>
The business and affairs of the Corporation shall be managed by, or
under the direction of, a Board of Directors comprised as follows:
(1) The initial number of directors shall be thirteen (13) and
thereafter the number of directors of the Corporation shall be not less than two
(2) and not more than seventeen (17), the exact number within such minimum and
maximum limits to be fixed and determined from time to time by resolution of a
majority of the Board of Directors or by the affirmative vote of the holders of
at least a majority of all outstanding shares entitled to be voted in the
election of directors, voting together as a single class.
(2) The Board of Directors shall be divided into three classes
(designated as Class I, Class II, and Class III), as nearly equal in number as
possible. The initial term of Class I
4
<PAGE>
directors shall expire at the annual meeting of stockholders in 2000, that of
Class II shall expire at the annual meeting in 2001, and that of Class III
directors shall expire at the annual meeting in 2002, and in all cases as to
each director until his or her successor shall be elected and shall qualify, or
until his or her earlier resignation, removal from office, death or incapacity.
(3) Subject to the foregoing, at each annual meeting of stockholders
the successors to the class of directors whose term shall then expire shall be
elected to hold office for a term expiring at the third succeeding annual
meeting and until their successors shall be elected and qualified. Except as set
forth below with respect to vacancies and newly created directorships, directors
shall be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors. The directors of the Corporation shall not be required to be elected
by written ballots.
(4) If the number of directors is changed by resolution of the Board of
Directors pursuant to this Article VIII, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors in each
class as nearly equal as possible, but in no case shall a decrease in the number
of directors shorten the term of an incumbent director.
(5) Nominations for the election of directors may be made by the Board
of Directors or a committee appointed by the Board of Directors, or by any
stockholder of record entitled to vote generally in the election of directors;
provided, however, that any stockholder of record entitled to vote generally in
the election of directors may nominate one or more persons for election as
directors at a meeting only if written notice of such stockholder's intent to
make such nomination or nominations has been given, either by personal delivery
or by the United States mail, postage prepaid, to the Secretary of the
Corporation not later than (i) with respect to any election to be held at the
Annual Meeting of Stockholders, 90 days in advance of such meeting, and (ii)
with respect to any election for directors to be held at a Special Meeting of
Stockholders, the close of business on the seventh day following the date on
which notice of such meeting is first given to stockholders. Each such notice
shall set forth:
(A) the name and address of the stockholder of record who intends to make
the nomination and of the person or persons to be nominated;
(B) a representation that the stockholder is a holder of record of shares
of the Corporation entitled to vote at such meeting and intends to appear
in person or by proxy at the meeting to nominate the person or persons
specified in the notice;
(C) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to
be made by the stockholder;
(D) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the then-current proxy rules of the Securities and Exchange
Commission if the nominees were to be nominated by the Board of Directors;
and
5
<PAGE>
(E) the consent of each nominee to serve as a director of the Corporation
if so elected.
The Chairman of the meeting may refuse to acknowledge the nomination of
any person not made in compliance with the foregoing procedure.
(6) Any vacancy on the Board of Directors that results from an increase
in the number of directors or from the prior death, resignation, retirement,
disqualification or removal from office of a director shall be filled by a
majority of the Board of Directors then in office, though less than a quorum, or
by the sole remaining director, or by the stockholders of the Corporation if the
Board of Directors has not filled the vacancy. Any director elected to fill a
vacancy resulting from the prior death, resignation, retirement,
disqualification or removal from office of a director shall have the same
remaining term as that of his or her predecessor.
(7) At any meeting of stockholders with respect to which notice of such
purpose has been given, the entire Board of Directors or any individual director
may be removed, with or without cause, by the affirmative vote of the holders of
a majority of all outstanding shares entitled to be voted at an election of
directors, except that if less than the entire Board of Directors is to be
removed, no director may be removed without cause if the votes cast against his
removal would be sufficient to elect him if then cumulatively voted at an
election of the entire Board of Directors.
(8) Notwithstanding the foregoing, whenever the holders of any one or
more classes or series of Preferred Stock issued by the Corporation shall have
the right, voting separately by class or series, to elect directors at an Annual
or Special Meeting of Stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation or the resolutions of the Board of
Directors creating such class or series, as the case may be, applicable thereto.
The invalidity or unenforceability of this Article 5 or any portion
hereof, or of any action taken pursuant to this Article 5, shall not affect the
validity or enforceability of any other provision of this Certificate of
Incorporation, any action taken pursuant to such other provision, or any action
taken pursuant to this Article 5.
ARTICLE 6. LIMITATION OF LIABILITY; INDEMNIFICATION
The directors of the Corporation shall be protected from personal
liability, through indemnification or otherwise, to the fullest extent permitted
under the DGCL as from time to time in effect and any other provisions of
Delaware law.
A director of the Corporation shall under no circumstances have any
personal liability to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for those specific breaches
and acts or omissions with respect to which the DGCL expressly provides that
this provision shall not eliminate or limit such personal liability of
directors. The modification or repeal of this paragraph of Article 6 shall not
adversely affect the restriction hereunder of a director's personal liability
for any act or omission occurring prior to such modification or repeal.
6
<PAGE>
The Corporation shall indemnify each director and officer of the
Corporation to the fullest extent permitted by applicable law, except as may be
otherwise provided in the Corporation's Bylaws. The modification or repeal of
this paragraph of Article 6 shall not adversely affect the right of
indemnification of any director or officer hereunder with respect to any act or
omission occurring prior to such modification or repeal.
ARTICLE 7. AMENDMENT OF CERTIFICATE OF INCORPORATION AND
BYLAWS
The Corporation reserves the right, at any time and from time to time,
to alter, amend or repeal any provision contained in this Amended and Restated
Certificate of Incorporation, and to add or insert other provisions authorized
by the DGCL, in the manner now or hereafter prescribed by the laws of the State
of Delaware, except that Article 5, Article 6 and this Article 7 may not be
altered, amended or repealed except by the affirmative vote of at least
two-thirds (2/3) of the shares entitled to vote thereon and the affirmative vote
of a majority of the members of the entire Board of Directors. The Board of
Directors of the Corporation is hereby expressly authorized to make, amend,
repeal or otherwise alter the Bylaws of the Corporation. All rights, preferences
and privileges of any nature conferred upon stockholders, directors or any other
persons whomsoever by and pursuant to this Amended and Restated Certificate of
Incorporation in its present form or as hereafter amended are granted subject to
the rights reserved in this Article 7.
7
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Amended
and Restated Certificate of Incorporation to be executed by Charles G. Betty,
its President and Chief Executive Officer, and by _____________________________,
its Secretary, this the ______ day of September ________, 1999.
EARTHLINK NETWORK, INC.
By:_______________________________
Charles G. Betty
President and Chief Executive Officer
ATTEST:
________________________________
________________________________,
Secretary
8
<PAGE>
Exhibit 3.3
BYLAWS
OF
WWW HOLDINGS, INC.
(A DELAWARE CORPORATION)
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I OFFICES.................................................................................................3
ARTICLE II STOCKHOLDERS' MEETINGS.................................................................................3
2.1 Places of Meetings...................................................................................3
2.2 Annual Meetings......................................................................................3
2.3 Special Meetings.....................................................................................3
2.4 Voting...............................................................................................3
2.5 Quorum...............................................................................................4
2.6 List of Stockholders.................................................................................4
2.7 Action Without Meeting...............................................................................4
ARTICLE III BOARD OF DIRECTORS....................................................................................4
3.1 Powers...............................................................................................4
3.2 Election of Directors................................................................................4
3.3 Compensation.........................................................................................5
3.4 Meetings and Quorum..................................................................................5
3.5 Committees...........................................................................................6
3.6 Conference Telephone Meetings........................................................................6
3.7 Action Without Meeting...............................................................................6
ARTICLE IV OFFICERS...............................................................................................6
4.1 Titles and Election..................................................................................6
4.2 Duties...............................................................................................7
(a) Chairman of the Board of Directors..........................................................7
(b) Vice-Chairman of the Board of Directors.....................................................5
(c) Chief Executive Officer.....................................................................7
(d) President...................................................................................7
(e) Vice Presidents.............................................................................7
(f) Secretary...................................................................................7
(g) Treasurer...................................................................................8
(g) Assistant Secretaries and Treasurers........................................................8
4.3 Delegation of Authority..............................................................................8
4.4 Compensation.........................................................................................8
ARTICLE V RESIGNATIONS, VACANCIES AND REMOVALS....................................................................8
5.1 Resignations.........................................................................................8
5.2 Vacancies............................................................................................9
(a) Directors...................................................................................9
(b) Officers....................................................................................9
5.3 Removals.............................................................................................9
(a) Directors...................................................................................9
(b) Officers....................................................................................9
ARTICLE VI CAPITAL STOCK..........................................................................................9
6.1 Certificates of Stock................................................................................9
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
6.2 Transfer of Stock....................................................................................9
6.3 Record Dates........................................................................................10
6.4 Lost Certificates...................................................................................10
ARTICLE VII FISCAL YEAR, BANK DEPOSITS, CHECKS, ETC..............................................................10
7.1 Fiscal Year.........................................................................................10
7.2 Bank Deposit, Checks, Etc...........................................................................10
ARTICLE VIII BOOKS AND RECORDS...................................................................................11
8.1 Place of Keeping Books..............................................................................11
8.2 Examination of Books................................................................................11
ARTICLE IX NOTICES...............................................................................................11
9.1 Requirements of Notice..............................................................................11
9.2 Waivers.............................................................................................11
ARTICLE X SEAL...................................................................................................11
ARTICLE XI POWERS OF ATTORNEY....................................................................................12
ARTICLE XII INDEMNIFICATION; INTERESTED PARTIES..................................................................12
12.1 Indemnification....................................................................................12
12.2 Miscellaneous......................................................................................13
ARTICLE XIII AMENDMENTS..........................................................................................13
13.1 Amendment or Repeal................................................................................13
13.2 Stockholder Proposals..............................................................................13
</TABLE>
<PAGE>
BYLAWS
OF
W W W H O L D I N G S, I N C.
ARTICLE I
OFFICES
WWW Holdings, Inc. (the "Corporation") shall at all times
maintain a registered office in the State of Delaware and a registered agent at
that address but may have other offices located in or outside of the State of
Delaware as the Board of Directors may from time to time determine.
ARTICLE II
STOCKHOLDERS' MEETINGS
2.1 PLACES OF MEETINGS. All meetings of stockholders shall be held at
such place or places in or outside of the State of Delaware as the Board of
Directors may from time to time determine or as may be designated in the notice
of meeting or waiver of notice thereof, subject to any provisions of the laws of
the State of Delaware.
2.2 ANNUAL MEETINGS. The annual meeting of stockholders for the
election of directors and the transaction of such other business as may properly
come before the meeting shall be held on such date within five (5) months after
the end of each fiscal year of the Corporation and at such time as may be
designated from time to time by the Board of Directors. If the annual meeting is
not held as specified in the preceding sentence, it may be held as soon
thereafter as convenient and shall be called the annual meeting. Written notice
of the time and place of the annual meeting shall be given by mail to each
stockholder entitled to vote thereat at the address of such stockholder as it
appears on the records of the Corporation, not less than ten (10) nor more than
sixty (60) days prior to the scheduled date thereof, unless such notice is
waived as provided in Article IX of these Bylaws.
2.3 SPECIAL MEETINGS. Special meetings of stockholders may be called at
any time by the Chairman of the Board of Directors or a majority of the Board of
Directors. Written notice of the time, place and specific purposes of such
meeting shall be given by mail to each stockholder entitled to vote thereat at
the address of such stockholder as it appears on the records of the Corporation,
not less than ten (10) nor more than sixty (60) days prior to the scheduled date
thereof, unless such notice is waived as provided in Article IX of these Bylaws.
2.4 VOTING. At all meetings of stockholders, each stockholder entitled
to vote on the record date, as determined under Article VI, Section 6.3 of these
Bylaws or, if not so determined, as prescribed under the General Corporation Law
of the State of Delaware (the "DGCL"), shall be entitled to one vote for each
share of stock standing of record in the name of such stockholder, subject to
any restrictions or qualifications set forth in the Certificate of Incorporation
or any amendment thereto.
(3)
<PAGE>
2.5 QUORUM. At any meeting of stockholders, a majority of the number of
shares of stock outstanding and entitled to vote thereat (or a majority of the
number of shares of stock entitled to vote as a class or series) present in
person or by proxy, shall constitute a quorum, but a smaller interest may
adjourn any meeting from time to time, and the meeting may be held as adjourned
without further notice, subject to such limitations as may be imposed under the
DGCL, and PROVIDED further that once a quorum is established at a meeting as set
forth hereunder, the quorum may not otherwise be eliminated during such meeting.
When a quorum is present at any meeting, a majority of the number of shares of
stock entitled to vote present thereat shall decide any question brought before
such meeting unless the question is one upon which a different vote is required
by the DGCL, the Certificate of Incorporation or these Bylaws, in which case
such express provision shall govern.
2.6 LIST OF STOCKHOLDERS. At least ten (10) days before every meeting,
a complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of and the number of shares
registered in the name of each stockholder, shall be prepared by the Secretary
or the transfer agent in charge of the stock ledger of the Corporation. Such
list shall be open for examination by any stockholder, for any purpose germane
to the meeting, during ordinary business hours, for a period of at least ten
(10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present. The stock ledger shall represent conclusive evidence as to who are the
stockholders entitled to examine such list or the books of the Corporation or to
vote in person or by proxy at such meeting.
2.7 ACTION WITHOUT MEETING. Action required to be taken or which may be
taken at any annual meeting or special meeting of stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by all
the holders of outstanding stock entitled to vote on such action, and shall be
delivered in the manner specified by law or by the Corporation's Certificate of
Incorporation.
ARTICLE III
BOARD OF DIRECTORS
3.1 POWERS. The business and affairs of the Corporation shall be
carried on by or under the direction of the Board of Directors, which shall have
all the powers authorized by the DGCL, subject to such limitations as may be
provided by the Certificate of Incorporation or these Bylaws.
3.2 ELECTION OF DIRECTORS. Directors shall be elected at each annual
meeting of stockholders as provided in the Certificate of Incorporation, each
director so elected to serve until the election and qualification of his or her
successor or until his or her earlier
(4)
<PAGE>
death, resignation, retirement, disqualification or removal from office.
Directors need not be stockholders, nor need they be residents of the State of
Delaware.
3.3 COMPENSATION. The Board of Directors, or a committee thereof, may
from time to time by resolution authorize the payment of fees or other
compensation to the directors for services as such to the Corporation,
including, but not limited to, fees for serving as members of the Board of
Directors or any committee thereof and for attendance at meetings of the Board
of Directors or any committee thereof, and may determine the amount of such fees
and compensation. Directors shall in any event be paid their reasonable travel
and other expenses for attendance at all meetings of the Board or committees
thereof. Nothing herein contained shall be construed to preclude any director
from serving the Corporation in any other capacity and receiving compensation
therefor in amounts authorized or otherwise approved from time to time by the
Board of Directors or any committee thereof.
3.4 MEETINGS AND QUORUM. Meetings of the Board of Directors may be held
either in or outside of the State of Delaware. A quorum shall be a majority of
the then-authorized and sitting number of directors.
Meetings other than regular meetings may be called at any time by the
Chief Executive Officer or the Chairman of the Board of Directors and must be
called by the Chief Executive Officer upon the request of a majority or more of
the members of the Board of Directors.
Special meetings of the Board of Directors may be called by the
Chairman of the Board of Directors or the Chief Executive Officer on five days'
notice to each director, either personally or by telephone, express delivery
service (so that the scheduled delivery date of the notice is at least one day
in advance of the meeting), telegram or facsimile transmission, and on five
days' notice by mail (effective upon deposit of such notice in the mail). The
notice need not describe the purpose of a special meeting.
Notice of each meeting, other than a regular meeting (unless required
by the Board of Directors), shall be given to each director by mailing the same
to each director at his or her residence or business address at least five days
before the meeting or by delivering the same to him personally or by telephone,
telegraph or telecopier at least two days before the meeting unless, in case of
exigency, the Chairman of the Board of Directors or the Chief Executive Officer
shall prescribe a shorter notice to be given personally, or notice may
alternatively be given by telephone, telegraph, telecopier, cable or wireless to
all or any one or more of the directors at their respective residences or places
of business. Notice by mail shall be deemed to be given at the earlier of (a)
receipt thereof, or (b) five days after it is deposited in the United States
mail with first-class postage affixed thereon. Notice to directors may also be
given by telecopier transmission to the director's telecopier transmission
number supplied for the purpose of telecopier transmissions and, upon actual
confirmation of such receipt by the director, such notice shall be deemed to be
given as of the date and time of telephonic confirmation of receipt.
(5)
<PAGE>
Telephonic notice shall be deemed given at such a time as such notice is
actually provided to the director.
Notice of any meeting shall state the time and place of such meeting,
but need not state the purposes thereof unless otherwise required by the DGCL,
the Certificate of Incorporation, the Bylaws or by the order of the Board of
Directors.
3.5 COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the entire Board of Directors, provide for committees of two or more
directors and shall elect the members thereof to serve at the pleasure of the
Board of Directors and may designate one of such members to act as chairman
thereof. The Board of Directors may at any time change the membership of any
committee, fill vacancies in it, designate alternate members to replace any
absent or disqualified members at any meeting of such committee or dissolve it.
During the intervals between the meetings of the Board of Directors, the
Executive Committee (if one shall have been constituted) shall possess and may
exercise any or all of the powers of the Board of Directors in the management or
direction of the business and affairs of the Corporation and under the Bylaws to
the extent authorized by resolution adopted by a majority of the whole Board of
Directors and subject to such limitations as may be imposed by the DGCL.
Each committee may determine its rules of procedure and the notice to
be given of its meetings (although in the absence of any special notice
procedure, the notice provisions of Section 3.4 hereof shall govern), and it may
appoint such other committees and assistants as it shall from time to time deem
necessary. A majority of the members of the each committee shall constitute a
quorum.
3.6 CONFERENCE TELEPHONE MEETINGS. Any one or more members of the Board
of Directors or any committee thereof may participate in a meeting by means of a
conference telephone call or other similar communication equipment by means of
which all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at such meeting.
3.7 ACTION WITHOUT MEETING. Any action required or permitted to be
taken at any meeting of the Board of Directors or any committee thereof may be
taken without a meeting if all members of the Board of Directors or such
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
such committee.
ARTICLE IV
OFFICERS
4.1 TITLES AND ELECTION. The officers of the Corporation shall be the
Chief Executive Officer, President and the Secretary, each of whom shall
initially be elected as soon as convenient by the Board of Directors. The
officers of the Corporation shall hold office until their successors are chosen
and qualify or until their earlier resignation or removal. Any officer may
resign at any time upon written notice to the Corporation. Any
(6)
<PAGE>
officer elected or appointed by the Board of Directors may be removed at any
time, with or without cause, by the affirmative vote of a majority of the Board
of Directors. Any person may hold more than one office if the duties can be
adequately performed by the same person and to the extent permitted by the DGCL.
The Board of Directors, in its discretion, may also at any time elect
or appoint a Chairman of the Board of Directors, one or more Senior or Executive
Vice Presidents, one or more Vice Presidents, a Chief Operating Officer, a Chief
Financial Officer, a Treasurer and one or more Assistant Secretaries and
Assistant Treasurers and such other officers as it may deem advisable, each of
whom shall hold office at the pleasure of the Board of Directors, except as may
otherwise be approved by the Board of Directors, or until his or her earlier
death, resignation, retirement, removal or other termination of employment, and
shall have such authority and shall perform such duties as may be prescribed or
determined from time to time by the Board of Directors or in case of officers
other than the Chairman of the Board, if not prescribed or determined by the
Board of Directors, the Chief Executive Officer or the then senior executive
officer may prescribe or determine. The Board of Directors may require any
officer or other employee or agent to give bond for the faithful performance of
his or her duties in such form and with such sureties as the Board may require.
4.2 DUTIES. Subject to such limitations and other conditions as the
Board of Directors may from time to time prescribe or determine, the following
officers shall have the following powers and duties:
(a) CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the
Board of Directors, if one is elected, shall be a director and, when
present, shall preside at all meetings of the stockholders and of the
Board of Directors.
(b) CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall
be charged with general supervision of the management, business,
affairs and policy of the Corporation, shall be the senior executive of
the Corporation, shall report directly to the Board of Directors and
shall have such other powers and perform such other duties as the Board
of Directors may prescribe from time to time. The Chief Executive
Officer shall (subject to the presence of the Chairman of the Board of
Directors, if one exists) preside at all meetings of the stockholders
and, if he is a director, of the Board of Directors.
(c) PRESIDENT. The President shall exercise the powers and
authority and perform all of the duties commonly incident to his or her
office, shall report to the Chief Executive Officer and shall perform
such other duties as the Board of Directors or Chief Executive Officer
shall specify from time to time.
(d) VICE PRESIDENTS. The Vice President or Vice Presidents
shall perform such duties as may be assigned to them from time to time
by the Board of Directors or by the Chief Executive Officer if the
Board of Directors does not do so. In the absence or disability of the
Chief Executive Officer, President, the Executive Vice
(7)
<PAGE>
Presidents in order of seniority, or if none, the Senior Vice
Presidents in order of seniority, or if none, the Vice Presidents in
order of seniority, may, unless otherwise determined by the Board of
Directors, exercise the powers and perform the duties pertaining to the
office of President, except that if one or more Vice Presidents has
been elected or appointed, the person holding such office in order of
seniority shall exercise the powers and perform the duties of the
office of President.
(e) SECRETARY. The Secretary or in his or her absence an
Assistant Secretary shall keep the minutes of all meetings of
stockholders and of the Board of Directors and any committee thereof,
give and serve all notices, attend to such correspondence as may be
assigned to him or her, keep in safe custody the seal of the
Corporation, and affix such seal to all such instruments properly
executed as may require it, shall perform all of the duties commonly
incident to his or her office and shall have such other duties and
powers as may be prescribed or determined from time to time by the
Board of Directors or by the Chief Executive Officer if the Board of
Directors does not do so.
(f) TREASURER. The Treasurer or in his or her absence an
Assistant Treasurer, subject to the order of the Board of Directors,
shall have the care and custody of the monies, funds, securities,
valuable papers and documents of the Corporation (other than his or her
own bond, if any, which shall be in the custody of the Chief Executive
Officer), and shall have, under the supervision of the Board of
Directors, all the powers and duties commonly incident to his or her
office. He or she shall deposit all funds of the Corporation in such
bank or banks, trust company or trust companies, or with such firm or
firms doing a banking business as may be designated by the Board of
Directors or by the Chief Executive Officer if the Board of Directors
does not do so. He or she may endorse for deposit or collection all
checks, notes and similar instruments payable to the Corporation or to
its order. He or she shall keep accurate books of account of the
Corporation's transactions, which shall be the property of the
Corporation, and together with all of the property of the Corporation
in his or her possession, shall be subject at all times to the
inspection and control of the Board of Directors. The Treasurer shall
be subject in every way to the order of the Board of Directors, and
shall render to the Board of Directors and/or the Chief Executive
Officer of the Corporation, whenever they may require it, an account of
all his or her transactions and of the financial condition of the
Corporation. In addition to the foregoing, the Treasurer shall have
such duties as may be prescribed or determined from time to time by the
Board of Directors or by the Chief Executive Officer if the Board of
Directors does not do so.
(g) ASSISTANT SECRETARIES AND TREASURERS. Assistants to the
Secretaries and Treasurers may be appointed by the Chief Executive
Officer or elected by the Board of Directors and shall perform such
duties and have such powers as shall be delegated to them by the
President or the Board of Directors.
(8)
<PAGE>
4.3 DELEGATION OF AUTHORITY. The Board of Directors may at any time
delegate the powers and duties of any officer for the time being to any other
officer, director or employee.
4.4 COMPENSATION. The compensation of the officers of the Corporation
shall be fixed by the Board of Directors or a committee thereof, and the fact
that any officer is a director shall not preclude such officer from receiving
compensation or from voting upon the resolution providing the same.
ARTICLE V
RESIGNATIONS, VACANCIES AND REMOVALS
5.1 RESIGNATIONS. Any director or officer may resign at any time by
giving written notice thereof to the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer or the Secretary. Any such
resignation shall take effect at the time specified therein or, if the time be
not specified, upon receipt thereof; and unless otherwise specified therein or
in these Bylaws, the acceptance of any resignation shall not be necessary to
make it effective.
5.2 VACANCIES.
(a) DIRECTORS. Any vacancy in the Board of Directors caused by
reason of death, disqualification, incapacity, resignation, removal,
increase in the authorized number of directors or otherwise, shall be
filled in the manner provided in the Certificate of Incorporation.
(b) OFFICERS. The Board of Directors may at any time or from
time to time fill any vacancy among the officers of the Corporation.
5.3 REMOVALS.
(a) DIRECTORS. Except as may otherwise be provided by the DGCL
or the Certificate of Incorporation or any amendment thereto, any
director or the entire Board of Directors may be removed, with or
without cause, by the affirmative vote of the holders of a majority of
all outstanding shares entitled to be voted at an election of
directors.
(b) OFFICERS. Subject to the provisions of any validly
existing agreement, the Board of Directors may at any meeting remove
from office any officer, with or without cause, and may appoint a
successor.
ARTICLE VI
CAPITAL STOCK
6.1 CERTIFICATES OF STOCK. Every stockholder shall be entitled to a
certificate or certificates for shares of the capital stock of the Corporation
in such form as may be prescribed or authorized by the Board of Directors, duly
numbered and setting forth the
(9)
<PAGE>
number and kind of shares represented thereby. Such certificates shall be signed
by the Chief Executive Officer, the President or a Vice President, unless some
other person is thereunto specifically authorized as provided in Article IV,
Section 4.2 of these Bylaws, and by the Treasurer or an Assistant Treasurer or
by the Secretary or an Assistant Secretary. Any or all of such signatures may be
in facsimile.
In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed on a certificate has ceased to be such
officer, transfer agent or registrar before the certificate has been issued,
such certificate may nevertheless be issued and delivered by the Corporation
with the same effect as if he were such officer, transfer agent or registrar at
the date of issue.
6.2 TRANSFER OF STOCK. Shares of the capital stock of the Corporation
shall be transferable only upon the books of the Corporation upon the surrender
of the certificate or certificates properly assigned and endorsed for transfer.
If the Corporation has a transfer agent or registrar acting on its behalf, the
signature of any officer or representative thereof may be in facsimile.
The Board of Directors may appoint a transfer agent and one or more
co-transfer agents and a registrar and one or more co-registrars and may make or
authorize such agents to make all such rules and regulations deemed expedient
concerning the issue, transfer and registration of shares of stock.
6.3 RECORD DATES. For the purpose of determining stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to receive payment of any dividend, or to express consent
to corporate action in writing without a meeting, or in order to make a
determination of stockholders for any other proper purposes, the Corporation's
stock transfer books shall not be closed, but a record date shall be set by the
Board of Directors and, upon that date, the Corporation or its transfer agent
shall take a record of the stockholders without actually closing the stock
transfer books. Such record date shall not be more than sixty (60) days, nor
less than ten (10) days, prior to the date on which the particular action
requiring such determination of stockholders is to be taken.
If no such record date is fixed by the Board, the record date shall be
that prescribed by the DGCL.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may, in their discretion, fix a
new record date for the adjourned meeting.
6.4 LOST CERTIFICATES. In case of loss or mutilation or destruction of
a stock certificate, a duplicate certificate may be issued upon such terms as
may be determined or authorized by the Board of Directors or the Executive
Committee (if one has been
(10)
<PAGE>
appointed), or by the Chief Executive Officer if the Board of Directors or the
Executive Committee does not do so.
ARTICLE VII
FISCAL YEAR, BANK DEPOSITS, CHECKS, ETC.
7.1 FISCAL YEAR. The fiscal year of the Corporation shall be the
calendar year, unless otherwise fixed by resolution of the Board of Directors.
7.2 BANK DEPOSIT, CHECKS, ETC. The funds of the Corporation shall be
deposited in the name of the Corporation or of any division thereof in such
banks or trust companies in the United States or elsewhere as may be designated
from time to time by the Board of Directors or by such officer or officers as
the Board of Directors may authorize to make such designations.
All checks, drafts or other orders for the withdrawal of funds from any
bank account shall be signed by such person or persons as may be designated from
time to time by the Board of Directors. The signatures on checks, drafts or
other orders for the withdrawal of funds may be in facsimile if authorized in
the designation.
ARTICLE VIII
BOOKS AND RECORDS
8.1 PLACE OF KEEPING BOOKS. The books and records of the Corporation
may be kept within or outside of the State of Delaware.
8.2 EXAMINATION OF BOOKS. Except as may otherwise be provided by the
DGCL, the Certificate of Incorporation or these Bylaws, the Board of Directors
shall have the power to determine from time to time whether and to what extent
and at what times and places and under what conditions any of the accounts,
records and books of the Corporation are to be open to the inspection of any
stockholder. No stockholder shall have any right to inspect any account or book
or document of the Corporation except as prescribed by law or authorized by
express resolution of the stockholders or of the Board of Directors.
ARTICLE IX
NOTICES
9.1 REQUIREMENTS OF NOTICE. Whenever notice is required to be given by
statute, the Certificate of Incorporation or these Bylaws, except as otherwise
provided in Section 3.4 hereof, it shall not mean personal notice unless so
specified, but such notice may be given in writing by depositing the same in a
post office, letter box or mail chute postage prepaid and addressed to the
person to whom such notice is directed at the address of such person on the
records of the Corporation, and such notice shall be deemed given at the time
when the same shall be thus mailed.
(11)
<PAGE>
9.2 WAIVERS. Any stockholder, director or officer may, in writing or by
telegram or cable, at any time waive any notice or other formality required by
law, the Certificate of Incorporation or these Bylaws. Such waiver of notice,
whether given before or after any meeting or action, shall be deemed equivalent
to notice. Presence of a stockholder either in person or by proxy at any meeting
of stockholders and presence of any director at any meeting of the Board of
Directors shall constitute a waiver of such notice as may be required by law,
the Certificate of Incorporation or these Bylaws, unless such presence is solely
for the purpose of objecting to the lack of notice and such objection is stated
at the commencement of the meeting.
ARTICLE X
SEAL
The corporate seal of the Corporation shall be in such form as the
Board of Directors shall determine from time to time and may consist of a
facsimile thereof or the word "SEAL" enclosed in parentheses or brackets. The
corporate seal of the Corporation shall not be necessary to validate or
authenticate any instrument duly executed by the Corporation or to render any
such instrument enforceable against the Corporation.
ARTICLE XI
POWERS OF ATTORNEY
The Board of Directors may authorize one or more of the officers of the
Corporation to execute powers of attorney delegating to named representatives or
agents power to represent or act on behalf of the Corporation, with or without
the power of substitution.
In the absence of any action by the Board of Directors, any officer of
the Corporation may execute, for and on behalf of the Corporation, waivers of
notice of meetings of stockholders and proxies, or may vote shares directly, for
such meetings of any company in which the Corporation may hold voting
securities.
ARTICLE XII
INDEMNIFICATION
12.1 INDEMNIFICATION. The Corporation shall have the power to indemnify
a director, officer or employee of the Corporation (including making provision
for advancement of expenses) to the full extent and under the circumstances
permitted by the DGCL in effect from time to time, as set forth in the
Corporation's Certificate of Incorporation (as amended from time to time), in
accordance with the procedures, conditions and limitations set forth therein.
The indemnification conferred in this Section 12.1 also shall include the right
to be paid by the Corporation (and such successor) the expenses (including
attorneys' fees) incurred in the defense of or other involvement in any such
proceeding in advance of its final disposition; provided, however, that, if and
to the extent the DGCL requires, the payment of such expenses (including
attorneys' fees) incurred by a director or officer in advance of the final
disposition of a proceeding shall
(12)
<PAGE>
be made only upon delivery to the Corporation of an undertaking by or on behalf
of such director or officer to repay all amounts so paid in advance if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified under this Section 12.1 or otherwise; and PROVIDED FURTHER, that,
such expenses incurred by other employees and agents may be so paid in advance
upon such terms and conditions, if any, as the Board of Directors deems
appropriate.
12.2 Claims; Process. If a claim under Section 12.1 is not paid in full
by the Corporation within sixty days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring an action against
the Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such action. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in connection with any
proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Corporation) that the claimant has
not met the standards of conduct which make it permissible under the DGCL for
the Corporation to indemnify the claimant for the amount claimed or is otherwise
not entitled to indemnification under Section 12.1, but the burden of proving
such defense shall be on the Corporation. Unless otherwise specified in an
agreement with the claimant, an actual determination by the Corporation (in the
manner provided under the DGCL) after the commencement of such action that the
claimant has not met such applicable standard of conduct shall not be a defense
to the action, but shall create a presumption that the claimant has not met the
applicable standard of conduct. The rights to indemnification and advance
payment of expenses provided by Section 12.1 hereof shall not be deemed
exclusive of any other rights to which those seeking indemnification and advance
payment of expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
or her official capacity and as to action in another capacity while holding such
office.
12.3 SURVIVAL OF INDEMNIFICATION RIGHTS; INSURANCE. The indemnification
and advance payment of expenses and rights thereto provided by, or granted
pursuant to, Section 12.1 hereof shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee, partner or agent and shall inure to the benefit of the
personal representatives, heirs, executors and administrators of such person.
The Corporation shall have power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee, partner (limited or general) or agent of another
corporation or of a partnership, joint venture, limited liability company, trust
or other enterprise, against any liability asserted against such person or
incurred by such person in any such capacity, or arising out of such person's
status as such, and related expenses, whether or not the Corporation would have
the power to indemnify such person against such liability under the provisions
of the DGCL.
(13)
<PAGE>
12.4 MISCELLANEOUS. Subject to the limitations set forth in the DGCL,
the Board of Directors may also on behalf of the Corporation grant
indemnification to any individual other than a Person to such extent and in such
matter as the Board of Directors in its sole discretion may from time to time
and at any time determine.
ARTICLE XIII
AMENDMENTS
13.1 AMENDMENT OR REPEAL. Except as provided otherwise by the laws of
the State of Delaware or the Certificate of Incorporation, these Bylaws may be
amended or repealed either:
(a) At any meeting of stockholders at which a quorum is
present by vote of a majority of the number of shares of stock entitled
to vote present in person or by proxy at such meeting as provided in
Article II of these Bylaws; provided that the notice of such meeting of
stockholders or waiver of notice thereof contains a statement of the
substance of the proposed amendment or repeal; or
(b) At any meeting of the Board of Directors by a majority
vote of the directors then in office, except for the provisions
authorizing actions by more than a majority of the directors in which
case such provision may be amended or repealed by such number of
directors as are required at act pursuant to such provision.
13.2 STOCKHOLDER PROPOSALS. Any stockholder who intends to
propose that any provision of these Bylaws be amended by action of the
stockholders shall notify the Secretary of the Corporation in writing
of the amendment or amendments which such stockholder intends to
propose not later than one hundred eighty (180) days prior to a request
by such stockholder to call a special meeting for such purpose or, if
such proposal is intended to be made at an annual meeting of
stockholders, not later than the latest date permitted for submission
of stockholder proposals by Rule 14a-8 under the Securities Exchange
Act of 1934. Such notice to the Secretary shall include the text of the
proposed amendment or amendments and a brief statement of the reason or
reasons why such stockholder intends to make such proposal.
(14)
<PAGE>
WWW HOLDINGS, INC.
By: /s/ CHARLES G. BETTY
-----------------------------
Name: Charles G. Betty
-----------------------------
Title: CHIEF EXECUTIVE OFFICER
-----------------------------
Date: September 23, 1999
-----------------------------
SIGNATURE PAGE --- BYLAWS OF WWW HOLDINGS, INC.
(15)
<PAGE>
Exhibit 3.4
WWW HOLDINGS, 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
------------------------------------------
WWW Holdings, 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."
3. DIVIDEND PROVISIONS.
(a) DIVIDENDS.
(i) LIQUIDATION ACCRETION DIVIDENDS. On and before
the fifth
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<PAGE>
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 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
2
<PAGE>
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.
(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
3
<PAGE>
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:
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>
1
2
3
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"):
5
<PAGE>
(a) OPTIONAL CONVERSION RIGHTS AND AUTOMATIC CONVERSION.
(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
6
<PAGE>
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 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
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<PAGE>
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 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
8
<PAGE>
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 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)
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<PAGE>
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
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
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<PAGE>
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.
(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
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<PAGE>
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;
(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
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<PAGE>
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 the
Corporation, dated the Purchase Date (the "Governance Agreement").
Notwithstanding any other provision of this Section 7 or Section 8, the 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
Significant 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
13
<PAGE>
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 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 (66 2/3%) 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;
14
<PAGE>
(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 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
15
<PAGE>
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 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.
16
<PAGE>
(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 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.
17
<PAGE>
(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 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 WWW Holdings, 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.
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<PAGE>
(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 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.
(xvi) "Higher Threshold" shall have the meaning set
forth in the Governance Agreement.
(xvii) "HSR Act" means the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the
regulations promulgated thereunder.
(xviii) "Lower Threshold" shall have the meaning set
forth in the Governance Agreement.
(xix) "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.
19
<PAGE>
(xx) "Purchase Date" means the date of the Closing as
defined in the Governance Agreement.
(xxi) "Qualified Offer" shall have the meaning set
forth in the Governance Agreement.
(xxii) "Significant Subsidiary" shall have the
meaning set forth in the Governance Agreement.
(xxiii) "Sprint Offer" shall have the meaning set
forth in the Governance Agreement.
(xxiv) "Sprint's Percentage Interest" shall have the
meaning set forth in the Governance Agreement.
(xxv) "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.
(xxvi) "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.
20
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused the foregoing
Certificate of Designations for Series A Convertible Preferred Stock to be
signed on ________________________, 2000.
WWW HOLDINGS, INC.
By:
-----------------------------------------
Charles G. Betty, Chief Executive Officer
21
<PAGE>
Exhibit 3.5
WWW HOLDINGS, INC.
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF
SERIES B CONVERTIBLE PREFERRED STOCK
-----------------------------------------
PURSUANT TO SECTION 151 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
------------------------------------------
WWW Holdings, 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 B 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 B 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 B Convertible
Preferred Stock" (herein referred to as "Series B Preferred Stock"), having a
par value per share equal to $.01, and the number of shares constituting such
series shall be 625,000. The Corporation shall only originally issue shares of
Series B Preferred Stock to Sprint Corporation, a Kansas corporation ("Sprint"),
and its successors and Affiliates.
2. RANK. The Series B Preferred Stock shall, with respect to any and
all rights and preferences set forth herein, including without limitation,
dividend rights and rights upon liquidation, winding up or dissolution, whether
voluntary or involuntary, rank immediately junior to that certain series of
preferred stock of the Corporation designated as Series A Convertible Preferred
Stock (the "Series A Stock") in the Certificate of Designation, Preferences and
Rights of the Series A Stock which was filed with the Secretary of State of the
State of Delaware on June 5, 1998. The Series B Preferred Stock will rank junior
only to the Series A Stock, and 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, other than the Series A Stock; PROVIDED, HOWEVER, that if the
Corporation hereafter issues a series of the equity securities of the
Corporation that rank immediately junior to the Series A Preferred Stock and
that are Alternative Securities issued pursuant to the Governance Agreement (as
defined in Section 7
1
<PAGE>
herein), such issuance shall in no event be interpreted to violate this
Certificate of Designation, shall be interpreted in all respects to be
consistent with this Certificate of Designation, and such additional Alternative
Securities shall be designated as PARI PASSU with the Series B Preferred Stock
in all applicable rights, preferences and terms. All equity securities of the
Corporation to which the Series B Preferred Stock ranks prior, including the
Common Stock, are collectively referred to herein as the "Junior Securities."
3. DIVIDEND PROVISIONS.
(a) DIVIDENDS.
(i) LIQUIDATION ACCRETION DIVIDENDS. On and before
the fifth anniversary of the Purchase Date, the Corporation
shall pay, and the holders of outstanding shares of Series B
Preferred Stock ("Holders") shall be entitled to receive on
each Dividend Payment Date, a dividend on each share of Series
B 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 B 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 B 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 B Preferred Stock shall be
entitled to receive, a dividend on each share of Series B
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
B 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 B 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 B Preferred Stock at a rate
per annum equal to three percent (3.00%) of the Liquidation
Value per share of Series B Preferred Stock, accruable
quarterly on each of the Dividend Accrual Dates, payable only
in cash; provided,
2
<PAGE>
however, that after the twentieth anniversary of the
Purchase Date, the Corporation shall pay, and the Holders of
outstanding shares of Series B 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 B Preferred
Stock at a rate per annum equal to 8% of the Liquidation
Value per share of Series B 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 Purchase Date thereafter, but not
to exceed a maximum rate of 12%. All cash dividends shall be
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 B 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 B Preferred Stock shall
be entitled to receive from the Corporation, with respect to the shares
of Series B Preferred Stock held by such Holder, the same dividend or
distribution that such Holder would have received if immediately prior
to the earlier of
3
<PAGE>
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 B Preferred Stock into shares of Common
Stock. Any such dividend, distribution or issuance shall be declared,
ordered, paid or made on the Series B Preferred Stock at the same time
such dividend, distribution or issuance is declared, ordered, paid or
made on the Common Stock.
(c) LIMITATION ON DIVIDENDS AND OTHER DISTRIBUTIONS. Unless
full cumulative dividends, if any, accrued on all outstanding shares of
the Series B 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 B 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 B 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 B 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 B Preferred Stock for each Dividend
Payment Date therefor, and (ii) the cumulative amount of the
Liquidation Value for each Share of Series B Preferred Stock, as of
each Dividend Payment Date, is as follows:
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 B Preferred Stock Each Share of Series B Preferred Stock
- ----------------------------- ---------------------------------------------- ---------------------------------------
<S> <C> <C>
1
2
3
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 B Preferred Stock, then the
Holders of outstanding shares of Series B Preferred Stock shall share
ratably in such distribution of assets. Except as provided in this
Section 4(a), Holders of Series B 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 B Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
5
<PAGE>
(a) OPTIONAL CONVERSION RIGHTS AND AUTOMATIC CONVERSION.
(i) Each share of Series B Preferred Stock shall be
convertible, at the option of the Holder thereof, at any time
after [ June 5, 1999 ], at the office of the Corporation or
any transfer agent for the Series B 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 B Preferred
Stock shall be required in the event of consummation of a
Business Combination. The Conversion Price per share for
shares of Series B 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 B Preferred Stock,
payment shall be made for (A) dividends under Section 3(a)(i)
on each converted share of Series B 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
B 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 B 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
6
<PAGE>
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 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 B 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 B
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
7
<PAGE>
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 B
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 B 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 B Preferred Stock shall
thereafter have the right to receive, in lieu of the
8
<PAGE>
shares of Common Stock of the Corporation immediately
theretofore receivable with respect to the conversion of such
shares of Series B 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 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 B 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 B 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 B 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 B 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 B 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 B 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 B 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 B 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 B 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
9
<PAGE>
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 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
B 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 B 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 B 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 B
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 B Preferred
Stock, in addition to such other remedies as shall be available to the
Holder of such Series B 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 B 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 B 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 B 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).
10
<PAGE>
6. REDEMPTION.
(a) OPTIONAL REDEMPTION. The Series B Preferred Stock may be
redeemed (subject to (i) the right of any or all shares of Series B
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 June 5, 2001, 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 B 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 B Preferred Stock pursuant to this Section 6(a), the Corporation
shall effect such redemption either pro rata according to the number of
shares held by each Holder of shares of Series B 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 B 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 B 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 B
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:
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<PAGE>
(1) the redemption price;
(2) whether all or less than all the
outstanding shares of the Series B Preferred Stock
are to be redeemed and the total number of shares of
the Series B Preferred Stock being redeemed;
(3) the number of shares of Series B
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 B 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 B
Preferred Stock to be redeemed; and
(6) that cash dividends on the shares of the
Series B 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 B Preferred Stock shall
surrender the certificate or certificates representing such
shares of Series B 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 B 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 B 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. The Holders of shares of Series B 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,
12
<PAGE>
Sprint, Sprint L.P. and the Corporation, dated the Purchase Date (the
"Governance Agreement"). Notwithstanding any other provision of this Section 7
or Section 8, the Holders of shares of Series B Preferred Stock shall not be
entitled to any voting rights hereunder with respect to a Business Combination
which is not a Discriminatory Transaction.
8. PROTECTIVE PROVISIONS.
(a) CLASS VOTING. So long as shares of Series B 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 (66 2/3%) of the then outstanding
shares of Series B Preferred Stock (voting as a class):
(i) alter or change the rights, preferences or
privileges of the shares of Series B Preferred Stock so as to
affect adversely the shares;
(ii) increase the number of authorized shares of
Series B 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 B Preferred Stock (other than Alternative
Securities) with respect to, 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 B 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 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 B 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 B
Preferred Stock is changed, and (ii) the Holders of Series B 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 B Preferred Stock had been converted into Common Stock
immediately prior to such Business Combination, after giving effect to
the
13
<PAGE>
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
B 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 B 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 B 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 B 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 B
Preferred Stock into Common Stock or otherwise impair the rights of the
Series B 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 B 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 B 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 of rights
thereunder with respect to the Common Stock (whether or not separate from the
Common Stock), each Holder of shares of Series B Preferred Stock shall be
entitled to receive from the Corporation, upon conversion of such shares of
Series B 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 B Preferred Stock had then increased by the full amount of all
Liquidation Accretion Dividends
14
<PAGE>
payable as if such shares of Series B 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 B 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 B 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 B
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 B 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) "Alternative Securities" shall have the meaning
set forth in the Governance Agreement.
(iv) 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 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
15
<PAGE>
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.
(v) "Business Combination" shall have the meaning set
forth in the Governance Agreement.
(vi) "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.
(vii) "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
16
<PAGE>
Market Value per share as determined in good faith by the
Board of Directors of the Corporation.
(viii) "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.
(ix) "Corporation" means WWW Holdings, Inc., a
Delaware corporation, together with any successors of the
Corporation, whether by merger, consolidation or otherwise,
including without limitation a Surviving Entity.
(x) "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.
(xi) "Discriminatory Transaction" shall have the
meaning set forth in the Governance Agreement.
(xii) "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.
(xiii) "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 B Preferred Stock.
(xiv) "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 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.
17
<PAGE>
(xv) "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended and in effect on the Purchase
Date.
(xvi) "Fair Market Value" means the amount which a
willing buyer would pay a willing seller in an arm's-length
transaction.
(xvii) "Higher Threshold" shall have the meaning set
forth in the Governance Agreement.
(xviii) "HSR Act" means the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the
regulations promulgated thereunder.
(xix) "Lower Threshold" shall have the meaning set
forth in the Governance Agreement.
(xx) "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.
(xxi) "Purchase Date" means [ January 20, 1999. ]
(xxii) "Qualified Offer" shall have the meaning set
forth in the Governance Agreement.
(xxiii) "Significant Subsidiary" shall have the
meaning set forth in the Governance Agreement.
(xxiv) "Sprint Offer" shall have the meaning set
forth in the Governance Agreement.
(xxv) "Sprint's Percentage Interest" shall have the
meaning set forth in the Governance Agreement.
(xxvi) "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.
(xxvii) "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.
18
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused the foregoing
Certificate of Designations for Series B Convertible Preferred Stock to be
signed on ________________________, 2000.
WWW HOLDINGS, INC.
By:
---------------------------------
Charles G. Betty, Chief Executive Officer
19
<PAGE>
Exhibit 3.6
WWW HOLDINGS, INC.
CERTIFICATE OF DESIGNATION, PREFERENCES AND
RIGHTS OF SERIES C CONVERTIBLE PREFERRED STOCK
PURSUANT TO SECTION 151 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
WWW Holdings, 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, the Board of Directors of the Corporation (the "BOARD OF
DIRECTORS") has adopted the following resolution creating a series of Preferred
Stock, $.01 par value, designated as Series C 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 C 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 C Convertible
Preferred Stock (herein referred to as "SERIES C PREFERRED STOCK"), having a par
value per share equal to $.01, and the number of shares constituting such series
shall be 4,385,965. The Corporation shall only originally issue shares of Series
C Preferred Stock to Apple Computer, Inc. Limited, a corporation organized under
the laws of the Republic of Ireland, and its successors, affiliates, parent
company and subsidiaries (collectively, "APPLE").
2. RANK. The Series C Preferred Stock shall, with respect to dividend
rights and rights upon liquidation, winding up or dissolution, whether voluntary
or involuntary, rank immediately junior to that certain series of preferred
stock of the Corporation designated as Series A Convertible Preferred
<PAGE>
Stock in the Certificate of Designation, Preferences, and Rights of the Series A
Convertible Preferred Stock which was filed with the Secretary of State of the
State of Delaware on June 5, 1998, and that certain series of preferred stock of
the Corporation designated as Series B Convertible Preferred Stock in the
Certificate of Designation, Preferences, and Rights of the Series B Convertible
Preferred Stock which was filed with the Secretary of State of the State of
Delaware on January 20, 1999. The Series C Preferred Stock will rank junior only
to the Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock, and shall with respect to dividend rights and rights upon liquidation,
winding up or dissolution, whether voluntary or involuntary, rank prior to the
Common Stock, $.01 par value, of the Corporation ("COMMON STOCK") and all other
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 C Petered
Stock ranks prior, including the Common Stock, are collectively referred to
herein as the "JUNIOR SECURITIES."
3. DIVIDENDS. The holders of the Series C Preferred Stock shall be entitled
to share in dividends on the Common Stock (on an as-converted to Common Stock
basis) if, when and as declared by the Board of Directors out of funds legally
available therefore, after the holders of Series A Preferred Stock and Series B
Preferred Stock have received any dividends to which they are first entitled.
All such dividends shall not be cumulative and no right to such dividends shall
accrue to the holders of the Series C Preferred Stock unless declared by the
Board of Directors.
4. LIQUIDATION PREFERENCE.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation (a "LIQUIDATION"),
holders of each share of Series C Preferred Stock shall be entitled to be paid
out of the Corporation's assets available for distribution to holders of the
Corporation's capital stock of all classes, whether such assets are capital,
surplus, or earnings, after the holders of Series A Preferred Stock and Series B
Preferred Stock of the Company have received the liquidation preference amounts
to which they are entitled upon a Liquidation, and prior and in preference to
any sums paid or any assets distributed to, or set aside for, the holders of
shares of Junior Securities an amount equal to $45.60 per share plus any
declared but unpaid dividends (subject to adjustment for all splits, dividends,
recapitalizations, combinations and the like). If the assets of the Corporation
shall be insufficient to permit the payment in full to the holders of the Series
C Preferred Stock as set forth herein, then the entire assets of the Corporation
available for distribution to the holders of Junior Securities shall be
distributed ratably among the holders of the Series C Preferred Stock in
proportion to the full preferential amount each such holder is otherwise
entitled to receive under this Section 4(a) if sufficient assets were available.
A consolidation, merger or sale of all or substantially all of the assets of the
Corporation shall not be deemed a Liquidation for purposes of this Section 4.
(b) After payment of the full liquidation preference of the Series C
Preferred Stock as set forth in Section 4(a) above, the assets of the Company
legally available for distribution, if any, shall be distributed ratably to the
holders of Junior Securities, in accordance with their respective rights
thereto.
<PAGE>
(c) NONCASH DISTRIBUTIONS. If any of the assets of the Company are to be
distributed under this Section 4, or for any purpose, in a form other than cash,
then the Board of Directors shall promptly determine in good faith the value of
the assets to be distributed to the holders of Series C Preferred Stock. The
Company shall, upon receipt of such determination, give prompt written notice of
the determination to each holder of shares of Series C Preferred Stock.
5.CONVERSION RIGHTS. The holders of the Series C Preferred Stock shall have
conversion rights as follows (the "CONVERSION RIGHTS"):
(a) RIGHT TO CONVERT INTO COMMON STOCK. Each share of the Series C
Preferred Stock shall be convertible, without the payment of any additional
consideration by the holder thereof, at the option of the holder thereof, at any
time after January 4, 2001, at the office of the Corporation or any transfer
agent for the Series C Preferred Stock, into a certain number of fully paid and
nonassessable shares of the Common Stock. The number of shares of Common Stock
for which each share of the Series C Preferred Stock may be exchanged (the
"SERIES C CONVERSION RATE") shall be calculated by dividing $45.60 (the "SERIES
C PURCHASE PRICE") by the Series C Conversion Price. The Series C Conversion
Price shall be subject to appropriate adjustment in the event of any stock split
or combination, stock dividend or similar event, as well as pursuant to other
provisions set forth herein. The "SERIES C CONVERSION PRICE" shall initially be
$45.60.
(b) AUTOMATIC CONVERSION. Each share of the Series C Preferred Stock
shall automatically be converted into shares of the Common Stock at the then
effective Series C Conversion Rate upon the occurrence of the first of the
following events:
(i) at any time after January 4, 2001, upon the receipt by the
Corporation of a duly executed written election, of the holders of more than 66
2/3% of the then outstanding shares of the Series C Preferred Stock in favor of
the conversion of all of the shares of the Series C Preferred Stock into the
Common Stock; or
(ii) if the Board of Directors of the Corporation shall have
determined in the good faith exercise of its reasonable judgment, that such
conversion is required in order for the Corporation to consummate any merger,
reorganization, business combination or other extraordinary transaction
(other than those transactions contemplated by the Agreement and Plan of
Reorganization dated September 22, 1999 by and among EarthLink Network, Inc.,
Mindspring Enterprises, Inc., and the Corporation) approved by the
Corporation's Board of Directors and pursuant to which all the holders of
Common Stock of the Corporation will receive an amount per share (in cash or
freely tradeable securities) greater than the Series C Purchase Price
(subject to adjustment for all splits, dividends, recapitalizations,
combinations and the like).
(c) MECHANICS OF CONVERSION.
(i) No fractional share of Common Stock shall be issued upon
conversion of the Series C Preferred Stock. In lieu of any fractional shares to
which the holder would otherwise be entitled, after aggregating all shares of
Common Stock (including fractional shares thereof) issuable
<PAGE>
upon the conversion of all shares of Series C Preferred Stock held by the holder
which are to be converted, the Corporation shall pay cash equal to such fraction
multiplied by the fair market value of a share of Common Stock at the time (as
determined in good faith by the Board of Directors).
(ii) Before any holder of Series C Preferred Stock shall be
entitled to convert the same into shares of Common Stock, and before the
Corporation shall be obligated to issue certificates for shares of Common Stock
upon the automatic conversion of the Series C Preferred Stock as set forth in
Section 5(b) hereof, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the Series C Preferred Stock, and shall give written notice to the
Corporation at such office that such holder elects to convert the same and shall
state therein the name or names in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued (except that no such
written notice of intent to convert shall be necessary in the event of an
automatic conversion pursuant to Section 5(b) hereof).
(iii) In the event of the loss, theft or destruction of the
holder's certificate or certificates, the holder shall notify the Corporation or
its transfer agent that such certificate or certificates have been lost, stolen
or destroyed and shall execute an agreement satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by it in connection with such
certificate or certificates. The Corporation shall, as soon as practicable after
delivery of certificates in accordance with this Section 5(c)(ii), or, in the
case of a lost, stolen or destroyed certificate, the execution and delivery of
the agreement and indemnity, issue and deliver at such office to such holder of
Series C Preferred Stock, or to such holder's nominee or nominees, a certificate
or certificates for the number of shares of Common Stock to which such holder
shall be entitled as aforesaid together with cash in lieu of any fraction of a
share. Such conversion shall be deemed to have been made immediately prior to
the close of business on the date of such surrender of the shares of Series C
Preferred Stock to be converted (except that in the case of an automatic
conversion pursuant to Section 5(b) hereof, such conversion shall be deemed to
have been made as specified in the affirmative vote or written consent) and the
person or persons entitled to receive the shares of Common Stock, issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date.
(d) ADJUSTMENTS FOR SUBDIVISIONS, STOCK DIVIDENDS, COMBINATIONS OR
CONSOLIDATION OF COMMON STOCK. In the event that the Corporation at any time or
from time to time declares or pays, without consideration, any dividend on
Common Stock payable in Common Stock or in any right to acquire Common Stock for
no consideration, or effects a subdivision or combination of its outstanding
shares of Common Stock into a greater or smaller number of shares without a
proportionate and corresponding subdivision or combination of the outstanding
shares of Series C Preferred Stock, then and in each such event the Series C
Conversion Price shall be increased or decreased proportionally.
