<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1997
REGISTRATION NO. 333-27241
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CONCENTRIC NETWORK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 4813 65-0257497
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR NUMBER)
ORGANIZATION)
----------------
CONCENTRIC NETWORK CORPORATION
10590 NORTH TANTAU AVENUE
CUPERTINO, CA 95014
(408) 342-2800
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
HENRY R. NOTHHAFT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CONCENTRIC NETWORK CORPORATION
10590 NORTH TANTAU AVENUE
CUPERTINO, CA 95014
(408) 342-2800
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE OF PROCESS)
----------------
COPIES TO:
DAVID J. SEGRE THOMAS A. BEVILACQUA
VALERIE SCHULTHIES BROBECK, PHLEGER & HARRISON LLP
PAUL B. SHINN TWO EMBARCADERO PLACE
2200 GENG ROAD
VICTOR H. SIM
WILSON SONSINI GOODRICH & ROSATI PALO ALTO, CA 94303
PROFESSIONAL CORPORATION (415) 424-0160
650 PAGE MILL ROAD
PALO ALTO, CA 94304
(415) 493-9300
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
SUBJECT TO COMPLETION, DATED JUNE 23, 1997
3,000,000 SHARES
CONCENTRIC NETWORK CORPORATION
COMMON STOCK
-----------
All of the 3,000,000 shares of Common Stock offered hereby are being sold
by Concentric Network Corporation ("Concentric" or the "Company"). Prior to
this offering, there has been no public market for the Common Stock of the
Company. It is currently estimated that the initial public offering price will
be between $10.00 and $12.00 per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
The shares of Common Stock have been approved for quotation on the Nasdaq
National Market under the symbol "CNCX."
Concurrently with the closing of this offering, certain strategic investors
have agreed to purchase directly from the Company shares of Common Stock having
an aggregate purchase price of approximately $15.0 million. All of such shares
will be unregistered shares purchased at the Price to Public set forth below.
See "Direct Placements."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
================================================================================
</TABLE>
(1) For information regarding indemnification of Underwriters, see
"Underwriting."
(2) Before deducting expenses of the offering payable by the Company, estimated
at $750,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days from the date hereof, to purchase up to 450,000 additional shares of
Common Stock on the same terms set forth above, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public will be $ , the Underwriting Discounts and Commissions will be
$ , and Proceeds to Company will be $ . Including the Direct
Placements, the total Proceeds to Company will be $ , or $ if the
over-allotment is exercised in full. See "Underwriting."
-----------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole and in part and to certain other
conditions. It is expected that delivery of such shares will be made at the
offices of UBS Securities LLC, 299 Park Avenue, New York, New York on or about
, 1997.
-----------
UBS SECURITIES
WHEAT FIRST BUTCHER SINGER
UNTERBERG HARRIS
, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE
PRICE OF THE COMMON STOCK OF THE COMPANY INCLUDING STABILIZING
BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF
PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors" and
the Financial Statements and Notes thereto, appearing elsewhere in this
Prospectus. Except as otherwise noted or as the context otherwise requires, all
information in this Prospectus (i) gives effect to the conversion of all
outstanding shares of Preferred Stock into shares of Common Stock that will
occur automatically immediately prior to the closing of the offering, (ii)
gives effect to the reincorporation of the Company from Florida to Delaware
prior to the closing of the offering, (iii) gives effect to a one-for-15
reverse split of the Company's Common Stock and Preferred Stock and the
conversion of all shares of Class B Common Stock into shares of Common Stock,
which will occur prior to the closing of the offering, and (iv) assumes no
exercise of the Underwriters' over-allotment option. See "Description of
Capital Stock" and "Underwriting." In addition, all share numbers herein assume
that no stockholder receiving the Rescission Offer, which Rescission Offer will
be made as promptly as practicable following the closing of the offering,
exercises its right to rescind its purchase of shares of the Company's Common
Stock. See "Rescission Offers." Certain terms used in this Prospectus are
defined in the Glossary of Terms beginning on page G-1.
THE COMPANY
Concentric provides tailored, value-added Internet Protocol ("IP") based
network services for businesses and consumers. To provide these services, the
Company utilizes its low/fixed latency, high-throughput network, employing its
advanced network architecture and the Internet. Concentric's service offerings
for enterprises include virtual private networks ("VPNs"), dedicated access
facilities ("DAFs") and Web hosting services. These services enable enterprises
to take advantage of standard Internet tools such as browsers and high-
performance servers for customized data communications within an enterprise and
between an enterprise and its suppliers, partners and customers. These services
combine the cost advantages, nationwide access and standard protocols of public
networks with the customization, high performance, reliability and security of
private networks. Among the current enterprise customers are Acer America
Corporation, Inc., Intuit, Inc., Total Entertainment Network, WebTV Networks,
Inc. and Ziff-Davis Publishing Co. Concentric's revenue from enterprise
customers accounted for 53.9% and 35.0% of the Company's revenue for the three
months ended March 31, 1997 and the year ended December 31, 1996, respectively.
Concentric's service offerings for consumers and small office/home office
customers include local Internet dial-up access, Web hosting services and
online multiplayer gaming.
Industry analysts expect the market size for both value-added IP data
networking services and Internet access to grow rapidly as businesses and
consumers increase their use of the Internet, intranets and privately managed
IP networks. The total market for these services is projected to grow from $1.2
billion in 1996 to approximately $22.7 billion in the year 2000, with
approximately $10.4 billion in the enterprise market segment and $12.3 billion
in the consumer market segment.
The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, SuperPOPs in 19 major metropolitan areas and 150
secondary and tertiary POPs in other cities, allowing dial-up network access in
the U.S. and Canada. In addition, the Company can provide analog dial-up, frame
relay, fractional T-1, T-1 and DS3 access to the network. The Concentric
network is engineered and managed to provide superior quality of service,
balancing several key performance criteria. The Company provides guaranteed
levels of service for DAFs to enterprise customers, and targets performance
benchmarks for connection success rates, latency levels and throughput for all
of its service offerings. Concentric also believes that a major advantage of
its network architecture is its ability to perform adaptive call processing
("ACP"), which is designed to enable the tuning of network parameters and
traffic routing to meet the latency, throughput, security, and reliability
requirements of a specific customer or application on a call-by-call basis.
Concentric is currently deploying the ACP technology in its network and is
planning to commercially introduce these capabilities during the second half of
1997.
In addition to strong network performance capabilities, the Company believes
that several factors distinguish its ability to provide value-added network
services. These factors include: (i) excellent service quality; (ii) rapid
development time and flexibility in meeting custom applications requirements;
(iii) responsive customer support and
3
<PAGE>
effective account management, available 24 hours per day, seven days per week
through the Company's 142 customer service personnel; and (iv) the Company's
technical expertise in devising cost-effective network solutions for customers.
The Company's objective is to become the leading provider of value-added IP-
based network services worldwide. In order to achieve its goal, the Company is
implementing business strategies which capitalize on a number of opportunities
in the marketplace and a large and growing IP network access market. Key
strategies include: (i) rapidly providing cost-effective, tailored network
solutions; (ii) optimizing network utilization; (iii) employing leveraged
marketing through strategic partners; (iv) offering next generation network
services; and (v) deploying network services internationally.
The Company aggressively pursues strategic alliances with a variety of
companies. Key partners currently include Bay Networks, Inc., Microsoft
Corporation, Netscape Communications, Inc., PictureTel Corporation, Racal-
Datacom, Inc. and TMI Telemedia International, Ltd., a subsidiary of Telecom
Italia, SpA ("TMI"). The Company is continuing to expand its value-added
services, and plans to introduce RemoteLink, a remote access service designed
to help businesses reduce the high costs of telecommunications charges and user
support associated with building, deploying and maintaining their own remote
access WAN, in mid-1997. In addition, Concentric is in early stage trials for
videoconferencing services and IP-based telephony services. The Company is also
working with TMI to establish an international network based on the Company's
network technology and expertise and TMI's global telecommunications
infrastructure.
The Company was incorporated in Florida in 1991 under the name Engineered
Video Concepts, Inc., changed its name to Concentric Research Corporation in
1992 and commenced network operations in 1994. In 1995, the Company changed its
name to Concentric Network Corporation. Unless the context otherwise requires,
"Concentric" and the "Company" refer to Concentric Network Corporation. The
address of the Company's principal executive offices is 10590 N. Tantau Avenue,
Cupertino, CA 95014, and its telephone number at that address is (408) 342-
2800.
Concentric Network Corporation, The Concentric Network, Concentric
RemoteLink, ConcentricView, FlexChannel, FullChannel, Powered by Concentric
Network, and PremierConnect are among the trademarks of the Company. This
Prospectus contains other product names, trade names and trademarks of the
Company and of other organizations.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company................ 3,000,000 shares(1)
Common Stock to be outstanding after the offering.. 11,700,769 shares(2)
Use of Proceeds.................................... For expansion of network
and data center
operations, to fund
operating losses and for
working capital and other
general corporate
purposes. In addition, the
Company expects to use a
portion of the proceeds to
fund the repurchase of
shares tendered in
connection with rescission
offers.
Proposed Nasdaq National Market Symbol............. CNCX
</TABLE>
- --------
(1) Excludes shares to be sold by the Company to certain strategic investors
concurrent with the closing of this offering. See "Direct Placements."
(2) Includes an assumed 1,363,636 shares to be issued to certain strategic
investors concurrent with the closing of this offering (assuming an initial
public offering price of $11.00 per share). See "Direct Placements."
Excludes 2,915,621 shares issuable upon exercise of options and warrants
outstanding at May 15, 1997 at a weighted average exercise price of $12.00
per share. See "Description of Capital Stock--Warrants."
DIRECT PLACEMENTS
Certain strategic investors have agreed to purchase from the Company, in a
private placement that will occur concurrently with the closing of this
offering, shares of Common Stock with an aggregate purchase price of
approximately $15.0 million. Such purchasers will pay to the Company a per
share amount equal to the Price to Public set forth on the cover page of this
Prospectus. See "Direct Placements."
4
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1991 THREE MONTHS ENDED
(INCEPTION) YEAR ENDED DECEMBER 31, MARCH 31,
THROUGH DEC. 31, ------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
---------------- ------- ------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. -- $ 23 $ 442 $ 2,483 $ 15,648 $ 1,533 $ 9,154
Cost of revenue......... -- 130 2,891 16,168 47,945 7,256 15,744
Network equipment write-
off(1) ................ -- -- -- -- 8,321 -- --
Total operating
expenses............... 28 1,114 1,784 7,602 22,503 4,196 7,021
---- ------- ------- -------- -------- --------- ---------
Loss from operations.... (28) (1,221) (4,233) (21,287) (63,121) (9,919) (13,611)
Net loss................ $(28) $(1,245) $(4,290) $(22,008) $(66,381) $ (10,380) $ (14,681)
==== ======= ======= ======== ======== ========= =========
Pro forma net loss per
share(2)............... $ (13.84) $ (2.24)
======== =========
Weighted average shares
used in computing pro
forma net loss per
share(2)............... 4,797 6,540
======== =========
OTHER OPERATING DATA:
EBITDA(3)............... $(28) $(1,103) $(4,064) $(19,091) $(53,650) $ (8,593) $ (9,755)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------
PRO PRO FORMA
ACTUAL FORMA(4) AS ADJUSTED(5)
-------- -------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................. $(24,705) $(24,705) $ 20,235
Property and equipment, net................ 53,227 53,227 53,227
Total assets............................... 61,438 61,438 106,378
Long-term debt and capital lease
obligations, less current portion......... 35,349 35,349 35,349
Stockholders' equity (deficit)............. (10,619) (10,619) 34,321
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1996 1996 1996 1997
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
QUARTERLY STATEMENT OF
OPERATIONS DATA:
Revenue................... $ 1,533 $ 2,489 $ 4,193 $ 7,433 $ 9,154
Cost of revenue........... 7,256 11,782 11,913 16,994 15,744
Network equipment write-
off(1)................... -- -- -- 8,321 --
Total operating expenses.. 4,196 5,475 5,464 7,368 7,021
-------- -------- -------- -------- --------
Loss from operations...... (9,919) (14,768) (13,184) (25,250) (13,611)
Net loss.................. $(10,380) $(15,420) $(14,473) $(26,108) $(14,681)
======== ======== ======== ======== ========
OTHER OPERATING DATA:
EBITDA(3)................. $ (8,593) $(12,971) $(10,579) $(21,507) $ (9,755)
</TABLE>
- --------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Financial Statements.
(2) The pro forma net loss per share computation gives retroactive effect to
the conversion of the outstanding Preferred Stock into Common Stock upon
the closing of the offering. See Note 1 of Notes to Financial Statements
for an explanation of the calculation of pro forma net loss per share.
(3) Represents earnings (loss) before depreciation and amortization, interest
expense and income tax expense (benefit). The Company has included
information concerning EBITDA herein because it understands that such
information is used by certain investors as one measure of an issuer's
historical ability to service debt. EBITDA should not be considered an
alternative to, or more meaningful than, income from operations, net income
or cash flow as an indication of the Company's operating performance.
(4) Pro forma to reflect the conversion of Class B Common Stock and Preferred
Stock into Common Stock.
(5) Adjusted to reflect the receipt by the Company of the estimated net
proceeds of $44,940,000 from the sale of 3,000,000 shares of Common Stock
offered hereby and an assumed 1,363,636 shares offered in the Direct
Placement at an assumed initial public offering price of $11.00 per share.
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information set forth in this
Prospectus, in connection with an investment in the Common Stock offered
hereby. The Prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Those statements appear in a number of places in this
Prospectus and include statements regarding the intent, belief or current
expectations of the Company or its directors or officers with respect to,
among other things: (i) trends affecting the Company's financial condition or
results of operation; and (ii) the Company's business and growth strategies.
Prospective investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those projected, expressed
or implied, in the forward-looking statements as a result of various factors.
The accompanying information contained in this Prospectus, including without
limitation the information set forth under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," identifies important factors that could cause such
differences. Such forward-looking statements speak only as of the date of this
Prospectus, and the Company cautions potential investors not to place undue
reliance on such statements.
LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES
The Company was incorporated in 1991, commenced network operations in 1994
and completed initial deployment of its current network architecture and use
of an advanced ATM backbone network in late 1996. Accordingly, the Company has
a limited operating history upon which an evaluation of the Company and its
prospects can be based. In addition, a majority of the Company's senior
management team have been working together at the Company for less than two
years. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets. To address these risks, the Company must, among other things, respond
to competitive developments, continue to attract, retain and motivate
qualified persons, and continue to upgrade its technologies and commercialize
its network services incorporating such technologies. There can be no
assurance that the Company will be successful in addressing such risks and the
failure to do so could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has
incurred net losses and experienced negative cash flow from operations since
inception and expects to continue to operate at a net loss and experience
negative cash flow for the foreseeable future. The Company experienced net
losses of approximately $4.3 million, $22.0 million and $66.4 million for the
years ended December 31, 1994, 1995 and 1996, respectively, and a net loss of
$14.7 million for the three months ended March 31, 1997. At March 31, 1997,
the Company had an accumulated deficit of approximately $108.6 million. There
can be no assurance that the Company will be able to achieve or sustain
revenue growth or profitability or positive cash flow on either a quarterly or
an annual basis. While the Company has incurred substantial operating losses
since inception, the Company's ability to utilize net operating loss
carryforwards for income tax purposes to offset taxable income, if any,
realized in future periods is severely limited. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 8 of
Notes to Financial Statements.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have fluctuated in the past and may in the
future fluctuate significantly depending upon a variety of factors, including
the timely deployment and implementation of expansion of the Concentric
network and new network architectures, the incurrence of related capital
costs, the receipt of new value-added network services and consumer services
subscriptions and the introduction of new services by the Company and its
competitors. Additional factors that may contribute to variability of
operating results include: the payment of statutory interest related to the
recission offer; the pricing and mix of services offered by the Company;
customer retention rate; market acceptance of new and enhanced versions of the
Company's services; changes in pricing policies by the Company's competitors;
the Company's ability to obtain sufficient supplies of sole- or limited-source
components; user demand for network and Internet access services; balancing of
network usage over a 24-hour period;
6
<PAGE>
and general access services. In response to competitive pressures, the Company
may take certain pricing or marketing actions that could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company's expense levels are relatively fixed in
the short term and are based, in part, upon the Company's estimates of growth
of its business. As a result, variations in the timing and amounts of revenues
could have a material adverse effect on the Company's quarterly operating
results. Due to the foregoing factors, the Company believes that period-to-
period comparisons of its operating results are not necessarily meaningful and
that such comparisons cannot be relied upon as indicators of future
performance. In the event that the Company's operating results in any future
period fall below the expectations of securities analysts and investors, the
trading price of the Company's Common Stock would likely be materially and
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CUSTOMER CONCENTRATION
The Company currently derives a substantial portion of its total revenue
from a single customer. For the year ended December 31, 1996 and the three
months ended March 31, 1997, revenue from WebTV Networks, Inc. ("WNI")
represented approximately 10.1% and 32.7%, respectively, of the Company's
revenue. While the Company expects revenue from WNI to decrease in both
absolute amount and as a percentage of revenue in future periods, the Company
believes that revenue derived from current and future large customers will
continue to represent a significant portion of its revenue. As a result, the
loss of one or more of the Company's major customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that revenue from customers
that have accounted for significant revenue in past periods, individually or
as a group, will continue, or if continued, will reach or exceed historical
levels in any future period. See Note 1 of Notes to Financial Statements.
MANAGEMENT OF POTENTIAL GROWTH AND EXPANSION
As of December 31, 1995, the Company had 96 employees and 60 independent
contractors, and as of December 31, 1996, the Company had 245 employees and 46
independent contractors. As of March 31, 1997, the Company had 280 employees
and 48 independent contractors. The growth and expansion of the Company's
business and its service offerings have placed, and are expected to continue
to place, a significant strain on the Company's management, operational and
financial resources. The Company has recently expanded and upgraded its
network to use an ATM backbone. The Company plans to continue to substantially
expand its network in the future. There can be no assurance that the Company
will be able to add services at the rate or according to the schedule
presently planned by the Company. To manage its growth, the Company must,
among other things, (i) continue to implement and improve its operational,
financial and management information systems, including its billing, accounts
receivable and payable tracking, fixed assets and other financial management
systems; (ii) hire and train additional qualified personnel; and (iii)
continue to expand and upgrade its network infrastructure. Demands on the
Company's network infrastructure and technical support resources have grown
rapidly with the Company's expanding customer base, and the Company may in the
future experience difficulties meeting the demand for its access services and
technical support. There can be no assurance that the Company's technical
support or other resources will be sufficient to facilitate the Company's
growth. As the Company strives to increase total network utilization and to
optimize this utilization by targeting both business and consumer users to
balance the network's usage throughout a 24-hour period, there will be
additional demands on the Company's customer support, sales and marketing
resources. Any failure of the Company to manage its growth effectively could
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEPENDENCE UPON NEW AND UNCERTAIN MARKETS
The markets for tailored, value-added network services for businesses and
consumers offered by the Company, including Internet access, are in the early
stages of development. Since these markets are relatively new and because
current and future competitors are likely to introduce competing services or
products, it is difficult to predict the rate at which the market will grow,
if at all, or whether new or increased competition will result in market
saturation. Certain critical issues concerning commercial use of tailored
value-added services and Internet services, including
7
<PAGE>
security, reliability, ease and cost of access and quality of service, remain
unresolved and may impact the growth of such services. If the markets for the
services offered by the Company, including Internet access, fail to grow, grow
more slowly than anticipated, or become saturated with competitors, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "-- Competition" and "-- Dependence upon
New and Enhanced Services," "-- Risks of Technological Change and Evolving
Industry Standards."
DEPENDENCE UPON NEW AND ENHANCED SERVICES
The Company has recently introduced new enterprise service offerings,
including the introduction of value-added, IP-based communication services to
enterprises. The failure of these services to gain market acceptance in a
timely manner or at all could have a material adverse effect on the business,
financial condition and results of operations of the Company.
Introduction by the Company of new or enhanced services with reliability,
quality or compatibility problems could significantly delay or hinder market
acceptance of such services, which could adversely affect the Company's
ability to attract new customers and subscribers. The Company's services may
contain undetected errors or defects when first introduced or as enhancements
are introduced. There can be no assurance that, despite testing by the Company
or its customers, errors will not be found in new services after commencement
of commercial deployment, resulting in additional development costs, loss of,
or delays in, market acceptance, diversion of technical and other resources
from the Company's other development efforts and the loss of credibility with
the Company's customers and subscribers. Any such event could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Services."
Additionally, if the Company is unable to achieve balanced network
utilization over a 24-hour period, the Concentric network could become
overburdened at certain periods during the day, which could adversely affect
the quality of service provided by the Company. Conversely, due to the high
fixed cost nature of Concentric's infrastructure, under-utilization of the
Concentric network during certain periods of the day could adversely affect
the Company's ability to provide cost-efficient services at other times. The
failure of the Company to achieve balanced network utilization, because of
either over- or under-utilization could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
The Company relies on other companies to supply certain key components of
its network infrastructure, including telecommunications services and
networking equipment, which, in the quantities and quality demanded by the
Company, are available only from sole or limited sources. AT&T Corp. ("AT&T"),
MCI Telecommunications, Inc. ("MCI"), WorldCom, Inc. ("WorldCom") and PacWest
Telecomm, Inc. are the primary providers to the Company of data communications
facilities and capacity. AT&T is the sole provider of the frame relay backbone
of the Concentric network, and MCI is the sole provider of the ATM backbone of
the Concentric network. The Company is also dependent upon local exchange
carriers ("LECs") to provide telecommunications services to the Company and
its customers. The Company from time to time has experienced delays in
receiving telecommunications services, and there can be no assurance that the
Company will be able to obtain such services on the scale and within the time
frames required by the Company at an affordable cost, or at all. Any failure
to obtain such services on a timely basis at an affordable cost would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The routers, switches and modems the Company uses are supplied by Bay
Networks, Inc. through Racal-Datacom, Inc. ("Racal"). In addition, Racal acts
as a systems integrator. The servers primarily used in the Company's network
infrastructure are supplied solely by Sun Microsystems, Inc. The Company
purchases these components pursuant to purchase orders placed from time to
time, does not carry significant inventories of these components and has no
guaranteed supply arrangements for such components. The Company's suppliers
also sell products to the Company's competitors and may in the future
themselves become competitors of the Company. There can be no assurance that
the Company's suppliers will not enter into exclusive arrangements with the
Company's competitors or stop selling their products or components to the
Company at commercially reasonable prices or at all.
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Expansion of network infrastructures by the Company and others is placing,
and will continue to place, a significant demand on the Company's suppliers,
some of which have limited resources and production capacity. In addition,
certain of the Company's suppliers, in turn, rely on sole or limited sources
of supply of components included in their products. Failure of the Company's
suppliers to adjust to meet such increasing demand may prevent them from
continuing to supply components and products in the quantities and quality and
at the times required by the Company, or at all. The Company's inability to
obtain sufficient quantities of sole- or limited-source components or to
develop alternative sources if required could result in delays and increased
costs in expanding, and overburdening of, the Company's network
infrastructure, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also is dependent on its suppliers' ability to provide necessary
products and components that comply with various Internet and
telecommunications standards and that interoperate with products and
components from other vendors. Any failure of the Company's sole- or limited-
source suppliers to provide products or components that comply with Internet
standards or that interoperate with other products or components used by the
Company in its network infrastructure could have a material adverse effect on
the Company's business, financial condition and results of operations.
Certain of the Company's suppliers, including the regional Bell operating
companies ("RBOCs") and other LECs, currently are subject to tariff controls
and other price constraints that in the future may be changed. In addition,
regulatory proposals are pending that may affect the prices charged by the
RBOCs and other LECs to the Company. Any such regulatory changes could result
in increased prices of products and services, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "-- Dependence upon New and Enhanced Services" and "-- Risks
of Technological Change and Evolving Industry Standards."
DEPENDENCE UPON NETWORK INFRASTRUCTURE
The Company's success will depend upon the capacity, reliability and
security of its network infrastructure. The Company currently derives a
significant portion of its revenue from customer subscriptions. The Company
expects that a substantial portion of its future revenues will be derived from
the provision of tailored value-added network services to its customers. The
Company must continue to expand and adapt its network infrastructure as the
number of users and the amount of information they wish to transfer increase,
and as customer requirements change. The Company's current projections of
utilization of the Concentric network require rapid expansion of the capacity
of the network to avoid capacity constraints that would adversely affect the
performance of the system. The expansion and adaptation of the Company's
network infrastructure will require substantial financial, operational and
management resources. There can be no assurance that the Company will be able
to expand or adapt its network infrastructure to meet additional demand or its
customers' changing requirements on a timely basis, at a commercially
reasonable cost, or at all. In addition, if demand for usage of the Concentric
network were to increase faster than projected or were to exceed the Company's
current forecasts, the network could experience capacity constraints, which
would adversely affect the performance of the system. Any failure of the
Company to expand its network infrastructure on a timely basis or adapt it to
either changing customer requirements or evolving industry standards, or
capacity constraints experienced by the Concentric network for any reason,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- The Concentric Network."
Currently, the Company has a transit agreement with networkMCI, Inc. to
support the exchange of traffic between the Concentric network and the
Internet. The Company connects to the MCI Internet via a DS3 (45 Mbps) link
from its Bay City Data Center and another DS3 link from its Cupertino Data
Center. The failure of the MCI Internet backbone, or either or both data
centers, or any other link in the delivery chain, and resulting interruption
in the Company's operations would have a material adverse effect on the
Company's business, financial condition and results of operations.
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COMPETITION
The market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company believes
that its ability to compete successfully depends upon a number of factors,
including market presence; the capacity, reliability, low latency and security
of its network infrastructure; technical expertise and functionality,
performance and quality of services; customization; ease of access to and
navigation of the Internet; the pricing policies of its competitors and
suppliers; the variety of services; the timing of introductions of new
services by the Company and its competitors; customer support; the Company's
ability to support industry standards; and industry and general economic
trends.
The Company's current and prospective competitors generally may be divided
into the following five groups: (i) telecommunications companies, such as
AT&T, MCI, Sprint, Inc., WorldCom, the RBOCs and various cable companies; (ii)
online services providers, such as America Online, Inc. ("America Online"),
CompuServe Incorporated ("CompuServe"), the Microsoft Network ("MSN") of
Microsoft Corporation ("Microsoft"), and Prodigy Services Company ("Prodigy");
(iii) Internet service providers ("ISPs"), such as BBN Corporation ("BBN"),
NETCOM On-Line Communications Services, Inc. ("NETCOM"), PSINet, Inc. ("PSI"),
and other national and regional providers; (iv) nonprofit or educational
Internet connectivity providers; and (v) Web server farms such as Internet
Direct and Exodus. Many of these competitors have greater market presence,
engineering and marketing capabilities, and financial, technological and
personnel resources than those available to the Company. As a result, they may
be able to develop and expand their communications and network infrastructures
more quickly, adapt more swiftly to new or emerging technologies and changes
in customer requirements, take advantage of acquisition and other
opportunities more readily, and devote greater resources to the marketing and
sale of their products and services than can the Company. In addition to the
companies named above, various organizations have entered into or are forming
joint ventures or consortiums to provide services similar to those of the
Company.
The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies, will enter the tailored value-added network services market,
resulting in even greater competition for the Company. Certain of such
telecommunications companies and online services providers are currently
offering or have announced plans to offer Internet or online services or to
expand their network services. Certain companies, including America Online,
BBN and PSI, have also obtained or expanded their Internet access products and
services as a result of acquisitions. Such acquisitions may permit the
Company's competitors to devote greater resources to the development and
marketing of new competitive products and services and the marketing of
existing competitive products and services. In addition, the ability of some
of the Company's competitors to bundle other services and products with
virtual private network services or Internet access services could place the
Company at a competitive disadvantage. Certain companies are also exploring
the possibility of providing or are currently providing high-speed data
services using alternative delivery methods such as over the cable television
infrastructure, through direct broadcast satellites and over wireless cable.
The Company is applying for certificates of authority to become a CLEC in
selected states. To the extent the Company obtains such authorizations and
commences CLEC operations, it will compete with the incumbent LEC and
additional CLECS providing telecommunications services in these markets. For
all new entrants, including the Company, the market for local exchange
services is extremely competitive. Local telecommunications services offered
by the Company will compete principally with services offered by the incumbent
LEC serving that area. Incumbent LECs, such as the RBOCs, currently dominate
their local telephone markets. Such companies have financial, managerial and
technical resources that substantially exceed those of the Company and have
long-standing relationships with their customers. While the 1996 Telecom Act
provides increased business opportunities to CLECs, it also allows incumbent
LECs increased pricing flexibility for their services. Increased price
competition from incumbent LECs could have a material adverse effect on the
Company's CLEC operations and, in turn, on the Company's results of operations
and financial condition to the extent its CLEC operations are a material
portion of its business. Furthermore, upon the satisfaction of certain
regulatory conditions, the RBOCs currently are expected to be able to offer
long distance services in their home markets in addition to local service,
which would afford their local customers "one-stop shopping" for
telecommunications services. The Company also expects to face increased
competition in the provision of local exchange services from other CLECs,
cable television companies, electric utilities,
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microwave carriers, wireless telephone system operators, AT&T, MCI, Sprint,
WorldCom and other long distance carriers who may choose to enter the local
exchange market by resale of incumbent LEC facilities.
As a result of increased competition and vertical and horizontal integration
in the industry, the Company could encounter significant pricing pressure,
which in turn could result in significant reductions in the average selling
price of the Company's services. For example, certain of the Company's
competitors that are telecommunications companies may be able to provide
customers with reduced communications costs in connection with their Internet
access services or private network services, reducing the overall cost of
their solutions and significantly increasing price pressures on the Company.
There can be no assurance that the Company will be able to offset the effects
of any such price reductions with an increase in the number of its customers,
higher revenue from enhanced services, cost reductions or otherwise. In
addition, the Company believes that the Internet access and online services
businesses are likely to encounter consolidation in the near future, which
could result in increased price and other competition in these industries and,
potentially, the virtual private networks industry. Increased price or other
competition could result in erosion of the Company's market share and could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Company will
have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully. See "-- Management of
Potential Growth and Expansion" and "Business -- Competition."
DEPENDENCE UPON THIRD-PARTY MARKETING, DISTRIBUTION AND ENGINEERING
RELATIONSHIPS
An important element of the Company's strategy is to develop relationships
with leading companies to enhance Concentric's engineering, marketing and
distribution efforts. The Company has OEM agreements with Netscape Corporation
("Netscape") and Microsoft pursuant to which the Company is entitled to
distribute and modify these companies' browsers. The customization of browsers
by the Company is an integral part of its current tailored VPN offerings. The
Netscape agreement expires in 1998 and the Microsoft agreement expires in
1999. The Company has an agreement with Intuit, Inc. ("Intuit") for the
development, operation and maintenance of a VPN that is the integrated access,
dial-up network and infrastructure used by purchasers of Quicken, Turbo Tax
and other Intuit software products to access the Quicken Financial Network
Website and upgrade to full Internet access. The Intuit contract expires in
1998. The Company relies on these relationships for acquisition of consumer
customers. The termination of or failure to renew any of these agreements or
the inability of the Company to enter into similar relationships with others
could have a material adverse effect on the Company's business, financial
condition and results of operation. The Company has an outsourcing agreement
with Critical Technologies Incorporated ("CTI"), a subsidiary of Williams
Telecommunications, Inc. that enables the Company to use CTI employees for the
operational support of the Concentric network. The Company's use of CTI
employees and CTI engineering expertise were integral to its development of
the Concentric network and continue to be integral to ongoing operation of the
Company's network operations center. Pursuant to the agreement with CTI, all
of the CTI employees currently working for Concentric will become employees of
Concentric at the termination of the agreement in October 1999. Termination of
any of these agreements or the failure of the Company to renew any of the
agreements upon termination on terms acceptable to the Company could result in
a material adverse affect on the Company's business, financial condition and
results of operations. See "Business -- Key Customer Applications."
