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FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION NO. 333-94177
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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 card.
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:
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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 Georgia Center for Advanced Telecommunications
2947 Bradley Street Technology (GCATT)
Pasadena, California 250 14(th) Street, NW
Atlanta, Georgia
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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 17 THROUGH 27.
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.
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Sky D. Dayton Charles M. Brewer
Chairman of the Board Chairman
EarthLink Network, Inc. and Chief Executive Officer
MindSpring Enterprises, Inc.
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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.
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
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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, which will change its
name to "EarthLink, Inc."
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,
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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.
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
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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 at the
Georgia Center for Advanced Telecommunications Technology (GCATT), Auditorium,
250 14(th) Street, NW, 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, which will change its name to "Earthlink, Inc."
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.
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TABLE OF CONTENTS
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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.......................................... 34
What MindSpring Stockholders Will Receive in the
Reorganization.......................................... 35
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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
Conditions to the Reorganization.......................... 75
Termination............................................... 75
Amendment; No Waiver...................................... 77
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
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Stockholder Action by Written Consent..................... 167
Board of Directors........................................ 167
MANAGEMENT AND OPERATION OF WWW HOLDINGS AFTER THE
REORGANIZATION............................................ 170
WWW Holdings Board of Directors........................... 170
Management................................................ 172
Executive Compensation.................................... 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
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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.
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
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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 29 and for MindSpring
shares at the address on page 31. 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
Telephone: (800) 559-1311
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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 174. EACH ITEM IN THIS SUMMARY REFERS TO THE
PAGES WHERE THAT SUBJECT IS DISCUSSED MORE FULLY.
THE COMPANIES (PAGES 96 THROUGH 159)
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 32)
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,
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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 34 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" beginning on
page 33 for a more detailed discussion of the option agreements.
WHAT YOU WILL RECEIVE IN THE REORGANIZATION (PAGE 34)
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 and B 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
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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 35)
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 28)
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 30)
The special meeting of MindSpring stockholders will be held at the Georgia
Center for Advanced Telecommunications Technology (GCATT), Auditorium,
250 14th Street, NW, 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 38)
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 17 and the section "A Caution About
Forward-Looking Statements" beginning on page 15.
MINDSPRING'S REASONS FOR THE REORGANIZATION (PAGE 47)
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 17 and the section "A Caution
About Forward-Looking Statements" beginning on page 15. 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
EARTHLINK (PAGE 40)
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 49)
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 10)
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 6, 2000, the last day for which such information was available before
the date of this joint proxy statement/prospectus, EarthLink common stock closed
at $43.25 per share and MindSpring common stock closed at $26.88 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 41)
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
DIRECTORS MAY NOT NECESSARILY REQUEST THAT CREDIT
7
<PAGE>
SUISSE FIRST BOSTON CONFIRM ITS OPINION AS OF A LATER DATE.
OPINION OF MINDSPRING FINANCIAL ADVISOR (PAGE 49)
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 60)
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 75)
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 75)
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 75 for a more detailed description of the termination provisions of the
reorganization agreement.
TERMINATION FEE (PAGE 76)
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 76 and 77 for more
information about when a termination fee may become payable.
8
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (PAGE 55)
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 55.
ACCOUNTING TREATMENT (PAGE 55)
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 58)
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 59)
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 163)
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 163.
WHERE YOU CAN FIND MORE INFORMATION (PAGE 174)
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 174.
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 78.
<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
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<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
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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.
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<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
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<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
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<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
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<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.
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<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);
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- 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 61 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 34 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, at the Georgia Center for Advanced
Telecommunications Technology (GCATT), Auditorium, 250 14(th) Street, NW,
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, 1430 West Peachtree Street, NW, Suite 400,
Atlanta, Georgia 30309. 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 34 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% on a fully
diluted basis, 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 75 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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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 January 3, 2000, of $44.75 per share,
would equal approximately $10.4 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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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" beginning on page 170.
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 any 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" beginning on page 170.
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; and
- 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 the proposal described in the preceding
two paragraphs;
- promptly notify Sprint in writing of EarthLink's execution of a
confidentiality agreement with respect to the proposal described in the
preceding two paragraphs;
- promptly notify Sprint in writing of the furnishing of any confidential
information in contemplation of the 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, series B, and series C convertible preferred stock or pursuant
to EarthLink's agreements with Sprint and Apple;
- 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; or
- 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 55, 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"
beginning on page 55.