(e) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the event that
the Corporation at any time or from time to time makes, or fixes a record date
for the determination of holders of Common Stock entitled to receive, any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this
<PAGE>
Section 5, then and in each such event provision shall be made so that the
holders of Series C Preferred Stock shall receive upon conversion thereof, in
addition to the number of shares of Common Stock receivable thereupon, the
amount of securities of the Corporation which they would have received had their
shares of Series C Preferred Stock been converted into Common Stock on the date
of such event and had they thereafter, during the period from the date of such
event to and including the date of conversion, retained such securities
receivable by them as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 5 with respect to
the rights of the holders of the Series C Preferred Stock.
(f) NO IMPAIRMENT. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, 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 the Corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series C Preferred Stock against impairment.
(g) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price 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 C 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 C Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, and (ii) the Series C Conversion Price at the time in effect.
(h) NOTICES OF RECORD DATE. In the event that the Corporation shall
propose at any time:
a) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
b) to offer for subscription pro rata to the
holders of any class or series of its stock any additional shares of stock of
any class or series or other rights
c) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in the
Common Stock;
d) to effect a liquidation or any other transaction
of a type similar to those described in Section 4 above; or
e) to effect a merger with or into another
corporation or a sale of all or substantially all of the assets of the
Corporation to another corporation;
then, in connection with each such event, the Corporation shall send to the
holders of the Series C Preferred Stock:
<PAGE>
i) at least 10 business days' prior written notice of the date on
which a record shall be taken for such dividend, distribution or subscription
rights or vote, with respect to a merger or other transaction requiring a vote
of the stockholders of the Corporation (and specifying the date on which the
holders of Common Stock shall be entitled thereto) or for determining rights to
vote in respect of the matters referred to in (c) or (d) above; and
ii) in the case of the matters referred to in (c) above, at least
10 business days' prior written notice of the date when the same shall take
place (and specifying the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon the occurrence of such event).
(i) RESERVATION OF STOCK 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 C Preferred Stock and such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
then outstanding shares of the Series C 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 C
Preferred Stock, the Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
(j) NOTICES. Any notice required by the provisions of this Section 5 to
be given to the holders of shares of Series C Preferred Stock shall be deemed
given three days after deposit in the United States mail, postage prepaid,
return receipt requested, and addressed to each holder of record at his address
appearing on the books of the Corporation. Notice to holders located outside the
United States shall be given by telex or telecopy; provided, however, that such
purchaser shall give the Corporation its telex or telecopy number.
(k) ADJUSTMENTS. Subject to Section 4 above, in case of any
reorganization, recapitalization or any reclassification of the capital stock of
the Corporation (other than a subdivision or combination of shares provided for
above), any merger of the Corporation with or into another corporation or
corporations, or the conveyance of all or substantially all of the assets of the
Corporation to another corporation, each share of Series C Preferred Stock shall
thereafter be convertible into the number of shares of stock or other securities
or property (including cash) to which a holder of the number of shares of Common
Stock deliverable upon conversion of such share of Series C Preferred Stock
would have been entitled upon the record date of (or, if no record date is
fixed, the date of) such reorganization, recapitalization, reclassification,
merger or conveyance; and, in any case, appropriate adjustment (as determined by
the Board of Directors) shall be made in the application of the provisions
herein set forth with respect to the rights and interests thereafter of the
holders of the Series C Preferred Stock, to the end that the provisions set
forth herein shall thereafter be applicable, as nearly as equivalent as is
practicable, in relation to any shares of stock or the securities or property
(including cash) thereafter deliverable upon the conversion of the shares of the
Series C Preferred Stock.
<PAGE>
(l) ISSUE TAXES. The Corporation shall pay any and all issue and other
taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of shares of Series C Preferred Stock pursuant
hereto; provided, however, that the Corporation shall not be obligated to pay
any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.
6. REDEMPTION RIGHTS. The Corporation shall have no redemption rights with
regard to the Series C Preferred Stock.
7. VOTING RIGHTS.
(a) At any time after January 4, 2001, except as required by law or by
the provisions hereof, the holders of the Series C Preferred Stock shall be
entitled to vote on all matters with the holders of the Common Stock on an
as-converted to Common Stock basis and shall be entitled to vote together with
holders of Common Stock, with respect to any question upon which holders of
Common Stock have the right to vote.
(b) The holders of Series C Preferred Stock, voting as a separate class,
shall be entitled to elect one (1) member of the Corporation's Board of
Directors; provided, however, that this Section 7(b) shall be of no force or
effect until such time as the shares of Series C Preferred Stock purchased by
Apple pursuant to the Preferred Stock Purchase Agreement dated January 4, 2000,
between Apple and the Company (the "PREFERRED STOCK PURCHASE AGREEMENT") have
been released from escrow pursuant to the terms of Section 2.3 thereof. The
Director elected by the holders of Series C Preferred Stock may be removed from
the Board of Directors only by the affirmative vote of the holders of a majority
of the Series C Preferred Stock, voting separately as a single class. In the
event of the death, disability, retirement, resignation or removal of the
Director elected by the holders of Series C Preferred Stock, the holders of the
Series C Preferred Stock shall be entitled to elect a successor to or
replacement for such Director. Notwithstanding the foregoing, the right of the
holders of the Series C Preferred Stock to elect a member to the Corporation's
Board of Directors pursuant to this Section 7(b) shall terminate upon the
earlier to occur of: (i) the termination of the exclusivity provisions under
Section 3.2 of the Internet Services Agreement dated January 4, 2000 by and
among EarthLink Network, Inc. and Apple, (ii) the conversion of all of the
issued and outstanding shares of Series C Preferred Stock into shares of
Common Stock of the Corporation, (iii) prior to the one year anniversary of
the Closing Date, the sale or disposition by Apple of any of the shares of
the Series C Preferred Stock acquired pursuant to the Preferred Stock
Purchase Agreement and pursuant to the exercise of Apple's right to purchase
additional shares of Series C Preferred Stock pursuant to Section 6.1 of the
Investor Rights Agreement dated January 4, 2000, by and between EarthLink
Network, Inc. and Apple (the "INVESTOR RIGHTS AGREEMENT"); (iv) on or after
the one year anniversary of the Closing Date and prior to the three year
anniversary of the Closing Date, the sale or disposition by Apple of more
than 25% of the shares of Series C Preferred Stock acquired pursuant to the
Preferred Stock Purchase Agreement and pursuant to the exercise of Apple's
right to purchase additional shares of Series C Preferred Stock pursuant to
Section 6.1 of the Investor Rights Agreement; and (v) on or after the three
year anniversary of the Closing Date, the sale or disposition by Apple of
more than 50% of the shares of Series C Preferred Stock acquired pursuant to
the Preferred Stock Purchase
<PAGE>
Agreement and pursuant to the exercise of Apple's right to purchase additional
shares of Series C Preferred Stock pursuant to Section 6.1 of the Investor
Rights Agreement.
8. COVENANTS. The Corporation shall not, without first obtaining
the affirmative vote or written consent of at least a majority of such
outstanding shares of Series C Preferred Stock voting separately as a class:
(i) increase or decrease the authorized number of shares of Series
C Preferred Stock;
(ii) create any new class or series of stock having preferences
prior to or on parity with the Series C Preferred Stock;
(iii) alter or change the rights, preferences or privileges or the
shares of Series C Preferred Stock so as to materially and adversely affect such
shares; or
(iv) pay or declare dividends on any shares of Common Stock in
contravention of Section 3.
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 of rights
thereunder with respect to the Common Stock (whether or not separate from the
Common Stock), each Holder of shares of Series C Preferred Stock shall be
entitled to receive from the Corporation, upon conversion of such shares of
Series C 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 such Holder had converted all of
such Holder's shares of Series C 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 C Preferred Stock
(including any adjustments that would otherwise be required by Section 5(d) and
(e) with respect to the subject matter of the immediately preceding sentence).
10. STATUS OF CONVERTED STOCK. In the event any shares of Series C
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.
* * * *
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused the foregoing
certificate to be signed on February __, 2000.
WWW Holdings, INC.,
a Delaware corporation
By:
Name:
Title:
<PAGE>
[LOGO] [LOGO] [LOGO]
COMMON STOCK SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 270321 10 2
EarthLink, Inc.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
- -------------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE OWNER OF
- -------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF
- -------------------------------EarthLink, Inc.----------------------------------
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of the duly authorized officers.
COUNTERSIGNED AND REGISTERED
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
Dated:
[SEAL]
/s/ Samuel R. DeSimone, Jr. /s/ Charles G. Betty
SECRETARY CHIEF EXECUTIVE OFFICER
<PAGE>
EarthLink, Inc.
The Corporation will furnish without charge to each stockholder who so
requests, a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian .
TEN ENT - as tenants by the entireties --------- ----------------
JT TEN - as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
----------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------
OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT
ATTORNEY
- ---------------------------------------------------------------------
TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH
FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED
------------------------
---------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
---------------------------------------------------
SIGNATURE(S) GUARANTEED: THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5
January 6, 2000
WWW Holdings, Inc.
3100 New York Drive
Pasadena, California 91107
REGISTRATION STATEMENT ON FORM S-4 RELATED TO THE MERGER OF EARTHLINK
NETWORK, INC. AND MINDSPRING ENTERPRISES, INC.
WITH AND INTO WWW HOLDINGS, INC.
Ladies and Gentlemen:
We have acted as counsel to WWW Holdings, Inc., a Delaware
corporation ("Holdings"), in connection with the preparation and filing of a
Registration Statement on Form S-4 (the "Registration Statement") relating to
the issuance of shares of common stock, Series A Convertible Preferred Stock,
Series B Convertible Preferred Stock and Series C Convertible Preferred Stock
of Holdings (collectively, the "Holdings Stock"), the surviving corporation
in connection with the merger of EarthLink Network, Inc., a Delaware
corporation ("EarthLink") and MindSpring Enterprises, Inc., a Delaware
corporation ("MindSpring") with and into Holdings pursuant to an Agreement and
Plan of Reorganization, dated September 22, 1999 (the "Agreement").
In rendering this opinion, we have examined such corporate records,
other documents, certificates and other instruments and we have reviewed such
matters of law as we have deemed necessary or appropriate to enable us to render
the opinions expressed below. As to any facts material to our opinions expressed
below, we have relied upon the representations and warranties of the various
parties to the Agreement and certificates of corporate officers of such parties
to the Agreement. In rendering the opinions expressed below, we have assumed (i)
the authenticity and conformity to the original documents of all documents
submitted to us as certified, conformed, facsimile or photographic copies, and
the genuineness of all signatures on all documents, and (ii) the correctness and
completeness of all documents and certificates of all public officials.
Based on the foregoing, we are of the opinion that the Holdings Stock
is legally authorized and, when the Registration Statement has been declared
effective by order of the Securities and Exchange Commission and the Holdings
Stock has been issued and paid for upon the terms and conditions set forth in
the Registration Statement, the Holdings Stock will be validly issued, fully
paid and nonassessable.
<PAGE>
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the proxy statement/prospectus contained within the
Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required by Section 7 of the
Securities Act of 1933 or the rules and regulations promulgated thereunder by
the Securities and Exchange Commission.
Very truly yours,
/s/ Hunton & Williams
<PAGE>
EXHIBIT 8.1
[HUNTON & WILLIAMS LETTERHEAD]
January 6, 2000
EarthLink Network, Inc.
3100 New York Drive
Pasadena, California 91107
MERGER OF EARTHLINK NETWORK, INC.
INTO WWW HOLDINGS, INC.
Ladies and Gentlemen:
We have acted as counsel to EarthLink Network, Inc., a Delaware
corporation ("EarthLink"), in connection with proposed transactions (the
"Reorganization") in which EarthLink and MindSpring Enterprises, Inc., a
Delaware corporation ("MindSpring"), each will merge with and into WWW Holdings,
Inc., a Delaware corporation ("Newco"). This opinion letter is delivered to you
pursuant to Section 10.2(b) of the Agreement and Plan of Reorganization (the
"Agreement"). Any capitalized term used but not defined in this letter has the
meaning given that term in the Agreement.
In the merger of EarthLink into Newco (the "EarthLink Merger"), each
outstanding share of EarthLink common stock will be converted into 1.615
shares of Newco common stock; each outstanding share of EarthLink Series A
Preferred stock will be converted into 1.615 shares of Newco Series A
Preferred stock; and each outstanding share of EarthLink Series B Preferred
stock will be converted into 1.615 shares of Newco Series B Preferred stock;
and each outstanding share of EarthLink Series C Preferred stock will be
converted into 1.615 shares of Newco Series C Preferred stock. Any EarthLink
common stock shareholder who becomes entitled to a fractional share of Newco
common stock as a result of the EarthLink Merger will receive cash in lieu of
the fractional share.
EarthLink has outstanding certain stock options and warrants to
purchase shares of EarthLink common stock. As a result of the EarthLink merger,
each option, warrant and other right to purchase, or that is convertible into,
EarthLink common stock shall be converted into an economically equivalent
option, warrant or other right to purchase, or that is convertible into, Newco
common stock.
Immediately following the EarthLink Merger, MindSpring will merge into
Newco (the "MindSpring Merger"). In the MindSpring
<PAGE>
EarthLink Network, Inc.
January 6, 2000
Page 2
Merger, shareholders of MindSpring will receive one share of Newco common stock
in exchange for each share of MindSpring common stock. In addition, each
outstanding option, warrant and other right to purchase, or that is convertible
into, MindSpring common stock shall be converted into an economically equivalent
option, warrant or right to purchase, or that is convertible into, Newco common
stock.
You have requested our opinion concerning certain federal income tax
consequences of the EarthLink Merger. In giving this opinion, we have reviewed
the Agreement, the Proxy Statement under the Securities Act of 1933 relating to
the Reorganization (the "Proxy Statement"), and such other documents as we have
considered necessary. In addition, we have been advised by appropriate officers
of EarthLink and Newco that:
1. The fair market value of the Newco stock (including any fractional
share interest) received by an EarthLink shareholder in exchange for EarthLink
stock will be approximately equal to the fair market value of the EarthLink
stock surrendered in the exchange.
2. No share of Newco stock will be issued for services rendered to or
for the benefit of Newco in connection with the EarthLink Merger; none of the
compensation received by any shareholder-employee of EarthLink will be separate
consideration for, or allocable to, any shares of EarthLink stock; none of the
shares of Newco stock received by any shareholder-employee in the EarthLink
Merger will be separate consideration for, or allocable to, any employment
agreement; and the compensation paid to any shareholder-employee will be for
services actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's length for similar services.
3. The payment of cash in lieu of fractional shares of Newco common
stock is solely for the purpose of avoiding the expense and inconvenience to
Newco of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash that will be paid in the EarthLink
Merger in lieu of fractional shares of Newco common stock will not exceed one
percent of the total consideration that will be issued in the
<PAGE>
EarthLink Network, Inc.
January 6, 2000
Page 3
EarthLink Merger to EarthLink shareholders in exchange for their EarthLink
stock.
4. Neither Newco, nor any subsidiary of Newco (including subsidiaries
of EarthLink or MindSpring), has a plan or intention to reacquire directly or
indirectly (including, without limitation, through a partnership) any of Newco's
stock issued in the EarthLink Merger or to make any extraordinary distribution
with respect to such stock.
5. No share of EarthLink stock has been or will be redeemed directly or
indirectly (including, without limitation, through a partnership) by EarthLink,
or acquired directly or indirectly (including, without limitation, through a
partnership) by any subsidiary of EarthLink, in anticipation of the EarthLink
Merger, and EarthLink has not made, and will not make, any extraordinary
distribution with respect to its stock in anticipation of the EarthLink Merger.
6. The liabilities of EarthLink that will be assumed by Newco and the
liabilities, if any, to which assets of EarthLink are subject were incurred by
EarthLink in the ordinary course of business.
7. At all times during the five-year period ending on the effective
date of the EarthLink Merger, the fair market value of all of EarthLink's United
States real property interests has been less than 50 percent of the total fair
market value of (i) its United States real property interests, (ii) its
interests in real property located outside the United States, and (iii) its
other assets used or held for use in a trade or business. For purposes of the
preceding sentence, (a) United States real property interests include all
interests (other than an interest solely as a creditor) in real property and
associated personal property (such as movable walls and furnishings) located in
the United States or the Virgin Islands and interests in any corporation (other
than a controlled corporation) owning any United States real property interest,
(b) EarthLink is treated as owning its proportionate share (based on the
relative fair market value of its ownership interest to all ownership interests)
of the assets owned by any controlled corporation or any partnership, trust, or
<PAGE>
EarthLink Network, Inc.
January 6, 2000
Page 4
estate in which EarthLink is a partner or beneficiary, and (c) any such entity
in turn is treated as owning its proportionate share of the assets owned by any
controlled corporation or any partnership, trust, or estate in which the entity
is a partner or beneficiary. As used in this paragraph, "controlled corporation"
means any corporation when at least 50 percent of the fair market value of its
stock is owned by EarthLink, in the case of a first-tier subsidiary, or by a
controlled corporation, in the case of a lower-tier subsidiary.
8. At the Effective Time of the EarthLink Merger, each of the total
adjusted federal income tax basis and the fair market value of EarthLink's
assets to be transferred to Newco will equal or exceed the sum of liabilities to
be assumed by Newco plus the amount of liabilities, if any, to which the
transferred assets are subject.
9. There is no intercorporate indebtedness existing between (a)
EarthLink or any subsidiary of EarthLink and (b) MindSpring or any subsidiary of
MindSpring.
10. Following the EarthLink Merger, Newco will continue the historic
business of EarthLink or use a significant portion of EarthLink's historic
business assets in a business.
11. Newco has no plan or intention to sell or otherwise dispose of any
of the assets of EarthLink acquired in the EarthLink Merger, except for
dispositions made in the ordinary course of business.
12. Neither Newco, MindSpring, nor any subsidiary of MindSpring (a) has
transferred or will transfer cash or other property to EarthLink or any
subsidiary of EarthLink for less than fair market value consideration in
anticipation of the EarthLink Merger or (b) has made or will make any loan to
EarthLink or any subsidiary of EarthLink in anticipation of the EarthLink
Merger.
13. Newco, EarthLink, and the shareholders of EarthLink will pay their
respective expenses, if any, incurred in connection with the EarthLink Merger.
<PAGE>
EarthLink Network, Inc.
January 6, 2000
Page 5
14. With respect to EarthLink, either (i) less than 50 percent of the
fair market value of its adjusted total assets consists of stock and securities,
(ii) less than 80 percent of the fair market value of its adjusted total assets
consists of assets held for investment, or (iii) not more than 25 percent of the
fair market value of its adjusted total assets consists of stock and securities
of any one issuer, and not more than 50 percent of the fair market value of its
adjusted total assets consists of stock and securities of five or fewer issuers.
For purposes of the preceding sentence, (a) EarthLink's adjusted total assets
exclude cash, cash items (including accounts receivable and cash equivalents),
and United States government securities, (b) EarthLink's adjusted total assets
exclude stock and securities issued by any subsidiary at least 50 percent of the
voting power or 50 percent of the total fair market value of the stock of which
is owned by EarthLink, but EarthLink is treated as owning directly a ratable
share (based on the percentage of the fair market value of the subsidiary's
stock owned by the corporation) of the assets owned by any such subsidiary, (c)
all corporations that are members of the same "controlled group" within the
meaning of section 1563(a) of the Internal Revenue Code (the "Code") are treated
as a single issuer, and (d) an asset is held for investment if it is held
primarily for gain from appreciation in value or for the production of passive
income (including royalties, rents, dividends, and interest).
15. Any shares of Newco stock received in exchange for shares of
EarthLink stock that (a) were acquired in connection with the performance of
services, including stock acquired through the exercise of an option or warrant
acquired in connection with the performance of services, and (b) are subject to
a substantial risk of forfeiture within the meaning of section 83(c) of the Code
will be subject to substantially the same risk of forfeiture.
16. Neither Newco, MindSpring nor any subsidiary of MindSpring (a) owns
any shares of EarthLink stock, or (b) has acquired or will acquire, directly or
indirectly (including,
<PAGE>
EarthLink Network, Inc.
January 6, 2000
Page 6
without limitation, through a partnership), any shares of EarthLink stock in
anticipation of the EarthLink Merger.
17. Since April 16, 1997, EarthLink has not distributed to its
shareholders or its security holders stock or securities of a controlled
corporation in a transaction to which Section 355(a) of the Code applies.
18. EarthLink has not made or entered into, and holds no asset subject
to, a consent filed pursuant to Section 341(f) of the Code or a "safe harbor
lease" subject to former Section 168(f)(8) of the Code.
On the basis of the foregoing, and assuming that (a) the preceding
enumerated statements are and will remain accurate and (b) the EarthLink Merger
will be consummated in accordance with the Agreement, we are of the opinion that
(under existing law) for federal income tax purposes:
1. The EarthLink Merger will be a "reorganization" within the meaning
of section 368(a)(1)(A) of the Code, and Newco and EarthLink each will be a
"party to a reorganization" within the meaning of section 368(b) of the Code.
2. Newco will not recognize gain or loss on (a) the acquisition of
EarthLink's assets in the EarthLink Merger in exchange for Newco stock and the
assumption of EarthLink's liabilities or (b) the distribution of Newco stock
to EarthLink shareholders.
3. EarthLink will not recognize gain or loss on the transfer of its
assets to Newco in the EarthLink Merger in exchange for Newco stock and the
assumption of EarthLink's liabilities.
4. An EarthLink shareholder will not recognize gain or loss on the
exchange of shares of EarthLink stock for shares of Newco stock (including any
fractional share interest) in the EarthLink Merger.
5. The aggregate basis of shares of Newco common stock received by an
EarthLink shareholder in the EarthLink Merger will
<PAGE>
EarthLink Network, Inc.
January 6, 2000
Page 7
be the same as the aggregate basis of the shares of EarthLink common stock
exchanged therefor. The aggregate basis of shares of each type of Newco
preferred stock received by an EarthLink shareholder in the EarthLink Merger
will be the same as the aggregate basis of the shares of the type of EarthLink
preferred stock exchanged therefor.
6. The holding period of the shares of Newco stock (including any
fractional share interest) received by an EarthLink shareholder in the EarthLink
Merger will include the holding period of the shares of EarthLink stock
exchanged therefor, if such shares of EarthLink stock are held as a capital
asset on the effective date of the EarthLink Merger.
7. Cash received by an EarthLink shareholder in lieu of a fractional
share of Newco common stock will be treated as having been received as full
payment in exchange for such fractional share pursuant to section 302(a) of the
Code. As a result, an EarthLink shareholder who receives cash in lieu of a
fractional share will recognize gain or loss equal to the difference between the
amount of cash received and the shareholder's basis in the fractional share
interest.
We are also of the opinion that the material federal income tax
consequences of the EarthLink Merger to EarthLink and the EarthLink shareholders
are fairly summarized in the Proxy Statement under the headings
"Summary--Material Federal Income Tax Consequences" and "Material Federal Income
Tax Consequences." Our opinion as to the material federal income tax
consequences of the EarthLink Merger to EarthLink and the EarthLink shareholders
is set forth in the Proxy Statement under the heading "Material Federal Income
Tax Consequences," and we confirm such opinion. We consent to the use of this
opinion as an exhibit to the Proxy Statement and to the reference to this firm
under such headings. In giving this consent, we do not admit that we are within
the category of persons whose consent is required by section 7 of the Securities
Act of 1933 or the rules and regulations promulgated thereunder by the
Securities and Exchange Commission.
Except as set forth above, we express no opinion regarding any tax
consequences of the EarthLink Merger. This opinion may
<PAGE>
EarthLink Network, Inc.
January 6, 2000
Page 8
not be distributed, quoted in whole or in part or otherwise reproduced in any
document, or filed with any governmental agency without our prior written
consent.
Very truly yours,
/s/ Hunton & Williams
<PAGE>
EarthLink Network, Inc.
January 6, 2000
Page 9
<PAGE>
Exhibit 8.2
January 6, 2000
Board of Directors
MindSpring Enterprises, Inc.
1430 West Peachtree Street, N.W.
Suite 400
Atlanta, GA 30309
Gentlemen/Ladies:
This opinion is being delivered to you in connection with the
Agreement and Plan of Reorganization (the "Agreement"), dated as of September
22, 1999, by and among WWW Holdings, Inc. ("Newco"), a Delaware corporation,
EarthLink Network, Inc. ("EarthLink"), a Delaware corporation, and MindSpring
Enterprises, Inc. ("MindSpring"), a Delaware corporation. Pursuant to the
Agreement, EarthLink will merge with and into Newco (the "EarthLink Merger")
and, immediately thereafter, MindSpring will merge with and into Newco (the
"MindSpring Merger").
In connection with the preparation of this opinion, we have
examined and with your consent relied upon (without any independent
investigation or review thereof) the following documents (including all
amendments, exhibits and schedules thereto): (1) the Agreement; (2) the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission (the "Registration Statement") and/or the Proxy Statement/Prospectus
of EarthLink and MindSpring; (3) representations and certifications made to us
by MindSpring and Newco as to matters of fact; and (4) such other instruments
and documents related to the formation, organization and operation of EarthLink,
MindSpring and Newco or to the consummation of the EarthLink Merger or the
MindSpring Merger and the transactions contemplated thereby as we have deemed
necessary or appropriate. (1)/
- ------------------
(1)/ All capitalized terms used herein and not otherwise defined shall have the
same meaning as they have in the Agreement. All section references, unless
<PAGE>
MindSpring Enterprises, Inc.
January 6, 2000
Page 2
THE PROPOSED TRANSACTION
Based solely upon our review of the documents set forth above,
and upon such information as MindSpring and Newco have provided to us (which we
have not attempted to verify in any respect), and in reliance upon such
documents and information, we understand that the proposed transaction and the
relevant facts with respect thereto are as follows:
EarthLink is a leading Internet service provider providing
nationwide Internet access and related value-added services to its individual
and business members. MindSpring is a leading national Internet service
provider, focusing on serving individuals and small businesses. Its primary
service offerings are dial-up Internet access and business services, which
MindSpring offers in various price and usage plans designed to meet the needs of
its members. Newco is a newly formed corporation that has not, to date,
conducted any activities other than those incident to its formation, the
execution of the Agreement and the preparation of the Proxy
Statement/Prospectus.
It is believed that the combined operations of EarthLink and
MindSpring will offer strategic and financial benefits to both EarthLink and
MindSpring. In reaching this decision, the EarthLink and MindSpring boards of
directors considered a number of factors, including: (1) the ability to take
advantage of the greater combined resources and efforts of the two companies
under one brand to accelerate member growth; (2) the increased opportunities
that could be available to a larger, combined company, including potentially
greater leverage with vendors, network providers and content providers, the
opportunity to become a leading Internet service provider portal site and the
opportunity to develop alternative revenue streams; and (3) significant
opportunities for cost savings, revenue growth, technological development and
other benefits. Thus, it is proposed that pursuant to the Agreement and the laws
of the State of Delaware, EarthLink will merge with and into Newco and,
immediately thereafter, MindSpring will merge with and into Newco. Newco will be
the surviving corporation resulting from the EarthLink Merger and the MindSpring
Merger and will change its name to EarthLink Network, Inc. at the Effective
Time.
- --------------------
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
<PAGE>
MindSpring Enterprises, Inc.
January 6, 2000
Page 3
Pursuant to the MindSpring Merger, each share of MindSpring
Common Stock outstanding immediately prior to the Effective Time will be
converted into and become one (1) share of Newco Common Stock, and each
outstanding option, warrant and other right to purchase, or which is convertible
into, MindSpring Common Stock will be converted into an option, warrant or other
right, as the case may be, having substantially identical terms and conditions,
to purchase or be convertible into one (1) share of Newco Common Stock. There
will be no dissenters' rights in the MindSpring Merger.
ASSUMPTIONS AND REPRESENTATIONS
In connection with rendering this opinion, we have assumed or
obtained representations (and, with your consent, are relying thereon, without
any independent investigation or review thereof, although we are not aware of
any material facts or circumstances contrary to or inconsistent therewith) that:
1. All information contained in each of the documents we have
examined and relied upon in connection with the preparation of this opinion is
accurate and completely describes all material facts relevant to our opinion,
all copies are accurate and all signatures are genuine. We have also assumed
that there has been (or will be by the Effective Time of the MindSpring Merger)
due execution and delivery of all documents where due execution and delivery are
prerequisites to the effectiveness thereof.
2. The MindSpring Merger will be consummated in accordance
with applicable state law and will qualify as a statutory merger under
applicable state law.
3. All factual representations made to us by MindSpring and
Newco are true, correct, and complete in all material respects. Any
representation or statement made "to the best of knowledge" or similarly
qualified is correct without such qualification.
4. The MindSpring Merger will be consummated in accordance
with the Agreement and as described in the Proxy Statement/Prospectus (including
satisfaction of all covenants and conditions to the obligations of the parties
without amendment or waiver thereof); MindSpring and Newco will comply with all
reporting obligations with respect to the MindSpring Merger required under the
Code and the Treasury Regulations thereunder; and the Agreement and all other
<PAGE>
MindSpring Enterprises, Inc.
January 6, 2000
Page 4
documents and instruments referred to therein or in the Proxy
Statement/Prospectus are valid and binding in accordance with their terms.
OPINION - FEDERAL INCOME TAX CONSEQUENCES
Based upon and subject to the assumptions and
qualifications set forth herein, it is our opinion that for federal income
tax purposes: (1) the MindSpring Merger will qualify as a reorganization
within the meaning of Section 368(a) of the Code; (2) both MindSpring and
Newco will be "a party to the reorganization" within the meaning of Code
Section 368(b); and (3) the discussion in the Registration Statement under
the heading "Federal Income Tax Consequences," to the extent such discussion
describes applicable federal income tax law applicable to the MindSpring
Merger, is correct in all material respects, as of the date hereof.
In addition to the assumptions set forth above, this opinion
is subject to the exceptions, limitations and qualifications set forth below:
1. This opinion represents and is based upon our best judgment
regarding the application of relevant current provisions of the Code and
interpretations of the foregoing as expressed in existing court decisions,
administrative determinations (including the practices and procedures of the
Internal Revenue Service (the "IRS") in issuing private letter rulings, which
are not binding on the IRS except with respect to the taxpayer that receives
such a ruling) and published rulings and procedures all as of the date hereof.
An opinion of counsel merely represents counsel's best judgment with respect to
the probable outcome on the merits and is not binding on the IRS or the courts.
There can be no assurance that positions contrary to our opinions will not be
taken by the IRS, or that a court considering the issues would not hold contrary
to such opinions. MindSpring has not requested a ruling from the IRS (and no
ruling will be sought) as to any of the federal income tax consequences
addressed in this opinion. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the opinion
expressed herein. Nevertheless, we undertake no responsibility to advise you of
any new developments in the law or in the application or interpretation of the
federal income tax laws.
2. This letter addresses only the specific tax opinions set
forth above. This letter does not address any other federal, state, local or
foreign tax consequences that may result from the MindSpring Merger or any other
transaction
<PAGE>
MindSpring Enterprises, Inc.
January 6, 2000
Page 5
(including the EarthLink Merger or any other transaction undertaken in
connection with the MindSpring Merger).
3. We express no opinion regarding, among other things, the
tax consequences of the MindSpring Merger (including the opinion set forth
above) as applied to specific stockholders of MindSpring that may be relevant to
particular classes of MindSpring shareholders, such as dealers in securities,
corporate shareholders subject to the alternative minimum tax, foreign persons,
and holders of shares acquired upon exercise of stock options or in other
compensatory transactions.
4. Our opinion set forth herein is based upon the description
of the contemplated transactions as set forth above in the section captioned
"The Proposed Transaction," the Agreement and the Proxy Statement/Prospectus. If
the actual facts relating to any aspect of the transactions differ from this
description in any material respect, our opinion may become inapplicable. No
opinion is expressed as to any transaction other than those set forth in the
section captioned "The Proposed Transaction," the Agreement and the Proxy
Statement/Prospectus or to any transaction whatsoever, including the Merger, if
all the transactions described in the section captioned "The Proposed
Transaction," the Agreement and the Proxy Statement/Prospectus are not
consummated in accordance with the terms of the section captioned "The Proposed
Transaction," the Agreement and the Proxy Statement/Prospectus and without
waiver or breach of any material provision thereof or if all of the
representations, warranties, statements and assumptions upon which we relied are
not true and accurate at all relevant times. In the event any one of the
statements, representations, warranties or assumptions upon which we have relied
to issue this opinion is incorrect, our opinion might be adversely affected and
may not be relied upon.
This opinion is provided to MindSpring only, and without our
prior consent, may not be relied upon, used, circulated, quoted or otherwise
referred to in any manner by any person, firm, governmental authority or entity
whatsoever other than reliance thereon by MindSpring or the MindSpring
shareholders. Notwithstanding the prior sentence, we hereby consent to the use
of the opinion letter as an exhibit to the Registration Statement and to the use
of our name in the
<PAGE>
MindSpring Enterprises, Inc.
January 6, 2000
Page 6
Registration Statement. In giving the consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
Sincerely yours,
/s/ HOGAN & HARTSON L.L.P.
<PAGE>
Exhibit 10.38
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OFFICE LEASE
BETWEEN
KINGSTON ATLANTA PARTNERS, L.P.,
A DELAWARE LIMITED PARTNERSHIP,
LANDLORD
AND
MINDSPRING ENTERPRISES, INC.,
A DELAWARE CORPORATION,
TENANT
NOVEMBER 16, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LEASE SUMMARY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DATE: November 16, 1999
LANDLORD: Kingston Atlanta Partners, L.P., a Delaware
limited partnership
TENANT: MindSpring Enterprises, Inc., a Delaware
corporation
PREMISES AND
FLOOR(S): Terrace Level, 1st, 2nd, 3rd, 4th, 5th, 6th
[SECTION 1.1(b)] and 7th floors*
<TABLE>
<CAPTION>
OPTION A OPTION B
AREA OF THE PREMISES: FLOOR(S) USABLE AREA RENTABLE AREA RENTABLE AREA
[SECTION 1.2] -------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
TERRACE 10,943 12,584 12,584
1 35,057 40,316 40,314
2 48,587 52,446 53,446
3* 48,209 26,200 53,030
4* 48,209 26,200 53,030
5* 48,209 53,030 26,200
6* 23,818 26,200 26,200
7* 23,818 26,200 -0-
------- -------
TOTAL 264,174 264,804
======= =======
</TABLE>
* A portion of the seventh (7th) floor (7 South) and a portion of the fifth
(5th) floor (5 North) will be leased by Tenant only if space takedown Option
A is implemented as provided in Section 1.1(b) of this Lease. A portion of
the third (3rd) floor (3 North) and a portion of the fourth (4th) floor (4
North) will be leased by Tenant only if space takedown Option B is
implemented as provided in Section 1.1(b) of the Lease. Notwithstanding
anything in this Lease to the apparent contrary, Tenant has agreed to lease
from Landlord, and Landlord has agreed to lease to Tenant, in accordance
with the terms of this Lease, not less than 264,174 square feet of Rentable
Area on the schedule set forth below under the heading "Occupancy and
Delivery Date Schedule."
RENTABLE AREA OF THE BUILDING: 383,397 square feet
[SECTION 1.3(a)]
METHOD OF MEASUREMENT
OF USABLE AREA: ANSI/BOMA Z65.1-1996
TENANT'S PERCENTAGE SHARE: 68.9% (Option A)*
[SECTION 1.3(b)] 69.1% (Option B)*
LEASE TERM: Seven (7) years, Seven (7) months,
[SECTION 2.1] twenty-two (22) days
ii
<PAGE>
COMMENCEMENT DATE: December 10, 1999
[SECTION 2.1]
EXPIRATION DATE: July 31, 2007
[SECTION 2.1]
OCCUPANCY AND DELIVERY DATE SCHEDULE:
<TABLE>
<CAPTION>
BASE RENTAL
PREMISES DELIVERY DATE OCCUPANCY DATE COMMENCEMENT DATE APPROXIMATE RSF
- -------- ------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C>
PHASE 1:
Terrace Level 12/10/99 12/10/99 08/01/00 2,257 RSF
Print Shop 01/01/00 02/01/00 08/01/00 10,327 RSF
1 North (partial) * 02/01/00 08/01/00 17,973 RSF
PHASE 2:
2 North (Partial) 02/15/00 05/01/00 08/01/00 17,276 RSF
2 North (balance) 08/01/00 11/01/00 11/01/00 9,980 RSF
PHASE 3:
1 South 04/01/00 08/01/00 08/01/00 22,341 RSF
2 South 04/01/00 08/01/00 08/01/00 26,190 RSF
3 South 04/01/00 08/01/00 08/01/00 26,200 RSF
PHASE 4:
4 South 09/01/00 01/01/01 01/01/01 26,200 RSF
5 South 09/01/00 01/01/01 01/01/01 26,200 RSF
6 South 09/01/00 01/01/01 01/01/01 26,200 RSF
PHASE 5 (OPTION A):
7 South 10/01/01 02/01/02 02/01/02 26,200 RSF
5 North 10/01/01 02/01/02 02/01/02 26,830 RSF
PHASE 5 (OPTION B):
3 North 10/01/01 02/01/02 02/01/02 26,830 RSF
4 North 10/01/01 02/01/02 02/01/02 26,830 RSF
TOTAL: OPTION A 264,174 RSF
OPTION B 264,804 RSF
-----------
-----------
</TABLE>
* Three (3) weeks after lease execution
BASE RENTAL:
[SECTION 3.1]
<TABLE>
<CAPTION>
PORTION RSF OF ANNUAL BASE ANNUAL BASE MONTHLY BASE
OF LEASE TERM THE PREMISES RENTAL/RSF RENTAL RENTAL
------------- ------------ ---------- ------ ------
<S> <C> <C> <C> <C>
12/10/99 - 01/31/00 2,257 -0- -0- -0-
02/01/00 - 04/30/00 30,557 -0- -0- -0-
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PORTION RSF OF ANNUAL BASE ANNUAL BASE MONTHLY BASE
OF LEASE TERM THE PREMISES RENTAL/RSF RENTAL RENTAL
------------- ------------ ---------- ------ ------
<S> <C> <C> <C> <C>
05/01/00 - 07/31/00 47,833 -0- -0- -0-
08/01/00 - 10/31/00 122,564 $12.85 $1,574,947.40 $131,245.62
11/01/00 - 12/31/00 132,544 $12.85 $1,703,190.40 $141,932.53
01/01/01 - 07/31/01 211,144 $12.85 $2,713,200.40 $226,100.03
08/01/01 - 01/31/02 211,144 $13.24 $2,795,546.56 $232,962.21
</TABLE>
<TABLE>
<CAPTION>
PORTION RSF OF ANNUAL BASE ANNUAL BASE MONTHLY BASE
OF LEASE TERM THE PREMISES RENTAL/RSF RENTAL RENTAL
------------- ------------ ---------- ------ ------
<S> <C> <C> <C> <C> <C>
OPTION A:
02/01/02 - 07/31/02 264,174 $13.24 $3,497,663.76 $291,471.98
08/01/02 - 07/31/03 264,174 $13.65 $3,605,975.10 $300,497.93
08/01/03 - 07/31/04 264,174 $14.04 $3,709,002.96 $309,083.58
08/01/04 - 07/31/05 264,174 $14.46 $3,819,956.04 $318,329.67
08/01/05 - 07/31/06 264,174 $14.90 $3,936,192.60 $328,016.05
08/01/06 - 07/31/07 264,174 $15.35 $4,055,070.90 $337,922.58
OPTION B:
02/01/02 - 07/31/02 264,804 $13.24 $3,506,004.96 $292,167.08
08/01/02 - 07/31/03 264,804 $13.65 $3,614,574.60 $301,214.55
08/01/03 - 07/31/04 264,804 $14.04 $3,717,848.16 $309,820.68
08/01/04 - 07/31/05 264,804 $14.46 $3,829,065.84 $319,088.82
08/01/05 - 07/31/06 264,804 $14.90 $3,945,579.60 $328,798.30
08/01/06 - 07/31/07 264,804 $15.35 $4,064,741.40 $338,728.45
</TABLE>
COMMITMENT DEPOSIT: N/A
[SECTION 3.4]
SECURITY DEPOSIT: N/A
[SECTION 3.5]
USE: General and professional office use.
[SECTION 5.1]
iv
<PAGE>
TENANT'S BROKER AND The Staubach Company Southeast, Inc.
ADDRESS FOR 3424 Peachtree Road, Suite 1650
NOTICES: Atlanta, Georgia 30326
[SECTION 9.1] Attn: Barbara Jeanneret
TENANT'S ADDRESS FOR NOTICES: MindSpring, Inc.
[SECTION 9.2(A)] 1430 West Peachtree Street, Suite 400
Atlanta, Georgia 30309
Attn: Kim Adamson
With a copy to: Holland & Knight LLP
One Atlantic Center, Suite 2000
1201 West Peachtree Street, N.E.
Atlanta, Georgia 30309-3400
Facsimile: (404) 791-0470
Attn: Robert J. Augustine, Esq.
LANDLORD'S ADDRESS FOR Kingston Atlanta Partners, L.P.
NOTICES: c/o Barry Real Estate Companies, Inc.
[SECTION 9.2(A)] 50 Glenlake Parkway, Suite 520
Atlanta, Georgia 30328
Facsimile: (770) 395-0069
Attn: Building Manager
With a copy to: Kingston Atlanta Partners, L.P.
c/o RB Management
645 Fifth Avenue
New York, New York 10022
Facsimile: (212) 848-0298
Attn: B.J. Hoppe
With an additional copy to: Sutherland, Asbill & Brennan
999 Peachtree Street
Atlanta, Georgia 30339
Facsimile: (404) 853-8806
Attn: Alfred G. Adams, Jr., Esq.
And an additional copy to: Parker, Hudson, Rainer & Dobbs LLP
285 Peachtree Center Avenue, Suite 1500
Atlanta, Georgia 30303
Facsimile: (404) 522-8409
Attn: Kenneth H. Kraft
PARKING SPACES: 4.0 unreserved spaces for each 1,000 square
[SECTION 9.15] feet of Rentable Area of the Premises up to a
maximum of 94,000 square feet of Rentable Area
of the Premises; for Rentable Area of the
Premises in excess of 94,000 square feet,
additional unreserved spaces will be provided
to the extent necessary to provide not less
than 3.5 unreserved spaces per 1,000 square
feet of Rentable Area of the entire Premises,
on average, up to a maximum of 264,000 square
feet. For example, if the total Rentable Area
of the Premises is 200,000 square feet
(including the original 94,000 square feet
leased), Landlord will provide 700 unreserved
parking spaces.
LANDLORD'S ALLOWANCE: The following amounts with respect to the
[EXHIBIT "C" AND Phases of the Premises:
SECTION 3.02]
Phase 1 None
Phase 2 None
Phase 3 $18.00 per square foot of
Rentable Area
Phase 4 $18.00 per square foot of
Rentable Area
Phase 5 $18.00 per square foot of
Rentable Area
v
<PAGE>
OFFICE LEASE
TABLE OF CONTENTS
<TABLE>
<S> <C>
I. PREMISES AND OTHER DEFINITIONS.........................1
1.1 PREMISES...............................................2
1.2 AREA OF THE PREMISES AND BUILDING......................2
1.3 TENANT'S PERCENTAGE SHARE..............................3
1.4 "OPERATING EXPENSES....................................4
1.5 "PRIME RATE............................................7
1.6 "PROPERTY TAXES........................................7
II. TERM, ASSIGNMENT AND SUBLETTING........................7
2.1 TERM...................................................7
2.2 TENANT ACCEPTANCE AGREEMENT............................9
2.3 REMOVAL OF TENANT'S PERSONAL PROPERTY..................9
2.4 HOLDING OVER...........................................9
2.5 ASSIGNMENT AND SUBLEASING.............................10
2.6 TRANSFER OF TENANTS...................................14
III. RENT AND DEPOSITS.....................................15
3.1 BASE RENTAL...........................................15
3.2 RENTAL ADJUSTMENT.....................................15
3.3 OPERATING EXPENSES AND PROPERTY TAXES.................15
3.4 COMMITMENT DEPOSIT....................................17
3.5 SECURITY DEPOSIT......................................17
3.6 PAYMENTS..............................................17
3.7 RENT FOR PARTIAL MONTHS...............................17
</TABLE>
<PAGE>
<TABLE>
<S> <C>
IV. PREPARATION, MAINTENANCE AND REPAIR OF PREMISES.......18
4.1 PREPARATION OF THE PREMISES...........................18
4.2 REPAIRS BY TENANT.....................................20
4.3 REPAIRS BY LANDLORD...................................20
4.4 ALTERATIONS BY TENANT.................................21
4.5 DISCHARGE OF LIENS....................................21
4.6 DAMAGE AND DESTRUCTION................................22
4.7 EMINENT DOMAIN........................................24
4.8 REPORTS OF DEFECTS....................................25
4.9 LANDLORD'S RIGHT TO ENTER PREMISES....................25
V. USE AND SERVICES......................................25
5.1 USE...................................................25
5.2 SERVICES..............................................26
VI. COMPLIANCE WITH LAWS..................................29
6.1 TENANT'S COMPLIANCE WITH LAWS.........................29
6.2 RENT CONTROL..........................................29
6.3 BUILDING ALTERATIONS..................................30
6.4 TAXES PAYABLE BY TENANT...............................30
VII. INSURANCE, LIABILITY AND INDEMNIFICATION..............30
7.1 INSURANCE.............................................30
7.2 WAIVER OF SUBROGATION AND RELEASE.....................31
7.3 INDEMNITY.............................................32
7.4 LIABILITY OF LANDLORD.................................33
7.5 LIMITATION OF LIABILITY...............................34
VIII. EVENT OF DEFAULT AND RELATED REQUIREMENTS.............34
8.1 DEFAULT AND REMEDIES..................................34
8.2 INSOLVENCY OR BANKRUPTCY..............................40
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
8.3 LATE PAYMENTS.........................................40
8.4 ATTORNEYS' FEES FOR COLLECTION........................40
8.5 WAIVER OF HOMESTEAD...................................40
8.6 NO WAIVER OF RIGHTS...................................41
8.7 LANDLORD'S DEFAULTS...................................41
IX. MISCELLANEOUS PROVISIONS..............................42
9.1 BROKER................................................42
9.2 ADDRESSES AND NOTICES.................................42
9.3 ENTIRE AGREEMENT AND EXHIBITS.........................43
9.4 SUBORDINATION AND ATTORNMENT..........................43
9.5 ESTOPPEL CERTIFICATE..................................45
9.6 SEVERABILITY..........................................45
9.7 CAPTIONS..............................................45
9.8 SUCCESSORS AND ASSIGNS................................45
9.9 GEORGIA LAW...........................................46
9.10 TIME IS OF THE ESSENCE................................46
9.11 EXECUTION.............................................46
9.12 FORCE MAJEURE.........................................46
9.13 MULTIPLE TENANTS......................................46
9.14 MUTUAL WARRANTY OF AUTHORITY..........................46
9.15 PARKING RIGHTS........................................47
9.16 NO RECORDATION OF LEASE...............................47
9.17 HAZARDOUS SUBSTANCES..................................48
9.18 NAMES.................................................49
9.19 SHARED COMMUNICATIONS SERVICES........................49
9.20 OWNERSHIP AND MANAGEMENT DISCLOSURE...................50
9.21 EFFECT OF LEASE TERMINATION...........................50
9.22 SPECIAL STIPULATIONS..................................50
</TABLE>
iii
<PAGE>
iv
<PAGE>
SCHEDULE OF EXHIBITS
EXHIBIT "A": Floor Plan(s)
EXHIBIT "B": Tenant Acceptance Agreement
EXHIBIT "C": Tenant Improvement Agreement
ATTACHMENT "C-1": Base Building Condition
ATTACHMENT "C-2": Construction Rules and Regulations
ATTACHMENT "C-3": Approved Contractors
EXHIBIT "D": Rules and Regulations
EXHIBIT "E": Special Stipulations
EXHIBIT "F": Arbitration Rules
EXHIBIT "G": Janitorial Specifications
EXHIBIT "H": Acceptable Off-Site Parking Area
EXHIBIT "I": Building Renovation Plans
EXHIBIT "J": Operating Expense Exclusions
EXHIBIT "K": Form of Nondisturbance Agreement
v
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OFFICE LEASE
THIS LEASE AGREEMENT (the "Lease"), dated as of November 16, 1999, made
by and between the undersigned Landlord and the undersigned Tenant;
W I T N E S S E T H T H A T:
------------------------------
Landlord, for and in consideration of the rents, covenants, agreements,
and stipulations herein contained, to be paid, kept, and performed by Tenant,
has leased and rented, and by these presents hereby leases and rents unto
Tenant, and Tenant hereby leases upon the terms and conditions herein contained,
the Premises described in Section 1.1(b) below, with no easement for light or
air included in the Premises. This Lease shall create the relationship of
landlord and tenant between Landlord and Tenant; no estate shall pass out of
Landlord, and Tenant has only a usufruct which is not subject to levy and sale.
So long as Tenant shall observe and perform the covenants and agreements binding
on it hereunder and subject to the terms and provisions hereof, Tenant shall at
all times during the Lease Term peacefully and quietly have and enjoy possession
of the Premises.
This Lease shall be applied and construed in a commercially reasonable
manner. Whenever herein the consent, approval or concurrence of either Landlord
or Tenant shall be required for action or forbearance by the other party, it is
agreed that such consent, approval or concurrence shall not be unreasonably
withheld, delayed or conditioned, except as to matters specified as being in the
"sole discretion" of the party from which the consent, approval or concurrence
is required. Such specific discretionary consent, approval or concurrence may be
withheld, delayed or conditioned without regard to any standard of
reasonableness.
I.
PREMISES AND OTHER DEFINITIONS
Unless the context otherwise specifies or requires, the following terms
shall have the meanings herein specified:
1.1 PREMISES. Terms used in defining Premises are:
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(a) The term "Building" shall mean Pershing Point
Plaza, located at 1375 Peachtree Road, N.E., Atlanta, Georgia 30309
which consists of an office building with a Terrace Level and seven (7)
floors of office space.
(b) The term "Premises" shall mean that portion of the
Building located on the floors of the Building specified in the Lease
Summary, which portion is shown on the floor plan(s) attached hereto as
EXHIBIT "A". Landlord and Tenant acknowledge that the location of the
space to be leased to Tenant as Phase 5 will be determined by whether
or not an existing tenant of the Building, Benefit Services
Corporation, a Georgia corporation or its successors or assignees
("BSC"), renews its lease for a term extending beyond the existing
expiration date of such term, which is August 31, 2001. If Landlord and
BSC renew the BSC lease, then Phase 5 shall be the space shown as
Option A in the Lease Summary. If Landlord and BSC do not renew the
lease of its space, then Phase 5 shall be the space shown as Option B
in the Lease Summary. Landlord shall advise Tenant of which option will
apply to Tenant's lease of Phase 5 under this Lease after the deadline
by which BSC must exercise its option to renew its lease under the
terms of its existing lease of space in the Building. Notwithstanding
anything in this Lease to the apparent contrary, Tenant has agreed to
lease from Landlord, and Landlord has agreed to lease to Tenant, in
accordance with the terms of this Lease, not less than 264,174 square
feet of Rentable Area on the schedule set forth in the Lease Summary
under the heading "Occupancy and Delivery Date Schedule."
(c) Upon any expansion or contraction of the Premises
pursuant to the terms of this Lease or other agreement of the parties,
the term "Premises" shall be deemed to apply to such space as adjusted
by such expansion or contraction.
1.2 AREA OF THE PREMISES AND BUILDING. Terms used in defining the
area of the Premises and the Building are:
(a) The "Rentable Area" of the Premises and the Building for
all purposes of this Lease shall be the agreed quantity of square
footage so designated in the Lease Summary. The "Rentable Area" of any
space on any multi-tenant floor of the Building shall be determined by
multiplying the Usable Area of such space by a factor of 1.15 and the
"Rentable Area" of any space on any floor of the Building leased
entirely to a single tenant shall be determined by multiplying the
Usable Area of such space by a factor of 1.10.
(b) The "Usable Area" of the Premises and of the Building
for all purposes of this Lease shall be the "usable area" thereof
determined pursuant to the Standard Method for Measuring Floor Area in
Office Buildings (ANSI/BOMA Z65.1-1996 (the "BOMA Standards"). For
purposes of the foregoing, "Usable Area" shall not include sill areas,
porches, areas under roof line overhangs, areas devoted to Building
standard mechanical rooms, Building standard bathrooms (other than
private bathrooms), Building standard electrical room, Building
standard telephone
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equipment rooms, Building standard stairwells, fire towers, Building
standard elevator shafts, Building standard flues, vents, stacks, pipes
and pipe shafts, Building standard vertical shafts and ducts and other
similar areas that are part of the Base Building Condition or their
enclosing walls.
(c) Landlord and Tenant acknowledge that the Rentable Areas
of the Premises and the Building as set forth in the Lease Summary are
estimates only, and that after delivery of each Phase of the Premises
(as defined in Section 2.1 below), Landlord will cause the architect of
record for the Building to measure the Usable Area of such Phase of the
Premises in accordance with the BOMA Standards. Tenant shall have ten
(10) days after receipt of such certification to independently verify
the calculations of Landlord's architect and to notify Landlord of any
objection thereto; if Tenant fails to notify Landlord of any such
objections within such ten (10) day period, then the certification of
Landlord's architect shall be deemed confirmed by Tenant and binding on
both parties hereto. If Landlord and Tenant are unable to agree upon
the Usable Area of any Phase of the Premises or any other portion of
the Building, either party may submit the subject matter of their
dispute to binding arbitration by the American Arbitration Association
office in Atlanta, Georgia in accordance with the rules thereof. After
Landlord's architect certifies its calculation of the Usable Area of a
Phase of the Premises and Tenant has confirmed, or is deemed to have
confirmed, such calculation, Landlord and Tenant agree, at Landlord's
option, to enter into an amendment to this Lease confirming the Usable
Area and the Rentable Area of such Phase of the Premises and the
Building. Furthermore, all calculations set forth in the Lease based on
the area of the Premises, including, without limitation, Base Rental,
Tenant's Percentage Share and Landlord's Allowance for Tenant
Improvement Costs, shall be adjusted based on the Rentable Area of the
Premises and the Building certified by Landlord's architect.
1.3 TENANT'S PERCENTAGE SHARE. "Tenant's Percentage Share" means and
shall be equal to the percentage stated in the Lease Summary. Landlord and
Tenant acknowledge that Tenant's Percentage Share has been obtained by dividing
the Rentable Area of the Premises by ninety-five percent (95%) of the agreed
Rentable Area of the Building, and multiplying the quotient by 100. In the event
Tenant's Percentage Share is changed during a calendar year by reason of a
change in the Rentable Area of the Premises (for example, by reason of the
occurrence of the Occupancy Date for any Phase of the Premises, as set forth in
the Lease Summary) or the Rentable Area of the Building, Tenant's Percentage
Share shall thereafter mean the result obtained by using the revised Rentable
Area in the foregoing formula. If the Tenant's Percentage Share changes during a
calendar year, Tenant's Percentage Share for the calendar year shall be
determined on the basis of the number of days during such calendar year at each
percentage share.
1.4 "OPERATING EXPENSES" shall mean all costs paid or incurred by
Landlord in the management, operation, maintenance, repair and security of the
Building and related amenities in a prudent, businesslike and commercially
reasonable manner, including, without limitation, the following:
(a) Costs and expenses for the maintenance and repair of the
Building and the personal property used in connection therewith,
including, without limitation, (i) the heating, ventilating, and air
conditioning equipment, (ii) plumbing
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and electrical systems, (iii) light bulbs and glass, including
replacement thereof, and (iv) elevators.
(b) Cleaning and janitorial costs and expenses, including
window cleaning expenses, for the Building.
(c) Landscaping and grounds maintenance costs and expenses.
(d) Utility costs and expenses including, without
limitation, those for electricity and other fuels and forms of power or
energy, water charges, sewer and waste disposal, which are not
separately metered and borne by Tenant for its own use at its election.
(e) Costs and expenses of redecorating, repainting, and
recarpeting the common areas of the Building; provided, however, that,
except as specified in subsections (f) and (j) hereof, the costs of
structural changes to the Building which should be capitalized in
accordance with sound accounting principles shall not be allocated or
charged to the Premises without Tenant's prior written approval.