RISKS OF TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS
The markets for the Company's services are characterized by rapidly changing
technology, evolving industry standards, changes in customer needs, emerging
competition and frequent new product and service introductions. The Company's
future success will depend, in part, on its ability to effectively use leading
technologies; to continue to develop its technical expertise; to enhance its
current networking services; to develop new services that meet changing
customer needs; to advertise and market its services; and to influence and
respond to emerging industry standards and other technological changes in a
timely and cost-effective basis. There can be no assurance that the Company
will be successful in effectively using new technologies, developing new
services or enhancing its existing services on a timely basis, or that such
new technologies or enhancements will achieve market acceptance. The Company's
pursuit of necessary technological advances may require substantial time and
expense, and there can be no assurance that the Company will succeed in
adapting its network service business to alternate access devices and
conduits. An integral
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part of the Company's strategy is to design its network in order to meet the
requirements of emerging standards such as 56.6 Kbps modems and applications
such as IP-based interactive video and voice conferencing communications.
Failure of the Company, for technological or other reasons, to develop and
introduce new or enhanced services that are compatible with industry standards
and that satisfy customer requirements would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- The Concentric Network."
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its
services with products and architectures offered by various vendors. Although
the Company intends to support emerging standards in the market for Internet
access, there can be no assurance that industry standards will be established
or, if they become established, that the Company will be able to conform to
these new standards in a timely fashion and maintain a competitive position in
the market. Specifically, the Company's services rely on the continued
widespread commercial use of TCP/IP. Alternative open protocol and proprietary
protocol standards have been or are being developed. If any of these
alternative protocols become widely adopted, there may be a reduction in the
use of TCP/IP, which could render the Company's services obsolete and
unmarketable. Additionally, two of the leading modem manufacturers, Rockwell
and US Robotics, have proposed different, incompatible standards for 56.6 Kbps
modems. The Company currently plans to accommodate both standards to the
extent it can do so cost effectively. The failure of the Company to anticipate
the prevailing standard, or the failure of a common standard to emerge could
have a material adverse effect on the Company's business and results of
operations. In addition, there can be no assurance that services or
technologies developed by others will not render the Company's services or
technology uncompetitive or obsolete.
The Company faces the risk of fundamental changes in the way Internet access
is delivered. Currently, Internet services are accessed primarily by computers
connected by telephone lines. Recently, several companies announced the
development and planned sale of cable television modems, wireless modems and
satellite modems to provide access to the Internet. Cable television,
satellite and wireless modems have the ability to transmit data at
substantially faster speeds than the modems the Company and its subscribers
currently use. In addition, wireless modems have the potential to reduce the
cost of network services. As the Internet becomes accessible through these
cable television, wireless and satellite modems and by screen-based
telephones, television or other consumer electronic devices, or subscriber
requirements change the way Internet access is provided, the Company will have
to develop new technology or modify its existing technology to accommodate
these developments. The Company's pursuit of these technological advances may
require substantial time and expense, and there can be no assurance that the
Company will succeed in adapting its Internet access business to alternate
access devices and conduits.
LEGAL PROCEEDINGS
On April 22, 1997, a complaint was filed in the Los Angeles County,
California Superior Court against the Company and other unnamed defendants by
Sattel Communications LLC ("Sattel"). The complaint alleges claims for breach
of contract, breach of the covenant of good faith and fair dealing, unfair
business practices, fraud and negligent misrepresentation. Sattel claims that
the Company is in breach of an agreement to pay for up to $4.3 million of DSS
Switches from Sattel for use in the Company's network. The Complaint also
seeks unspecified consequential and punitive damages. On April 29, 1997,
Sattel served the Company with an Application for Writ of Attachment, seeking
to secure a lien on the Company's assets up to an amount of $3.6 million.
Prior to this offering and the Direct Placements, Sattel holds approximately
1.7% of the Company's Common Stock. At a hearing on June 17, 1997, the court
indicated its intention to grant the writ of attachment, but deferred issuing
a final ruling until another hearing can be held on June 25, 1997. If the
Court grants the writ, the Company intends to post a bond in the amount of the
writ, thereby precluding Sattel from executing on the writ. No trial date has
been set in the matter.
In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana Corporation ("Diana"), the parent corporation of
Sattel, alleging securities fraud related to plaintiffs' purchase of shares of
Diana Common Stock in reliance upon allegedly misleading statements made by
defendants, Diana, Sattel and certain of their respective affiliates, officers
and directors. Concentric was named as a defendant in the complaint in
connection with certain statements made by
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Diana and officers of Diana related to Concentric's purchase of network
switching equipment from Diana's Sattel subsidiary. The complaints do not
appear to allege that Concentric made any false or misleading statements. The
plaintiffs seek unspecified compensatory damages.
While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct
vigorous defenses. An unfavorable outcome in these matters could have a
material adverse effect on the Company's financial condition. In addition,
even if the ultimate outcomes are resolved in favor of the Company, the
defense of such litigation could entail considerable cost and the diversion of
efforts of management, either of which could have a material adverse effect on
the Company's results of operations. See "Business -- Legal Proceedings" and
Note 10 of Notes to Financial Statements.
RISK OF SYSTEM FAILURE
As the Company expands its network and usage grows, increased stress will be
placed upon network hardware and traffic management systems. While the
Company's network has been designed with redundant backbone circuits to allow
traffic re-routing, there can be no assurance that the Company will not
experience failures relating to individual network points of presence ("POPs")
or even catastrophic failure of the entire network. Moreover, the Company's
operations are dependent upon its ability to protect its network
infrastructure against damage from fire, earthquakes, floods, mudslides, power
loss, telecommunications failures and similar events. A significant portion of
the Company's computer equipment, including critical equipment dedicated to
its Internet access services, is located at its facilities in Bay City,
Michigan, and Cupertino, California. In addition, the Company's modems and
routers that serve large areas of the United States are located in such
cities. The Company's network operations center, which manages the entire
network, is in St. Louis, Missouri. Despite precautions taken by the Company,
the occurrence of a natural disaster or other unanticipated problems at the
Company's network operations center, at its hubs (sites at which the Company
has located routers, switches and other computer equipment that make up the
backbone of the Company's network infrastructure) or at a number of the
Company's POPs has from time to time in the past caused, and in the future
could cause, interruptions in the services provided by the Company. In
addition, failure of the Company's telecommunications providers to provide the
data communications capacity in the time frame required by the Company as a
result of a natural disaster or operational disruption or for any other reason
could cause interruptions in the services provided by the Company. Any damage
or failure that causes interruptions in the Company's operations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
SYSTEM SECURITY RISKS
Despite the implementation of network security measures, the core of the
Company's network infrastructure is vulnerable to computer viruses, break-ins
and similar disruptive problems caused by its customers or Internet users.
Computer viruses, break-ins or other problems caused by third parties could
lead to interruptions, delays or cessation in service to the Company's
customers and subscribers. Furthermore, such inappropriate use of the network
by third parties could also potentially jeopardize the security of
confidential information stored in the computer systems of the Company and its
customers, which may result in liability to the Company and also may deter
potential subscribers. Although the Company intends to continue to implement
industry-standard security measures, such measures occasionally have been
circumvented in the past, and there can be no assurance that measures
implemented by the Company will not be circumvented in the future. The costs
and resources required to eliminate computer viruses and alleviate other
security problems may result in interruptions, delays or cessation of service
to the Company's customers that could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Management of Potential Growth and Expansion," "-- Dependence upon New and
Enhanced Services,"""-- Risks of Technological Change and Evolving Industry
Standards," "Use of Proceeds" and "Business -- Services."
DEPENDENCE UPON KEY PERSONNEL; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its executive management team, including Henry R. Nothhaft,
the Company's President and Chief Executive Officer, and John K. Peters, the
Company's Executive Vice President and General Manager, Network Services
Division. The loss of the services of Messrs. Nothhaft or Peters could have a
material adverse effect on the Company. The Company does not
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have employment agreements with any of its senior officers, including Messrs.
Nothhaft or Peters. Nor does the Company carry key man life insurance on the
life of any such persons. The Company's success will also depend upon the
continued service of the other members of its senior management team and
technical, marketing and sales personnel. The Company's employees may
voluntarily terminate their employment with the Company at any time, and
competition for qualified employees is intense. The Company's success also
depends upon its ability to attract and retain additional highly qualified
management, technical, sales and marketing and customer support personnel. The
process of locating such personnel with the combination of skills and
attributes required to carry out the Company's strategy is often lengthy. The
loss of the services of key personnel, or the inability to attract additional
qualified personnel, could have a material adverse effect upon the Company's
results of operations, development efforts and ability to complete the
expansion of its network infrastructure. Any such event could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "-- Management of Potential Growth and Expansion," "--
Dependence upon New and Enhanced Services," "-- Risks of Technological Change
and Evolving Industry Standards" and "Business --Services."
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
A key component of the Company's strategy is its planned expansion into
international markets. In particular, the Company has entered into an
agreement with TMI Telemedia International Ltd., a subsidiary of Telecom
Italia SpA ("TMI"), to establish an international network based on
Concentric's network technology and expertise and TMI's existing
telecommunications infrastructure to deliver a range of compatible network
services worldwide. If the companies are not able to successfully deploy
Concentric's technology over TMI's infrastructure, or if Concentric is
unsuccessful in transferring its knowledge to TMI employees, the Company's
international strategy may be delayed and the Company's business, results of
operation or financial condition could be materially adversely affected. To
date, the Company has only limited experience in working with TMI to develop
versions of its products and marketing and distributing its products
internationally. There can be no assurance that the Company will be able to
successfully market, sell and deliver its products in these markets. In
addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent in doing business on
an international level, such as unexpected changes in regulatory requirements,
export restrictions, export controls relating to encryption technology,
tariffs and other trade barriers, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting accounts
receivable, political instability, fluctuations in currency exchange rates,
seasonal reductions in business activity during the summer months in Europe
and certain other parts of the world and potentially adverse tax consequences
that could adversely impact the success of the Company's international
operations. There can be no assurance that one or more of such factors will
not have a material adverse effect on the Company's future international
operations and, consequently, on the Company's business, financial condition
and results of operations. See "Business -- Sales and Marketing."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that its available cash resources combined
with the net proceeds of the offering, the Direct Placements and existing
lease and credit facilities, and funds from operations will be sufficient to
meet its anticipated working capital and capital expenditure requirements for
the next 12 months. However, there can be no assurance that such resources
will be sufficient for its anticipated working capital and capital expenditure
requirements. The Company may need to raise additional funds through public or
private debt or equity financings in order to take advantage of unanticipated
opportunities, including more rapid international expansion or acquisitions of
complementary businesses or technologies, or to develop new products or
otherwise respond to unanticipated competitive pressures. The Company may also
raise additional funds through public or private debt or equity financings if
such financings become available on favorable terms. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
then current stockholders of the Company may be reduced and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. If additional funds are raised through
the issuance of debt securities, such securities would have certain rights,
preferences and privileges senior to holders of Common Stock and the terms of
such debt could impose restrictions on the operations of the Company. There
can be no assurance that additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or
are not available on acceptable terms, the Company may not be able to take
advantage of unanticipated opportunities, develop new products or
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otherwise respond to unanticipated competitive pressures. Such inability could
have a material adverse effect on the Company's business, results of
operations and financial condition. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company may seek to acquire assets or businesses complementary to its
operations, although no specific acquisitions are currently in negotiation.
Any such future acquisitions would be accompanied by the risks commonly
encountered in acquisitions of companies. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's business, the
inability of the Company's management to maximize the financial and strategic
position of the Company by the incorporation of acquired technology or
business into the Company's service offerings, the difficulty of maintaining
uniform standards, controls, procedures and policies, the potential loss of
key employees of acquired companies, and the impairment of relationships with
employees and customers as a result of changes in management. No assurance can
be given that any acquisition by the Company will or will not occur, that if
an acquisition does occur it will not materially and adversely affect the
Company or that any such acquisition will be successful in enhancing the
Company's business.
If the Company proceeds with one or more significant acquisitions in which
the consideration consists of cash, a substantial portion of the Company's
available cash, including proceeds of this offering, could be used to
consummate the acquisitions. If the Company were to consummate one or more
acquisitions in which the consideration consisted of stock, stockholders of
the Company could suffer significant dilution of their interests in the
Company. Many business acquisitions must be accounted for as a purchase for
financial reporting purposes. Most of the businesses that might become
attractive acquisition candidates for the Company are likely to have
significant goodwill and intangible assets, and acquisition of these
businesses, if accounted for as a purchase, would typically result in
substantial amortization of goodwill charges to the Company.
GOVERNMENT REGULATION
Value-Added Network and Internet Service Providers. The Federal
Communications Commission (the "FCC") currently does not regulate value-added
network software or computer equipment related services that transport data or
voice messages over telecommunication facilities. The Company provides value-
added IP-based network services, in part, through data transmissions over
public telephone lines. These transmissions are governed by regulatory
policies establishing charges and terms for wireline communications. Operators
of these types of value-added networks that provide access to regulated
transmission facilities only as part of a data services package currently are
excluded from regulations that applies to "telecommunications carrier" and as
such the Company is not currently subject to direct regulation by the FCC or
any other governmental agency, other than regulations applicable to businesses
generally. However, in the future the Company could become subject to
regulation by the FCC or another regulatory agency as a provider of basic
telecommunications services.
Currently, the FCC is reviewing its regulatory positions and could seek to
impose common carrier regulation on the network transport and communications
facilities aspects of an enhanced or information service package. Further, the
FCC could conclude that the Company's protocol conversions, computer
processing, and interaction with customer-supplied information are
insufficient to afford the Company the benefits of the enhanced or information
service classification, and thereby may seek to regulate some segments of the
Company's activities as basic telecommunications services. While state public
utility commissions generally have declined to regulate enhanced or
information services, some states have continued to regulate particular
aspects of enhanced services in limited circumstances, such as where they are
provided by local exchange carriers ("LECs"). Moreover, the public service
commissions of certain states continue to review potential regulation of such
services. There can be no assurance that regulatory authorities of states
within which Concentric makes its Internet access, Intranet and VPN services
available will not seek to regulate aspects of these activities as
telecommunications services. Changes in the regulatory environment relating to
the Internet connectivity market, including regulatory changes that directly
or indirectly affect telecommunications costs or increase the likelihood or
scope of competition from the RBOCs or other telecommunications companies,
could affect the prices at which the Company may sell its services. The
Company
15
<PAGE>
cannot predict the impact, if any, that future regulation or regulatory
changes may have on its business and there can be no assurance that such
future regulation or regulatory changes will not have a material adverse
effect on the Company's business, results of operations and financial
condition.
Competitive Local Exchange Carriers. The Company is applying for
certificates of authority to become a CLEC in selected states. To the extent
the Company obtains such authorizations and commences CLEC operations, the
telecommunications services provided by such operations will be subject to
regulation by federal, state and local governmental agencies. At the federal
level, the FCC has jurisdiction over interstate telecommunications services.
State regulatory commissions exercise jurisdiction over intrastate services.
Additionally, municipalities and other local government agencies may regulate
limited aspects of the Company's business, such as use of rights-of-way.
Typically start-up telecommunications carriers are not as heavily regulated as
incumbent LECs. For example, under current regulations, the Company would not
be subject to price cap or rate of return regulation by the FCC. However, the
Telecommunications Act of 1996 (the "1996 Telecom Act") requires the FCC to
establish a subsidy mechanism for universal telephone service to which the
Company will be required to contribute based on its telecommunications
revenues and requires all LECs, including CLECs, to make services available
for resale by other carriers, provide nondiscriminatory access to rights-of-
way, offer reciprocal compensation for termination of local telecommunication
traffic and provide dialing parity and telephone number portability, and
ensure that their services are accessible to and usable by persons with
disabilities. The 1996 Telecom Act retains for individual states the authority
to impose their own regulations of local exchange services, including state
universal service subsidy programs, so long as this regulation is not
inconsistent with the requirements of the 1996 Telecom Act. The Company is
unable to predict the final form of such regulation and its potential impact
on the Company. In its provision of interstate, international and intrastate
services as a CLEC, the Company generally will be subject to tariff filing
requirements setting forth the terms, conditions and prices for services,
prior to offering telecommunications services. At the state level, the Company
will also be subject to state certification proceedings as a CLEC. These
certifications generally require a showing that the carrier has adequate
financial, managerial and technical resources to offer the proposed services
consistent with the public interest. Under some state statutes changes in the
ownership of the Company's outstanding voting securities also may trigger
additional state public utility commission approval. For example, in certain
jurisdictions an investor who acquires as little as ten percent or more of the
Company's voting securities may have to obtain prior approval of the
acquisition of such securities because such ownership might be deemed to
constitute an indirect controlling interest in the CLEC. While uncommon,
challenges to these tariffs and certificates by third parties could cause the
Company to incur substantial legal and administrative expenses. Many states
also have additional regulatory requirements such as minimum service quality
reporting and customer service requirements and uniform LEC accounting
requirements.
Although the 1996 Telecom Act eliminates legal barriers to entry into the
CLEC market, no assurance can be given that changes in current or future
regulations adopted by the FCC or state regulators or other legislative or
judicial initiatives relating to the telecommunications industry would not
have a material adverse effect on the Company's ability to offer such
services. With the passage of the 1996 Telecom Act and the anticipated
increase in the level of competition faced by incumbent LECs, the FCC could
grant incumbent LECs substantial pricing flexibility with regard to interstate
access services. It is also anticipated that the prices incumbent LECs charge
for access services will be substantially reduced as a result of the FCC's
reform of the current access charge regime and the adoption of universal
service rules. Similarly, a number of states have allowed incumbent LECs rate
and tariff flexibility, particularly for services deemed subject to
competition. Such price competition could significantly and adversely affect
the Company's CLEC operations which could, in turn, adversely affect the
Company's results of operations and financial condition to the extent its CLEC
operations are a material portion of its business.
DEPENDENCE ON TECHNOLOGY; PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
technology, although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights. The Company
principally relies upon a combination of copyright, trademark and trade secret
laws and contractual restrictions to protect its proprietary technology. It
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization or to develop similar
technology independently, and there
16
<PAGE>
can be no assurance that such measures have been, or will be, adequate to
protect the Company's proprietary technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent
or superior to the Company's technology. The Company operates a material
portion of its business over the Internet, which is subject to a variety of
risks. Such risks include but are not limited to the substantial uncertainties
that exist regarding the system for assigning domain names and the status of
private rules for resolution of disputes regarding rights to domain names.
There can be no assurance that the Company will continue to be able to employ
its current domain names in the future or that the loss of rights to one or
more domain names will not have a material adverse effect on the Company's
business and results of operations.
Although the Company does not believe that it infringes the proprietary
rights of any third parties, there can be no assurance that third parties will
not assert such claims against the Company in the future or that such claims
will not be successful. The Company could incur substantial costs and
diversion of management resources with respect to the defense of any claims
relating to proprietary rights, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief that
could effectively block the Company's ability to license its products in the
United States or abroad. Such a judgment would have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company is obligated under certain agreements to indemnify the
other party in connection with infringement by the Company of the proprietary
rights of third parties. In the event the Company is required to indemnify
parties under these agreements, it could have a material adverse effect on the
business, financial condition and results of operations of the Company. In the
event a claim relating to proprietary technology or information is asserted
against the Company, the Company may seek licenses to such intellectual
property. There can be no assurance, however, that licenses could be obtained
on commercially reasonable terms, if at all, or that the terms of any offered
licenses would be acceptable to the Company. The failure to obtain the
necessary licenses or other rights could have a material adverse effect on the
Company's business, financial condition and results of operations.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK
The law relating to the liability of online service providers, private
network operators and Internet service providers for information carried on or
disseminated through the facilities of their networks is currently unsettled.
Several lawsuits seeking a judgment of such liability are pending. In one case
brought against an Internet service provider, Religious Technology Center v.
Netcom On-Line Communication Services, Inc., the United States District Court
for the Northern District of California ruled in a preliminary phase that
under certain circumstances Internet service providers could be held liable
for copyright infringement. The case has not reached final judgment. Although
no claims have been asserted against the Company to date, there can be no
assurance that such claims will not be asserted in the future, or if asserted,
will not be successful. The Telecommunications Act of 1996 prohibits and
imposes criminal penalties and civil liability for using an interactive
computer service for transmitting certain types of information and content,
such as indecent or obscene communications. The indecency provision has been
declared unconstitutional by the United States District Court for the Eastern
District of Pennsylvania, which has issued a preliminary injunction against
its enforcement. The United States Supreme Court has recently heard arguments
with respect to the indecency provision and is expected to announce a decision
during the current term of Court. Numerous states have adopted or are
currently considering similar types of legislation. The imposition upon the
Company, Internet service providers or Web server hosts of potential liability
for materials carried on or disseminated through their systems could require
the Company to implement measures to reduce its exposure to such liability,
which may require the expenditure of substantial resources or the
discontinuation of certain product or service offerings. Further, the costs
incurred in defending against any such claims and potential adverse outcomes
of such claims could have a material adverse effect on the Company's financial
condition and results of operations. The Company believes that it is currently
unsettled whether the Telecommunications Act of 1996 prohibits and imposes
liability for any services provided by the Company should the content of
information transmitted be subject to the statute.
SUBSTANTIAL CONTROL BY OFFICERS AND DIRECTORS AND THEIR AFFILIATES
Following the offering and the Direct Placements, the Company's officers and
directors and their affiliates will beneficially own or control approximately
36.5% of the outstanding shares of Common Stock (35.3% if the over-allotment
option is exercised in full). As a result, the Company's officers, directors
and their affiliates will have the
17
<PAGE>
ability to significantly influence the election of the Company's Board of
Directors and the outcome of corporate actions requiring stockholder approval.
See "Principal Stockholders."
RESCISSION OFFERS
From August 1993 through March 1995, the prior management of the Company
sold convertible debentures and Common Stock for aggregate consideration of
approximately $5.1 million. Through December 1996, all of the convertible
debentures were subsequently converted into shares of Common Stock. The offer
and sale of these securities were not made pursuant to a registration
statement under the Securities Act, nor were the offer and sale registered or
qualified under any state securities laws. Although the prior management of
the Company believed at the time that such offers, sales and conversion were
exempt from such registration or qualification, they may not have been exempt.
As a result, certain purchasers of such securities may have the right under
the Securities Act or such state securities laws to rescind their purchases,
and thereby be entitled to return such securities to the Company and in return
receive back from the Company the full consideration paid by such purchasers
with the appropriate interest thereon. Additionally, options issued pursuant
to the Company's 1995 Stock Incentive Plan to Employees and Consultants (the
"1995 Plan") and non-plan options were issued to approximately 200 people in
California for which the Company was unable to rely on an exemption.
Additionally, smaller numbers of options were issued in other states,
including Michigan, Virginia and Florida, for which the Company may not have
had an available exemption under state laws. Such options are potentially
subject to rescission and the Company intends to include them in any
rescission offer. As of the date hereof, no claims for any such rescission
have been asserted against the Company. However, the Company believes that
once the Rescission Offer is made, a substantial number of offerees may accept
the Rescission Offer. The effective price per share of Common Stock and Common
Stock equivalents of such purchases ranged from $3.75 to $30.00, and the
exercise price of the options was $3.75. The Company is filing a registration
statement relating to a rescission offer with respect to such shares (the
"Rescission Offer") and expects to conclude the Rescission Offer to all such
holders approximately 30 days following the closing of this offering in an
amount equal to approximately $5.1 million plus statutory interest of
approximately $1.0 million (which would be an expense during the period in
which the rescission was effected) with respect to the shares of Common Stock
issued upon conversion of the convertible debentures and an amount equal to
$556,000 with respect to the options issued under the 1995 Plan. If all such
holders accept the Rescission Offer, the Company will be required to apply a
portion of the proceeds of this placement towards such rescission. See "Use of
Proceeds," "Shares Eligible for Future Sale; Registration Rights" and
"Rescission Offers."
ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law and the Company's Amended and Restated
Certificate of Incorporation and Bylaws could make it more difficult for a
third party to acquire, and could discourage a third party from attempting to
acquire, control of the Company. Certain of these provisions allow the Company
to issue Preferred Stock with rights senior to those of the Common Stock
without any further vote or action by the Stockholders, eliminate cumulative
voting and impose various procedural and other requirements that could make it
more difficult for Stockholders to effect certain corporate actions.
Additionally, the Company's Certificate of Incorporation provides for these
classes of directors, to be elected in a staggered basis. One class is elected
each year with each class serving a three year term, enabling management to
exercise significant control over the Company's affairs. Such charter
provisions could limit the price that certain investors might be willing to
pay in the future for shares of the Company's Common Stock or Preferred Stock
and may have the effect of delaying or preventing a change in control of the
Company. The issuance of Preferred Stock also could decrease the amount of
earnings and assets available for distribution to the holders of Common Stock
or could adversely affect the rights and powers, including voting rights, of
the holders of the Common Stock. See "Certain Transactions" and "Description
of Capital Stock --Common Stock" and "-- Preferred Stock."
NO PRIOR PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE
There has been no public market for the Company's Common Stock prior to the
offering. Although application has been made to the Nasdaq National Market for
listing of the Common Stock, there can be no assurance that an active trading
market will develop or be sustained or that the market price of the Common
Stock will not decline below the initial public offering price. The initial
public offering price will be determined through negotiations between the
Company and the Underwriters and may not be indicative of the market price for
the Common Stock
18
<PAGE>
following the offering. See "Underwriting" for a discussion of the factors to
be considered in determining the initial public offering price. Even if an
active trading market does develop, the market price of the Common Stock
following this offering may be highly volatile. Factors such as variations in
the Company's revenue, earnings and cash flow and announcements of new service
offerings, technological innovations or price reductions by the Company, its
competitors or providers of alternative services could cause the market price
of the Common Stock to fluctuate substantially. In addition, from time to time
the stock markets have experienced significant price and volume fluctuations
that particularly have affected companies in the technology and
telecommunications sectors and resulted in changes in the market price of the
stocks of many companies that have been unrelated or disproportionate to the
operating performance of those companies. Such broad market fluctuations, as
well as a shortfall in revenue earnings compared to securities analysts'
expectations, changes in analysts' recommendations or projections, and general
economic and market conditions may adversely affect the market price of the
Common Stock following this offering.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial numbers of shares of Common Stock in the public market
could adversely affect the market price of the Common Stock and make it more
difficult for the Company to raise funds through equity offerings in the
future. A substantial number of outstanding shares of Common Stock and other
shares of Common Stock issuable upon exercise of outstanding stock options and
warrants will become available for resale in the public market at prescribed
times. Upon completion of the offering, in addition to the shares sold in the
offering, approximately 137,673 shares, which are not subject to lock-up
agreements, will be immediately eligible for resale in the public market
without restriction under the Act. Approximately 7,199,460 shares of Common
Stock held by existing stockholders are subject to one year lock-up
agreements. Upon the expiration of the lock-up agreements, such shares of
Common Stock will become eligible for sale in the public market, subject to
the provisions of Rules 144(k), 144 and 701 under the Securities Act. UBS
Securities LLC may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements.
The holders of approximately 5,954,254 shares of Common Stock are entitled to
certain registration rights with respect to such shares. In addition, the
Company intends to register the shares of Common Stock reserved for issuance
under the Company's 1995 Stock Incentive Option Plan, 1996 Stock Plan, 1997
Stock Plan and 1997 Employee Stock Purchase Plan following the date of this
Prospectus. See "Shares Eligible for Future Sale" and "Description of Capital
Stock --Registration Rights."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution, in the amount of $7.97 per share, in the net tangible
book value per share of the Common Stock from the initial public offering
price. See "Dilution."
19
<PAGE>
USE OF PROCEEDS
Assuming an initial public offering price of $11.00 per share, the net
proceeds from the sale of the shares of Common Stock offered hereby, after
deducting the underwriting discount and estimated offering expenses are
estimated to be approximately $29,940,000 (approximately $34,543,500 if the
Underwriters' over-allotment is exercised in full) and the proceeds from the
sale of Common Stock in the Direct Placements concurrently with the closing of
this offering are estimated to be approximately $15,000,000.
The Company currently plans to use $3.0 million of the net proceeds from
this offering and the Direct Placements for capital expenditures associated
with expanding the Company's network and data center operations. The balance
of the proceeds will be used to fund operating losses and for working capital
requirements or for other general corporate purposes. Additionally, the
Company currently expects that a portion of the proceeds may also be used to
fund the repurchase of shares of the Company tendered in connection with the
Company's rescission offer in an amount up to $5.1 million plus approximately
$1.0 million of statutory interest with respect to shares of Common Stock
issued upon conversion of the convertible debentures and an amount up to
$556,000 with respect to the options issued under the 1995 Plan. See
"Rescission Offer." Proceeds from the offering also may be used for possible
acquisitions of businesses or technology that expand, complement or are
otherwise related to the Company's current services, although no specific
acquisitions are currently in negotiation. Pending such uses, the proceeds
will be invested in short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain all of its earnings, if any, for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future.
DIRECT PLACEMENTS
Certain strategic investors (collectively, the "Strategic Investors") have
agreed to purchase from the Company, in a private placement that will occur
concurrently with the closing of this offering (the "Direct Placements"),
shares of Common Stock with an aggregate purchase price of approximately $15.0
million. Such purchasers will pay to the Company the per share amount equal to
the Price to Public set forth on the cover page of this Prospectus. At an
assumed offering price of $11.00, such purchasers would purchase an aggregate
of 1,363,636 shares of Common Stock. The Strategic Investors have agreed with
the Company and with the Underwriters that they will not sell or otherwise
dispose of any Common Stock acquired in the Direct Placements until at least
one year after the closing of this offering.
20
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
derived from its financial statements as of March 31, 1997, (ii) such
capitalization presented to reflect on a pro forma basis the conversion of
Class B Common Stock and Preferred Stock into Common Stock, and (iii) such pro
forma capitalization as adjusted to reflect the sale by the Company of (a)
3,000,000 shares of Common Stock pursuant to this offering at an assumed
public offering price of $11.00 per share and the receipt by the Company of
the estimated net proceeds therefrom, after deducting underwriting discounts
and estimated offering expenses and (b) an assumed 1,363,636 shares of Common
Stock in the Direct Placements at an assumed price of $11.00 per share. The
capitalization information set forth in the table below is qualified by the
more detailed Financial Statements and Notes thereto included elsewhere in
this Prospectus and should be read in conjunction with such Financial
Statements and Notes.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------------
PRO FORMA
ACTUAL(1) PRO FORMA(1) AS ADJUSTED(2)
--------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligations, excluding
current portion(3)..................... $ 35,349 $ 35,349 $ 35,349
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value
(7,333,333 shares authorized;
5,007,018 shares issued and
outstanding actual; 10,000,000 shares
authorized, none outstanding pro
forma and pro forma as adjusted)..... 96,323 -- --
Common Stock, $0.001 par value
(13,343,333 shares authorized;
1,395,788 shares issued and
outstanding actual; 100,000,000
shares authorized pro forma and pro
forma as adjusted; 6,403,059 shares
outstanding pro forma; 10,766,695
shares outstanding pro forma as
adjusted)............................ 1,958 98,281 143,221
Deferred compensation................. (267) (267) (267)
Accumulated deficit................... (108,633) (108,633) (108,633)
--------- --------- ---------
Total stockholders' equity (deficit).. (10,619) (10,619) 34,321
--------- --------- ---------
Total capitalization.................... $ 24,730 $ 24,730 $ 69,670
========= ========= =========
</TABLE>
- --------
(1) Excludes 482,229 shares of Common Stock issued after March 31, 1997 and
2,915,621 shares issuable upon exercise of options and warrants
outstanding at May 15, 1997 at a weighted average exercise price of $12.00
per share. In addition, the foregoing tables exclude the Common Stock
subject to rescission. Therefore such shares are excluded from the number
of shares outstanding and the purchase price thereof is excluded from
total consideration paid for shares. See "Description of Capital Stock--
Warrants."