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 be 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; or
- 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; or
- 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.
On January 4, 2000, EarthLink and MindSpring amended the reorganization
agreement to permit EarthLink to consummate the strategic alliance with Apple.
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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.
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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>
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WWW HOLDINGS, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(UNAUDITED)
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>
92
<PAGE>
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>
93
<PAGE>
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.
94
<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 6, 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 $43.25, and for MindSpring shares was
$26.88. 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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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, USAA, 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 USAA 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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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 each
customer registering through an Apple computing device who meets a minimum
subscription requirement.
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 5,
2000 pending the
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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 Internet access 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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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 USAA 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
Internet access 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 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, Weather.com, E*Trade, USA Banc, 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 our Internet access
software through direct mail and catalog promotions to SAM's Club members.
SONY ENTERTAINMENT. Sony bundles our Internet access 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 Internet access 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 EarthLink 5.0 access software, 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;
- "free access" Internet service providers, such as NetZero, Inc.; 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 Internet access 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 Internet access package that we developed is
the front-end and installation/registration program. We intend to maintain or
negotiate renewals of existing software
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licenses and authorizations. We may also want or need to license other
applications in the future. Our 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, 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, 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.
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<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 electronic commerce.
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<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.
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<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
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<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.
122
<PAGE>
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
123
<PAGE>
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;
- "free access" ISPs, such as NetZero, Inc.; 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
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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.
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.
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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 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.
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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 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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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, NW, 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 million 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," beginning on page 159.
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 159.
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" on page 160.
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 164.
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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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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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 transaction
with Apple, 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
December 27, 1999 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 March 12, 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 has provided 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 (333-94177) 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 7, 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.
175
<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................................................ 27
Section 7.1. EARTHLINK INTERIM OPERATIONS................................ 27
Section 7.2. ACQUISITION PROPOSALS; BOARD RECOMMENDATION................. 29
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........................... 34
Section 9.1. REASONABLE BEST EFFORTS..................................... 34
Section 9.2. CERTAIN FILINGS; COOPERATION IN RECEIPT OF CONSENTS;
LISTING..................................................... 34
Section 9.3. PUBLIC ANNOUNCEMENTS........................................ 35
Section 9.4. ACCESS TO INFORMATION, NOTIFICATION OF CERTAIN MATTERS...... 36
Section 9.5. FURTHER ASSURANCES.......................................... 36
Section 9.6. TAX AND ACCOUNTING TREATMENT................................ 36
Section 9.7. AFFILIATE LETTERS........................................... 36
Section 9.8. CONFIDENTIALITY............................................. 37
Section 9.9. MINDSPRING STANDSTILL....................................... 38
Section 9.10. EARTHLINK STANDSTILL........................................ 39
Section 9.11. ASR 135..................................................... 40
Section 9.12. BENEFIT MATTERS............................................. 41
Section 9.13. ANTITRUST MATTERS........................................... 41
Section 9.14. EXEMPTION FROM LIABILITY UNDER SECTION 16(B)................ 41
ARTICLE X CONDITIONS TO THE MERGERS............................................... 42
Section 10.1. CONDITIONS TO THE OBLIGATIONS OF EACH PARTY................. 42
Section 10.2. CONDITIONS TO THE OBLIGATIONS OF EARTHLINK.................. 43
Section 10.3. CONDITIONS TO THE OBLIGATIONS OF MINDSPRING................. 44
ARTICLE XI TERMINATION............................................................ 44
Section 11.1. TERMINATION................................................. 44
Section 11.2. EFFECT OF TERMINATION....................................... 45
Section 11.3. FEES AND EXPENSES........................................... 45
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.
4
<PAGE>
"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
<PAGE>
<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>
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<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
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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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(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.
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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
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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>
[LOGO]
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
<PAGE>
Board of Directors
EarthLink Network, Inc.
September 22, 1999
Page 2
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, 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>
[LOGO]
Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue, New York, New York 10172 - (212) 892-3000
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
<PAGE>
[LOGO]
September 22, 1999
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.
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