(f) Amortization (calculated as hereinafter specified) of
the costs of all repairs, alterations, additions, changes, replacements
and other items required by any law or governmental regulation imposed
after the date of this Lease, including structural changes, regardless
of whether such costs, when incurred, are classified as capital
expenditures under generally accepted accounting principles. With
respect to the costs described in the immediately preceding sentence
which are capital expenditures, the amount of such capital expenditure
shall be amortized over the useful life of the capital improvement,
with a reasonable salvage value, all as determined in accordance with
generally accepted accounting principles, with interest at the same
rate as Landlord is paying for the funds to finance the capital
improvements (or if Landlord is not financing the costs, then 1% above
the Prime Rate). For each calendar year during the Lease Term which is
also within the useful life of the capital improvement, only that
amortized amount (including interest), determined in accordance with
foregoing, shall be included in Operating Expenses.
(g) Cost of wages and salaries of all persons engaged in the
management, operation, maintenance, repair and security of the
Building, and so-called fringe benefits, including social security
taxes, unemployment insurance taxes, costs for providing coverage for
disability benefits, costs of any pensions, hospitalization, welfare or
retirement plans, or any other similar or like expense incurred under
the provisions of any collective bargaining agreement, costs of
uniforms, and all other costs or expenses which the Landlord pays to or
on behalf of employees engaged in the management, operation,
maintenance, repair and security of the Building. This item of
Operating Expenses shall include, without limitation, expenses, fringe
benefits and other compensation to management personnel to the extent
reasonably and directly allocable to the management, operation
maintenance, repair and security of the Building.
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(h) Charges of any independent contractor which, under
contract with the Landlord or its manager or representatives, does any
of the work of operating, maintaining, repairing or providing security
for the Building.
(i) Legal and accounting fees and expenses, including,
without limitation, such fees and expenses related to seeking or
obtaining reductions in and/or refunds of Property Taxes.
(j) Amortization over such period of time as Landlord shall
reasonably determine with a reasonable salvage value, and, with
interest at a rate per annum equal to the greater of (i) the Prime Rate
plus two percentage points or (ii) the rate Landlord is paying for
funds borrowed for the purpose of financing the capital improvements in
question, of capital expenditures for capital improvements made by
Landlord after completion of the Building where such capital
improvements are for the purpose of, or result in, reducing Operating
Expenses, but only to the extent such Operating Expenses have been so
reduced.
(k) Landlord's insurance costs and expenses for all types of
insurance carried by Landlord with respect to the Building, provided
that such costs and expenses with respect to insurance coverage that is
not substantially the same as the coverage in effect on January 1, 2001
shall be included in Operating Expenses only to the extent such
coverage is reasonable and customary for projects similar to the
Building located in the Midtown, Atlanta, Georgia market area.
(l) Security service costs and expenses.
(m) Management fees and expenses (not to exceed three
percent (3%) of the gross revenue collected from Tenants of the
Building, their agents, employees or contractors, or otherwise received
with respect to the Building and any appurtenant facilities).
(n) Property Taxes.
(o) Such other costs, fees and expenses paid by Landlord
from time to time, in connection with the management, operation,
maintenance, repair and security of the Building.
Operating Expenses shall not include (i) depreciation on the Building, (ii)
tenant improvement costs, (iii) real estate brokers' commissions, (iv) interest
and capital items other than those referred to above, (v) the cost of special
services rendered to a particular tenant of the Building, which are payable by
such tenant, (vi) costs and expenses associated with the repair of latent
defects in the construction of the Building (which, by way of illustration and
not limitation, shall not include repairs due to ordinary wear and tear), (vii)
increases in Property Taxes that are directly attributable to sale of the
Building, but such exclusion shall apply only if the Building were assessed at
its full fair market value prior to such sale, and (viii) those items set forth
in Exhibit "J" attached hereto and incorporated herein by this reference. If the
average occupancy level was less than ninety-five (95%) percent of the total
Rentable Area of the Building during a calendar year, the actual Operating
Expenses (exclusive of Property Taxes for this purpose only) for that
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calendar year shall be adjusted to equal Landlord's reasonable estimate of
Operating Expenses had ninety-five (95%) percent of the total Rentable Area of
the Building been occupied. Landlord and Tenant acknowledge that certain of the
costs of management, operations, maintenance, repair and security of the
development from time to time shall be allocated among and shared by the owners
of two or more of the buildings in the development (including the Building). The
determination of such costs and their allocation shall be made by Landlord in
accordance with sound accounting principles. Accordingly, the term "Operating
Expenses", as used in this Lease, from time to time shall include some costs,
expenses, and taxes enumerated above which were incurred with respect to other
buildings in the development but which are allocated to and shared by the
Building in accordance with the foregoing. Notwithstanding the foregoing, Tenant
understands and agrees that its rights to use other portions of the development
of which the Building is a part are those available to the general public and
that this Lease does not grant to it additional rights of use.
Landlord will use reasonable efforts to maintain Operating Expenses consistent
with the standards of other office buildings in the Midtown, Atlanta, Georgia
market area of similar age, size and use, and shall not utilize these Operating
Expense pass-throughs for anything other than a reimbursement for actual costs
incurred to operate the Building.
1.5 "PRIME RATE" shall mean the rate of interest announced from time
to time by Wachovia Bank of Georgia, N.A. as its prime rate of interest. An
increase or decrease in the Prime Rate shall result in a corresponding increase
or decrease in the rate of interest being charged hereunder and shall take
effect on the day the increase or decrease in the Prime Rate is made effective.
In the event that Wachovia Bank of Georgia, N.A. shall abandon or abolish the
practice of publishing the Prime Rate, or should the same become
unascertainable, Landlord shall designate a comparable reference rate which
shall then be deemed to be the Prime Rate under this Lease.
1.6 "PROPERTY TAXES" shall mean the following: (a) personal property
ad valorem taxes imposed upon the furniture, fixtures, machinery, equipment,
apparatus, systems, and appurtenances used in connection with the Building for
the operation thereof; (b) real estate ad valorem taxes, assessments, impact
fees, sewer charges and transit taxes; (c) private assessments against the
Building under any private regime, and annual or special assessments and other
levies made by a community improvement district or other public or quasi-public
authority; and (d) any other federal, state, or local governmental charge,
general, special, ordinary or extraordinary (but not including income or
franchise taxes or any other taxes imposed upon or measured by Landlord's income
or profits, unless the same shall be imposed in lieu of real estate ad valorem
taxes) which may now or hereafter be levied or assessed against the Building and
the land underlying the Building or the rents derived from the Building (in the
case of special taxes or assessments which may be payable in installments, only
the amount of installments paid during a calendar year shall be included in the
taxes for that year).
II.
TERM, ASSIGNMENT AND SUBLETTING
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2.1 TERM.
(a) Tenant takes and accepts the Premises from Landlord in
their present condition and as suited for the use intended by Tenant,
except for such improvements as may be expressly provided for in
Section 4.1(a), for the term described below (the "Lease Term"). The
Lease Term shall commence on the date specified in the Lease Summary as
the Commencement Date (the "Commencement Date"), and shall end at 6:00
p.m. Atlanta local time on the date specified in the Lease Summary as
the Expiration Date (the "Expiration Date").
(b) Landlord will deliver the Premises in phases (each a
"Phase" and collectively, the "Phases"), with each Phase being
delivered to Tenant pursuant to Section 4.1(a) by the "Delivery Date"
stipulated for such Phase in the Lease Summary. The date upon which
Tenant's obligation to pay Base Rental under this Lease with respect to
a particular Phase is also as set forth in the Lease Summary as the
"Base Rental Commencement Date" for such Phase (the "Base Rental
Commencement Date"). Notwithstanding the foregoing, Tenant's obligation
to pay Additional Rental and other charges under this Lease with
respect to a particular Phase shall commence upon the date set forth in
the Lease Summary as the "Occupancy Date" for such Phase. If for any
reason whatsoever any particular Phase is not delivered to Tenant in
the condition required pursuant to Section 4.1(a) below by the date
stipulated in the Lease Summary as the "Delivery Date" for such Phase,
this Lease shall not be void or voidable, nor shall Landlord be liable
to Tenant for any resulting loss or damages. If Landlord is unable to
deliver possession of such Phase by the Delivery Date for such Phase
set forth in the Lease Summary for any reason other than delay caused
by Tenant (including changes in the Drawings and Specifications), the
Tenant shall not be obligated to pay Base Rental, Additional Rental or
other charges under this Lease (other than costs for tenant
improvements as provided in the Tenant Improvement Agreement) until a
period has elapsed subsequent to the date such Phase is delivered to
Tenant in the condition required by Section 4.1, which period is equal
to the number of days between the scheduled Occupancy Date and the
scheduled Delivery Date for such Phase as set forth in the Lease
Summary; provided, however, that if Tenant occupies such Phase for the
purpose of conducting business therefrom prior to expiration of such
period, then Tenant's obligation to pay Base Rental, Additional Rental
and other charges under this Lease shall commence on the first date of
such occupancy. Furthermore, if Tenant is unable to occupy any Phase of
the Premises because Tenant is unable to obtain a certificate of
occupancy (or other documentation permitting legal occupancy) for
such Phase on or after the Base Rental Commencement Date for such
Phase, as set forth in the Lease Summary, which date for this
purpose only shall be deferred by the number of days of delay due to
force majeure (as described in Section 9.12) or delays caused by
Tenant, and if the sole reason for Tenant being unable to obtain
such certificate of occupancy (or other documentation permitting
legal occupancy) for such Phase is any defect in the Base Building
Condition (as that term is defined in Section 4.1) not caused by
Tenant or its contractors in connection with the completion of
Tenant's improvements to the Premises, then, in addition to the rent
deferral described above, Tenant shall be entitled to a rent
abatement equal to one (1) day of the Base Rental attributable to
the portion of the Phase for which a certificate of occupancy (or
other documentation
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permitting legal occupancy) has not issued for each day of such
Landlord caused delay up to a maximum of thirty (30) days of delay, and
after such thirty (30) day period, any continuing delay in Tenant's
being able to take legal occupancy shall entitle Tenant to a rent
abatement equal to two (2) days of the Base Rental attributable to the
portion of the Phase for which a certificate of occupancy (or other
documentation permitting legal occupancy) has not issued for each day
of such continuing day of a Landlord caused delay beyond the first
thirty (30) days of delay. Such deferral and rent abatement shall be
Tenant's sole remedy for Landlord's failure to deliver possession of
any Phase of the Premises. Except as aforesaid, no delay of possession
shall operate to relieve Tenant of Tenant's obligations to Landlord
(including the payment of rent and other amounts) as provided in this
Lease. Notwithstanding the foregoing, if possession of any Phase of the
Premises has not been delivered to Tenant within six (6) months
following the Delivery Date for such Phase set forth in the Lease
Summary, for any reason whatsoever other than a force majeure event
described in Section 9.12, either Landlord or Tenant, at its option at
any time thereafter but prior to the delivery of possession, may
terminate this Lease by notice to the other, and Landlord and Tenant
shall thereupon be released from all obligations under this Lease;
provided, however, that with respect only to Tenant's right to
terminate pursuant to this sentence, the scheduled Delivery Date shall
be postponed by the number of days of delay caused by Tenant.
2.2 TENANT ACCEPTANCE AGREEMENT. Within twenty (20) days after the
Delivery Date for a Phase, Tenant shall execute and deliver to Landlord a Tenant
Acceptance Agreement in the form attached hereto as EXHIBIT "B". Tenant may
state in such Tenant Acceptance Agreement any defects in the Base Building
Condition (as that term is defined in Section 4.1) remaining to be repaired or
completed by Landlord, and Tenant thereby shall preserve its objection to such
listed defects. Tenant shall have waived objection to any defects not so listed
in the Tenant Acceptance Agreement except that Tenant shall retain the right to
object to latent defects not subject to detection upon reasonable inspection of
the Base Building Condition of any Phase of the Premises prior to the Delivery
Date for such Phase, provided that objections to latent defects not disclosed in
writing to Landlord within thirty (30) days subsequent to the Delivery Date
shall be deemed waived.
2.3 REMOVAL OF TENANT'S PERSONAL PROPERTY. Upon or prior to the
termination of this Lease, Tenant shall remove from the Premises and the
Building all its personal property (including, without limitation, all wiring
and cabling installed by Tenant or its contractors within the walls, ceiling or
floor of the Premises), repair any damage caused by such removal and peaceably
surrender the Premises to Landlord in the same condition as on the Occupancy
Date for each Phase, normal wear and tear excepted. Such property of Tenant not
so removed from the Premises or the Building upon the termination of this Lease
shall be considered abandoned by Tenant and may be disposed of by Landlord in
any manner whatsoever without accounting to Tenant for same or being liable in
any way to Tenant for such disposition. Upon surrender of possession of the
Premises, Tenant shall deliver to Landlord all keys to the Premises.
2.4 HOLDING OVER. In no event shall there be any renewal of this
Lease by operation of law, and if Tenant remains in possession of the Premises
after the termination
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of this Lease without written authorization executed by Landlord and Tenant, but
with the acquiescence or consent of Landlord, Tenant shall be deemed to be
occupying the Premises under a month-to-month periodic tenancy at a monthly
rental equal to one hundred twenty-five (125%) percent of the Base Rental in
effect under this Lease for the full month prior to the expiration or
termination of this Lease, as set forth in the Lease Summary, plus all
Additional Rental provided for in this Lease, and otherwise subject to all the
covenants and provisions of this Lease insofar as the same are applicable to a
month-to-month periodic tenancy. Landlord and Tenant agree that any such
periodic tenancy may be terminated by thirty (30) days prior written notice by
either party to the other party, notwithstanding any contrary provision of
applicable law (the benefits of which are hereby expressly waived). If Tenant
remains in possession after termination of this Lease without Landlord's
acquiescence or consent, Tenant thereupon shall be deemed a tenant-at-sufferance
subject to summary eviction as provided by law.
2.5 ASSIGNMENT AND SUBLEASING.
(a) Tenant shall not, without Landlord's prior written
consent, (i) assign, convey, mortgage, pledge, encumber, or otherwise
transfer (whether voluntarily, by operation of law, or otherwise) this
Lease or any interest thereunder; (ii) allow any transfer thereof or
any lien upon Tenant's interest by operation of law; (iii) sublease the
Premises or any part thereof; or (iv) permit the use or occupancy of
the Premises or any portion thereof by any party other than Tenant; and
any attempt to consummate any of the foregoing without Landlord's
consent shall be void. Landlord hereby agrees that, subject to the
terms and conditions of this Section 2.5, Landlord will not
unreasonably withhold, condition or delay its consent to an assignment
or sublease to any assignee or subtenant who is acceptable to Tenant
(it being agreed, however, that if the holder of any mortgage, deed to
secure debt or other similar security instrument withholds, conditions
or delays its consent to a proposed assignment or sublease pursuant to
a right to do so under such mortgage, deed to secure debt or other
security instrument, then Landlord shall be deemed reasonable in
withholding, conditioning or delaying Landlord's consent thereto).
Contract employees or others performing services directly for Tenant
shall not be deemed sublessees, assignees, or otherwise be subject to
the provisions of this Section 2.5.
(b) Notwithstanding anything herein to the contrary, if at
any time or from time to time during the Lease Term, Tenant desires to
sublease all or a portion of the Premises or assign the Lease, Tenant
shall notify Landlord in writing (hereinafter referred to in this
Section 2.5 as the "Notice") of such desire, which notice shall contain
(1) the name and address of the proposed subtenant or assignee and its
form of organization, (2) the nature of the proposed subtenant's or
assignee's business to be conducted in the Premises, (3) the terms and
conditions of the proposed sublease or assignment, and (4) financial
statements for the three most recent completed fiscal years of the
proposed subtenant or assignee and such other financial information as
Landlord shall request, including a bank reference, together with a
request that Landlord approve such assignment or subletting. Landlord
shall then have the options: (i) to sublease from Tenant such space
(hereinafter referred to as "Subject Space") at the same Base Rental
and Additional Rental as Tenant is required to pay to Landlord under
this Lease for the same space; (ii) to terminate
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this Lease or this Lease with respect to the Subject Space only; or
(iii) to review such proposed assignment or sublease for approval or
disapproval. The option to sublease, to terminate, or to review, as the
case may be, shall be exercisable by Landlord in writing within a
period of thirty (30) days after receipt of the Notice; and if Landlord
fails to otherwise notify Tenant, Landlord shall be deemed to have
elected to review such proposed assignment or sublease for approval or
disapproval pursuant to Section 2.5(e).
(c) If Landlord elects to terminate this Lease and the
Subject Space constitutes the entire Premises, then this Lease shall
terminate on the date set forth in Landlord's notice to Tenant, which
termination shall be no earlier than thirty (30) and no later than
ninety (90) days after the date of such notice. If the Subject Space
does not constitute the entire Premises and Landlord so exercises its
option to terminate this Lease with respect to the Subject Space, then
this Lease shall remain in full force and effect except that the Base
Rental, Rental Adjustment and Tenant's Percentage Share shall be
reduced to conform to the reduced Rentable Area of the Premises.
(d) In the event Landlord exercises the option to sublease
the Subject Space, the term of the subleasing from Tenant to Landlord
shall be the term set forth in the Notice (which shall not be longer
than the then current Lease Term unless Landlord expressly agrees in
writing that any extension or renewal option contained in this Lease
will apply to such Subject Space) and shall be on such terms and
conditions as are contained in this Lease to the extent applicable,
except that Landlord shall have the right further to sublease or assign
the sublease of Subject Space.
(e) If Landlord fails to exercise either its option to
sublease or its option to terminate within the aforesaid thirty-day
period but elects to review the proposed assignment or sublease for
approval or disapproval, Tenant shall submit to Landlord within twenty
(20) days after said period a copy of the proposed assignment or
sublease and such additional information concerning the proposed
assignee or sublessee as may be requested by Landlord for Landlord's
review. Within thirty-five (35) days subsequent to Landlord's receipt
of the proposed assignment or sublease and such requested additional
information, Landlord, in its reasonable discretion, shall approve or
disapprove in writing the proposed assignment or sublease and the
proposed assignee or subtenant, subject, however, to all of the
following conditions:
(i) The sublease or assignment shall be on the same terms and
conditions set forth in the notice given to Landlord.
(ii) The proposed assignee or sublessee shall engage in a business
in the Premises which is consistent with the then standards of the
Building, compatible with use of the Building by other occupants
thereof, and is permitted by the provisions of Section 5.1 hereof,
and the use of the Premises or any portion thereof by such
subtenant or assignee will not, in Landlord's estimation, increase
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the scope or quantity of services or utilities then being
furnished to Tenant as of the proposed date of assignment or
subletting.
(iii) The proposed assignee or sublessee is of good repute and of
sufficient financial worth to perform its obligations under this
Lease or under the sublease, as applicable, and Tenant shall have
provided Landlord with proof thereof.
(iv) No subletting or assignment shall release Tenant of Tenant's
obligation or alter the primary liability of Tenant to pay the
Base Rental, Additional Rental and other charges hereunder and to
perform all other obligations to be performed by Tenant under this
Lease.
(v) All rental rates to be charged to any such sublessee under any
sublease entered into prior to December 31, 2001 shall not be less
than the current market rates for similar space leased for a
similar term in the Building or buildings of similar quality and
grade in the Midtown, Atlanta, Georgia market area, and no
sublessee shall have any right to assign this Lease or further
sublet the Premises.
(f) Notwithstanding the giving by Landlord of its consent to
any assignment or sublease with respect to the Premises, no assignee or
sublessee, other than an assignee or sublessee who is an "affiliate" of
Tenant as provided in Section 2.5(m), may exercise any expansion
option, preemptive right or so-called right of first refusal to lease,
or term renewal or extension option under this Lease except in
accordance with a separate written agreement entered into directly
between such assignee or sublessee and Landlord. Subsequent to an
approved assignment or sublease, the original Tenant shall have no
right to exercise on behalf of the assignee or sublessee (as to the
space assigned or subleased) any expansion option, preemptive right or
so-called right of first refusal to lease or term renewal or extension
option.
(g) Tenant agrees to pay to Landlord, as additional rental
on demand, actual, reasonable costs incurred by Landlord (including,
without limitation, any administrative fee charged to Landlord by
Landlord's management company for the Building) (i) in connection with
any request by Tenant for Landlord to consent to any assignment or
subleasing by Tenant, and (ii) in providing any services or materials
to any assignee or sublessee of Tenant.
(h) Any transfer or series of transfers resulting in a
change in the controlling interest in Tenant (whether Tenant is a
corporation, partnership, trust or other entity), whether voluntarily,
by operation of law, or otherwise, shall be deemed an assignment of
this Lease within the meaning of this Section 2.5, except that Tenant
may merge or consolidate with EarthLink Network, Inc., and the entity
surviving such transaction shall be deemed a permitted assignee under
this Lease.
(i) In the case of an assignment or subletting, fifty
percent (50%) of any sums or other economic consideration (for example,
but not by way of limitation,
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increased rental, forgiveness of an obligation, or services given at no
cost or at reduced cost) received by Tenant or its agents as a result
of such assignment or subletting, whether denominated as consideration
for the assignment, as rental under the sublease or otherwise, which
exceed, in the aggregate, the sum of (x) the total sums which Tenant is
obligated to pay Landlord under this Lease either (i) for the Premises,
if the entire Premises is assigned or sublet, or (ii) pro rata on a
square foot basis for that portion of the Premises assigned or sublet,
if less than the entire Premises is assigned or sublet, plus (y) the
amortized portion of brokerage commissions, tenant improvement
allowances, moving allowances and reasonable legal fees, if any,
actually incurred by Tenant in consummating such sublease (such
amortization to be on a straight-line basis over the remaining portion
of the Lease Term after the rent commencement date under such
assignment or sublease) shall be payable to Landlord as additional
rental under this Lease without affecting or reducing any rental or
other obligation of Tenant under this Lease.
(j) If, as provided herein, this Lease is assigned or the
Premises or any part thereof is subleased or occupied by any party
other than Tenant, Landlord may, after default by Tenant, collect rent
from the assignee, subtenant or occupant, and apply the net amount
collected to the Base Rental and Additional Rental herein reserved, but
no such assignment, subleasing, occupancy or collection shall be deemed
(i) a waiver of any of Tenant's covenants contained in this Lease, (ii)
the acceptance by Landlord of the assignee, subtenant or occupant as
Tenant, or (iii) the release of Tenant from further performance by
Tenant of its covenants under this Lease.
(k) No assignment of or sublease under this Lease shall
release Tenant from, or serve as a defense against, Tenant's primary
liability under this Lease. Furthermore, Landlord's approval of or
consent to an assignment or sublease transaction shall not affect
Landlord's rights under this Section 2.5 as to any subsequent proposed
assignment or sublease.
(l) Tenant covenants and agrees to deliver to Landlord one
(1) fully executed counterpart of the instruments and documents
(including amendments thereto) evidencing any approved assignment or
subleasing effected pursuant to this Lease. Such delivery shall be made
promptly following the execution of any such instrument or document.
(m) Notwithstanding anything to contrary in this Section
2.5, Tenant shall have the right to assign this Lease or sublet the
Premises to any firm, person, corporation, partnership or other entity
which (i) controls, is controlled by or is under common control with
Tenant or (ii) if Tenant (or, if Tenant is a wholly-owned subsidiary,
Tenant's parent company) is a public company, is deemed an "affiliate"
of Tenant in accordance with the promulgated definition of such term
under the rules and regulations of the Federal Securities and Exchange
Commission, or its successor agency, provided in each of the foregoing
instances (x) Tenant shall give notice to Landlord of the proposed
assignment or subletting and, together with such notice, any financial
information with respect to Tenant's affiliate, as Landlord may
reasonably request, at least thirty (30) days in advance of the
consummation thereof, and (y) Tenant shall not be released from
liability under this Lease, which shall
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remain primary. The term "control," as used in the immediately
preceding sentence and in Section 2.5(m), means, with respect to a
corporation, the right to the exercise, directly or indirectly, of more
than 50% of the voting rights attributable to the shares of the
controlled corporation, and, with respect to any person or entity that
is not a corporation, the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of
the controlled person or entity. As used in this Lease, an "affiliate"
of Tenant shall be deemed an entity described in this Section 2.5(m).
2.6 RIGHT OF RECAPTURE. THIS SECTION 2.6 SHALL BE EFFECTIVE ONLY IF
TENANT, AT ANY TIME AFTER FEBRUARY 1, 2002, CEASES TO OCCUPY AT LEAST 150,000
SQUARE FEET OF THE RENTABLE AREA IN THE BUILDING: If the Premises, or any
portion thereof in excess of 25,000 square feet of Rentable Area (whether or not
contiguous), is abandoned or deserted, or vacated for a period of more than
ninety (90) consecutive days or one hundred twenty (120) business days (whether
or not consecutive) in any twelve (12) month period, then Landlord may, at its
option, upon written notice to Tenant, terminate this Lease from time to time as
to such portion or portions of the Premises that have been so abandoned,
deserted or vacated (or any part thereof) and cause such portion or portions of
the Premises (or such part thereof) to be returned to Landlord upon demand,
without terminating the Lease as to the balance of the Premises. Following any
termination of this Lease as to a portion or portions of the Premises, Tenant
shall have no further rights with respect to such portion or portions of the
Premises, and shall immediately surrender such portion or portions of the
Premises broom-clean, with all people and property of Tenant removed therefrom,
and Tenant shall have no further obligation to pay rent with respect to such
portion or portions of the Premises, but Tenant shall continue to be liable for
all of its obligations under this Lease with respect to such portion or portions
of the Premises arising prior to such termination and with respect to all
obligations under this Lease relating to those portions of the Premises for
which this Lease has not been terminated.
III.
RENT AND DEPOSITS
3.1 BASE RENTAL. Tenant shall pay to Landlord an annual base rent in
monthly installments for and during the Lease Term the amounts specified in the
Lease Summary (the "Base Rental"). The monthly installments of Base Rental shall
be paid in advance on the first day of every calendar month during the Lease
Term.
3.2 RENTAL ADJUSTMENT. [Intentionally deleted.]
3.3 OPERATING EXPENSES AND PROPERTY TAXES . In addition to the Base
Rental, Tenant shall pay as additional rental (the "Additional Rental"), for
each calendar year during the Lease Term, Tenant's Percentage Share (which shall
be the sum of Tenant's Percentage Share of each Phase of the Premises for which
the Occupancy Date has occurred, subject to the provisions of Section 1.3 above)
of the total Operating Expenses for
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the calendar year in question. The Additional Rental payable pursuant to this
Section 3.3 shall be determined and adjusted in accordance with the following
procedures:
(a) During each December of the Lease Term, or as soon
thereafter as practicable, Landlord shall give Tenant written notice of
its estimate of Additional Rental payable under this Section 3.3 for
the ensuing calendar year. On or before the first day of each month
during the ensuing calendar year, Tenant shall pay to Landlord 1/12 of
such estimated amounts together with the Base Rental, provided that if
such notice is not given in December Tenant shall continue to pay
during the ensuing calendar year on the basis of the amounts payable
during the calendar year just ended, until the month after such notice
is given. If at any time or times it appears to Landlord that the
actual amount payable under this Section 3.3 for the current calendar
year will vary from Landlord's estimate by more than 5%, Landlord may
revise, by notice to Tenant, its estimate for such year, and subsequent
payments by Tenant for such year shall be based upon such revised
estimate. Failure to make a revision contemplated by the immediately
preceding sentence shall not prejudice Landlord's right to collect the
full amounts of Additional Rental payable under this Section 3.3.
Notwithstanding the foregoing, for calendar year 2000, estimated
payments of Additional Rental payable under this Section 3.3 shall be
made at the rate of Six and 75/100 Dollars ($6.75) per square foot of
Rentable Area of each Phase of the Premises for which the Occupancy
Date has occurred during calendar year 2000. Such amount shall not
constitute a floor or otherwise have any bearing upon the amount of
estimated payments for any calendar year subsequent to calendar year
2000.
(b) Within one-hundred and twenty (120) days after the close
of each calendar year during the Lease Term, or as soon after such
120-day period as practicable, Landlord shall deliver to Tenant a
statement of the adjustments to be made pursuant to this Section 3.3
for the calendar year just ended certified by certified public
accountants designated by Landlord, and such statement shall be final
and binding upon Landlord and Tenant absent manifest error. If on the
basis of such statement Tenant owes an amount of Additional Rental that
is less than the estimated payments for the calendar year just ended
previously made by Tenant, Landlord shall credit such excess to the
next payments of Additional Rental coming due pursuant to this Section
3.3 or, if the term of this Lease is about to expire, refund such
excess to Tenant if Tenant is not in default under this Lease (in the
instance of an event of default such excess shall be held as additional
security for Tenant's performance, may be applied by Landlord to cure
any such event of default, and shall not be refunded until any such
event of default is cured). If on the basis of such statement Tenant
owes an amount of Additional Rental that is more than the estimated
payments for the calendar year just ended previously made by Tenant,
Tenant shall pay the deficiency to Landlord within thirty (30) days
after delivery of the statement.
(c) If the Lease term shall expire on a day other than the
last day of a calendar year, the amount of Additional Rental payable
pursuant to this Section 3.3 shall be the product of multiplying the
Additional Rental which otherwise would have been payable for the full
calendar year by a fraction, the numerator of which is the actual
number of days of the calendar year in question included within the
Lease
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Term, and the denominator of which is 365. The expiration of this
Lease shall not affect the obligations of Landlord and Tenant pursuant
to subsection (b) of this Section 3.3 to be performed subsequent to
such expiration.
(d) Notwithstanding anything in this Section 3.3 of this
Lease to the contrary, Tenant's Percentage Share of increases in
"controllable" Operating Expenses (as that term is hereinafter defined)
for any calendar year shall not include a portion of such
"controllable" Operating Expenses for such year to the extent the
amount of such "controllable" Operating Expenses exceeds the product of
(i) "controllable" Operating Expenses for the immediately preceding
calendar year, multiplied by (ii) 105%. For the purposes of this
subsection (d), "controllable" Operating Expenses are defined to be all
Operating Expenses other than taxes, utility costs, cost of labor that
is provided directly or indirectly through a contractor at or near
minimum wage, and insurance costs. For avoidance of doubt, Tenant's
obligations with respect to increases in Property Taxes shall not be
subject to the limitations set forth in this subsection (d).
(e) Within one hundred twenty (120) days after Tenant
receives the annual statement of adjustment described in subsection (b)
above, Tenant may contest the statement by written notice to Landlord,
which notice shall specify the particular areas of Operating Expenses
that Tenant desires to contest; provided, however, that no such contest
shall entitle Tenant to withhold or delay amounts due to Landlord as
set forth in Landlord's statement. If no such contest is made by
written notice to Landlord delivered within such 120-day period, such
statement shall be binding upon Tenant in all respects. If Tenant
timely contests such statement, Tenant shall have the right to inspect
and examine, at reasonable times during normal business hours,
Landlord's books of account and records pertaining to the Operating
Expenses of the Building for the calendar year in question and for the
immediately preceding calendar year, all at Tenant's sole cost and
expense. Such inspection shall be conducted by an independent certified
public accountant who in no event is compensated on a contingent fee
basis. Such inspection shall be conducted in Landlord's office in
Atlanta, Georgia, at Tenant's expense, and shall be completed within
five (5) business days after such inspection is commenced, with written
notice to Landlord of the results thereof, by no later than forty-five
(45) days after the date of Tenant's notice of contest delivered to
Landlord pursuant to the foregoing provisions of this subsection (e);
any matters not specifically disputed in a written notice timely filed
with Landlord after such audit has been completed shall be final and
binding upon Tenant in all respects. Landlord may have an agent or
employee present during such inspection and audit. If the contest
ultimately results in Landlord and Tenant agreeing that Tenant has
overpaid Landlord for its share of Operating Expenses, such overpayment
shall be refunded by Landlord to Tenant within thirty (30) days after
the date such contest is so resolved. Furthermore, if a review by
Tenant disclosed a discrepancy of greater than five percent (5%) in any
category of Operating Expenses (a "Material Discrepancy") for the year
being reviewed, then Tenant shall have the right to review Landlord's
records of Operating Expenses for such category for the four (4)
calendar years immediately prior to the calendar year in which the
Material Discrepancy occurred, but not any calendar year prior to
calendar year 2000.
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3.4 COMMITMENT DEPOSIT. [Intentionally deleted.]
3.5 SECURITY DEPOSIT. [Intentionally deleted.]
3.6 PAYMENTS. Tenant shall pay to Landlord all Base Rental,
additional rent, and all other charges due and owing by Tenant under this Lease
without deduction or set off, in legal tender, and at Landlord's address
specified in the Lease Summary or as otherwise directed from time to time by
Landlord.
3.7 RENT FOR PARTIAL MONTHS. A prorated monthly installment, based on
a thirty (30) day month, shall be paid in advance (i) on the Commencement Date
for any fraction of a month if the Lease Term begins on any day other than the
first day of any month and (ii) on the first day of the final month of the Lease
Term for any fraction of a month if the Lease Term shall terminate on any day
other than the last day of any month.
IV.
PREPARATION, MAINTENANCE AND REPAIR OF PREMISES
4.1 PREPARATION OF THE PREMISES.
(a) Landlord shall deliver each Phase of the Premises to
Tenant in the condition required for such Phase when delivered, as
follows:
Phase 1 "As Is" condition, provided that (other than with
respect to the areas shown on EXHIBIT "A" hereto as
the "Terrace Level - Phase I" and the "Print Shop")
all prior tenant improvements therein shall have
been demolished and removed by Landlord, at its
expense
Phase 2 "As Is" condition, provided that (other than with
respect to the area shown on EXHIBIT "A" hereto as
"Phase IIB") all prior tenant improvements therein
shall have been demolished and removed by Landlord,
at its expense
Phase 3 Base Building Condition (in process on Delivery
Date)
Phase 4 Base Building Condition (completed on Delivery
Date)
Phase 5 Base Building Condition (completed on Delivery
Date)
As used in this Lease, the term "Base Building Condition" shall mean
the condition described in Attachment "C-1" attached to and
incorporated into this Lease. Said Attachment "C-1" is also a part of
the Tenant Improvement Agreement attached as EXHIBIT "C" to this Lease
and made a part hereof by this reference (the "Tenant Improvement
Agreement").
(b) Tenant shall construct or install in the Premises the
Tenant Improvements, as defined in and to be constructed or installed
pursuant to the provisions of the Tenant Improvement Agreement. Tenant
agrees to comply with all
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of the terms and provisions of the Tenant Improvement Agreement,
including, without limitation, the obligation to pay, as additional
rental, all amounts due Landlord under Section 3 thereof according to
the payment procedures contained therein. Landlord acknowledges that
Tenant intends to increase the floor loading capacity of the Terrace
Level and the first (1st) floor of the Building in certain areas and to
install a conduit zone completely enclosed by concrete block that would
be of sufficient size to permit passageway for persons as well as for
seven (7) six inch (6") conduits plus seven (7) four inch (4")
conduits, and that the foregoing improvements are essential components
of Tenant's operations in the Building. Landlord agrees that it will be
reasonable in working with Tenant, at no cost to Landlord, to
accomplish these features for the Building. In connection therewith,
Tenant expressly acknowledges and agrees that:
(i) Any and all costs incurred in connection with making any such
improvements shall be deemed Tenant Improvement Costs for purposes
of Exhibit "C' to this Lease;
(ii) If any such improvements required by Tenant compromise the
marketability of any other leaseable space in the Building, such
space shall be included in the Premises and leased by Tenant
pursuant to the terms of this Lease;
(iii) If such improvements eliminate or compromise any parking
spaces in the on-site Parking Facility, such spaces shall be
leased by Tenant as part of its parking allotment under Section
9.15 of this Lease;
(iv) Any such improvements required by Tenant must comply with
applicable laws, codes, ordinances, rules and regulations; and
(v) Tenant will remove any such improvements upon the expiration
or earlier termination of this Lease, if requested to do so by
Landlord.
In addition to the foregoing, as part of the initial construction of
Tenant Improvements to the Premises, Tenant may submit to Landlord
requests respecting the location of sprinklers in the Premises, and
Landlord agrees to cooperate reasonably with Tenant in connection with
such relocation as long as (i) such request is received sufficiently in
advance of the installation of any sprinklers for Landlord to
accommodate Tenant's request without delay in completion of the
Building renovation, (ii) any such location of sprinklers must comply
with applicable laws, codes, ordinances, rules and regulations, and
(iii) any incremental costs incurred by Landlord as a result of any
such location or relocation of sprinklers in order to accommodate
Tenant (over the cost Landlord would have incurred in the absence of
such request) shall be a part of the Tenant Improvement Costs for
purposes of Exhibit "C" to this Lease.
(c) If Tenant causes the Tenant Improvements to exceed in
value the value of the Base Building Condition PLUS Landlord's
Allowance for Tenant
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Improvement Costs (as such term is defined in the Tenant Improvement
Agreement), and if the installation or construction of such Tenant
Improvements causes an increase in the ad valorem taxes on the
Building, then Tenant shall pay from time to time, as additional
rental, any such increase in ad valorem taxes on demand of Landlord.
(d) Tenant acknowledges that any space delivered to Tenant
in "as is" condition will be subject to some renovation work by
Landlord after such delivery in order to remove existing restrooms and
convert such space to Usable Area and to complete renovations to other
portions of the Building. At present the scope of this work is as
described in the plans referenced in EXHIBIT "I" hereto, and the
estimated time for completion of work sufficient for Tenant's occupancy
is August, 2000, with additional work (including, without limitation,
bathroom renovation) estimated to be completed by December 1, 2000.
Landlord shall complete such work on a timely basis and in a good and
workmanlike manner, and shall be responsible for any repairs thereto.
Any entry by Landlord into the Premises to complete such work shall be
governed by Section 4.9 of this Lease. In addition to the renovation
work to the Premises described above, Tenant acknowledges that the
Building will be undergoing a major renovation from and after the date
this Lease is executed, which renovation is projected to be
substantially completed in August, 2000. In consideration of the
disruption of Tenant's operations resulting from such renovation work,
Landlord has agreed to allow Tenant to occupy the Premises until August
1, 2000 without any charge for Base Rental. Landlord agrees to complete
the Building renovations in substantial accordance with the plans
described on EXHIBIT "I" hereto (which plans Tenant hereby approves),
subject to change orders issued during the course of renovation work
that do not materially vary the overall design, construction or level
of finishes from those shown in the aforesaid plans and renderings.
4.2 REPAIRS BY TENANT. Tenant shall at its own expense keep the
Premises in good repair and tenantable condition and indemnify Landlord against
any loss, damage, or expense arising by reason of any failure of Tenant so to
keep the Premises in good repair and tenantable condition or due to any act or
neglect of Tenant, its agents, employees, contractors, invitees, licensees,
tenants, or assignees. If Tenant fails to perform, or cause to be performed,
such maintenance and repairs, then at the option of Landlord, in its sole
discretion, any such maintenance or repair may be performed or caused to be
performed by Landlord and the cost and expense thereof charged to Tenant, and
Tenant shall pay the amount thereof to Landlord on demand as additional rental.
4.3 REPAIRS BY LANDLORD. Landlord shall maintain in good order and
repair, subject to normal wear and tear, casualty and condemnation, the Building
(excluding the Premises and other portions of the Building leased to other
tenants), including without limitation, public areas, the parking lot and
landscaped areas, elevators, stairs, corridors, common restrooms, the
mechanical, plumbing and electrical systems and the structure itself (including
the glass exterior surfaces of the Premises). The cost of any such repairs or
maintenance to the foregoing necessitated by the intentional acts or omissions,
negligence or gross negligence of Tenant, or its agents, employees, contractors,
invitees, licensees, tenants or assignees, however, shall be reimbursed by
Tenant to Landlord upon demand as additional rental.
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4.4 ALTERATIONS BY TENANT. Tenant shall make no alterations or
additions of any kind in or to the Premises without first obtaining Landlord's
prior written consent. Such consent may be granted or withheld in Landlord's
sole discretion; provided, however, Landlord agrees it will not unreasonably
withhold its consent to cosmetic or non-structural alterations or additions
which do not involve structure, walls, floors, Building systems, electrical
installations or the obtaining of building permits or otherwise result directly
or indirectly in Landlord incurring any costs not paid by Tenant in full. Except
as may otherwise be agreed by Landlord in writing at the time of granting its
consent, all such work, including additions, fixtures, and Tenant Improvements
(but excluding moveable office furniture and equipment and other personal
property of Tenant) made or placed in or upon the Premises by either Tenant or
Landlord shall be and become the Landlord's property at the termination of this
Lease by lapse of time or otherwise, all without compensation or payment to
Tenant. Approved alterations or additions made by Tenant shall be at the sole
expense and liability of Tenant, and Tenant's indemnity in Subsection 7.3(d)
hereof shall apply to any contractors engaged by Tenant in connection therewith.
Landlord shall have the right to take depreciation with respect to the Tenant
Improvements to the extent of the Landlord's Allowance and Tenant shall have the
right to take depreciation with respect to Tenant Improvements to the extent
that it contributes towards the cost of Tenant Improvements in excess of
Landlord's Allowance. If at the time of Landlord's approval of the plans for any
tenant improvements to the Premises after the initial Tenant Improvements are
completed pursuant to Section 4.1(b) of this Lease, Tenant requests in writing
that Landlord designate which, if any, of such tenant improvements Landlord will
require Tenant to remove at Tenant's expense prior to the expiration or earlier
termination of this Lease, Tenant shall not be obligated to remove any of such
tenant improvements from the Premises, except to the extent such removal is
required in writing at the time of Landlord's approval of such plans in response
to such request from Tenant.
4.5 DISCHARGE OF LIENS. Tenant is not authorized to contract for or
on behalf of Landlord for work on or the furnishing of materials to the Premises
or any other part of the Building. Tenant shall discharge of record by payment,
bond or otherwise, within ten (10) days subsequent to the date of its receipt of
notice thereof from Landlord, any mechanic's, laborer's or similar lien filed
against the Premises or the Building for work or materials claimed to have been
furnished at the instance of Tenant. If Tenant shall fail to cause such lien or
claim of lien to be so discharged or bonded within such period, in addition to
any other right or remedy it may have, Landlord may, but shall not be obligated
to, discharge the same by paying the amount claimed to be due or by procuring
the discharge of such lien or claim by deposit in court or bonding, and in any
such event, Landlord shall be entitled, if Landlord so elects, to compel the
prosecution of any action for the foreclosure of such lien or claim by the
claimant and to pay the amount of the judgment, if any, in favor of the
claimant, with interest, costs and allowances. Tenant shall pay as additional
rental on demand from time to time any sum or sums so paid by Landlord and all
costs and expenses incurred by Landlord, including, but not limited to,
attorneys' fees in processing such discharge or in defending any such action.
4.6 DAMAGE AND DESTRUCTION.
(a) If the Building or Premises is damaged partially or
wholly by fire, the elements, act of God or other casualty, and if such
damage cannot, in Landlord's
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reasonable estimation, be materially restored within ninety (90) days
of such damage, then Landlord may, at its sole option, terminate this
Lease as of the date of such fire or casualty and the Lease Term shall
end on such date as if that date had been originally fixed in this
Lease for the expiration of the Lease Term. Landlord shall exercise its
option provided herein by written notice to Tenant within sixty (60)
days of such fire or other casualty.
(b) If this Lease is not terminated pursuant to subsection
(a) above, then Landlord shall proceed with all due diligence to repair
and restore the Building or Premises, as the case may be (except that
Landlord may elect not to rebuild, and thus terminate this Lease, if
such damage occurs during the last year of the Lease Term, regardless
of any term renewal option which is unexercised at the date of
occurrence of the casualty). Landlord's obligation to restore the
Premises under the preceding sentence shall be discharged upon
Landlord's restoration of the Premises to Base Building Condition, as
defined in EXHIBIT "C" hereto. Tenant shall be responsible for
restoration of Tenant Improvements utilizing its own funds, without
allowance or reimbursement from Landlord. If Landlord shall fail to
complete such repairs and material restoration within one hundred fifty
(150) days after the date of such damage and Tenant's use and enjoyment
of the Premises is then materially impaired by the uncompleted
restoration, Tenant may at its option and as its sole remedy terminate
this Lease by delivering written notice to Landlord, whereupon the
Lease shall end on the date of such notice as if the date of such
notice were the date originally fixed in this Lease for the expiration
of the term hereof; provided, however, that if construction is delayed
because of changes, deletions or additions in construction requested by
Tenant, or because of strikes, lockouts, casualties, acts of God, war,
material or labor shortages, governmental regulation or control, or
other causes beyond the reasonable control of Landlord, the 150-day
period for restoration, repair, or rebuilding shall be extended for the
amount of time Landlord is so delayed. In no event shall Landlord be
required to rebuild, repair, or replace any personal property,
equipment or trade fixtures which belong to Tenant.
(c) If this Lease is not terminated by Landlord pursuant to
this Section 4.6 and if the Premises are unfit for occupancy in whole
or in part following such damage, the Base Rental and Rental Adjustment
payable during the period in which the Premises are unfit for occupancy
shall abate for the period from the date of such casualty until the
earlier of sixty (60) days after Landlord completes its restoration
work or the date Tenant resumes occupancy of the Premises for the
purpose of conducting business therefrom, and Tenant's Percentage Share
shall be reduced for such period in proportion to the number of square
feet of Rentable Area of the premises rendered unusable by such damage;
provided, however, that no such abatement and reduction shall be made
under the provisions of this subsection (c) in excess of the amount of
rent insurance proceeds actually collected by Landlord and directly
attributable to rent loss under this Lease (taking into account rent
loss under all other leases of space in the Building) in the event such
damage shall have been caused through the negligence or willful
misconduct of Tenant, its agents, employees, contractors, invitees,
licensees, tenants or assignees.
(d) In the event of any damage or destruction to the
Building or the Premises, Tenant shall, upon notice from Landlord,
remove forthwith, at its sole cost
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and expense, such portion or all of the property belonging to Tenant
(other than partitions, fixtures, additions and similar improvements),
from such portion or all of the Building or the Premises as Landlord
shall request and Tenant agrees to indemnify and hold Landlord harmless
from any loss, liability, costs, and expenses, including attorneys'
fees, arising out of any claim of damage or injury as a result of any
alleged failure by Tenant to secure properly the Premises following
such damage or destruction and prior to such removal.
(e) Any insurance which may be carried by Landlord or Tenant
against loss or damage to the Building or Premises shall be for the
sole benefit of the party carrying such insurance and under its sole
control except that Landlord's insurance may be subject to control by
the holder or holders of any indebtedness secured by a mortgage or deed
to secure debt covering any interest of Landlord in the Premises or the
Building.
(f) Notwithstanding anything herein to the contrary, in the
event the holder of any indebtedness secured by a mortgage or deed to
secure debt covering the Premises or Building requires that any
insurance proceeds be paid to it, such that restoration of the Building
cannot be performed, then Landlord shall have the right to terminate
this Lease by delivering written notice of termination to Tenant within
thirty (30) days after such requirement is made by any such holder,
whereupon the Lease shall end on the date of such damage as if the date
of such damage were the date originally fixed in this Lease for the
expiration of the Lease Term.
(g) If any such casualty stated in this Section 4.6 occurs,
Landlord shall not be liable to Tenant for inconvenience, annoyance,
loss of profits, expenses, or any other type of injury or damage
resulting from the repair of any such damage, or from any repair,
modification, arranging, or rearranging of any portion of the Premises
or any part or all of the Building or for termination of this Lease as
provided in this Section 4.6.
4.7 EMINENT DOMAIN.
(a) If all or any substantial part of the Building or of the
Premises should be taken for any public or quasi-public use under
governmental law, ordinance, or regulation, or by right of eminent
domain, or by private purchase in lieu thereof, and the taking would
prevent or materially interfere with the use of the Premises for the
purpose for which it is then being used, this Lease shall terminate
effective when the physical taking shall occur in the same manner as if
the date of such taking were the date originally fixed in this Lease
for the expiration of the Lease Term.
(b) If part of the Building or Premises is taken for any
public or quasi-public use under any governmental law, ordinance, or
regulation, or by right of eminent domain, or by private purchase in
lieu thereof, and this Lease is not
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terminated as provided in subsection (a) above, this Lease shall not
terminate but the Base Rental and Rental Adjustment payable hereunder
during the unexpired portion of this Lease and Tenant's Percentage
Share shall be reduced to such extent, if any, as may be fair and
reasonable under all of the circumstances and Landlord shall undertake
to restore the Building and Premises to a condition suitable for
Tenant's use, as near to the condition thereof immediately prior to
such taking as is reasonably feasible under the circumstances.
(c) Tenant shall not share in any condemnation award or
payment in lieu thereof or in any award for damages resulting from any
grade change of adjacent streets, the same being hereby assigned to
Landlord by Tenant; provided, however, that Tenant may, to the extent
provided by law, separately claim against and receive from the
condemning authority, if legally payable, compensation for Tenant's
removal, relocation costs, loss of business, business interruption and
loss of trade fixtures, but only if and to the extent no such claim or
award therefor will reduce or affect Landlord's awards.
(d) Notwithstanding anything to the contrary contained in
this Section 4.7, if during the Lease Term the use or occupancy of any
part of the Building or Premises shall be taken or appropriated
temporarily for any public or quasi-public use under any governmental
law, ordinance, or regulation, or by right of eminent domain, this
Lease shall be and remain unaffected by such taking or appropriation
and Tenant shall continue to pay in full all rental payable hereunder
by Tenant during the Lease Term. In the event of any such temporary
appropriation or taking, Tenant shall be entitled to receive that
portion of any award which represents compensation for the loss of use
or occupancy of the Premises during the Lease Term, and Landlord shall
be entitled to receive that portion of any award which represents the
cost of restoration and compensation for the loss of use or occupancy
of the Premises after the end of the term of this Lease.
4.8 REPORTS OF DEFECTS. Tenant shall report to Landlord immediately
in writing any damage to or defective condition in or about the Building or
Premises known to Tenant.
4.9 LANDLORD'S RIGHT TO ENTER PREMISES. Tenant shall not change the
locks on any entrance to the Premises or install additional locks without
Landlord's prior written consent, which consent shall be in Landlord's sole
discretion. Upon Tenant's written request to Landlord, Landlord will make a
reasonable change of locks on behalf of Tenant and at Tenant's sole cost and
expense. Landlord and its agents, employees and contractors shall have the right
to enter the Premises at such times as Landlord deems reasonably necessary to
make necessary repairs, additions, alterations and improvements to the Building,
including, without limitation, the erection, use and maintenance of pipes and
conduits and repairs to adjacent premises or other premises and the renovations
contemplated by Section 4.1(d) above or by the Tenant Improvement Agreement.
Landlord shall also be allowed to take into and through the Premises any and all
needed materials that may be required to make such repairs, additions,
alterations and improvements, all without being liable to Tenant in any manner
whatsoever. During such time as work is being carried on in or about the
Premises, provided such work is carried out in a manner so as not to interfere
unreasonably with the conduct of Tenant's business therein, the rent provided
herein shall in no wise abate, and Tenant waives any claim and cause of action
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against Landlord for damages by reason of loss or interruption to Tenant's
business and profits therefrom because of the prosecution of any such work or
any part thereof. In addition, upon reasonable notice to Tenant (which may be
oral), Landlord and its agents, employees and contractors shall have the right
to enter the Premises during normal business hours, without undue interference
with the conduct of Tenant's business therein, to inspect and examine the
Premises and to exhibit the Premises to prospective purchasers, tenants and
lenders. In the event of emergency, or if otherwise necessary to prevent injury
to persons or damage to property, such entry to the Premises may be made by
force without any liability whatsoever on the part of Landlord for damage
resulting from such forcible entry.
V.
USE AND SERVICES
5.1 USE. Tenant shall use the Premises for the purposes stated in the
Lease Summary and for no other purpose. Tenant shall not use the Premises for
any illegal purpose, nor violate any statute, regulation, rule or order of any
governmental body in its use thereof, nor create or allow to exist any nuisances
or trespasses, nor do any act in or about the Premises or bring anything onto or
into the Premises which will in any way increase the rate of insurance on the
Premises nor deface or injure the Premises or overload the floor of the
Premises.
5.2 SERVICES. Provided no event of default shall have occurred under
this Lease, Landlord agrees to provide to Tenant, as Landlord deems reasonably
necessary, the following services:
(a) General cleaning and janitorial service required as a
result of normal, prudent use of the Premises and completion in
accordance with the basic Janitorial Specifications provided in Exhibit
"G," performed by a service selected by Landlord, and only on Mondays
through Fridays, inclusive, with New Year's Day, Martin Luther King
Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day (herein collectively called the "Holidays") excepted.
Notwithstanding the foregoing, Tenant may take over all responsibility
for cleaning Tenant's Premises by giving Landlord not less than sixty
(60) days advance notice of such election, in which event (i) Landlord
shall not charge Tenant for any janitorial costs as Operating Expenses
other than such costs as are incurred to clean and maintain common
areas of the Building and the Building structure; and (ii) Landlord
shall have no further obligation respecting janitorial service to the
Premises;
(b) Heating and air-conditioning service daily on Mondays
through Fridays, inclusive, with Holidays excepted, from 8:00 A.M. to
7:00 P.M. and on Saturdays, if not a Holiday, from 8:00 A.M. to 1:00
P.M. Landlord reserves the right to prohibit the use of machines and
equipment which generate heat in their operation that put excessive
demands on Landlord's base building air-conditioning system unless and
until arrangements are made by Tenant, acceptable to Landlord, to
obtain and install in the Premises at Tenant's cost supplementary
air-conditioning equipment, and the cost of operation and maintenance
of such
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equipment shall be paid by Tenant on the Base Rental payment dates at
such rates as are established from time to time by Landlord.
Notwithstanding the foregoing, if Tenant provides for such supplemental
air conditioning at its expense, as aforesaid, in accordance with
Landlord's requirements and plans and specifications approved by
Landlord, Landlord will not object to Tenant's use of Tenant's computer
equipment, other office machinery and computer rooms in the Premises as
shown on the drawings and specifications approved by Landlord from time
to time in accordance with this Lease, to the extent such equipment,
machinery and rooms are adequately serviced, in Landlord's reasonable
judgment, by such supplemental air conditioning. Should Tenant desire
either heating or air-conditioning at times when such services are not
furnished by Landlord under the terms of this Lease, Landlord may
elect, entirely at its option, to furnish such services as requested by
Tenant upon not less than 24 hours notice from Tenant. Such service
shall be provided at an hourly charge of FORTY-FIVE and NO/100 DOLLARS
($45.00) per hour per building (i.e., north wing or south wing of the
Building) (subject to increase from time to time to reflect actual
increases in the cost to landlord of providing such services to
Tenant), which charges Tenant shall promptly pay upon invoice from
Landlord. Payments for such additional services shall be deemed
additional rental due from Tenant;
(c) Outside air ventilation for the Building to provide 20
cfm per person (assuming a design condition of one person per 142
rentable square feet) in accordance with ASHRAE Standard 62-1989.
Landlord agrees to maintain fresh air within the Premises in compliance
with ASHRAE Standard 62-1989.
(d) Passenger and freight elevator service to all floors of
the Building on which the Premises are located daily on Mondays through
Fridays, inclusive, with Holidays excepted, from 8:00 A.M. to 7:00 P.M.
and on Saturdays, if not a Holiday, from 8:00 A.M. to 1:00 P.M. At
least one elevator shall be operative at all other hours. A freight
elevator will be available at all hours, subject to scheduling with
Landlord and Tenant's paying any reasonable costs actually incurred by
Landlord associated with Tenant's use of the freight elevator outside
of normal operating costs;
(e) Landlord shall furnish electric current in a quantity
sufficient to ensure that Tenant has constant access to and ability to
use a minimum of seven (7) watts per usable square foot of the Premises
for small business machinery only from electric circuits designated by
Landlord for Tenant's use, exclusive of Building standard tenant
lighting and HVAC. Such circuits will be fed into one or more of the
existing electrical panels (a 480/277 volt panel or panels for Building
standard tenant lighting and a 208/120 volt panel or panels for tenant
outlet requirements) in the electrical closet or closets located on the
same Building floor as the Premises. Tenant's usage of said panels on
any given floor shall not exceed Tenant's pro rata share (based on
rentable square footage) of the panels' capacity. Tenant shall not use
any electrical equipment which in Landlord's opinion will overload the
wiring installations or interfere with the reasonable use thereof by
other users in the Building. Tenant shall not install or operate in the
Premises any electric power generation equipment or transformer
carrying substantial non-linear loads, producing above-average amounts
of heat, or not having the capability of
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neutralizing harmonic distortion. Tenant shall not, without Landlord's
prior written consent in each instance, which consent shall not be
unreasonably withheld, connect any items such as non-Building standard
tenant lighting, vending equipment, printing or duplicating machines,
computers (other than desktop word processors and personal computers),
auxiliary air conditioners, and other computer related equipment to the
Building's electrical system, or make any alteration or addition to the
system. If Tenant desires any such items, additional 208/120 volt
electrical power beyond that supplied by Landlord as provided above,
electric current in excess of 208/120 volts for purposes other than
Building standard tenant lighting, or other special power requirements
or circuits, then Tenant may request Landlord to provide such
supplemental power or circuits to the Premises. If Landlord furnishes
any special power or circuits, Tenant shall pay Landlord, on demand,
the cost of the design, installation and maintenance of the facilities
required to provide such additional or special electric power or
circuits, and the cost of all electric current so provided at a rate
not to exceed that which would be charged by Georgia Power Company, or
its successor, if Tenant were a direct customer thereof. Landlord may
require separate electrical metering of such supplemental electric
power or circuits to the Premises, and Tenant shall pay, on demand, the
cost of the design, installation and maintenance of such metering
facilities. In no event shall Tenant have access to any electrical
closets in the Building, it being agreed that any electrical
engineering design or contract work shall be performed at Tenant's
expense by Landlord or an electrical engineer and/or electrical
contractor designated by Landlord. With respect to any proposed
separate metering or electrical surcharge Tenant shall have the right
to have its own engineer review such proposal to confirm for Tenant the
reasonableness thereof. All invoices respecting the design,
installation and maintenance of the facilities requested by Tenant
shall be paid within thirty (30) days of Tenant's receipt thereof.