(2) Includes an assumed 1,363,636 shares to be issued to certain strategic
investors concurrent with the closing of this offering (assuming a public
offering price of $11.00 per share). See "Direct Placements."
(3) See Note 3 of Notes to Financial Statements.
21
<PAGE>
DILUTION
The net tangible book value of the Company as of March 31, 1997 was
$(12,322,000), or $(1.92) per share of Common Stock. Net tangible book value
per share is equal to the Company's total tangible assets less its total
liabilities, divided by the number of shares of Common Stock outstanding after
giving pro forma effect to the conversion into Common Stock of all Class B
Common Stock and all outstanding Preferred Stock. After giving effect to the
sale of 3,000,000 shares of Common Stock offered hereby and an assumed
1,363,636 shares offered in the Direct Placements at an assumed public
offering price of $11.00 per share and the receipt by the Company of the
estimated net proceeds therefrom, after deducting underwriting discounts and
estimated offering expenses, the net tangible book value of the Company as of
March 31, 1997 would have been $32,618,000, or $3.03 per share. This
represents an immediate increase in net tangible book value of $4.95 per share
to existing stockholders and an immediate dilution of $7.97 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share...................... $11.00
------
Net tangible book value per share before the offering and
Direct Placements(1)...................................... $(1.92)
------
Increase per share attributable to new investors in the
offering.................................................. 4.95
------
Net tangible book value per share after the offering and
Direct Placements........................................... 3.03
------
Dilution per share to new investors.......................... $ 7.97
======
</TABLE>
The following table summarizes as of March 31, 1997, the number of shares of
Common Stock purchased from the Company, the total consideration paid to the
Company and the average price per share paid by existing stockholders, by
investors participating in the Direct Placements and by the investors
purchasing shares of Common Stock in this offering (before deducting
underwriting discounts and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)..... 6,403,059 59.5% $ 98,281,000 67.2% $15.35
Direct placements............ 1,363,636 12.7 15,000,000 10.2 11.00
Investors in the offering.... 3,000,000 27.8 33,000,000 22.6 11.00
---------- ----- ------------ -----
Total...................... 10,766,695 100.0% $146,281,000 100.0%
========== ===== ============ =====
</TABLE>
- --------
(1) Adjusted to give effect to the conversion of all outstanding shares of
Class B Common Stock and Preferred Stock into Common Stock.
The foregoing tables (i) do not give effect to the issuance of 482,229
shares of Common Stock after March 31, 1997, (ii) assume no exercise of the
Underwriters' over-allotment option and (iii) exclude 2,915,621 shares that
were issuable upon exercise of options and warrants outstanding at May 15,
1997 at a weighted average exercise price of $12.00 per share. See
"Description of Capital Stock--Warrants." To the extent of such new issuances
and to the extent that outstanding options and warrants are exercised in the
future, there will be further dilution to new investors. In addition, the
foregoing tables exclude the Common Stock subject to rescission. Therefore
such shares are excluded from the number of shares outstanding, the purchase
price thereof is treated as a liability in calculating net tangible value and
such amount is deducted from total consideration paid for shares.
22
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Financial Statements and related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere herein. The selected financial data for the three years ended
December 31, 1996 are derived from financial statements of the Company which
have been audited by Ernst & Young LLP, independent auditors and included
elsewhere herein. The selected financial data for the period from May 1, 1991
(inception) through December 31, 1992 and for the year ended December 31, 1993
and for the three-month periods ended March 31, 1996 and March 31, 1997 are
derived from unaudited financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which the Company considers necessary for a fair presentation of the financial
position and results of operations for these periods. The operating results
for the three months ended March 31, 1997 are not necessarily indicative of
the results to be expected for any future period. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1991
(INCEPTION) THREE MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, --- ------------------------------------ ------------------
1992 1993 1994 1995 1996 1996 1997
------------ ------- ------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ -- $ 23 $ 442 $ 2,483 $ 15,648 $ 1,533 $ 9,154
Costs and operating
expenses
Cost of revenue........ -- 130 2,891 16,168 47,945 7,256 15,744
Network equipment
write-off(1).......... -- -- -- -- 8,321 -- --
Development............ -- 349 534 837 2,449 340 1,025
Marketing and sales.... -- 131 639 3,899 16,609 3,120 4,936
General and
administrative........ 28 634 611 2,866 3,445 736 1,060
----- --- ------- ------- -------- -------- -------- --------
Total costs and
operating expenses.... 28 1,244 4,675 23,770 78,769 11,452 22,765
----- --- ------- ------- -------- -------- -------- --------
Loss from operations.... (28) (1,221) (4,233) (21,287) (63,121) (9,919) (13,611)
Net interest expense.... -- 24 57 721 3,260 461 1,070
----- --- ------- ------- -------- -------- -------- --------
Net loss................ $ (28) $(1,245) $(4,290) $(22,008) $(66,381) $(10,380) $(14,681)
===== === ======= ======= ======== ======== ======== ========
Pro forma net loss per
share(2)............... $ (13.84) $ (2.24)
======== ========
Weighted average shares
used in computing pro
forma net loss per
share(2)............... 4,797 6,540
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
----- ------- ------- ------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit)............... $ -- $ (603) $(1,046) $ 8,992 $(10,868) $(24,705)
Property and equipment,
net..................... -- 675 1,303 16,289 47,927 53,227
Total assets............. -- 783 1,798 37,235 70,722 61,438
Long-term debt and
capital lease
obligations, less
current portion......... -- 491 -- 10,977 30,551 35,349
Convertible debentures... 760 1,648 70 -- --
Common stock subject to
rescission.............. -- -- 2,812 5,080 5,150 5,150
Common and preferred
stock................... 28 101 1,360 37,334 97,065 98,281
Deferred compensation.... -- -- -- -- (188) (267)
Stockholders' equity
(deficit)............... (28) (1,172) (4,203) 9,763 2,925 (10,619)
</TABLE>
- --------
(1) See Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 2 of Notes to Financial Statements.
(2) The pro forma net loss per share computation gives retroactive effect to
the conversion of outstanding Preferred Stock into Common Stock upon
closing of the offering. See Note 1 of Notes to the Financial Statements
for an explanation of the calculation of pro forma net loss per share.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with financial
statements and related notes included elsewhere in this Prospectus. The
results shown herein are not necessarily indicative of the results to be
expected in any future periods. This discussion contains forward-looking
statements based on current expectations which involve risks and
uncertainties. Actual results and the timing of certain events may differ
significantly from those projected in such forward-looking statements due to a
number of factors, including those set forth in the section entitled "Risk
Factors" and elsewhere in this Prospectus.
OVERVIEW
Concentric was founded in 1991. From 1991 to mid-1993, the Company conducted
development and network services planning activities and realized no revenues.
Initially, the Company was focused on providing consumers with direct dial-up
connectivity to bulletin board services. On-line gaming and entertainment
services for consumers were commenced in July 1993 through the utilization of
a third party network infrastructure. The Company commenced operation of its
own network in late 1994.
In May 1995, new management led by Henry R. Nothhaft redefined and broadened
the Company's strategy to provide a range of Internet and tailored, value-
added IP-based network services to consumers and businesses.
The Company's revenue prior to 1996 has been primarily generated from
providing Internet access to consumers. The Company's current focus is on
developing and deploying VPNs and providing network access and Web hosting
services for enterprise customers. Contracts with enterprise customers
typically have a term ranging from one to three years. Enterprise-related
revenue accounted for 53.9% and 35.0% of the Company's total revenue for the
three months ended March 31, 1997 and the year ended December 31, 1996,
respectively. The Company expects enterprise-related revenue to represent an
increasing portion of total revenue in future periods. The foregoing
expectation is a forward-looking statement that involves risks and
uncertainties, and actual results could vary as a result of a number of
factors including the Company's operating results, the results and timing of
the Company's launch of new products and services, governmental or regulatory
changes, the ability of the Company to meet product and project demands, the
success of the Company's marketing efforts, competition and acquisitions of
complementary businesses, technologies or products.
The Company has incurred net losses and experienced negative cash flow from
operations since inception and expects to continue to operate at a net loss
and experience negative cash flow for the foreseeable future. The Company
experienced net losses of approximately $4.3 million, $22.0 million and $66.4
million for the years ended December 31, 1994, 1995 and 1996, respectively and
$14.7 million for the quarter ended March 31, 1997. At March 31, 1997, the
Company had an accumulated deficit of approximately $108.6 million. There can
be no assurance that the Company will be able to sustain revenue growth or to
achieve profitability or positive cash flow on either a quarterly or an annual
basis. While the Company has incurred substantial operating losses since
inception, the Company's ability to utilize net operating loss carryforwards
for income tax purposes to offset taxable income, if any, realized in future
periods is severely limited. See Note 8 of Notes to Financial Statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
Revenue. Revenue totaled approximately $9.2 million for the three months
ended March 31, 1997, a $7.7 million increase over revenue of approximately
$1.5 million for the three months ended March 31, 1996. Revenue derived from
network services to enterprise customers totaled $4.9 million for the period,
an increase of $4.7 million over the same period in 1996. Revenue derived from
consumer services totaled $4.3 million, an increase of $3.0 million over first
quarter 1996 revenue of $1.3 million derived from such services. The increased
proportion of revenue derived from enterprise customers reflects the Company's
current focus on developing and deploying products for this market as well as
the lower average selling prices of the Company's offerings for consumer
Internet access due to industry-wide adoption of flat monthly rates for
unlimited Internet access in April 1996.
24
<PAGE>
For the three months ended March 31, 1997, revenue from WebTV Networks, Inc.
("WNI") accounted for 32.7% of the Company's revenue. No other customer
accounted for more than 10% of the Company's revenue during the period. The
Company expects revenue from WNI to decrease both in absolute amounts and as a
percentage of revenue.
Cost of Revenue. Cost of revenue consists primarily of personnel costs to
maintain and operate the Company's network, access charges from local exchange
carriers, backbone and Internet access costs, depreciation of network
equipment and amortization of related assets. Cost of revenue for the three
month period ended March 31, 1997 was approximately $15.7 million, an increase
of $8.4 million from cost of revenue of $7.3 million in the first quarter of
1996. This increase is attributable to the overall growth in the size of the
network. As a percentage of revenue, such costs declined to 172.0% of revenue
in the three months ended March 31, 1997 from 473.3% of revenue in the year
earlier period, due to increased network utilization associated with the
Company's revenue growth and lower per port costs of the Company's SuperPOP
network architecture deployed in the second half of 1996. The Company expects
its cost of revenue to continue to increase in dollar amount, while declining
as a percentage of revenue as the Company expands its customer base.
Development. Development expense consists primarily of personnel and
equipment related expenses associated with the development of products and
services of the Company. Development expense was approximately $1.0 million
and $300,000 for the three months ended March 31, 1997 and 1996, respectively.
This higher level of development expense reflects an overall increase in
personnel to develop new product offerings and to manage the overall growth in
the network. Development expense as a percentage of revenue declined to 11.2%
for the three months ended March 31, 1997 from 22.2% in the year earlier
period as a result of the Company's increased revenue. The Company expects its
development spending to continue to increase in dollar amount, but to decline
as a percentage of revenue.
Marketing and Sales. Marketing and sales expense consists primarily of
personnel expenses, including salary and commissions, costs of marketing
programs and the cost of 800 number circuits utilized by the Company for
customer support functions. Marketing and sales expense was approximately $4.9
million and $3.1 million for the three months ended March 31, 1997 and 1996,
respectively. The $1.8 million increase in 1997 reflects a substantial
investment in the customer support, marketing and sales organizations
necessary to support the Company's expanded customer base. This increase also
reflects a growth in subscriber acquisition costs, related to both increased
direct marketing efforts as well as commissions paid to distribution partners.
Additionally, the increase reflects the ramp-up of marketing efforts related
to the introduction of enterprise products and services. Marketing and sales
expense as a percentage of revenue declined to 53.9% for the three months
ended March 31, 1997 from 203.5% in the year earlier period as a result of the
Company's increased revenue. The Company expects marketing and sales
expenditures to continue to increase in dollar amount, but to decline as a
percentage of revenue.
General and Administrative. General and administrative expense consists
primarily of personnel expense and professional fees. General and
administrative expense was approximately $1.1 million and $700,000 for the
three months ended March 31, 1997 and 1996, respectively. This higher level of
expense reflects an increase in personnel and professional fees necessary to
manage the financial, legal and administrative aspects of the business.
General and administrative expense as a percentage of revenue declined to
11.6% for the three months ended March 31, 1997 from 48.0% in the year earlier
period as a result of the Company's increased revenue. The Company expects
general and administrative expense to increase in dollar amount, reflecting
its growth in operations and costs associated with being a publicly held
entity, but to decline as a percentage of revenue.
Net Interest Expense. Net interest expense was approximately $1.1 million
and $500,000 for the first quarter of 1997 and 1996, respectively. The
increase is primarily due to an increase of $31.6 million in principal amount
of capitalized lease obligations from March 31, 1996 to March 31, 1997.
Net Loss. The Company's net loss increased to approximately $14.7 million
for the quarter ended March 31, 1997 as compared to approximately $10.4
million for the same quarter of 1996.
25
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue. Revenue totaled approximately $15.6 million for the year ended
December 31, 1996, an increase of $13.1 million over 1995 revenue of
approximately $2.5 million. Revenue derived from consumer services totaled
$10.2 million in 1996, an increase of $7.7 million over 1995 revenue derived
from such services. Revenue derived from the sale of network services for
enterprise customers totaled $5.4 million in 1996 and were immaterial in
amount in 1995. The average selling prices of the Company's offerings for
consumer Internet access services decreased by approximately 33% beginning in
April 1996 due to industry-wide adoption of flat monthly rates for unlimited
Internet access.
Cost of Revenue. Cost of revenue for the year ended December 31, 1996 was
approximately $47.9 million, an increase of $31.7 million from 1995 cost of
revenue of approximately $16.2 million. The largest component of this
increase, approximately $15.0 million, was the cost of providing virtual local
access ("VLA") service over 800 circuits. VLA service was an interim solution
for providing nationwide coverage, while the Company's SuperPOP network
architecture was being deployed. This deployment was substantially completed
in December 1996. Costs associated with VLA service are expected to be
immaterial in amount in 1997. The remainder of the increase in 1996 cost of
revenue is primarily attributable to the overall growth in the size of the
network.
Network Equipment Write-off. In 1996, the Company took a charge of
approximately $8.3 million related to the cost of certain network equipment.
The Company decided not to deploy the equipment in the network because of
concerns that the equipment would not provide the functionality and
reliability required by the Company and concerns that the equipment provider
would be unable to provide timely maintenance and support. See Note 2 of Notes
to Financial Statements.
Development. Development expense for the year ended December 31, 1996 was
approximately $2.4 million, an increase of $1.6 million over 1995 expenditures
of approximately $837,000. This higher level of development expense in 1996
primarily reflects an overall increase in personnel to develop new product
offerings and to manage the overall growth in the network.
Marketing and Sales. Marketing and sales expense for 1996 was approximately
$16.6 million, an increase of $12.7 million over 1995 expenditures of
approximately $3.9 million. This increase in marketing and sales expense
reflects a substantial investment in the customer support, marketing and sales
organizations required to support the Company's expanded customer base. This
increase also reflects a growth in subscriber acquisition costs, related to
both increased direct marketing efforts as well as commissions paid to
distribution partners. Additionally, the increase reflects the ramp-up of
marketing efforts related to the introduction of enterprise products and
services.
General and Administrative. General and administrative expense for 1996 was
approximately $3.4 million, an increase of $500,000 over 1995 expenditures of
approximately $2.9 million. This increase reflects an increase in personnel
and professional fees necessary to manage the financial, legal and
administrative aspects of the business.
Net Interest Expense. Net interest expense for 1996 was approximately $3.3
million as compared to approximately $721,000 for 1995. The increase of $2.6
million is primarily due to an increase of $27.6 million in principal amount
of the capitalized lease obligations from December 31, 1995 to December 31,
1996. This increase in interest expense was partially offset by greater
interest income from higher average cash balances resulting from equity
financings completed in late 1995 and in August 1996. See Notes 3 and 6 of
Notes to Financial Statements.
Net Loss. The Company's net loss increased to approximately $66.4 million in
1996 from approximately $22.0 million in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue. Revenue totaled approximately $2.5 million for 1995, an increase of
$2.1 million, over 1994 revenue of approximately $400,000. The Company's
revenue in both of these years was derived entirely from the sale of Internet
access services to consumers.
26
<PAGE>
Cost of Revenue. Cost of revenue for 1995 was approximately $16.2 million,
an increase of $13.3 million over 1994 cost of revenue of approximately $2.9
million. The increase in cost of revenue from 1994 to 1995 reflected overall
higher costs associated with deploying and managing the Company's own network
infrastructure. Prior to late 1994, the Company had leased third party network
facilities and thus had not incurred significant network deployment and
maintenance expenses.
Development. Development expense for 1995 was approximately $837,000, an
increase of $303,000 over 1994 expenditures of approximately $534,000. This
higher level of development expense primarily reflected an overall increase in
personnel required to develop new products and support network growth.
Marketing and Sales. Marketing and sales expense for 1995 was approximately
$3.9 million, an increase of $3.3 million over 1994 expenditures of
approximately $639,000. This higher level of spending in 1995 reflected the
Company's new market focus on providing IP-based network services. In
connection with this new focus, the Company incurred increased expenses
related to direct subscriber acquisition, formation of a telesales group,
development of strategic relationships and marketing communications. With the
growth in subscribers, the Company added personnel to its customer support
organization.
General and Administrative. General and administrative expense for 1995 was
$2.9 million, an increase of $2.3 million over 1994 expenditures of
approximately $600,000. This increase generally reflects an increase in
personnel and professional fees necessary to manage the financial, legal and
administrative aspects of the business.
Net Interest Expense. Net interest expense for 1995 was approximately
$721,000 as compared with approximately $57,000 for 1994. This increase in net
interest expense resulted from the Company's deployment of network equipment
for its own network infrastructure beginning in late 1994 which equipment
purchases were primarily financed under capital leases. Capital lease
obligations at December 31, 1995 were $14.2 million, compared with no such
obligations at December 31, 1994.
Net Loss. The Company's net loss increased to approximately $22.0 million in
1995 from a net loss of $4.3 million in 1994.
27
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The Company's quarterly operating results can fluctuate from period-to-
period depending upon factors such as the success of the Company's efforts to
expand its subscriber and third party partnership base, changes in, and the
timing of, expenses relating to development and sales and marketing and
changes in pricing policies by the Company or its competitors. Management
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance. The Company may
experience significant period-to-period fluctuations in operating results.
The following tables set forth the statement of operations data for each of
the nine quarters through March 31, 1997, as well as the percentage of the
Company's revenue. This information has been derived from the Company's
unaudited financial statements. In the opinion of management, the unaudited
information set forth below has been prepared on the same basis as the audited
financial statements contained herein and includes all adjustments, consisting
only of normal recurring adjustments, except for the write-off of network
equipment in the three months ended December 31, 1996, necessary to present
fairly the information set forth herein. The operating results for any quarter
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------------- ----------------------------------------- --------
MAR. 31 JUNE 30 SEP. 30 DEC. 31 MAR. 31 JUNE 30 SEP. 30 DEC. 31 MAR. 31
------- ------- ------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 413 $ 632 $ 691 $ 747 $ 1,533 $ 2,489 $ 4,193 $ 7,433 $ 9,154
------- ------- ------- -------- -------- -------- -------- -------- --------
Costs and operating
expenses:
Cost of revenue........ 3,079 3,557 3,652 5,880 7,256 11,782 11,913 16,994 15,744
Network equipment
write-off............. -- -- -- -- -- -- -- 8,321 --
Development............ 126 186 239 286 340 571 692 846 1,025
Marketing and sales.... 302 474 1,260 1,863 3,120 3,868 4,045 5,576 4,936
General and
administrative........ 129 1,124 396 1,217 736 1,036 727 946 1,060
------- ------- ------- -------- -------- -------- -------- -------- --------
Total operating costs
and expenses.......... 3,636 5,341 5,547 9,246 11,452 17,257 17,377 32,683 22,765
------- ------- ------- -------- -------- -------- -------- -------- --------
Loss from operations.... (3,223) (4,709) (4,856) (8,499) (9,919) (14,768) (13,184) (25,250) (13,611)
Net interest expense.... 10 262 209 240 461 652 1,289 858 1,070
------- ------- ------- -------- -------- -------- -------- -------- --------
Net loss................ $(3,233) $(4,971) $(5,065) $ (8,739) $(10,380) $(15,420) $(14,473) $(26,108) $(14,681)
======= ======= ======= ======== ======== ======== ======== ======== ========
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------------- ----------------------------------------- --------
MAR. 31 JUNE 30 SEP. 30 DEC. 31 MAR. 31 JUNE 30 SEP. 30 DEC. 31 MAR. 31
------- ------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------- ------- ------- -------- -------- -------- -------- -------- --------
Costs and operating
expenses:
Cost of revenue........ 745.6 562.8 528.5 787.1 473.3 473.4 284.1 228.6 172.0
Network equipment
write-off............. -- -- -- -- -- -- -- 112.0 --
Development............ 30.5 29.4 34.6 38.3 22.2 22.9 16.5 11.4 11.2
Marketing and sales.... 73.1 75.0 182.3 249.4 203.5 155.4 96.5 75.0 53.9
General and
administrative........ 31.2 177.8 57.3 162.9 48.0 41.6 17.3 12.7 11.6
------- ------- ------- -------- -------- -------- -------- -------- --------
Total operating costs
and expenses.......... 880.4 845.0 802.7 1,237.7 747.0 693.3 414.4 439.7 248.7
------- ------- ------- -------- -------- -------- -------- -------- --------
Loss from operations.... (780.4) (745.0) (702.7) (1,137.7) (647.0) (593.3) (314.4) (339.7) (148.7)
Net interest expense.... 2.4 41.5 30.3 32.1 30.1 26.2 30.8 11.5 11.7
------- ------- ------- -------- -------- -------- -------- -------- --------
Net loss................ (782.8)% (786.5)% (733.0)% (1,169.8)% (677.1)% (619.5)% (345.2)% (351.2)% (160.4)%
======= ======= ======= ======== ======== ======== ======== ======== ========
</TABLE>
The Company's quarterly operating results have fluctuated and will continue
to fluctuate from period to period depending upon factors such as the timely
deployment and implementation of expansion of the Concentric network and new
network architectures, the incurrence of related capital costs, the receipt of
new value-added network services and consumer services subscriptions and the
introduction of new services by the Company and its competitors. Additional
factors that may contribute to variability of operating results include: the
payment of statutory interest related to the rescission offer; the pricing and
mix of services offered by the Company; customer retention rate; market
28
<PAGE>
acceptance of new and enhanced versions of the Company's services; changes in
pricing policies by the Company's competitors; the Company's ability to obtain
sufficient supplies of sole- or limited-source components; user demand for
network and Internet access services; balancing of network usage over a 24-
hour period; and general access services.
In view of the significant growth of the Company's operations, the Company
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance and that the Company may
experience in the future significant period-to-period fluctuations in
operating results. The Company expects to focus in the near term on building
and increasing its revenue base, which will require it to significantly
increase its expenses for personnel, marketing, network infrastructure and the
development of new services, and may adversely impact short term operating
results. As a result, there can be no assurance that the Company will be
profitable on a quarterly basis in the future and the Company believes that it
will incur losses in the near term.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has satisfied its cash requirements primarily through
capitalized lease financings and the sale of capital stock. The Company's
principal uses of cash are to fund working capital requirements and capital
expenditures and to service its capital lease financing obligations. Net cash
used in operating activities for the three months ended March 31, 1997 and
1996 was approximately $11.1 million and $8.4 million, respectively. Net cash
used in investing activities for the three months ended March 31, 1997 and
1996 was approximately $2.5 million and $500,000, respectively. For the three
months ended March 31, 1997 and 1996, cash of approximately $1.2 million and
$800,000, respectively, was used in financing activities. Cash used in the
first quarter of 1997 is net of $1.1 million cash received from a current
investor for rights to purchase warrants, which warrants were subsequently
issued.
Net cash used in operating activities for the years ended December 31, 1996,
1995 and 1994 was approximately $42.1 million, $15.8 million and $2.6 million,
respectively. Net cash used in investing activities was approximately $7.3
million, $1.2 million and $1.0 million for 1996, 1995 and 1994, respectively.
Net cash flow provided by financing activities was approximately $48.1
million, $36.0 million and $3.7 million for 1996, 1995 and 1994, respectively.
Cash provided by financing activities in 1996 includes approximately $53.5
million net proceeds from the issuance of Series D Preferred Stock, while 1995
reflects net proceeds from the issuance of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, totaling approximately $34.8
million.
The Company used approximately $6.9 million, $1.4 million and $791,000 of
cash to purchase capital equipment and leasehold improvements in 1996, 1995
and 1994, respectively, and approximately $2.6 million in the three months
ended March 31, 1997. To date, the Company primarily has used capital lease
arrangements to finance capital equipment purchases and the principal amount
of such lease financing obligations totaled $47.6 million at March 31, 1997.
The Company currently has financing availability under the following equipment
lease facilities: (i) a master lease agreement with no minimum or maximum for
the lease financing of equipment sold and/or manufactured by Racal; (ii) a
master lease agreement of up to a maximum of $3.3 million in the aggregate for
lease financing of telecommunications and computer equipment which was fully
utilized at March 31, 1997; and (iii) a master lease agreement of up to a
maximum of $2.0 million in the aggregate for lease financing of
telecommunications and computer equipment, of which approximately $1.7 million
had been utilized at March 31, 1997. In addition, the Company is contemplating
entering into negotiations for a lease financing facility to finance its
telecommunications and computer equipment requirements for the remainder of
1997. See Note 3 of Notes to Financial Statements.
The Company has already made significant capital investments in its network,
data centers, development equipment and other capital assets totaling
approximately $39.1 million, $17.2 million and $800,000 in 1996, 1995 and
1994, respectively. The Company expects to make additional investments in
capital equipment to expand and enhance its network, with approximately $8.0
million of anticipated purchases of capital equipment throughout the remainder
of 1997, of which the Company plans to finance approximately $5.0 million
through capital lease arrangements. The foregoing expectation with respect to
additional capital investments is a forward-looking statement that involves
risks and uncertainties and the actual amount of capital investment could vary
materially as a result of a number of factors, including those described in
"Risk Factors--Future Capital Needs; Uncertainty of Additional
29
<PAGE>
Financing." In addition, the Company may be obligated to repurchase shares
tendered in connection with the Company's rescission offer for a maximum
liability of approximately $5.1 million plus statutory interest of
approximately $1.0 million with respect to shares issued on conversion of the
convertible debentures and an amount of $556,000 with respect to options
issued under the 1995 Plan. See Note 5 of Notes to Financial Statements and
"Risk Factors--Rescission Offers."
Since the Company expects to incur operating losses in the foreseeable
future, the Company will rely on the following to meet its near term capital
requirements: (i) the contemplated lease financing discussed above; and (ii)
the net proceeds from this offering and the Direct Placements. The Company
believes that such financing will be sufficient to meet its anticipated cash
needs for working capital and for the acquisition of capital equipment at
least for the next 12 months. However, there can be no assurance that the
Company will not require additional financing within this time frame. The
Company's forecast of the period of time through which its financial resources
will be adequate to support its operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary. The Company
may be required to raise additional funds through public or private financing,
strategic relationships or other arrangements. There can be no assurance that
such additional funding, if needed, will be available on terms attractive to
the Company, or at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Strategic arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain
of its technologies. See "Risk Factors--Future Capital Needs; Uncertainty of
Additional Financing."
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123"), which established a fair-value based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies that elect not to adopt the new method of
accounting. In January 1996, the Company adopted the disclosure requirements
of FAS 123. The Company accounts for stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees." The adoption of the disclosure requirements of FAS 123 did not
have a material impact on the Company's financial condition or results of
operations.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"),
which adjusts the calculation of earnings per share under generally accepted
accounting principles. FAS 128 is effective for the Company's fiscal year
ending December 31, 1997. See Note 1 of Notes to Financial Statements for the
effect of FAS 128 on the Company's pro forma net loss per share presentation.
30
<PAGE>
BUSINESS
Concentric provides tailored, value-added Internet Protocol ("IP") based
network services for businesses and consumers. To provide these services, the
Company utilizes its low/fixed latency, high-throughput network, employing its
advanced network architecture and the Internet. Concentric's service offerings
for enterprises include virtual private networks ("VPN's"), dedicated access
facilities and Web hosting services. These services enable enterprises to take
advantage of standard Internet tools such as browsers and high-performance
servers for customized data communications within an enterprise and between an
enterprise and its suppliers, partners and customers. These services combine
the cost advantages, nationwide access and standard protocols of public
networks with the customization, high performance, reliability and security of
private networks. Among the current enterprise customers are Acer America
Corporation, Inc., Intuit, Inc., Total Entertainment Network, WebTV Networks,
Inc. and Ziff-Davis Publishing Co. Concentric's revenue from enterprise
customers accounted for 53.9% and 35.0% of the Company's revenue for the three
months ended March 31, 1997 and the year ended December 31, 1996,
respectively. Concentric's service offerings for consumers and small
office/home office customers include local Internet dial-up access, Web
hosting services and online multiplayer gaming.
INDUSTRY BACKGROUND
Development of Private Networks
Historically, the data communications services offered by public carriers
had limited security features, were expensive and did not adequately ensure
accurate and reliable transmission. As a result, many corporations established
and maintained their own private wide-area networks ("WANs") to provide
network-based services, such as transaction processing, to their customers and
to coordinate operations between employees, suppliers and business partners.
Such private WANs were frequently customized to specific applications,
business practices and user communities. As a result, these private WANs had
the capability of providing organizations and users with tailored performance
and features, security, reliability and private-label branding.
The demand for WANs has grown as a result of today's competitive business
environment. Factors stimulating the higher demand include the need to provide
broader and more responsive customer service, to operate faster and more
effectively between operating units, suppliers and other business partners,
and the need to take advantage of new business opportunities for network-based
offerings in a timely fashion. In addition, as businesses become more global
in nature, the ability to access business information across the enterprise
has become a competitive necessity.
Despite the attractive capabilities of private networks, limitations of many
private WANs have impeded or reduced the effectiveness of their use. These
networks, which traditionally have required the use of leased telephone lines
with bandwidth dedicated solely to this purpose and the purchase of vendor-
specific networking equipment, are inherently expensive to set up, operate and
maintain. Private WANs often require the development and maintenance of
proprietary software and lack cost-effective access. These aspects of
developing, deploying and maintaining such private WANs have conflicted with
the increased focus of many businesses on their core competencies, which has
prompted the outsourcing of many noncore functions. The Company believes that
many businesses have viewed as unacceptable the costs of maintaining a private
WAN infrastructure and the risks of investing in new technologies in the
absence of a single technological standard.
Emergence of the Internet
The emergence of the Internet and the widespread adoption of IP as a data
transmission standard in the 1990s, combined with deregulation of the
telecommunications industry and advances in telecommunications technology have
significantly increased the attractiveness of providing data communication
applications and services over public networks. At the same time, growth in
client/server computing, multimedia personal computers and online computing
services and the proliferation of networking technologies have resulted in a
large and growing group of people who are accustomed to using networked
computers for a variety of purposes, including e-mail, electronic file
transfers, online computing and electronic financial transactions. These
trends have led businesses increasingly to
31
<PAGE>
explore opportunities to provide IP-based applications and services within
their organization, and to customers and business partners outside the
enterprise.
Need for IP-Based Private Networks
The ubiquitous nature and relatively low cost of the Internet have resulted
in its widespread usage for certain applications, most notably Web access and
e-mail. However, usage of the Internet for mission-critical business
applications has been impeded by the limited security and unreliable
performance inherent in the structure and management of the Internet.
Additionally, emerging applications such as IP-based voice and video
applications, multiplayer gaming and certain multimedia applications require a
network that has high performance characteristics, including low and/or fixed
latency (response time) and high throughput, as well as the ability to
customize features for specific user requirements. On the Internet, latency is
frequently relatively high and variable, making it suboptimal for these
emerging applications. Although private networks are capable of offering lower
and more stable latency levels, providers of these emerging applications also
desire a network that will offer their customers full access to the Internet.
As a result, these businesses and applications providers require a network
that combines the best features of the Internet, such as openness, ease of
access and low cost made possible by the IP standard, with the advantages of a
private network, such as high security, low/fixed latency and customized
features.
Industry analysts expect the market size for both value-added IP data
networking services and Internet access to grow rapidly as businesses and
consumers increase their use of the Internet, intranets and privately managed
IP networks. The total market for these services is projected to grow from
$1.2 billion in 1996 to approximately $22.7 billion in the year 2000, with
approximately $10.4 billion in the enterprise market segment and $12.3 billion
in the consumer market segment.
THE CONCENTRIC SOLUTION
Concentric provides tailored, value-added IP-based network services for
businesses and consumers. To provide these services, the Company employs a
low/fixed latency, high-throughput network based on its advanced,
geographically dispersed ATM and frame relay backbone and the Internet.
Concentric allows enterprises to create virtual private networks providing
tailored network access, content and services to enterprise-defined end users
with higher reliability and more security than is available over the Internet.
Concentric's VPN solutions also provide the ease of access and flexibility of
public networks at a lower cost than private WANs without sacrificing
reliability or security.
The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, SuperPOPs in 19 major metropolitan areas and 150
secondary and tertiary POPs in other cities, allowing dial-up network access
in the U.S. and Canada. In addition, the Company can provide analog dial-up,
frame relay, fractional T-1, T-1 and DS3 access to the network. The Concentric
network is engineered and managed to provide superior quality of service,
balancing several key performance criteria. The Company provides guaranteed
levels of service for dedicated access facilities to enterprise customers, and
targets performance benchmarks for connection success rates, latency levels
and throughput for all of its service offerings. Concentric also believes that
a major advantage of its network architecture is its ability to perform
adaptive call processing ("ACP"), which is designed to enable the tuning of
network parameters and traffic routing to meeting the latency, throughput,
security, and reliability requirements of a specific customer or application
on a call-by-call basis. Concentric is currently deploying the ACP technology
in its network and is planning to commercially introduce ACP capabilities
during the second half of 1997.
In addition to strong network performance capabilities, the Company believes
that several factors distinguish its ability to provide value-added network
services. These factors include: (i) excellent service quality; (ii) rapid
development time and flexibility in meeting custom applications requirements;
(iii) responsive customer support and effective account management, available
24 hours per day, seven days per week through the Company's 142 customer
service personnel; and (iv) the Company's technical expertise in devising
cost-effective network solutions for customers.
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BUSINESS STRATEGY
The Company's objective is to become the leading supplier of value-added,
IP-based network services worldwide. In order to achieve this goal, the
Company is implementing a business strategy focused on the following key
principles:
Rapidly Provide Cost-Effective, Tailored Network Solutions. The Company
intends to capitalize on its expertise in developing tailored VPNs to
establish a leadership position in rapidly developing, deploying and
maintaining a range of value-added network services to meet the specific needs
of its customers. The Company utilizes a set of software and hardware
technology modules as "building blocks" to offer a variety of tailored network
services on an IP-based network architecture with minimal additional
investment in engineering and rapid time to market for businesses and
consumers. These building blocks include modules for client and system
software, dedicated and remote network connectivity, tracking and billing, Web
hosting, customer support and security.
Optimize Network Utilization. Given the fixed cost nature of Concentric's
network infrastructure, the Company strives to increase total network
utilization and to optimize this utilization by targeting both daytime
business and evening-intensive consumer users to balance the network's usage
throughout a 24-hour period. Accordingly, while the Company's current
strategic focus is on providing value-added IP-based communications services
to enterprises, the Company intends to continue partnering with multichannel
distributors to acquire and maintain a base of consumer subscribers who access
the Concentric network predominantly during non-business hours.
Employ Leveraged Marketing Through Strategic Partners. The Company actively
seeks to form alliances with certain software developers, gaming companies,
and telecommunications service and equipment suppliers that have substantially
greater marketing, distribution and sales resources than does the Company and
that have a large installed customer base. These alliances facilitate the
cost-effective acquisition of consumer and business customers and increase
Concentric's network utilization. These marketing relationships are developed
and enhanced through the bundling of Concentric's IP-based network services
with the products and services offered by the strategic partners. These
relationships may involve customized browsers, registration services and
specialized pricing, revenue sharing and billing programs. To date, Concentric
has established such strategic relationships with a number of companies,
including Acer America Corporation, Bay Networks, Inc., Intuit, Inc.,
Microsoft Corporation, Netscape, OzEmail, PictureTel Corporation
("PictureTel"), Racal-Datacom, Inc., Total Entertainment Network, Inc.
("TEN"), Telecom Italia and WebTV Networks, Inc. ("WNI"). See "--Key Customer
Applications" and "Sales and Marketing."
Offer Next Generation Network Services. The Company is continuing to expand
the value-added network services that it makes available to its customers.
Towards this end, the Company is in early stage trials with providers of video
conferencing and IP-based telephony services that require the low/fixed
latency characteristics afforded by the Concentric network. Additionally, the
Company is applying for licenses to become a Competitive Local Exchange
Carrier ("CLEC") in selected states. The Company believes that successful
implementation of its CLEC strategy will enable the Company to reduce its
local access charges, as well as to expand its range of services.
Deploy Network Services Internationally. The Company believes that its
enterprise customers increasingly will require their network solutions
providers to offer network services on a global basis. Pursuant to an
agreement with TMI Telemedia International, Ltd., a subsidiary of Telecom
Italia SpA ("TMI"), entered into in August 1996, the Company is working to
establish an international network based on Concentric's network technology
and expertise and TMI's existing telecommunications infrastructure to deliver
a range of compatible network services worldwide. TMI currently has a
telecommunications network deployed in over 40 countries worldwide. While the
Company does not expect to generate significant revenue from deployment of an
international network until at least 1998, the Company believes that the
ability to deliver network solutions globally will be a key competitive factor
in its industry.
SERVICES
Concentric provides tailored, value-added IP-based network services for
businesses and consumers. To provide these services, the Company employs a
low/fixed latency high-throughput network based on an advanced, geographically
dispersed ATM and frame relay backbone and the Internet.
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Enterprise Solutions
For businesses, the Company has developed a set of enterprise services
including VPNs, dedicated and remote access services and Web hosting services.
VPNs. Concentric's VPN solutions enable its customers to deploy tailored,
IP-based mission-critical business applications for internal enterprise,
business-to-business and business-to-customer data communications on the
Concentric network while also affording high-speed access to the Internet.
Concentric offers its customers a secure network on which to communicate and
access information between an organization's geographically dispersed
locations; collaborate with external groups or individuals, including
customers, suppliers, and other business partners and use the Web to access
information on the Internet and communicate with other Web users. The
Company's VPN solutions allow the enterprise customer to tailor the type of
access, services and information that various users of the VPN are afforded
according to the specific needs of the enterprise.
The Company's VPN building blocks include modules for client and system
software, network connectivity (high-speed dedicated access lines, remote
access services and dial-up accounts), tracking and billing, Web hosting
(intranet, Web, e-mail, news or other servers), customer support and security.
VPN customers may choose to use one or more of the elements individually or in
tandem with existing or third-party components to create a customized
networking solution that is generally superior in terms of price, performance
and time to market to the option of building and maintaining a private
network. Key benefits include rapid implementation time, lower operating and
maintenance costs, minimal capital investment, higher quality of service
overall and 24-hour network and customer support.
For example, starting in October 1995 the Company created and now maintains
the VPN used by Intuit customers using a customized version of the Netscape
Navigator browser bundled with Quicken for Windows, Quickbooks, ProTax and
TurboTax. The bundled software allows a Quicken customer to click on an icon
that launches Netscape, and takes the user directly to Quicken Financial
Network Website. On the Web page Quicken customers will find useful financial
advice, information from Intuit's bank and financial institution partners,
answers to commonly asked technical questions and tips on how to tap the full
potential of Intuit's financial products. See "--Key Customer Applications."
Pricing options for enterprise solutions are a combination of standard
prices and standard charges for integration of the Company's VPN building
blocks into a comprehensive package. VPN services are priced by combining
elements such as dedicated access facilities and Web hosting with customer
support, software and other Concentric building blocks. The pricing is
standard for each service, but may be combined as a package with quantity
discounts.
Dedicated Access Facilities. In April 1997, the Company began offering
dedicated access facilities ("DAFs") as a stand-alone product targeted at
businesses that desire single or multipoint high-speed, dial-up and/or
dedicated connections to distributed locations such as regional offices,
warehouses, manufacturing facilities and/or to the Internet. DAF products are
primarily targeted at providing intranet connectivity amongst distributed
enterprise locations with the additional benefit of Internet access if desired
by the customer. The Company provides a full range of connectivity options,
allowing the customer to order the appropriate amount of bandwidth to meet its
networking requirements. In addition, Concentric offers its DAF customers a
guarantee on the quality of service and performance of these facilities.
Furthermore, Concentric believes it is the only network service provider to
bill customers based on average usage levels rather than peak usage levels.
Concentric also performs around-the-clock monitoring of network performance
and enables its customers to monitor their network as well through the
Company's proprietary ConcentricView software. ConcentricView is a distributed
Web-based network management tool that enables a customer to monitor usage on
a call-by-call basis and performance of that portion of the Concentric network
bandwidth supporting the customer's applications. The Company believes it is
the only network services provider to offer this service.
Concentric has four offerings in its dedicated access product line:
FullChannel T-1, FullChannel T-1 Protected, FlexChannel and LECFrame Relay.
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FULLCHANNEL T-1 PRICING
<TABLE>
<CAPTION>
ONE-TIME FEE AVERAGE USAGE LEVEL MONTHLY FEE(1)
------------ ------------------- --------------
<S> <C> <C>
$3,000.00 0-64Kbps $1,095.00
$3,000.00 64-128Kbps $1,595.00
$3,000.00 128-256Kbps $2,095.00
$3,000.00 256-384Kbps $2,395.00
$3,000.00 384Kbps + $2,695.00
- ------------------------------------------------------------------------------------------
</TABLE>
FULLCHANNEL T-1 PROTECTED PRICING
<TABLE>
<CAPTION>
ONE-TIME FEE AVERAGE USAGE LEVEL MONTHLY FEE(1)
------------ ------------------- --------------
<S> <C> <C>
$3,000.00 384Kbps + $2,095.00
- ------------------------------------------------------------------------------------------
</TABLE>
FLEXCHANNEL PRICING
<TABLE>
<CAPTION>
ONE-TIME FEE FRACTIONAL T-1 BANDWIDTH MONTHLY FEE(1)
------------ ------------------------ --------------
<S> <C> <C>
$3,000.00 128Kbps $ 895.00
$3,000.00 256Kbps $1,295.00
$3,000.00 384Kbps $1,595.00
$3,000.00 512Kbps $1,895.00
- --------------------------------------------------------------------------------------
</TABLE>
LECFRAME RELAY PRICING(2)
<TABLE>
<CAPTION>
ONE-TIME FEE FRAME RELAY CIR(3) MONTHLY FEE(1)
------------ ----------- ------- --------------
<S> <C> <C> <C>
$2,000.00 56Kbps 32Kbps $ 395.00
$2,000.00 128Kbps 64Kbps $ 795.00
$2,000.00 256Kbps 128Kbps $ 995.00
$2,000.00 512Kbps 256Kbps $1,095.00
</TABLE>
(1) Monthly billing based on average usage.
(2) Offer varies by region.
(3) Committed Information Rate.
FullChannel T-1 pricing is based on average utilization pricing. The
customer's usage is measured at five-minute intervals throughout the month,
and the average of all of those measurements is used to determine the
customer's bill at the end of the month. This is the appropriate choice for
those customers who have fluctuating and/or uncertain bandwidth consumption
patterns.
FullChannel T-1 Protected gives a customer a fixed price for a full 1.5
megabits of bandwidth. This is an economical choice for those customers who
recognize in advance that their bandwidth throughput requirements will equal
T-1 levels.
FlexChannel gives a customer the opportunity to purchase a fractional
portion of a T-1 for a fixed monthly fee. This is the appropriate choice for
the customers who know that their bandwidth requirements are going to be
consistently less than a full T-1.
LECFrame Relay is based on various LECs' Frame Relay facilities. Although
Concentric does not offer service level guarantees over LECFrame Relay,
Concentric does guarantee the committed information rate ("CIR"). This
offering gives a lower cost, lower performance network service for those
customers for whom performance is less imperative.
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<PAGE>
Web Hosting Services. The Company's Web hosting services were introduced in
March 1997, and are targeted at businesses that are implementing high-
performance intranet, Web, e-mail, gaming, chat or other types of servers.
Concentric offers a wide range of hosting solutions structured to meet the
needs of small businesses to very large enterprises. By outsourcing its Web
hosting requirements to Concentric, an enterprise can reduce costs while
increasing reliability and performance of its servers.
Web hosting consists of providing and/or managing the necessary equipment to
allow companies to operate Web sites. The components of Web hosting are the
server; a workstation or PC that runs the Website; the facility to host the
server; high speed Internet access for hosted servers; server and power backup
to ensure 24 hour functionality; and maintenance to ensure ongoing operation
of the server. Concentric also bundles Web hosting software and network
services to provide businesses with complete Internet presence solutions.
WEB HOSTING PRICING
<TABLE>
<CAPTION>
CONCENTRIC NETWORK SMALL
SHARED HOSTING SERVICES ENTERPRISE HOSTING
----------------------- ------------------
<S> <C>
Internet Access Yes
Address Virtual Domain
Email Accounts 10
Web site storage 30 MB
Monthly Throughput 1000 MB
Set-up Fee $100.00
Monthly Price $59.95
</TABLE>
DEDICATED CO-LOCATED SERVER PRICING
<TABLE>
<CAPTION>
INTERNET CONNECTION MONTHLY PRICE
------------------- -------------
<S> <C>
1 Mbps Priority Bandwidth $1,500.00
2 Mbps Priority Bandwidth $2,500.00
4 Mbps Priority Bandwidth $4,500.00
Dedicated 10 Mbps Ethernet $5,000.00
Setup Fee $1,000.00
</TABLE>
Remote Access Service. The Company's remote access services ("RAS"), will be
marketed as Concentric RemoteLink, and are scheduled for commercial release in
mid-1997. RemoteLink services are targeted at businesses that have employees
in remote locations. RemoteLink will enable an enterprise's salespeople and
other mobile employees, telecommuters and business partners to dial into an
enterprise's corporate network resources and use them just as if they were
connected locally, thus increasing their potential productivity and allowing
for information to be available on a real-time basis across the enterprise.
Concentric's RemoteLink is designed to be highly customizable and will have
the ability to interface with existing Company network infrastructure.
Currently RemoteLink is in beta testing with Bay Networks, Inc. Additionally,
RemoteLink is being designed to support multiple layers of security including
privacy encryption, local and remote firewalls and network access security.
The Company believes that RemoteLink will help businesses significantly
reduce the high costs of telecommunications charges and user support
associated with building, deploying and maintaining their own remote access
WAN, typically based on remote access servers or modem pools, 800 circuits and
router links to the Internet. In addition, the enterprise will see utilization
of Concentric's high-performance network, combined with T1 or fractional T1
links to the enterprise LAN, offering more reliable and faster access.
Concentric RemoteLink will offer support for remote users 24 hours a day,
seven days a week. See "Risk Factors--Dependence on New and Enhanced
Services."
Consumer Services
Concentric provides its individual and small office/home office ("SOHO")
customers with a broad range of Internet access options and Web hosting e-
mail, chat, File Transfer Protocol ("FTP"), Gopher and online shareware
36
<PAGE>
services. Users can choose from 800-number, telnet and direct dial services.
Concentric offers the Netscape Navigator or Microsoft Internet Explorer
browser to its users when they sign up for dial-up or 800-number service.
INTERNET ACCESS PRICING
<TABLE>
<CAPTION>
PLAN MONTHLY FEE ADDITIONAL TIME
---- ----------- ---------------
<S> <C> <C>
Starter Plan $ 7.95 $1.95/hr after 5 hrs
Standard Plan $19.95 No charges for additional time.
Unlimited active access for one
monthly fee.
800-number Plan $10.00 $5/hr after 2 hrs
Inbound Internet Plan $10.00 No charges for additional time.
Unlimited active access for one
monthly fee.
</TABLE>
WEB HOSTING PRICING
<TABLE>
<CAPTION>
CONCENTRIC NETWORK
SHARED HOSTING SERVICES HOME OFFICE HOSTING
----------------------- -------------------
<S> <C>
Internet Access Yes
Address Subdomain
Email Accounts 5
Web site storage 5 MB
Monthly Throughput 300 MB
Set-up Fee $50.00
Monthly Price $29.95
</TABLE>
Concentric also offers a variety of shell accounts, including PPP, SLIP and
UNIX, as access solutions to users who do not require a graphical user
interface. Shell accounts also enable users who already have Internet access
to set up extra mailboxes or post their own Website. Shell account services
currently are priced at $10.00 per month.
The Company also offers DAFs to its SOHO and individual customers. These
customers use these facilities to connect their Web servers to the Concentric
network (and hence to the Internet) or to offer dedicated connection to an
internal SOHO local area network.
The Company also offers consumers value-added services, including a
collection of online multiplayer games and premium products targeted to
vertical segments such as the SOHO and family market. This includes the
upselling of discounted products and services in such areas as education,
retail products, telephony, and travel services with such partners as
Infonautics, Amazon.com, Inc., QuadraCom, LLC and PrimePower, Inc. Such
arrangements not only provide a profitable monthly revenue stream but also
increase customer retention. Additional value-added products/services being
reviewed by the Company for potential introduction include premium service
levels, critical file disk back-up/recovery, hard drive maintenance software,
virus protection, and long distance and faxing services.
Gaming Gateway. Concentric is developing its Gaming Gateway as a broad
offering of online multiplayer games, affording consumers access to a number
of the major online gaming networks with the convenience of a single billing
account, login identification and password. The Gaming Gateway will be offered
to the public via the Internet and will be made available at an attractive
price to Concentric dial-up access customers in mid-1997.
The Gaming Gateway offers a unified packaged solution not available in the
marketplace. With a focus on ease of use and advanced functionality tying in
all the major online gaming networks in one package, consumers will be
presented with the best combined value on one service. Gaming Gateway
customers will also be offered a free CD-ROM with additional value added
offerings including free content, gaming software and free time online. A
strategic partnership with Unified Gamers Online, LLC provides the Gaming
Gateway with gaming oriented
37
<PAGE>
editorial, game experts which will manage tournaments and other gamer-oriented
activities like chats and message boards all of which will be free to gamers.
CUSTOMERS
The following is a representative list of the Company's customers during the
last 12 months.
Acer America Corporation Netscape Communications Corporation
Ameritech Services, Inc. SCP Communications
Bay Networks, Inc. SMC Communications LLC
Books That Work Surfers Unlimited LLC
Electronic Data Systems Corporation Toshiba America Information Systems
ENGAGE Games Online, Inc. Total Entertainment Network
Hewlett-Packard Company WebTV Networks, Inc.
Infonautics Corporation You Bet! On-Line Entertainment
Intuit, Inc. Ziff-Davis Publishing Co.
Netlink, LTD
During the year ended December 31, 1996 and the three months ended March 31,
1997, revenue from WebTV accounted for 10.1% and 32.7%, respectively, of the
Company's revenue. See "Risk Factors--Customer Concentration."
KEY CUSTOMER APPLICATIONS
The Company aggressively pursues business alliances with a variety of
companies. Through these partners, the Company seeks to expand its enterprise
and consumer customer base and increase the 24 hour utilization of the
Concentric network. The following is a summary of selected strategic
relationships:
Intuit. Intuit Inc. ("Intuit"), a financial software and Web-based
services company, is a market leader in personal and small business
financial software. Intuit's mission is to change for the better how people
and small businesses manage their financial lives, and to change for the
better how financial providers reach, sell, and serve their customers and
prospects. Intuit views its Websites as a key channel for communicating
with its customers, and as a vehicle to provide personal finance,
investment and tax related financial information. Concentric and Intuit
partnered in October 1995 to launch the integrated Internet access to the
Quicken Financial Network and the Internet. The Internet access capability
included both a virtual private network service designed to provide Intuit
customers subsidized access to select Intuit Web sites and the ability to
upgrade to full access to the Internet. Intuit has bundled tailored
versions of the Netscape Navigator browser in its fiscal year 1996 and 1997
releases of Quicken, TurboTax, ProTax and Quickbooks. Concentric designed
and implemented tailored registration and network access software to
provide Intuit customers with seamless, subsidized access to select Intuit
Web sites. Concentric provides an easy, Web-based upgrade process for
customers desiring full Internet access and e-mail services. Customers are
billed for network time through Concentric's billing systems. In addition,
Concentric provides private-labeled customer service to Intuit customers
with full network access on a twenty-four hour a day, seven day a week
basis.
WebTV Networks Inc. WebTV Networks Inc. ("WNI") provides the world's
first high-quality Internet solution for television. In the fall of 1996,
WNI's licensees, Sony Electronics, Inc. and Philips Electronics introduced
a plug-and-play set-top box that enables Internet browsing from a
television. As part of the WNI service, Concentric and WNI jointly designed
and implemented a national virtual private dial-up network solution to
connect WebTV Network(TM) users to the Internet, utilizing Concentric's
network. The WebTV(TM) Internet terminal, combined with the virtual private
network, allows anyone to browse the Internet from the comfort of their
living room.
You Bet! On-Line Entertainment. You Bet! On-Line Entertainment ("You
Bet!") is a technology company that facilitates live events and is focused
on content development, network deployment, and event management via a
cross-platform environment. You Bet! is a service organization providing
horse players instant access to live racing, information, and wagering
worldwide via a private, secure online environment. The Company's initial
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<PAGE>
service, the You Bet! Racing Network is focused on the emerging market for
home wagering on domestic horse racing. The application, which runs on the
Concentric network, involves the synchronization of audio, video and data
feeds that are accumulated at a single point. The multicast application is
supported by a secure front-end processor and maintained at the Concentric
data centers. A closed community group has access to the multicast
information, which consists of live races, track calls, live odds, past
performance, secured wagering from a pari-mutuel escrow account and
handicap information. Concentric believes it was chosen as the network
provider by You Bet! because of its expertise in developing back-end
systems and its ability to deploy and manage a virtual private network.
Concentric will collect hourly usage fees from You Bet!
Total Entertainment Network. Total Entertainment Network ("TEN") operates
a popular Internet-based game network that enables consumers to play PC
multi-player titles from packaged software marketed in major computer
retail outlets. In addition to the games, TEN offers a number of community
arenas that include chat areas, player profiles, rankings, contest,
tournaments and editorial content. Concentric believes it was chosen as the
preferred provider for network services because of its ability to deliver a
reliable, high performance, low/fixed latency network that is essential for
the advanced features of top-performing action multi-player games. TEN
utilizes Concentric's advanced ATM backbone and distributed data centers to
connect game players dialing into the Concentric Network with a series of
TEN game servers co-located at Concentric's data centers. Concentric
collects an hourly fee from TEN for network usage.
PictureTel Corporation. PictureTel Corporation ("PictureTel"), a leading
provider of video conferencing products, and Concentric have signed a
Letter of Agreement which specifies both parties' intent to negotiate final
agreements concerning a business relationship regarding plans to enable
PictureTel desktop and room video conferencing systems to communicate over
the Concentric network. Both Concentric and PictureTel currently have trial
systems installed and operating over the Concentric network. Preliminary
results demonstrate that the low/fixed latency and high throughput of the
Concentric network delivers superior quality for both desktop and room
video conferencing over IP-routed networks.
THE CONCENTRIC NETWORK
The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, 19 SuperPOPs in many major metropolitan areas plus a
total of 150 secondary and tertiary POPs in other cities, allowing local dial-
up access to the network to users in the U.S. and Canada. In addition, the
Company can provide analog dial-up, frame relay, fractional T-1, T-1 and DS3
access to the network. The Concentric network currently supports 28.8 Kbps
(V.34) modems and is evaluating plans to upgrade to 56.6 Kbps modem access.
The Concentric network is managed via a centralized network control center in
St. Louis, Missouri. Two data centers (located in Bay City, Michigan and
Cupertino, California) house the servers that support logon/authentication,
billing, e-mail, Internet access, Web services and other network services.
The Concentric SuperPOPs are designed to support both dial-up and dedicated
access services within a broad geographic region. Typically, a SuperPOP will
utilize one or more CLECs and LECs to aggregate dial traffic within a 50-200
mile radius of the SuperPOP and terminate it at the SuperPOP. This strategy
allows Concentric to offer users local call coverage within the SuperPOP
region without having to deploy individual POPs in each local calling area.
All the calls are terminated at the modem equipment at the regional SuperPOP.
This results in broader call coverage, lower costs due to the typically lower
rates from CLECs and economies of scale from larger modem installations, lower
maintenance costs, and easier capacity upgrades since equipment is located in
a single location within a region.
DAFs from customer locations in a region are terminated in the SuperPOP as
well. Typically, Fractional T-1, T-1, and T-3 circuits are terminated directly
into SuperPOP router equipment (via CSU/DSUs). Frame access is terminated via
aggregated LEC Frame Access circuit(s). Both dial and dedicated traffic is
then aggregated by the routers/switches in the SuperPOP and directed to the
Concentric ATM backbone via one or more T-3 ATM links.
Traditional network designs allocate dedicated network resources to specific
classes of applications. For example, separate network resources (or networks)
might be dedicated to transaction processing applications versus Internet
applications. Concentric believes that a major advantage of its network
architecture is the ability of the network to
39
<PAGE>
support adaptive call processing ("ACP"). ACP is designed to allow a common
set of network resources to be used for different applications on a call-by-
call basis. Performance and functionality for the user is improved, because
each end-user receives the needed services on a customized basis instead of
relying on a "one-size-fits-all" network approach. Furthermore, the Company
believes that ACP will reduce costs by making it possible to optimize network
usage on a call-by-call basis to provide only the services actually needed.
Using software implemented by Bay Networks, Inc. in accordance with Concentric
specifications, ACP is designed to enable the tuning of network parameters and
traffic routing to meet the level of latency, throughput, security/privacy,
and reliability requirements of a specific customer or application on a call-
by-call basis. The initial release of ACP will utilize the phone number dialed
by the subscriber to determine the configuration parameters and protocol
support required by the access modems and communications servers. Concentric
is currently deploying the software technology in its network and is planning
to commercially introduce the initial ACP capabilities during the second half
of 1997.
Some applications, such as Web browsing and file transfer require high
throughput, but can tolerate moderate and variable latency, while others, such
as mission-critical business applications, multiplayer gaming and voice and
video conferencing, require low/fixed latency. Still others, such as
transaction processing, require fast connect/disconnect times, may require
high levels of security and are indifferent to latency levels. Traditional
static network access technologies and backbone architectures cannot cost-
effectively manage these varied requirements in a single network. The
Concentric network has been designed to be able to solve this problem by
incorporating software intelligence in both its access and backbone
technologies to adapt the network's connection setup and data transfer
properties to the nature of the user's application requirements on a call-by-
call or service-by-service basis.
The Concentric network also offers its customers the security, reliability
and management features that companies require in their own private networks.
Varying layers of security and encryption are supported and tailored to
specific customer requirements. The network design includes a standard
security layer and is compatible with most types of custom security
applications. Further, security is provided at both the edge of the network
and internally based on embedded firewall and encryption techniques. The
Concentric network features co-location of network access and switching
equipment in "hardened" facilities, direct connections to carrier facilities,
a resilient ATM/frame relay backbone, dual data processing centers, and
redundancy within data centers to substantially enhance its uptime
performance.
Network managers, customer service, and technical support staff require near
real-time access to information about the performance and quality of their
networks. In traditional private networks, this information is provided by
network management, trouble reporting/tracking, and management information
systems. Customers usually sacrifice a great deal of control and have access
to less information when using a public network instead of a private network.
It has been difficult for public network providers to provide their major
customers with information regarding network performance that relates to that
customer's usage without either compromising other customers' proprietary
information or compromising the integrity of the network itself. Concentric
has developed a set of non-intrusive software tools and reporting mechanisms,
distributed to DAF enterprise customers as ConcentricView. ConcentricView
allows a customer's network manager to monitor network performance and quality
and to adequately support inquiries for help from their users. Web browsers
and file transfer tools are used to provide access to much of this
information. In some cases, custom integration of Concentric's network
management and trouble tracking/reporting systems will be provided to
customers.
SALES AND MARKETING
The Company focuses on marketing its services to two distinct market
segments: enterprise and consumer. By attracting enterprise customers who use
the network primarily during the daytime, and consumer customers who use the
network primarily at night, the Company is able to more fully utilize its
network infrastructure by having some customers online during the day and the
others, using the same modem pools, online during the evening. The
Company has developed a multi-tiered sales strategy consisting of leveraged
third party distribution channels, inbound and outbound telesales, value-added
resellers and direct sales.
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Leveraged Third Party Distribution. The Company has positioned itself as a
key network services provider for companies that bundle network access in
their products or services. For example, the Company's network service is
bundled with Intuit's Quicken, TurboTax and Quickbooks products, Microsoft
Office 97 and with WebTV and Sega Saturn Internet access devices.
Additionally, the Company is one of the Internet services providers listed on
the Netscape Navigator and Microsoft Internet Explorer browser registration
servers.