Landlord's charge to Tenant for the cost of electric current so
provided shall be paid within thirty (30) days of receipt of invoice by
Tenant; and
(f) Common use restrooms, toilets, and drinking fountains
available on each floor or partial floor of the Building occupied by
Tenant.
(g) Landlord shall provide security services for the
Building, the Common Areas and the parking facility for the Building
specified in Section 9.15 (a) of this Lease (the "Parking Facility")
consisting of the following:
(i) Subject to compliance with applicable laws, codes, ordinances,
rules and regulations, Landlord shall install, at Landlord's sole
cost, a security system (the "Security System") consisting of (i)
a "card-key" access system on all exterior doors of the Building,
all doors providing entry to the Premises and all elevators
operating after hours and (ii) security cameras (monitored 24
hours a day, 7 days per week) that are located in locations
reasonably agreed upon by Landlord and Tenant. Such Security
System must permit the use of the fire stairwells for emergency
exiting in accordance with applicable codes and any requirements
Landlord may impose. Landlord shall provide Tenant with any keys
or codes necessary to access the Premises after installation of
the Security System and Tenant may coordinate its security system
with Landlord's security system.
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(ii) Landlord will make reasonable efforts, at no cost to
Landlord, to coordinate with Tenant during the planning stage of
the renovation of the Building concerning the integration of
Landlord's and Tenant's security systems.
(iii) At least two (2) uniformed guards, one of which shall be
stationed in the main entrance lobby and the other of which shall
cruise the Building and the on-site Parking Facility during the
times that such services are customarily and generally furnished
in comparable office buildings in the Midtown, Atlanta, Georgia
market area. One (1) such guard shall, if available, escort
Tenant's employees to/from vehicles in the on-site Parking
Facility of the Building upon Tenant's request. One of the guards
may be designated by Tenant, but Tenant hereby releases,
indemnifies and holds harmless Landlord with respect to any and
all liability arising from any incident in which the guard
designated by Tenant is involved.
Notwithstanding the foregoing, Tenant acknowledges that: (x) Landlord
and its agents, employees and contractors cannot guaranty the security
of the Building, the Common Areas, or the Parking Facility, (y)
Landlord shall not be liable for the willful misconduct, gross
negligence or negligence of other tenants or third parties including,
without limitation, vandalism, theft, mysterious disappearances and
damage to property or person; and (z) Tenant, for itself and its
agents, employees, business invitees and licensees, releases Landlord
and its agents, employees and contractors from any and all loss, cost
or damage that Tenant, or its agents, employees, business invitees or
licensees may suffer or incur as a result of the matters described in
clause (y) above.
(h) Tenant shall be afforded access to its Premises on a
24-hour-per-day basis, although such access may be subject to the Rules
and Regulations and reasonable security measures.
VI.
COMPLIANCE WITH LAWS
6.1 TENANT'S COMPLIANCE WITH LAWS. Tenant shall comply, at its own
expense, with all statutes, regulations, rules, ordinances, and orders of any
governmental body, department, or agency thereof which apply to or result from
Tenant's use or occupancy of the Premises and shall abide by and observe the
Rules and Regulations attached to this Lease as EXHIBIT "D" and such other rules
and regulations for the use, occupancy, or operation of the Building as may
hereafter be established in writing by Landlord.
6.2 RENT CONTROL. Tenant waives the benefit of all existing and
future rent control laws and similar governmental rules and regulations, whether
in time of war or not, to the full extent permitted by law.
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6.3 BUILDING ALTERATIONS. If, in order to maintain the Building as an
office building or otherwise, Landlord shall be required by any governmental
authority to repair, alter, remove, construct, reconstruct, or improve any part
or all of the Building or Premises, Tenant's obligations under this Lease will
not be affected and Tenant waives all claims for injury, damage, or abatement of
rent because of such repair, alteration, removal, construction, reconstruction,
or improvement, or lack thereof; provided, however, that if such action by
Landlord shall render the Premises partially or wholly unfit for occupancy and
if, in Landlord's reasonable estimation, it cannot complete such acts within
ninety (90) days, then at the option of Landlord to be exercised by giving
written notice to Tenant within sixty (60) days following the date of notice to
Landlord by such governmental authority, this Lease shall terminate on the date
of such election and Tenant shall immediately surrender the Premises to
Landlord. In such event Tenant shall continue to owe and pay rent and other
charges up to but not beyond the time of such surrender. If Landlord shall elect
not to terminate this Lease as provided above, Landlord and Tenant shall have
the same respective rights and obligations as provided above in Sections 4.6(b)
and (c), and the provisions of Section 4.6(g) shall apply regardless of whether
or not Landlord elects to terminate this Lease.
6.4 TAXES PAYABLE BY TENANT. In addition to Base Rental and other
charges to be paid by Tenant hereunder, Tenant shall reimburse Landlord upon
demand for any and all taxes payable by Landlord whether or not now customary or
within the contemplation of the parties hereto, to the extent not included in
Property Taxes: (a) upon, measured by or reasonably attributable to the cost or
value of Tenant's equipment, furniture, fixtures and other personal property
located in the Premises or by the cost or value of any improvements made in or
to the Premises by Tenant regardless of whether title to such improvements shall
be in Tenant or Landlord; (b) upon or measured by the rental payable hereunder
in the nature of a sales tax upon rent or a so-called "rent tax", but not
federal or state income taxes of Landlord; and (c) upon this transaction or any
document to which Tenant is a party creating or transferring an interest in the
Premises. In the event that it shall not be lawful for Tenant so to reimburse
Landlord, the monthly rental payable to Landlord under this Lease shall be
revised to net Landlord the same net rental after imposition of any such tax
upon Landlord as would have been payable to Landlord if such tax had not been
imposed.
VII.
INSURANCE, LIABILITY AND INDEMNIFICATION
7.1 INSURANCE.
(a) Tenant agrees to carry fire and extended coverage
insurance insuring Tenant's interest in its improvements and
betterments to the Premises, including, without limitation, the Tenant
Improvements, and any and all furniture, equipment, supplies, and other
property owned, leased, held, or possessed by it and contained therein,
such insurance coverage to be in an amount equal to the full insurable
value of such improvements and property. Said policy or policies, or
certificates thereof, shall be delivered to Landlord by Tenant upon
commencement of the term of the Lease and upon each renewal of said
policy.
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(b) Tenant also agrees to carry a policy or policies of
worker's compensation and comprehensive general liability insurance,
including personal injury and property damage, with contractual
liability endorsement, in the amount of Five Hundred Thousand Dollars
($500,000.00) for property damage and One Million Dollars
($1,000,000.00) per occurrence for personal injuries or deaths of
persons occurring in or about the Premises. Said policies shall: (i)
name Landlord as an additional insured and insure Landlord's contingent
liability under this Lease, (ii) be issued by an insurance company
which is reasonably acceptable to Landlord and licensed to do business
in the State of Georgia, and (iii) provide that said insurance shall
not and may not be canceled unless thirty (30) days prior written
notice shall have been given to Landlord. Said policy or policies, or
certificates thereof, shall be delivered to Landlord by Tenant upon
commencement of the term of the Lease and upon each renewal of said
insurance.
(c) Landlord shall carry fire and extended coverage
insurance for the completed Building (excluding land, foundations and
other uninsurable components) and on-site Parking Facility (except that
Landlord shall have no obligation to maintain insurance as to tenant
improvements), in such amount as is required by the holder of a first
priority deed to secure debt encumbering the Building (or, if none, in
an amount that prudent landlords of first class office buildings in the
Midtown, Atlanta, Georgia market area would ordinarily and customarily
carry); provided, however, that Landlord shall be entitled to
self-insure pursuant to a bona fide self-insurance program as to all or
any portion of the risk of loss that would otherwise by insured by the
aforesaid insurance coverage. For purposes of Section 7.2 of this
Lease, Landlord's waiver of subrogation and release of Tenant for
liabilities covered by insurance shall extend to liabilities otherwise
required under this Lease to be insured against but with respect to
which Landlord has elected to self-insure in whole or in part, as well
as liabilities encompassed by the insurance coverage maintained by
Landlord.
7.2 WAIVER OF SUBROGATION AND RELEASE. Landlord and Tenant shall
obtain from their respective insurers under all policies of fire, theft and
other property damage insurance maintained by either of them at any time during
the term of this Lease insuring or covering the Building or any portion thereof
or personal property or operations therein, a waiver of all rights of
subrogation which the insurer of one party might have against the other party,
and Landlord and Tenant shall each indemnify the other against any loss or
expense, including reasonable attorney's fees, resulting from the failure to
obtain such waiver.
Landlord and Tenant, to the fullest extent permitted by law, each
waives all rights of recovery against the other, and releases the other from
liability, for loss or damage to the extent (but only to the extent) of the sum
of (i) the deductible amount under the applicable insurance policy (or, in the
case of self-insurance by Landlord, the amount of deductible customarily
maintained in the Midtown, Atlanta, Georgia market area by prudent landlords of
buildings comparable to the Building insuring similar risks), plus (ii) either
the collected insurance proceeds received by the party suffering such loss or
damage or, in the case of self-insurance by Landlord, the amount of insurance
proceeds that would have been paid with respect to such loss had Landlord
maintained the insurance coverage otherwise required under Section 7.1 of this
Lease; provided, however, that if either Landlord or
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Tenant fails to obtain and/or maintain in full force and effect the insurance
coverage required of such party under Section 7.1(c) hereof (including without
limitation the required waivers of subrogation and the required naming of
Landlord as an additional insured) other than (in the case of Landlord only)
pursuant to a bona fide self-insurance program that complies with Section 7.1,
the party so failing to maintain and/or obtain insurance coverage (the "failing
party") shall nevertheless waive and release (and shall be deemed to have waived
and released) the other party (the "non-failing party") from its liability as
set forth above, as fully as if the failing party had not so failed to obtain
and/or maintain such insurance coverage, but the non-failing party shall in such
event not waive or release (or be deemed to have waived or released) any
obligation or liability of the failing party to the non-failing party.
7.3 INDEMNITY. Tenant agrees to indemnify and hold Landlord harmless
from and defend Landlord against any and all claims or liability for any injury
or death to any person or damage to any property whatsoever:
(a) either (i) occurring in, on or about the Premises, or
(ii) occurring in, on, or about any facilities (including, without
limitation, elevators, stairways, passageways or hallways) the use of
which Tenant may have in conjunction with other tenants of the
Building, when such injury, death or damage shall be caused by the act,
neglect or fault of, or omission of any duty with respect to the same,
by Tenant, its agents, employees, contractors, invitees, licensees,
tenants, or assignees;
(b) arising from any work or thing whatsoever done by or on
behalf of Tenant in or about the Premises or from transactions of the
Tenant concerning the Premises;
(c) arising from any breach or event of default on the part
of the Tenant in the performance of any covenant or agreement on the
part of the Tenant to be performed pursuant to the terms of this Lease;
or
(d) otherwise arising from any act or neglect of the Tenant,
or any of its agents, employees, contractors, invitees, licensees,
tenants or assignees.
7.4 LIABILITY OF LANDLORD. Except as otherwise provided herein,
Landlord shall be liable to Tenant for direct damages proximately occasioned by
the negligence or intentional acts of Landlord, its agents and employees acting
within the scope of their agency or employment, but not for consequential or
speculative damages such as business loss. Landlord shall not be liable to
Tenant or to any person, firm, corporation or other business association
claiming by, through or under Tenant, for failure to furnish or for delay in
furnishing any service provided for in this Lease, and no such failure or delay
by Landlord shall be an actual or constructive eviction of Tenant nor shall any
such failure or delay operate to relieve Tenant from the prompt and punctual
performance of each and all the covenants to be performed herein by Tenant; nor
for defects in the cooling, heating, electric, water, elevator, or other
apparatus or systems or for water discharged from sprinkler systems in the
Building; nor for the theft, mysterious disappearance, or loss of any property
of Tenant whether from the Premises or any part of the Building. Landlord agrees
to make reasonable efforts to protect Tenant from interference or disturbance by
third persons, including other tenants; however, Landlord shall not be liable
for any
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interference, disturbance or act whether caused by another tenant or tenants of
Landlord or other person, nor shall Tenant be relieved from any obligation
herein because of such interference, disturbance or act.
Notwithstanding the provisions of this Section 7.4 to the contrary, if
Landlord fails to furnish or delays in furnishing any essential Building service
Landlord is obligated to provide under this Lease (including water, electricity,
sewer, elevators, HVAC and restrooms) for any reason other than a reason beyond
Landlord's control, Tenant shall be entitled to abate Base Rental until the
service is restored, but only under the following terms and conditions:
(a) The loss of service must be of a material nature so as to
render the Premises substantially unusable for the purposes
contemplated by this Lease for a period of not less than three (3)
consecutive days after the notice described in clause (b) below is
given by Tenant to Landlord;
(b) At the time of the loss of service, Tenant must give
written notice promptly to Landlord of the loss of service and its
claim for abatement under this Section 7.4 and Tenant only shall be
entitled to abatement of Base Rental, assuming all other conditions of
this Section 7.4 are satisfied, if such notice is timely given to
Landlord;
(c) Landlord may prevent or stop abatement by providing
substantially the same service by temporary or alternative means until
the cause of the loss of service can be corrected; and
(d) In no event shall Tenant be entitled to any abatement of
rent as a result of (i) any loss of service as a result of an event
contemplated under any of Sections 4.4, 4.6 or 4.7 of this Lease or
(ii) any loss of service to any area outside of the Premises if such
loss of service is not essential to the customary use and enjoyment of
the Premises by Tenant.
Landlord agrees to use commercially reasonable efforts to restore any essential
Building services.
7.5 LIMITATION OF LIABILITY. Landlord's obligations and liability with
respect to this Lease shall be limited solely to Landlord's interest in the
Building, as such interest is constituted from time to time, and neither
Landlord (beyond its interest in the Building) nor any officer, director,
shareholder or partner of Landlord shall have any personal liability whatsoever
with respect to this Lease. In any action or proceeding brought to enforce the
obligation of Landlord to Tenant under this Lease, Landlord and Tenant agree
that any final judgment or decree shall be enforceable against Landlord only to
the extent of Landlord's interest in the Building, as aforesaid, and any such
judgment or decree shall not be capable of execution against, nor be a lien on,
any assets of Landlord other than its interest in the Building, as aforesaid.
VIII.
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EVENT OF DEFAULT AND RELATED REQUIREMENTS
8.1 DEFAULT AND REMEDIES.
(a) The occurrence of any of the following shall constitute
an event of default ("Default") by Tenant hereunder:
(i) The Base Rental or Additional Rental is not paid when due, and
such failure of payment shall continue for more than ten (10) days
subsequent to the date of receipt by Tenant of written notice of
non-payment from Landlord, provided that Landlord shall not be
obligated to provide such notice and opportunity to cure more than
two (2) times in any calendar year during the Lease Term, and the
third or any subsequent occasion of a failure to pay Base Rental
or Additional Rental when due during any such calendar year shall
constitute a Default. No right to receive notice or cure period in
favor of Tenant shall affect Tenant's obligation to pay late fees
or interest under Section 8.3 for having failed to make timely
payment of a monetary obligation;
(ii) Any other sum of money payable under this Lease is not paid
when due, and such failure of payment shall continue for more than
thirty (30) business days subsequent to the date of receipt by
Tenant of written notice of non-payment from Landlord, provided
that Landlord shall not be obligated to provide such notice and
opportunity to cure more than two (2) times in any calendar year
during the Lease Term, and the third or any subsequent occasion of
such failure during any such calendar year shall constitute a
Default. No right to receive notice or cure period in favor of
Tenant shall affect Tenant's obligation to pay late fees or
interest under Section 8.3 for having failed to make timely
payment of a monetary obligation;
(iii) [Intentionally deleted.]
(iv) [Intentionally deleted.]
(v) Tenant's interest in the Lease or the Premises shall be
subjected to any attachment, levy, or sale pursuant to any order
or decree entered against Tenant in any legal proceeding and such
order or decree shall not be vacated within thirty (30) days of
entry thereof;
(vi) Tenant breaches or fails to comply with any of the Rules and
Regulations in EXHIBIT "D" hereto, as the same may hereafter be
amended from time to time, and such breach or failure shall
continue for more than thirty (30) days subsequent to the date of
receipt by Tenant of written notice of such breach or failure from
Landlord;
(vii) Tenant breaches or fails to comply with any other term,
provision, condition, or covenant of this Lease, and such breach
or failure shall
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continue for more than thirty (30) days subsequent to the date of
receipt by Tenant of written notice of such breach or failure from
Landlord (if the matter in question is not reasonably susceptible
of cure by Tenant within the thirty-day period, then Tenant shall
have such additional time as may reasonably be necessary, as set
forth in a schedule for such curative action reasonably agreed
upon by Landlord and Tenant during such thirty (30) day period,
provided that Tenant institutes the curative action within the
thirty-day period and prosecutes the same diligently to
completion); provided, however, that if such breach or failure by
Tenant is of such a nature as to create an emergency condition
(which, for this purpose, shall mean a condition that poses an
immediate threat to the safety or security of persons or property,
a nuisance to other tenants of the Building as to which a tenant
has registered a complaint with Landlord, a breach or default
condition (or a condition that, with notice or passage of time, or
both, would constitute a breach or default) under any loan or
other agreement between Landlord and a third party, or any
condition adversely affecting the structural integrity or systems
of the Building), such event shall constitute a default
immediately upon Landlord giving Tenant notice thereof, but
Landlord shall not have the right to terminate this Lease by
reason of such default by Tenant (notwithstanding anything in
Section 8.1(b) to the contrary), but Landlord may, in addition to
any other remedies hereunder, cure such default for and on behalf
of Tenant, and at Tenant's expense, and receive from Tenant the
reasonable cost of such curative action incurred by Landlord, as
additional rent, together with interest thereon at the rate set
forth in Section 8.3 hereof from the date such cost is incurred to
the date reimbursed by Tenant; or
(viii) Tenant, if a corporation, joint venture, partnership,
limited partnership or trust, without Landlord's prior written
consent and the written assumption of this Lease by another party
approved by Landlord, both in Landlord's sole discretion, shall be
dissolved (except that a dissolution in connection with a
permitted assignment or subletting as set forth in Section 2.5 (m)
or Tenant's merger with Earth Link shall not constitute a
Default).
(b) Upon the occurrence of a Default, Landlord shall have
the option to do and perform any one or more of the following in
addition to, and not in limitation of, any other remedy or right
permitted it at law or in equity or by this Lease (but subject to
clause (vii) of Section 8.1(a) above):
(i) Landlord, with or without terminating this Lease, may
immediately or at any time thereafter reenter the Premises and
perform, correct or repair any condition which shall constitute a
failure on Tenant's part to keep, observe, perform, satisfy, or
abide by any term, condition, covenant, agreement, or obligation
of this Lease or of the Rules and Regulations now in effect or
hereafter adopted, and Tenant shall fully reimburse and compensate
Landlord on demand for all costs and expenses incurred by Landlord
in such performance, correction or repairing, including accrued
interest as provided in the next sentence. All sums so
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expended to cure Default shall accrue interest from the date of
demand until date of payment at a rate of interest which is the
lower of (x) a per annum rate equal to the Prime Rate plus two
percent, or (y) sixteen (16%) percent per annum, but in no event
at a rate higher than that permitted by applicable law.
(ii) Landlord, with or without terminating this Lease, may
immediately or at any time thereafter demand in writing that
Tenant vacate the Premises and thereupon Tenant shall vacate the
Premises and remove therefrom all property thereon belonging to or
placed on the Premises by, at the direction of, or with consent of
Tenant within ten (10) days of receipt by Tenant of such notice
from Landlord, whereupon Landlord shall have the right to reenter
and take possession of the Premises. Any such demand, reentry and
taking possession of the Premises by Landlord shall not of itself
constitute an acceptance by Landlord of a surrender of this Lease
or of the Premises by Tenant and shall not of itself constitute a
termination of this Lease by Landlord.
(iii) Landlord, with or without terminating this Lease, may
immediately or at any time thereafter reenter the Premises and
remove therefrom Tenant and all property belonging to or placed on
the Premises by, at the direction of, or with consent of Tenant.
Any such reentry and removal by Landlord shall not of itself
constitute an acceptance by Landlord of a surrender of this Lease
or of the Premises by Tenant and shall not of itself constitute a
termination of this Lease by Landlord.
(iv) Landlord, with or without terminating this Lease, may
immediately or at any time thereafter relet the Premises or any
part thereof for such time or times, at such rental or rentals and
upon such other terms and conditions as Landlord in its sole
discretion may deem advisable, and Landlord may make any
alterations or repairs to the Premises which it may deem necessary
or proper to facilitate such reletting; and Tenant shall pay all
costs of such reletting including but not limited to the cost of
any such alterations and repairs to the Premises, attorneys' fees,
and brokerage commissions; and if this Lease shall not have been
terminated, Tenant shall continue to pay all rent and all other
charges due under this Lease up to and including the date of
beginning of payment of rent by any subsequent tenant of part or
all of the Premises, and thereafter Tenant shall pay monthly
during the remainder of the term of this Lease the difference, if
any, between the rent and other charges collected from any such
subsequent tenant or tenants and the rent and other charges
reserved in this Lease, but Tenant shall not be entitled to
receive any excess of any such rents collected over the rents
reserved herein.
(v) Landlord may immediately or at any time thereafter terminate
this Lease, and this Lease shall be deemed to have been terminated
upon receipt by Tenant of written notice of such termination. Upon
such termination Landlord shall have the right to recover from
Tenant, as liquidated damages, the following:
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(A) the worth, at the time of the award, of the unpaid
rent that is due and payable at the time of
termination of this Lease; and
(B) the worth, at the time of the award, of the amount
by which the unpaid rent that would have been
earned after the date of termination of this Lease
until the time of the award exceeds the amount of
rent that could have been reasonably obtained by
Landlord using reasonable diligence and good faith
efforts to relet the Premises; and
(C) the worth, at the time of the award, of the amount
by which the unpaid rent for the balance of the
Lease Term (or the then current extension period)
after the time of the award exceeds the amount of
rent that could have been reasonably obtained by
Landlord using reasonable diligence and good faith
efforts to relet the Premises; and
(D) any other amount and court costs necessary to
compensate Landlord for all detriment directly
caused by Tenant's failure to perform its
obligations under this Lease; provided Tenant shall
never have any liability or responsibility whatever
for any consequential or indirect damages.
Any amount due Landlord for future rent obligations under
subsection (C) above may, at Tenant's option, be paid immediately
in cash, or in lieu thereof, Tenant may give Landlord its
promissory note in the face amount due Landlord, which shall be
payable by Tenant to Landlord, in equal monthly principal
installments together with interest on the unpaid principal for a
term equal to what would have been the remaining portion of the
Lease Term (or the then current extension period). Payment of such
note shall be guaranteed in writing in a form and by a guarantor
which are reasonably acceptable to Landlord.
The following words and phrases as used in this Section
8.1(b)(v) shall have the following meanings:
(x) The "worth at the time of the award" as used in Section
8.1(b)(v)(A) and (B) shall be computed by allowing interest
at the lesser of (a) the Prime Rate plus three percent (3%)
or (b) the maximum rate permitted by law.
(y) The "worth at the time of the award" as used in Section
8.1(b)(v)(C) shall be computed by discounting the amount at
the discount rate of the Federal Reserve Bank of Atlanta at
the time of the award, plus two percent (2%); and
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(z) The term "time of the award" shall mean either the date
upon which Tenant pays to Landlord the amount recoverable by
Landlord as set forth above or the date of entry of any
determination, order or judgment of any court, whichever
first occurs.
(vi) Landlord may exercise all remedies granted a "Secured Party"
under the Georgia Uniform Commercial Code. Landlord shall have a
lien upon all goods, chattels or personal property of any
description belonging to Tenant which are placed in, or become a
part of, the Premises, as security for the performance by Tenant
of its obligations under this Lease, which lien shall not be in
lieu of or in any way affect any statutory landlord's lien given
by law, but shall be cumulative thereto; and Tenant hereby grants
to Landlord a security interest in all such property placed in the
Premises, which shall be subject to rights of Tenant's lenders or
others providing financing for such property. In the event
Landlord exercises its option to terminate this Lease, or to
reenter and relet the Premises as provided herein, Landlord may at
its option take possession of all of Tenant's property on the
Premises and sell the same at public or private sale after giving
Tenant reasonable notice of the time and place of any public sale,
or of the time after which any private sale is to be made, for
cash or on credit, or for such prices and terms as Landlord deems
best, with or without having the property present at such sale. In
addition, Landlord may at its option foreclose this lien in the
manner and form provided by the foreclosure of security
instruments or in any other manner permitted by law. The proceeds
of any such foreclosure or sale shall be applied first to the
necessary and proper expense of removing, storing and selling such
property, including reasonable attorney's fees, then to the
payment of any indebtedness, other than rent, due hereunder from
Tenant to Landlord, including interest thereon, then to the
payment of any rent or other sums due or to become due under this
Lease, with the balance, if any, to be paid to Tenant.
(c) If Landlord reenters the Premises or terminates this
Lease pursuant to any of the provisions of this Lease, Tenant hereby
waives all claims for damages which may be caused by such reentry or
termination by Landlord. Tenant shall and does hereby agree to
indemnify and hold Landlord harmless from any loss, cost (including
court costs and attorneys' fees), or damages suffered by Landlord by
reason of such reentry or termination. No such reentry or termination
shall be considered or construed to be a forcible entry.
(d) No course of dealing between Landlord and Tenant or any
failure or delay on the part of Landlord in exercising any rights of
Landlord under this Section 8.1 or under any other provisions of this
Lease shall operate as a waiver of any rights of Landlord hereunder or
under any other provisions of this Lease, nor shall any waiver of a
Default on one occasion operate as a waiver of any subsequent Default
or of any other Default. No express waiver shall affect any condition,
covenant, rule, or regulation other than the one specified in such
waiver and that one only for the time and in the manner specifically
stated.
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(e) The exercise by Landlord of any one or more of the
rights and remedies provided in this Lease shall not prevent the
subsequent exercise by Landlord of any one or more of the other rights
and remedies herein provided. All remedies provided for in this Lease
are cumulative and may, at the election of Landlord, be exercised
alternatively, successively, or in any other manner and are in addition
to any other rights provided for or allowed by law or in equity.
8.2 INSOLVENCY OR BANKRUPTCY. The making by Tenant of an assignment
for the benefit of its creditors, the appointment under state law of a receiver
to take possession of all or substantially all of Tenant's assets, or the
voluntary or involuntary involvement of Tenant as a principal in a state law
insolvency or reorganization proceeding, may, at the option of Landlord, be
deemed and declared a Default by Tenant hereunder. Tenant covenants and agrees
promptly to notify Landlord in writing of (i) the occurrence of any of the
events described in the preceding sentence or any event similar thereto, whether
occurring in Georgia or any other jurisdiction, and (ii) the institution by or
against Tenant of any proceeding under the United States Bankruptcy Code
including a copy of the petition filed to initiate such proceeding.
8.3 LATE PAYMENTS. Tenant shall pay, in the event Base Rental,
Additional Rental, or other charge to be paid by Tenant hereunder is not paid
when due, (A) a late fee of five (5%) percent of the amount past due, which late
fee Tenant acknowledges is an agreed reimbursement to Landlord for the
administrative expense incurred by Landlord as a result of Tenant's late payment
and not a penalty; and (B) interest on the amount past due (excluding late fees)
at a rate (the "Default Rate") which is the lower of (x) a per annum rate equal
to the Prime Rate plus three percent, or (y) sixteen (16%) percent per annum,
but in no event at a rate higher than that permitted by applicable law, from due
date until paid. Should Tenant make a partial payment of past due amounts, the
amount of such partial payment shall be applied first, to late fees, second, to
accrued but unpaid interest, and third, to past due amounts, in inverse order of
their due date.
8.4 ATTORNEYS' FEES FOR COLLECTION. If any Base Rental, Additional
Rental or other debt owing by Tenant to Landlord hereunder is collected by or
through an attorney-at-law, Tenant agrees to pay an additional amount, as
attorneys' fees, Landlord's actual, reasonable costs thereof. In connection with
any payment of attorneys' fees and costs pursuant to this Section 8.4, Landlord
and Tenant hereby waive any right either might have under O.C.G.A.
Section 13-1-11 respecting the determination of such attorneys' fees and costs.
8.5 WAIVER OF HOMESTEAD. Tenant hereby waives and renounces all
homestead or exemption rights which Tenant may have under or by virtue of the
Constitutions and Laws of the United States of America, the State of Georgia,
and any other State as against any debt or sum Tenant may owe Landlord under
this Lease and hereby transfers, conveys, and assigns to Landlord all homestead
or exemption rights which may be allowed or set apart to Tenant, including such
as may be set apart in any bankruptcy proceeding to pay any debt or sum owing by
Tenant to Landlord hereunder.
8.6 NO WAIVER OF RIGHTS. No failure or delay of either party to
exercise any right or power given it herein or to insist upon strict compliance
by the other party of any
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obligation imposed on it herein and no custom or practice of either party hereto
at variance with any term hereof shall constitute a waiver or a modification of
the terms hereof by either party or any right it has herein to demand strict
compliance with the terms hereof by the other party. Neither party has or shall
have any authority to waive any provision of this Lease unless such waiver is
expressly made in writing.
8.7 LANDLORD'S DEFAULTS. Notwithstanding any other provision of this
Lease to the contrary, in the event of any default by Landlord under this Lease,
Tenant will give Landlord written notice specifying such default with
particularity, and Landlord shall then have thirty (30) days in which to cure
any such default; provided, however, in the event any such default cannot with
reasonable diligence be cured within such thirty-day period, Landlord shall have
such additional reasonable period of time as is necessary to cure such default
so long as Landlord commences such cure within such thirty-day period and shall
diligently prosecute in good faith such cure to completion. Unless and until
Landlord fails to so cure any default after such notice, Tenant shall not have
any remedy or cause of action by reason thereof. If Landlord fails to cure such
default prior to the expiration of such cure period, then Tenant may give an
additional notice to Landlord and upon the expiration of ten (10) days after
such second notice without such default having been cured, Tenant may cure such
default, all on behalf of and at the expense of Landlord, and do all necessary
work and make all necessary payments in connection therewith. Landlord shall pay
Tenant the reasonable amount actually incurred by Tenant, together with interest
thereon at the Default Rate from the date of payment until re-payment, within
thirty (30) days after notice from Tenant that such cost has been incurred
together with supporting invoices evidencing the amount of such cost. If
Landlord fails to pay the amount requested by Tenant within such thirty (30) day
period, then Tenant may withhold up to twenty-five percent (25%) of each payment
of Base Rental thereafter due to Landlord to satisfy the payment of such
indebtedness (with such offset to be applied first to accrued and unpaid
interest); provided, however, that Tenant shall be entitled to increase such
withholding up to one hundred percent (100%) of any and all such payments of
Base Rental to Landlord at such time that the unpaid and unapplied amount of
such indebtedness (including accrued, unpaid interest) equals or exceeds
seventy-five percent (75%) of the remaining unpaid Base Rental obligations
payable for the balance of the then current term of this Lease. Notwithstanding
the foregoing, in the event Landlord notifies Tenant that Landlord disputes
Tenant's allegation of a Landlord default under this Lease (such notice to be
given prior to the expiration of the cure period afforded Landlord, as recited
above, with respect to such alleged default), then Landlord shall have the right
to institute an arbitration proceeding in accordance with the provisions of
EXHIBIT "F" hereto within ten (10) days after the effective date of such dispute
notice; in such case, Tenant shall not exercise the foregoing "self-help" rights
(except in an emergency), nor shall Landlord be liable for any expenses incurred
by Tenant in connection therewith, nor shall Tenant make any offset against Base
Rental, until (in each case) such time as all such arbitration proceedings are
completed. All reasonable attorneys' fees and arbitration costs in any such
proceeding which are incurred by the prevailing party shall be paid by the other
party. If the holder of a properly recorded first mortgage or deed to secure
debt has notified Tenant, in writing, that it is the holder of such lien on the
Premises and shall so request, then Tenant shall provide such holder with a
duplicate copy of any notice sent to Landlord covering a default hereunder and
such holder shall be granted sixty (60) days after receipt thereof (as such time
period may be extended beyond such 60-day period as reasonably necessary to
correct or remedy such default, so long as such holder commences such corrective
action within
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such 60-day period and thereafter diligently pursues the same to completion), to
correct or remedy such default (provided, however, that such holder shall
provide written notice to Tenant on or before the thirty-first (31st) day after
receipt of Tenant's notice of default as to whether such holder intends to cure
said default).
IX.
MISCELLANEOUS PROVISIONS
9.1 BROKER. Tenant represents and warrants to Landlord that, except
with respect to any broker identified in the Lease Summary as Tenant's Broker
("Tenant's Broker"), no broker, agent, commission salesperson, or other person
has represented Tenant in the negotiations for and procurement of this Lease and
of the Premises and that, except with respect to Tenant's Broker, no
commissions, fees or compensation of any kind are due and payable in connection
herewith to any broker, agent, commission salesperson, or other person. Tenant
agrees to indemnify and hold Landlord harmless from all loss, cost and damage
(including reasonable attorneys' fees and court costs) suffered or incurred by
Landlord as a result of a breach by Tenant of the representation and warranty
contained in the immediately preceding sentence or as a result of Tenant's
failure to pay commissions, fees or compensation due to any broker who
represented Tenant, whether or not disclosed. Landlord and Tenant each represent
and disclose to the other that Tenant's Broker identified in the Lease Summary
has represented Tenant, and that Barry Real Estate Companies, Inc. ("Landlord's
Broker") has represented Landlord in the negotiation of this Lease. The
commissions or other compensation due and payable to Tenant's Broker and to
Landlord's Broker by reason of this Lease will be paid by Landlord pursuant to
separate written agreements.
9.2 ADDRESSES AND NOTICES. All notices, unless oral notice is
specified, required or permitted to be given with respect to this Lease in order
to be effective shall be in writing and shall be sent to the address of the
intended party at its address specified in the Lease Summary. Notices shall be
sent either by local or overnight courier service, or by the United States
Postal System, certified or registered mail, return receipt requested, with
postage and charges prepaid. Notices by courier service shall be deemed
effective on date of delivery to the specified address. Notices by the United
States Postal System shall be deemed effective on the third (3rd) business day
subsequent to date of postmark or on the date of actual receipt by the
addressee, whichever shall be the earlier. In the event of a change of address
by either party, such party shall give written notice thereof in accordance with
the foregoing.
9.3 ENTIRE AGREEMENT AND EXHIBITS. This Lease constitutes and
contains the sole and entire agreement of Landlord and Tenant with respect to
the Premises and no prior or contemporaneous oral or written representation or
agreement between the parties and affecting the Premises shall have legal
effect. No modification or amendment of this Lease shall be binding upon the
parties unless such modification or amendment is in writing and signed by
Landlord and Tenant. The content of each and every exhibit, attachment and the
Lease Summary which is referenced in this Lease as being attached hereto is
incorporated into this Lease as fully as if set forth in the body of this Lease.
In the
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event of any conflict between the Lease Summary and the body of this Lease or
the exhibits hereto, the terms of the Lease Summary shall control.
9.4 SUBORDINATION AND ATTORNMENT.
(a) Except as provided in subsections (c) and (d) below, and
subject to subsection (e) below, this Lease and all rights of Tenant
hereunder are and shall be subject and subordinate to (i) the lien,
title and interest of any first-in-priority mortgage, first-in-priority
deed to secure debt, first-in-priority deed of trust, or other
first-in-priority instrument in the nature thereof which may now or
hereafter affect Landlord's estate or interest in and to the Building
or the land underlying the Building and to any other first-in-priority
instrument encumbering the fee title of the Building or the land
underlying the Building and to any modifications, renewals,
consolidations, extensions, or replacements thereof; and (ii) all
ground leases which may hereafter be executed affecting the Building or
the land underlying the Building.
(b) Subsection (a) above shall be self-operative, and no
further instrument of subordination shall be required by the holder of
any such instrument affecting or encumbering the Building or the land
underlying the Building. In confirmation of such subordination, Tenant
shall, upon demand, at any time or times, execute, acknowledge and
deliver to Landlord or the holder of any such mortgage, deed to secure
debt, deed of trust, or other instrument or to the lessor under any
such ground lease, without expense, any and all instruments that may be
requested by Landlord or such holder or such lessor to evidence the
subordination of this Lease and all rights hereunder to any such
mortgage, deed to secure debt, deed of trust, or other instrument or
the grant of any such ground lease, and each such renewal,
modification, consolidation, replacement, and extension thereof.
(c) Tenant shall, upon demand of Landlord, at any time or
times, execute, acknowledge, and deliver to Landlord or to the holder
of any mortgage, deed to secure debt, deed of trust, or other
instrument affecting or encumbering the Building or the land underlying
the Building or to the lessor under any ground lease affecting the
Building or the land underlying the Building, without expense, any and
all instruments that may be necessary to make this Lease superior to
any such mortgage, deed to secure debt, deed of trust or other
instrument or the grant of any such ground lease, and each renewal,
modification, consolidation, replacement, and extension thereof.
(d) If the holder of any mortgage, deed to secure debt, deed
of trust or other instrument affecting or encumbering the Building or
the land underlying the Building or if the lessor under any ground
lease affecting the Building or the land underlying the Building shall
hereafter succeed to the rights of Landlord under this Lease, whether
through possession or foreclosure action or exercise of private power
of sale or delivery of a new lease, Tenant shall, at the option of such
holder or lessor, attorn to and recognize such successor as Tenant's
landlord under this Lease as of the date of such succession to
Landlord's interest and shall promptly execute and deliver any
instrument that may be necessary to evidence such attornment. Upon such
attornment, this Lease shall continue in full force and effect as a
direct lease
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between such successor Landlord and Tenant, subject to all of the
terms, covenants, and conditions of this Lease.
(e) Notwithstanding the foregoing, Tenant's agreement in
Section 9.4(a) above is expressly conditioned upon Landlord obtaining,
at no cost to Landlord, from any lessor under a future ground lease or
the holder of any future mortgage or security deed encumbering the
Building a commercially reasonable agreement (a "Nondisturbance
Agreement") stating that such lessor or holder, as the case may be,
will not disturb Tenant's occupancy of the Premises in the event of a
foreclosure of such mortgage or security deed or a termination of such
ground lease, provided there is not a Default under this Lease.
Landlord shall be deemed to have satisfied such condition under this
Section 9.4(e) if Landlord delivers to Tenant a Nondisturbance
Agreement to Tenant for signature on such lessor's or holder's form of
subordination, nondisturbance and attornment agreement as proposed by
such lessor or holder to be used with respect to this Lease, so long as
such form sets forth the nondisturbance covenant required by this
Section 9.4(e) and is consistent with commercially reasonable standards
for such agreements as generally used in Atlanta, Georgia. Tenant
hereby expressly approves a Nondisturbance Agreement in the form
attached as EXHIBIT "K" hereto. Landlord agrees to deliver a
Nondistrubance Agreement substantially in the form of EXHIBIT "K"
executed by Landlord and Landlord's existing mortgagee within thirty
(30) days after the date of this Lease.
(f) In the event of any conflict between the terms and
conditions of this Lease and the terms and conditions of any
Nondisturbance Agreement executed by both Landlord and Tenant, the
terms of such Nondisturbance Agreement shall control.
(g) Landlord hereby represents and warrants that Landlord
has not entered into any mortgage, deed to secure debt or ground lease
with respect to the Building subsequent to September 1, 1998.
9.5 ESTOPPEL CERTIFICATE. At any time and from time to time, Tenant,
on or before the date specified in a request therefor made by Landlord, which
date shall not be earlier than ten (10) days from the making of such request,
covenants and agrees to execute, acknowledge and deliver to Landlord a
certificate evidencing (i) whether or not this Lease is in full force and
effect, (ii) whether or not this Lease has been amended in any manner, and if so
specifying such amendment or amendments, (iii) whether or not there are any
existing events of default on the part of Landlord hereunder to the knowledge of
Tenant and specifying the nature of such events of default, if any, and (iv) the
date to which rent, and other amounts due hereunder, if any, have been paid.
Each certificate delivered pursuant to this Section may be relied on by any
prospective purchaser or transferee of Landlord's interest hereunder or of any
part of Landlord's property or by any mortgagee of Landlord's interest hereunder
or of any part of Landlord's property or by an assignee of any such mortgagee or
by any ground lessor of Landlord's interest hereunder.
9.6 SEVERABILITY. If any clause or provision of this Lease is or
becomes illegal, invalid or unenforceable because of present or future laws or
any rule or regulation of any governmental body or entity, effective during the
Lease Term, the intention of the parties
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hereto is that the remaining parts of this Lease shall not be affected thereby,
unless the lack of such clause or provision is, in the sole determination of
Landlord, essential to the rights of both parties in which event Landlord shall
have the right to terminate this Lease on written notice to Tenant.
9.7 CAPTIONS. The captions used in this Lease are for convenience
only and do not in any way limit or amplify the terms and provisions hereof.
9.8 SUCCESSORS AND ASSIGNS. The words "Landlord" and "Tenant" as used
herein shall include the respective contracting party, whether singular or
plural, and whether an individual, masculine or feminine, or a corporation,
general partnership, joint venture, limited partnership or trust. The provisions
of this Lease shall inure to the benefit of and be binding upon Landlord and
Tenant, and their respective successors, heirs and assigns, subject, however, in
the case of Tenant, to the provisions of Section 2.5 hereof. It is understood
and agreed that the term "Landlord", as used in this Lease, means only the
owner(s), or the lessee(s), from time to time of the Building and/or the land
underlying the Building so that in the event of any sale or sales of the
Building and/or the land underlying the Building, or of any lease thereof, the
Landlord named herein shall be and hereby is entirely freed and relieved of all
covenants and obligations of Landlord hereunder accruing thereafter to the
extent of such sale or lease, and it shall be deemed without further agreement
that the purchaser, or the lessee, as the case may be, has assumed and agreed,
to the same extent, to carry out any and all covenants and obligations of
Landlord hereunder during the period such party has possession of all or such
portion of the Building and/or the land underlying the Building which it has
purchased or leased. Should all of the land underlying the Building and the
entire Building be severed as to ownership by sale and/or lease, then, unless
the Tenant is otherwise notified to the contrary in writing, either the owner of
the entire Building or the lessee of the entire Building, as the case may be,
which has the right to lease space in the Building to tenants shall be deemed
the "Landlord". Tenant shall be bound to any successor landlord for all the
terms, covenants, and conditions hereof and shall execute any attornment
agreement not in conflict herewith at the request of any successor landlord.
9.9 GEORGIA LAW. The laws of the State of Georgia shall govern the
interpretation, validity, performance and enforcement of this Lease.
9.10 TIME IS OF THE ESSENCE. Time is of the essence of this Lease.
Unless specifically provided otherwise, all references to terms of days or
months shall be construed as references to calendar days or calendar months,
respectively.
9.11 EXECUTION. This Lease may be executed in any number of
counterparts, each of which shall be deemed an original and any of which shall
be deemed to be complete in itself and may be introduced into evidence or used
for any purpose without the production of the other counterparts.
9.12 FORCE MAJEURE. A party to this Lease shall be excused from the
performance of its duties and obligations under this Lease, except obligations
for the payment of money such as Base Rental, for the period of delay, but in no
event longer than ninety (90) days, caused by labor disputes, governmental
regulations, riots, war,
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insurrection, acts of God or other causes beyond the control of the party whose
performance is being excused (but such causes shall not include insufficiency of
funds).
9.13 MULTIPLE TENANTS. Should more than one party enter into this
Lease as Tenant, each party so constituting Tenant shall be liable, jointly and
severally with the other or others, for all obligations of Tenant under this
Lease, and Landlord may enforce its rights hereunder against such party with or
without seeking enforcement thereof against the other or others.
9.14 MUTUAL WARRANTY OF AUTHORITY. Landlord warrants to Tenant that
Landlord is a validly existing limited partnership under the laws of the State
of Georgia, that its entry into and performance of this Lease has been duly
authorized, and that the party executing this Lease on its behalf is duly
authorized to do so. Tenant, if other than an individual, warrants to Landlord
that Tenant is a validly existing legal entity under the laws of the state of
its formation and that it is duly qualified to do business in the State of
Georgia, that its entry into and performance of this Lease has been duly
authorized, and that the officer(s), partner(s) or trustee(s), as applicable,
executing this Lease on its behalf are duly authorized to do so.
9.15 PARKING RIGHTS . For use by Tenant and its employees and invitees,
Landlord shall provide for Tenant's use seven days a week, 24 hours per day the
number of unassigned parking spaces as designated in the Lease Summary. Such
spaces shall be located in the on-site Parking Facility or in the parking
facility for 1365 Peachtree Road, a parking facility located on the property of
the First Presbyterian Church and, if necessary, such other location or
locations as is mutually acceptable to Landlord and Tenant, with Landlord and
Tenant hereby agreeing, that a location in the area described on EXHIBIT "H"
hereto or otherwise not more than a ten (10) minute shuttle ride from the
Building (if Landlord provides such a shuttle) is mutually acceptable, so long
as Tenant approves such location as being reasonably safe and secure, with
reasonable acceptable security assess and illumination. After acceptance of such
location, Landlord shall preserve the condition of such Parking Facility as
originally presented to Tenant for its approval. Any such off-site facilities so
provided shall be deemed a part of the "Parking Facility" for purposes of this
Lease, except where reference is made to the on-site parking Facility and
Landlord's obligation to provide spaces therein. Not less than the greater of
(x) 376 parking spaces, or (y) two (2) spaces per 1,000 square feet of Rentable
Area of the Premises will be located in the on-site Parking Facility (including,
without limitation, the facility for the 1365 Peachtree building) and shall be
available to Tenant during the Term of this Lease on a twenty-four (24) hour,
seven (7) days a week basis. Regardless of the location of the parking spaces
provided to Tenant, such parking spaces shall be provided to Tenant at the
prevailing market rate for such parking spaces, as said market rates shall be
determined and adjusted from time to time (except that the initial 376 parking
spaces provided in the on-site Parking Facility shall be $60.00 per space per
month during the Term) by Landlord or by the operator of such parking facility
at its sole discretion (the current market rate for spaces located in the
on-site Parking Facility is $60.00 per space per month). Tenant shall pay such
monthly charges to Landlord or to the operator of the Parking Facility on or
before the first (1st) day of each calendar month throughout the term of the
Lease, and Tenant shall abide by and comply with any and all regulations
promulgated by Landlord, the owner of the subject parking facility, or the
operator of the Parking Facility with respect to such parking spaces. All such
parking spaces attributable to any Phase of the Premises not
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rented at any time after the Base Rental Commencement Date for such Phase may be
rented or otherwise disposed of by Landlord or the operator of the Parking
Facility in the ordinary course of their business without further obligation to
Tenant with respect thereto or any spaces in replacement thereof.
9.16 NO RECORDATION OF LEASE. This Lease is not in recordable form,
and Tenant agrees not to record or permit the recording of this Lease.
9.17 HAZARDOUS SUBSTANCES.
(a) Tenant hereby covenants that Tenant shall not cause or
permit any "Hazardous Substances" (as hereinafter defined) to be
placed, held, located or disposed of in, on or at the Premises or any
part thereof and neither the Premises nor any part thereof shall ever
be used as a dump site or storage site (whether permanent or temporary)
for any Hazardous Substances during the Lease Term.
(b) Tenant hereby agrees to indemnify Landlord and hold
Landlord harmless from and against any and all losses, liabilities,
including strict liability, damages, injuries, expenses, including
reasonable attorneys' fees, costs of any settlement or judgment and
claims of any and every kind whatsoever paid, incurred or suffered by,
or asserted against, Landlord by any person or entity or governmental
agency for, with respect to, or as a direct or indirect result of, the
presence on or under, or the escape, seepage, leakage, spillage,
discharge, emission, discharging or release from, the Premises of any
Hazardous Substance (including, without limitation, any losses,
liabilities, including strict liability, damages, injuries, expenses,
including reasonable attorneys' fees, costs of any settlement or
judgment or claims asserted or arising under the Comprehensive
Environmental Response, Compensation and Liability Act, any so-called
federal, state or local "Superfund" or "Superlien" laws, statute, law,
ordinance, code, rule, regulation, order or decree regulating, relating
to or imposing liability, including strict liability, substances or
standards of conduct concerning any Hazardous Substance), provided,
however, that the foregoing indemnity is limited to matters arising
solely from Tenant's violation of the covenant contained in subsection
(a) above.
(c) For purposes of this Lease, "Hazardous Substances" shall
mean and include those elements or compounds which are contained in the
list of hazardous substances now or hereafter adopted by the United
States Environmental Protection Agency (the "EPA") or the list of toxic
pollutants designated by Congress or the EPA or which are now or
hereafter defined as hazardous, toxic, pollutant, infectious or
radioactive by any other Federal, state or local statute, law,
ordinance, code, rule, regulation, order or decree regulating, relating
to, or imposing liability or standards of conduct concerning, any
hazardous, toxic or dangerous waste, substance or material, as now or
at any time hereafter in effect.
(d) Landlord shall have the right but not the obligation,
and without limitation of Landlord's rights under this Lease, to enter
onto the Premises or to
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take such other actions as it deems necessary or advisable to cleanup,
remove, resolve or minimize the impact of, or otherwise deal with, any
Hazardous Substance following receipt of any notice from any person or
entity (including without limitation the EPA) asserting the existence
of any Hazardous Substance in, on or at the Premises or any part
thereof which, if true, could result in an order, suit or other action
against Tenant or Landlord or both. All reasonable costs and expenses
incurred by Landlord in the exercise of any such rights, which costs
and expenses result from Tenant's violation of the covenant contained
in subsection (a) above, shall be deemed additional rental under this
Lease and shall be payable by Tenant upon demand.
(e) This Section 9.17 shall survive cancellation,
termination or expiration of this Lease.
9.18 NAMES. Upon written notice to Tenant, Landlord reserves the
right, from time to time, to change the name of the development, the name of the
Building and the street address of the Building, except that Landlord shall not
use the name of any tenant of the Building to identify the Building unless such
tenant occupies more space in the Building at the time the Building is so named
than does Tenant. Tenant shall not, without the prior written consent of
Landlord, use the name given the development, the Building, or any other
deceptively similar name, or use any associated service mark or logo of the
development or the Building for any purpose other than Tenant's business
address.
9.19 SHARED COMMUNICATIONS SERVICES. Landlord may contract with a
vendor (the "Shared Services Vendor") to make available to tenants of the
Building certain shared communications services. With respect to such shared
communications services, if and so long as available, Landlord and Tenant agree
as follows:
(a) Tenant, at its election, may contract with Shared
Services Vendor or any other vendor for communications services,
including, without limitation, Southern Bell Telephone and Telegraph
Company, the public utility provider of telecommunications regulated by
the Georgia Public Service Commission. Tenant may make such election at
its sole and absolute discretion.
(b) Tenant acknowledges and agrees that Shared Services
Vendor is an independent contractor of Landlord and not Landlord's
employee, agent, partner or joint venturer and Tenant waives any and
all right Tenant may have or claim to have to assert the contrary.
(c) Tenant acknowledges and agrees that any cessation or
interruption of shared communications services or default by Shared
Services Vendor under the terms and conditions of Tenant's agreement
with Shared Services Vendor shall not constitute a default under this
Lease nor a constructive eviction by Landlord of Tenant. Tenant agrees
that it shall not abate or setoff against any amount of Base Rental,
Rental Adjustment, additional rent or other sum due under this Lease
for any claim against Shared Services Vendor or for a default under
Tenant's agreement with Shared Services Vendor. Tenant waives and
releases Landlord from any and all claims Tenant may have, now or in
the future, against
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Landlord, if any, that arise from or are related to the acts,
omissions, negligence or gross negligence of Shared Services Vendor or
its agents and employees.
9.20 OWNERSHIP AND MANAGEMENT DISCLOSURE. Landlord discloses to
Tenant, and Tenant acknowledges, that Landlord is the owner of record of the
Building and the Premises and that Landlord's Broker, and its affiliates, are to
manage the Building and the Premises on behalf of Landlord. The address of
Landlord's Broker is 50 Glenlake Parkway, Suite 520, Atlanta, Georgia 30328.
Landlord shall provide Tenant with notice of any change in the management of the
Building at least thirty (30) days prior to any such change.
9.21 EFFECT OF LEASE TERMINATION. No termination of this Lease by
reason of exercise of an optional right, lapse of time, failure of condition or
election of a party to terminate shall release or otherwise relieve either party
from liability for breach of this Lease or from performance of any contractual
obligation provided herein accruing prior to such termination. The possessory
rights of Tenant, however, shall cease and expire as of the effective time of
any such termination.
9.22 SPECIAL STIPULATIONS. The Special Stipulations, if any, attached
hereto as EXHIBIT "E" and made a part hereof, are hereby incorporated herein and
in the event they conflict with any of the foregoing provisions, the Special
Stipulations shall control.
[SIGNATURES BEGIN ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, the parties hereto have duly executed this Lease as
of the date and year first above stated.
LANDLORD:
KINGSTON ATLANTA PARTNERS, L.P., a
Delaware limited partnership
By: Pershing Properties, Inc, a Georgia
corporation
Its: General Partner
By: /s/ B.J. Hoppe
---------------------------------
Title: Vice President
------------------------------
Attest: /s/ B.J. Hppe
-----------------------------
Title: Vice President
------------------------------
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TENANT:
MINDSPRING ENTERPRISES, INC., a Delaware
corporation
By: /s/ John A. Bushfield
---------------------------------
Title: VP P&P
------------------------------
Attest: /s/ Juliet Reising
-----------------------------
Title: EVP and CFO
------------------------------
[SEAL]
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Exhibit 10.39
FIRST AMENDMENT TO LEASE
This First Amendment to Lease (the "AMENDMENT") is made and entered
into this 1st day of October, 1999 (the "EFFECTIVE DATE") by and between PARK
WEST E-3 ASSOCIATES, a Texas joint venture ("LANDLORD") and MINDSPRING
ENTERPRISES, INC., a Delaware corporation ("TENANT").
W I T N E S S E T H:
WHEREAS, Landlord and NETCOM On-Line Communications Services, Inc.
("NETCOM") entered into a Lease (the "LEASE") dated February 23, 1996, whereby
Landlord leased to NETCOM and NETCOM leased from Landlord certain premises (the
"INITIAL PREMISES") consisting of the entire first floor and the mezzanine level
of the building located at 1607 LBJ Freeway, Dallas, Texas, and containing
60,827 net rentable square feet;
WHEREAS, NETCOM assigned its right, title and interest in the Lease to
Tenant pursuant to that certain Assignment and Assumption of Lease dated March
8, 1999, between NETCOM, as Assignor, and Tenant, as Assignee; and
WHEREAS, Landlord and Tenant desire to amend the Lease as set forth
below.
NOW, THEREFORE, in consideration of the benefits to accrue to the
parties hereto and of the mutual agreements set forth below, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree:
1. The Term of this Lease is hereby extended such that the
Expiration Date of this Lease is hereby amended to be September 30, 2004.
2. Rider No. 2 to the Lease is hereby deleted in its entirety,
and is replaced for all purposes by Rider No. 2 attached hereto.
3. Rider No. 4 to the Lease is hereby deleted in its entirety,
and the terms and provisions thereof are null and void and of no force or
effect.
4. Effective on September 30, 2002, the area of the Premises
shall be increased to incorporate that certain space more particularly described
on Exhibit A attached hereto and made a part hereof (the "SECOND FLOOR SPACE").
The area of the Second Floor Space shall be measured in accordance with 1996
BOMA National Standards ANSI Z265. The Base Rent for the Second Floor Space
shall be the product of Twenty-Two and 40/100 Dollars ($22.40) times the number
of net rentable square feet comprising the Second Floor Space for the period
commencing on September 30, 2002 through September 30, 2004. It is understood
and agreed
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that the Base Rent for the Second Floor Space set forth herein represents a
"full-service" rental rate, excluding charges for Tenant's electrical usage,
which shall be additional charges to be paid by Tenant. As of September 30,
2002, all references in the Lease to the Premises shall refer to the original
Premises plus the Second Floor Space.
5. Base Rent for the Initial Premises shall be the product of
60,827 times (a) Six and 59/100 Dollars ($6.59) for the period commencing
October 1, 1999 through September 30, 2000; (b) Seven and 89/100 Dollars ($7.89)
for the period commencing October 1, 2000 through September 30, 2001; (c) Eight
and 81/100 Dollars ($8.81) for the period commencing October 1, 2001 through
September 30, 2002; and (d) Nine and 89/100 Dollars ($9.89) for the period
commencing October 1, 2002 through September 30, 2004. It is understood and
agreed that the Base Rent rates set forth herein are "triple net" rental rates
and that Tenant shall be responsible for the payment of the Operating Costs (as
such term is defined in Section 5.02 of the Lease, and without regard to any
"Base Year" computation) attributable to the Initial Premises.
6. Commencing on October 1, 1999, and continuing through the
remainder of the Term of this Lease, (a) Tenant shall no longer be obligated to
pay Additional Rent pursuant to Article 5 with respect to the Initial Premises,
and (b) Tenant shall be responsible for the payment of all Operating Costs
relating to the Initial Premises. Tenant shall pay Operating Costs as described
in Article 5 Section 5.01 (A). Landlord's calculation for Operating Costs shall
not include any base year or expense stop. Tenant shall continue to pay
Operating Costs in accordance with the then current budget until Landlord
provides a revised statement. Such costs shall be deemed to be Rent for the
purposes of Article 13 of this Lease.
7. Effective on September 30, 2002, Tenant shall be entitled to
an additional sixty (60) Parking Permits for an additional sixty (60) unassigned
parking spaces to those provided in Section 1.01P. of the Lease. The total
number of parking permits allocated to Tenant shall be 312 [being the sum of 252
(the number allocated to the Initial Premises) and 60 (the number allocated to
the Second Floor Space)]. All such Parking Permits shall be at no charge during
the Initial Term expiring on September 30, 2004, shall be used in common with
other persons in the Parking Facility, and shall be subject to the terms of
Article 6 of the Lease.
Reference is made to that certain Sublease attached hereto as
Exhibit C (the "SUBLEASE"). Landlord and Tenant agree that as of September 30,
2002, the terms and provisions of Paragraph 12 of the Sublease shall be
incorporated into the Lease as if set forth herein except that (i) all
references therein to "sixty-two (62)" shall be changed to read "sixty (60)" and
(ii) all references therein to "Sublessor,"
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"Subtenant" and "Sublease" shall be changed to read "Landlord," "Tenant," and
"Lease," respectively.
8. The Base Year Operating Costs for the Second Floor Space shall
be the actual grossed up Operating Costs for calendar year 2002 for the Project,
as determined on a per NRSF basis.
9. Tenant accepts the Premises in their "as is" condition as of
the Effective Date.
10. All capitalized terms not otherwise defined herein shall have
the meanings ascribed to said terms in the Lease.
11. This Amendment shall be governed by the laws of the State of
Texas.
12. Except as expressly modified herein, the Lease shall continue
in full force and effect and all terms of the Lease are ratified and
reconfirmed. In the event of any conflict or inconsistency between the terms and
provisions of this Amendment and those of the Lease, the terms and provisions of
this Amendment shall govern and control.
IN WITNESS WHEREOF, this Amendment has been duly executed by the
parties hereto as of the Effective Date.
LANDLORD:
PARK WEST E-3 ASSOCIATES,
a Texas joint venture
By: PRENTISS/COPLEY INVESTMENT GROUP,
managing venturer
By: PAC/SIB L.L.C.,
managing partner
By: PACIFIC REALTY ASSOCIATES, L.P.,
managing member
By: PACTRUST REALTY, INC.,
general partner
By: /s/ Peter F. Bechen
-----------------------
Name: Peter F. Bechen
----------------------
Title: President & CEO
---------------------
3
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TENANT:
MINDSPRING ENTERPRISES, INC.,
a Delaware corporation
By: /s/ John Bushfield
-------------------------
Name: John Bushfield
------------------------
Title: Vice President
-----------------------
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Exhibit 10.40
LEASE AGREEMENT
LEASE AGREEMENT (this "Lease"), entered into this 30th day of June,
1998, between RYAN SOUTHBANK II, L.L.C., a Minnesota Limited Liability Company
("Landlord"), and MINDSPRING ENTERPRISES, INC. ("Tenant").
1. PREMISES: PERMITTED USE:
Landlord, subject to the following terms and conditions, hereby leases
to Tenant the premises (the "Premises") at 3255 East Elwood Street, Suite 106,
Phoenix, Arizona, designated on the floor plan attached as EXHIBIT A, comprising
40,398 square feet of area in the building located at such address (the
"Building"). Landlord has provided Tenant with the basis of the calculation of
square footages of the Premises and of the Building, which are, respectively,
40,398 sq. ft. and 120,778 sq. ft., and which Landlord and Tenant hereby approve
for all purposes of' this Lease. The Building, the underlying land described on
EXHIBIT B (the "Land") and all improvements thereon are referred to as the
"Property".
The Premises shall be used by Tenant for general office purposes, and
for no other purpose. Tenant shall conduct and permit no activities on the
Property which create the risk of release of a Hazardous Material on, in, under
or about the Property or into the environment or violation of the Hazardous
Material Laws, or otherwise expose Landlord, Tenant, or the Property to action
by any governmental authority or third parties under the Hazardous Materials
Laws, or otherwise.
Tenant shall have the exclusive right of possession of the Premises and
the non-exclusive and reasonable use of the driveways, parking lot and other
common areas on the Property throughout the Lease Term, 24 hours each day,
subject to casualty, condemnation, force majeure or other events beyond the
control of Landlord.
2. TERM; POSSESSION:
The term of this Lease ("Lease Term") shall be approximately
seventy-two (72) months commencing on the eighty-fourth (84th) calendar day
after the issuance of a building permit for the Tenant Improvements (the "Target
Commencement Date"), subject to the provisions of this Paragraph 2, and of
Paragraph 27, and ending on the last day of the seventy-second (72nd) calendar
month thereafter, unless sooner terminated or extended as herein provided.
Notwithstanding the Target Commencement Date, the Lease Term will
commence on 'the tenth (10th) business day after Landlord notifies Tenant that a
certificate of occupancy (or equivalent governmental approval of completion) has
been issued for the Tenant Improvements (as defined in Paragraph 27) by the
appropriate governmental agency, at which time the Premises will be deemed
"ready for occupancy." The certificate of occupancy (or equivalent governmental
<PAGE>
approval of completion) may contain stipulations and conditions to be fulfilled
by Landlord so long as it permits Tenant to take possession of the Premises and
to use the Premises for the purposes contemplated by this Lease. Tenant shall
take possession of the Premises no later than thirty (30) business days after
Landlord notifies Tenant that a certificate of occupancy (or equivalent
governmental approval of completion) has been issued. The Premises shall be
considered "ready for occupancy" notwithstanding that punchlist items of a minor
nature not interfering with Tenant's intended beneficial use of the Premises
exist,, Landlord agrees to complete the punchlist items to Tenant's reasonable
satisfaction at Landlord's sole expense within a period of time that is
reasonable under the circumstances following the commencement date of the Lease
Term. Landlord and Tenant shall execute a written statement specifying (a) the
commencement date of the Lease Term and (b) the termination date of the Lease
Term prior to Tenant's taking possession of the Premises.
If the Premises are not ready for occupancy by the Tenant on the Target
Commencement Date for any reason other than Tenant's default under this Lease,
Landlord shall continue to use due diligence to complete construction and to
deliver possession of the Premises to Tenant.
Notwithstanding any provision in this Lease to the contrary:
(a) If the Premises are not ready for occupancy by Tenant on or before
the one hundredth (100th) calendar day after the issuance of a building permit
for the Tenant improvements (the "Adjusted Delivery Date") for any reason other
than Tenant's default under this Lease, Tenant Delay or force majeure, then
Tenant's sole and exclusive remedy will be to receive one (1) day of free rent
for each day from the Adjusted Delivery Date until the Premises are ready for
occupancy; and
(b) If the Premises are not ready for occupancy by Tenant on or before
the fiftieth (50th) day after the Adjusted Delivery Date for any reason other
than Tenant's default under this Lease or Tenant Delay, then Tenant shall have
the right to cancel this Lease as its sole and exclusive remedy by notice given
to Landlord on or before ten (10) days thereafter.
The Adjusted Delivery Date shall be extended one (1) day for each day
of Tenant Delay. "Tenant Delay" shall mean any delay in Landlord's commencement
or completion of the Building or the Tenant Improvements that occurs as the
result of: (i) any request by 'Tenant either that Landlord perform any work in
addition to that required under the Final Plans or that Landlord delay in the
commencement or completion of the Building or the *Tenant Improvements for any
reason, (ii) any change by Tenant to the Final Plans after final approval
thereof, (iii) any failure of Tenant to respond to any request for approval
required hereunder within the time period specified for such response or, where
no response time is specified, within a reasonable period of time after the
request, (iv) any delay in Landlord's construction
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of the Building or the Tenant Improvements caused by Tenant's activities in the
Premises, or (v) any other act or omission of Tenant that effectively delays
commencement or completion of the Building or the Tenant Improvements.
Tenant shall be entitled to enter the Premises prior to commencement of
the Lease Term, without the payment of rent of, any other sums under this Lease,
but subject to all other requirements and covenants of this Lease, for the sole
purpose of installing Tenant's furniture, fixtures and equipment. Tenant shall
use reasonable care in connection with such entry, and shall not materially
interfere with construction of the Tenant Improvements or other activity of
Landlord.
3. MONTHLY BASE RENT:
Tenant shall pay to Landlord during the Lease Term without any set-off,
deduction, or abatement (except only as otherwise expressly provided in this
Lease) monthly base rent ("Rent") calculated at the-following annual rates and
payable on the first day of each month, in advance, at the office of Landlord at
900 Second Avenue South, Suite 700, Minneapolis, Minnesota 55402, or at such
other place as may from time to time be designated by Landlord:
Years 1 - 3 $12.00 sq. ft., Net of Operating Costs
Years 4 - 6 $13.00 sq. ft., Net of Operating Costs
If the Lease Term commences on a day other than the first day of a
calendar month, Rent for such month shall be prorated on a daily basis, based on
the number of days in effect during such month, and paid on or before the
commencement of the Lease Term.
Notwithstanding the foregoing, monthly base rent will be paid for the
initial six (6) months on 15,000 square feet and for the subsequent six (6)
months on 25,000 square feet. Tenant will nevertheless be responsible for
Tenant's prorata share of Operating Costs and for all other Tenant performance
under this Lease during the abatement periods. Should tenant default in its
performance under this Lease and fail to cure the default within any grace
period expressly granted to Tenant under this Lease, the rental abatement will
become null and void and Tenant shall be liable to Landlord for immediate
repayment of all sums of rent abated under this provision without further notice
or demand from Landlord.
4. OPERATING COSTS:
Tenant shall, for the entire Lease Term, pay to Landlord as additional
rent, without any set-off, deduction or abatement (except only as otherwise
expressly provided in this Lease), Tenant's Proportionate Share of Operating
Costs incurred by Landlord in the operation, maintenance, repair and management
of the Property. Operating Cost shall be based on a one hundred percent
(100%)-occupied
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building, whether or not the entire Building is actually occupied. Tenant's
Proportionate Share of Operating Costs is a fraction whose numerator is the
square footage of the Premises and whose denominator is the square footage of
the Building.
"Operating Costs" incurred in respect to the Property are hereby
defined to include, but shall not be limited to: (i) real estate taxes and
assessments, general or special, ordinary or extraordinary, foreseen or
unforeseen, including, without limitation, ad valorum taxes, personal property
taxes, transit taxes, special or extraordinary assessments, government levies,
substitute taxes, assessments, excises, charges or fees assessed or levied in
lieu of the foregoing, and expenses and fees incurred in protesting any of the
foregoing taxes or assessments, but excluding income taxes, franchise taxes,
inheritance taxes and gift taxes; (ii) insurance premiums and costs including
deductibles for the all-risk property and casualty insurance that Landlord
maintains under this Lease; (iii) the yearly amortization of capital costs
incurred by Landlord for improvements or structural repairs to the Property
required to comply with any laws, rules or regulations of any governmental
authority having jurisdiction over the Property which are enacted after the
commencement date of this Lease, or with any changes in laws;, rules or
regulations of any governmental authority having jurisdiction over the Property
which existed on the commencement date of this Lease, but which changes were
enacted or come into effect after the commencement date of this Lease, or the
application of either, or for the purposes of reducing Operating Costs, which
shall be amortized over the useful life of such improvements or repairs, as
reasonably estimated by Landlord; (iv) costs of maintenance, repair, and
replacement of the parking lot and 'driveways (including periodic resurfacing as
needed), sidewalks, loading docks (if any), exterior light fixtures,
landscaping, common signage, other common areas and elements, and regular
painting of the exterior of the Building; (v) routine service and maintenance of
the roof (including reasonable preventive care but excluding structural
repairs/replacements); (vi) costs of electricity, water and other utilities for
the common areas; (vii) competitively priced management fees charged by
Landlord, an affiliate of Landlord or any other entity managing the Property or
any part thereof; (viii) reasonable reserves for Operating Costs; (ix)
assessments, charges, and fees levied, assessed or imposed against the Property
or any part thereof under any CC&RS or any, property owner association or
authority; (x) wages, salaries and compensation of employees, consulting,
accounting, legal, maintenance and other services; and (x) any other reasonable
cost, charge, or expense which under generally accepted accounting principles
would be regarded as a maintenance and operating expense of the Property.
In no event (except only as provided in the preceding subparagraph or
in Paragraph 8) will Operating Costs include, nor will Tenant be obligated to
pay for, (A) STRUCTURAL improvements, alterations or expenditures; (B)
depreciation; (C) Landlord's overhead; (D) repairs, alterations, additions,
improvements or replacements made to rectify or correct any defect in the
design, materials or
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workmanship of the Building or the Property (unless caused by Tenant) or to
comply with any requirements of any governmental authority; (E) damage and
repairs attributable to fire or other casualty; (F) damage and repairs paid for
under any insurance policy carried by Landlord in connection with the Property;
(G) costs incurred due to violation by Landlord of the terms and conditions of
this Lease; (H) legal fees, brokerage commissions, advertising costs or other
related expenses incurred in connection with leasing; (I) accountants' fees; (J)
sculptures or artwork; (K) fees and costs incurred in connection with the
defense of Landlord's title or interest in the Property or the Building or any
part thereof; (L) rent and other costs payable under any ground lease; and (M)
principal, interest and other amounts paid pursuant to any loan secured by the
Property or the Building or any part thereof.
As soon as reasonably practicable prior to the commencement of each
calendar year during the Lease Term, Landlord shall furnish to Tenant an
estimate of Tenant's Proportionate Share of Operating Costs for the ensuing
calendar year and Tenant shall pay, as additional rent hereunder together with
each installment of Rent, one-twelfth (1/12th) of its estimated annual share of
such Operating Costs. Attached as EXHIBIT C is Landlord's estimate of Operating
Costs for the period indicated, which is subject to adjustment hereafter, and
which Tenant shall pay, as additional rent hereunder together with each
installment of rent, one-twelfth (1/12th) of its share of such estimated
Operating Costs. As soon as reasonably practicable (but in no event later than
ninety (90) days) after the end of each calendar year during the Lease Term,
Landlord shall furnish to Tenant a statement of the actual Operating Costs for
the previous calendar year, including Tenant's share of such amount, and within
thirty (30) days thereafter Tenant shall pay to Landlord, or Landlord to Tenant,
as the case may be, the difference between such actual and estimated Operating
Costs paid by Tenant. Tenant's share of such Operating Costs for the years in
which this Lease commences and terminates shall be prorated based upon the dates
of commencement and termination of the Lease Term.
The annual statement of actual Operating Costs shall be certified to be
correct by Landlord. Landlord shall maintain full and accurate books and records
with respect to all Operating Costs for a period of not less than one (1) year.
Tenant shall have the right at any time during normal business hours
and upon reasonable prior notice to Landlord to inspect and audit Landlord's
books and records with respect to Operating Costs. Tenant shall not have the
right, however, to inspect and audit Landlord's books and records with respect
to the Operating Costs of any given year following the first (1st) anniversary
of Tenant's receipt of the statement of the actual Operating Costs for the year
in question.
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5. ADDITIONAL TAXES:
Tenant shall pay as additional rent to Landlord, together with each
installment of Rent, Tenant's Proportionate Share of Operating Costs and any
other payment made by Tenant under this Lease, the amount of any gross receipts
tax, transaction privilege or sales tax or similar tax (but excluding therefrom
any income tax) payable, or which will be payable, by Landlord, by reason of
the receipt of the Rent, Tenant's share of Operating Costs and any other
payment made by Tenant under this Lease, and adjustments thereto.
6. ASSIGNMENT, SUBLETTING:
Except for an assignment or subletting to a parent, an affiliate or a
wholly owned subsidiary of Tenant (any such entity is referred to herein as a
"Tenant Affiliate"), Tenant may not assign this Lease, or sublet all or any part
of the Premises, without the Landlord's prior written consent, which consent
shall not be unreasonably withheld, or delayed. Notwithstanding the foregoing,
it shall be a condition to any assignment or subletting (including, without
limitation, one to a Tenant Affiliate) that the assignee or sublessee shall
assume in writing the obligations of Tenant under this Lease, and such
assignment or subletting shall not relieve Tenant of its obligations to Landlord
under this Lease.
7. UTILITIES:
Landlord shall provide mains and conduits to supply phone, water,
electricity (including main panel with breakers) and sanitary sewage to the
Premises. Tenant shall pay, when due, all charges for sewer usage, garbage
disposal, refuse removal, water, electricity, telephone and/or other utility
services or energy source furnished to the Premises during the Lease Term.
Tenant may separately contract for utilities with utility providers so long as
Tenant pays all associated costs and expenses.
8. CARE AND REPAIR OF PREMISES:
Tenant shall, at all times throughout the Lease Term, including all
renewals and extensions, and at its sole expense, keep and maintain the Premises
in good repair and in a clean, safe, orderly, sanitary and first class condition
in compliance with all applicable laws, codes, ordinances, rules and
regulations, free of any accumulation of dirt and rubbish,, and Tenant shall
arrange its own trash removal. Tenant's obligations shall include, but not be
limited to, the maintenance, repair, and replacement, if necessary, of interior
lighting, HVAC, electrical and plumbing systems (including without limitation
sewer lines), fixtures and equipment, restrooms, interior walls and ceilings,
partitions, doors and windows, regular painting of the interior, and the
replacement of all broken glass from doors and windows unless breakage is due to
a defect in the design, materials or workmanship of the Building (excluding
Tenant's design errors), to a breach of Landlord's own
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repair and maintenance obligations under this Lease, or to Landlord's
negligence. Tenant's responsibility in respect to the electrical and plumbing
systems is limited to system components within the Premises and to any damage to
the systems that is caused by Tenant. Tenant shall cause to be performed by a
competent service company, preventive maintenance of the HVAC units serving the
Premises as recommended by the equipment manufacturer. When used in this
provision, the term "repairs" shall include ordinary and customary replacements
or renewals when necessary, and all repairs made by Tenant shall be equal in
quality and class to the original work.
Tenant shall not be required to perform or pay for any structural
expenditure on the Property in order to comply with (i) any law, ordinance, rule
or regulation; or (ii) with any recommendation of Landlord's insurance rating
organization, unless the same is required as the direct result of Tenant's
particular use of the Premises (as opposed to Tenant's mere occupancy of the
Premises or Tenant's conduct of business, generally), EXCEPT to the extent that
Tenant is required to pay Tenant's Proportionate Share of amortized capital
expenditures under Paragraph 4.
If Tenant fails, refuses or neglects to maintain or repair the Premises
and the Property as required in this Lease for ten (10) days after notice shall
have been given Tenant, Landlord may make such repairs without liability to
Tenant for any loss or damage that may accrue to Tenant's merchandise, fixtures
or other property or to Tenant's business by reason thereof (except that
Landlord shall be liable for its own negligence or willful misconduct), and upon
completion thereof, Tenant shall pay to Landlord all competitively priced costs
plus eight percent (8%) for overhead incurred by Landlord in making such repairs
within ten (10) days after Tenant receives from Landlord the bill therefor.
Landlord shall be responsible for maintenance, repair and replacement
of the parking lot, driveways, sidewalks, loading docks (if any), exterior light
fixtures, landscaping, and other common areas located on the Property, the
structural elements of the roof and shall keep the foundation (concrete slab
floor), exterior walls, and all other structural portions of the Property and
the Building (not otherwise designated to be maintained and repaired by Tenant)
in good repair and in a clean, safe, sanitary and first class condition and in
compliance with all applicable laws, codes, ordinances, rules and regulations,
and if necessary or required by proper governmental authority, make
modifications or replacements thereof, except that Landlord shall not be
required to make any such repairs, modifications or replacements which become
necessary or desirable by reason of the negligence or willful misconduct of
Tenant, its agents, servants or employees, by reason of anyone illegally
entering or upon the Premises, which repairs, modifications or replacements
shall be made by Tenant at its sole expense. Landlord shall also remedy, at
Landlord's sole expense, any latent defects in the Premises existing at the
beginning of the Lease Term as well as damage to the Premises caused by the
willful act or negligence of Landlord or its agents; Landlord
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shall also repair any defects or failures in building systems to the extent the
same were not constructed in accordance with the terms of this Lease or
applicable law. Notwithstanding the foregoing, Landlord shall have no liability
under this paragraph for any repair, maintenance or replacement required because
of Tenant's own design error, and nothing in this paragraph will alter Tenant's
obligation to pay Operating Costs to Landlord under Paragraph 4 even though this
paragraph may impose on Landlord the obligation of performing the necessary
maintenance, repair or replacement.
9. COVENANTS OF TENANT:
Tenant agrees that it shall:
(a) Observe (i) such reasonable and customary rules and regulations as
from time to time may be put in effect by Landlord, provided that Tenant has
received reasonable prior notice of the same, for the general safety of Landlord
and the occupants of the Building and for the integrity and reputation of the
Property; and (ii) the restrictions and requirements of CC&RS now or hereafter
applicable to the Property or any portion thereof.
(b) Give Landlord access to the Premises at all reasonable times, and
upon reasonable prior notice (but not less than one (1) business day, except in
case of emergency) from Landlord, without change or diminution of rent so long
as Landlord complies with the terms of this Lease, to enable Landlord to examine
the same and to make such repairs, additions and alterations as Landlord is
entitled or required to make under the terms of this Lease, and to exhibit the
Premises to prospective purchaser of the Property or lenders thereon; and during
the one hundred twenty (120) days prior to the expiration of the term, to
exhibit the Premises to prospective tenants. Landlord may place upon the
Building any "For Sale" and "For Lease" signs. Landlord will schedule such
entries with Tenant and will use reasonable efforts to minimize disruption of
Tenant's business caused by such entry and Landlord will comply with Tenant's
reasonable security procedures in connection with such entry. Tenant will have
the right to be present whenever Landlord comes on the Premises under this
paragraph.
(c) Upon the expiration or earlier termination of this Lease in any
manner whatsoever, excepting only termination because of Tenant's default under
this Lease (unless Landlord elects the contrary in writing), remove Tenant's
furniture, fixtures and equipment, generators, computers, telephones and
switches, and telecommunications equipment (to the extent the same was installed
by Tenant) and Tenant's other goods, inventory and effects and those of any
other person claiming under Tenant, and quit and deliver the Premises and the
Property to Landlord peaceably and quietly in as good order and condition as the
same are now in or hereafter may be put in by Landlord or Tenant, reasonable use
and wear thereof, and repairs which are Landlord's obligation, excepted.
Furniture, fixtures,
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equipment, and all other property not removed by Tenant at the termination of
this Lease shall be considered abandoned, and Landlord may dispose of the same
as it deems expedient.
(d) Not place signs on or about the Premises or the Property without
first obtaining Landlord's written consent thereto, which consent will not be
unreasonably withheld or delayed. All signs must comply with applicable laws,
ordinances, and regulations, all CC&RS and Landlord's reasonable sign criteria.
Tenant shall have "major tenant" status for signage purposes under the Southbank
Comprehensive Sign Program dated June 30, 1988, and if authorization of the
governing body under the Southbank Comprehensive Sign Program is required,
Landlord will make every reasonable effort to obtain such authorization for
Tenant, such that Tenant will have three exterior signs on the building facing
each of the three major roadways, which are University Drive, Ellwood Street,
and interstate 10. Landlord agrees that placement of these three signs is
acceptable under Landlord's sign criteria. EXHIBIT D sets forth "major tenant"
criteria and associated signage rights.
(e) Not overload, damage or deface the Premises or do any act which may
make void or voidable any insurance on the Premises or the Building, or which
may render an increased or extra premium payable for insurance.
(f) Not make any alterations or additions to the Property the cost of
which would exceed $10,000.00 without obtaining the prior written approval of
the Landlord, which shall not be unreasonably withheld or delayed. All
alterations, additions or improvements (including carpeting or other floor
covering which has been glued or otherwise affixed to the floor) which may be
made by Landlord upon the Property, except movable office furniture, equipment
and generators, computers, telephone and telecommunication systems, shall be the
property of Landlord, and shall remain upon and be surrendered with the
Premises, as a part thereof, at the termination of this Lease.
(g) Keep the Premises and the Property free from any mechanics',
materialmen's, contractors' or other liens arising from, or any claims for
damages growing out of, any work performed, materials furnished or obligations
incurred by or on behalf of Tenant. Provided, however, that Tenant shall have
the right to contest any such lien, in which event such lien shall not be
considered a default under this Lease until the existence of the lien has been
finally adjudicated and all appeal periods have expired. Tenant shall indemnify,
defend, and hold harmless Landlord for, from and against any such lien, or claim
or action thereon, reimburse Landlord within ten (10) business days after demand
therefor by Landlord for costs of suit and reasonable attorneys' fees incurred
by Landlord in connection with any such lien, claim or action, and, upon written
request of Landlord, provide Landlord with a bond in an amount and under
circumstances necessary to obtain a release of the Premises or the Property from
such lien. Notwithstanding the foregoing,
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Tenant will have no responsibility for the liens of contractors or others hired
exclusively by and for Landlord.
(h) Indemnify, defend and hold Landlord harmless for, from and against
all claims, obligations, liabilities, costs, expenses and reasonable attorneys'
fees and court costs which Landlord may suffer or incur by reason of Tenant's
breach of this Lease, or by reason of the negligence or willful misconduct of
Tenant or its employees, agents, invitees or licensees on or about the Premises
or the Property. Tenant shall comply with all applicable laws, regulations,
ordinances and other legal requirements in connection with its use and occupancy
of the Premises.
10. PARKING AND DRIVES:
Subject to the refinements, if any, in Paragraph 26 of the Rider to
this Lease, Tenant, its employees, and invitees shall have the non-exclusive
right to use the common driveways and parking lots with the other tenants and
customers of the Building. The use of such driveways and parking facilities is
subject to such reasonable rules and regulations as Landlord may impose. Tenant
further agrees not to use, or permit the use by employees, the driveways,
parking or truck-loading areas for the overnight or any other storage, or for
the maintenance or repair or cleaning, of automobiles or other vehicles without
the written permission of Landlord. Tenant shall not place or store goods,
materials, supplies, equipment, automobiles or other vehicles, or other property
of Tenant in the common areas, common driveways or parking lots or anywhere else
in the Project or in the Building, excepting wholly with the Premises.
11. CASUALTY LOSS:
Subject to the qualifications in this Paragraph 11, in case of damage
to the Premises or the Building by fire or other casualty, Tenant shall give
immediate notice to Landlord, who shall then cause the damage (including any
damage to the Tenant Improvements) to be repaired with reasonable speed, at the
expense of the Landlord, subject to reasonable delays caused by force majeure
events and other similar delays beyond the reasonable control of Landlord. Rent
and other charges payable by Tenant hereunder shall abate proportionately during
any period in which, by reason of such casualty, Tenant reasonably determines
that there is substantial interference with the operation of Tenant's business
in the Premises. Such abatement shall continue for the period commencing with
the date of such damage or destruction and ending with the date that business
may be fully resumed on the Premises, as reasonably determined by Tenant. In the
event such damage results solely from the act, fault or neglect of Tenant,
Tenant's employees or agents, there shall be no abatement of rent.
In the event the cost to repair the damage shall exceed twenty-five
percent (25%) of the full replacement value of the Building, or if the damage
shall be so
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extensive that repairs cannot be completed within ninety (90) days from the date
of issuance of required permits (permitting to take no more than 60 days and
Landlord to use diligent efforts to obtain same), then Landlord shall have the
right to terminate this Lease, as of the date of such damage, by notice given to
Tenant within thirty (30) days following the casualty loss. If this Lease is
terminated, Rent and Operating Costs shall be adjusted to the date of such
damage and Tenant shall vacate the Premises.
Tenant hereby waives any statutory right to terminate this Lease or to
have a reduction of rent in the event of casualty loss or destruction, the
rights of tenant in such instance to be determined by this Paragraph 11.
Notwithstanding the foregoing two paragraphs, Landlord shall have no obligation
to repair or rebuild the Premises or any portion of the Building unless Landlord
has received sufficient insurance proceeds for that purpose, free of any claim
by any lender on the Property, or if the casualty loss occurs in the last
eighteen (18) months of the Lease Term.
12. CONDEMNATION:
If all or a portion or the Premises or the Property is taken by eminent
domain or transferred under threat of such taking, this Lease shall
automatically terminate as of the date of taking only with respect to the
portion of the Premises or Property so taken. If a portion of the Premises or
the Property is taken by eminent domain such that the Premises are no longer
suitable for Tenant's intended use, in Tenant's reasonable discretion, Tenant
shall have the right to terminate this Lease as of the date of taking by giving
written notice thereof to Landlord within ten (10) days after such date of
taking. If Tenant does not elect to terminate this Lease, Landlord shall, at its
expense, promptly restore the Premises and the Property (including the Tenant
Improvements), exclusive of any improvements or other changes made by Tenant, to
as near the condition which existed immediately prior to the date of taking as
reasonably possible, and the rent and other charges payable under this Lease
shall abate in the same manner as described in Paragraph 11.
All damages awarded for a taking of the Property under the power of
eminent domain shall belong to and be the exclusive property of Landlord,
whether such damages be awarded as compensation for diminution in value of the
leasehold estate hereby created or to the fee of the Property; provided,
however, that Landlord shall not be entitled to any separate award made to
Tenant for the value and cost of Tenant's personal property, fixtures and moving
expenses.
13. MUTUAL RELEASE/WAIVER OF SUBROGATION, INSURANCE:
Landlord and Tenant each hereby release the other from any and all
liability or responsibility for any direct or consequential loss, injury or
damage during the Lease Term, to the extent such loss, injury or damage is
covered by the terms of any
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insurance policy maintained by Landlord or Tenant. Inasmuch as the above mutual
waivers will preclude the assignment of any claim by way of subrogation (or
otherwise) to an insurance company (or any other person), each party hereto
agrees if required by such policies to give to each insurance company which has
issued to it all risk and other property insurance, written notice of the terms
of said mutual waivers, and to have such policies properly endorsed, if
necessary, to prevent the invalidation of said insurance coverage by reason of
the waivers.
Tenant shall not do anything in or about the Premises or the Property
which will increase insurance rates on the Premises or the Property. If Landlord
shall consent to such use, Tenant agrees to pay as additional rental any
increase in premiums for all risk insurance resulting from the business carried
on in the Premises by Tenant. Tenant shall, at its own expense, comply with the
requirements of insurance underwriters and insurance rating bureaus and
governmental authorities having jurisdiction, except to the extent this Lease
requires Landlord to comply with the same.
Tenant shall maintain in full force and effect during the term hereof,
a policy of public liability insurance under which Landlord and Tenant shall be
named insureds. The minimum limits of liability of such insurance shall be
$2,000,000.00 combined single limit as to bodily injury and property damage.
Tenant shall also carry at its own cost business interruption insurance with
coverage and terms that are commercially reasonable.
Tenant may provide any coverage required under this Lease through
blanket policies.
Landlord shall, during the Lease Term, maintain the following
insurance:
(a) Property insurance insuring the Building and the Premises
(including all installations and fixtures, but excluding Tenant's personal
property) against loss or damage due to the perils of fire and other casualties
covered within the classification of fire and extended coverage, vandalism,
malicious mischief, special extended coverage (All Risk), sprinkler leakage and
water damage. Such policies shall provide for loss payable to Landlord. Such
policies shall include coverage equal to the full replacement cost of the
Building, including the Premises (replacement cost new, including coverage for
the cost of debris removal and coverage for the cost of complying with building,
zoning, safety, land use and other laws as a result of any casualty or loss) as
to prevent the application of co-insurance provisions. Such policies may include
rent loss and difference in conditions coverage.
Property insurance required to be carried by Landlord hereunder shall
be obtained from companies maintaining at the commencement of the policy term a
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"General Policyholders Rating" of at least B+ and a financial rating of at least
Class V, as set forth in the most current issue of "Best's Insurance Guide."
The party with a duty to maintain insurance hereunder (the "Insured
Party") agrees to deliver to the other party certificates of insurance
evidencing such coverage. Each policy shall contain a provision requiring thirty
(30) days' written notice to both parties before cancellation of the policy can
be effected. The Insured Party shall provide the other party, at least fifteen
(15) days prior to the expiration of such policies, with evidence of renewals or
"insurance binders" evidencing renewal thereof.
14. HAZARDOUS MATERIALS:
(a) As used in this Lease, the term "Hazardous Material" means any
explosives, radioactive materials, or substances defined as or included in the
definition of "hazardous substances", "hazardous wastes", "infectious wastes",
"hazardous materials" or "toxic substances" now or subsequently regulated under
any past, present, or future federal, state or local laws or regulations or
ordinances ("Hazardous Materials Laws") including, without limitation, oil,
petroleum-based products, medical wastes, paints, solvents, lead, mercury,
cyanide, DDT, acids, pesticides, asbestos, radon, PCBS, similar compounds, and
other contaminants.
(b) Excepting the reasonable and prudent use of materials essential to
the processes in Tenant's operations, and the incidental storage thereof, which
shall be in full compliance with all Hazardous Material Laws, Tenant shall not
cause or permit any Hazardous Material to be generated, produced, brought upon,
used, stored, treated, discharged, released, spilled or disposed of on, in,
under or about the Premises or the Property, or into the groundwater or the
environment, by Tenant, its affiliates, sublessees, assignees, or the employees,
agents, invitees, licensees, contractors or representatives of any of the
foregoing. Tenant shall conduct no business on the Premises or the Property
whose primary purpose is the generation, production, use, storage, treatment,
disposal, sale, conveyance or transfer of any Hazardous Material. The use of any
Hazardous Material on the Premises or the Property shall be a secondary function
incidental to Tenant's business. Tenant shall not cause or permit any
above-ground or underground storage tank or container to be located on, in,
under or about the Premises or the Property without Landlord's prior written
consent, full compliance with all Hazardous Materials Laws, and adherence to all
other reasonable requirements of Landlord protecting the Premises, the Property,
the groundwater and the environment.
(c) Tenant shall indemnify, defend and hold Landlord harmless for, from
and against all actions (including, without limitation, remedial or enforcement
actions of any kind, administrative or judicial proceedings, and orders or
judgments arising out of or resulting therefrom), costs, claims, damages,
expenses (including,
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without limitation, attorneys', consultants' and experts' fees, court costs and
amounts paid in settlement of any claims or actions), fines, forfeitures or
other civil, administrative or criminal penalties, injunctive or other relief
(whether or not based upon personal injury, property damage, or contamination
of, or adverse effects upon, the environment, water tables or natural
resources), liabilities or losses arising from a breach of the provisions of
this Paragraph 14, or from any release of a Hazardous Material on, in, under or
about the Property, or into the groundwater or the environment, by Tenant, its
affiliates, sublessees, assignees, or the employees, agents, invitees,
licensees, contractors or representatives of any of the foregoing.
(d) In the event that Hazardous Materials are discovered upon, in, or
under the Property, and any governmental agency or entity having jurisdiction
over the Property or any Hazardous Material Law requires the removal or
remediation of such Hazardous Materials, (i) Tenant shall be responsible for
removing and remediating those Hazardous Materials arising out of or related to
(x) any breach of the provisions of clause (b) above or (y) any act or omission
of Tenant, it affiliates, sublessees, assignees or the employees, agents,
invitees, licensees, contractors or representatives of any of the foregoing on
or about the Property, and (ii) Landlord shall be responsible for removing and
remediating any Hazardous Materials released on, in, under or about the Property
by Landlord or Landlord's employees, agents, invitees, licensees, contractors or
representatives, at Landlord's expense. Notwithstanding the foregoing, Tenant
shall not take any remedial action in or about the Premises or the Property
without first notifying Landlord of Tenant's intention to do so and affording
Landlord the opportunity to protect Landlord's interest with respect thereto.
(e) Tenant immediately shall notify Landlord in writing of: (i) any
spill, release, discharge or disposal of any Hazardous Material in, on or under
the Premises, the Property or any portion thereof; (ii) any enforcement,
cleanup, removal or other governmental or regulatory action instituted,
contemplated, or threatened (if Tenant has notice thereof pursuant to any
Hazardous Materials Laws; (iii) any claim made or threatened by any person
against Tenant, the Premises, or the Property relating to damage, contribution,
cost recovery, compensation, loss or injury resulting from or claimed to result
from any Hazardous Materials; and (iv) any reports made to any governmental
agency or entity arising out of or in connection with any Hazardous Materials
in, on, under or about or removed from the Premises or the Property, including
any complaints, notices, warnings, -reports or asserted violations in connection
therewith. Tenant also shall supply to Landlord as promptly as possible, and in
any event within five (5) business days after Tenant first receives or sends the
same, copies of all claims, reports, complaints, notices, warnings or asserted
violations relating in any way to the Premises, the Property or Tenant's use or
occupancy thereof.
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Without limiting the foregoing indemnity, Tenant shall be responsible
to pay for, or reimburse Landlord for, the cost of any investigations, studies,
cleanup or corrective action initiated or undertaken on account of any action or
inaction of Tenant in violation of 'any Hazardous Materials Laws at or affecting
the Premises and/or Property, or by reason of any other act or omission of
Tenant in breach of this Lease.
(g) Tenant will provide Landlord with a copy of any environmental
audit, study or report concerning the Property or any part thereof within the
possession or control of Tenant.
(h) Landlord represents and warrants to Tenant that the Premises
contains no Hazardous Materials (including, without limitation, asbestos) as a
result of Landlord's development of the Property,, excepting insubstantial
amounts thereof, if any, in quantities not having materially adverse effects on
the environment or upon the health and safety of persons. Landlord is making no
representation or warranty to Tenant in respect to the Land other than the
assurance that Landlord has not discharged, released, spilled or disposed of a
Hazardous Material on, in, under or about the Land.
(i) The respective rights and obligations of Landlord and Tenant under
this Paragraph 14 shall survive the expiration or termination of this Lease or
Tenant's non-occupancy of the Premises.
15. DEFAULT; WAIVER OF TRIAL BY JURY:
In the event Tenant fails to perform any of the terms or conditions
hereof (but excluding the payment of rental or other monetary sums due under
this Lease) and such failure continues for thirty (30) days after written notice
of default from Landlord, provided, however, that if such failure cannot
reasonably be corrected, even by prompt and diligent action, within thirty (30)
days, and if Tenant commences curing such failure within such 30-day period and
thereafter diligently pursues the cure to completion, Tenant shall have a
reasonable period of time after the thirtieth (30th) day to continue curing, or
in the event Tenant fails to pay any rental or other sum of money due hereunder
and such failure continues for ten (10) days after notice thereof to Tenant,
time being declared to be of the essence, and no further notice of default being
required, Landlord may resort to any and all legal remedies or combination of
remedies which Landlord may desire to assert including but not limited to one or
more of the following: (1) re-enter the Premises in the manner provided by law,
(2) declare this Lease at an end and terminated, (3) sue for the rent due and to
become due under the Lease, and for any damages sustained by Landlord and (4)
continue this Lease in effect and relet the Premises on such terms and
conditions as Landlord may deem reasonably advisable with Tenant remaining
liable for the monthly rent and all other sums payable under this Lease, plus
the reasonable cost of obtaining possession of the Premises and of reletting the
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Premises, including broker's commissions, and of any repairs and alterations
necessary to prepare the Premises for reletting, less the rentals actually
received from such reletting, if any. Landlord shall use reasonable efforts to
mitigate damages and relet the Premises. Any recovery of future rent from
Tenant, will be discounted by applying the Federal Reserve rate of the Federal
Reserve Bank in San Francisco at the time of award, plus one percent (1%).
No action of Landlord shall be construed as an election to terminate
the Lease or to accept a surrender of the Premises unless written notice of such
intention be given to Tenant. Tenant agrees to pay as additional rental all
reasonable attorneys' fees and other costs and expenses incurred by Landlord in
enforcing any of Tenant's obligations under this Lease. The mention in this
Lease of any remedies shall not be deemed to be a waiver by Landlord of any
other or further remedies available at law or in equity or under other
provisions of this Lease, all of which are expressly preserved and shall be
available to Landlord including, without limitation, Landlord's statutory lien
rights.
The prevailing party in any dispute arising under this Lease shall be
entitled to recover from the other party all reasonable attorneys' fees and
other costs and expenses incurred by the prevailing party, such fees to be set
by a court and not a jury. Any amount due from either party hereunder which is
not paid when due shall bear interest at the rate of twelve percent (12%) per
annum from the due date until paid. The mention in this Lease of any remedies
shall not be deemed to be a waiver by Tenant of any other or further remedies
available at law or in equity from time to time, all of which are expressly
preserved and shall be available to Tenant.
Neither acceptance of Rent by Landlord, nor acceptance of partial
payment of Rent or other partial performance, with or without knowledge of
breach, nor failure of Landlord to take action on account of any breach hereof
or to enforce its rights hereunder shall be deemed a waiver of any breach, and
absent written notice or consent, the breach shall be a continuing one.
If Landlord defaults under this Lease, Tenant shall give Landlord
written notice of the default and Landlord shall have (a) ten (10) days to
correct the same, if the default can be corrected by the payment of money, and
(b) thirty (30) days to correct the same, if the default cannot be corrected by
the payment of money, provided that if a non-monetary default cannot reasonably
be cured within such 30-day period, and if Landlord is proceeding with due
diligence to cure the default, Landlord will have such additional time as may be
reasonably necessary to cure the default so long as Landlord promptly commences
such cure within the 30-day period. The holder of any mortgage or deed of trust
on the Property shall have the right to cure any default of Landlord with equal
cure periods. Such lender's cure period will begin to run upon its receipt of
written notice from Tenant setting forth the alleged default of Landlord,
provided Landlord or such lender has given Tenant written notice of the lender's
address. If Landlord or its lender fails to pay any
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amounts due Tenant within the applicable time period or to otherwise cure any
default of Landlord within the time period specified above, then Tenant shall
have as its sole and exclusive remedy the right to cure any default at
Landlord's expense and seek recovery of such sum from Landlord by an action at
law, except that nothing herein shall limit Tenant's right to equitable relief
(including injunction or specific performance) in the event Landlord and its
lender fail to cure within the applicable time period.
Tenant agrees to look solely to Landlord's interest in the Property for
the recovery of any judgment from Landlord or the payment of any obligation,
liability or claim under, arising out of, or relating to this Lease, it being
hereby agreed that, except to the extent of Landlord's interest in the Property,
Landlord, the assets of Landlord, or if Landlord is a partnership, its partners
whether general or limited, or if Landlord is a corporation, Landlord, its
directors, officers or shareholders, or if Landlord is a limited liability
company, Landlord and its members and managers shall never be liable for any
judgments, claims, obligations, or liabilities under, arising out of, or
relating to this Lease.
LANDLORD AND TENANT, EACH BEING FULLY INFORMED BY THEIR RESPECTIVE
COUNSEL OF THE LEGAL CONSEQUENCES, WAIVE THE RIGHT TO TRIAL BY JURY.
16. NOTICES:
All bills, statements, notices or communications which Landlord or
Tenant may desire or be required to give to the other shall be deemed
sufficiently given or rendered if in writing and either delivered to the
recipient personally or by facsimile transmission, or sent by a nationally
recognized overnight courier service, or sent by registered or certified U.S.
mail, postage prepaid, return receipt requested, addressed to the recipient at
the address set forth below, and the time of the giving of such notice or
communication shall be deemed to be (i) the time when the same is delivered to
the recipient, if delivered personally or by facsimile transmission, (ii) the
next business day, if sent by overnight courier, or (iii) three (3) business
days after deposit in the mail as herein provided. Notices shall be sent to the
following addresses:
Tenant:
Mindspring Enterprises, Inc.
1430 West Peachtree Street, N.W., Suite 400
Atlanta, Georgia 30309
Attn: Kimberly L. Adamson
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with a copy to:
Robert J. Augustine
Holland & Knight
1201 West Peachtree Street, Suite 2000
Atlanta, Georgia 30309
Landlord:
Ryan Southbank II, L.L.C.
c/o Ryan Companies US, Inc.
3200 East Camelback Road, Suite 129
Phoenix, Arizona 85018
Attn: James D. Tubbs
with a copy to:
Gary H. Fry
Hienton, Miner, Fry & Kurtz, P.C.
3636 North Central Avenue, Suite 520
Phoenix, Arizona 85012
Any notice by Tenant to Landlord must be given in the same manner, but
addressed to Landlord at the address set forth above, or in case of subsequent
change upon notice given, to the latest address furnished
17. HOLDING OVER:
Should Tenant continue to occupy the Premises after expiration of the
Lease Term with Landlord's express written consent, such tenancy shall be from
month to month (and in no event for any longer term) at a rental rate equal to
the rate in force immediately preceding expiration of the Lease Term. If
Tenant's holdover is without Landlord's express written consent, Landlord may
re-enter and take possession of the Premises immediately and have all other
remedies set forth in this Lease, in which event Tenant shall pay for each day
of occupancy after the expiration of the Lease Term a sum equal to one hundred
fifty percent (150%) of the monthly rent for the last month of the Lease Term,
prorated on a daily basis and based upon a thirty-day month.
18. SUBORDINATION:
This Lease and the rights of Tenant shall be and are subject and
subordinate at all times to the lien of any first mortgage or deed of trust now
or hereafter in force against the Property, provided, however, that (i) in the
case of any mortgage or deed of trust encumbering the Property as of the date of
this Lease, Landlord will
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obtain, prior to the commencement of the Lease Term, an agreement between the
beneficiary or mortgagee thereof and Tenant that so long as no default exists
hereunder and Tenant attorns to Landlord's successor pursuant to the provisions
of this Lease, no termination of such encumbrance (or any proceeding in
connection therewith) shall disturb Tenant's possession of the Premises and this
Lease shall remain in full force and effect; and (ii) in the case of any first
mortgage or deed of trust encumbering the Property after the date hereof, the
beneficiary or mortgagee thereof agrees, either in such encumbrance or in a
separate agreement with Tenant, that so long as no default exists under this
Lease and Tenant attorns pursuant to Landlord's successor pursuant to the
provisions of this Lease, no foreclosure of such encumbrance (or any proceeding
in connection therewith) shall disturb Tenant's possession of the Premises and
this Lease shall remain in full force and effect. Tenant at any time and from
time to time, upon not less than ten (10) days' prior written notice from
Landlord shall execute such further instruments confirming the subordination of
this Lease to the lien of any such first mortgage or deed of trust as shall be
requested by Landlord.
19. ESTOPPEL CERTIFICATE:
Tenant shall at any time and from time to time, upon not less than ten
(10) days' prior written notice from Landlord, execute, acknowledge and deliver
to Landlord and any other parties designated by Landlord, a statement in writing
certifying (a) that this Lease is in full force and effect and is unmodified and
that Tenant has taken possession of the Premises and has accepted and approved
the condition of the Premises and the Tenant Improvements (or, if modified, or
disapproved, stating the nature of such modification or disapproval), (b) the
date to which the rental and other charges payable hereunder have been paid in
advance, if any, (c) that there are, to Tenant's actual knowledge, no uncured
defaults on the part of Landlord hereunder (or specifying such defaults if any
are claimed), and (d) any additional statement commonly included in a reputable
institutional lender's estoppel certificate in similar transactions. Such
statement may be furnished to and relied upon by any prospective purchaser,
tenant or encumbrancer of all or any portion of the Property and shall include
any further statement that a good faith purchaser, tenant or encumbrancer would
reasonably require.
Landlord shall at any time and from time to time, upon not less than
ten (10) days' prior written notice from Tenant, execute, acknowledge and
deliver to Tenant and any other parties designated by Tenant, a statement in
writing certifying (a) that this Lease is in full force and effect and is
unmodified (or, if modified, stating the nature of such modification), (b) the
date to which the rental and other charges payable hereunder have been paid in
advance, if any, and (c) that there are, to Landlord's actual knowledge, no
uncured defaults on the part of Tenant hereunder (or specifying such defaults if
any are claimed), and (d) any additional statement commonly included in a
reputable institutional lender's estoppel certificate in similar transactions.
Such statement may be furnished to and relied
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<PAGE>
upon by any prospective sublessee, assignee or encumbrancer of all or any
portion of Tenant's interest in the Property and shall include any further
statement that a good faith sublessee, assignee or encumbrancer would reasonably
require.
20. SERVICE CHARGE:
Tenant agrees to pay a service charge equal to one percent (1%) per
month or any portion thereof of any payment of Rent payable by Tenant hereunder
which is not paid within ten (10) business days from the date due, or of $5.00
per month or portion thereof, whichever is greater. Such service charge shall
only be assessed against Tenant if Tenant has failed to pay the Rent within ten
(10) business days of the date due more than twice in a 12-month period during
the Lease Term, and Landlord has delivered to Tenant notice of such failure more
than twice in such 12-month period.
21. BINDING EFFECT:
The word "Tenant", wherever used in this Lease, shall be construed to
mean tenants in all cases where there is more than one tenant, and the necessary
grammatical changes required to make the provisions hereof apply to
corporations, partnerships, limited liability companies, or individuals, men or
women, shall in all cases be assumed as though in each case fully expressed.
Each provision hereof shall extend to and shall, as the case may require, bind
and inure to the benefit of Landlord and Tenant and their respective heirs,
legal representatives, successors and assigns, provided that this Lease shall
not inure to the benefit of any heir, legal representative, transferee or
successor of Tenant except as expressly provided in this Lease.
Landlord may assign its right, title, and interest in the Property and
under this Lease, and such assignment shall thereupon automatically terminate
Landlord's future obligations under this Lease, provided that the assignee shall
assume, in writing, the Landlord's obligations under this Lease arising from the
date of assignment.
22. QUIET ENJOYMENT:
So long as Tenant is not in default under this Lease (after expiration
of any applicable notice and cure periods), Tenant shall peaceably and quietly
have, hold and enjoy the Premises during the Lease Term, subject to force
majeure, casualty, condemnation and other events beyond Landlord's reasonable
control. Notwithstanding the foregoing, defects in Landlord's title, foreclosure
or other enforcement of Landlord's lender's lien shall not be excluded from
Landlord's covenant of quiet enjoyment.
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<PAGE>
23. BROKER:
If and when Tenant takes possession of the Premises, Landlord shall pay
a leasing commission to CB Commercial Real Estate Group, Inc., in the amount of
five percent (5.0%) for years one (1) through five (5) and three (3.0%) for year
six (6) of the rent payable hereunder. Each party hereto represents to the other
that, except for CB Commercial Real Estate Group, Inc. (with respect to Tenant)
and Lee & Associates (with respect to Landlord), it has not authorized any
broker or finder to act on its behalf in connection with this Lease and that
such party has not dealt with any broker, agent, or finder purporting to act on
behalf of any other party. Landlord shall pay any commissions due Lee &
Associates. Each party hereto agrees to indemnify and hold harmless the other
party from and against any and all claims, losses, damages, costs, or expenses
of any kind or character arising out of or resulting from any agreement,
arrangement, or understanding (except as set forth above with respect to Agent)
alleged to have been made by such party or on its behalf with any broker or
finder in connection with this Lease or the transaction contemplated hereby.
24. RIDER:
The provisions of the attached Rider shall be an integral part of this
Lease.
RYAN SOUTHBANK II, L.L.C. MINDSPRING ENTERPRISES, INC.
a Minnesota Limited Liability Company
By: RYAN PROPERTIES, INC.
Its: Managing Member
By: /s/ [signature illegible]
---------------------------
By: /s/ [signature illegible] Its: VICE PRESIDENT, HR
------------------------- -------------------------
Its: VP
-------------------
LANDLORD TENANT
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<PAGE>
RIDER TO LEASE AGREEMENT
DATED JUNE 30TH 1998
BETWEEN
RYAN SOUTHBANK II, L.L.C., A LIMITED LIABILITY COMPANY,
AS LANDLORD,
AND
MINDSPRING ENTERPRISES, INC.,
AS TENANT
THIS RIDER is an integral part of the attached Lease Agreement between
Ryan Southbank II, L.L.C., a Limited Liability Company, as Landlord, and
Mindspring Enterprises, Inc., as Tenant. In the event of any conflict between
the two, the terms of this Rider will govern. This Rider and the attached Lease
Agreement are called the "Lease."
25. FINANCIAL INFORMATION:
Tenant represents and warrants to Landlord that there has been no
material adverse change in the financial condition of Tenant between the
effective date of the information delivered to Landlord and the date of this
Lease. Tenant acknowledges that, but for the truth and completeness of the
financial information given to Landlord, as well as the truth of the foregoing
representations, Landlord would not have entered into this Lease with Tenant.
26. PARKING:
At no additional charge to Tenant during the term of this Lease and any
renewals, Landlord will provide Tenant with six (6) parking spaces for every one
thousand (1,000) square feet of space in the Premises, thirty (30) of which will
be covered (if Tenant elects to have covered spaces) and reserved and the rest
uncovered and unreserved, and all of which shall be in the general parking areas
within the Project as shown on EXHIBIT A. The cost for constructing the covered
spaces (if Tenant elects to have covered spaces) (which Landlord estimates to be
approximately $30,000) may, at Tenant's election, be charged against the Tenant
Improvement Allowance. Tenant's parking privileges are contingent on Tenant's
full compliance with the terms and conditions of this Lease. While Tenant is in
default hereunder, Tenant's parking privileges will be suspended without further
demand or notice from Landlord.
27. TENANT IMPROVEMENTS AND OTHER INCENTIVES:
27.1 Landlord shall provide, at Landlord's sole cost and expense, a
base building (the "Building") with parking lot, driveways, sidewalks, exterior
lighting and landscaping. Attached as EXHIBIT E is a description of the
Building. Landlord
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shall also provide an Allowance for Tenant Improvements to the Premises not to
exceed twenty-seven dollars ($27.00) per square foot. Notwithstanding any
provision in this Lease to the contrary, Tenant shall have the right to apply
the Allowance for Tenant Improvements (not to exceed $27.00 per square foot) to
Tenant Improvements and/or to the moving allowance, lease assumption, signage
and parking allowances in such combination as Tenant may select, but without
increase in Landlord's total obligation, which shall not exceed $27.00 per
square foot.