Telesales. The Company uses an inbound telesales group to answer calls from
potential consumers/subscribers and to sign up customers. Inbound telesales
representatives also proactively upsell premium products and services. The
Company also uses an outbound telesales group to sell DAFs and high-end
hosting products to small and medium-sized businesses. Both the inbound and
outbound telesales groups forward leads to the direct sales force when
appropriate.
Value-Added Resellers. The Company has also begun to establish sales
channels through value-added resellers. These resellers are companies that
sell equipment or other components for full-service network solutions to
medium and large businesses. Value-added resellers such as Racal-Datacom,
Inc., which employs more than 500 field sales, sales-support and field
engineering people, are compensated for selling Concentric's enterprise
service offerings in conjunction with their other products. These
relationships enable the VARs to provide more comprehensive solutions to their
customers while affording the Company the benefit of the VAR's large sales
force without incurring the costs of maintaining a large sales force of its
own.
Direct Sales Force. For large and complex enterprise solutions and to
acquire, support and retain distribution channel partners, the Company employs
11 direct sales people located in Cupertino and Orange County, California,
Dallas, Texas, and the New York metropolitan area to provide national direct
sales coverage. The Company's direct sales force is supported by inside
sales/account managers and systems engineers.
Concentric markets its enterprise services to information service ("IS")
professionals. In addition, the Company uses print advertising in targeted
industry publications to build awareness and acquire leads for its VARs and
its direct sales team. The Company is also planning to launch in the second
half of 1997 a large direct response effort (direct mail/outbound
telemarketing) targeting enterprise IS managers and senior management of
multilocation companies, and companies with large numbers of mobile and
telecommuting employees.
In the consumer market, the Company focuses on direct mail to targeted
audiences; establishment of customer referral programs; and co-marketing such
as packaging literature with MasterCard mailers and Intuit software. In
addition, the Company has implemented on-line programs, such as a Website
"home" where they can learn how to use the service, how to use the Internet,
and how to find information quickly, designed to increase customer retention.
The Company is also implementing programs to sell additional products and
services to its consumer customers. Additionally, the Company is generating
advertising revenue on its growing Website traffic in direct ad banner
placements as well as in shared revenue relationships with content partners
such as Excite, Inc., Lycos, Inc., and Classifieds2000, Inc.
The Company employs public relations personnel in-house and works with an
outside public relations agency to provide broad coverage in network computer
and vertical industry publications. The Company participates in industry trade
shows based on the size and vertical makeup of the trade show audience.
Planned shows in 1997 include E3, NetWorld + InterOp and Fall Internet World.
The Company also participates in trade shows with its strategic marketing
partners such as Racal-Datacom to promote the sale of Concentric products and
services.
As of March 31, 1997, the Company employed 63 persons in sales and
marketing. The Company is in the process of expanding its sales and marketing
staff. The Company's sales operations are conducted from its principal office
in Cupertino, California and by its field sales personnel in Orange County,
California, Dallas, Texas and the New York metropolitan area.
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CUSTOMER SUPPORT
Concentric believes that a high level of customer support is critical to
attracting and retaining its enterprise and consumer customers. The Company
maintains a customer support call center at its Saginaw, Michigan, facility.
Concentric offers several levels of customer support all of which are
available 24 hours per day, seven days per week. The basic level of customer
support includes support for customers on installing and using their software,
customer communications and customer training. Premier level service programs
guarantee an exceptional performance standard, offer supplemental support
training, and provide monthly reports on operations. Private label support
gives businesses a premier level of support provided by their own customer
service team who answer calls with that customer's company name. Customer
support is provided by e-mail, telephone, Website and online chat.
As of March 31, 1997, the Company employed 142 persons in customer support.
In addition, the Company outsources supplemental customer support to
Concentric customers and their end-users.
COMPETITION
The market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company believes
that its ability to compete successfully depends upon a number of factors,
including market presence; the capacity, reliability, low latency and security
of network infrastructure; technical expertise and functionality, performance
and quality of services; customization; ease of access to and navigation of
the Internet; the pricing policies of its competitors; the variety of
services; the timing of introductions of new services by the Company and its
competitors; customer support; the Company's ability to support industry
standards; and industry and general economic trends.
The Company's current and prospective competitors generally may be divided
into the following five groups: (i) telecommunications companies, such as
AT&T, MCI, Sprint, Inc., WorldCom, RBOCs and various cable companies; (ii)
online services providers, such as America Online, CompuServe, Microsoft's
MSN, and Prodigy; (iii) ISPs, such as BBN, NETCOM, PSI, and other national and
regional providers; (iv) nonprofit or education Internet connectivity
providers; and (v) Web server farms such as Internet Direct and Exodus. Many
of these competitors have greater market presence, engineering and marketing
capabilities, and financial, technological and personnel resources than those
available to the Company. As a result, they may be able to develop and expand
their communications and network infrastructures more quickly, adapt more
swiftly to new or emerging technologies and changes in customer requirements,
take advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products than can the
Company. In addition, various organizations, including certain of those
identified above, have entered into or are forming joint ventures or
consortiums to provide services similar to those of the Company.
The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies will enter the value added network services markets, resulting in
even greater competition for the Company. Certain of such telecommunications
companies and online services providers are currently offering or have
announced plans to offer Internet or online services or to expand their
Internet access services. Certain companies, including America Online, BBN and
PSI, have also obtained or expanded their Internet access products and
services as a result of acquisitions. Such acquisitions may permit the
Company's competitors to devote greater resources to the development and
marketing of new competitive products and services and the marketing of
existing competitive products and services. In addition, the ability of some
of the Company's competitors to bundle other services and products with VPN
and consumer network services could place the Company at a competitive
disadvantage. Certain companies are also exploring the possibility of
providing high-speed data services using alternative delivery methods such as
over the cable television infrastructure, through direct broadcast satellite
technology and by wireless cable.
The Company is applying for licenses to become a CLEC in selected states. To
the extent the Company obtains such licenses and commences CLEC operations, it
will compete with the incumbent LEC and additional CLECS providing
telecommunications services in these markets. For all new entrants, including
the Company, the market for
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local exchange services is extremely competitive. Local telecommunications
services offered by the Company will compete principally with services offered
by the incumbent LEC serving that area. Incumbent LECs, such as the RBOCs,
currently dominate their local telephone markets. Such companies have
financial, managerial and technical resources that substantially exceed those
of the Company and have long-standing relationships with their customers.
While the 1996 Telecom Act provides increased business opportunities to CLECs,
it also allows incumbent LECs increased pricing flexibility for their
services. Increased price competition from incumbent LECs could have a
material adverse effect on the Company's CLEC operations and, in turn, on the
Company's results of operations and financial condition to the extent its CLEC
operations are a material portion of its business. Furthermore, upon the
satisfaction of certain regulatory conditions, the RBOCs currently are
expected to be able to offer long distance services in their home markets in
addition to local service, which would afford their local customers "one-stop
shopping" for telecommunications services. The Company also expects to face
increased competition in the provision of local exchange services from other
CLECs, cable television companies, electric utilities, microwave carriers,
wireless telephone system operators, AT&T, MCI, Sprint, WorldCom and other
long distance carriers who may choose to enter the local exchange market by
resale of incumbent LEC facilities.
As a result of increased competition in the industry and vertical and
horizontal integration in the industry, the Company could encounter
significant pricing pressure, which in turn could result in significant
reductions in the average selling price of the Company's services. For
example, certain of the Company's competitors that are telecommunications
companies may be able to provide customers with reduced communications costs
in connection with their Internet access services or private network services,
reducing the overall cost of their solutions and significantly increasing
price pressures on the Company. There can be no assurance that the Company
will be able to offset the effects of any such price reductions with an
increase in the number of its customers, higher revenue from enhanced
services, cost reductions or otherwise. In addition, the Company believes that
the Internet access and online services businesses are likely to encounter
consolidation in the near future, which could result in increased price and
other competition in these industries and, potentially, the virtual private
networks industry. Increased price or other competition could result in
erosion of the Company's market share and could have a material adverse effect
on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will have the financial resources,
technical expertise or marketing and support capabilities to continue to
compete successfully. See "Risk Factors--Competition," "--Risks of Growth and
Expansion" and "--Future Capital Needs; Uncertainty of Additional Financing"
and "Business--Competition."
GOVERNMENT REGULATION
Value-Added Network and Internet Service Providers. The FCC currently does
not regulate value-added network software or computer equipment related
services that transport data or voice messages over telecommunication
facilities. The Company provides value-added IP-based network services, in
part, through data transmissions over public telephone lines. These
transmissions are governed by regulatory policies establishing charges and
terms for wireline communications. Operators of these types of value-added
networks that provide access to regulated transmission facilities only as part
of a data services package are currently excluded from regulations that
applies to "telecommunications carrier" and as such the Company is not
currently subject to direct regulation by the FCC or any other governmental
agency, other than regulations applicable to businesses generally. However, in
the future the Company could become subject to regulation by the FCC or
another regulatory agency as a provider of basic telecommunications services.
Currently, the FCC is reviewing its regulatory positions and could seek to
impose common carrier regulation on the network transport and communications
facilities aspects of an enhanced or information service package. Further, the
FCC could conclude that the Company's protocol conversions, computer
processing, and interaction with customer-supplied information are
insufficient to afford the Company the benefits of the enhanced or information
service classification, and thereby may seek to regulate some segments of the
Company's activities as basic telecommunications services. While state public
utility commissions generally have declined to regulate enhanced or
information services, some states have continued to regulate particular
aspects of enhanced services in limited circumstances, such as where they are
provided by LECs. Moreover, the public service commissions of certain states
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continue to review potential regulation of such services. There can be no
assurance that regulatory authorities of states within which Concentric makes
its Internet access, Intranet and VPN services available will not seek to
regulate aspects of these activities as telecommunications services. Changes
in the regulatory environment relating to the Internet connectivity market,
including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition
from the RBOCs or other telecommunications companies, could affect the prices
at which the Company may sell its services. The Company cannot predict the
impact, if any, that future regulation or regulatory changes may have on its
business and there can be no assurance that such future regulation or
regulatory changes will not have a material adverse effect on the Company's
business, results of operations and financial condition.
Competitive Local Exchange Carriers. The Company is applying for
certificates of authority to become a CLEC in selected states. To the extent
the Company obtains such authorizations and commences CLEC operations, the
telecommunications services provided by such operations will be subject to
regulation by federal, state and local governmental agencies. At the federal
level, the FCC has jurisdiction over interstate telecommunications services.
State regulatory commissions exercise jurisdiction over intrastate services.
Additionally, municipalities and other local government agencies may regulate
limited aspects of the Company's business, such as use of rights-of-way.
Typically start-up telecommunications carriers are not as heavily regulated as
incumbent LECs. For example, under current regulations, the Company would not
be subject to price cap or rate of return regulation by the FCC. However, the
Telecommunications Act of 1996 (the "1996 Telecom Act") requires the FCC to
establish a subsidy mechanism for universal telephone service to which the
Company will be required to contribute based on its telecommunications
revenues and requires all LECs, including CLECs, to make services available
for resale by other carriers, provide nondiscriminatory access to rights-of-
way, offer reciprocal compensation for termination of local telecommunication
traffic and provide dialing parity and telephone number portability, and
ensure that their services are accessible to and usable by persons with
disabilities. The 1996 Telecom Act retains for individual states the authority
to impose their own regulations of local exchange services, including state
universal service subsidy programs, so long as this regulation is not
inconsistent with the requirements of the 1996 Telecom Act. The Company is
unable to predict the final form of such regulation and its potential impact
on the Company. In its provision of interstate, international and intrastate
services as a CLEC, the Company generally will be subject to tariff filing
requirements setting forth the terms, conditions and prices for services,
prior to offering telecommunications services. At the state level, the Company
will also be subject to state certification proceedings as a CLEC. These
certifications generally require a showing that the carrier has adequate
financial, managerial and technical resources to offer the proposed services
consistent with the public interest. Under some state statutes changes in the
ownership of the Company's outstanding voting securities also may trigger
additional state public utility commission approval. For example, in certain
jurisdictions an investor who acquires as little as ten percent or more of the
Company's voting securities may have to obtain prior approval of the
acquisition of such securities because such ownership might be deemed to
constitute an indirect controlling interest in the CLEC. While uncommon,
challenges to these tariffs and certificates by third parties could cause the
Company to incur substantial legal and administrative expenses. Many states
also have additional regulatory requirements such as minimum service quality
reporting and customer service requirements and uniform LEC accounting
requirements.
Although the 1996 Telecom Act eliminates legal barriers to entry into the
CLEC market, no assurance can be given that changes in current or future
regulations adopted by the FCC or state regulators or other legislative or
judicial initiatives relating to the telecommunications industry would not
have a material adverse effect on the Company's ability to offer such
services. With the passage of the 1996 Telecom Act and the anticipated
increase in the level of competition faced by incumbent LECs, the FCC could
grant incumbent LECs substantial pricing flexibility with regard to interstate
access services. It is also anticipated that the prices incumbent LECs charge
for access services will be substantially reduced as a result of the FCC's
reform of the current access charge regime and the adoption of universal
service rules. Similarly, a number of states have allowed incumbent LECs rate
and tariff flexibility, particularly for services deemed subject to
competition. Such price competition could significantly and adversely affect
the Company's CLEC operations which could, in turn, adversely affect the
Company's results of operations and financial condition to the extent its CLEC
operations are a material portion of its business.
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PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
technology, although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights. The Company
principally relies upon a combination of copyright, trademark and trade secret
laws and contractual restrictions to protect its proprietary technology. It
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization or to develop similar
technology independently, and there can be no assurance that such measures
have been, or will be, adequate to protect the Company's proprietary
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology.
Although the Company does not believe that it infringes the proprietary
rights of any third parties, there can be no assurance that third parties will
not assert such claims against the Company in the future or that such claims
will not be successful. In addition, participants in the Company's industry
also rely upon trade secret law. The Company could incur substantial costs and
diversion of management resources with respect to the defense of any claims
relating to proprietary rights which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief which
could effectively block the Company's ability to license its products in the
United States or abroad. Such a judgment would have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company is obligated under certain agreements to indemnify the
other party in connection with infringement by the Company of the proprietary
rights of third parties. In the event a claim relating to proprietary
technology or information is asserted against the Company, the Company may
seek licenses to such intellectual property. There can be no assurance,
however, that licenses could be obtained on commercially reasonable terms, if
at all, or that the terms of any offered licenses will be acceptable to the
Company. The failure to obtain the necessary licenses or other rights could
have a material adverse effect on the Company's business, financial condition
and results of operations.
EMPLOYEES
As of March 31, 1997, Concentric had 280 employees and 48 independent
contractors, including 63 persons in sales and marketing, 91 persons in
network operations and development, 142 in customer support and 32 in finance
and administrative functions. The Company believes that its future success
will depend in part on its continued ability to attract, hire and retain
qualified personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to identify, attract, and retain
such personnel in the future. None of the Company's employees is represented
by a labor union, and management believes its employee relations are good.
PROPERTIES
The Company's executive offices are located in Cupertino, California, under
a lease that expires in April 1998. The Company also leases network operations
and customer support facilities in Bay City, Michigan, and Saginaw, Michigan,
respectively, under leases expiring in December 1997 and December 2001,
respectively. The Saginaw lease obligates the Company to pay up to $1.25
million to restore the building in the event of any damage or destruction to
it during the lease term, without any rent abatement for loss of use. The
Company believes that its existing facilities are adequate for its current
needs.
LEGAL PROCEEDINGS
On April 22, 1997, a complaint was filed in the Los Angeles County,
California Superior Court against the Company and other unnamed defendants by
Sattel Communications LLC ("Sattel"). The complaint alleges claims for breach
of contract, breach of the covenant of good faith and fair dealing, unfair
business practices, fraud and negligent misrepresentation. Sattel claims that
the Company is in breach of an agreement to pay for up to $4.3 million of DSS
Switches from Sattel for use in the Company's network. The Complaint also
seeks unspecified consequential and punitive damages. On April 29, 1997,
Sattel served the Company with an Application for Writ of Attachment,
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seeking to secure a lien on the Company's assets up to an amount of $3.6
million. Prior to this offering and the Direct Placements, Sattel holds
approximately 1.7% of the Company's Common Stock. At a hearing on June 17,
1997, the court indicated its intention to grant the writ of attachment, but
deferred issuing a final ruling until another hearing can be held on June 25,
1997. If the Court grants the writ, the Company intends to post a bond in the
amount of the writ, thereby precluding Sattel from executing on the writ. No
trial date has been set in the matter.
In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana Corporation ("Diana"), the parent corporation of
Sattel, alleging securities fraud related to plaintiffs' purchase of shares of
Diana Common Stock in reliance upon allegedly misleading statements made by
defendants, Diana, Sattel and certain of their respective affiliates, officers
and directors. Concentric was named as a defendant in the complaint in
connection with certain statements made by Diana and officers of Diana related
to Concentric's purchase of network switching equipment from Diana's Sattel
subsidiary. The complaints do not appear to allege that Concentric made any
false or misleading statements. The plaintiffs seek unspecified compensatory
damages.
While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct
vigorous defenses. An unfavorable outcome in these matters could have a
material adverse effect on the Company's financial condition. In addition,
even if the ultimate outcomes are resolved in favor of the Company, the
defense of such litigation could entail considerable cost and the diversion of
efforts of management, either or which could have a material adverse effect on
the Company's results of operations. See "Risk Factors--Legal Proceedings."
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth certain information as of March 31, 1997,
with respect to the executive officers and directors of the Company, as well
as certain members of its senior management.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------------------------------------------------
<S> <C> <C>
Henry R. Nothhaft.............. 52 President, Chief Executive Officer and
Director
John K. Peters................. 49 Executive Vice President and General
Manager, Network Services Division
Michael F. Anthofer............ 45 Senior Vice President and Chief Financial
Officer
William Etheredge.............. 50 Senior Vice President of Sales
George D. Carr................. 52 Vice President of Field Sales
Eileen A. Curtis............... 48 Vice President of Customer Relations
Scott G. Eagle................. 38 Vice President of Marketing
Donald C. Schutt............... 51 Vice President of Michigan Operations
Warren A. Smith................ 46 Vice President of Software Engineering
James L. Isaacs................ 37 Vice President of Product Management
Vinod Khosla................... 42 Director
Terence M. O'Toole............. 38 Director
Randy A. Maslow................ 42 Director
Franco Regis................... 41 Director
L. Rod Manning................. 48 Director
Gary E. Rieschel............... 41 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Henry R. Nothhaft joined the Company as President and Chief Executive
Officer in May 1995 and became a Director of the Company in August 1995. From
1989 to August 1994, Mr. Nothhaft was President, Chief Executive Officer and a
Director of David Systems, Inc. ("David Systems"), a networking company. From
1983 to 1989, Mr. Nothhaft held various positions with DSC Communications
Corporation ("DSC"), including Senior Vice President of Marketing, President
of the Digital Switch Corporation subsidiary, President of the Business
Network Systems Group and a Corporate Director of DSC. From 1979 to 1983, Mr.
Nothhaft was Vice President of Domestic Marketing and Vice President of Sales
for GTE Telenet Communications Corporation (now Sprint). Mr. Nothhaft has an
M.B.A. in Information Systems Technology from George Washington University and
a B.S. degree from the U.S. Naval Academy.
John K. Peters joined the Company in May 1995 as an independent consultant.
Mr. Peters was named Executive Vice President and General Manager, Network
Services Division of the Company in June 1995. From 1993 to August 1995, Mr.
Peters served as President of Venture Development Consulting, a consulting
firm specializing in new communications, information services and software
businesses. From 1988 to 1993, Mr. Peters was Vice President and Chief
Operating Officer of Pacific Bell Information Services, Inc. Prior to that,
Mr. Peters spent three years as Vice President of Application Services for
Telestream Corporation. In 1981, Mr. Peters co-founded Integrated Office
Systems, Inc., a communications and information systems company. From 1976 to
1980, Mr. Peters was Vice President of Advanced Network Services for GTE
Telenet Communications Corporation. Mr. Peters has an M.B.A. from Stanford
Graduate School of Business and a B.S. degree in Statistics from Stanford
University.
Michael F. Anthofer joined the Company in January 1996 as Vice President and
Chief Financial Officer and became a Senior Vice President in November 1996.
From January 1991 to December 1995, Mr. Anthofer served as an Executive Vice
President and Chief Financial Officer of Shared Resource Exchange, Inc., a
privately held digital switching platform and PBX supplier. Prior to 1991, Mr.
Anthofer held various executive positions, including Vice President, Corporate
Business Planning, Vice President, Business Network Group and Vice President,
Network Products Group, at DSC. Mr. Anthofer has an M.B.A. and a B.S. degree
from the University of California, Berkeley.
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William C. Etheredge joined the Company in March 1997 as the Senior Vice
President of Sales. From May 1991 to March 1997, Mr. Etheredge served first as
Vice President of Sales and Marketing and then as Vice President of Sales for
Meridian Data, Inc., a provider of networked CD-ROM database creation and
retrieval software and network servers. From July 1990 to May 1991, he served
as Vice President of Strategic Accounts for Maxtor Corporation. From June 1985
to June 1990, he served first as Vice President US Sales and Marketing and
then Vice President Western Region for Memorex-Telex Corporation. Mr.
Etheredge has an M.B.A. degree from Bowling Green University and a B.A. degree
from Westminster College.
George D. Carr joined the Company in June 1995 as an independent consultant.
In September 1995 Mr. Carr became Vice President of Sales. From June 1993 to
June 1995, Mr. Carr was Vice President of Sales and Marketing of David
Systems/ChipCom. From June 1989 to June 1993, Mr. Carr was VP of Operations
and International Sales of David Systems. From December 1983 to June 1989, Mr.
Carr was VP of Operations and Service of David Systems. Mr. Carr has a B.A.
degree from Loyola Marymount.
Eileen A. Curtis joined the Company in November 1994 as an independent
consultant. She became Customer Relations Manager in January 1995, Director of
Customer Relations in September 1995 and Vice President, Customer Relations in
November 1996. From August 1987 to July 1993, Ms. Curtis was employed by Cox
Communications Saginaw, Inc. and served in various positions including
Marketing and Public Relations Manager, Administrative Manager and Customer
Service Manager. Ms. Curtis has a B.S. degree from Central Michigan
University.
Scott G. Eagle joined the Company in March 1996 as Vice President of
Marketing. From November 1993 to February 1996, Mr. Eagle was the Vice
President, Strategic Marketing Development for MFS Intelenet, Inc., a start-up
division of MFS Communications Company, Inc. From February 1989 to November
1993, Mr. Eagle was the Vice President of Marketing for the Woodbridge Group,
a marketer of consumer package goods. Prior to February 1989, Mr. Eagle served
in various marketing management positions with The Procter & Gamble Company.
Mr. Eagle has a B.S. degree from the University of Pennsylvania, Wharton
School of Business.
Donald C. Schutt joined the Company in February 1994 as Vice President of
Sales and Marketing and was appointed Chief Operations Officer later that
year. Mr. Schutt was named Vice President and General Manager, Bay City
Operations in August 1995. His title was changed to Vice President of Michigan
Operations in March 1996. From 1964 to 1985, Mr. Schutt held various
management positions with General Motors, after which Mr. Schutt served until
1989 as Vice President for Sales and Marketing for Gentex Corporation. From
1989 to 1993, Mr. Schutt was President and Chief Executive Officer of AMPM,
Inc., a full-service advertising agency, and retains a 54 percent interest in
such entity. Mr. Schutt has a B.S. degree in Marketing from Ferris University.
Warren A. Smith joined the Company in April 1996 as Vice President, Software
Engineering. From October 1992 to April 1996, Mr. Smith was the Director of
Engineering at NetManage, Inc., a software company. From July 1987 to July
1992, Mr. Smith was the Director of Distributed Computing Technology for Sun
Microsystems, Inc. From March 1983 to July 1987, Mr. Smith was the Western
Regional Manager of SEI Information Technology an engineering consulting firm.
Mr. Smith has a B.S. degree from California State University, Sacramento.
James L. Isaacs joined the Company in October 1995 as the Director of
Product Management. In March 1997, he became Vice President of Product
Management. From July 1988 to October 1995, Mr. Isaacs held various positions
at Apple Computer, including Group Manager Product Marketing, Apple On Line
Services Division and Business Development Manager of Apple On Line Services
Division. Mr. Isaacs has an M.B.A. degree from the University of California,
Berkeley and an A.B. degree from Stanford University.
Vinod Khosla has been a Director of the Company since April 1995. Mr. Khosla
has been a General Partner with the venture capital firm of Kleiner Perkins
Caufield & Byers from February 1986 to the present. Mr. Khosla was a co-
founder of Daisy Systems and the founding Chief Executive Officer of Sun
Microsystems, Inc. Mr. Khosla also serves on the boards of Excite, Inc.,
PictureTel, The 3DO Company, and Spectrum Holobyte. He has a B.S.E. from the
Indian Institute of Technology in New Delhi, an M.S.E. from Carnegie Mellon
University, and an M.B.A. from the Stanford Graduate School of Business.
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Terence M. O'Toole has been a Director of the Company since April 1995. Mr.
O'Toole is a Managing Director at Goldman, Sachs & Co. Mr. O'Toole joined
Goldman, Sachs & Co. in 1983, became a general partner in 1992 and a Managing
Director in 1996. Mr. O'Toole serves on the boards of directors of AMF Group,
Inc., Insilco Corporation, and Western Wireless Corporation. He has a B.S.
degree from Villanova University and an M.B.A. from the Stanford University
Graduate School of Business.
Randy A. Maslow joined the Company in March 1994 as an independent
consultant and subsequently served as Vice President for Business Development
from September 1994 through February 1996. He has been a director of the
Company since January 1995. Since February 1996, Mr. Maslow has been Managing
Director of Electric Ventures, Inc., a venture finance firm in the interactive
services industry. Prior to joining Concentric, Mr. Maslow was a co-founder
and managing partner of the RAM Group, a venture finance and business
development consulting firm in the online services and electronic publishing
industries. From 1982 through 1989, Mr. Maslow was a corporate attorney in
private practice. Mr. Maslow has a B.A. degree from Cornell University and a
J.D. from Rutgers Law School.
Franco Regis has been a Director of the Company since October 1996. Since
1994, Mr. Regis has been a Director of Business Development and Strategic
Planning at Telecom Italia, SpA, the telephone operating company of Italy.
From 1992 to 1994, Mr. Regis was a Director of Budget and Control for the
business division of Telecom Italia. Mr. Regis has an engineering degree from
the Rome State University.
L. Rod Manning has been a Director of the Company since May 1997. Since
March 1997, he has been President and General Counsel of the Racal
Corporation, which holds 100% of the stock of Racal-DataCom, Inc, a
telecommunications equipment provider and systems integrator. Prior to such
time, Mr. Manning acted as Deputy General Counsel of the Racal Corporation.
Gary E. Rieschel has been a Director of the Company since October 1996. Mr.
Rieschel is a Senior Vice President at SOFTBANK Holdings, having joined that
company in January 1996. Mr. Rieschel was Vice President for N-Cube
Corporation from August 1994 through December 1995. He was Sales Director at
Cisco Systems, Inc. from July 1993 through October 1994. Prior to this, Mr.
Rieschel was a General Manager and Sales Director at Sequent Computer for over
nine years. Mr. Rieschel has an M.B.A. from Harvard Graduate School of
Business and a B.A. in biology from Reed College.
Members of the Board of Directors are elected each year at the Company's
annual meeting of stockholders, and serve until the following annual meeting
of stockholders and until their respective successors have been elected and
qualified.
Voting Agreements
Pursuant to a Stockholder Agreement entered into in connection with the
Company's sale of Series A Preferred Stock, as amended and restated in
connection with the issuance of Series B Preferred Stock and Series B
warrants, each of Kleiner Perkins Caufield & Byers VII, KPCB VII Founders Fund
and KPCB Information Sciences Zaibatsu Fund II (collectively, the "Kleiner
Entities"), Mr. Collins-Rector, Mr. Chad Shackley, Intuit and GS Capital
Partners, L.P. ("GSCP") has agreed to vote all its capital stock, except for
any Series B Preferred Stock, to elect as directors the Chief Executive
Officer of the Company and two other individuals designated by GSCP and the
Kleiner Entities. This voting obligation terminates as to each such
stockholder upon the earlier of (i) such stockholder no longer beneficially
owning any shares of Stock, as defined in such Stockholder Agreement, and (ii)
the closing of a public offering resulting in at least $15 million in gross
proceeds to the Company and reflecting a corporation valuation of at least $50
million. In addition, GSCP and the Kleiner Entities have delivered irrevocable
proxies to Intuit to vote their Series B Preferred shares for an Intuit
director designee in the event that Intuit fully exercises its warrants to
purchase Series B shares. The latter proxies terminate upon the earliest of
(a) Intuit's ceasing to hold at least half of its Series B shares, (b) the
conversion of all Series B Preferred Stock into Common Stock, and (c) the
closing of a public offering resulting in at least $15 million in gross
proceeds to the Company and reflecting a corporation valuation of at least $50
million.
Pursuant to a Shareholder Agreement entered into in connection with the
Company's sale of Series D Preferred Stock, each of Racal, TMI and SOFTBANK
has agreed, until the earlier of (i) the date on which the number of
49
<PAGE>
outstanding Series D Preferred shares falls below certain specified minimums
and (ii) the occurrence of a qualified public offering of the Company's Common
Stock, to vote the shares of Common Stock and Preferred Stock controlled by
them to elect as Directors that number of Series D Directors provided for in
the Amended and Restated Articles of Incorporation, to be designated in
accordance with the respective holdings of the three parties. Currently, each
of Racal, TMI and SOFTBANK is entitled to designate one director, and each of
the three agrees to vote all shares of Common Stock and Preferred Stock
controlled by it to elect the designees of the other two parties.
Each of the foregoing voting arrangements will terminate upon completion of
the offering.
Pursuant to a Governance Agreement entered into among GSCP, the Kleiner
Entities, Intuit, Mr. Collins-Rector, Mr. Shackley and the Company (the
"Government Agreement"), Mr. Collins-Rector and Mr. Shackley are jointly
enabled to designate one member of the Company's Board of Directors. The
Governance Agreement also obligates the Company to use reasonable efforts to
maintain such designee on the Board of Directors until the earlier to occur of
(i) one year after the closing of the Company's initial public offering, (ii)
the expiration or full release of Mr. Collins-Rector and Mr. Shackley from any
lock-up restrictions granted to the underwriters in connection with such
initial public offering, or (iii) the sale of all or substantially all of the
assets of the Company or the merger, acquisition or other reorganization of
the Company in which more than 50% of the voting power of the Company is
disposed of. Initially, such designee is Robert W. Doede.
Director Compensation
Directors are reimbursed for certain reasonable expenses incurred in
attending Board or committee meetings. Officers of the Company are elected
annually by the Board of Directors and serve at its discretion. The Company
has entered into indemnification agreements with each member of the Board of
Directors and certain of its officers providing for the indemnification of
such person to the fullest extent authorized, permitted or allowed by law.
Compensation Committee
The Company's Board of Directors currently has a Compensation Committee that
reviews and approves the compensation and benefits to be provided to the
officers, directors, employees, and consultants of the Company, administers
the Company's 1993 Incentive Stock Option Plan, 1995 Stock Incentive Plan for
Employees and Consultants, and Amended and Restated 1996 Stock Plan, and will
administer the 1997 Stock Plan and 1997 Employee Stock Purchase Plan, which
are to take effect upon closing of the Company's initial public offering.
Audit Committee
The Company's Board of Directors currently has an Audit Committee that
monitors the corporate financial reporting and the internal and external
audits of the Company, reviews and approves material accounting policy
changes, monitors internal accounting controls, to recommend engagement of
independent auditors, reviews related-party transactions and performs other
duties as prescribed by the Board of Directors.
50
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth in summary form the
compensation earned by the Company's Chief Executive Officer, and the four
most highly compensated executive officers (the "Named Officers") during 1996.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ------------
SECURITIES ALL OTHER
OTHER ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) ($)(3)
- --------------------------- ---------- --------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Henry R. Nothhaft....... 184,808 -- -- -- 3,105
President and Chief
Executive Officer
John K. Peters.......... 184,273 -- -- -- 3,076
Executive Vice
President and General
Manager, Network
Services Division
Michael F. Anthofer..... 136,336 20,000 155,212(2) 43,333 1,545
Senior Vice President
and Chief Financial
Officer
George D. Carr.......... 105,000 25,897(1) -- 6,667 1,761
Vice President of Field
Sales
Scott G. Eagle.......... 114,337 -- 82,396(2) 30,000 1,347
Vice President of
Marketing
</TABLE>
- --------
(1) Reflects sales commissions.
(2) Reflects relocation expense payments.
(3) Reflects Company contributions to an employee 401(k) plan and term life
insurance premiums paid by the Company.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL
--------------------------------------------------------- RATES OF STOCK
PERCENT OF MARKET PRICE
NUMBER OF TOTAL PRICE OF APPRECIATION
SECURITIES OPTIONS SECURITIES FOR OPTIONS
UNDERLYING GRANTED TO EXERCISE UNDERLYING TERM(2)
OPTIONS EMPLOYEES PRICE OPTIONS ON EXPIRATION --------------
NAME GRANTED(1) IN 1996 PER SHARE DATE OF GRANT DATE 5%($) 10%($)
---- ---------- ---------- --------- ------------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry R. Nothhaft....... -- -- -- -- -- -- --
John K. Peters.......... -- -- -- -- -- -- --
Michael F. Anthofer..... 33,333(1) 5.9% $3.75 1/11/2006 78,611 199,216
10,000(2) 1.8 $3.75 $4.80 12/31/2006 40,687 87,000
George D. Carr.......... 3,333(1) 0.6 $3.75 2/21/2006 7,861 19,922
3,333(2) 0.6 $3.75 $4.80 12/31/2006 13,561 28,997
Scott G. Eagle.......... 30,000(1) 5.3 $3.75 2/21/2006 70,750 179,296
</TABLE>
Option Grants During 1996. The following table sets forth for each of the
Named Officers certain information concerning stock options granted during
1996.
- --------
(1) Options vest with respect to 25% of the shares on the first anniversary
date of grant and the remaining 75% vests monthly over the succeeding
three years.
(2) Potential Realizable Value is based on the assumption that the Common
Stock of the Company appreciates at the annual rate shown (compounded
annually) from the date of grant until the expiration of the option term.
These numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.
Aggregate Option Exercises in 1996 and Year-End Option Values. The following
table sets forth for each of the Named Officers certain information concerning
the number of shares subject to both exercisable and unexercisable
51
<PAGE>
stock options as of December 31, 1996. Also reported are values for "in-the-
money" options that represent the positive spread between the respective
exercise prices of outstanding options and the fair market value of the
Company's Common Stock as of December 31, 1996. No Named Officer exercised
options during 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT 12/31/96(#) 12/31/96($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Henry R. Nothhaft........... 73,210 76,124 76,871 79,930
John K. Peters.............. 59,832 67,101 62,824 70,456
Michael F. Anthofer......... -- 43,333 -- 45,500
George D. Carr.............. 2,917 13,750 3,063 14,438
Scott G. Eagle.............. -- 30,000 -- 31,500
</TABLE>
- --------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1996 ($4.80 per
share) and the exercise price of the Named Officer's option.
EMPLOYEE STOCK PLANS
1995 Stock Incentive Plan for Employees and Consultants. The Company's 1995
Stock Incentive Plan for Employees and Consultants (the "1995 Plan") provides
for the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
for the granting to employees and consultants of nonstatutory stock options,
stock appreciation rights ("SARs") and restricted stock awards ("RSAs"). No
SARs or RSAs have been granted under the 1995 Plan. The 1995 Plan was approved
by the Board of Directors in September 1995 and Stockholders in September
1995, and an amendment decreasing the number of shares thereunder from 840,000
to 762,600 was approved by the Board of Directors in February 1996. The 1995
Plan was terminated effective October 4, 1996, and no further grants are being
made thereunder except to the extent that an exchange of options under the
Company's 1993 Incentive Stock Option Plan for options under the 1995 Plan,
which exchange was begun in October 1995, is continuing and has not yet been
completed. A total of 762,600 shares of Common Stock are reserved for issuance
pursuant to the 1995 Plan. As of May 15, 1997, options to purchase 344,952
shares of Common Stock at a weighted exercise price of $5.55 per share were
outstanding.
The 1995 Plan is administered by a committee of the Board of Directors,
which committee is required, once the Company's Common Stock becomes publicly
traded, to be constituted to comply with Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended, and applicable laws. The
administrator has the power to determine the terms of the options granted,
including the exercise price, the number of shares subject to the option and
the exercisability thereof, and the form of consideration payable upon
exercise. Options granted under the 1995 Plan are not generally transferable
by the optionee, and each option is exercisable during the lifetime of the
optionee only by such optionee. Incentive stock options granted under the 1995
Plan must generally be exercised within three months of the end of an
optionee's status as an employee or consultant of the Company, or within 12
months after such optionee's termination by death or disability, but in no
event later than the expiration of the option's term, which may not exceed ten
years. The exercise price of all options granted under the 1995 Plan must be
at least equal to the fair market value of the Common Stock on the date of
grant. With respect to any participant who owns stock possessing more than 10%
of the voting power of all classes of the Company's outstanding capital stock,
the exercise price of any option must equal at least 110% of the fair market
value on the grant date and the term of the option must not exceed five years.
The term of all other options granted under the 1995 Plan may not exceed 10
years.
The 1995 Plan provides that in the event of a recapitalization, stock split,
stock dividend, combination or reclassification or other increase or decrease
in the number of issued shares of Common Stock without consideration, the
number of shares subject to each outstanding stock option, as well as the
exercise price are appropriately adjusted as determined by the Committee.
Amended and Restated 1996 Stock Plan. The Company's Amended and Restated
1996 Stock Plan (the "Restated 1996 Plan") provides for the granting to
employees of incentive stock options within the meaning of Section 422 of
52
<PAGE>
the Code, and for the granting to employees, directors and consultants of
nonstatutory stock options and stock purchase rights ("Rights"). The 1996 Plan
was initially approved by the Board of Directors effective as of December
1996. It was amended and restated in May 1997 and will be presented to the
Stockholders for their approval at the 1997 annual meeting. Unless terminated
sooner, the Restated 1996 Plan will terminate automatically in December 2006.
A total of 793,333 shares of Common Stock are currently reserved for issuance
pursuant to the Restated 1996 Plan. As of May 15, 1997, options to purchase
595,580 shares of Common Stock at a weighted average exercise price of $6.75
per share were outstanding, and 2,966,295 shares of Common Stock remained
available for future grant under the Restated 1996 Stock Plan.
The Restated 1996 Plan may be administered by a committee of the Board of
Directors constituted to comply with applicable laws (the "Committee") or by
the Board itself. The Board or Committee (the "Administrator") has the power
to determine the terms of the options or Rights granted, including the
exercise price, the number of shares subject to each option or Right, the
exercisability thereof, or any vesting acceleration or waiver of forfeiture
conditions. The Administrator may determine the form of payment upon exercise,
including cash, check, promissory note, other shares, cashless exercise or a
combination of the foregoing. The Board has the authority to amend, suspend or
terminate the Restated 1996 Plan, provided that no such action may impair the
rights of any optionee or Right holder without that person's consent.
Options and Rights granted under the Restated 1996 Plan are not generally
transferable by the optionee or Right holder other than by will or the laws of
descent and distribution, and each option and Right is exercisable during the
lifetime of the optionee or Right holder only by such optionee or Right
holder. The form of option agreement currently in use provides that options
generally must be exercised within 90 days of the end of optionee's status as
an employee, director or consultant of the Company. Under the Plan, options
must be exercised within twelve months after such optionee's termination by
death or disability, but in no event later than the expiration of the option's
term. In the case of Rights, unless the Administrator determines otherwise,
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
disability). The purchase price for shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator but in no case more slowly than 20% per year over five years.
Generally, options vest 25% after one year and 1/36 per month thereafter. The
exercise price of all incentive stock options granted under the Restated 1996
Plan must be at least equal to the fair market value of the Common Stock on
the date of grant. The exercise price of nonstatutory stock options and Rights
must at least be equal to 85% of the fair market value of the Common Stock on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of the Company's outstanding
capital stock, the exercise price of any incentive or nonstatutory stock
option granted must equal at least 110% of the fair market value on the grant
date. The term of an incentive stock option granted to such a 10% Stockholder
must not exceed five years. The term of other options granted under the
Restated 1996 Plan may not exceed ten years.
The Restated 1996 Plan provides that in the event of a merger of the Company
with or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option shall be
assumed or an equivalent option substituted by the successor corporation. If
the outstanding options are not assumed or substituted as described in the
preceding sentence, the Administrator shall provide for the optionee or Right
holder to have the right to exercise the option or Right as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. If the Administrator makes an option or Right exercisable in full
in the event of a merger or sale of assets, the Administrator shall notify the
optionee or Right holder that the option or Right shall be fully exercisable
for a period of fifteen days from the date of such notice, and the option or
Right will terminate upon the expiration of such period. The forms of option
agreement and restricted stock purchase agreement currently in use provide for
a 180-day lockup of the optionee's or Right holder's shares in the event of
the Company's initial public offering. The option exercise notice and the
restricted stock purchase agreement also grant the Company a right of first
refusal (prior to the initial public offering) on the sale or transfer of any
shares purchased pursuant to an option or Right, other than transfers by gift,
operation of law or certain family transfers.
53
<PAGE>
1997 Stock Plan. The Company's 1997 Stock Plan (the "1997 Plan") provides
for the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), and for the granting to employees, directors and consultants
of nonstatutory stock options and stock purchase rights ("Rights"). The 1997
Plan will be presented to the Board of Directors and to the stockholders in
June 1997. Unless terminated sooner, the 1997 Plan will terminate
automatically in 2007. A total of 1,500,000 shares of Common Stock are
currently reserved for issuance pursuant to the 1997 Plan.
The 1997 Plan may be administered by a committee of the Board of Directors
(the "Committee") or by the Board itself. In the case of options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code, the Committee shall consist of two or more "outside
directors" within the meaning of Section 162(m) of the Code. The Board or
Committee (the "Administrator") has the power to determine the terms of the
options or Rights granted, including the exercise price, the number of shares
subject to each option or Right, the exercisability thereof, and the form of
consideration payable upon such exercise. In addition, the Administrator has
the authority to amend, suspend or terminate the 1997 Plan, provided that no
such action may affect any share of Common Stock previously issued and sold or
any option previously granted under the 1997 Plan.
Options and Rights granted under the 1997 Plan are not generally
transferable by the optionee or Right holder, and each option and Right is
exercisable during the lifetime of the optionee or Right holder only by such
optionee or Right holder. Options granted under the 1997 Plan must generally
be exercised within three months of the end of optionee's status as an
employee, director or consultant of the Company, or within twelve months after
such optionee's termination by death or disability, but in no event later than
the expiration of the option's ten-year term. In the case of Rights, unless
the Administrator determines otherwise, the restricted stock purchase
agreement shall grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the purchaser's employment with the
Company for any reason (including death or disability). The purchase price for
shares repurchased pursuant to the restricted stock purchase agreement shall
be the original price paid by the purchaser and may be paid by cancellation of
any indebtedness of the purchaser to the Company. The repurchase option shall
lapse at a rate determined by the Administrator. The exercise price of all
incentive stock options granted under the 1997 Plan must be at least equal to
the fair market value of the Common Stock on the date of grant. The exercise
price of nonstatutory stock options and Rights granted under the 1997 Plan is
determined by the Administrator, but with respect to nonstatutory stock
options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Code, the exercise price must at least be
equal to the fair market value of the Common Stock on the date of grant. With
respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of the Company's outstanding capital stock, the
exercise price of any incentive stock option granted must equal at least 110%
of the fair market value on the grant date and the term of such incentive
stock option must not exceed five years. The term of other incentive stock
options granted under the 1997 Plan may not exceed ten years.
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets
or a like transaction involving the Company, each option shall be assumed or
an equivalent option substituted by the successor corporation. If the
outstanding options are not assumed or substituted as described in the
preceding sentence, the Administrator shall provide for the optionee or Right
holder to have the right to exercise the option or Right as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. If the Administrator makes an option or Right exercisable in full
in the event of a merger or sale of assets, the Administrator shall notify the
optionee or Right holder that the option or Right shall be fully exercisable
for a period of fifteen days from the date of such notice, and the option or
Right will terminate upon the expiration of such period.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the "1997 Purchase Plan") will be presented to the Board of
Directors and to the stockholders in June 1997. A total of 500,000 shares of
Common Stock has been reserved for issuance under the 1997 Purchase Plan. The
1997 Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, consists of 24-month offering periods beginning on the
first trading day, respectively, except for the first such offering period,
which commences on the first trading day on or after the closing of the
Company's initial public offering and ends on the last trading day. Each
offering
54
<PAGE>
period contains four six-month purchase periods. To the extent permitted by
applicable laws, regulations and stock exchange rules, if the fair market
value of the Common Stock on any exercise date in an offering period is lower
than it was on the enrollment date of such offering period, then all
participants in that offering period will be automatically withdrawn from such
offering period after exercise and re-enrolled in the immediately following
offering period. The 1997 Purchase Plan is administered by the Board of
Directors or by a committee appointed by the Board. Employees are eligible to
participate if they are customarily employed by the Company or any designated
subsidiary for at least 20 hours per week and more than five months in any
calendar year. The 1997 Purchase Plan permits eligible employees to purchase
Common Stock through payroll deductions of up to 10% of an employee's
compensation (excluding overtime, shift premium, and other bonuses and
incentive compensation), up to a maximum of $25,000 for all offering periods
ending within the same calendar year. The price of stock purchased under the
1997 Purchase Plan is 85% of the lower of the fair market value of the Common
Stock at the beginning of the offering period or at the end of the current
purchase period. Employees may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with the
Company.
Rights granted under the 1997 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1997 Purchase Plan. The 1997 Purchase Plan
provides that, in the event of a merger of the Company with or into another
corporation or a sale of substantially all of the Company's assets, each
outstanding option shall be assumed or an equivalent option shall be
substituted for it, or the Board of Directors or its committee shall shorten
the purchase and offering periods then in progress (so that employees' rights
to purchase stock under the Plan are exercised prior to the merger or sale of
assets). The 1997 Purchase Plan will terminate in 2007. The Board of Directors
has the authority to amend or terminate the 1997 Purchase Plan, except that no
such action may adversely affect any outstanding rights to purchase stock
under the 1997 Purchase Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the current members of the Compensation Committee is an executive
officer of the Company.
55
<PAGE>
CERTAIN TRANSACTIONS
PREFERRED STOCK ISSUANCES
The Company has sold shares of its Preferred Stock in private financings
from April 1995 through April 1997 as follows (all share amounts set forth in
this "Certain Transactions" section reflect the one-for-15 reverse stock split
of the Company's Common Stock and Preferred Stock which will occur prior to
the closing of the offering but do not reflect the conversion of outstanding
shares of Preferred Stock into shares of Common Stock that will occur
automatically immediately prior to the closing of the offering): 909,364
shares of Series A Preferred Stock at an effective price of $11.00 per share;
433,638 shares of Series B Preferred Stock at an effective price of $11.00 per
share; 1,031,146 shares of Series C Preferred Stock at an effective price of
$27.30 per share; and 2,933,252 shares of Series D Preferred Stock at an
effective price of $20.40 per share.
<TABLE>
<CAPTION>
DIRECTORS, EXECUTIVE SHARES OF SHARES OF SHARES OF SHARES OF
OFFICERS AND COMMON SERIES A SERIES B SHARES OF SERIES SERIES D
5% STOCKHOLDERS STOCK PREFERRED PREFERRED C PREFERRED PREFERRED WARRANTS
-------------------- --------- --------- --------- ---------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
The Goldman Sachs Group,
L.P.(1)................ 167,249 454,682 216,819 136,964 14,706 57,595
Kleiner Perkins Caufield
& Byers entities(2).... 167,249 454,682 216,819 -- 14,706 57,595
TMI Telemedia
International,
Ltd.(3)................ -- -- -- -- 1,184,642 325,786
SOFTBANK Holdings(4).... -- -- -- -- 980,393 --
Racal Data Group(5)..... -- -- -- -- 490,197 491,631
Henry R. Nothhaft(6).... -- -- -- -- -- 4,902
John Peters(7).......... -- -- -- -- -- 2,451
</TABLE>
- --------
(1) Consists of securities held of record by GS Capital Partners, L.P. See
"Principal Stockholders." Includes 90,938 shares of Common Stock issued
upon exercise of warrants in April 1997 at an exercise price of $6.60 per
share, 33,344 shares of Series B Preferred Stock issued upon exercise of
warrants in April 1997 at an exercise price of $6.60 per share, and 14,706
shares of Series D Preferred Stock issued upon exercise of warrants in
April 1997 at an exercise price of $12.24 per share. GS Capital Partners
L.P. exercised such warrants at a discounted exercise price in
consideration of its early exercise. Terence M. O'Toole, a Director of the
Company, is a Managing Director of Goldman, Sachs & Co., the investment
manager for GS Capital Partners, L.P. See "Principal Stockholders."
(2) Vinod Khosla, a director of the Company, is a general partner of KPCB VII
Associates, the general partner of Kleiner Perkins Caufield & Byers VII
and KPCB VII Information Sciences Zaibatsu Fund II. Includes 90,938 shares
of Common Stock issued upon exercise of warrants in April 1997 at an
exercise price of $6.60 per share 33,344 shares of Series B Preferred
Stock issued upon exercise of warrants in April 1997 at an exercise price
of $6.60 per share, and 14,706 shares of Series D Preferred Stock issued
upon exercise of warrants in April 1997 at an exercise price of $12.24 per
share. The Kleiner Entities exercised such warrants at a discounted
exercise price in consideration of their early exercise.
(3) Franco Regis, a director of the Company, is Director of Business
Development and Strategic Planning of Telecom Italia, SpA, the parent of
TMI Telemedia International, Ltd. Includes 204,248 shares of Series D
Preferred issued upon exercise of a warrant in April 1997 at an exercise
price of $12.24 per share. TMI exercised such warrants at a discounted
exercise price in consideration of its early exercise.
(4) Gary Reischel, a director of the Company, is Senior Vice President of
SOFTBANK Holdings, Inc.
(5) L. Rod Manning, a director of the Company, is the President and General
Counsel of The Racal Corporation, the parent of Racal Datacom, Inc.
(6) Henry R. Nothhaft is the President of the Company. Represents 4,902 shares
of Series D Preferred Stock issuable upon exercise of a warrant at an
exercise price of $20.40 per share. The warrant was granted to Mr.
Nothhaft in July 1996 in consideration of a bridge loan in the amount of
$100,000. The principal and interest on such bridge loan was repaid in
full.
(7) John Peters is the Executive Vice President and General Manager Network
Operations of the Company. Represents 2,451 shares of Series D Preferred
Stock issuable upon exercise of a warrant at an exercise price of $20.40
per share. The warrant was granted to Mr. Peters in July 1996 in
consideration of a bridge loan in the amount of $50,000. The principal and
interest on such bridge loan was repaid in full.
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<PAGE>
The Preferred Stock described above will convert into Common Stock upon the
closing of this Offering. Holders of the Preferred Stock are entitled to
certain registration rights with respect to the Common Stock issued or
issuable upon conversion thereof. In addition, GSCP, the Kleiner Entities and
Marc Collins-Rector are entitled to certain registration rights with respect
to shares of Common Stock held by them, and employees of Critical
Technologies, Inc. have certain piggyback registration rights with respect to
shares issuable upon exercise of certain options issued to them. See
"Description of Capital Stock--Registration Rights."
SERIES A AGREEMENT
The Preferred Stock and Warrant Purchase Agreement, dated April 20, 1995, as
amended (the "Series A Agreement") by which the Registrant sold Series A
Preferred Stock and warrants to purchase Common Stock to GSCP, Kleiner Perkins
Caufield & Byers VII and KPCB VII Founders Fund for an aggregate consideration
of approximately $10.0 million, provides that as long as GSCP and its
affiliates beneficially own five percent or more of the outstanding Common
Stock of the Registrant, Goldman, Sachs & Co. or any of its affiliates have
the right to perform all investment banking services for the Registrant on
customary terms consistent with an arms'-length transaction. The Series A
Agreement, further obligates the Registrant to complete by June 30, 1997, a
rescission offer with respect to all Common Stock and Common Stock equivalents
issued prior to April 20, 1995, and to indemnify the GSCP and the Kleiner
Entities against "rescission losses," in excess of the estimated amount of
rescission losses described in the Series A Agreement.
BRIDGE LOANS
In connection with the alliance between Intuit and the Company, GSCP and the
Kleiner Entities made bridge loans totaling $2 million to the Company on
October 16, 1995, which were rolled over into bridge loans totaling $4 million
on November 6, 1995. On November 29, 1995, GSCP made a further bridge loan of
$3 million. In consideration of these loans, GSCP and the Kleiner Entities
received warrants to purchase 181,876 shares of Series B Preferred Stock at an
exercise price of $11.00 per share. Effective as of December 20, 1995, GSCP
and the Kleiner Entities converted the principal and interest due under their
$2 million promissory notes into a total of 366,947 shares of Series B
Preferred Stock at a price of $11.00 per share. In addition, effective as of
January 1996, GSCP converted the entire amount of principal and interest on
its $3 million bridge note into 123,297 Series C Shares as an exercise price
of $6.60 per share.
On July 31, 1996, the Company closed bridge loans from GSCP and KPCB for
$300,000 each, evidenced by convertible promissory notes dated July 29, 1996.
The Company issued GSCP and KPCB each a warrant dated July 31, 1996, to
purchase 14,706 shares of Series D Preferred Stock at an exercise price of
$20.40 per share. The loans were repaid on August 21, 1996. On April 4, 1997,
the Company and GSCP and KPCB entered warrant amendment agreements reducing
the exercise price of the warrants to $12.24 per share, and the warrants were
exercised.
On July 31, 1996, the Company closed bridge loans from Henry Nothhaft, the
Company's President, Chief Executive Officer and a director, and John Peters,
the Company's Executive Vice President and President, Network Services
Division, for $100,000 and $50,000, respectively. The loans were evidenced by
promissory notes dated July 29, 1996. The Company issued Mr. Nothhaft and Mr.
Peters warrants dated July 31, 1996, to purchase 4,902 shares and 2,451
shares, respectively, of Series D Preferred Stock at an exercise price of
$20.40 per share. The loans were repaid on August 21, 1996.
COMMISSIONS
The Company paid commissions totaling $350,000 to Goldman, Sachs & Co. in
August 1996 in connection with the sale of shares of Series D Preferred Stock.
Terence M. O'Toole, a Director of the Company, is a Managing Director of
Goldman, Sachs & Co.
WARRANT EXERCISES
Effective as of April 4, 1997, the Company entered into warrant amendment
agreements with TMI, GSCP, and the Kleiner Entities to reduce the exercise
price of certain of their warrants in return for the immediate exercise of
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such warrants. The exercise price of warrants for 124,282 shares of Class A
Common Stock and 66,688 shares of Series B Preferred Stock held by GSCP and
the Kleiner Entities was reduced from $11.00 to $6.60 per share. The exercise
price of warrants for 233,660 shares of Series D Preferred Stock held by GSCP,
KPCB and TMI was reduced from $20.40 per share to $12.24 per share. Also, in
connection with the reduction of the exercise price of the GSCP and Kleiner
Entities' Common Stock warrants, the exercise price of Intuit's $1.5 million
warrant was similarly reduced to $6.60 per share, and the expiration date was
extended to December 31, 2000.
RACAL AND TRANSACTION
Pursuant to a master lease agreement between the Company and Racal-Datacom,
Inc. ("Racal"), effective March 31, 1995, the Company has installed networking
equipment under lease financing. The terms of the leases under the master
agreement are 48 months or 60 months, depending on the equipment. In 1996, the
Company paid Racal approximately $8.3 million in lease payments and related
charges. As of December 31, 1996, the current portion of the Company's capital
lease obligations to Racal totaled $10.2 million, and the noncurrent portion
totaled $29.2 million. As security for the lease financing, Racal has a
security interest in all leased equipment.
AMPM, INC. TRANSACTIONS
Donald C. Schutt, Vice President of Michigan Operations, for the Company, is
a majority stockholder of AMPM, Inc., an advertising agency. The Company
incurred marketing fees payable to AMPM, Inc. totaling $2.5 million in 1996.
The Company believes that the fees charged by AMPM for such services are
competitive with those of similar advertising agencies.
EMPLOYMENT AND TERMINATION AGREEMENTS
In February 1996, the Company entered into a termination of services and
indemnification agreement with Marc Collins-Rector and Chad Shackley (the
"Founders"). Pursuant to such agreement Mr. Collins-Rector agreed to resign
from the Board of Directors of the Company and the Founders agreed to resign
as Company employees and to enter into lock-up agreements in the event of the
Company's initial public offering. If asked to do so by the Founders, the
Company agreed it will file a registration statement on Form S-8 or Form S-3
by certain deadlines after it becomes eligible to do so, with respect to
certain shares issuable upon exercise of the Founders' options.
Also in February 1996, the Company entered into an agreement with Randy
Maslow wherein Mr. Maslow agreed to serve as an advisor to the Board of
Directors through October 31, 1996. Pursuant to such agreement, Mr. Maslow
agreed to resign from the Board upon the effectiveness of an initial public
offering. If asked to do so by Mr. Maslow, the Company agreed it will file a
registration statement on Form S-8 or Form S-3 as soon as practicable after it
becomes eligible to do so, with respect to certain shares issuable upon
exercise of Mr. Maslow's options.
OPTIONS OF MANAGEMENT AND DIRECTORS
In August 1996, the Board of Directors amended the vesting provisions of
options to purchase 14,000 shares issued to Henry Nothhaft, President, Chief
Executive Officer and a director of the Company, on October 31, 1995, and an
option to purchase 11,900 shares issued to John Peters, Executive Vice
President and General Manager, Network Services Division, on October 31, 1995,
so the options would fully vest as of the closing date of the sale of at least
$29 million of Series D Preferred Stock of the Company, which occurred on
August 21, 1996.
In August 1996, the Company exchanged four options previously issued to
Randy Maslow, a director of the Company, for new options exercisable for an
aggregate of 46,673 shares of Class A Common Stock at $3.75 per share. The
four-year vesting schedule accelerates so that all shares vest immediately in
the event of an initial public offering or a change of control. The options
may be exercised through their expiration date regardless of when Mr. Maslow
ceases being an employee or consultant. Mr. Maslow's employment with the
Company ended on October 31, 1996.
In May 1997, the Company amended the terms of options to purchase 53,341
shares of Common Stock previously issued to Donald C. Schutt, an executive
officer of the Company, at an average exercise price of $20.34. The exercise
price was decreased to $3.75 per share and conditions precedent to vesting of
such options was removed.
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In May 1997, the Company amended options to purchase 26,666 shares of Common
Stock previously issued to Marc Collins-Rector, a founder and 5% shareholder
of the Company's Common Stock, to remove vesting conditions.
All future transactions among the Company and its officers, directors,
principal stockholders and their affiliates will be approved by a majority of
the Board of Directors, including a majority of the independent and
disinterested directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock on a fully diluted basis as of March
31, 1997, and as adjusted to reflect the sale of the 3,000,000 shares of
Common Stock offered hereby and an assumed 1,363,636 shares to be sold in the
Direct Placements, by: (i) each person who is known by the Company to own
beneficially more than 5% of the Common Stock; (ii) each director and Named
Officer of the Company; and (iii) all directors and executive officers of the
Company as a group. For purposes of the following table, Common Stock issuable
upon exercise of all outstanding options and warrants (including unvested
option and warrants) are considered outstanding. In addition, Common Stock
issuable upon conversion of all outstanding Preferred Stock and upon
conversion of all Preferred Stock issuable upon exercise of outstanding
warrants are considered outstanding. Except as otherwise noted, the persons
named in the table have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
SHARES PERCENT BENEFICIALLY OWNED(1)
BENEFICIALLY ------------------------------
NAMES AND ADDRESSES OWNED BEFORE OFFERING AFTER OFFERING
------------------- ------------ --------------- --------------
<S> <C> <C> <C>
TMI Telemedia International,
Ltd.(2).......................... 1,510,428 19.7% 12.6%
Viale del Campo Boario, 56D
00153 Rome, Italy
The Goldman Sachs Group, L.P.(3).. 1,048,011 14.2 8.9
85 Broad Street
New York, NY 10004
Racal-Datacom, Inc.(4)............ 981,828 12.5 8.1
1601 North Harrison Parkway
Sunrise, FL 333233-2899
Yoshitaka Kitao SOFTBANK Holdings,
Inc. ............................ 980,393 13.4 8.4
10 Langley Road, Suite 403
Newton Center, MA 02159
Kleiner Perkins Caufield & Byers
Entities(5)...................... 911,051 12.3 7.7
2750 Sand Hill Road
Menlo Park, CA 94025
Marc Collins-Rector(6)............ 649,507 8.8 5.5
2000 Benedict Canyon
Beverly Hills, CA 90210
Henry R. Nothhaft(7).............. 100,667 1.4 *
John K. Peters(8)................. 81,455 1.1 *
Michael F. Anthofer(9)............ 13,195 * *
Scott G. Eagle(10)................ 11,250 * *
George D. Carr(11)................ 5,834 * *
Franco Regis(12).................. 1,510,428 19.7 12.6
Terence M. O'Toole(13)............ -- -- --
L. Rod Manning(14)................ 981,828 12.5 8.1
Gary E. Rieschel(15).............. 980,393 13.4 8.4
Vinod Khosla(16).................. 911,051 12.3 7.3
Randy Maslow(17).................. 46,674 * *
All current executive officers and
directors as a group
(16 persons)(18)................. 4,712,065 55.2% 36.5%
</TABLE>
- -------
* Less than 1%.
(1) Applicable percentage ownership after this offering reflects the issuance
of 3,000,000 shares in the offering and an assumed 1,363,636 shares in
the Direct Placements. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission, based on
factors including voting and investment power with respect to shares,
subject to the applicable community property laws. Shares of Common Stock
subject to options or warrants currently exercisable, or exercisable by
August 31, 1997, 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.
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(2) Includes warrants to purchase 325,786 shares of stock.
(3) Consists of securities held of record by GS Capital Partners, L.P., an
investment partnership, of which affiliates of The Goldman Sachs Group,
L.P. ("GS Group") are the general partner or investment manager. GS Group
disclaims beneficial ownership of the shares owned by GS Capital
Partners, L.P. to the extent attributable to partnership interests
therein held by persons other than GS Group and its affiliates. GS
Capital Partners, L.P. shares voting and investment power with certain of
its affiliates. Includes warrants to purchase 57,595 shares of stock.