27.2 If plans and specifications for the Tenant Improvements are not
attached to this Lease (the "Final Plans"), Landlord and Tenant will mutually
develop the Final Plans before Landlord will commence construction, and both
parties agree to negotiate in good faith to determine the Final Plans. Landlord
and Tenant shall determine the Final Plans within Thirty (30) days from the date
of this Lease. Agreement on the Final Plans by the foregoing date is necessary
to enable Landlord to obtain required permits sufficiently early to commence
construction on or about July 1, 1998. If Landlord and Tenant fail to determine
the Final Plans within such period of time, each day of delay will extend,
day-for-day, the Adjusted Delivery Date in Paragraph 2 of this Lease.
27.3 Landlord will construct the Tenant Improvements based upon the
Final Plans under a design/build format, on an open book basis at cost plus 5%
for overhead and 3% for profit, together with Landlord's general conditions
charges which are included as a portion of the estimated cost shown on EXHIBIT F
attached hereto. EXHIBIT F, the Project Cost Estimate, is subject to completion
of the Final Plans as provided herein, and to completion of detailed
construction drawings and to solicitation of bids for the work to be performed.
Accordingly, the Project Cost Estimate is preliminary and is subject to change.
The Tenant Improvements will be constructed in a good and workmanlike manner in
accordance with the terms of this Lease pursuant to applicable laws, rules and
regulations. Subcontractor contracts will be competitively bid where
appropriate.
Landlord will be required to construct and provide no additional
improvements other than the Tenant Improvements.
27.4 If the actual cost of the Tenant Improvements exceeds the
Allowance, Tenant will pay the difference by a cash payment made to Landlord
within thirty (30) days following the issuance of the certificate of occupancy
for the Tenant Improvements. If the actual cost of the Tenant Improvements is
less than the Allowance. Any unused portion of the Tenant Improvement Allowance
shall be applied to rent payments in the regular order of maturity; provided
however, that the amount credited shall not exceed five dollars ($5.00) per
square foot; and provided that any unused portion of the Tenant Improvement
Allowance may in Tenant's discretion be applied to other allowance items as
permitted above.
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27.5 The Tenant Improvements will be the property of Landlord, and upon
expiration or termination of this Lease, Tenant will deliver the Premises
including the Tenant Improvements to Landlord in good condition, normal wear and
tear excepted.
27.6 Landlord represents and warrants to Tenant (as of the commencement
of the Lease Term):
(a) the Premises will be structurally sound, and the mechanical and
electrical systems therein will be in good working order; and
(b) the Premises will substantially comply with all legal requirements
(including without limitation the Americans With Disabilities Act of 1990) and
with applicable regulatory standards and codes, excepting any noncompliance
resulting from design error or acts of Tenant or its own designers or
consultants.
28. RENEWAL OPTION(S):
Provided that Tenant is not in default under this Lease either at the
time it exercises the Renewal Options set forth below, or at the date a Renewal
Term begins, Tenant will have the right to renew this Lease for two (2)
successive five (5) year terms (the "Renewal Terms") by giving notice of
exercise of the Renewal Option to Landlord at least six (6) months before the
end of the Lease Term and the first Renewal Term. If Tenant fails to deliver
timely written notice of exercise of a Renewal Option to Landlord, all Renewal
Options shall lapse and Tenant will have no further privilege to extend the
Lease Term.
Each Renewal Term shall be on the same terms and conditions of this
Lease (unless by their very nature inapplicable), except that Rent payable by
Tenant to Landlord during each Renewal Term shall be based on the prevailing
"market rental rate" for comparable space in competing buildings of similar
size, type, quality and location as reasonably calculated by Landlord for each
Renewal Term, BUT IN NO EVENT less than the rate in force at the end of the
preceding Lease Term. Determination of the effective "market rental rate" will
give appropriate consideration to rental rates for renewals, rental escalations,
tenant improvement allowances, common area charges, operating costs, and other
terms that would affect the economics in a similar lease renewal at a competing
building in the area.
If Landlord and Tenant are unable to agree on the "market rental rate"
to be applied to the Property, Landlord and Tenant shall select a highly
qualified and reputable real estate professional with at least ten (10) years of
experience in the relevant leasing market (the "Arbiter") to determine the
"market rental rate." If Landlord and Tenant are unable to agree on the Arbiter,
the resident manager of the largest commercial real estate brokerage house in
Phoenix will select the Arbiter from a major brokerage house other than his or
her own. The term "largest"
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<PAGE>
means the brokerage house with the largest sales volume in the preceding
calendar year.
In addition to paying the Rent determined pursuant to this Paragraph
28, Tenant will continue to pay Tenant's Proportionate Share of Operating Costs
and all other sums required under this Lease during each Renewal Term.
If this Lease, or Tenant's right to possession of the Premises, shall
expire or terminate for any reason whatsoever before Tenant exercises the
Renewal Options, or if Tenant has sublet or assigned all or any portion of the
Premises other than to a Tenant Affiliate, then immediately upon such expiration
or termination, subletting or assignment, the Renewal Options shall
simultaneously terminate and become null and void. The Renewal Options are
personal to Tenant. Under no circumstances shall a subtenant or an assignee
other than a Tenant Affiliate have the right to exercise the Renewal Options.
TIME IS OF THE ESSENCE OF THIS PROVISION.
RYAN SOUTHBANK II, L.L.C.
a Minnesota Limited Liability Company
By: RYAN PROPERTIES, INC.
Its: Managing Member
By:
-------------------------------
Its: VP
-----------------------
LANDLORD
MINDSPRING ENTERPRISES, INC.
By:
-------------------------------
Its: VICE PRESIDENT, HUMAN
RESOURCES
-----------------------
TENANT
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<PAGE>
Exhibit 10.41
SUBLEASE
THIS AGREEMENT, made the 14th of September, 1999, between INTERNATIONAL
BUSINESS MACHINES CORPORATION, a New York corporation, having its principal
office at New Orchard Road, Armonk, New York 10504, hereinafter called
"Sublessor" and MINDSPRING ENTERPRISES, with an office at 1430 West Peachtree
Road, Suite 400, Atlanta, Georgia 30309, hereinafter called "Subtenant".
WITNESSETH:
WHEREAS, by lease dated September 28, 1983, as amended by First Amendment
to Lease dated March 3, 1984, Second Amendment to Lease dated December 31, 1987,
Third Amendment to Lease dated November 20, 1992 and Fourth Amendment to Lease
dated February 16, 1996 (the lease and all amendments thereto together called
the "Prime Lease"), Sublessor leases from Park West E-3 Associates, a Texas
joint venture (the "Prime Lessor"), approximately 187,237 square feet of
rentable area in the building known as 1605 LBJ Freeway (Park West), Farmers
Branch, Texas (the "Building"); and
WHEREAS, Subtenant desires to sublease approximately 20,602 square feet of
rentable area on the entire second floor from Sublessor.
NOW, THEREFORE, for and in consideration of the foregoing and for other
good and valuable consideration and of the mutual agreements hereinafter set
forth, Sublessor and Subtenant stipulate, covenant and agree as follows:
Premises 1. Sublessor hereby subleases to Subtenant a portion of the Building
consisting of approximately 20,602 square feet of rentable area
on the entire second floor (the "Premises") as outlined on
EXHIBIT A, attached hereto and made a part hereof, in the
Building.
Term 2. The term for the Premises shall commence on October 1, 1999 and
expire on September 29, 2002 (the "Term"). Subtenant shall be
granted access to the Premises ten (10) business days after the
mutual execution of the Sublease by Sublessor and Subtenant.
Uses 3. Subtenant shall use and occupy the Premises for executive and
administrative purposes only and for no other purpose.
1
<PAGE>
Rents and 4. (A) (1) Subtenant shall pay Sublessor the annual rent of
Additional Rent Three Hundred Thirty-Nine Thousand Nine Hundred Thirty-Three
and 00/100 Dollars ($339,933.00), payable in equal monthly
installments of Twenty-Eight Thousand Three Hundred
Twenty-Seven and 75/100 Dollars ($28,327.75) in advance on
the first day of each month during the term of this Sublease
without deduction, set off or demand. Rent for any portion
of a month shall be prorated on a thirty (30) day basis.
Rent payments will be delivered to Scribcor, Inc., as agent
for IBM Lease Administration, P.O. Box 809224, Chicago,
Illinois 60680-9224, or such other place as Sublessor may
designate in writing.
(2) The annual rent set forth in paragraph (a) above is
Sixteen and 50/100 Dollars ($16.50) per square foot of
rentable area.
(B) During the Term, Subtenant shall pay as additional rent
Subtenant's pro rata share (hereinafter defined) of any
increases in operating expenses incurred from and after
December 31, 1999 which are due under Addendum No. 1 of the
Prime Lease. Subtenant's pro rata share is eleven percent
(11%), which is the ratio that 20,602 square feet of
rentable area of the Premises bears to 187,237 square feet
of rentable area in the Building. Sublessor shall furnish
Subtenant with a true copy of the statement of operating
expenses, delivered by Prime Lessor to Sublessor pursuant to
the Prime Lease and include thereon a detailed statement of
Subtenant's pro rata share of any increase in operating
expenses. Subtenant shall reimburse Sublessor within thirty
(30) days after the operating expense statement is furnished
to Subtenant.
Preparation for 5. Subtenant shall accept the Premises in its then "as is"
Occupancy condition, "broom clean," and all of the Sublessor's
furniture, fixtures, equipment, and other personal property
shall be removed therefrom at Sublessor's expense prior to
Subtenant's access to the Premises. Subtenant shall have the
right to enter and retrofit the Premises ten (10) business
days after the mutual execution of the Sublease by Sublessor
and
2
<PAGE>
Subtenant. Sublessor shall not be required to perform work
of any kind of nature, and all such work and the performance
thereof shall be subject to the provisions of the Sublease
and of the Prime Lease, as more particularly described in
the Prime Lease within Article Six, "Improvements and
Alterations." Additionally, Subtenant shall not allow its
contractors to perform construction and/or demolition work
that is noisy or otherwise disruptive to the other tenants
in the Building during the Building's normal business hours.
Incorporation 6. (a) This Sublease is subject to all of the terms of the
of Prime Lease Prime Lease with the same force and effect as if fully set
forth herein at length, excepting only as otherwise
specifically provided herein. All of the terms with which
Sublessor is bound to comply under the Prime Lease shall, to
the extent only that they apply to the Premises and except
as otherwise provided herein, be binding upon Subtenant, and
all of the obligations of Prime Lessor set forth in the
Prime Lease shall, to the extent that they apply to the
Premises, inure to Subtenant's benefit. It is the intention
of the parties that, except as otherwise provided in this
Sublease, the relationship between Sublessor and Subtenant
shall be governed by the language of the various articles of
the Prime Lease as if they were typed out in this Sublease
in full, and the words "Landlord", "Tenant" and "Lease" as
used in the Prime Lease, shall read, respectively,
"Sublessor", "Subtenant" and "Sublease".
(b) For the purposes of this Sublease, the following
provisions of the Prime Lease are hereby deleted or modified
as follows:
Delete in its entirety "Premises"; "Term"; Addendum
No. 1; Article Two, titled "Preparation for
Occupancy"; Article Thirteen, titled "Signs"; Article
Thirty-One, titled "First Refusal -- Additional
Space"; Rider 4, titled "Extension"; Article
Thirty-Two, titled "Option for Additional Space";
Article Twenty-Eight, titled "First Refusal Sale"; and
Article Twenty-Five, titled "Memorandum of Lease."
3
<PAGE>
Quiet Enjoyment 7. (a) Sublessor covenants and agrees with Subtenant that upon
Subtenant paying the rent and additional rent reserved in
this Sublease and observing and performing all of the other
obligations, terms, covenants and conditions of this
Sublease on Subtenant's part to be observed and performed,
Subtenant may peaceably and quietly enjoy the Premises
during the term; provided, however, that this Sublease shall
automatically terminate upon termination of the Prime Lease
and Subtenant shall have no claim against Sublessor unless
such termination was caused by the default of Sublessor in
the performance of its obligations under the Prime Lease
which have been assumed by Sublessor under this Sublease and
have not been assumed by Subtenant hereunder.
(b) Subtenant covenants and agrees that Subtenant shall not
do or suffer or permit anything to be done which would
constitute a default under the Prime Lease or would cause
the Prime Lease to be cancelled, terminated or forfeited by
virtue of any rights of cancellation, termination, or
forfeiture reserved or vested in Prime Lessor under the
Prime Lease, and that Subtenant will indemnify and hold
harmless Sublessor from and defend Sublessor against all
claims, liabilities, losses and damages of any kind
whatsoever (excepting indirect, special and consequential
damages) that Sublessor may incur by reason of, resulting
from or arising out of any such cancellation, termination or
forfeiture.
Notices 8. Any notice, approval, demand or request under this Sublease
shall be in writing and shall be considered properly
delivered when addressed as hereinafter provided and
delivered by registered or certified mail (return receipt
requested) which is deposited in the United States general
or branch post office, or delivered by private express mail
service. Any notice, demand or request by Sublessor to
Subtenant shall be addressed to Subtenant at MINDSPRING
ENTERPRISES, 1430 West Peachtree Road, Suite 400, Atlanta,
Georgia 30309, attention: General Counsel, with a copy sent
simultaneously to MINDSPRING ENTERPRISES, 1430 West
Peachtree
4
<PAGE>
Road, Suite 400, Atlanta, Georgia 30309, attention: Kim
Adamson, Director of Real Estate, until otherwise
directed in writing by Subtenant. Any notice, demand or
request by Subtenant to Sublessor shall be addressed to
INTERNATIONAL BUSINESS MACHINES CORPORATION, Real Estate
Services, 1501 LBJ Freeway, Suite 465, Dallas, Texas
75234, Attention: Program Manager, with a copy sent
simultaneously to INTERNATIONAL BUSINESS MACHINES
CORPORATION, Real Estate Services, New Orchard Road,
Armonk, New York 10504, Attention: Associate General
Counsel, until otherwise directed in writing by
Subtenant. Rejection or other refusal to accept or the
inability to deliver because of a changed address of
which no notice was given shall be deemed to be receipt
of the notice, demand or request sent.
Assignment and 9. Subtenant shall not assign, mortgage, transfer, pledge or
Subletting otherwise encumber its interest in this Sublease, in whole
or in part, or sublet or permit the subletting of the
Premises, or permit the Premises or any part thereof to be
occupied or used by any person or entity other than
Subtenant, in each case without first obtaining the prior
written consent of Sublessor, which consent Sublessor may
withhold in its sole discretion. As used in this Sublease
the word "Person" shall mean an individual, partnership,
trust, corporation, firm or other entity.
Prime Lessor's 10. Subtenant recognizes that SubLessor is not in a position to
Responsibilities furnish the services set forth in the Prime Lease, obtain an
agreement of nondisturbance, or how to perform certain other
obligations which are not within the control of Sublessor,
such as, without limitation, maintenance, repairs, and
replacements to the Building and Premises, compliance with
laws, and restoration of the Premises and Building after
casualty or condemnation. Therefore, notwithstanding
anything to the contrary contained in this Sublease,
Subtenant agrees that Subtenant shall look solely to Prime
Lessor to furnish all services and to perform all
obligations which Prime Lessor has agreed to perform and
observe under the Prime Lease. Sublessor shall not be liable
to
5
<PAGE>
Subtenant or be deemed in default hereunder for failure of
Prime Lessor to furnish or perform the same. However,
whenever under the terms of the Prime Lease, Prime Lessor
shall fail to perform any of its Prime Lease obligations
pertaining to the Premises, Subtenant may, at its option,
enforce performance thereof if and to the extent authorized
by the terms of the Prime Lease, and Sublessor shall
cooperate with Subtenant in such enforcement. However,
Sublessor shall not be obligated to initiate any arbitration
or legal proceeding or otherwise to enforce the Prime Lease.
Casualty and 11. Article Nine, titled "Casualty" and Article Eleven, titled
Condemnation "Condemnation", of the Prime Lease are modified to provide
that if by operation of either of these two Articles the
Prime Lease is not terminated and continues in full force
and effect, this Sublease shall not be terminated but shall
also continue in full force and effect, except that until
the Premises are restored in accordance with these two
Articles there shall be a proportionate abatement of annual
rent and additional rent payable hereunder to the extent of
damage to the Premises as determined by Prime Lessor,
Sublessor and Subtenant; provided, however, that such
abatement shall in no event exceed the abatement granted to
Sublessor under the Prime Lease for the Premises and,
provided further, that no compensation or claim or reduction
will be allowed or paid by Sublessor by reason of
inconvenience, annoyance or injury to Subtenant's business
arising from the necessity of effecting repairs to the
Premises or any portion of the Building, whether such
repairs are required by operation of these two Articles or
any other provision of the Prime Lease.
Parking 12. Sublessor shall, without charge to Subtenant, provide
Subtenant sixty-two (62) permits for parking spaces for the
access-controlled portion of the Parking Facilities on an
unassigned basis throughout the term of the Sublease.
Subtenant shall have access to the Parking Facilities
twenty-four (24) hours a day, seven (7) days a week.
In the event that the number of parked cars at a
6
<PAGE>
given time as determined by Sublessor or its agents exceed
the capacity of the Parking Facilities (see EXHIBIT C)
available for use by Sublessor and Subtenant which capacity
is defined as 95% of the portion of the Parking Facilities
associated with the 1605 and 1607 Buildings (624 spaces out
of 731 total spaces), Sublessor will notify Subtenant of the
condition in writing. Within ten business days of receiving
notification from the Sublessor, Subtenant will secure and
utilize additional off-site parking in a quantity sufficient
to accommodate its housed population in excess of sixty-two
parking spaces allocated to the Subtenant under this
Sublease. If supplemental parking is not available,
Subtenant acknowledges that Subtenant's housed population in
the subleased Premises will be reduced to use no more than
sixty-two parking spaces in the Parking Facilities allocated
in accordance with this Sublease. Subtenant shall
immediately notify Sublessor in writing of Subtenant's total
housed population within the subleased Premises as of the
date of Sublessor's notice.
Subtenant shall promptly provide Sublessor written
notification from the third party with which the Subtenant
has contracted for its off-site parking that such parking
accommodations have been leased and are being utilized by
Subtenant. In addition to the foregoing, Sublessor may also
impose on Subtenant any parking restrictions imposed by
Landlord on Sublessor.
Binding and 13. This Sublease shall be binding on Subtenant and its heirs
Entire Agreement and executors, and on the respective legal representatives,
successors and assigns of the parties. This Sublease
contains the entire agreement of the parties with respect to
the subject matter herein and may not be modified except by
instrument in writing which is signed by both parties.
Broker 14. Subtenant warrants and represents to Sublessor that no
Person has negotiated or brought about this transaction on
its behalf other than The Staubach Company ("Broker") and
Sublessor covenants and agrees to pay a brokerage commission
to Broker in
7
<PAGE>
accordance with the provisions of a separate agreement.
Subtenant shall defend, indemnify and save harmless
Sublessor from and against any claim which may be asserted
against Sublessor by any Person other than Broker if (a)
the claim is made in connection with this transaction and
(b) Subtenant employed or dealt with the claiming Person.
Subtenant shall reimburse Sublessor for reasonable
expenses, losses, costs and damages (including reasonable
attorneys' fees and court costs if Subtenant fails or
refuses to defend as herein required) incurred by
Sublessor in connection with such claims. This Article
shall survive the expiration or earlier termination of
this Sublease.
Loading Dock 15. Subtenant shall be granted shared access to the Building
Loading Dock.
Data/Voice 16. Sublessor shall retain a data/voice room as designated on
Room the attached plan labeled EXHIBIT B and incorporated
herein. Subtenant shall provide escorted access to the
data/voice room during normal business hours and with
reasonable advance notice. If Sublessor requires extended
access to the data/voice room, Sublessor shall arrange for
a security guard to accompany Sublessor at Sublessor's
expense.
Twenty-Four (24) 17. Subtenant shall have access to the Premises twenty-four
Hour Access (24) hours a day, seven (7) days a week.
SIGNATURE PAGE TO FOLLOW
8
<PAGE>
IN WITNESS WHEREOF, duly authorized representatives of the parties hereto
have executed this Sublease as of the day and year first above written.
INTERNATIONAL BUSINESS MACHINES
WITNESS: CORPORATION
By: /s/ Craig Anderson
- ------------------------------ ------------------------------
Craig Anderson
Title: Program Manager
WITNESS: MINDSPRING ENTERPRISES
/s/ Kimberly Adamson By: /s/ M. T. Brown
- ------------------------------ ------------------------------
Title: Ex. Director
Corporate Services
9
<PAGE>
Exhibit 10.42
FOURTH AMENDMENT TO LEASE
THIS AMENDMENT made this 24th day of June, 1998, by and among 1430
L.L.C., successor in interest to West Peachtree Point Partners L.P. (The
Landlord), and Mindspring Enterprises, Inc., a Georgia Corporation (The Tenant).
WHEREAS, by Agreement of Lease ("The Lease") dated August 11, 1995,
amended February 6, 1996 ("The First Amendment"), amended September 25, 1996
("The Second Amendment"), amended February 10, 1997 ("The Third Amendment"),
Landlord leased to Tenant that certain Premises known as Suite 400 located in
the building ("The Building"), now situated on the property at 1430 West
Peachtree Street, Atlanta, Fulton County, Georgia.
NOW, THEREFORE, in consideration of the Premises and the additional
terms and conditions set forth below, Landlord and Tenant hereby agree to amend
said Lease as follows:
1. FOURTH EXPANSION PREMISES. Landlord does hereby rent and lease to Tenant
and Tenant does hereby rent and lease from Landlord for general office use
reasonable and customary in Atlanta, Georgia, the space described below together
with the non-exclusive right to use the common areas (as the same may from time
to time be changed by Landlord) in common with all other Tenants of the Building
and their licensees and invitees and in common with any other parties permitted
by Landlord to use such areas, 17,998 rentable square feet of space located on
the first, second and fifth floors of that certain building consisting of
approximately 68,987 rentable square feet and commonly known as 1430 West
Peachtree, Atlanta, Georgia, said space to be located as shown on the floorplans
attached hereto as "Exhibit A-4" and made a part hereof by reference.
2. RENT. Tenant shall pay to Landlord, c/o RB Management Services at 3475
Lenox Road, Suite 800, Atlanta, Georgia 30326 or at such other place as Landlord
shall designate in writing to Tenant, annual base rent in an amount equal to
$238,473.50, payable in equal monthly installments of $19,872.79, due on the
first day of each calendar month, in advance, without abatement, demand,
deduction, or offset whatsoever, except as provided in Article 10 herein.
3. TERM. The term for the Fourth Expansion Premises shall be forty-eight (48)
months, and shall commence on July 15, 1998 ("The Commencement Date") and shall
terminate at noon on July 14, 2002 ("The Expiration Date"). Should Tenant not
occupy a portion of the Fourth Expansion Premises, due to Landlord's inability
to relocate the existing tenants located on the fifth floor of the Building,
then the monthly rental shall be prorated based upon actual square footage
available to Tenant to occupy. Landlord shall have ninety (90) days from the
Commencement Date to make best efforts to provide for Tenant to occupy all space
<PAGE>
located on the fifth floor. After ninety (90) days, should Tenant not be able to
occupy a portion of the fifth floor of the Fourth Expansion Premises, due to
existing tenants still located on the floor, Tenant shall have the option to
occupy within thirty (30) days thereafter any reasonable portion of other space
available in the Building, or mutually agree with Landlord to modify the Fourth
Amendment to reflect the square footage Tenant occupies.
4. ESCALATION. Landlord and Tenant agree that the Base Rental set forth in
Paragraph 3 above shall be increased annually by four percent (4%) on each
anniversary date of the commencement date.
5. RELOCATION OF EXISTING TENANT. Landlord and Tenant acknowledge the existing
tenants in Suites 503, 504, 506, 508, and 512 will be required to relocate to
accommodate this fourth expansion of Tenant's Premises. Tenant acknowledges it
will be responsible to pay all relocation costs associated with relocating the
existing tenants located on the fifth floor listed above, exclusive of any
Tenant Improvement costs associated with the existing tenants' new premises.
It is assumed that an average relocation cost will be $3.00 per rentable square
foot. If the actual relocation is more than $3.00 per rentable square foot,
Tenant will have the option to direct Landlord not to relocate the existing
tenant, and Landlord and Tenant agree to modify the Fourth Amendment to reflect
the square footage Tenant occupies, as above described in Article 3.
Landlord also agrees that provided funds are available in Tenant's Tenant
Improvement Allowance, that these funds may be used to fund existing tenant's
relocation costs.
6. TENANT IMPROVEMENT. Landlord agrees to furnish Tenant a Tenant Improvement
Allowance of $3.00 per occupied rentable square foot. Should Tenant occupy any
available space in the Building with less than forty-eight (48) months of Term
remaining, the Tenant Improvement Allowance shall be prorated to reflect the
shortened term.
7. PARKING. Paragraph #33, Sub-Paragraph J of the original Lease Agreement
dated August 11, 1995, and Paragraph #6 of the First Amendment dated February 6,
1996, and Paragraph #5 of the Second Amendment dated September 25, 1996, are
hereby deleted in their entirety and replaced with the following:
Landlord will provide Tenant with a parking ratio of two parking permits per
1,000 rentable square feet of space occupied by Tenant at the Building. Tenant
shall pay Landlord the sum of Thirty and 00/100 Dollars ($30.00) per parking
permit per month for use of said permits. Landlord may raise the cost of said
permits if the owners of comparable parking lots raise the costs of their
permits above $30.00 per
<PAGE>
permit per month.
8. EXPANSION AND CANCELLATION OPTION. Paragraph #35E of the original Lease
Agreement dated August 11, 1995, and Paragraph #9 of the First Amendment dated
February 6, 1996 and Paragraph #7 of the Second Amendment dated September 25,
1996 and Paragraph #6 of the Third Amendment dated February 10, 1997 are hereby
deleted in their entirety.
9. RIGHT OF REFUSAL. Paragraph #35, Sub-Paragraph A of the original Lease
Agreement dated August 11, 1995, is hereby amended to include any portion of the
available space on the sixth floor of the Building (the "Option Area").
10. CAPITAL IMPROVEMENTS. The following list of' improvements are scheduled to
be completed within twelve (12) months of Mindspring occupying their fourth
expansion space. Should these items not be completed in the twelve (12) month
time period, Mindspring will have a right to deduct five percent (5%) from the
Fourth Expansion Premises monthly rental for each item, until such time each
item is completed.
HVAC: Auto change-over HVAC controls.
Security: Installation of a card key access system for the building.
Elevators: Elevators to be brought up to substantial code compliance with
respect to life safety and ADA compliance.
11. When the Premises as defined in the original Lease Agreement dated August
11, 1995, amended February 6, 1996 ("The First Amendment"), amended September
25, 1996 ("The Second Amendment"), amended February 10, 1997 ("The Third
Amendment"), is relinquished to Landlord on March 31, 2001, Landlord
acknowledges and agrees that Tenant's remaining 17,998 square feet of Premises
shall be contiguous and that the Premises described in the Fourth Amendment
shall need to be redefined by mutual agreement between Landlord and Tenant.
12. Landlord and Tenant acknowledge Tenant's notification of its renewal
according to Paragraph 34 of the Lease, Paragraph 8 of the First Amendment,
Paragraph 6 of the Second Amendment, and Paragraph 5 of the Third Amendment.
EXCEPT as herein specifically provided all terms and conditions of the
original Lease dated August 11, 1995, amended February 6, 1996, amended
September 25, 1996, amended February 10, 1997, shall remain the same.
IN WITNESS WHEREOF, the parties hereto have set their hands and seal
the day and year first above written.
<PAGE>
Signed, Scaled and Delivered in the Presence of
LANDLORD: 1430 L.L.C.
/s/ [signature illegible] By: /s/ [signature illegible] CEO
- --------------------------- ----------------------------------
Witness
/s/ [signature illegible]
- ---------------------------
Notary Public
TENANT: MINDSPRING ENTERPRISES,
INC.
/s/ Kimberly Adamson By: /s/ [signature illegible]
- ---------------------------- ----------------------------
Manager, Facilities & Vice President, Human Resources
Admin. Services
- ------------------------------
Notary Public
<PAGE>
Exhibit 10.43
FIFTH AMENDMENT TO LEASE
THIS AMENDMENT made this 26th day of October, 1999, by and among 1430
L.L.C., (The Landlord), and Mindspring Enterprises, Inc., a Delaware Corporation
(The Tenant).
WHEREAS, by Agreement of Lease ("The Lease") dated August 11, 1995,
amended February 6, 1996 ("The First Amendment"), amended September 25, 1996
("The Second Amendment"), amended February 10, 1997 ("The Third Amendment"),
amended June 24, 1998 ("The Fourth Amendment"), Landlord leased to Tenant that
certain Premises known as Suite 400 located in the building ("The Building"),
now situated on the property at 1430 West Peachtree Street, Atlanta, Fulton
County, Georgia.
NOW, THEREFORE, in consideration of the Premises and the additional
terms and conditions set forth below, Landlord and Tenant hereby agree to amend
said Lease as follows:
1. FIFTH EXPANSION PREMISES. Landlord does hereby rent and lease to Tenant and
Tenant does hereby rent and lease from Landlord for general office use
reasonable and customary in Atlanta, Georgia, the space described below together
with the non-exclusive right to use the common areas (as the same may from time
to time be changed by Landlord) in common with all other Tenants of the Building
and their licensees and invitees and in common with any other parties permitted
by Landlord to use such areas, 8,491 rentable square feet of space located on
the sixth floor of that certain building consisting of approximately 68,987
rentable square feet and commonly known as 1430 West Peachtree, Atlanta,
Georgia, said space to be located as shown on the floorplans attached hereto as
Exhibit "A-5" and made a part hereof by reference.
2. TERM. The Term for the fifth expansion Premises shall commence on January 1,
2000 and shall terminate at noon on July 14, 2002. Tenant shall have possession
of all space except Suites 615 and 618 upon execution of the Fifth Amendment.
Possession of Suites 615 and 618 shall be available when space becomes vacant
but in no event later than November 30, 1999.
3. Paragraph six of the Fourth Amendment dated June 24, 1998 is hereby deleted
in its entirety.
4. In the event Tenant completes a merger with EarthLink Network, Inc., Landlord
conceptually approves the merger contingent upon Tenant completing any Terms or
conditions of the Lease or any existing Amendments that apply to assignment.
<PAGE>
EXCEPT as herein specifically provided all terms and conditions of the
original Lease dated August 11, 1995, amended February 6, 1996, amended
September 25, 1996, amended February 10, 1997, amended June 24, 1998, shall
remain the same.
IN WITNESS WHEREOF, the parties hereto have set their hands and seal
the day and year first above written.
Signed, Sealed and Delivered in the Presence of
LANDLORD: 1430 L.L.C.
/s/ Shirley Baker By: /s/ Rex Baker
- ---------------------------------- ---------------------------------
Witness Manager
/s/ Laurie Cann
- ----------------------------------
Notary Public
TENANT: MINDSPRING ENTERPRISES,
INC.
/s/ KIMBERLY ADAMSON By: /s/ John Bushfield
- ----------------------------------- --------------------------------
Witness Vice President, People and Places
/s/ [signature illegible]
- -----------------------------------
Notary Public
<PAGE>
Exhibit 10.44
AMENDMENT TO OFFICE BUILDING LEASE AGREEMENT
THIS AMENDMENT to Office Building Lease Agreement is made between
Pennsylvania Dental Service Corporation, a Pennsylvania Corporation d/b/a Delta
Dental of Pennsylvania ("Landlord") and Mindspring Enterprises, Inc., a Delaware
Corporation ("Tenant").
WITNESSETH:
WHEREAS Landlord and Tenant have previously entered into the Office
Building Lease Agreement (the "Lease") dated December 15, 1997; and
WHEREAS Landlord and Tenant desire to enter into this Amendment to the
Lease Agreement upon the terms and conditions herein set forth:
NOW THEREFORE, Landlord and Tenant in consideration of the above
Premises, the mutual covenants and conditions contained herein, and for other
good and valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the parties intending to be legally bound, do hereby agree as
follows.
1. Paragraph 3 of the Lease is hereby modified to extend the Term through
April 30, 2000. The other terms and conditions of the Least shall remain in
full force and effect. The rent during such term shall be based upon an
annual rental of $313,800 per year adjusted and payable on a monthly pro
rats basis.
2. Tenant agrees that it shall make the following repairs to the Premises at
its expense and shall undertake the following actions:
(a) Institute a policy and take appropriate action to eliminate the
cigarette butts discarded on the landscaping and parking areas
of the Premises.
(b) Service and/or replace if necessary the portable fire extinguishers
located at the Premises.
(c) Clean and maintain the carpet and repair gouges and holes in the
walls.
(d) Repair the fabric that is torn on the modular furniture located in
the Premises belonging to Landlord, as described in paragraph 44
of the Lease.
3. Tenant agrees to maintain the floors in the restrooms and stairwells within
the Premises and shall strip and wax these floors regularly. In addition,
<PAGE>
Tenant shall replace any missing or damaged ceiling tiles that Tenant has
removed from the ceiling in the Premises, or damaged.
4. Tenant hereby acknowledges its obligations pursuant to paragraph 44 of the
Lease concerning reimbursement of Landlord for any damage or destruction of
the personal property described therein, except for customary wear and
tear.
5. Tenant shall promptly reimburse Landlord, no later than thirty (30) days
from Landlord's written request, for any costs Landlord may incur by reason
of Tenant's failure to make any of the aforementioned repairs.
IN WITNESS WHEREOF, the parties have set forth their hands and seals
this 20th of December, 1999.
ATTEST: LANDLORD:
Pennsylvania Dental Service Corporation
D/B/A Delta Dental of Pennsylvania
/s/ Audrey J. Hess By: /s/ [signature illegible]
- ------------------------------- ----------------------------------
Name: Audrey J. Hess Name:
- ------------------------------- ----------------------------------
Title: Mgr., Corporate Services Title: President
- ------------------------------- ----------------------------------
ATTEST: TENANT:
Mindspring Enterprises, Inc.
/s/ Kimberly Adamson By: /s/ M. T. Brown
- ------------------------------ ------------------------------------
Name: Kimberly Adamson Name: M. T. Brown
------------------------- -------------------------------
Title: Director, Corporate Real Estate Title: Ex. Director, Corporate Services
--------------------------------- ---------------------------------
-2-
<PAGE>
Exhibit 10.45
EARTHLINK CENTRE
STANDARD MODIFIED GROSS OFFICE LEASE
W I T N E S S E T H
This lease ("LEASE") is entered into by and between Limar Realty
Corp. #6, a California corporation ("LANDLORD") and EarthLink Network, Inc., a
Delaware corporation ("TENANT"). For and in consideration of the payment of
rents and the performance of the covenants herein set forth by Tenant, Landlord
does lease to Tenant and Tenant accepts the Premises described below subject to
the agreements herein contained.
1. BASIC LEASE TERMS
a. DATE OF LEASE: October 5, 1999
b. TENANT: EarthLink Network, Inc.
Address (of the Premises): 465 North Halstead Street (AKA 460
Sierra Madre Villa Ave.)
Address (for Notices):
EarthLink Network, Inc.
3100 New York Drive
Pasadena, California 91107
Attn: Hans Eisenman
with copy to: Hunton & Williams
Peachtree Street
Suite 4100
Atlanta, Georgia 30308
Attn: S. Tammy Pearson
c. LANDLORD: Limar Realty Corp. #6
Address (for Notices): 1730 So. El Camino Real
Suite 400
San Mateo, CA 94402
Attn: Thomas A. Numainville
d. TENANT'S USE OF PREMISES: General office use including call
center, data center operators and/or
sales.
e. PREMISES AREA: 125,348 Rentable Square Feet ("RSF"),
consisting of the entire second floor
area of the Project.
f. PROJECT AREA: 230,852 RSF, located in a two (2)
story building together with a partial
lower level.
g. TENANT'S SHARE: 54.30% (125,348/230,852)
h. BASE YEAR: Calendar year 2000
i. TERM (inclusive): Commencement Date: November 15, 1999
("COMMENCEMENT DATE")
Expiration Date: September 30, 2007 ("EXPIRATION
DATE")
Number of Months: approximately 94.5333
j. BASE RENT: See Section 32.
k. BASE RENT ADJUSTMENT:
STEP INCREASE. The step adjustment provisions of Section 4.b. apply
for the periods shown below:
PERIODS (INCLUSIVE) MONTHLY BASE RENT
5/15/02 - 11/14/04 $213,091.60
<PAGE>
11/15/04 - 9/30/07 $225,626.40
l. TOTAL TERM BASE RENT (assumes space is taken down according to Section
32. net of rental abatement): $19,116,064.96
m. PREPAID BASE RENT: $120,000.00 (the "PREPAID BASE RENT")
n. TENANT'S NUMBER OF NON-RESERVED PARKING SPACES: 414
o. SECURITY DEPOSIT: $225,626.40
p. BROKER(S): Cushman Realty Corporation and Insignia/ESG, Inc.
q. GUARANTOR(S): None.
r. EXHIBITS: Exhibits lettered "A" through "F" are attached hereto and
made a part hereof.
2. PREMISES.
a. PREMISES. Landlord leases to Tenant the premises described in Section
1. and in EXHIBIT A (the "PREMISES"). Subject to (1) any additional
work Landlord has agreed herein to do, including, without limitation,
that work which Landlord is required to perform pursuant to the
provisions of Section 29 below, (2) the terms and representations of
this Lease, including, without limitation, those set forth in Sections
8 and 29 below, and (3) Landlord's agreement to cause the Project to
comply with any notice (as defined in subclause (A) and (B) below, a
"GOVERNMENTAL NOTICE") which is (A) issued either before or after the
Date of this Lease by a governmental authority with jurisdiction
requesting work to be performed in the Project (including any
elevators and/or stairwells serving the Premises) and (B) for the
purpose of causing the Project to be in compliance with a zoning,
municipal, federal, county or state law, ordinance or regulation in
effect as of the date of execution and delivery of this Lease
(exclusive of an order to cause such compliance with respect to any
improvements to and/or the use of the interior of the Premises;
provided, however, that if and as long as Tenant utilizes improvements
in the Premises in the condition of such improvements existing as of
the Date of Lease without undertaking any modifications thereto,
Landlord shall cause such existing improvements to comply with any
such Governmental Notice), Tenant hereby accepts the Premises in their
condition existing as of the date of the execution hereof, subject to
all applicable zoning, municipal, county and state laws, ordinances
and regulations governing and regulating the use of the Premises, and
accepts this Lease subject thereto and to all matters disclosed
thereby and by any exhibits attached hereto. The rentable square
footage of the Premises shall include a portion of the common area of
the Project and the occupied space located within the Project and
dedicated to the service of the Project. Tenant agrees with the square
footage specified for the Premises in Section 1. and will not
hereafter challenge such determination and agreement. Landlord shall
have the right, in Landlord's sole good faith discretion: (i) to make
changes, including, without limitation, changes in the location, size,
shape, number and appearance to the Project (excluding the Premises to
the extent that size, shape, and/or location is affected) interior and
exterior, including but not limited to the lobbies, windows,
stairways, air shafts, elevators, restrooms, driveways, entrances,
parking spaces (provided that Tenant's allotted parking spaces shall
not be reduced and shall otherwise be located in similar proximity to
the Premises), parking areas, loading and unloading areas, ingress,
egress, direction of traffic, decorative walls, landscaped areas and
walkways; (ii) to close temporarily any part of the Project for
maintenance purposes so long as reasonable access to the Premises
remains available; (iii) to designate other land and improvements
outside the boundaries of the Project to be a part of the Project,
provided that such other land and improvements have a reasonable and
functional relationship to the Project; (iv) to add additional
buildings and improvements to the Project; (v) to use the common areas
while engaged in making additional improvements, repairs or
alterations to the Project or any portion thereof; and (vi) to do and
perform such other acts and make such other changes in, to or with
respect to the Project as Landlord may, in the exercise of sound
business judgment deem to be appropriate, provided (x) none of the
above adversely interferes in any specific and significant manner
given Tenant's actual requirement with respect to the utilization of
the affected portion of the Premises for the purpose of conducting
Tenant's business therein, taking into account Landlord's contractual
obligations with respect to the Project, (y) Tenant's obligations
hereunder are not increased, (z) Tenant's rights hereunder are not
decreased, and (aa) Landlord's activities shall not
-2-
<PAGE>
affect "mission critical" areas of the Premises, as such areas are
identified by Tenant to Landlord promptly following receipt by
Tenant of notice from Landlord of its intended activities.
b. ACCEPTANCE; QUIET ENJOYMENT. Landlord represents that it is the fee
simple owner of the Premises and has full right and authority to make
this Lease. Landlord hereby leases the Premises to Tenant and Tenant
hereby accepts the same from Landlord, in accordance with the
provisions of this Lease. Landlord covenants that Tenant shall have
peaceful and quiet enjoyment of the Premises during the Term (as
defined below) of this Lease. Tenant covenants that it will not
interfere with other tenants' quiet enjoyment of their premises.
3. TERM. The term ("TERM") of this Lease is for the period that commences at
12:01 a.m. on the Commencement Date and expires at 11:59 p.m. on the
Expiration Date.
4. RENT
a. BASE RENT. Tenant shall pay Landlord in lawful money of the United
States, without notice, demand, offset or deduction, rent in the
amount(s) set forth in Section 1. which shall be payable in advance on
the first day of each and every calendar month ("BASE RENT') provided,
however, the first month's Base Rent is due and payable upon mutual
execution and delivery of this Lease. Unless otherwise specified in
writing by Landlord, all installments of Base Rent shall be payable to
Limar Realty Corp. #6, Department #44294, P.O. Box 44000, San
Francisco, California 94144-4294. Base Rent for any partial month at
the beginning or end of this Lease will be prorated in accordance with
the number of days in the subject month.
For purposes of Section 467 of the Internal Revenue Code, the parties
to this Lease hereby agree to allocate the stated Base Rent provided
herein to the periods which correspond to the actual Base Rent
payments as provided under the terms and conditions of this Agreement.
b. STEP INCREASE. The Base Rent shall be increased periodically to the
amounts and at the times set forth in Section 1.k.
c. RENT WITHOUT OFFSET AND LATE CHARGE. All Rent shall be paid without
prior demand or notice and without any deduction or offset whatsoever.
All Rent shall be paid in lawful currency of the United States of
America. Tenant acknowledges that late payment by Tenant to Landlord
of any Rent will cause Landlord to incur costs not contemplated by
this Lease, the exact amount of such cost being extremely difficult
and impracticable to ascertain. Such costs include, without
limitation, processing and accounting charges and late charges that
may be imposed on Landlord by the terms of any encumbrance or note
secured by the Premises. Therefor, if any Rent is not received by
Landlord within ten (10) days of its due date, Tenant shall pay to
Landlord a late charge equal to ten percent (10%) of such overdue
payment. Landlord and Tenant hereby agree that such late charge
represents a fair and reasonable estimate of the costs that Landlord
will incur by reason of any such late payment and that the late charge
is in addition to any and all remedies available to the Landlord and
that the assessment and/or collection of the late charge shall not be
deemed a waiver of any other default. Additionally, unless a late
charge has been paid by Tenant with respect to such delinquent Rent as
provided above, all such delinquent Rent or other sums, plus this late
charge, shall bear interest from the due date thereof at the lesser of
ten percent (10%) per annum or the maximum legal interest rate
permitted by law. Any payments of any kind returned for insufficient
funds will be subject to an additional handling charge of $25.00.
d. EXPENSES. The purpose of this Section 4.d. is to ensure that Tenant
bears a share of all Expenses (as defined below) related to the use,
operation, maintenance, ownership, repair or replacement, and
insurance of the Project in excess of those incurred during the Base
Year. The term "PROJECT" is defined as all the land and improvements
(including building(s), landscape, parking lot, etc.) as described on
EXHIBIT B. Commencing January 1 of each year ("COMPARISON YEAR")
subsequent to the Base Year (as specified in Section 1.), Tenant shall
pay to Landlord, Tenant's Share (as defined in Section 1.) of any
increases in Expenses related to the Project over and above the
Expenses incurred during the Base Year. Expenses shall be reflective
of a Project at least ninety-five percent (95%) occupied in
determining Base Year and Comparison Year costs.
1) EXPENSES DEFINED. The term "EXPENSES" shall mean all costs and
expenses of the use, operation, maintenance, ownership, repair or
replacement, and insurance of the Project, including, without
limitation, the following costs:
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a) All supplies, materials, labor, equipment, and utilities
(except for those utilities which are chargeable to
individual tenants) used in or related to the use, operation
and maintenance of the Project including, without
limitation, window cleaning, security and elevator
maintenance;
b) All maintenance, management, janitorial, legal, accounting,
insurance and service agreement costs related to the
Project, except for those costs which are chargeable to
individual tenants. Expenses shall include the management
fees of all independent contractors engaged by Landlord or
reasonably charged by Landlord or an affiliate of Landlord
for management services in connection with the Project,
provided that the total management fees charged by Landlord
or an affiliate of Landlord shall not exceed the management
fees normally incurred by owners and operators of properties
similar to the Project which are located in the county in
which the Project is located;
c) All maintenance, replacement and repair costs including
capital expenses that are incurred at the Project after the
Commencement Date of this Lease and which are to be
amortized over the useful life of the asset relating to the
areas within or around the Project, including, without
limitation, air conditioning systems, sidewalks,
landscaping, service areas, driveways, parking areas
(including resurfacing and restriping parking areas),
walkways, building exteriors (including painting), signs and
directories, repairing and replacing roofs, walls, etc.
Capitalization and amortization of expenses (along with
reasonable actual or implicit financing charges) will be on
a straight line basis over the useful life of the
improvement as reasonably determined by Landlord;
d) Amortization of capital improvements that are incurred at
the Project after the Commencement Date of this Lease and
which are required by any government authority or which will
improve the operating efficiency of the Project (provided,
however, that the amount of such amortization for
improvements not mandated by government authority shall not
exceed in any year the amount of costs reasonably determined
by Landlord in its reasonable discretion to have been saved
by the expenditure either through the reduction or
minimization of increases which would have otherwise
occurred). Capitalization and amortization of expenses
(along with reasonable actual or implicit financing charges)
will be on a straight line basis in accordance with GAAP;
and
e) Real Property Taxes including all taxes, assessments
(general and special) and other impositions or charges which
may be taxed, charged, levied, assessed or imposed upon all
or any portion of or in relation to the Project or any
portion thereof, any leasehold estate in the Premises or
measured by Rent from the Premises. "REAL PROPERTY TAXES"
shall also include any form of assessment, levy, penalty,
charge or tax (other than estate, corporation, net profits,
transfer, inheritance, net income or franchise taxes)
imposed by any authority having a direct or indirect power
to tax or charge, including, without limitation, any city,
county, state, federal or any improvement or other district,
whether such tax is (1) determined by the value of the
Project or the Rent or other sums payable under this Lease;
(2) determined by the size of the Project (land acreage or
building square footage); (3) upon or with respect to any
legal or equitable interest of Landlord in the Project or
any part thereof; (4) upon this transaction or any document
to which Tenant is a party creating a transfer in any
interest in the Project; (5) in lieu of or as a direct
substitute in whole or in part of or in addition to any real
property taxes on the Project; (6) based on any parking
spaces or parking facilities provided in the Project; or (7)
in consideration for services, such as police protection,
fire protection, street, sidewalk and roadway maintenance,
refuse removal or other services that may be provided by any
governmental or quasi-governmental agency from time to time
which were formerly provided without charge or with less
charge to property owners or occupants.
2) OPERATING EXPENSES SHALL NOT INCLUDE:
a) Costs paid for directly by Tenant or other tenants;
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b) Costs incurred in connection with the financing, sale,
transfer taxes or acquisition of the Project or any portion
thereof;
c) Costs incurred in leasing or procuring tenants (including
without limitation, lease commissions, advertising expenses,
attorneys' fees and expenses of renovating space for
tenants);
d) Executive salaries of off-site personnel employed by
Landlord except for the charge (or pro rata share) of the
property manager of the Project;
e) Expenses for structural capital improvements made to the
Project;
f) Subject to the provisions of Section 4.d.1)c) above,
depreciation on the building or other improvements on the
Project;
g) Legal expenses, fines or penalties for disputes with tenants
and any other professional fees of attorneys, auditors or
consultants not incurred in connection with the normal
maintenance and operation of the Project;
h) Expenses which relate to the preparation of rental space for
tenants, including without limitation building permit,
license and inspection costs incurred with respect to the
installation or improvements made for occupants of the
Project or incurred in renovating or otherwise improving,
decorating, painting or decorating vacant tenant space for
the Project or other occupants of the Project;
i) Costs incurred that are reimbursed by tenants of the
Project, including Tenant, or third parties, including
insurers;
j) Expenses for repair or replacement covered by warranties,
and any costs due to casualty that are covered by insurance
carried by Landlord;
k) Rentals and other payments by Landlord under any ground
lease or other lease underlying the Lease, and interest,
principal, points and other fees on debt or amortization of
any debt secured in whole or part by all or any portion of
the Project;
l) Repairs or replacements caused by Landlord's or Tenant's or
their respective employees' or agents' gross negligence or,
to the extent that the costs thereof are in excess of
$10,000 for any one occurrence or $15,000 as an annual
aggregate, the ordinary negligence of Landlord or Tenant or
their respective employees or agents;
m) Net income, franchise, capital stock, estate or inheritance
taxes or taxes which are the personal obligation of Landlord
or another tenant of the Project;
n) Landlord's charitable or political contributions;
o) Payments to subsidiaries and affiliates of Landlord for
services to the Project for supplies or other materials to
the extent that the cost of such services, supplies or
materials exceed the cost which would have been paid had the
services, supplies or materials been provided by
unaffiliated parties on a competitive basis (provided,
however, any fee for management services paid to an
affiliate of Landlord shall be in the amount set forth in
Section 4.d.1)b);
p) Specific costs for any capital repairs, replacements or
improvements, except as provided above;
q) Payments for rented equipment, the cost of which would
constitute a capital expenditure not permitted pursuant to
the foregoing if the equipment were purchased;
r) Expenses in connection with services or other benefits which
are not offered to Tenant or for which Tenant is charged
directly but which are provided to another tenant or
occupant of the Project;
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s) Any and all costs incurred by Landlord in the operation by
Landlord of any health club or any luncheon or other
restaurant, club or commercial facility;
t) Costs incurred in bring the Building into compliance with
any code, regulation or law in existence and as enforced as
of the Commencement Date; or
u) Expenses attributable to the development of new buildings in
the Project.
In addition, if any particular work or service otherwise included
in Operating Expenses is not furnished to a tenant or occupant of
the Project who is undertaking to perform such work or service
itself, Operating Expenses shall be deemed to be increased by an
amount equal to the additional Operating Expenses which would
have been incurred if Landlord had furnished such work to such
tenant or occupant.
3) ANNUAL ESTIMATE OF EXPENSES. As soon as practicable for each
Comparison Year, Landlord shall estimate Tenant's Share of
Expenses for the Comparison Year, by multiplying the estimated
Expenses for the Comparison Year in excess of the Expenses for
the Base Year by Tenant's Share (such product being the
"ESTIMATED TENANT'S SHARE OF EXPENSES").
4) MONTHLY PAYMENT OF EXPENSES. Tenant shall pay to Landlord,
monthly in advance as additional Rent, one-twelfth (1/12) of the
Estimated Tenant's Share of Expenses beginning on January 1 and
on the first day of each succeeding month of the Comparison Year.
As soon as practical following each calendar year but not later
than July 1 of the following year, Landlord shall prepare an
accounting of actual Expenses incurred during said year in the
form attached hereto as EXHIBIT E and such accounting shall
reflect the actual amount of Tenant's Share of Expenses;
provided, however, in the event that Landlord fails to deliver
such accounting by July 1 of the following year, Landlord shall
not be deemed to be in default under this Lease unless Landlord
fails to deliver such accounting within thirty (30) days after
receipt of written notice from Tenant requesting such accounting.
If the additional Rent paid by Tenant under this Section during
the preceding calendar year was more than the actual amount of
Tenant's Share of Expenses for such year, the amount overcharged
shall be paid to Tenant within thirty (30) days of receipt of
such notice. If the additional Rent paid by Tenant under this
Section during the preceding calendar year was less than the
actual amount of Tenant's Share of Expenses for such year,
Landlord shall so notify Tenant and Tenant shall pay such amount
to Landlord within 30 days of receipt of such notice. Such amount
shall be deemed to have accrued during the prior calendar year
and shall be due and payable from Tenant even if the term of this
Lease has expired or this Lease has been terminated prior to
Tenant's receipt of this notice.
5) TENANT'S RIGHT TO AUDIT. Within ninety (90) days after receipt of
Landlord's statement setting forth actual Operating Expenses (the
"STATEMENT"), commencing with the Statement for the Base Year,
Tenant shall be entitled to a preliminary review of Landlord's
books and records forming the basis of this Statement by
employees of Tenant. If Tenant is not satisfied with the results
of such employee review, then, Tenant shall have the right to
audit at Landlord's local offices, at Tenant's expense,
Landlord's accounts and records relating to Operating Expenses,
so long as (a) Tenant delivers written notice to Landlord
requesting such audit (the "NOTICE OF AUDIT") within one hundred
ten (110) days after receipt of the Statement, and (b) such audit
must be completed within sixty (60) days after Landlord's receipt
of the Notice of Audit. Such audit shall be conducted by a
certified public accountant approved by Landlord, which approval
shall not be unreasonably withheld. If such audit reveals that
Landlord has overcharged Tenant, the amount overcharged shall be
paid to Tenant within thirty (30) days after the audit is
concluded. If such audit reveals that Landlord has undercharged
Tenant, the amount of undercharge shall be paid by Tenant to
Landlord within 30 days after the audit is conducted. In
addition, if the Statement exceeds the actual Operating Expenses
which should have been charged to Tenant by more than five
percent (5%), the cost of the audit shall be paid by Landlord.
e. RENT. The term "RENT" as used in this Lease shall refer to Base Rent,
Tenant's Share of Expenses, Security Deposit(s), late charges and all
other charges payable by Tenant to Landlord.
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f. UTILITIES & JANITORIAL SERVICES. Tenant shall pay for all janitorial
services, water, gas, heat, light, power, sewer, electricity
(including the electricity to run the HVAC system), telephone or other
service(s) metered, chargeable or provided to the Premises. Landlord
reserves the right to install separate meters for any such utility;
Landlord has installed in the Project so-called "check meters" for the
purpose of measuring utility usage. To the extent that separate meters
have not been established for all such utilities, Landlord may
reasonably apportion and bill Tenant's usage through the use of
prorations. There shall be no abatement of Rent and Landlord shall not
be liable in any respect whatsoever for the inadequacy, stoppage,
interruption or discontinuance of any utility or service due to riot,
strike, labor dispute, breakdown, accident, repair or other cause
beyond Landlord's reasonable control or in cooperation with
governmental request or directions.
g. LIGHT BULB AND BALLAST REPLACEMENT. During the Term, Tenant shall, at
its sole cost and expense, replace light bulbs in all fixtures and
ballasts in all fluorescent fixtures within the Premises, and Landlord
shall be responsible for light bulbs and ballasts (where applicable)
in all common area fixtures as required.
5. PREPAID RENT. Upon the mutual execution and delivery of this Lease, Tenant
shall pay to Landlord the Prepaid Base Rent set forth in Section 1., and
such Prepaid Base Rent shall be applied toward the Base Rent due for the
first month of the Term for which Rent is due. Landlord shall not be
required to pay Tenant interest on the Prepaid Base Rent. Landlord shall be
entitled to immediately endorse and cash Tenant's Prepaid Base Rent.
6. SECURITY DEPOSIT. Upon execution of this Lease, Tenant shall deposit a
security deposit ("SECURITY DEPOSIT") in the amount set forth in Section 1.
with Landlord. If Tenant is in default, Landlord can (but without any
requirement to do so) use the Security Deposit or any portion of it to cure
the default or to compensate Landlord for any damages sustained by Landlord
resulting from Tenant's default. Upon demand, Tenant shall immediately pay
to Landlord a sum equal to the portion of the Security Deposit expended or
applied by Landlord to restore the Security Deposit to its full amount. In
no event will Tenant have the right to apply any part of the Security
Deposit to any Rent due under this Lease. Landlord's obligations with
respect to the Security Deposit are those of a debtor and not a trustee,
and Landlord can commingle the Security Deposit with Landlord's general
funds. Landlord shall not be required to pay Tenant interest on the
Security Deposit. If Tenant is not in default at the expiration or
termination of this Lease and has fully complied with the provisions of
Section 13.d.6) and Section 26., Landlord shall return the Security Deposit
to Tenant.