(4) Includes warrants to purchase 491,631 shares of stock.
(5) Includes shares held by Kleiner Perkins Caufield & Byers VII, KPCB
Information Sciences Zaibatsu Fund, KCPB Information Sciences Zaibatsu
Fund II and KCPB VII Founders Fund (collectively, the "KCPB Entities").
Also includes warrants to purchase 57,595 shares held by the KCPB
Entities.
(6) Includes 80,007 shares of Common Stock issuable upon exercise of
outstanding stock options.
(7) Includes 100,667 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants.
(8) Includes 81,455 shares of Common Stock issuable upon exercise of
outstanding stock options and (ii) warrants.
(9) Includes 13,195 shares of Common Stock issuable upon exercise of
outstanding stock options.
(10) Includes 11,250 shares of Common Stock issuable upon exercise of
outstanding stock options.
(11) Includes 5,834 shares of Common Stock issuable upon exercise of
outstanding stock options.
(12) Includes 1,510,428 shares held by TMI Telemedia International, Ltd. Mr.
Regis is the Director of Business Development and Strategic Planning of
Telecom Italia, S.p.A., the parent of TMI Telemedia International, Ltd.
See note (2). Mr. Regis disclaims beneficial ownership of such shares.
(13) Excludes 1,048,011 shares which may be deemed to be beneficially owned by
the Goldman Sachs Group, L.P. See note (3). Mr. Terence M. O'Toole, a
director of the Company, serves on the Board of Directors as a
representative of GS Capital Partners, L.P., pursuant to a contractual
arrangement. Mr. O'Toole is a Managing Director of Goldman, Sachs & Co.,
the investment manager for GS Capital Partners, L.P. Mr. O'Toole
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein.
(14) Includes 981,828 shares held by Racal Datacom, Inc. See note (4). Mr.
Manning is the President and General Counsel of The Racal Corporation,
the parent of Racal-Datacom, Inc. Mr. Manning disclaims beneficial
ownership of such shares.
(15) Represents 980,393 shares held by Yoshitaka Kitao SOFTBANK Ventures, Inc.
See note (5). Mr. Rieschel is a Senior Vice President at SOFTBANK
Holdings, Inc. Mr. Rieschel disclaims beneficial ownership of such
shares.
(16) Represents shares beneficially owned by the KCPB Entities. Mr. Khosla is
an affiliate of such entities. Mr. Khosla disclaims beneficial ownership
of such shares, except to the extent of his pecuniary interest therein.
(17) Includes 46,674 shares of Common Stock issuable upon exercise of
outstanding stock options.
(18) Includes shares of Common Stock issuable upon exercise of outstanding
options and warrants, and shares beneficially owned by entities
associated with Messrs. Regis, Manning, Rieschel and Khosla, as to which
they disclaim beneficial ownership. See Notes (7)-(17).
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DESCRIPTION OF CAPITAL STOCK
Upon the completion of the offering and the Direct Placements, the
outstanding Common Stock of the Company will consist of 11,700,769 shares,
$0.001 par value. At March 31, 1997, there were 6,854,904 shares of Common
Stock outstanding held of record by approximately 340 stockholders.
The following description of the Company's capital stock does not purport to
be complete and is subject to and qualified in its entirety by the Company's
Amended and Restated Certificate of Incorporation and Bylaws and by the
provisions of applicable Delaware law.
The Amended and Restate Certificate of Incorporation and Bylaws contain
certain provisions that are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and which may have
the effect of delaying, deferring, or preventing a future takeover or change
in control of the Company unless such takeover or change in control is
approved by the Board of Directors.
COMMON STOCK
A total of 100,000,000 shares of Common Stock of the Company will be
authorized upon the closing of the offering. Holders of Common Stock do not
have cumulative voting rights, and, therefore, holders of a majority of the
shares voting for the election of directors can elect all of the directors. In
such event, the holders of the remaining shares will not be able to elect any
directors.
Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between the Company and its debtholders. See "Dividend Policies." The Company
has never declared or paid cash dividends on its capital stock, expects to
retain future earnings, if any, for use in the operation and expansion of its
business, and does not anticipate paying any cash dividends in the foreseeable
future. In the event of the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets legally available for distribution after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding.
The Common Stock has no preemptive, redemption or subscription rights. The
outstanding shares of Common Stock are, and the shares offered by the Company
will be, when issued and paid for, fully paid and nonassessable.
PREFERRED STOCK
Effective upon the closing of the offering, the Board of Directors has the
authority, without further action by the Stockholders, to issue up to
10,000,000 shares of Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any
series or the designation of such series, without any further vote or action
by the Stockholders. The issuance of Preferred Stock could adversely affect
the voting power of holders of Common Stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control of
the Company. The Company has no present plan to issue any shares of Preferred
Stock.
WARRANTS
As of April 30, 1997, the following warrants were outstanding:
(i) Warrants to purchase 44,935 shares of Common Stock at an exercise
price of $3.75 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on September 1, 1998.
(ii) Warrants to purchase 5,000 shares of Common Stock exercisable
through February 15, 2000, at an exercise price equal to the lowest of (a)
$30 per share, (b) the lowest price per share of which the Company may sell
shares of its Common Stock (or securities convertible into or exchangeable
for shares of its Common Stock)
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on or after February 15, 1995, and (c) the lowest price at which the holder
of a warrant, option or other Company security entitling the holder to
purchase shares of the Company's Common Stock may purchase such shares on
or after February 15, 1995 (currently $3.75).
(iii) Warrants to purchase 17,453 shares of Common Stock at an exercise
price of $10.82 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on July 20, 1998.
(iv) Warrants to purchase 115,188 shares of Series B Preferred Stock at
an exercise price of $11.00 per share (subject to adjustment for stock
splits, stock dividends and the like), which expire on December 11, 1998.
(v) Warrants to purchase 227,273 shares of Series B Preferred Stock at an
exercise price of Series B Preferred Stock at an exercise price of $6.60
per share (subject to adjustment for stock splits, stock dividends and the
like), which expire on December 31, 2000.
(vi) Warrants to purchase 128,205 shares of Series B Preferred Stock at
an exercise price of $27.30 per share (subject to adjustment for stock
splits, stock dividends and the like), which expire on December 31, 2000.
(vii) Warrants to purchase 36,765 shares of Series D Preferred Stock at
an exercise price of $20.40 per share (subject to adjustment for stock
splits, stock dividends and the like), which expires on June 6, 1999.
Warrants to purchase 34,314 shares of Series D Preferred Stock at an
exercise price of $20.40 per share (subject to adjustment for stock splits,
stock dividends and the like), which expire on July 31, 1999. Warrant to
purchase 149,108 shares of Series D Preferred Stock at an exercise price of
$20.40 per share (subject to adjustment for stock splits, stock dividends
and the like), which expires on August 21, 1999. Warrants to purchase
441,695 shares of Series D at an exercise price of $20.40 per share
(subject to adjustment for stock splits, stock dividends and the like),
which expire on October 31, 1999. Warrant to purchase 176,678 shares of
Series D Preferred Stock at an exercise price of $20.40 per share (subject
to adjustment for stock splits, stock dividends and the like), which
expires on March 5, 2000.
REGISTRATION RIGHTS
Pursuant to the agreement between the Company and holders of approximately
5,954,254 shares of Common Stock the "Holders"), the Holders are entitled to
certain rights with respect to the registration of such shares under the
Securities Act. If the Company proposes to register any of its securities
under the Securities Act, either for its own account or for the account of
other security Holders exercising registration rights, such Holders are
entitled to notice of such registration and are entitled to include shares of
such Common Stock therein. Additionally, Holders of the Registrable Securities
are also entitled to certain demand registration rights pursuant to which they
may require the Company to file a registration statement under the Securities
Act at the Company's expense with respect to their shares of Common Stock, and
the Company is required to use its best efforts to effect such registration.
All of these registration rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration and the right of the
Company not to effect a requested registration within six months following an
offering of the Company's securities, including the offering made hereby.
Additionally, pursuant to an agreement with Critical Technologies Inc.
("CTI"), certain employees of CTI who have been granted options to purchase an
aggregate of up to 900,000 shares of the Company's Common Stock are entitled
to certain piggyback registration rights with respect to such shares. Such
rights are subject to the right of the underwriters of an offering to limit
the number of shares included in such registration.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Limitation of Director and Officer Liability
The Company's Certificate of Incorporation and Bylaws contain certain
provisions relating to the limitation of liability and indemnification of
directors and officers. The Company's Certificate of Incorporation provides
that directors of the Company may not be held personally liable to the Company
or its stockholders for monetary damages for a breach of fiduciary duty,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or
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its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii) under
Section 174 of the Delaware General Corporation Law, relating to prohibited
dividends, distributions and repurchases or redemptions of stock, or (iv) for
any transaction from which the director derives an improper personal benefit.
However, such limitation does not limit the availability of non-monetary
relief in any action or proceeding against a director. In addition, the
Company's Certificate of Incorporation and Bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent authorized by
Delaware law.
Classified Board of Directors
Upon completion of this offering, the Company's Certificate of Incorporation
will provide that, so long as the Board of Directors consists of more than two
directors, the Board of Directors will be divided into three classes of
directors serving staggered three-year terms. As a result, one-third of the
Company's Board of Directors will be elected each year.
No Stockholder Action by Written Consent
Upon completion of this offering, the Company's Certificate of Incorporation
will provide that the stockholders can take action only at a duly called
annual or special meeting of Stockholders. Stockholders of the Company will
not be able to take action by written consent in lieu of a meeting. These
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company.
TRANSFER AGENT AND REGISTRAR
ChaseMellon has been appointed as the transfer agent and registrar for the
Company's Common Stock. Its telephone number for such purposes is (212)553-
9730.
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RESCISSION OFFERS
The Company intends to commence approximately 30 days after the
effectiveness of the Offering made hereby, a rescission offer (the "Rescission
Offer") pursuant to a registration statement filed under the Securities Act of
1933, as amended (the "Act") and pursuant to the state securities laws of the
States of Florida, Illinois, Missouri, Ohio and Wisconsin, covering
convertible debentures and Common Stock sold to investors which may have been
sold in violation of the registration requirements of the federal and state
securities laws, which represent an aggregate of 73,089 shares through
December 31, 1996 (the "Rescission Stock"). Because of the frequency and
number of sales, including the number of persons who received offers and who
purchased shares, the private placement exemption under the Act may not have
been available for the Company's prior sales of the Rescission Stock. The
Company will offer to rescind such prior sales by repurchasing the Rescission
Stock at the price per share paid therefor (a range of $3.75 per share to
$30.00 per share) plus interest thereon at the statutory rate as the case may
be from the date of purchase by the purchaser to the expiration of the
Rescission Offer. The Rescission Offer will expire approximately 30 days after
the effectiveness of the registration statement with respect to the Rescission
Stock. Under such Rescission Offer, the Company would be required to make an
aggregate payment of approximately $5.1 million plus the aggregate amount of
interest thereon as described above, if all offerees accept the offer.
Offerees who do not accept the Rescission Offer will, for purposes of
applicable federal and state securities laws, be deemed to hold registered
shares under the Act which will be freely tradeable in the public market as of
the effective date of the registration statement with respect to the
Rescission Stock. The Act does not expressly provide that a Rescission Offer
will terminate a purchaser's right to rescind a sale of stock which was not
registered under the Act as required. Accordingly, should the Rescission Offer
be rejected by any of all offerees, the Company may continue to be
contingently liable under the Act for the purchase price of Rescission Stock
up to an aggregate amount of approximately $5.1 million plus statutory
interest of approximately $1.0 million.
In addition, options issued pursuant to the Company's 1995 Stock Incentive
Plan for Employees and Consultants (the "1995 Plan") and nonplan options for
the purchase of Common Stock were issued to approximately 150 to 200 people in
California in 1995 and 1996 for which the Company was unable to rely on the
exemption provided by Section 25102(f) of the California Corporations Code. In
March 1996, the Company was denied a permit for these issuances by the
California Commissioner of Corporations as a result of the Company's having
had two classes of Common Stock with differing voting rights. In addition, a
smaller number of options were issued to optionees in other states, including
Michigan, Missouri, Virginia and Florida, for which the Company may not have
had available an exemption from qualification. Also, the November 17, 1995,
grant of options for the purchase of 900,000 shares of Common Stock to
employees of Critical Technologies Incorporated was not qualified and may not
have had an exemption available under the blue sky laws of California. The
aforementioned options are potentially subject to rescission, and the Company
intends to include them in its planned Rescission Offer discussed above. Under
such Rescission Offer, the Company will be required to make an aggregate
payment of approximately $556,000.
As of the date hereof, management is not aware of any claims for rescission
against the Company. While the Company will offer to rescind the securities
sales, there are no assurances that the Company will not otherwise be subject
to possible penalties or fines relating to these issuances. The Company
believes the Rescission Offers will provide it with additional meritorious
defenses to any such future claims. See "Risk Factors--Rescission Offers,"
"Shares Eligible for Future Sale" and Note 5 of Notes to the Financial
Statements.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have approximately
11,700,769 shares of Common Stock outstanding, after giving effect to the
automatic conversion of all outstanding shares of Preferred Stock into Common
Stock immediately prior to the closing of this offering and assuming (i) no
exercise of the Underwriters' over-allotment option, and (ii) no exercise of
outstanding options or warrants. Effective upon the consummation of this
offering, assuming no exercise of outstanding options or warrants, the Company
will have outstanding options and warrants to purchase an aggregate of
approximately 2,915,621 shares of Common Stock.
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Of the Common Stock outstanding upon completion of this offering, the
3,000,000 shares of Common Stock sold in this offering will be freely
tradeable without restriction or further registration under the Securities
Act, except for any shares purchased by "affiliates" of the Company, as that
term is defined under the Securities Act and the Regulations promulgated
thereunder (an "Affiliate"). The remaining 8,700,769 shares of Common Stock
held by officers, directors, employees, consultants and other stockholders of
the Company were sold by the Company in reliance on exemptions from the
registration requirements of the Securities Act and are "restricted
securities" within the meaning of Rule 144 under the Securities Act. Any
shares of Common Stock issued upon the exercise of options or warrants held by
any of such persons will constitute restricted securities. Approximately
137,673 of the outstanding shares of Common Stock which are restricted
securities will be eligible for sale in the public market as of the date of
this Prospectus (the "Effective Date") in reliance on Rule 144(k) under the
Securities Act. The remaining 8,563,096 shares of Common Stock held by
existing stockholders are subject to lock-up agreements with the
Representatives and may not be sold or otherwise transferred until 360 days
after the Effective Date without the consent of such underwriter except for
transfers pursuant to gifts or certain partnership distributions and similar
transfers in which the transferee enters into a substantially similar lock-up
agreement. Upon the expiration of the lock-up agreements, all of such locked-
up shares will become eligible for sale 360 days after the Effective Date
subject to the provisions of Rules 144(k), 144 or 701. UBS Securities LLC may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to these lock-up agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially
owned restricted securities for a period of at least one year from the later
of the date such restricted securities were acquired from the Company or the
date they were acquired from an Affiliate, is entitled to sell, within any
three-month period commencing 90 days after the Effective Date, a number of
shares that does not exceed the greater of 1% of the then outstanding shares
of Common Stock (approximately 117,000 shares immediately after this offering)
or the average weekly trading volume in the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain provisions relating to the number and notice of sale and the
availability of current public information about the Company.
Further, under Rule 144(k), if a period of at least two years has elapsed
between the later of the date restricted securities were acquired from the
Company and the date they were acquired from an Affiliate of the Company, a
holder of such restricted securities who is not an Affiliate at the time of
the sale and has not been an Affiliate for at least three months prior to the
sale would be entitled to sell the shares immediately after the Effective Date
without regard to the volume and manner of sale limitations described above.
Any employee, director or consultant to the Company who purchased his or her
shares pursuant to a written compensation plan or contract is entitled to rely
on the resale provisions of Rule 701, which permits non-Affiliates to sell
their Rule 701 shares beginning 90 days after the Effective Date without
having to comply with the volume limitations and other restrictions of Rule
144 and permits Affiliates to sell their Rule 701 shares without having to
comply with the Rule 144 holding period restrictions. As of May 15, 1997,
there were outstanding options to purchase approximately 1,539,007 shares
which under certain circumstances would be available for sale pursuant to Rule
701, subject to the lock-up agreements.
In addition, the Company intends to register shares of Common Stock reserved
for issuance pursuant to its 1993 Incentive Stock Option Plan, 1995 Stock
Incentive Plan for Employees and Consultants, Amended and Restated 1996 Stock
Plan, 1997 Stock Plan and 1997 Employee Stock Purchase Plan following the
closing of this offering. Shares issued under the Executive Stock Option Plan,
Director Stock Plan and Employee Stock Purchase Plan (other than shares issued
to the Affiliates) after the effective date of a registration statement
covering such shares generally may be sold immediately in the public market,
subject to vesting requirements and the lock-up agreements described above.
See "Management--Employee Stock Plans."
Prior to this offering, there has been no public market for the Common Stock
of the Company, and any sale of substantial amounts of Common Stock in the
open market, or the availability of shares for sale, may adversely affect the
market price of the Common Stock and the ability of the Company to raise funds
through equity offerings in the future.
The holders of approximately 5.3 million shares are entitled to certain
registration rights with respect to their shares. See "Description of Capital
Stock--Registration Rights."
66
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom UBS Securities LLC,
Wheat, First Securities, Inc. and Unterberg Harris are acting as
representatives (the "Representatives"), have agreed to purchase from the
Company the following respective number of shares of Common Stock:
<TABLE>
<CAPTION>
TOTAL NUMBER
UNDERWRITERS OF SHARES
------------ ------------
<S> <C>
UBS Securities LLC..............................................
Wheat, First Securities, Inc. ..................................
Unterberg Harris................................................
---------
Total......................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligations is such that they are committed to
purchase all shares of Common Stock offered hereby if any of such shares are
purchased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering
price set forth on the cover page of this Prospectus, and to certain dealers
at such price less a commission not in excess of $ per share. The
Underwriters may allow and such dealers may reallow a concession not in excess
of $ per share to certain other dealers. After the public offering of the
shares of Common Stock, the offering price and other selling terms may be
changed by the Underwriters.
The Representatives have further advised the Company that, pursuant to
Regulation M under the Securities Act, certain persons participating in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Stock on behalf
of the Underwriters for the purpose of fixing or maintaining the price of the
Common Stock. A "syndicate covering transaction" is the bid for or the
purchase of the Common Stock on behalf of the Underwriters to reduce a short
position incurred by the Underwriters in connection with the offering. A
"penalty bid" is an arrangement permitting the Representatives to reclaim the
selling concession otherwise accruing to an Underwriter or syndicate member in
connection with the offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed
by such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
Certain of the Company's current investors have agreed to grant the
Representatives an option to sell up to [ ] shares of Common Stock to such
current investors at a purchase price equal to the initial public offering
price set forth on the cover of this Prospectus (the "Put"). Upon exercise of
the Put, the current investors have agreed to purchase from the
Representatives all of the shares put back to them up to [ ] shares of
Common Stock. The Representatives may exercise the Put, in whole or in part,
for a period of 30 days following the offering.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock to cover over-allotments, if any, at the
public offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions.
67
<PAGE>
To the extent that the Underwriters exercise this option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased
by it shown in the above table bears to the total number of shares of Common
Stock offered hereby. The Company will be obligated, pursuant to the option,
to sell such shares to the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
All officers, directors and significant stockholders of the Company who
beneficially own or have dispositive power over substantially all of the
shares of Common Stock outstanding prior to this offering, have agreed that
they will not, without the prior written consent of the Representatives,
offer, sell, contract to sell, pledge, grant any option to sell or otherwise
dispose of shares of Common Stock or securities convertible, or exchangeable
for, Common Stock, or warrants or other rights to purchase shares of Common
Stock, whether now owned or hereafter acquired, for a period of 360 days after
the date of this Prospectus. The Company has agreed that it will not, without
the prior written consent of lead managing underwriter, offer, sell or
otherwise dispose of any shares of Common Stock, for a period of 360 days
after the date of this Prospectus, except that the Company may grant
additional options and issue stock under its stock option plans and stock
purchase plans or issue shares of Common Stock upon the exercise of
outstanding stock options.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereof.
Concurrently with the closing of the offering, certain strategic investors
have agreed to purchase directly from the Company shares of Common Stock
having an aggregate purchase price of approximately $15.0 million. All of such
shares will be purchased at the Price to Public set forth on the cover page of
this Prospectus. See "Direct Placements."
Prior to this offering, there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined through
negotiations among the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price, in addition to
prevailing market and economic conditions, are certain financial information
of the Company, the history of, and the prospects for, the Company and the
industry in which it competes, an assessment of the Company's management, its
past and present operations, the prospects for, and timing of, future revenues
of the Company, the present stage of the Company's development and the above
factors in relation to market values and various valuation measures of other
companies engaged in activities similar to those of the Company. The initial
public offering price set forth on the cover page of this Prospectus should
not, however, be considered an indication of the actual value of the Common
Stock. Such price is subject to change as a result of market conditions and
other factors. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to this offering at or above the initial offering price.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Certain legal matters in connection with
the Common Stock offered hereby will be passed upon for the Underwriters by
Brobeck, Phleger & Harrison LLP, Palo Alto, California.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996 and
for each of the three years in the period ended December 31, 1996, appearing
in this Prospectus and Registration Statement have been audited by
68
<PAGE>
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission, Washington, D.C. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to such Registration Statement, exhibits and schedules. A
copy of the Registration Statement may be inspected by anyone without charge
at the Commission's principal office, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of all or any part thereof, including any exhibit thereto,
may be obtained from the Commission upon the payment of certain fees
prescribed by the Commission. The Commission maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements certified by its independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
69
<PAGE>
GLOSSARY OF TERMS
56 Kbps.................... Equivalent to a single high-speed telephone
service line; capable of transmitting one voice
call or 56 Kbps of data. Currently in widespread
use by medium and large businesses primarily for
entry level high-speed data and very low-speed
video applications.
ATM........................ Asynchronous Transfer Mode. A low latency, fixed
delay information transfer standard for routing
traffic. The ATM format can be used by many
different information systems, including LANs, to
deliver traffic at varying rates, permitting a
mix of data, voice and video.
Backbone................... A centralized high-speed network that
interconnects smaller, independent networks.
Bandwidth.................. The number of bits of information that can move
through a communications medium in given amount
of time; the capacity of a telecommunications
circuit/network to carry voice, data and video
information. Typically measured in Kbps and Mbps.
Bandwidth from public networks is typically
available to business and residential end-users
in increments from 56 Kbps to T-3.
CIR........................ Committed Information Rate.--The rate, usually
expressed as a particular quantitative amount of
Kbps of Mbps of bandwidth, at which data is
guaranteed to be transmitted through a dedicated
lease line network connection.
CLEC....................... Competitive local exchange carrier. A
telecommunications company that provides an
alternative to a LEC for local transport of
private line and special access
telecommunications services.
E-mail..................... An application that allows a user to send or
receive text messages to or from any other user
with an Internet address, commonly termed an E-
mail address.
Firewall................... A system placed between networks that filters
data passing through it and removes unauthorized
traffic, thereby enhancing the security of the
network.
Frame relay................ A variable delay information transfer standard
for relaying traffic. Frame relay can be an
economical means to backhaul traffic to an ATM
network.
FTP........................ File Transfer Protocol. A protocol that allows
file transfer between a host and a remote
computer.
Internet................... A global collection of interconnected computer
networks which use TCP/IP, a common
communications protocol.
ISDN....................... Integrated Services Digital Network. An
information transfer standard for transmitting
digital voice and data over telephone lines at
speeds up to 128 Kbps.
Kbps....................... Kilobits per second. A transmission rate. One
kilobit equals 1,024 bits of information.
LAN........................
Local Area Network. A data communications network
designed to interconnect personal computers,
workstations, minicomputers, file servers and
other communications and computing devices within
a localized environment.
G-1
<PAGE>
Leased line................
Telecommunications line dedicated to a particular
customer along a predetermined route.
LEC........................ Local Exchange Carrier. A telecommunications
company that provides telecommunications services
in a geographic area in which calls generally are
transmitted without toll charges.
Mbps....................... Megabits per second. A transmitting digital
information over an analog telephone line.
Modem...................... A device for transmitting digital information
over an analog telephone line.
NAP........................ Network Access Point. A location at which ISPs
exchange each other's traffic.
Online services............ Commercial information services that offer a
computer user access to a specified slate of
information, entertainment and communications
menus on what appears to be a single system.
Peering.................... The commercial practice under which nationwide
ISPs exchange each other's traffic without the
payment of settlement charges.
POPs....................... Points-of-presence. Geographic areas within which
the Company provides local access. For purposes
of this Memorandum, POPs include both physical
points of presence as well as VLA.
Router..................... A system placed between networks that relays data
to those networks based upon a destination
address contained in the data packets being
routed.
Server..................... Software that allows a computer to offer a
service to another computer. Other computers
contact the server program by means of matching
client software. In addition, such term means the
computer on which server software runs.
SuperPOP................... A SuperPOP is a Concentric POP that is directly
connected to the Concentric ATM backbone.
SuperPOPs typically support dial access from the
region surrounding the SuperPOP (typically within
200 miles of the SuperPOP) using the services of
a CLEC. SuperPOPs also support dedicated access
connections to customer locations using Local
Exchange Carrier and/or Competitive Access
Provider facilities to connect the customer to
the Concentric SuperPOP.
TCP/IP..................... Transmission Control Protocol/Internet Protocol.
A suite of network protocols that allow computers
with different architectures and operating system
software to communicate with other computers on
the Internet.
T-1........................ A data communications circuit capable of
transmitting data at 1.5 Mbps.
T-3........................ A data communications circuit capable of
transmitting data at 45 Mbps.
UNIX.......................
A computer operating system frequently found on
workstations and PCs and noted for its
portability and communications functionality.
G-2
<PAGE>
VLA........................
Virtual local access call numbers which allow a
subscriber in a location outside the calling area
of a physical POP to place a local call to a
phone number without incurring long distance or
message unit charges.
VPN........................ Virtual Private Network. A network capable of
providing the tailored services of a private
network (i.e., low latency, high throughput,
security and customization) while maintaining the
benefits of a public network (i.e., ubiquity and
economies of scale).
World Wide Web or Web...... A system that supports easy access to documents
that have been linked across the Internet. The
documents contain links to each other, hence the
term "Web." Users do not have to know the
locations of particular documents and work
through a user friendly interface.
Website....................
A server connected to the Internet from which
Internet users can obtain information.
G-3
<PAGE>
CONCENTRIC NETWORK CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Common Stock Subject to Rescission and Stockholders' Equity
(Deficit)............................................................... F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors Concentric Network Corporation
We have audited the accompanying balance sheets of Concentric Network
Corporation as of December 31, 1995 and 1996, and the related statements of
operations, common stock subject to rescission and stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated March 14, 1997,
except for Note 10 as to which the date is May 14, 1997, which report
contained an explanatory paragraph regarding the Company's ability to continue
as a going concern, the Company, as discussed in Note 1, has obtained written
representations from certain shareholders as to their intent and ability to
fund the operations of the Company through at least December 31, 1997.
Therefore, the conditions that raised substantial doubt about whether the
Company will continue as a going concern no longer exist.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Concentric Network
Corporation at December 31, 1995 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
March 14, 1997, except for Note 1--"The Company" and Note 10, as to which the
date is June , 1997
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the reincorporation of the Company under the laws of the State of Delaware
and the restatement of capital accounts described in Note 10 to the financial
statements.