7. USE OF PREMISES.
a. TENANT'S USE. Tenant shall use the Premises solely for the purposes
stated in Section 1. and for no other purposes without obtaining
the prior written consent of Landlord. Tenant acknowledges that,
except as provided in writing in this Lease, neither Landlord nor
any agent of Landlord has made any representation or warranty with
respect to the Premises or with respect to the suitability of the
Premises to the conduct of Tenant's business, nor has Landlord
agreed to undertake any modification, alteration or improvement to
the Premises. Tenant shall promptly comply with all laws, statutes,
ordinances, orders and governmental regulations now or hereafter
existing affecting the Premises, excluding any requirements in the
Lease that may require alterations to be performed solely by
Landlord. Tenant shall not do or permit anything to be done in or
about the Premises or bring or keep anything in the Premises that
will in any way increase the premiums paid by Landlord on its
insurance related to the Premises. In connection therewith,
Landlord acknowledges that as of the Date of Lease, to Landlord's
actual knowledge, Tenant's anticipated use of the Premises in
accordance with Section 1 above will not cause any such increase in
insurance premiums, based upon Landlord's current insurance
coverage. Tenant will not perform any act or carry on any practices
that may injure the Premises. Tenant shall not use the Premises for
sleeping, washing clothes, cooking (except in accordance with the
Rules and Regulations attached hereto as EXHIBIT C) or the
preparation, manufacture or mixing of anything that emits any
objectionable odor, noises, vibrations or lights onto such other
tenants. If, in Landlord's reasonable judgment, sound insulation is
required to muffle noise produced by Tenant on the Premises, Tenant
at its own cost shall provide all necessary insulation. Tenant
shall not do anything on the Premises which will overload any
existing parking or service to the Premises. Non-domesticated pets
and/or animals of any type shall not be kept on the Premises.
Tenant covenants that it will not interfere with other tenants'
quiet enjoyment of their premises.
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b. RULES AND REGULATIONS. Tenant shall comply with and use the Premises
in accordance with the Rules and Regulations attached hereto as
EXHIBIT C and to any reasonable modifications to such Rules
and Regulations as Landlord may adopt from time to time, provided
however that if any rule or regulation is in conflict with any term,
covenant or condition of this Lease, this Lease shall prevail. In
addition, no such rule or regulation, or any subsequent amendment
thereto adopted by Landlord, shall in any material way alter, reduce
or adversely affect any of Tenant's rights or materially enlarge
Tenant's obligations under this Lease. Landlord agrees to apply such
Rules and Regulations in a fair, equitable and non-discriminatory
manner, in Landlord's reasonable discretion.
8. EMISSIONS; STORAGE, USE AND DISPOSAL OF WASTE
a. EMISSIONS. Tenant shall not:
1) Knowingly permit any vehicle on the Premises to emit exhaust
which is in violation of any governmental law, rule, regulation
or requirement;
2) Discharge, emit or permit to be discharged or emitted, any
liquid, solid or gaseous matter, or any combination thereof, into
the atmosphere or on, into or under the Premises, any building or
other improvements of which the Premises are a part, or the
ground or any body of water which matter, as reasonably
determined by any governmental entity, does or may pollute or
contaminate the same, or is, or may become, radioactive or does,
or may, adversely affect the (a) health or safety of persons,
wherever located, whether on the Premises or anywhere else, (b)
condition, use or enjoyment of the Premises or any other real or
personal property, whether on the Premises or anywhere else, or
(c) Premises or any of the improvements thereto including
buildings, foundations, pipes, utility lines, or landscaping;
3) Produce, or permit to be produced, any intense glare, light or
heat;
4) Create, or permit to be created, any sound pressure level which
will interfere with the quiet enjoyment of any real property
outside the Premises, or which will create a nuisance or violate
any governmental law, rule, regulation or requirement;
5) Create, or permit to be created, any vibration that is
discernible outside the Premises; or
6) Transmit, receive or permit to be transmitted or received, any
electromagnetic, microwave or other radiation which is or may be
harmful or hazardous to any person or property in, or about the
Premises, or anywhere else, excluding, however, any "microwaves"
emitted from a microwave oven and any computer transmissions.
b. STORAGE AND USE.
1) STORAGE. Subject to the uses permitted and prohibited to Tenant
under this Lease, Tenant shall store in appropriate leak proof
containers all solid, liquid or gaseous matter, or any
combination thereof, which matter, if discharged or emitted into
the atmosphere, the ground or any body of water, does or may (a)
pollute or contaminate the same, or (b) adversely affect the (i)
health or safety of persons, whether on the Premises or anywhere
else, (ii) condition, use or enjoyment of the Premises or any
real or personal property, whether on the Premises or anywhere
else, or (iii) Premises.
2) USE. In addition, without Landlord's prior written consent,
Tenant shall not use, store or permit to remain on the Premises
any solid, liquid or gaseous matter which is, or may become
radioactive. If Landlord does give its consent, Tenant shall
store the materials in such a manner that no radioactivity will
be detectable outside a designated storage area and Tenant shall
use the materials in such a manner that (a) no real or personal
property outside the designated storage area shall become
contaminated thereby and (b) there are and shall be no adverse
effects on the (i) health or safety of persons, whether on the
Premises or anywhere else, (ii) condition, use or enjoyment of
the Premises or any real or personal property thereon or therein,
or (iii) Premises or any of the improvements thereto or thereon.
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3) HAZARDOUS MATERIALS. Subject to the uses permitted and prohibited
to Tenant under this Lease, Tenant shall store, use, employ,
transport and otherwise deal with all Hazardous Materials (as
defined below) employed on or about the Premises in accordance
with all federal, state, or local law, ordinances, rules or
regulations applicable to Hazardous Materials in connection with
or respect to the Premises.
c. DISPOSAL OF WASTE.
1) REFUSE DISPOSAL. Tenant shall not keep any trash, garbage, waste
or other refuse on the Premises except in sanitary containers and
shall regularly and frequently remove same from the Premises.
Tenant shall keep all containers or other equipment used for
storage or disposal of such materials in a clean and sanitary
condition.
2) SEWAGE DISPOSAL. Tenant shall properly dispose of all sanitary
sewage and shall not use the sewage disposal system (a) for the
disposal of anything except sanitary sewage or (b) for amounts
reasonably contemplated by the uses permitted under this Lease.
Tenant shall keep the sewage disposal system serving the Premises
free of all obstructions and in good operating condition. As of
the date of this Lease, Landlord has not received any notice of
noncompliance with respect to such sanitary sewage disposal
system from any governmental authority or other third party.
3) DISPOSAL OF OTHER WASTE. Tenant shall properly dispose of all
other waste or other matter delivered to, stored upon, located
upon or within, used on, or removed from, the Premises by Tenant,
its employees, agents, contractors, invitees (or other persons or
entities under the control of Tenant) in such a manner that it
does not, and will not, adversely affect the (a) health or safety
of persons, wherever located, whether on the Premises or
elsewhere, (b) condition, use or enjoyment of the Premises or any
other real or personal property, wherever located, whether on the
Premises or anywhere else, or (c) Premises or any of the
improvements thereto or thereon including buildings, foundations,
pipes, utility lines, landscaping or parking areas.
d. INFORMATION. Tenant shall provide Landlord with any and all
information regarding Hazardous Materials in the Premises, including
copies of all filings and reports to governmental entities at the time
they are originated, and any other information requested by Landlord.
In the event of any accident, spill or other incident involving
Hazardous Materials, Tenant shall immediately report the same to
Landlord and supply Landlord with all information and reports with
respect to the same. All information described herein shall be
provided to Landlord regardless of any claim by Tenant that it is
confidential or privileged.
e. COMPLIANCE WITH LAW. Notwithstanding any other provision in this Lease
to the contrary, to the extent necessary to perform their respective
obligations under this Lease, each party hereto shall comply with all
laws, statutes, ordinances, regulations, rules and other governmental
requirements now or hereafter existing, and in particular, relating to
the storage, use and disposal of Hazardous Materials.
f. INDEMNITY. Tenant hereby agrees to indemnify, defend and hold
Landlord, its agents, employees, lenders, shareholders, directors,
representatives, successors and assigns harmless from and against any
and all actions, causes of action, losses, damages, costs, claims,
expenses, penalties, obligations or liabilities of any kind whatsoever
(including but not limited to reasonable attorneys' fees) arising out
of or relating to any Hazardous Materials employed, used, transported
across, or otherwise brought upon the Premises by Tenant (or invitees,
or persons or entities under the control of Tenant) in connection with
or with respect to the Premises. Notwithstanding any of the provisions
of this Lease, the indemnity obligation of Tenant pursuant to this
Section 8.f. shall survive the termination of this Lease and shall
relate solely to any occurrence as described in this Section 8.
occurring in connection with this Lease. Landlord hereby agrees to
indemnify, defend and hold Tenant harmless from and against any and
all actions, causes of action, losses, damages, costs, claims,
expenses, penalties, obligations or liabilities of any kind whatsoever
(including reasonable attorneys' fees) arising out of or relating to
Hazardous Materials that (i) are now located in, on, under, about or
emanating to or from the Premises or the Project as of the date of
this Lease, or (ii) have been or will be employed, used, transported
to the Project, for which the Premises are a part thereof, by
Landlord, its agents, employees or contractors. For purposes of this
Lease the term "HAZARDOUS MATERIALS" shall
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mean any hazardous, toxic or dangerous waste, substance or material,
pollutant or contaminant, as defined for purposes of the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (42
U.S.C. Sections 9601 et seq.), as amended, or the Resource
Conservation and Recovery Act (42 U.S.C. Sections 6901 et seq.), as
amended, or any other federal, state, or local law, ordinance, rule or
regulation applicable to the Premises, or any substance which is
toxic, explosive, corrosive, flammable, infectious, radioactive,
carcinogenic, mutagenic, or otherwise hazardous, or any substance
which contains gasoline, diesel fuel or other petroleum hydrocarbons,
polychlorinated biphenyls (PCB's), or radon gas, urea formaldehyde,
asbestos or lead. Except as otherwise disclosed in those certain
environmental reports identified as: (1) Preliminary Environmental
Assessment prepared by Dames & Moore, issued on November 27, 1989; (2)
Phase I Report prepared by Certified Engineering & Testing Company,
issued on September 15, 1993; and (3) Inspection Report prepared by
Wagner, Hohns, Inglis, Inc., issued on September 27, 1993, each of
which has been previously provided to Tenant, Landlord hereby
represents to Tenant that, to its current, actual knowledge, no
Hazardous Materials (except routine office and janitorial supplies in
usual and customary quantities) presently exists as of the Date of
Lease on or under the Project. For purposes of this Lease, current
actual knowledge shall mean the actual present knowledge of Thomas A.
Numainville as of the Date of Lease, without investigation or inquiry
of any kind.
9. SIGNAGE.
a. GENERAL. All signage shall meet the criteria described on EXHIBIT F
attached to this Lease, or otherwise comply with Landlord's standard
sign criteria and with rules and regulations set forth by Landlord
as may be reasonably modified from time to time. Landlord shall
provide building standard tenant identification adjacent to the suite
entrance. Landlord shall have the right to review and approve all
Tenant signage. Tenant shall place no window covering (e.g., shades,
blinds, curtains, drapes, screens, or tinting materials), stickers,
signs, lettering, banners or advertising or display material on or
near exterior or common corridor windows or doors if such materials
are visible from the exterior of the Premises or from the common
corridor, without Landlord's prior written consent, which consent
shall not be unreasonably withheld or delayed. Similarly, Tenant may
not install any alarm boxes, foil protection tape or other security
equipment on the Premises without Landlord's prior written consent,
which shall not be unreasonably withheld, conditioned or delayed. Any
material violating this provision may be destroyed by Landlord without
compensation to Tenant.
b. DIRECTORY BOARD LISTINGS. To the extent there is a central directory
board(s) in the building, then, during the Term, at Tenant's sole cost
and expense (except for Tenant's initial listing strip which shall be
provided at Landlord's sole cost and expense), Tenant shall be
entitled to a proportionate amount of listing strips on the directory
board in the lobby of the building, for the purposes of identifying
Tenant and its employees, as well as any of Tenant's sublessees and/or
assignees and their employees. Any changes made by Tenant during the
Term to the directory board listings to reflect additions and/or
deletions, including for any of Tenant's sublessees and/or assignees
and their employees, shall be performed by Landlord, at Tenant's
request and expense.
c. IDENTITY. As long as Tenant is paying rent for over 80,000 RSF in the
building located in the Project, and has not otherwise sublet,
assigned or transferred its interest in more than 40,000 RSF in the
aggregate in accordance with the terms of this Lease, the name of the
building shall be exclusive to Tenant and shall be referred to as
EarthLink Centre (currently Pasadena Technology Center).
d. EXTERIOR SIGNAGE. During the Term, Tenant, at Tenant's sole and cost
and expense, shall have the exclusive right to place its name and/or
logo on two (2) sides of the building [as selected by Tenant], said
location to be subject to Landlord's reasonable approval. Existing
grade-level monuments adjacent to the building's entrance on Sierra
Madre Villa Boulevard shall be modified at Tenant's expense to include
EarthLink's identity to be displayed on the top slot. The design,
size, lettering, materials, lighting and colors of all such signage
shall be as described on EXHIBIT F attached to this Lease, and subject
to all sign ordinances in the City of Pasadena and Landlord's
reasonable approval. Upon the expiration or termination of the Lease,
Tenant, at Tenant's sole cost and expense, shall remove all such
exterior signage and repair and repaint to match the exterior of the
building.
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e. INTERIOR SIGNAGE. Tenant shall be permitted to install appropriate
signage on the walls of its lobbies and on entrance doors to space
under lease by Tenant. All such signage shall be at Tenant's sole cost
and expense, including the costs of installation and subject to
Landlord's reasonable approval. Upon the expiration or termination of
the Lease, Tenant, at Tenant's sole cost and expense, shall remove all
such interior signage and repair and repaint to match the surrounding
area.
10. PERSONAL PROPERTY TAXES. Tenant shall pay at least ten (10) days prior to
delinquency all taxes assessed against and levied upon Tenant owned
leasehold improvements, trade fixtures, furnishings, equipment and all
personal property of Tenant contained in the Premises or elsewhere. When
possible, Tenant shall cause its leasehold improvements, trade fixtures,
furnishings, equipment and all other personal property to be assessed and
billed separately from the real property of Landlord. If any of Tenant's
said personal property shall be assessed with Landlord's real property,
Tenant shall pay Landlord the taxes attributable to Tenant within ten (10)
days after receipt of a written statement setting forth the taxes
applicable to Tenant's property. Notwithstanding anything to the contrary
contained herein, Tenant shall have the right to dispute such taxes if
Tenant reasonably believes the same to be incorrect.
11. VEHICLE PARKING. At no cost to Tenant for the initial Term, Landlord grants
to Tenant and Tenant's customers, suppliers, employees and invitees, a
nonexclusive license to use the number of parking spaces set forth in
Section 1. to be located in the designated parking areas in the Project for
the use of motor vehicles during the Term of this Lease. Landlord reserves
the right at any time to grant similar non-exclusive use to other tenants,
to promulgate rules and regulations relating to the use of such parking
areas, including reasonable restrictions on parking by tenants and
employees, to designate specific spaces for the use of any tenant, to make
changes in the parking layout from time to time and to establish reasonable
time limits on parking. Notwithstanding the above, during the Term,
Landlord shall guarantee and make available to Tenant, 7 days a week, 24
hours a day, 365 days a year, as requested from time to time by Tenant, up
to 3.3 parking spaces, on an unassigned basis, in the surface parking areas
for each 1,000 RSF contained within the Premises. Tenant shall have up to
five of such parking spaces, at Tenant's option, located at the closest
available location to the entry of the Premises (excluding only handicapped
parking), in a location to be agreed upon by Landlord and Tenant. Such five
(5) spaces shall be clearly designated for Tenant's sole use. There shall
be no charge or assessments to Tenant, its employees, or visitors for the
use of any such parking during the initial Term.
12. SERVICES AND UTILITIES. Provided that the Tenant is not in default
hereunder, Landlord, as part of Operating Expenses, agrees to furnish to
the Premises during standard business hours (excluding the utilities
required to operate same) and to maintain the heating, ventilating and air
conditioning ("HVAC") systems during the term of the Lease to the Premises
consistent with usage for call center and/or data center operations, Monday
through Sunday, 24 hours a day, 7 days a week, 365 days a year. Landlord as
part of Operating Expenses shall also maintain, clean and keep lighted the
common stairs, common entries, and shall be responsible for the repair,
replacement and/or maintenance of the base building plumbing, surface
parking areas of the Project, common area loading dock, wiring (after
installation and warranty period), roof, and restrooms and exterior windows
in the Project. Landlord as part of Operating Expenses shall provide
security personnel, equipment, procedures and systems as Landlord shall
deem appropriate for buildings of comparable age, size, type and quality of
construction in the Pasadena area (the "COMPARABLE BUILDINGS"), including
with respect to the associated surface parking areas. Tenant at Tenant's
sole cost shall have the right to supplement the security relative to its
Premises and surveillance of parking lots. Except as otherwise set forth
herein, Landlord shall not be in default hereunder or be liable for any
damages directly or indirectly resulting from, nor shall the Rent be abated
by reason of (i) the installation, use or interruption of use of any
equipment in connection with the furnishing of any of the foregoing
services, (ii) failure to furnish or delay in furnishing any such services
where such failure or delay is caused by accident or any condition or event
beyond the reasonable control of Landlord, or by the making of necessary
repairs or improvements to the Premises or Project, or (iii) the
limitation, curtailment or rationing of, or restrictions on, use of water,
electricity, gas or any other form of energy serving the Premises or
Project. Except as otherwise provided herein, Landlord shall not be liable
under any circumstances for a loss of or injury to property or business,
however occurring, through or in connection with or incidental to failure
to furnish any such services. Notwithstanding the above, Landlord and
Tenant agree that there are certain building services without which Tenant
cannot occupy the Premises for the intended purposes under the Lease; such
services are heating, ventilation, air conditioning, electrical service,
elevator service, surface parking for three and 30/100 (3.3) cars per 1,000
RSF contained within the Premises, and water and plumbing. Should Landlord
fail to provide, during the Term, for any reason other than reason(s)
beyond the control of
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Landlord any one or more of the aforementioned services for a continuous
period of five (5) days following notice to Landlord of the problem, or
more than twelve (12) days in any one calendar year, then Base Rental plus
Tenant's pro-rata share of Operating Expenses and Taxes shall abate (in
proportion to the degree to which occupancy of the Premises is unfeasible)
until such service or services are restored. If Tenant uses heat generating
machines or equipment in the Premises which affect the temperature
otherwise maintained by the HVAC system, Landlord reserves the right to
install supplementary air conditioning units in the Premises and the cost
thereof, including cost of installation, operation and maintenance thereof,
shall be paid by Tenant to Landlord upon demand by Landlord.
Except as otherwise provided herein, Tenant shall not, without the written
consent of Landlord, use any apparatus or device in the Premises, including
without limitation, electronic data processing machines, punch card
machines or machines using in excess of 120 volts, which consumes more
electricity than is usually furnished or supplied for the use of Premises
as general office space, as determined by Landlord. Tenant shall not
connect any apparatus with electrical current except through existing
electrical outlets in the Premises. Tenant shall not consume water or
electrical current in excess of that usually furnished or supplied for the
use of Premises as general office space (as determined by Landlord),
without first procuring the written consent of Landlord, which Landlord may
refuse, and in the event of consent, Landlord may have installed a water
meter or electrical current meter in the Premises to measure the amount of
water or electrical current consumed. The cost of any such meter and of its
installation, maintenance and repair shall be paid for by the Tenant, and
Tenant agrees to pay to Landlord promptly upon demand for all such water
and electrical current consumed as shown by said meters, at the rates
charged for such services by the local public utility plus any additional
expense incurred in keeping account of the water and electrical current so
consumed. If a separate meter is not installed, the excess cost for such
water and electrical current shall be established by an estimate made by a
utility company or electrical engineer hired by Landlord at Tenant's
expense. Notwithstanding anything to the contrary contained herein, upon
the prior written request of Tenant, Tenant may use additional electricity
in excess of that usually furnished for use of the Premises as general
office space, so long as Tenant's excess usage does not overburden the
existing power supplied to the Project or otherwise adversely affect the
use of other tenants in the Project; provided further, however that Tenant
shall be responsible, at Tenant's sole cost and expense, for the
installation of any additional transformers and/or distribution panels (or
any upgrades to existing transformers and/or distribution panels) necessary
to accommodate such additional electricity requirements.
Landlord shall furnish elevator service, lighting replacement for building
standard lights, restroom supplies, and window washing for the Premises and
the Project in a manner that such services are customarily furnished to
comparable office buildings in the area.
13. REPAIRS AND MAINTENANCE.
a. LANDLORD'S OBLIGATION. Landlord and Tenant have reviewed the heating,
ventilation and air conditioning equipment serving the Premises, and
Landlord shall deliver the Premises to Tenant free of deferred
maintenance on such equipment. Landlord shall maintain, in good order,
condition and repair the Project and the Premises except to the extent
that Tenant (or other tenants of the Project) are otherwise obligated
for such maintenance.
b. TENANT'S OBLIGATIONS.
1) Tenant at Tenant's sole expense shall, except for services
furnished by Landlord pursuant to Section 13.a. hereof, maintain
the Premises in good order, condition and repair, including the
interior surfaces of the ceilings, walls and floors, all doors,
all interior windows, and building standard fixtures, building
standard furnishings and special items and equipment installed by
or at the expense of Tenant.
2) Except as otherwise set forth herein, Tenant shall be responsible
for all repairs in and to the Premises and Project, the need for
which arises out of (i) the installation, removal, use or
operation of Tenant's property in the Premises, (ii) the moving
of Tenant's property into or out of the Project, or (iii) the
act, omission, misuse or negligence of Tenant, its agents,
contractors, employees or invitees.
3) If Tenant fails to maintain the Premises in good order, condition
and repair, Landlord shall give Tenant notice to do such acts as
are reasonably required to so maintain the Premises. If Tenant
fails to promptly commence such work and diligently prosecute it
to completion, then Landlord shall have the right to do such acts
and expend such funds at
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the expense of Tenant as are reasonably required to perform such
work. Any amount so expended by Landlord shall be paid by Tenant
promptly after demand with interest at the prime commercial rate
then being charged by Wells Fargo Bank plus two percent (2%) per
annum, from the date of such work, but not to exceed the maximum
rate then allowed by law. Landlord shall have no liability to
Tenant for any damage, inconvenience or interference with the use
of the Premises by Tenant as a result of performing any such
work; provided, however, in connection therewith, Landlord shall
use reasonable efforts to minimize interference with Tenant's
business operations in the Premises.
4) AS-IN CONDITION. The parties affirm that Landlord, its
subsidiaries, officers, shareholders, directors, agents and/or
employees have made no representations to Tenant respecting the
condition of the Premises except as specifically stated herein.
5) AMERICANS WITH DISABILITIES ACT. Tenant acknowledges that as of
the Commencement Date, the Premises may not comply with the
Americans with Disabilities Act of 1990 ("ADA"), and that
Landlord shall have no obligation with respect to any such
failure of the Premises to so comply. Notwithstanding the
foregoing, Landlord shall cause the Project (outside of the
perimeters of the Premises as outlined on the rendering attached
as EXHIBIT A and including all Common Areas within the Premises)
to comply with the ADA as of the Commencement Date of this Lease
at no cost and expense to Tenant unless such compliance is
required as a result of a unique or special use of the Premises
by Tenant in comparison with the typical use of similar space for
office purposes in the vicinity of the building; provided,
however, that in no event shall Tenant be required to pay for any
changes to the restroom facilities for the Project as a result of
the permitting and construction of the Tenant Improvements other
than those restrooms existing within the Premises or any
elevators or stairwells. Tenant shall, at its cost, at any time
during the Term as required by any applicable governmental agency
having jurisdiction over the Premises, make such modifications
and alterations to the Premises as may be required after the Date
of Lease in order to fully comply with the provisions of the ADA,
as from time to time amended, and any and all regulations issued
pursuant to or in connection with the ADA in such a manner as to
satisfy the applicable governmental agency or agencies requiring
remediation. Tenant shall at least thirty (30) days prior to the
commencement of any construction in connection with satisfaction
of the ADA, give written notice to Landlord of its intended
commencement of construction together with sufficient details so
as to reasonably disclose to Landlord the nature of the proposed
construction, copies of any notices received by Tenant from
applicable governmental agencies in connection with the ADA and
such other documents or information as Landlord may reasonably
request. In any event, notwithstanding anything to the contrary
contained in this Lease, prior to the termination of the Term,
Tenant shall, at its cost, make such modifications and
alterations to the Premises as may be required to comply fully
with the ADA as from time to time amended and any and all
regulations issued thereunder; provided, however, that if Tenant
is made aware that such modifications and alterations will be
required to be constructed within the Premises during the last
twenty-four (24) months of the term of this Lease, then Tenant's
financial obligation with respect to such construction shall be
limited ("ADA COST LIMITATION") to a maximum of $120,000, if
twenty-four (24) months remain in the Term, $115,000 if
twenty-three (23) months remain in the Term, and so forth
thereafter, continuing to be calculated on a sliding scale,
reduced monthly by $5,000, through the end of the Term of this
Lease; provided, however, if the Term of this Lease is extended
pursuant to Section 33 below or otherwise, then the ADA Cost
Limitation shall be rescinded and any prior subsidy by Landlord
with respect thereto shall be refunded by Tenant to Landlord
within thirty (30) days of Tenant's exercise of such option to
extend or the execution of such other agreement by Tenant to
extend the Term of this Lease. By way of illustration, if twelve
(12) months remain in the Term, such maximum financial obligation
shall be $60,000. Landlord shall be responsible for the cost of
the balance of such work. Tenant shall give the Landlord thirty
(30) days prior written notice as described above in connection
with any such construction. Any and all construction required to
so comply with the ADA shall be completed by Tenant prior to the
expiration of the Term.
c. COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Except as otherwise provided
herein, Tenant shall, at its own cost and expense, promptly and
properly observe and comply with all present and future orders,
regulations, directions, rules, laws, ordinances, and requirements of
all
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governmental authorities (including but not limited to state,
municipal, county and federal governments and their departments,
bureaus, boards and officials) arising from the use or occupancy of,
or applicable to, the Premises or privileges appurtenant to or in
connection with the enjoyment of the Premises. Except as otherwise
provided herein, Tenant shall also comply with all such rules, laws,
ordinances and requirements at the time Tenant makes any alteration,
addition or change to the Premises. To the extent necessary to perform
its obligations under this Lease, including the obligations
specifically referenced in Section 2.a. above, Landlord shall comply
with all present and future orders, regulations, directions, rules,
laws, ordinances, and requirements of all governmental authorities
(including but not limited to state, municipal, county and federal
governments and their departments, bureaus, boards and officials)
arising from the use or occupancy of, or applicable to, the Project.
d. MISCELLANEOUS.
1) Landlord and Tenant shall each do all acts required to comply
with all applicable laws, ordinances and rules of any public
authority relating to their respective maintenance obligations as
set forth herein.
2) To the extent that it is inconsistent with any provisions of this
Lease, Tenant expressly waives the benefits of any statute now or
hereafter in effect which would otherwise afford the Tenant the
right to make repairs at Landlord's expense or to terminate this
Lease because of Landlord's failure to keep the Premises in good
order, condition and repair.
3) Tenant shall not place a load upon any floor of the Premises
which exceeds the load per square foot which such floor was
designed to carry, as reasonably determined by Landlord or
Landlord's structural engineer. The cost of any such
determination made by Landlord's structural engineer shall be
paid for by Tenant upon demand. Tenant shall not install business
machines or mechanical equipment which cause noise or vibration
to such a degree as to be reasonably objectionable to Landlord or
other Project tenants.
4) Except as otherwise expressly provided in this Lease, Landlord
shall have no liability to Tenant nor shall Tenant's obligations
under this Lease be reduced or abated in any manner whatsoever by
reason of any inconvenience, annoyance, interruption or injury to
business arising from Landlord making any repairs or changes
which Landlord is required to make or is permitted to make by
this Lease or by any tenant's lease or is required by law to make
in or to any portion of the Project or the Premises. Landlord
shall nevertheless use reasonable efforts to minimize any
interference with Tenant's business in the Premises.
5) Tenant shall give Landlord prompt notice of any damage to or
defective condition in any part or appurtenance of the Project's
mechanical, electrical, plumbing, HVAC or other systems serving,
located in or passing through the Premises.
6) Upon the expiration or early termination of this Lease, Tenant
shall return the Premises to Landlord clean and in the same
condition as on the date of completion of the initial tenant
improvements to the Premises, except for normal wear and tear.
Any damage to the Premises, including any structural damage,
resulting from Tenant's use or from the removal of Tenant's
fixtures, furnishings and equipment shall be repaired by Tenant
prior to the end of the Term at Tenant's expense.
14. ALTERATIONS. Tenant shall not make any alterations to the Premises,
including any changes to the existing landscaping, without Landlord's prior
written consent. Tenant may make non-structural alterations costing less
than $50,000 per event without Landlord's consent. Regardless of whether
Landlord's consent for alteration is required, Tenant must provide Landlord
at least fifteen (15) business days prior to the commencement of any
alteration with a complete description of each such alteration including
any building permit drawing(s) and specifications. Landlord may post
notices regarding non-responsibility in accordance with the laws of the
state in which the Premises are located. All alterations made by Tenant,
whether or not subject to the approval of Landlord, shall be performed by
Tenant and its contractors in a first class workmanlike manner and permits
and inspections shall be obtained from all required governmental entities.
Any alterations made shall remain on and be surrendered with the Premises
upon expiration or termination of this Lease, except that Landlord may, in
connection with Tenant's request for Landlord's approval of any such
alteration, elect to require Tenant to remove some or all of the
alterations which Tenant may have made to the Premises ("REQUIRED
REMOVABLES"). If Landlord so elects, Tenant shall at its own cost restore
the Premises to the condition designated by
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Landlord in its election or pursuant to any prior approval, before the last
day of the Term. Should Landlord consent in writing to Tenant's alteration
of the Premises, Tenant shall contract with a contractor approved by
Landlord for the construction of such alterations, shall secure all
appropriate governmental approvals and permits, and shall complete such
alterations with due diligence in compliance with plans and specifications
approved by Landlord (if required). Tenant shall pay all costs for such
construction and shall keep the Premises free and clear of all mechanics'
liens which may result from construction by Tenant. Tenant's property shall
include, without limitation, Tenant's furniture, furnishings, business
machines and equipment, computer conduits, communications equipment and
such other property as may be required in the conduct of Tenant's business.
Tenant shall have the right, but not the obligation (except at the
expiration or prior termination of the Term), to remove the same at any
time, to finance the purchase thereof, to grant security interests therein
and to otherwise encumber same.
15. RELEASE AND INDEMNITY. As material consideration to Landlord, Tenant agrees
that, except as otherwise provided herein, Landlord shall not be liable to
Tenant for any damage to Tenant or Tenant's property from any cause, except
for damages resulting from Landlord's gross negligence or willful
misconduct or resulting from Landlord's ordinary negligence to the extent
that (i) Landlord and/or its property manager for the Project has received
prior notice specifically describing the activity or condition allegedly
constituting ordinary negligence by Landlord, and Landlord thereafter
continues to engage in such activity or otherwise fails to commence and
diligently pursue to completion the cure of such activity or condition
within a reasonable period of time, and (ii) the results of such ordinary
negligence are not covered by insurance required to be carried by Landlord
or Tenant under the terms of this Lease, and, except as otherwise provided
herein, Tenant waives all claims against Landlord for damage to persons or
property arising for any reason, except for damage resulting directly from
Landlord's gross negligence or willful misconduct (or resulting from
Landlord's ordinary negligence to the extent that (i) Landlord and/or its
property manager for the Project has received prior notice specifically
describing the activity or condition allegedly constituting ordinary
negligence by Landlord, and Landlord thereafter continues to engage in such
activity or otherwise fails to commence and diligently pursue to completion
the cure of such activity or condition within a reasonable period of time,
and (ii) the results of such ordinary negligence are not covered by
insurance required to be carried by Landlord or Tenant under the terms of
this Lease) or Landlord's breach of this Lease. Except to the extent
otherwise provided herein, Tenant shall indemnify and hold Landlord, its
subsidiaries, officers, shareholders, directors, agents and employees
harmless from all damages including attorneys' fees and costs arising out
of any damage to any person or property occurring in, on or about the
Premises or Tenant's use of the Premises or Tenant's breach of any term of
this Lease. Furthermore, Landlord shall indemnify, defend, and hold
harmless Tenant and its affiliates from liability for any and all claims,
liabilities and costs (including attorneys' fees and disbursements) arising
from the gross negligence and willful misconduct of Landlord, its agents,
employees, contractors, invitees and licensees or arising from Landlord's
ordinary negligence to the extent that (i) Landlord and/or its property
manager for the Project has received prior notice specifically describing
the activity or condition allegedly constituting ordinary negligence by
Landlord, and Landlord thereafter continues to engage in such activity or
otherwise fails to commence and diligently pursue to completion the cure of
such activity or condition within a reasonable period of time, and (ii) the
results of such ordinary negligence are not covered by insurance required
to be carried by Landlord or Tenant under the terms of this Lease. This
indemnification is in addition to that indemnification by Landlord provided
in Section 8.f. of this Lease.
16. INSURANCE. Tenant, at its cost, shall maintain public liability and
property damage insurance and products liability insurance with a single
combined liability limit of at least $5,000,000, insuring against all
liability of Tenant and its representatives, employees, invitees and agents
arising out of or in connection with Tenant's use or occupancy of the
Premises. Public liability insurance, products liability insurance and
property damage insurance shall insure performance by Tenant of the
indemnity provisions of Section 15. Landlord, Landlord's lender(s) and
ground lessor, if any, shall be named as additional insureds on all
required policies, and the policies shall contain cross liability
endorsements. On all its personal property, at its cost, Tenant shall
maintain a policy of standard fire and extended coverage insurance with
boiler and machinery, vandalism and malicious mischief endorsements and
"all risk" coverage on all of Tenant's improvements and alterations,
including without limitation, all items of Tenant responsibility described
in Section 13. in or about the Premises, to the extent of at least ninety
percent (90%) of their full replacement value. The proceeds from any such
policy shall be used by Tenant for the replacement of personal property and
the restoration of Tenant's improvements or alterations. All insurance
required to be provided by Tenant under this Lease shall release Landlord
from any claims for damage to any person or the Premises and the Project,
and to Tenant's fixtures, personal property, improvements and alterations
in or on the Premises or the Project, caused by or resulting from risks
insured against under any insurance policy carried by Tenant in force at
the time of
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such damage. All insurance required to be provided by Tenant under this
Lease: (a) shall be issued by insurance companies authorized to do business
in the state in which the Premises are located with a financial rating of
at least an A+X status as rated in the most recent edition of Best's
Insurance Reports; (b) shall be issued as a primary policy; and (c) shall
contain an endorsement requiring at least 30 days prior written notice of
cancellation to Landlord, before cancellation or change in coverage, scope
or amount of any policy. Tenant shall deliver a certificate or copy of such
policy together with evidence of payment of all current premiums to
Landlord within 30 days of execution of this Lease. Tenant's failure to
provide evidence of such coverage to Landlord may, in Landlord's sole good
faith discretion, constitute a default under this Lease. Notwithstanding
anything to the contrary contained in this Lease, to the extent that this
release and waiver does not invalidate or impair their respective insurance
policies, the parties hereto release each other and their respective
agents, employees, officers, directors, shareholders, successors, assignees
and subtenants from all liability for injury to any person or damage to any
property that is caused by or results from a risk which is actually insured
against pursuant to the provisions of this Lease without regard to the
negligence or willful misconduct of the parties so released. Each party
shall use its best efforts to cause each insurance policy it obtains to
provide that the insurer thereunder waives all right of recovery by way of
subrogation as required herein in connection with any injury or damage
covered by the policy. If such insurance policy cannot be obtained with
such waiver of subrogation, or if such waiver of subrogation is only
available at additional cost and the party for whose benefit the waiver is
not obtained does not pay such additional costs after reasonable notice,
then the party obtaining such insurance shall promptly notify the other
party of the inability to obtain insurance coverage with the waiver of
subrogation. During the Term, Landlord shall carry casualty and all-risk
insurance for the full replacement value of the building on such terms as
those contained in policies typically maintained by owners of the
Comparable Buildings (and containing waivers of subrogation). At no cost to
Tenant, Tenant and its designated affiliates shall be named as additional
insureds on any and all policies of liability insurance obtained with
respect to the building and Tenant's occupancy of the Premises, with the
limits and deductibles of such policies to be reasonably determined by
Landlord. Landlord shall obtain and maintain a commercially reasonable
public liability insurance policy.
17. DESTRUCTION. In the event the Premises and/or Project are damaged during
the term of this Lease then Landlord's general contractor in charge of
construction shall certify to Landlord and Tenant within thirty (30) days
following Landlord's receipt of notification of such damage whether or not
the Premises and Project can be restored within one hundred eighty (180)
days following the occurrence of such destruction. If such certificate
states that the Premises and Project cannot be restored within said one
hundred eighty (180) day period, then either Landlord or Tenant may
terminate this Lease by delivery of notice to the other party. If neither
Landlord nor Tenant elects to terminate this Lease within ten (10) days
following receipt of such certificate, or if such certificate states that
the Premises and Project can be restored within one hundred eighty (180)
days following the occurrence of such destruction, then Landlord shall
promptly commence to restore the Premises in compliance with then existing
laws and shall complete such restoration with due diligence; provided,
however, Landlord shall not be required to restore alterations made by
Tenant which were not approved by Landlord in accordance with the terms of
this Lease or Tenant's trade fixtures and Tenant's personal property, such
excluded items being the sole responsibility of Tenant to restore provided,
however, that Landlord shall, to the extent of available insurance
proceeds, restore tenant improvements to the Premises made by Tenant such
as interior offices, lab and production improvements and other like
improvements. If at any time during the course of the work of repair and
restoration to the Premises and Project Tenant requests that the general
contractor in charge of such work of construction certify to Tenant as to
the date that such work of construction will be substantially completed and
if such certificate states that the date of such substantial completion
will extend beyond that date which is two hundred seventy (270) days
following the date of such destruction (the "OUTSIDE DATE"), then Tenant
shall have the right, within ten (10) days following receipt of such
certificate, to either agree to extend the Outside Date to the date of
substantial completion projected by the general contractor, or to notify
Landlord that Tenant has elected to terminate this Lease. If Landlord,
within ten (10) days following receipt of Tenant's notice of its election
to terminate, agrees to accelerate through overtime or multiple shifts the
date of substantial completion such that the general contractor certifies
to Tenant that, given Landlord's commitment to overtime and/or multiple
shifts, the substantial completion date will occur prior to the Outside
Date, as such date may have been previously extended by Tenant either
directly or through delays caused by Tenant, Tenant's notice of termination
shall be automatically rescinded. Tenant shall have the right following
such rescission to request update certificates from such general contractor
and the procedure described above shall repeat. Tenant hereby waives the
provisions of Civil Code Section 1932(2) and Civil Code Section 1933(4)
with respect to any destruction of the Premises. In such event, this Lease
shall remain in full force and effect, but there shall be an abatement of
Rent between the date of destruction and the date of completion of
restoration, based on the extent to which destruction interferes with
Tenant's use of the Premises. If the date of the destruction
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described above occurs within the last eighteen months of the term of this
Lease, and as a result of such destruction, Tenant is required in Tenant's
reasonable business judgment to relocate, and, in fact, within thirty (30)
days of such destruction Tenant physically causes, or is substantially
under way with, such relocation, of either (a) substantially all of
Tenant's switching equipment or substantially all of Tenant's other primary
"heavy" equipment which constitutes a fundamental element of Tenant's
business operations from the Premises to temporary premises in order to
properly conduct its business or (b) substantially all elements of Tenant's
operations in the Premises to temporary premises in order to properly
conduct its business (provided, however, that alternative "(b)" shall only
be available to Tenant if Landlord's contractor in charge of repair of such
destruction certifies to the parties, after consultation with Tenant's
contractor, that Tenant would be able, in such Landlord's contractor's
judgment, to relocate substantially all elements of Tenant's operations to
temporary premises and commence operations therein prior to the date by
which such destruction could be repaired by Landlord's contractor), Tenant
shall have the right to terminate this Lease as of the date of such
destruction by delivery of written notice to Landlord within thirty (30)
days following such date of destruction.
18. CONDEMNATION.
a. DEFINITIONS. The following definitions shall apply: (1) "CONDEMNATION"
means (a) the exercise of any governmental power of eminent domain,
whether by legal proceedings or otherwise by condemnor, and (b) the
voluntary sale or transfer by Landlord to any condemnor either under
threat of condemnation or while legal proceedings for condemnation are
proceeding; (2) "DATE OF TAKING" means the date the condemnor has
right to possession of the property being condemned; (3) "AWARD" means
all compensation, sums or anything of value awarded, paid or received
on a total or partial condemnation; and (4) "CONDEMNOR" means any
public or quasi-public authority, or private corporation or
individual, having power of condemnation.
b. OBLIGATIONS TO BE GOVERNED BY LEASE. If during the Term of the Lease
there is any taking of all or any part of the Premises or the Project,
the rights and obligations of the parties shall be determined strictly
pursuant to this Lease. Each party waives the provisions of Code of
Civil Procedure Section 1265.130 allowing either party to petition the
Superior Court to terminate this Lease in the event of a partial
condemnation of the Premises to the extent such statute is
inconsistent with the provisions of this Section 18.
c. TOTAL OR PARTIAL TAKING. If the Premises are totally taken by
Condemnation, this Lease shall terminate on the Date of Taking. If any
portion of the Premises is taken by Condemnation, this Lease shall
remain in effect, except that Tenant can elect to terminate this Lease
if in Tenant's reasonable judgment the remaining portion of the
Premises is rendered unsuitable for Tenant's continued use of the
Premises. If Tenant elects to terminate this Lease, Tenant must
exercise its right to terminate by giving notice to Landlord within 30
days after the nature and extent of the taking have been finally
determined. If Tenant elects to terminate this Lease, Tenant shall
also notify Landlord of the date of termination, which date shall not
be earlier than 30 days nor later than 90 days after Tenant has
notified Landlord of its election to terminate; except that this Lease
shall terminate on the Date of Taking if the Date of Taking falls on a
date before the date of termination as designated by Tenant. If any
portion of the Premises is taken by Condemnation and this Lease
remains in full force and effect, on the Date of Taking the Rent shall
be reduced by an amount in the same ratio as the total number of
square feet in the Premises taken bears to the total number of square
feet in the Premises immediately before the Date of Taking. Any award
for the taking of all or any part of the Premises under the power of
eminent domain or any payment made under threat of the exercise of
such power shall be the property of Landlord, whether such Award shall
be made as compensation for diminution in value of the leasehold or
for the taking of the fee, or as severance damages; provided, however,
that Tenant shall be entitled to any compensation separately awarded
to Tenant for Tenant's relocation expenses and/or loss of Tenant's
trade fixtures.
19. ASSIGNMENT OR SUBLEASE
a. Tenant shall not assign or encumber its interest in this Lease or the
Premises or sublease all or any part of the Premises or allow any
other person or entity (except Tenant's authorized representatives,
employees, invitees or guests) to occupy or use all or any part of the
Premises without first obtaining Landlord's consent, which consent
shall not be unreasonably withheld. Any assignment, encumbrance or
sublease without Landlord's prior written consent shall be voidable
and at Landlord's election, shall constitute a default. If Tenant is a
partnership, a
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withdrawal or change, voluntary, involuntary or by operation of law of
any partner, or the dissolution of the partnership, shall be deemed a
voluntary assignment. If Tenant consists of more than one person, a
purported assignment, voluntary or involuntary or by operation of law
from one person to the other shall be deemed a voluntary assignment.
Subject to the last sentence of this Section 19.a, if Tenant is a
corporation, any dissolution, merger, consolidation or other
reorganization of Tenant, or sale or other transfer of a controlling
percentage of the capital stock of Tenant, or the sale of at least
fifty percent (50%) of the value of the assets of Tenant shall be
deemed a voluntary assignment. Notwithstanding the sentence
immediately above, if the Tenant is a corporation, the Tenant shall be
entitled to assign this Lease without Landlord's prior written consent
to: (i) a successor corporation related to Tenant by merger,
consolidation or non-bankruptcy reorganization, provided that the
surviving corporation in connection with any such assignment shall
have a minimum net worth as of the date of the assignment at least
equal to that of Tenant immediately prior to completion of the subject
merger, consolidation or reorganization, or (ii) a purchaser of
substantially all of Tenant's assets, provided that immediately
following such purchase, such purchaser shall have a net worth at
least equal to that of Tenant immediately prior to the completion of
the subject purchase (a transferee described in (i) or (ii) shall be
referred to as a "PERMITTED TRANSFEREE"). Notwithstanding the
foregoing, in the event that any assignment as described in the
sentence immediately above results in the transferee having a net
worth below the minimum requirements specified in (i) and (ii) above,
respectively, Tenant shall not be required to obtain the prior written
consent of Landlord to such transfer to a Permitted Transferee;
provided that (a) Tenant shall provide written notice to Landlord of
such transfer within thirty (30) days after the effective date of the
transfer, and in connection with such transfer shall provide to
Landlord copies of any documents or other information as Landlord may
reasonably request; (b) for a period of sixty (60) days after the
effective date of such transfer, Landlord and Tenant shall confer in
good faith to attempt to agree on terms and conditions, including
without limitation, modifications of the Lease and/or the requirement
of an increase in the Security Deposit to the extent that such
increase should be commercially reasonable in Landlord's discretion
given the financial condition of Tenant and the assignee following
such event; and (c) if for any reason, Landlord and Tenant do not
agree upon such terms and conditions within such sixty (60) day
period, such transfer to a Permitted Transferee shall constitute an
uncurable event of default under this Lease. Unless otherwise
expressly agreed in writing by Landlord, no assignment shall relieve
Tenant of any of its obligations pursuant to this Lease. All Rent
received by Tenant from its subtenants in excess of the Rent payable
by Tenant to Landlord under this Lease applicable to the portion of
the Premises subleased, after deducting therefrom the commercially
reasonable brokerage commissions, moving allowance to subtenants,
tenant improvements made at the request of subtenants and attorneys'
fees incurred by Tenant in negotiating and documenting the sublease
and any other reasonable subleasing costs, shall be deemed "BONUS
RENT" and fifty percent (50%) of the Bonus Rent shall be promptly paid
to Landlord, or, as the case may be, fifty percent (50%) of all sums
(determined in the same manner as Bonus Rent) to be paid by an
assignee to Tenant in consideration of the assignment of this Lease
shall be promptly paid to Landlord. There shall be no deemed Bonus
Rent in the case of a sublease or assignment to a Permitted
Transferee. If Tenant requests Landlord to consent to a proposed
assignment or subletting, Tenant shall pay to Landlord, whether or not
consent is ultimately given, an amount equal to Landlord's reasonable
attorneys' fees and costs incurred in connection with such request up
to a maximum amount of $2,000.00 per request. Each request for consent
to an assignment or subletting shall be in writing, and shall be
accompanied by information as may be relevant to Landlord's
determination as to the financial and operational responsibility and
stability of the proposed assignee or sublessee and the
appropriateness of the proposed use by such assignee or sublessee.
Such information shall include a summary of the proposed use of, and
any proposed modifications to, the Premises. Tenant shall provide
Landlord with such other or additional information and/or
documentation as may reasonably be requested by Landlord. Tenant
shall, upon completion of any assignment or subletting of all or any
portion of the Premises, immediately and irrevocably assign to
Landlord as security for Tenant's obligations under the Lease, all
Rent from any such subletting or assignment. Landlord, as assignee and
attorney in fact for Tenant, shall have the right to collect all rent
and other revenues collectable pursuant to any such sublet or
assignment and apply such rent and other revenues towards Tenant's
obligations under the Lease. Notwithstanding the foregoing provisions
of this Section 19, transfers of shares of Tenant which trade in the
over-the-counter market or any recognized national securities exchange
shall not constitute an assignment for purposes of this Lease,
provided that the principal purpose of such transfer or transfers is
not to avoid the restrictions on assignment otherwise applicable under
this Section 19.
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b. No interest of Tenant in this Lease shall be assignable by involuntary
assignment (as hereinafter defined) through operation of law
(including without limitation the transfer of this Lease by testacy or
intestacy). Each of the following acts shall be considered an
involuntary assignment: (a) if Tenant is or becomes bankrupt or
insolvent, makes an assignment for the benefit of creditors, or
institutes proceedings under the Bankruptcy Act in which Tenant is the
bankrupt; or if Tenant is a partnership or consists of more than one
person or entity, if any partner of the partnership or other person or
entity is or becomes bankrupt or insolvent, or makes an assignment for
the benefit of creditors; or (b) if a writ of attachment or execution
is levied on this Lease; or (c) if in any proceeding or action to
which Tenant is a party, a receiver is appointed with authority to
take possession of the Premises. An involuntary assignment shall
constitute a default by Tenant and Landlord shall have the right to
elect to terminate this Lease, in which case this Lease shall not be
treated as an asset of Tenant.
20. DEFAULT. The occurrence of any of the following shall constitute a default
by Tenant: (a) a failure of Tenant to pay Rent within five (5) days
following receipt by Tenant of written notice from Landlord that such rent
was not paid on its due date; (b) abandonment pursuant to applicable law
(California Civil Code Section 1951.3) or vacation of the Premises without
providing security such that vandalism of the Premises will be minimized in
Landlord's reasonable judgment and such that the cost of insurance will not
be increased as a result of such vacation; or (c) failure to timely perform
any other provision of this Lease which Tenant fails to cure within thirty
(30) days after Tenant's receipt of written notice of default; provided
that, if the default cannot reasonably be cured within thirty (30) days,
Tenant shall not be in default of this Lease if Tenant commences to cure
the default within the thirty (30) day period and diligently and in good
faith proceeds to cure the default. Tenant shall give written notice to
Landlord of any default by Landlord of its obligations pursuant to this
Lease asserted by Tenant (with a copy of such notice to any lender
("LENDER") against the Premises). Landlord and Landlord's Lender shall be
afforded a reasonable opportunity to cure any claimed default by Landlord
and Landlord shall not be considered in default so long as Landlord (or
Landlord's Lender) commences such cure within a reasonable period of time
and thereafter, continues to attempt to complete such cure. Landlord, from
time to time, shall provide Tenant with the name and address of its Lender.
21. LANDLORD'S REMEDIES. Landlord shall have the following remedies if Tenant
is in default. (These remedies are not exclusive; they are cumulative and
in addition to any remedies now or later allowed by law):
a. Landlord may continue this Lease in full force and effect, and this
Lease will continue in effect so long as Landlord does not terminate
Tenant's right to possession, and Landlord shall have the right to
collect Rent when due. During the period Tenant is in default,
Landlord can enter the Premises and relet the Premises, or any part of
the Premises, to third parties for Tenant's account. Tenant shall be
liable immediately to Landlord for all costs Landlord incurs in
reletting the Premises, including without limitation, brokers'
commissions, expenses of remodeling the Premises required by the
reletting, and like costs. Reletting can be for a period shorter or
longer than the remaining Term of this Lease. Tenant shall pay to
Landlord the Rent due under this Lease on the dates the Rent is due,
less the Rent Landlord receives from any reletting. No act by Landlord
allowed by this Section 2l.a. shall terminate this Lease unless
Landlord notifies Tenant in writing that Landlord elects to terminate
this Lease. After Tenant's default and for so long as Landlord does
not terminate Tenant's right to possession of the Premises, if Tenant
obtains Landlord's consent, Tenant shall have the right to assign or
sublet its interest in this Lease, but Tenant shall not be released
from liability. Landlord's consent to such a proposed assignment or
subletting shall not be unreasonably withheld. If Landlord elects to
relet the Premises as provided in this Section 2l.a., Rent that
Landlord receives from reletting shall be applied to the payment of,
first, any indebtedness from Tenant to Landlord other than Rent due
from Tenant; second, all costs, including for maintenance incurred by
Landlord in reletting; and third, Rent due and unpaid under this
Lease. After deducting the payments referred to in this Section 21.a.,
any sum remaining from the Rent Landlord receives from reletting shall
be held by Landlord and applied in payment of future Rent as Rent
becomes due under this Lease. In no event shall Tenant be entitled to
any excess Rent received by Landlord. If, on the date Rent is due
under this Lease, the Rent received from the reletting is less than
the Rent due on that date, Tenant shall pay to Landlord, in addition
to the remaining Rent due, all costs including for maintenance
Landlord incurred in reletting that remain after applying the Rent
received from the reletting as provided in this Section 2l.a.; and
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b. Landlord may terminate Tenant's right to possession of the Premises at
any time. No act by Landlord other than giving express written notice
thereof to Tenant shall terminate this Lease. Acts of maintenance,
efforts to relet the Premises, or the appointment of a receiver on
Landlord's initiative to protect Landlord's interest under this Lease
shall not constitute a termination of Tenant's right to possession.
Upon termination of Tenant's right to possession, Landlord has the
right to recover from Tenant: (1) the Worth of the unpaid Rent that
had been earned at the time of termination of Tenant's right to
possession; (2) the Worth of the amount by which the unpaid Rent that
would have been earned after the date of termination until the time of
award exceeds the amount of the loss of Rent that Tenant proves could
have been reasonably avoided; (3) subject to Section 1951.2(c) of the
California Code the Worth of the amount of the unpaid Rent that would
have been earned after the award throughout the remaining Term of the
Lease to the extent such unpaid Rent exceeds the amount of the loss of
Rent that Tenant proves could have been reasonably avoided; and (4)
any other amount, including but not limited to, expenses incurred to
relet the Premises, court costs, attorneys' fees and collection costs
necessary to compensate Landlord for all detriment caused by Tenant's
default. The "Worth", as used above in (1) and (2) in this Section
2l.b. is to be computed by allowing interest at the lesser of 12
percent per annum or the maximum legal interest rate permitted by law.
The "Worth", as used above in (3) in this Section 21.b. is to be
computed by discounting the amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of the award, plus one
percent (1 %).
22. ENTRY OF PREMISES. Landlord and/or its authorized representatives shall
have the right after reasonable notice except for emergencies to enter the
Premises at all reasonable times for any of the following purposes: (a) to
determine whether the Premises are in good condition and whether Tenant is
complying with its obligations under this Lease; (b) to do any necessary
maintenance and to make any restoration to the Premises or the Project that
Landlord has the right or obligation to perform; (c) to post "for sale"
signs at any time during the term, to post "for rent" or "for lease" signs
during the last one hundred eighty (180) days of the Term or during any
period while Tenant is in default; (d) to show the Premises to prospective
brokers, agents, lenders, buyers, tenants or persons interested in leasing
or purchasing the Premises, at any time during the Term; or (e) to repair,
maintain or improve the Project and to erect scaffolding and protective
barricades outside the Premises but not so as to prevent entry to the
Premises and to do any other act or thing necessary for the safety or
preservation of the Premises or the Project. Except as otherwise provided
herein, Landlord shall not be liable in any manner for any inconvenience,
disturbance, loss of business, nuisance or other damage arising out of
Landlord's entry onto the Premises as provided in this Section 22. Tenant
shall not be entitled to an abatement or reduction of Rent if Landlord
exercises any rights reserved in this Section 22. Landlord shall conduct
its activities on the Premises as provided herein in a commercially
reasonable manner that will lessen the inconvenience, annoyance or
disturbance to Tenant. For each of these purposes, Landlord shall at all
times have and retain a key with which to unlock all the doors in, upon and
about the Premises, excluding Tenant's vaults, computer data rooms and
safes. Tenant shall not alter any lock or install a new or additional lock
or bolt on any door of the Premises without prior written consent of
Landlord. If Landlord gives its consent, Tenant shall promptly furnish
Landlord with a key for any such lock or bolt.
23. SUBORDINATION.
a. AUTOMATIC SUBORDINATION. Without the necessity of any additional
document being executed by Tenant for the purpose of effecting a
subordination, and at the election of Landlord or Landlord's Lender,
this Lease shall be subject and subordinate at all times to (i) all
ground leases or underlying leases which may now exist or hereafter be
executed affecting the Premises, (ii) the lien of any mortgage or deed
of trust which may now exist or hereafter be executed affecting the
Premises, and (iii) the lien of any mortgage or deed of trust which
may hereafter be executed in any amount for which the Premises, ground
leases or underlying leases, or Landlord's interest or estate in any
of said items is specified as security. In the event that any ground
lease or underlying lease terminates for any reason or any mortgage or
deed of trust is foreclosed or a conveyance in lieu of foreclosure is
made for any reason, Tenant shall, notwithstanding any subordination,
attorn to and become the Tenant of the successor in interest
(including without limitation to Lender) to Landlord ("SUCCESSOR") and
in connection therewith, Tenant shall execute an attornment agreement.
In connection with any such termination of a ground lease or
underlying lease or any foreclosure or conveyance in lieu of
foreclosure made in connection with any mortgage or deed of trust,
then so long as Tenant is not in default after all applicable notice
and cure periods pursuant to this Lease, Tenant shall not be disturbed
in its possession of the Premises or in the enjoyment of its rights
pursuant to this Lease during the Term of this Lease or
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any extension or renewal thereof. Notwithstanding any subordination of
this Lease to the lien of any mortgage or deed of trust, the Lender,
at any time, shall be entitled to subordinate the lien of its mortgage
or deed of trust to this Lease by filing a notice of subordination in
the County in which the Premises are located, and Lender shall agree
in connection with any such filing, that Tenant shall not be disturbed
in its possession of the Premises so long as Tenant is not in default
beyond all applicable notice and cure periods pursuant to this Lease.
In connection with any such filing, Tenant shall be obligated to
attorn to and to become a Tenant of any Successor.
b. ADDITIONAL SUBORDINATION. From time to time at the request of
Landlord, Tenant covenants and agrees to execute and deliver within
ten (10) days following the date of written request from Landlord,
documents evidencing the priority or subordination of this Lease with
respect to any ground lease or underlying lease or the lien of any
mortgage or deed of trust in connection with the Premises. Any and all
such documents shall be in such form as is reasonably acceptable to
the Lender(s). Any subordination agreement so requested by Landlord
shall provide for Tenant to attorn to the Successor and shall further
provide that Tenant shall not be disturbed in its possession of the
Premises or in the enjoyment of its rights pursuant to this Lease so
long as Tenant is not in default after all applicable notice and cure
periods with respect to its obligations pursuant to the Lease. Any
such Subordination, Non-disturbance and Attornment Agreement shall be
recorded in the official records of the office of the County Recorder
in the County in which the Premises is located. Upon full execution of
this Lease, Landlord shall make a commercially reasonable effort to
secure and deliver to Tenant a non disturbance agreement from
Landlord's Lender according to the terms of this Section 23.b.
c. NOTICE FROM LENDER. Tenant shall be entitled to rely upon any notice
given by a Lender in connection with the Premises requesting that
Tenant make all future Rent payments to such Lender, and Tenant shall
not be liable to Landlord for any payment made to such Lender in
accordance with such notice. Notwithstanding any provision to the
contrary of this Lease, a Successor shall not be (i) obligated to
recognize the payment of Rent for a period of more than one month in
advance; (ii) responsible for liabilities accrued pursuant to this
Lease prior to the date ("SUCCESSION DATE" ) upon which the Successor
becomes the "Landlord" hereunder; (iii) responsible to cure defaults
of the Landlord pursuant to this Lease existing as of the Succession
Date, except for defaults of a continuing nature of which Successor
received notice (as provided in Paragraph 20) and in respect of which
Tenant afforded Successor a reasonable cure period following such
notice; (iv) responsible for any Security Deposit delivered by Tenant
pursuant to this Lease not actually received by the Successor; or (v)
bound by any execution, modification, termination or extension of this
Lease or any grant of a purchase option or right of first negotiation
or any other action taken by the Landlord pursuant to this Lease.
24. ESTOPPEL CERTIFICATE/TENANT FINANCIAL STATEMENTS. Tenant, at any time and
from time to time, upon not less than ten (10) business days written notice
from Landlord, will execute, acknowledge and deliver to Landlord and, at
Landlord's request, to any existing or prospective purchaser, ground lessor
or mortgagee of any part of the Premises, a certificate of Tenant stating:
(a) that Tenant has accepted the Premises (or, if Tenant has not done so,
Tenant has not accepted the Premises and specifying the reasons therefor);
(b) the Commencement and Expiration Dates of this Lease; (c) that this
Lease is unmodified and in full force and effect (or, if there have been
modifications, that same is in full force and effect as modified and
stating the modifications); (d) whether or not to the best of Tenant's
knowledge there are then existing any defenses against the enforcement of
any of the obligations of Tenant under this Lease (and, if so, specifying
same); (e) whether or not to the best of Tenant's knowledge there are then
existing any defaults by Landlord in the performance of its obligations
under this Lease (and, if so, specifying same); (f) the dates, if any, to
which the Rent and other charges under this Lease have been paid; (g)
whether or not there are Rent increases during the Lease Term and if so the
amount of same; (h) whether or not the Lease contains any options or rights
of first offer or first refusal; (i) the amount of any Security Deposit or
other sums due Tenant; j) the current notice address for Tenant; and (k)
any other information that may reasonably be required by any of such
persons. It is intended that any such certificate of Tenant delivered
pursuant to this Section 24. may be relied upon by Landlord and any
existing or prospective purchaser, ground lessor or mortgagee of the
Premises. Tenant agrees, at any time upon request by Landlord, to deliver
to Landlord the current financial statements of Tenant with an opinion of a
certified public accountant, if available, including a balance sheet and
profit and loss statement for the most recent prior three years all
prepared in accordance with generally accepted accounting principles
consistently applied.
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25. WAIVER. No delay or omission in the exercise of any right or remedy by
Landlord or Tenant shall impair such right or remedy or be construed as a
waiver. No act or conduct of Landlord, including without limitation,
acceptance of the keys to the Premises, shall constitute an acceptance of
the surrender of the Premises by Tenant before the expiration of the Term.
Only written notice from Landlord to Tenant shall constitute acceptance of
the surrender of the Premises and accomplish termination of the Lease.
Landlord's consent to or approval of any act by Tenant requiring Landlord's
consent or approval shall not be deemed to waive or render unnecessary
Landlord's consent to or approval of any subsequent act by Tenant. Any
waiver by Landlord of any Default must be in writing and shall not be a
waiver of any other Default concerning the same or any other provision of
the Lease.
26. SURRENDER OF PREMISES. Upon expiration of the Term, Tenant shall surrender
to Landlord the Premises and all tenant improvements and alterations in the
same condition as existed at the time of completion of the initial tenant
improvements to the Premises, except for ordinary wear and tear and
alterations which Tenant has the right or is obligated to remove under the
provisions of Section 14. herein. Tenant shall remove all personal property
including, without limitation, decorative improvements or fixtures and
shall perform all restoration made necessary by the removal of any
alterations or Tenant's personal property before the expiration of the
Term. Landlord can elect to retain or dispose of in any manner Tenant's
personal property not removed from the Premises by Tenant prior to the
expiration of the Term. Tenant waives all claims against Landlord for any
damage to Tenant resulting from Landlord's retention or disposition of
Tenant's personal property. Tenant shall be liable to Landlord for
Landlord's cost for storage, removal and disposal of Tenant's personal
property.
27. HOLDOVER. If Tenant with Landlord's consent remains in possession of the
Premises after expiration of the Term or after the date in any notice given
by Landlord to Tenant terminating this Lease, such possession by Tenant
shall be deemed to be a month to month tenancy cancelable by either party
on thirty (30) days written notice given at any time by either party and
all provisions of this Lease, except those pertaining to Term, renewal
options and Base Rent, shall apply and Tenant shall thereafter pay monthly
Base Rent, computed on a per-month basis, for each month or part thereof
(without reduction for any partial month) that Tenant remains in
possession, in an amount equal to one hundred fifty percent (150%) of the
Base Rent that was in effect for the last full calendar month immediately
preceding expiration of the Term.
If Tenant holds over after the expiration or earlier termination of the
Term hereof, without the consent of Landlord, Tenant shall become a Tenant
at sufferance only with a continuing obligation to pay Rent provided that,
as liquidated damages (which shall be Landlord's sole damages) for such
holding over, the Base Rent shall be one hundred fifty percent (150%) of
the Base Rent that was in effect for the last full calendar month
immediately preceding expiration of the Term for the first thirty (30) days
of such holdover, and two hundred percent (200%) of such Base Rent
thereafter during the pendency of such holdover. Acceptance by Landlord of
Rent after expiration or earlier termination of the Term shall not
constitute a consent to a holdover hereunder or result in a renewal. The
foregoing provisions of this Section 27 are in addition to and do not
affect Landlord's right of re-entry or any rights of Landlord hereunder or
as otherwise provided by law except for Landlord's damages which are
liquidated at the amounts set forth above. No provision of this Section 27
shall be construed as implied consent by Landlord to any holding over by
Tenant. Landlord expressly reserves the right to require Tenant to
surrender possession of the Premises to Landlord as provided in this Lease
upon expiration or other termination of this Lease.
28. NOTICES. All notices, demands, or other communications required or
contemplated under this Lease, including any notice delivered to Tenant by
the Lender, shall be in writing and shall be deemed to have been duly given
48 hours from the time of mailing if mailed by registered or certified
mail, return receipt requested, postage prepaid, or 24 hours from the time
of shipping by overnight carrier, or the actual time of delivery if
delivered by personal service to the parties at the addresses specified in
Section 1. Either Tenant or Landlord may change the address to which
notices are to be given to such party hereunder by giving written notice of
such change of address to the other in accordance with the notice
provisions hereof.
29. TENANT IMPROVEMENTS. Except as otherwise provided herein, Landlord shall
deliver the Premises to Tenant in its "as is" condition, excluding latent
defects, which Landlord shall promptly repair upon receipt of written
notice from Tenant, the cost of which repair shall not be passed through to
Tenant as an Operating Expense or otherwise, and in a vacuumed and broom
clean condition with all of the prior tenant's personal property removed.
If by October 15, 2000 Tenant retains an environmental consultant to test
the Premises for the existence of asbestos or lead-based paint, and if such
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environmental consultant issues a report stating that (1) asbestos or
lead-based paint has been found to exist within the Premises, and (2) such
asbestos or lead-based paint needs to be encapsulated, removed, repaired,
or otherwise abated in order to allow Tenant to use, occupy and renovate,
at Tenant's sole discretion, the Premises in compliance with applicable
law, then Landlord shall have thirty (30) days of receipt of such report to
retain an independent environmental consultant to confirm the results set
forth in such report. If Landlord's consultant agrees with the findings in
the report, Landlord shall reimburse Tenant for certain costs incurred
thereafter to encapsulate, remove, repair or abate such asbestos or
lead-based paint in order to cause the Premises to be in compliance with
law; provided, however, Landlord's reimbursement obligation shall be
limited to the most cost effective method of remediating such asbestos or
lead-based paint, as determined by Landlord's consultant, after
consultation with Tenant's consultant; provided, further, however, that if
the lead-based paint may be "painted over" rather than removed under
applicable law, and provided the Tenant intends to paint the affected
portion of the Premises, then Tenant shall undertake such painting at
Tenant's sole cost and expense. Landlord hereby grants Tenant a one-time
Construction Allowance of $3,133,700 ("LANDLORD'S CONSTRUCTION ALLOWANCE")
for the cost of tenant improvements to be installed by Tenant, including
demising walls, lighting, electrical systems, wall covering, floor
covering, telephone and cabling installation costs, the cost of any
required demolition, and costs of facilities for computer rooms, lunchrooms
(including kitchens in support thereof), training rooms, telephone
equipment rooms, fiber optics, and high-ceiling areas. Tenant shall submit
its plans for such tenant improvements for Landlord's written approval (the
"APPROVED WORK") prior to Tenant's commencement of construction of the
Approved Work, and Landlord shall respond within five (5) business days of
the date Tenant provides Landlord any specific set of complete preliminary
or complete final plans required for Landlord's approval. Tenant, at its
sole cost and expense, shall be responsible for the filing of such plans,
construction and engineering drawings and specifications, and the securing
of all permits and licenses required therefore, including all fees and
related costs. All work performed by Tenant shall be performed in strict
compliance with the plans submitted for the Approved Work and no
modification shall be made in such plans without the prior written approval
of Landlord. Landlord shall pay Tenant's outside vendors or contractors for
materials and services constituting the Approved Work, up to the maximum
Landlord's Construction Allowance set forth in this Section 29., within
thirty (30) days following Landlord's receipt of Tenant's submittal to
Landlord of approved invoices and conditional lien releases for payment.
Subject to the total amount available within Landlord's Construction
Allowance, Tenant shall also be reimbursed from Landlord's Construction
Allowance for the reasonable cost of all preliminary and final plans and
specifications and all permits relating to the installation of the Approved
Work. All of the work to be done by Tenant under this Section 29. shall be
done in accordance with the provisions of Section 14. hereof, and Tenant
shall be required to follow Landlord's reasonable rules and regulations
relating to contractors working in the Project. Landlord shall have the
right to reasonably approve all of Tenant's proposed contractors and
subcontractors related to the installation of the Approved Work. Tenant's
contractors and vendors shall comply with the building's Rules and
Regulations for Construction Work attached as Exhibit D. Landlord shall not
charge an administrative fee relating to the installation of the Approved
Work unless and to the extent that Landlord incurs actual third party cost
for the review or approval of said plans. Tenant shall have the right to
incorporate special improvements into the building and the Premises,
including, but not limited to, separate, self-contained air conditioning
systems (including rooftop equipment for same), backup generators and
switching, telecommunication and electrical power redundancy, and other
special facilities incidental to Tenant's operations, provided same shall
be compatible with Landlord's base building systems, and subject to
Landlord's consent, which consent shall not be unreasonably withheld,
conditioned or delayed. Such special improvements, to the extent that same
are for Tenant's sole use, shall be furnished and installed at Tenant's
sole cost and expense. Tenant as part of the Approved Work is responsible
for modifying the building electrical system to deliver electrical service
to the Premises as designed by Tenant's architects, engineers and
contractors. Once installed, Landlord will maintain the electrical system
delivering power to the Premises as an Operating Expense of the building.
The cost of said electricity consumption in the Premises (but not in the
Common Areas of the building) shall be Tenant's sole cost and expense with
no overhead or supervision included.
30. COMMENCEMENT DATE. The Term of the Lease shall commence in sections on the
earliest to occur of commencement of occupancy of each Section of the
Premises by Tenant's personnel or the Delivery Date specified for each
Section in Section 32.
31. EARLY POSSESSION. Notwithstanding the provisions of Section 3. hereof,
prior to the Commencement Date, Tenant shall have the right to enter the
Premises after full execution and delivery
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of this Lease, delivery to Landlord of payment of the Security Deposit and
Prepaid Base Rent, and delivery to Landlord of a certificate of insurance
in form and content reasonably satisfactory to Landlord, so that Tenant can
install the Approved Work pursuant to Section 29. above (the "CONSTRUCTION
PERIOD"). During the Construction Period, Tenant may also install its
fixtures, equipment and other personal property in the Premises. All of the
terms and conditions of the Lease, except for Tenant's obligations to pay
Rent, shall be in effect during the Construction Period provided, such
right of prior access shall also include access to and use of the delivery
area and surface parking, and elevator as well as access to and use of
appropriate electrical and other systems and related facilities, provided
such entry and work shall be in harmony with Landlord's contractors and
their subcontractors, and shall not unreasonably interfere with or delay
completion of any work to be performed by Landlord in the Premises or
elsewhere in the building or with other tenant's quiet enjoyment of their
premises. During normal business hours there shall be no charge to Tenant,
its vendors, or its contractors or their subcontractors for parking, HVAC,
security, insurance (except as relates to work which Tenant and/or its
contractors or their subcontractors may undertake in the Premises,
including general liability coverage) and/or taxes during the Construction
Period, or for the use of the loading/delivery area, elevators, or the
personnel required for the operation thereof, during the Construction
Period or otherwise prior to the Commencement Date of the Lease for the
Premises or any additional space leased by Tenant in the building during
the Term, as applicable.
32. INITIAL BASE RENT AND DELIVERY OF PREMISES. The Premises shall consist of
125,348 RSF (Section 1.e.) which shall be delivered to Tenant according to
the following schedule:
<TABLE>
<CAPTION>
SECTION DELIVERY DATE RSF DELIVERED CUMULATIVE RSF
------- ------------- ------------- --------------
<S> <C> <C> <C>
A Commencement Date 50,000 50,000
(Estimated to be 11/15/99)
B 2/15/00 25,000 75,000
C 5/15/00 25,000 100,000
D 8/15/00 25,348 125,348
</TABLE>
Tenant may accelerate this delivery time schedule and/or increase the RSF
delivered by giving Landlord 10 days advance written notice. Tenant may not
delay or reduce the RSF for any delivered date.
Base Rent shall for the period from the Commencement Date through 5/14/02
shall be as given below. After 5/14/02 Base Rent shall step increase
according to Section 1.k.
<TABLE>
<CAPTION>
PERIODS (INCLUSIVE) MONTHLY BASE RENT
------------------- -----------------
<S> <C>
Commencement date to 2/14/00 $ 80,000.00
2/15/00 to 5/14/00 120,000.00
5/15/00 to 8/14/00 160,000.00
8/15/00 to 5/14/02 200,556.80
</TABLE>
Should Tenant decide to accelerate the delivery schedule or increase the
RSF taken down, the Base Rent Schedule above shall be adjusted using the
rate of $1.60 per RSF per month.
Notwithstanding the above rent schedule, no Base Rent shall be due through
March 14, 2000 on any space taken through March 14, 2000.
33. OPTION(S) TO EXTEND.
a. GRANT OF OPTION(S). Tenant shall have the right, at its option, to
extend the Lease for two (2) period(s) of five (5) years each
("EXTENDED TERM(S)") on an "as is" basis commencing at the expiration
of the previous Term, provided that at the time of exercise and at the
time of commencement of each Extended Term, Tenant is not in default
beyond any applicable cure period under this Lease. Upon commencement
of each renewal option term, Landlord shall extend to Tenant a
refurbishment allowance in the amount of five dollars ($5.00) per
rentable square foot, which allowance shall be reflected in the
determination of the Fair Market Rental Value.
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b. EXERCISE OF OPTION(S). If Tenant decides to extend the Lease for an
Extended Term, Tenant shall give written notice to Landlord of its
election to extend not less than twelve (12) months prior to the
expiration of the previous Term. Tenant's failure to give timely
notice to Landlord of Tenant's election to extend shall be deemed a
waiver of Tenant's right to extend. The terms and conditions
applicable to each Extended Term shall be the same terms and
conditions contained in this Lease except that Tenant shall not be
entitled to any further option to extend beyond the second Extended
Term. The Base Rent for each Extended Term shall be as determined in
accordance with Section 33.c.
c. DETERMINATION OF BASE RENT DURING THE EXTENDED TERM(S).
1) AGREEMENT ON INITIAL BASE RENT. Upon written request from Tenant
within eighteen (18) months prior to the expiration of the
previous Term, Landlord shall advise Tenant of Landlord's
non-binding expectation of the general level of such Fair Market
Rental Value. Further, upon written request from Tenant within
fourteen (14) months prior to the expiration of the previous
Term, Landlord shall deliver to Tenant Landlord's good faith
estimate of the Fair Market Rental Value of the Premises.
Landlord and Tenant shall have thirty (30) days after Landlord
provides to Tenant Landlord's good faith estimate in order to
reach agreement as to the Fair Market Value for the Premises. If
agreement is not reached by that date which is thirteen months
prior to the expiration of the previous Term, then upon written
request from Tenant, Landlord shall deliver to Tenant Landlord's
"binding estimate" of the Fair Market Rental Value for the
Premises, which request from Tenant shall be accompanied by
Tenant's "binding estimate" as to the Fair Market Rental Value
for the Premises. As used above, "binding estimate" shall mean
the estimate which if accepted by the other party shall become
the Fair Market Rental Value for the applicable Extended Term,
and if not so accepted shall be the estimate submitted to the
arbitrator pursuant to Section 33.c.3) and 4) below. If by the
date which is twelve (12) months prior to the expiration of the
previous Term (the "OUTSIDE AGREEMENT DATE") the parties have
failed to reach agreement on the Fair Market Rental Value, then
Tenant may nonetheless elect to exercise its option to extend the
Term of this Lease and the parties shall proceed to negotiate in
good faith to agree on the Base Rent during the applicable
Extended Term, which shall be 100% of the Fair Market Rental
Value of the Premises during said Extended Term. If Landlord and
Tenant agree on the Base Rent for each Extended Term by the
Outside Agreement Date, they shall immediately execute an
amendment to this Lease stating the new Base Rent.
2) DEFINITION OF FAIR MARKET RENTAL VALUE. With respect to the
Extended Term(s), right of first negotiation and preferential
right to lease provisions hereunder, the applicable Fair Market
Rental Value shall be that rate (determined on a "modified gross"
lease basis) charged to non-sublease, non-equity tenants for
space of comparable size, location and conditions, in the
Comparable Buildings taking into consideration the following:
a) the location, quality and age of the building;
b) the use, location, size and floor level(s) of the space in
questions;
c) the definition of "rentable area";
d) the extent of leasehold improvements (other than those
installed by tenant after the initial buildout of the
premises);
e) leasehold improvement allowances;
f) abatements (including with respect to base rental, operating
expenses and real estate tax charges);
g) the inclusion of lease takeovers/assumptions;
h) relocation/moving allowances;
i) space planning/interior architecture and engineering
allowances;
j) refurbishment and repainting allowances;
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k) other concessions or inducements;
l) extent of services provided or to be provided;
m) distinction between "gross" and "net" lease;
n) base year or dollar amount for escalation purposes (both
operating expenses and real estate taxes);
o) any other adjustments (including by way of indexes) to base
rental;
p) credit standing and financial stature of the tenant; term or
length of lease;
q) the time the particular rental rate under consideration was
agreed upon and became or is to become effective;
r) the payment of a leasing commission and/or fees/bonuses in
lieu thereof, whether to Landlord, any person or entity
affiliated with Landlord, or otherwise;
s) the absence of rent increases during the renewal period; and
t) any other relevant term or condition in making such Fair
Market Rental Value determination.
3) SELECTION OF ARBITRATORS. If Landlord and Tenant are unable to
agree on the Fair Market Rental Value for the applicable Extended
Term by the Outside Agreement Date, then within ten (10) days
after the Outside Agreement Date, Landlord and Tenant each shall
submit to the other a separate written determination of the Fair
Market Rental Value, and such determinations shall be submitted
to arbitration in accordance with this Section 33. Failure of
Tenant or Landlord to submit a written determination of the Fair
Market Rental Value within such ten (10) day period shall
conclusively be deemed to be the non-determining party's approval
of the Fair Market Rental Value submitted within such ten (10)
day period by the other party. Landlord and Tenant shall each
appoint one arbitrator who shall by profession be an independent
real estate broker who shall individually have no ongoing
business relationship with Tenant or Landlord and who shall have
been active over the eight (8) year period ending on the date of
such appointment in the leasing of first-class office buildings
in the Project area. The determination of the arbitrators shall
be limited solely to the issue of whether Landlord's or Tenant's
submitted Fair Market Rental Value is the closest to the actual
Fair Market Rental Value as determined by the arbitrators, taking
into account the requirements of Section 33.c.2). Each such
arbitrator shall be appointed within thirty (30) days after the
Outside Agreement Date. The two (2) arbitrators so appointed
shall within ten (10) business days of the date of the
appointment of the last appointed arbitrator agree upon and
appoint a third arbitrator who shall be qualified under the same
criteria as set forth hereinabove for qualification of the
initial two (2) arbitrators.
4) VALUE DETERMINED BY THREE (3) ARBITRATORS. The three (3)
arbitrators shall within thirty (30) days after the appointment
of the third arbitrator reach a decision as to whether Landlord's
or Tenant's submitted Fair Market Rental Value is the closest to
the actual Fair Market Rental Value, and shall use the closest of
Landlord's or Tenant's submitted Fair Market Rental Value as the
Fair Market Rental Value for purposes of calculating the Base
Rent for the applicable Extended Term, and shall notify Landlord
and Tenant thereof. The decision of the majority of the three (3)
arbitrators shall be binding upon Landlord and Tenant. If either
Landlord or Tenant fails to appoint an arbitrator within thirty
(30) days after the Outside Agreement Date, the arbitrator
appointed by one of them shall reach a decision, notify Landlord
and Tenant thereof, and such arbitrator's decision shall be
binding upon Landlord and Tenant. If the two (2) arbitrators fail
to agree upon and appoint a third arbitrator within the time
period provided in Section 33.c.3) above, then the parties shall
mutually select the third arbitrator, who shall be qualified
under the same criteria as set forth above. If Landlord and
Tenant are unable to agree upon the third arbitrator within ten
(10) days, then either party may, upon at least five (5) days'
prior written notice to the other party, request the Presiding
Judge of the Los Angeles County Superior Court, acting in his or
her private and nonjudicial capacity, to appoint the third
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arbitrator who shall be qualified under the same criteria as set
forth above. Following the appointment of the third arbitrator,
the panel of arbitrators shall within thirty (30) days thereafter
reach a decision as to whether Landlord's or Tenant's submitted
Fair Market Rental Value shall be used and shall notify Landlord
and Tenant thereof. The cost of the arbitrators and the
arbitration proceeding shall be paid by the non-prevailing party.
34. RIGHT OF FIRST NEGOTIATION AND PREFERENTIAL RIGHT TO LEASE. During the
Term, Tenant shall have a continuing and recurring right of first
negotiation and preferential right to lease with respect to any space in
the Project, which from time to time may be or become vacant and available
for direct lease, at the Fair Market Rental Value determined as of when
such right of first negotiation or preferential right to lease is exercised
by Tenant, subject to the then existing rights of the then current tenants
of the Project. Upon written request by Tenant delivered to Landlord from
time to time during the Term, Landlord will provide Tenant with the
scheduled expiration dates of the leases of space in the Project.
If (i) Tenant wishes to lease additional space in the Project, (ii)
Landlord wishes to make an offer to a bona fide third-party with respect to
any available space in the Project; or (iii) Landlord receives an offer
from a bona fide third-party tenant for any space in the Project, Landlord
shall notify Tenant in writing of the availability of such additional space
prior to leasing such space to a third-party tenant, said notice to include
an existing-condition floor plan(s), the relevant business terms, and
Landlord's good faith determination of the Fair Market Rental Value
therefore, and Tenant shall notify Landlord in writing of its intentions
within (a) ten (10) business days after receipt of said availability notice
absent an offer to or from a bona fide third-party tenant for such space or
(b) three (3) business days if there is an offer to or from a bona fide
third-party tenant for such space.
If Landlord and Tenant are unable to agree within ten (10) business days of
receipt of the availability notice on the Fair Market Rental Value and/or
other terms and conditions other than Fair Market Rental Value for such
additional space, then Landlord shall have the right to lease all or any
portion of subject space to another tenant or tenants, provided that same
shall be on terms and conditions no more favorable (to such other tenant or
tenants) than those offered to Tenant. If a lease to another tenant(s) is
not consummated within six (6) months next following the end of the
above-referenced ten (10) or three (3) business day notice period, as
applicable, then Tenant's right of first negotiation and preferential right
to lease as to such space shall be reinstated.
Except as otherwise agreed by Landlord in this Lease, specifically
including Landlord's agreements in Paragraph 2.a. above, such additional
space shall be leased on an "as is" basis, excluding latent defects, which
Landlord shall promptly repair upon receipt of written notice from Tenant,
the cost of which repair shall not be passed through to Tenant as an
Operating Expense or otherwise, and in a vacuumed and broom-cleaned
condition with all of the prior tenants' personal property removed
therefrom.
The failure of Tenant to exercise its right of first negotiation or
preferential right to lease in any given instance shall not prejudice
Tenant's right to exercise its right of first negotiation or preferential
right to lease with respect to any other space or the same space, should
all or any part of such space again become available.
No such provisions covering Tenant's right of first negotiation or
preferential right to lease shall preclude Landlord from leasing to tenants
of its own choosing, and in sizes, locations and for lease terms, including
renewals thereof, as Landlord shall deem appropriate except as set forth
elsewhere in this document.
35. ROOFTOP COMMUNICATIONS EQUIPMENT. Without obligation for rental or any
other charges therefore, except as expressly stated hereunder, Tenant shall
be permitted, at its sole cost and expense, during the Term, to use the
roof of the building to install and operate thereon up to two (2) microwave
dishes/earth satellite disks and up to two (2) whip antennae (collectively,
the "ROOFTOP COMMUNICATIONS EQUIPMENT") for the exclusive use of Tenant, in
locations as selected by Tenant and approved by Landlord which approval
shall not be unreasonably withheld, conditioned or delayed, provided the
same complies with all applicable governmental rules, regulations,
ordinances and codes and is approved by Landlord as to plans,
specifications, location, weight and size. During the Term, Landlord shall
not install, and shall prohibit the installation and/or operation by any
other party of, any additional microwave dishes/earth satellite disks, whip
antennae, towers and/or other structures on the roof of the building which
shall be reasonably deemed by Landlord (after reasonable consultation with
Tenant) to interfere with the existing Rooftop Communications Equipment.
During the Term, Tenant shall be permitted to select a contractor of its
choice to undertake the installation of the Rooftop
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Communications Equipment, subject to Landlord's approval, which approval
shall not be unreasonably withheld, conditioned or delayed. In addition,
Tenant shall be permitted to construct equipment enclosures, if required,
in locations, design and materials to be mutually agreed upon, between
Landlord and Tenant, for accommodation of the Rooftop Communications
Equipment. Tenant shall also have the right to install necessary conduit
and sleeving from the roof to the points of connection within the Premises.
Tenant shall be responsible for all costs of installation (including
structural reinforcing), repair and maintenance and removal with respect to
the Rooftop Communications Equipment.
36. OTHER APPURTENANCES. During the Term, Tenant shall have the right to use
building shafts or conduits between the Premises and other parts of the
building (including the roof) if available for the installation and
maintenance of conduits, cables, ducts, flues, pipes and other devices,
supplementary HVAC and other facilities consistent with Tenant's intended
use of the Premises and other portions of the building. During the Term,
Tenant shall also have the right to use, in common with other tenants, the
lobbies and other public areas of the building, elevator, the mail room and
other building facilities.
37. MISCELLANEOUS PROVISIONS.
a. TIME OF ESSENCE. Time is of the essence of each provision of this
Lease.
b. SUCCESSOR. This Lease shall be binding on and inure to the benefit of
the parties and their successors, except as provided in Section 19.
c. CONSENT. Any consent or approval required by either Landlord or Tenant
under this Lease shall be granted in writing and shall not be
unreasonably withheld, conditioned or delayed by the consenting party
unless the Lease specifically allows such party to grant such consent
in such party's sole discretion.
d. PERSONAL RIGHTS. Notwithstanding any other provision(s) of this Lease
to the contrary, any provisions of this Lease providing for the
renewal, extension or early termination of the Lease and/or for the
expansion of the Premises (to include without limitation rights to
negotiate, rights of first refusal, etc.) shall be (i) personal to the
original Tenant and shall not be assignable or otherwise transferable
other than to a Permitted Transferee (either voluntarily or
involuntarily) to any third party for any reason whatsoever, and (ii)
conditioned upon Tenant not then being in default under this Lease.
e. YEAR 2000. Landlord is in the process of performing a readiness audit
with respect to YEAR 2000 PERFORMANCE. As used herein, the term "YEAR
2000 PERFORMANCE" means that building-related systems and equipment
under Landlord's control which are material to proper building
operations can reasonably be expected to perform without material
adverse effect despite the change of century from 1999 to 2000 and the
leap year. The parties acknowledge that the process of auditing,
assessing and implementing Year 2000 Performance solutions is time
consuming and uncertain, and dependent in part on the performance of
third parties not under Landlord's control. Thus, Landlord makes no
representations or warranties with respect to Year 2000 Performance of
building-related systems and equipment, and interruptions of services
as a result of Year 2000 Performance problems will be deemed to be
interruptions out of Landlord's reasonable control. Landlord will
inform Tenant promptly after Landlord gains actual knowledge of any
significant Year 2000 Performance problem which Landlord reasonably
believes may adversely impact building operations, and will use
commercially reasonable efforts to audit, assess and implement
programs to meet the goal of Year 2000 Performance. The cost of such
efforts shall be included as an Operating Expense in the year
incurred, provided, however, that capital replacement costs, if any,
shall be amortized over the useful life of the replacement. Some
information may be obtained from third parties, and may not have been
independently verified. Any information which Landlord provides will
be subject to and made in reliance on the Year 2000 Information
Readiness and Disclosure Act.
f. COMMISSIONS. Each party represents that it has not had dealings with
any real estate broker, finder or other person with respect to this
Lease in any manner, except for the Broker(s) identified in Section
1., who shall be compensated by Landlord in accordance with the
separate agreement between Landlord and the Broker(s).
g. OTHER CHARGES; LEGAL FEES. If Landlord becomes a party to any
litigation concerning this Lease or the Premises by reason of any act
or omission of Tenant or Tenant's authorized representatives, Tenant
shall be liable to Landlord for reasonable attorneys' fees and court
costs
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incurred by Landlord in the litigation. Should the court render a
decision which is thereafter appealed by any party thereto, Tenant
shall be liable to Landlord for reasonable attorneys' fees and court
costs incurred by Landlord in connection with such appeal.
If Tenant becomes a party to any litigation concerning this Lease or
the Premises by reason of any act or omission of Landlord or
Landlord's authorized representatives, Landlord shall be liable to
Tenant for reasonable attorneys' fees and court costs incurred by
Tenant in the litigation. Should the court render a decision which is
thereafter appealed by any party thereto, Landlord shall be liable to
Tenant for reasonable attorneys' fees and court costs incurred by
Tenant in connection with such appeal.
If either party commences any litigation against the other party or
files an appeal of a decision arising out of or in connection with the
Lease, the prevailing party shall be entitled to recover from the
other party reasonable attorneys' fees and costs of suit. If Landlord
employs a collection agency to recover delinquent charges, Tenant
agrees to pay all collection agency and attorneys' fees charged to
Landlord in addition to Rent, late charges, interest and other sums
payable under this Lease.
h. LANDLORD'S SUCCESSORS. In the event of a sale or conveyance by
Landlord of the Premises, the same shall operate to release Landlord
from any liability under this Lease arising subsequent to said
transfer or as assumed by any such transferee, including as to any
Security Deposit to the extent transferred to Landlord's
successor-in-interest, and in such event Landlord's successor in
interest shall be solely responsible for all obligations of Landlord
under this Lease.
i. INTERPRETATION. This Lease shall be construed and interpreted in
accordance with the laws of the state in which the Premises are
located. This Lease constitutes the entire agreement between the
parties with respect to the Premises, except for such guarantees or
modifications as may be executed in writing by the parties from time
to time. When required by the context of this Lease, the singular
shall include the plural, and the masculine shall include the feminine
and/or neuter. "PARTY" shall mean Landlord or Tenant. If more than one
person or entity constitutes Landlord or Tenant, the obligations
imposed upon that party shall be joint and several. The
enforceability, invalidity or illegality of any provision shall not
render the other provisions unenforceable, invalid or illegal.
j. AUCTIONS. Tenant shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without
first having obtained Landlord's prior written consent.
Notwithstanding anything to the contrary in this Lease, Landlord shall
not be obligated to exercise any standard of reasonableness in
determining whether to grant such consent.
k. CONFLICT. Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions shall be controlled by
the typewritten or handwritten provisions.
l. OFFER. Preparation of this Lease by Landlord or Landlord's agent and
submission of same to Tenant shall not be deemed an offer to lease to
Tenant. This Lease is not intended to be binding until executed by all
parties hereto.
m. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall
amend this Lease from time to time to reflect any adjustments that are
made to the Base Rent or other Rent payable under this Lease. As long
as they do not materially change Tenant's obligations hereunder,
Tenant agrees to make reasonable non-monetary modifications to this
Lease as may be reasonably required by Lender(s) in connection with
the obtaining of normal financing or refinancing of the property of
which the Premises are a part.
n. CONSTRUCTION. The Landlord and Tenant acknowledge that each has had
its counsel review this Lease, and hereby agree that the normal rule
of construction to the effect that any ambiguities are to be resolved
against the drafting party shall not be employed in the interpretation
of this Lease or in any amendments or exhibits hereto.
o. MEMORANDUM OF LEASE. Upon request of either party, Landlord and Tenant
shall join in executing a recordable, short-form instrument setting
forth the appropriate terms and conditions
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of the Lease, including those with respect to any renewal rights
exercisable by Tenant during the Term, and further including the
non-disturbance provisions.
p. [Intentionally Omitted].
q. CAPTIONS. Article, section and paragraph captions are not a part
hereof.
r. TERMINATION OPTION. Notwithstanding anything to the contrary contained
in the Lease, Tenant shall have a one-time right to terminate the
Lease (the "TERMINATION RIGHT"), such termination to be effective as
of November 15, 2004 (the "TERMINATION DATE"), provided that all of
the following conditions precedent to such termination are satisfied:
(a) Tenant shall exercise the Termination Right, if at all, by
providing Landlord with written notice ("TENANT'S TERMINATION NOTICE")
of Tenant's election to exercise its Termination Right on or before
the date that is twelve (12) months prior to the Termination Date; (b)
on or before the date of Tenant's Termination Notice, Tenant shall
remit to Landlord, in immediately available funds, an amount equal to
the sum of all unamortized Rent abatement (defined below), plus
unamortized costs (including without limitation leasing commissions
and costs of tenant improvements), plus an amount equal to twelve (12)
months Rent (calculated based upon then current Rent), as
consideration for the early termination of the Lease (collectively,
the "TERMINATION FEE"); and (c) no default (past the expiration of any
applicable grace or cure period) exists as of the date of Tenant's
Termination Notice or at any time between the date of Tenant's
Termination Notice and the Termination Date, and no default or event
that, with the giving of notice or the passage of time, or both, would
constitute a default exists as of the Termination Date. Provided that
all of the foregoing conditions are satisfied, the Lease shall
terminate on the Termination Date with the same force and effect as if
scheduled to expire by its terms as of the Termination Date. For
purposes hereof, "RENT ABATEMENT" shall mean the Base Rent that would
otherwise have been due pursuant to Section 32 from the Commencement
Date through March 14, 2000. For example, if the Lease commences on
November 15, 1999, the abatement of Rent would equal $360,000.00 (3
months multiplied by $80,000.00 + 1 month multiplied by $120,000.00 =
$360,000.00).
s. EXHIBITS. For reference purposes the Exhibits are listed below:
Exhibit A: The Premises
Exhibit B: The Project
Exhibit C: Rules and Regulations
Exhibit D: Building Rules and Regulations for Construction
Exhibit E: Form of Schedule of Expenses
Exhibit F: Approved Signage Criteria
LANDLORD: TENANT:
LIMAR REALTY CORP. #6, EARTHLINK NETWORK, INC.,
a California corporation a Delaware corporation
By: /s/ Thomas Numainville By: /s/ Grayson Hoberg
-------------------------------- ---------------------------
Name: Thomas Numainville Name: Grayson Hoberg
----------------------------- -------------------------
Title: Seinor VP and Asst. Secretary Title: Chief Finanical Officer
----------------------------- ------------------------
Date: Date:
------------------------------ --------------------------
By: By: /s/ David Tommela
-------------------------------- ---------------------------
Name: Name: David Tommela
------------------------------ -------------------------
Title: Title: Executive Vice President
----------------------------- ------------------------
-30-
<PAGE>
Date:_________________________ Date:__________________________
-31-
<PAGE>
EXHIBIT 12
MINDSPRING ENTERPRISES
Statement Re: Computation of Ratio of Earnings to Fixed Charges
(In millions)
<TABLE>
<CAPTION> For the Nine Months
For the Years Ended December 31, Ended September 30,
-------------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
FIXED CHARGES:
Interest expense (including amortization of
debt issuance costs) - (725) (415) (749) (890) (718) (6,618)
Interest element of rent expense (1/3 rent) (492) (21) (171) (492) (492) (377) (1,782)
-------- ------- ------- ------- ------- ------- -------
(492) (746) (586) (1,241) (1,382) (1,095) (8,400)
======== ======= ======= ======= ======= ======= =======
EARNINGS:
Net Loss (75) (1,959) (7,612) (4,083) 10,544 6,866 (21,219)
Add back:
Provision (benefit) for income taxes - - - - 1,544 92 (6,640)
Fixed charges excluding cap interest (492) (746) (586) (1,241) (1,382) (1,095) (8,400)
-------- ------- ------- ------- ------- ------- -------
417 (1,213) (7,026) (2,842) 13,470 8,053 (19,459)
======== ======= ======= ======= ======= ======= =======
COVERAGE (DEFICIENCY) (75) (1,959) (7,612) (4,083) 9.7 7.4 (27,859)
======== ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
EarthLink Network, Inc. of our report dated February 16, 1999, except as to
Note 14, which is as of February 24, 1999, relating to the consolidated
financial statements of EarthLink Network, Inc. and of our report dated
June 16, 1998, relating to the statement of assets acquired and liabilities
assumed of the Sprint Internet Passport Business acquired by EarthLink Network,
Inc., which appear in such Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Century City, California
January 4, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 6, 1998, with respect to the Statement of Revenues
and Direct Expenses of the Consumer Internet Access Services of Sprint
Corporation in the Registration Statement (Form S-4) and related Proxy
Statement/Prospectus of EarthLink Network, Inc.
Ernst & Young LLP
Kansas City, Missouri
January 4, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of our
reports on the financial statements for MindSpring Enterprises, Inc. as of
December 31, 1997 and 1998, and for the three years ended December 31, 1998, the
financial statements of Spry, Inc. as of April 30, 1997, and January 31, 1998,
and for the years ended April 30, 1996 and 1997 and the nine months ended
January 31, 1998, and the financial statements of NETCOM On-Line Communication
Services, Inc. Domestic subscriber operations as of December 31, 1997 and 1998,
and for the three years ended December 31, 1998, into this Registration
Statement.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 5, 2000
<PAGE>
Exhibit 99.1
January 4, 2000
Board of Directors
EarthLink Network, Inc.
3100 New York Drive
Pasadena, CA 91107
Consent to Include Fairness Opinion
in the Joint Proxy/Registration Statement
-----------------------------------------
Dear Sirs:
We hereby consent to the inclusion of and reference to our opinion, dated
September 22, 1999, in the Proxy Statement of EarthLink Network, Inc.
("EarthLink"), and Mindspring Enterprises, Inc. ("Mindspring"), which is
included in WWW Holdings, Inc.'s Registration Statement of Form S-4, relating
to the proposed merger transaction involving EarthLink and Mindspring. In
giving the foregoing consent, we do not admit that we come within the
category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended (the "Securities Act"), or the rules and
regulations promulgated thereunder, nor do we admit that we are experts with
respect to any part of such Registration Statement within the meaning of the
term "experts" as used in the Securities Act or the rules and regulations
promulgated thereunder.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
By: /s/ Ethan M. Topper
------------------------------------
Name: Ethan M. Topper
Title: Managing Director
<PAGE>
Exhibit 99.2
[Letterhead of Donaldson, Lufkin & Jenrette Securities Corporation]
CONSENT OF DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
We hereby consent to the (i) inclusion of our opinion letter dated
September 22, 1999 to the Board of Directors of MindSpring Enterprises, Inc.
("MindSpring") as Annex C to the Joint Proxy Statement/Prospectus of MindSpring
and EarthLink Network, Inc. ("EarthLink") relating to the proposed merger
between MindSpring and EarthLink and (ii) references thereto in the sections
captioned "SUMMARY -- MindSpring's Reasons for the Reorganization," "SUMMARY
- --Opinion of MindSpring Financial Advisor," "THE REORGANIZATION -- Background
and Negotiation of the Reorganization," "THE REORGANIZATION -- Reasons of
MindSpring for Agreeing to the Reorganization with EarthLink" and "THE
REORGANIZATION -- Opinion of MindSpring Financial Advisor" of the Joint Proxy
Statement/Prospectus of MindSpring and EarthLink which forms a part of this
Registration Statement on Form S-4. In giving such consent, we do not admit that
we come within the category of persons whose consent is required under, and we
do not admit that we are "experts" for purposes of, the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ William S. Oglesby
--------------------------
Name: William S. Oglesby
Title: Managing Director
New York, New York
January 5, 2000
<PAGE>
EXHIBIT 99.3
Consent of Person About to Become A Director
(pursuant to Rule 438 under the Securities Act of 1933, as amended)
In connection with a Form S-4 filed by WWW Holdings, Inc. with the
Securities and Exchange Commission (the "Registration Statement"), I, Sky D.
Dayton, expect to be elected to the Board of Directors of WWW Holdings, Inc., as
described therein. As of the effective time of the Registration Statement, I
will not be a member of the Board of Directors of WWW Holdings, Inc., and I am
not required to sign the Registration Statement.
I hereby consent to being named in the Registration Statement as a
future member of WWW Holdings, Inc.'s Board of Directors, and to the filing of
the Registration Statement as contemplated by WWW Holdings, Inc.
January 6, 2000 /s/ Sky D. Dayton
- ------------------------------- -------------------------------------
Date Sky D. Dayton
<PAGE>
Exhibit 99.4
Consent of Person About to Become A Director
(pursuant to Rule 438 under the Securities Act of 1933, as amended)
In connection with a Form S-4 filed by WWW Holdings, Inc. with the
Securities and Exchange Commission (the "Registration Statement"), I, Campbell
B. Lanier, III, expect to be elected to the Board of Directors of WWW Holdings,
Inc., as described therein. As of the effective time of the Registration
Statement, I will not be a member of the Board of Directors of WWW Holdings,
Inc., and I am not required to sign the Registration Statement.
I hereby consent to being named in the Registration Statement as a
future member of WWW Holdings, Inc.'s Board of Directors, and to the filing of
the Registration Statement as contemplated by WWW Holdings, Inc.
January 6, 2000 /s/ Campbell B. Lanier, III
- ------------------------ ----------------------------------------
Date Campbell B. Lanier, III
<PAGE>
Exhibit 99.5
Consent of Person About to Become A Director
(pursuant to Rule 438 under the Securities Act of 1933, as amended)
In connection with a Form S-4 filed by WWW Holdings, Inc. with the
Securities and Exchange Commission (the "Registration Statement"), I, William H.
Scott, III, expect to be elected to the Board of Directors of WWW Holdings,
Inc., as described therein. As of the effective time of the Registration
Statement, I will not be a member of the Board of Directors of WWW Holdings,
Inc., and I am not required to sign the Registration Statement.
I hereby consent to being named in the Registration Statement as a
future member of WWW Holdings, Inc.'s Board of Directors, and to the filing of
the Registration Statement as contemplated by WWW Holdings, Inc.
January 6, 2000 /s/ William H. Scott, III
- -------------------------- ------------------------------------
Date William H. Scott, III
<PAGE>
Exhibit 99.6
Consent of Person About to Become A Director
(pursuant to Rule 438 under the Securities Act of 1933, as amended)
In connection with a Form S-4 filed by WWW Holdings, Inc. with the
Securities and Exchange Commission (the "Registration Statement"), I, Len J.
Lauer, expect to be elected to the Board of Directors of WWW Holdings, Inc., as
described therein. As of the effective time of the Registration Statement, I
will not be a member of the Board of Directors of WWW Holdings, Inc., and I am
not required to sign the Registration Statement.
I hereby consent to being named in the Registration Statement as a
future member of WWW Holdings, Inc.'s Board of Directors, and to the filing of
the Registration Statement as contemplated by WWW Holdings, Inc.
January 6, 2000 /s/ Len J. Lauer
- -------------------------- ---------------------------------------
Date Len J. Lauer
<PAGE>
Exhibit 99.7
Consent of Person About to Become A Director
(pursuant to Rule 438 under the Securities Act of 1933, as amended)
In connection with a Form S-4 filed by WWW Holdings, Inc. with the
Securities and Exchange Commission (the "Registration Statement"), I, William T.
Esrey, expect to be elected to the Board of Directors of WWW Holdings, Inc., as
described therein. As of the effective time of the Registration Statement, I
will not be a member of the Board of Directors of WWW Holdings, Inc., and I am
not required to sign the Registration Statement.
I hereby consent to being named in the Registration Statement as a
future member of WWW Holdings, Inc.'s Board of Directors, and to the filing of
the Registration Statement as contemplated by WWW Holdings, Inc.
January 6, 2000 /s/ William T. Esrey
- ------------------------- --------------------------------
Date William T. Esrey
<PAGE>
Exhibit 99.8
Consent of Person About to Become A Director
(pursuant to Rule 438 under the Securities Act of 1933, as amended)
In connection with a Form S-4 filed by WWW Holdings, Inc. with the
Securities and Exchange Commission (the "Registration Statement"), I, Michael S.
McQuary, expect to be elected to the Board of Directors of WWW Holdings, Inc.,
as described therein. As of the effective time of the Registration Statement, I
will not be a member of the Board of Directors of WWW Holdings, Inc., and I am
not required to sign the Registration Statement.
I hereby consent to being named in the Registration Statement as a
future member of WWW Holdings, Inc.'s Board of Directors, and to the filing of
the Registration Statement as contemplated by WWW Holdings, Inc.
January 6, 2000 /s/ Michael S. McQuary
- ------------------------- --------------------------------
Date Michael S. McQuary
<PAGE>
Exhibit 99.9
Consent of Person About to Become A Director
(pursuant to Rule 438 under the Securities Act of 1933, as amended)
In connection with a Form S-4 filed by WWW Holdings, Inc. with the
Securities and Exchange Commission (the "Registration Statement"), I, Linwood A.
Lacy, Jr., expect to be elected to the Board of Directors of WWW Holdings, Inc.,
as described therein. As of the effective time of the Registration Statement, I
will not be a member of the Board of Directors of WWW Holdings, Inc., and I am
not required to sign the Registration Statement.
I hereby consent to being named in the Registration Statement as a
future member of WWW Holdings, Inc.'s Board of Directors, and to the filing of
the Registration Statement as contemplated by WWW Holdings, Inc.
January 6, 2000 /s/ Linwood A. Lacy, Jr.
- ------------------------ -----------------------------------------
Date Linwood A. Lacy, Jr.
<PAGE>
Exhibit 99.10
Consent of Person About to Become A Director
(pursuant to Rule 438 under the Securities Act of 1933, as amended)
In connection with a Form S-4 filed by WWW Holdings, Inc. with the
Securities and Exchange Commission (the "Registration Statement"), I, Reed E.
Slatkin, expect to be elected to the Board of Directors of WWW Holdings, Inc.,
as described therein. As of the effective time of the Registration Statement, I
will not be a member of the Board of Directors of WWW Holdings, Inc., and I am
not required to sign the Registration Statement.
I hereby consent to being named in the Registration Statement as a
future member of WWW Holdings, Inc.'s Board of Directors, and to the filing of
the Registration Statement as contemplated by WWW Holdings, Inc.
January 6, 2000 /s/ Reed E. Slatkin
- --------------------------- -----------------------------------
Date Reed E. Slatkin
<PAGE>
Exhibit 99.11
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
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
Special Meeting of Stockholders and Proxy Statement, for the Special Meeting
of Stockholders of the Company to be held at 8:00 a.m. Pacific Standard Time
on Friday, February 4, 2000 at Town Hall Conference Room, 2947 Bradley
Street, Pasadena, California 91107, 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 Special Meeting of Stockholders 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>
SPECIAL MEETING OF STOCKHOLDERS OF
EARTHLINK NETWORK, INC.
FRIDAY, FEBRUARY 4, 2000
TO VOTE BY MAIL
- ---------------
PLEASE DATE, SIGN AND MAIL YOUR PROXY CARD IN THE ENVELOPE PROVIDED AS SOON
AS POSSIBLE.
TO VOTE BY TELEPHONE (TOUCH-TONE PHONE ONLY)
- --------------------------------------------
PLEASE CALL TOLL-FREE 1-800-PROXIES AND FOLLOW THE INSTRUCTIONS. HAVE YOUR
CONTROL NUMBER AND THE PROXY CARD AVAILABLE WHEN YOU CALL.
TO VOTE BY INTERNET
- -------------------
PLEASE ACCESS THE WEB PAGE AT "WWW.VOTEPROXY.COM" AND FOLLOW THE ON-SCREEN
INSTRUCTIONS. HAVE YOUR CONTROL NUMBER AVAILABLE WHEN YOU ACCESS THE WEB PAGE.
------------------
/ /
YOUR CONTROL NUMBER IS / /
------------------
Please Detach and Mail in the Envelope Provided
Please mark your
A /X/ vote as in this
example.
<TABLE>
<S> <C> <C> <C> <C>
FOR AGAINST ABSTAIN
THIS PROXY, WHEN PROPERLY EXECUTED, 1. Approval and adoption of the Agreement and / / / / / /
WILL BE VOTED IN ACCORDANCE WITH THE Plan of Reorganization, dated as of
DIRECTIONS GIVEN BY THE UNDERSIGNED September 22, 1999, by and among EarthLink
STOCKHOLDER(S). IF NO DIRECTION IS MADE, Network, Inc., MindSpring Enterprises, Inc.
IT WILL BE VOTED FOR PROPOSAL (1) AND and WWW Holdings, Inc. and each of the
AS THE PROXIES DEEM ADVISABLE ON SUCH transactions contemplated therein.
OTHER MATTERS AS MAY NAY PROPERLY
BEFORE THE MEETING. 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 APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF
REORGANIZATION.
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.
PLEASE COMPLETE, DATE, SIGN AND RETURN THIS PROXY PROMPTLY.
Signature: ____________________________ Signature (if held jointly) ___________________________________ Dated: ___________
Title or Authority (if applicable)
</TABLE>
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.
<PAGE>
Exhibit 99.12
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF MINDSPRING
ENTERPRISES, INC.
The undersigned stockholder(s) of MindSpring Enterprises, Inc., a
Delaware corporation (the "Company"), hereby acknowledges receipt of the
Notice of Special Meeting of Stockholders and Proxy Statement for the Special
Meeting of Stockholders of the Company to be held at 11:00 a.m. local time on
Friday, February 4, 2000 at the High Museum of Art, Hill Auditorium, 1280
Peachtree Street, NE, Atlanta, Georgia, and hereby appoints Campbell B.
Lanier, III, Charles M. Brewer and Michael S. McQuary, or any 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 Special
Meeting of Stockholders 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>
SPECIAL MEETING OF STOCKHOLDERS OF
MINDSPRING ENTERPRISES, INC.
FRIDAY, FEBRUARY 4, 2000
TO VOTE BY MAIL
- ---------------
PLEASE DATE, SIGN AND MAIL YOUR PROXY CARD IN THE ENVELOPE PROVIDED AS SOON
AS POSSIBLE.
TO VOTE BY TELEPHONE (TOUCH-TONE PHONE ONLY)
- --------------------------------------------
PLEASE CALL TOLL-FREE 1-800-PROXIES AND FOLLOW THE INSTRUCTIONS. HAVE YOUR
CONTROL NUMBER AND THE PROXY CARD AVAILABLE WHEN YOU CALL.
TO VOTE BY INTERNET
- -------------------
PLEASE ACCESS THE WEB PAGE AT "WWW.VOTEPROXY.COM" AND FOLLOW THE ON-SCREEN
INSTRUCTIONS. HAVE YOUR CONTROL NUMBER AVAILABLE WHEN YOU ACCESS THE WEB PAGE.
------------------
/ /
YOUR CONTROL NUMBER IS / /
------------------
Please Detach and Mail in the Envelope Provided
Please mark your
A /X/ vote as in this
example.
<TABLE>
<S> <C> <C> <C> <C>
FOR AGAINST ABSTAIN
THIS PROXY, WHEN PROPERLY EXECUTED, 1. Approval and adoption of the Agreement and / / / / / /
WILL BE VOTED IN ACCORDANCE WITH THE Plan of Reorganization, dated as of
DIRECTIONS GIVEN BY THE UNDERSIGNED September 22, 1999, by and among EarthLink
STOCKHOLDER(S). IF NO DIRECTION IS MADE, Network, Inc., MindSpring Enterprises, Inc.
IT WILL BE VOTED FOR PROPOSAL (1) AND and WWW Holdings, Inc. and each of the
AS THE PROXIES DEEM ADVISABLE ON SUCH transactions contemplated therein.
OTHER MATTERS AS MAY PROPERLY COME
BEFORE THE MEETING. 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 APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF
REORGANIZATION.
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.
PLEASE COMPLETE, DATE, SIGN AND RETURN THIS PROXY PROMPTLY.
Signature: ____________________________ Signature (if held jointly) ___________________________________ Dated: ___________
Title or Authority (if applicable)
</TABLE>
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.