/s/ Ernst & Young LLP
San Jose, California
June 23, 1997
F-2
<PAGE>
CONCENTRIC NETWORK CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY (DEFICIT)
------------------ MARCH 31, AT MARCH 31,
1995 1996 1997 1997
-------- -------- ----------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $ 19,054 $ 17,657 $ 2,841
Accounts receivable, net of
allowances including $80 in
1996 and $303 in 1997 to a
related party.............. 116 1,849 2,323
Prepaid expenses and other
current assets............. 1,167 1,722 1,689
-------- -------- ---------
Total current assets......... 20,337 21,228 6,853
Property and equipment:
Computer and telecommunica-
tions equipment............ 17,622 55,091 60,927
Software.................... 256 583 789
Furniture and fixtures and
leasehold improvements..... 833 2,130 2,612
-------- -------- ---------
18,711 57,804 64,328
Accumulated depreciation and
amortization............... 2,422 9,877 11,101
-------- -------- ---------
16,289 47,927 53,227
Other assets................. 609 1,567 1,358
-------- -------- ---------
Total assets................. $ 37,235 $ 70,722 $ 61,438
======== ======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable............ $ 4,159 $ 16,723 $ 15,619
Accrued compensation and
other employee benefits.... 230 714 571
Other current liabilities... 617 2,163 1,882
Current portion of capital
lease obligations, includ-
ing $2,758 in 1995,$10,180
in 1996, and $10,772 in
1997 to a related party.... 3,198 11,258 12,304
Note payable to related par-
ty......................... 3,000 -- --
Deferred revenue............ 141 1,238 1,182
-------- -------- ---------
Total current liabilities.... 11,345 32,096 31,558
Capital lease obligations,
including $10,210 in 1995,
$29,167 in 1996, and $33,034
in 1997 to a related party,
net of current portion...... 10,977 30,551 35,349
Convertible debentures....... 70 -- --
Commitments and contingencies
Class A common stock subject
to rescission, $0.001 par
value:
Issued and outstanding
shares--445 in 1995, 455 in
1996 and 1997.............. 5,080 5,150 5,150
Stockholders' equity (defi-
cit):
Preferred stock, $0.001 par
value; issuable in series:
Authorized shares--4,667 in
1995 and 7,333 in 1996 and
1997
Issued and outstanding
shares--2,170 in 1995,
5,007 in 1996 and 1997;
none outstanding pro
forma--unaudited (liquida-
tion preference of $89,798
at March 31, 1997)......... 35,695 95,215 96,323 $ --
Common stock, $0.001 par
value; issuable in clas-
ses:
Authorized shares--6,677 in
1995, 13,343 in 1996 and
1997
Issued and outstanding
shares--1,388 in 1995,
1,393 in 1996 and 1,396 in
1997; 6,403 shares issued
and outstanding
pro forma--unaudited....... 1,639 1,850 1,958 98,281
Accumulated deficit.......... (27,571) (93,952) (108,633) (108,633)
Deferred compensation........ -- (188) (267) (267)
-------- -------- --------- ---------
Total stockholders' equity
(deficit)................... 9,763 2,925 (10,619) $ (10,619)
-------- -------- --------- =========
Total liabilities and stock-
holders' equity (deficit)... $ 37,235 $ 70,722 $ 61,438
======== ======== =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CONCENTRIC NETWORK CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED DECEMBER 31, PERIODS ENDED
--------------------------- --------------------
MARCH 31, MARCH 31,
1994 1995 1996 1996 1997
------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue..................... $ 442 $ 2,483 $ 15,648 $ 1,533 $ 9,154
Costs and expenses:
Cost of revenue........... 2,891 16,168 47,945 7,256 15,744
Network equipment write-
off...................... -- -- 8,321 -- --
Development............... 534 837 2,449 340 1,025
Marketing and sales,
including $95, $920,
$2,448, $792, and $494 to
a related party for the
years ended December 31,
1994, 1995, and 1996, and
the three-month periods
ended March 31, 1996 and
1997, respectively....... 639 3,899 16,609 3,120 4,936
General and
administrative........... 611 2,866 3,445 736 1,060
------- -------- -------- -------- --------
Total costs and expenses.... 4,675 23,770 78,769 11,452 22,765
------- -------- -------- -------- --------
Loss from operations........ (4,233) (21,287) (63,121) (9,919) (13,611)
Interest income............. (19) (137) (614) (192) (129)
Interest expense, including
$0, $797, $3,065, $506, and
$1,061 to a related party
for the years ended
December 31, 1994, 1995,
and 1996, and the three-
month periods ended March
31, 1996 and 1997,
respectively............... 76 858 3,874 653 1,199
------- -------- -------- -------- --------
Net loss.................... $(4,290) $(22,008) $(66,381) $(10,380) $(14,681)
======= ======== ======== ======== ========
Pro forma net loss per
share...................... $ (13.84) $ (2.24)
======== ========
Shares used in computing pro
forma net loss per share... 4,797 6,540
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONCENTRIC NETWORK CORPORATION
STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND STOCKHOLDERS' EQUITY
(DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK STOCKHOLDERS' EQUITY (DEFICIT) TOTAL
SUBJECT TO --------------------------------------------------- STOCK-
RESCISSION PREFERRED STOCK COMMON STOCK ACCUMU- DEFERRED HOLDERS'
------------- ---------------- -------------- LATED COMPEN- EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT SATION (DEFICIT)
------ ------ ------- -------- ------ ------ --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993................. -- $ -- -- $ -- 1,339 $ 101 $ (1,273) $ -- $ (1,172)
Issuance of Class A common stock............ 7 200 -- -- 5 19 -- -- 19
Issuance of stock for services.............. -- -- -- -- 8 93 -- -- 93
Stock exchanged for long-term debt.......... -- -- -- -- 31 348 -- -- 348
Contribution of shares in connection with
note settlement............................ -- -- -- -- (66) -- -- -- --
Stock options granted for debt and
services................................... -- -- -- -- -- 800 -- -- 800
Conversion of debentures to common stock.... 241 2,612 -- -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- -- (4,290) -- (4,290)
--- ------ ------ -------- ----- ------ --------- ----- --------
Balance at December 31, 1994................. 248 2,812 -- -- 1,317 1,361 (5,563) -- (4,202)
Issuance of Series A preferred stock and
common stock (net of issuance costs)....... -- -- 909 10,147 62 117 -- -- 10,264
Issuance of Series C preferred stock (net of
issuance costs)............................ -- -- 894 20,691 -- -- -- -- 20,691
Conversion of note to Series B preferred
stock...................................... -- -- 367 4,035 -- -- -- -- 4,035
Warrants issued to purchase Series B
preferred stock............................ -- -- -- 822 -- -- -- -- 822
Issuance of Class A common stock............ 23 690 -- -- -- 1 -- -- 1
Issuance of Class A common stock for
services................................... -- -- -- -- 2 19 -- -- 19
Conversion of officer's note payable for
Class B common stock....................... -- -- -- -- 7 80 -- -- 80
Warrants issued to purchase Class A common
stock...................................... -- -- -- -- -- 61 -- -- 61
Conversion of debentures to Class A common
stock...................................... 174 1,578 -- -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- -- (22,008) -- (22,008)
--- ------ ------ -------- ----- ------ --------- ----- --------
Balance at December 31, 1995................. 445 5,080 2,170 35,695 1,388 1,639 (27,571) -- 9,763
Issuance of Class A common stock............ -- -- -- -- -- 1 -- -- 1
Conversion of debentures to Class A common
stock...................................... 10 70 -- -- -- -- -- -- --
Exercise of options......................... -- -- -- -- 5 22 -- -- 22
Conversion of note to Series C preferred
stock (net of issuance costs).............. -- -- 137 2,960 -- -- -- -- 2,960
Issuance of Series D preferred stock (net of
issuance costs)............................ -- -- 2,451 48,533 -- -- -- -- 48,533
Conversion of note to Series D preferred
stock...................................... -- -- 249 5,072 -- -- -- -- 5,072
Warrants issued to purchase Series D
preferred stock............................ -- -- -- 2,955 -- -- -- -- 2,955
Deferred compensation resulting from grant
of options................................. -- -- -- -- -- 188 -- (188) --
Net loss.................................... -- -- -- -- -- -- (66,381) -- (66,381)
--- ------ ------ -------- ----- ------ --------- ----- --------
Balance at December 31, 1996................. 455 5,150 5,007 95,215 1,393 1,850 (93,952) (188) 2,925
Issuance of Class A common stock
(unaudited)................................ -- -- -- -- 3 11 -- -- 11
Warrants issued to purchase Series D
preferred stock (net of issuance costs)
(unaudited)................................ -- -- -- 1,108 -- -- -- -- 1,108
Deferred compensation resulting from grant
of options (unaudited)..................... -- -- -- -- -- 97 -- (97) --
Amortization of deferred compensation
(unaudited)................................ -- -- -- -- -- -- -- 18 18
Net loss (unaudited)........................ -- -- -- -- -- -- (14,681) -- (14,681)
--- ------ ------ -------- ----- ------ --------- ----- --------
Balance at March 31, 1997 (unaudited)........ 455 $5,150 5,007 $ 96,323 1,396 $1,958 $(108,633) $(267) $(10,619)
- --------------------------------------------------
=== ====== ====== ======== ===== ====== ========= ===== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONCENTRIC NETWORK CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED DECEMBER 31, PERIODS ENDED
--------------------------- --------------------
MARCH 31, MARCH 31,
1994 1995 1996 1996 1997
------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................... $(4,290) $(22,008) $(66,381) $(10,380) $(14,681)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 169 2,196 7,528 1,261 3,629
Amortization of deferred
interest and marketing and
sales related to issuance
of warrants................ -- -- 1,942 65 209
Amortization of deferred
compensation............... -- -- -- -- 18
Loss on disposal of
equipment.................. -- 29 -- -- --
Network equipment write-
off........................ -- -- 8,321 -- --
Compensation related to
stock sales and option
grants..................... 400 864 -- -- --
Stock issued for services... 93 19 -- -- --
Changes in current assets
and liabilities:
Prepaid expenses and other
current assets............ (48) (818) (57) (114) 33
Accounts receivable........ (81) (14) (1,734) (301) (474)
Accounts payable........... 1,081 3,051 5,129 (75) 624
Accrued compensation and
other employee benefits... 57 173 484 32 (143)
Deferred revenue........... -- 141 1,097 715 (57)
Other current liabilities.. (20) 539 1,546 373 (282)
------- -------- -------- -------- --------
Net cash used in operating
activities................... (2,639) (15,828) (42,125) (8,424) (11,124)
INVESTING ACTIVITIES
Additions of property and
equipment.................... (791) (1,427) (6,889) (514) (2,495)
Increase in refundable
deposits..................... -- -- (442) -- --
(Increase) decrease in note
receivable................... (255) 255 -- -- --
------- -------- -------- -------- --------
Net cash used in investing
activities................... (1,046) (1,172) (7,331) (514) (2,495)
FINANCING ACTIVITIES
Proceeds from notes payable... 298 7,000 6,300 -- --
Repayment of lease obligations
to a related party........... -- (1,609) (4,561) (492) (1,972)
Repayment of lease
obligations.................. -- -- (886) (88) (344)
Repayment of notes payable.... (324) (218) (1,300) -- --
Proceeds from sales of
convertible debentures....... 3,500 -- -- -- --
Proceeds from issuances of
stock and warrants........... 219 30,818 48,506 (211) 1,119
------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities......... 3,693 35,991 48,059 (791) (1,197)
------- -------- -------- -------- --------
Increase (decrease) in cash
and cash equivalents......... 8 18,991 (1,397) (9,729) (14,816)
Cash and cash equivalents at
beginning of period.......... 55 63 19,054 19,054 17,657
------- -------- -------- -------- --------
Cash and cash equivalents at
end of period................ $ 63 $ 19,054 $ 17,657 $ 9,325 $ 2,841
======= ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
CONCENTRIC NETWORK CORPORATION
STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE-MONTH
31, PERIODS ENDED
---------------------- -------------------
MARCH 31, MARCH 31,
1994 1995 1996 1996 1997
------ ------- ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Stock options issued to settle note
payable........................... $ 400 $ -- $ -- $ -- $ --
Stock exchanged for notes payable,
including accrued interest........ $ 348 $ 4,115 $ 8,082 $3,010 $ --
Capital lease obligations incurred
with a related party.............. $ -- $14,578 $30,945 $2,485 $6,435
Capital lease obligations
incurred.......................... $ -- $ 1,207 $ 2,136 $ -- $ --
Reduction of accounts payable
through capital lease obligations
incurred.......................... $ -- $ -- $ -- $ -- $1,726
Convertible debentures exchanged
for stock......................... $2,612 $ 1,578 $ 70 $ -- $ --
Issuance of warrants............... $ -- $ 883 $ 2,955 $ -- $ --
Purchase of property and equipment
through accounts payable.......... $ -- $ -- $ 6,344 $ -- $ --
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Interest paid...................... $ 9 $ 850 $ 2,807 $ 401 $1,156
</TABLE>
See accompanying notes.
F-7
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Concentric Network Corporation (the Company or Concentric) was incorporated
in the state of Florida in April 1991. Concentric provides tailored, value-
added Internet Protocol (IP) based network services for businesses and
consumers. To provide these services, the Company utilizes its low/fixed
latency, high-throughput network, employing its advanced network architecture
and the Internet. Concentric's service offerings for enterprises include
virtual private networks (VPNs), dedicated access facilities (DAFs) and Web
hosting services. These services enable enterprises to take advantage of
standard Internet tools such as browsers and high-performance servers for
customized data communications within an enterprise and between an enterprise
and its suppliers, partners and customers. These services combine the cost
advantages, nationwide access and standard protocols of public networks with
the customization, high performance, reliability and security of private
networks. Concentric's service offerings for consumers and small office/home
office customers include local Internet dial-up access, Web hosting services
and online multiplayer gaming.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since inception, the Company has
incurred cumulative net losses of approximately $108,633,000 and has negative
working capital as of March 31, 1997. Management expects the Company to incur
additional losses and recognizes the need for an infusion of cash during the
fiscal year 1997. The Company is actively pursuing various alternatives to
secure additional financing and believes that sufficient funding will be
available to achieve its planned business objectives (see Note 10). The
Company has obtained written representations from certain shareholders as to
their intent and ability to fund operations through at least December 31,
1997.
Interim Results
The accompanying balance sheet as of March 31, 1997 and the statements of
operations and cash flows for the three months ended March 31, 1996 and 1997
and the statement of common stock subject to rescission and stockholders'
equity (deficit) for the three months ended March 31, 1997 are unaudited. In
the opinion of management, the statements have been prepared on the same basis
as the audited financial statements and include all adjustments, consisting of
normal recurring adjustments, necessary for the fair statement of interim
periods. The data disclosed in these notes to the financial statements for
these periods is also unaudited.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity (at date of purchase) of three months or less to be the equivalent of
cash for the purpose of balance sheet and statement of cash flows
presentation. Cash and cash equivalents are carried at cost which approximates
market value. There were no short-term investments at December 31, 1995 and
1996 or March 31, 1997.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets as follows: computer and telecommunications equipment: three to
five years; purchased software: three to five years; furniture and fixtures:
eight to ten years; and leasehold improvements: the shorter of the remaining
term of the related leases or the estimated economic useful lives of the
improvements. Equipment under capital leases is amortized over the related
lease term (see Note 3).
Revenue and Customer Receivables
Revenue is recognized over the period in which services are provided,
generally monthly. Payments received in advance of services being provided are
included in deferred revenues. Substantially all end-user subscribers pay for
services with major credit cards for which the Company receives daily
remittances from the credit card carriers.
F-8
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
Concentration of Credit Risk
The Company typically offers its enterprise customers credit terms. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have
historically been insignificant.
Cost of Revenue
Cost of revenue includes the cost of operating the Company's network,
including telecommunications charges, personnel costs, equipment depreciation
and amortization, and related overhead.
Development
Development expenditures primarily include personnel and related overhead
expenses incurred to design, create, and test product offerings and associated
client and server tools. These expenditures are charged to operations as
incurred. The Company does not currently develop software that is sold,
licensed, or otherwise marketed. Substantially all software development
efforts by the Company are in connection with the development of its network.
Marketing and Sales
Marketing and sales expense consists primarily of personnel expenses,
including salary and commissions, costs of marketing programs and the cost of
800 number circuits utilized by the Company for customer support functions.
Advertising Costs
The Company expenses the costs of advertising as incurred except for direct-
response advertising costs meeting certain specific criteria. To date, no
direct-response advertising costs have been capitalized.
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes".
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Net Loss Per Share (Historical)
Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding excluding common stock
subject to rescission. Common stock equivalent shares from convertible
preferred stock and from stock options and warrants are not included as the
effect is antidilutive. Pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins, common and common equivalent shares issued by the
Company at prices below the initial public offering price during the twelve-
month period prior to the offering have been included in the calculation as if
they were outstanding for all periods presented (using the treasury stock
method and the estimated public offering price in calculating equivalent
shares).
F-9
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
Per share information calculated on the above noted basis is as follows (in
thousands, except for per share amounts):
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED PERIODS ENDED
DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net loss per share...... $ (2.94) $ (14.99) $ (43.41) $ (6.80) $ (9.58)
========= ========= ========= ========= =========
Shares used in computing
net loss per share..... 1,460,261 1,467,656 1,529,300 1,527,280 1,533,147
========= ========= ========= ========= =========
</TABLE>
Pro Forma Net Loss Per Share and Unaudited Pro Forma Stockholders' Equity
(Deficit)
Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from
convertible preferred shares that will automatically convert to common shares
upon the closing of the Company's initial public offering (using the as-if-
converted method). If the offering contemplated by the prospectus is
consummated, all of the convertible preferred stock outstanding as of the
effective date of the offering will automatically be converted into an
aggregate of 6,885,288 shares of common stock based on the number of shares of
convertible preferred stock outstanding at May 15, 1997. Unaudited pro forma
stockholders' equity (deficit) at March 31, 1997, as adjusted for the
conversion of preferred stock is disclosed on the balance sheet.
Stock-Based Compensation
The Company accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25), and has adopted the "disclosure only"
alternative described in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123).
Effect of New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" (FAS 128), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact of
FAS 128 on the calculation of primary and fully diluted earnings per share is
not expected to be material.
Customer Concentrations
The Company currently derives a substantial portion of its total revenue
from a single customer. For the year ended December 31, 1996 and the three
months ended March 31, 1997, revenue from WebTV Networks, Inc. represented
approximately 10.1% and 32.7%, respectively, of the Company's total revenue.
2. NETWORK EQUIPMENT WRITE-OFF
In December 1996, the Company wrote off approximately $8,321,000
representing the net book value and future commitments for certain network
equipment purchased from Sattel Communications LLC (Sattel), an approximately
1.7% stockholder of the Company prior the offering and the Direct Placements.
The Company decided not to deploy the equipment in the network because of
concerns that the equipment would not provide the functionality and
F-10
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
reliability required by the Company and concerns that the equipment provider
would be unable to provide timely maintenance and support. Included in
accounts payable in the accompanying balance sheet at December 31, 1996 and
March 31, 1997 was $7,517,000 and $5,791,000, respectively, related to this
equipment.
3. COMMITMENTS
Operating Leases
The Company has an agreement with a third party through which such third
party makes available the premises at which the Company's POP sites throughout
the United States are located. POP sites are locations where certain
telecommunications switching and related equipment are installed. This
agreement expires in October 1999, and the amount of the payments is based,
among other things, on the number of POP sites maintained by the Company,
subject to certain minimums. Expenses of approximately $232,000, $1,155,000,
$1,622,000, $356,000, and $372,000 were incurred during the years ended
December 31, 1994, 1995, and 1996, and the three-month periods ended March 31,
1996 and 1997, respectively, for these facilities. Additionally, the Company
has agreements with three telecommunications companies to locate POP sites and
certain of such equipment at their facilities. The expiration dates associated
with these agreements range from December 1998 to January 2000. Expenses
incurred on these leases was $0 during 1996 and $162,000 for the three-month
period ended March 31, 1997.
The Company leases space for offices and a data center in Bay City,
Michigan. The lease expires in December 1997. Rent expense associated with the
facility was approximately $36,000, $36,000, $42,000, $9,000, and $11,000 in
the years ended December 31, 1994, 1995, and 1996, and the three-month periods
ended March 31, 1996 and 1997, respectively. In March 1996, the Company
entered into a lease agreement for office space in Saginaw, Michigan,
primarily for its customer support organization. This lease expires in
December 2001. Rent expense associated with the Saginaw facility was
approximately $129,000 in 1996 and $54,000 for the three-month period ended
March 31, 1997. The Company maintains its corporate headquarters in Cupertino,
California where it leases its facility under an operating lease that expires
in April 1998. Lease expense associated with this facility was approximately
$100,000, $267,000, $61,000, and $200,000 in the years ended December 31, 1995
and 1996, and the three-month periods ended March 31, 1996 and 1997,
respectively.
Rent expense under all operating leases of the Company totaled approximately
$268,000, $1,291,000, $2,060,000, $426,000, and $799,000 in the years ended
December 31, 1994, 1995 and 1996 and the three-month periods ended March 31,
1996 and 1997, respectively.
F-11
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
Future minimum lease commitments for all noncancelable operating leases at
December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997.............................................................. $2,283
1998.............................................................. 985
1999.............................................................. 779
2000.............................................................. 217
2001.............................................................. 217
------
Total............................................................. $4,481
======
</TABLE>
Capital Leases
In August 1994, the Company entered into a master lease agreement under
which a related party began installing networking equipment at the Company's
POP sites and data center. This agreement became effective upon installation
and acceptance by the Company on March 31, 1995. The lease provides for
monthly payments for terms of 48 or 60 months, depending upon the type of
equipment. The Company has continued to install equipment under the terms of
this agreement, resulting in a monthly payment of approximately $896,000 and
$1,228,000 at December 31, 1996 and March 31, 1997, respectively.
In September 1995, the Company entered into a master lease agreement with a
third party for an equipment lease line against which the Company has leased
approximately $3,342,000 as of March 31, 1997. The term of the lease is 36
months and provides for monthly payments of approximately $114,000 as of March
31, 1997. The Company has granted to the third party a security interest in
all equipment leased under this agreement.
Assets capitalized under capital leases totaled approximately $15,785,000,
$48,856,000, and $52,885,000 at December 31, 1995 and 1996, and March 31,
1997, respectively, and are included in computer and telecommunications
equipment. Accumulated amortization for assets capitalized under capital
leases totaled approximately $1,787,000, $8,306,000, and $9,055,000 at
December 31, 1995 and 1996, and March 31, 1997 respectively. Amortization of
leased assets is included in depreciation and amortization expense. Future
minimum lease payments under capital lease obligations at December 31, 1996
are as follows (in thousands):
<TABLE>
<S> <C>
1997............................................................ $15,732
1998............................................................ 15,105
1999............................................................ 11,321
2000............................................................ 6,069
Thereafter...................................................... 3,393
-------
Total minimum lease payments.................................... 51,620
Less amount representing interest............................... 9,811
-------
Present value of net minimum lease payments..................... 41,809
Less current portion of capital leases.......................... 11,258
-------
Long-term portion of capital leases............................. $30,551
=======
</TABLE>
F-12
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
Other
The Company has a noncancelable service agreement with AT&T for the
utilization of its frame relay telecommunications network. The agreement
provides for minimum payments to AT&T of approximately $300,000 per month over
its three-year term, expiring in June 1999.
The Company has a noncancelable service agreement with MCI for the
utilization of its ATM telecommunications network. The agreement provides for
minimum payments to MCI of approximately $1,200,000 per year over its term,
expiring three years after the end of an initial ramp up period but no later
than June 2000. The Company also has a noncancelable telecommunications
service agreement with MCI for other services, including dedicated access and
800 service, that provides for minimum payments of approximately $8,500,000
over the term of the agreement, expiring in June, 1998. The Company had
incurred expenses of approximately $3,700,000, $0, and $3,994,000 for the year
ended December 31, 1996 and the three-month periods ended March 31, 1996 and
1997, respectively, related to these other services.
The Company has remaining minimum prepaid royalty commitments to a vendor
for distribution of licenses of the vendor's software totaling approximately
$1,016,000 due in installments through 1997. Prepaid royalties related to this
agreement were $300,000 at December 31, 1996 and $225,000 at March 31, 1997.
In November 1995, the Company entered into a two-year service agreement
under which a third party provides substantially all of the network analysis
and deployment and maintenance of POP sites. This agreement has subsequently
been extended to October 31, 1999. The Company will reimburse the third party
for its employee compensation and direct costs for services provided. At the
end of the agreement, the third party is obligated to transfer to the Company
those personnel, resources, and facilities used to support the Company's
network analysis, POP site deployment, and maintenance. The Company, in turn,
will pay the third party $675,000 to relocate the remainder of the third
party's business to new facilities. Additionally, as part of the agreement,
the Company granted 60,000 options for its Class A common stock to employees
of such third party at an exercise price of $3.75. At March 31, 1997, all of
these options were vested.
4. CONVERTIBLE DEBENTURES AND NOTES
At December 31, 1995, convertible debentures in the amount of $70,000,
representing 9,802 shares of common stock, were outstanding. The conversion of
these debentures into shares of Class A common stock subject to rescission was
completed in March 1996.
In 1995, the Company issued convertible notes totaling $7,000,000 to
shareholders of which $4,000,000, plus accrued interest, was converted into
Series B convertible preferred stock in December 1995. The remaining
$3,000,000 outstanding at December 31, 1995 was converted into Series C
convertible preferred stock in February 1996.
5. COMMON STOCK SUBJECT TO RESCISSION
In August 1993, the Company commenced sales of convertible debentures and
certain additional shares of its common stock. Through March 31, 1995, sales
of convertible debentures aggregated $4,260,000, and issuance of common stock
aggregated $890,200. The sale of common stock and sale of and/or conversion of
debentures into common stock was not made pursuant to a registration statement
filed under the Securities Act of 1933 (the Act) or any filings pursuant to
the laws of any of the states in which such sales occurred (State Blue Sky
Laws). Although at the time the Company believed the sale and conversion, if
applicable, of these securities was exempt from the provisions of the Act and
applicable State Blue Sky Laws, it appears that the appropriate exemptions may
not
F-13
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
have been. As a result,the Company is conducting a Recission Offer and
purchasers of these securities will be entitled to a return of the
consideration paid for their stock or debentures. As such, these shares have
been classified as common stock subject to rescission in the accompanying
financial statements. Additionally, options issued pursuant to the Company's
1995 Stock Incentive Plan to Employees and Consultants (the 1995 Plan) and
non-plan options were issued in various states for which the Company may not
have had an available exemption under state laws. Such options are potentially
subject to rescission and the Company intends to include them in the
rescission offer. As of March 31, 1997, there have been no claims asserted
against the Company. While the Company will offer to rescind the shares and
options, there can be no assurances that the Company will not otherwise be
subject to possible statutory interest totaling approximately $1,000,000
related to the issuance of this stock and an amount equal to $556,000 with
respect to options issued under the 1995 Plan.
6. STOCKHOLDERS' EQUITY
On August 5, 1996, the Company amended its Articles of Incorporation to
increase the number of authorized shares of Class A common stock and preferred
stock to 13,333,333 and 7,333,333, respectively. Of the 7,333,333 authorized
shares of preferred stock, 1,000,000, 866,667, 933,333, and 4,533,333 are
designated as Series A, B, C, and D, respectively.
Preferred Stock
Preferred stock at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED AND PAR LIQUIDATION
AUTHORIZED OUTSTANDING VALUE AMOUNT PREFERENCE
---------- ----------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Series A convertible...... 1,000,000 909,359 $0.001 $10,146,987 $10,000,000
Series B convertible...... 866,667 366,947 $0.001 4,857,130 4,035,130
Series C convertible...... 933,333 1,031,124 $0.001 23,651,008 20,690,804
Series D convertible...... 4,533,333 2,699,588 $0.001 56,559,871 55,071,586
--------- ----------- -----------
5,007,018 $95,214,996 $89,797,520
========= =========== ===========
</TABLE>
In April 1995, the Company agreed to sell 909,359 shares of Series A
convertible preferred stock and, as discussed below, warrants to purchase
Class A common stock for an aggregate of $10,000,000. In December 1995,
convertible notes totaling $4,000,000 and accrued interest were converted into
366,947 shares of Series B convertible preferred stock (see Note 4). In
October 1995, the Company agreed to sell 1,031,124 shares of Series C
convertible preferred stock. In August 1996, the Company agreed to sell
2,699,588 shares of Series D convertible preferred stock and, as discussed
below, warrants to purchase 795,051 shares of Series D convertible preferred
stock in connection with other agreements established with certain Series D
investors. Included in the sale of Series D shares was the conversion of a
June 1996 $5,000,000 bridge loan and accrued interest thereon.
The Preferred Stock and Warrant Purchase Agreement pursuant to which the
Series A convertible preferred stock was issued, as amended through August 21,
1996 (the Series A Agreement), contains certain provisions relating to
corporate governance prior to completion of a Qualified Public Offering, as
defined and as amended (see Note 10). These provisions include limiting the
size of the Company's Board of Directors to five, giving investors the right
to designate certain directors for election by the Company, and the automatic
designation for election of the Chief Executive Officer of the Company.
F-14
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
The Series D Preferred Stock Purchase Agreement (the Series D Agreement)
also contains certain provisions relating to corporate governance, which are
effective as long as 20% of the shares of Series D preferred stock issued at
the initial closing remain outstanding. These provisions include a requirement
that the Board of Directors be large enough to enable the Series D holders to
designate three, four, or five board members, depending on the number of
Series D shares outstanding.
In addition, the Series A Agreement and the Series D Agreement provide that
without approval of the Series A and Series D investors, the Company may not
declare or pay dividends on common stock other than in common stock, make
loans or advances to any person except in the ordinary course of business or
under terms of a board-approved employee stock or option plan, or engage in a
transaction with an officer or director on terms better than could be obtained
from arms' length negotiations with an unrelated third party.
Each share of Series A, B, C, and D convertible preferred stock is
convertible into shares of Class A common stock initially on a one-for-one
basis, subject to adjustment for, among other things, stock splits, stock
dividends, and the issuance of additional shares of common stock and
securities convertible into common stock. Additionally, each share of Series A
convertible preferred stock is convertible into .003207 shares of Class B
common stock. The conversion price of Series A, B, C, and D convertible
preferred stock is subject to adjustment for any future issuance of common
stock at a per share price less than the exercise or conversion price. Holders
of each share of Series A, B, C, and D convertible preferred stock are
entitled to the number of votes equal to the number of shares of Class A and
Class B common stock into which the preferred stock is convertible. Holders of
Series A, B, C, and D convertible preferred stock will be entitled to receive
dividends on a pari passu basis.
Each share of Series A, B, C, and D convertible preferred stock will be
converted automatically into the number of shares of Class A common stock into
which such shares are convertible, immediately prior to the closing of a sale
of the Company's common stock to the public in a Qualified Public Offering, as
defined and as amended.
In the event of liquidation, dissolution, or winding up of the Company, each
holder of Series A, B, C, and D convertible preferred stock will be entitled
to be paid, with respect to each share of Series A, B, C, and D convertible
preferred stock held, a liquidation preference out of the assets available for
distribution to shareholders in an amount equal to $11.03, $11.00, $27.30, and
$20.40, respectively. Thereafter, holders of common stock will get pro rata
shares of an amount equal to the aggregate liquid amounts paid to Series A, B,
C, and D. Any residual assets will be distributed among the holders of common
and preferred stock as if each share of convertible preferred stock had been
converted into the number of shares of common stock issuable upon conversion
of the convertible preferred stock immediately prior to such liquidation,
dissolution, or winding up of the Company.
Warrants to Purchase Preferred Stock
In connection with a customer network services arrangement, the Company
issued warrants to purchase 136,407 shares of Series B convertible preferred
stock at an exercise price of $11.00 beginning December 11, 1995 and warrants
to purchase 128,205 shares of Series B convertible preferred stock at an
exercise price of $27.30 beginning February 27, 1996. The warrants expire at
the earlier of October 1998 or ten days from the closing of a Qualified Public
Offering of the Company's common stock meeting certain criteria. In 1995, the
Company recorded deferred sales and marketing expense of $822,000 to reflect
the value of these warrants as determined by using the Black-Scholes option
pricing method. Amortization of deferred sales and marketing expense totaled
$249,000 for the year ended December 31, 1996, and $43,000 and $69,000 for the
three-month periods ended March 31, 1996 and 1997, respectively.
F-15
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
In December 1995, the Company issued warrants to purchase 181,876 shares of
Series B convertible preferred stock to certain preferred shareholders in
connection with the Series B convertible preferred stock financing. The
warrants expire three years from issuance and are exercisable at $11.00 per
share.
On June 6, 1996 and July 29, 1996, the Company received bridge loans from
various investors of $5,000,000 and $1,300,000, respectively. Included in
these transactions were the issuance of warrants to purchase 36,765 shares and
63,725 shares of Series D convertible preferred stock. These warrants expire
three years from issuance and are exercisable at $20.40 per share. The value
of these warrants, approximately $330,000, was expensed as a cost of
financing.
As part of the sale of Series D convertible preferred stock in August 1996,
the Company issued warrants to purchase 795,051 shares of Series D convertible
preferred stock to certain Series D investors. These warrants were issued in
connection with distribution, lease financing, and joint sales and marketing
agreements. These warrants will expire in three years and are exercisable at
$20.40 per share. The value of these warrants was determined by using the
Black-Scholes option pricing method. Approximately $1,369,000 and $121,000 of
this value was expensed in the year ended December 31, 1996 and the three-
month period ended March 31, 1997, respectively, with the remaining balance
being amortized over the three-year life of the warrants.
Also, in connection with the sale of Series D convertible preferred stock,
an additional 176,678 warrants to purchase Series D convertible preferred
stock were issued for net consideration of approximately $1,108,000 in March
1997. These warrants will expire in three years and are exercisable at $20.40
per share.
Common Stock
Common stock at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES ISSUED
AND
AUTHORIZED OUTSTANDING PAR VALUE AMOUNT
---------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Class A........................ 13,333,333 1,385,790 $0.001 $1,769,819
Class B........................ 10,024 7,117 $0.001 80,065
---------- --------- ----------
13,343,357 1,392,907 $1,849,884
========== ========= ==========
</TABLE>
The holders of Class A common stock are entitled to one vote per share on
all matters submitted to the shareholders. The holders of Class B common stock
are entitled to 500 votes per share on all matters submitted to the
shareholders. Each share of Class B common stock will automatically be
converted into one share of Class A common stock immediately prior to the
closing of common stock in a Qualified Public Offering, as defined and as
amended. The holders of common stock do not have preemptive rights under the
Company's Articles of Incorporation to subscribe for additional shares of
common stock. See Note 10 for the conversion of Class B common stock.
Subject to the preferences of the preferred stock, the holders of common
stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available for payment. In the event of the liquidation, dissolution, or
winding up of the Company, holders of common stock are entitled to receive
ratably an amount equal to the aggregate liquidation amount paid to all
holders of preferred stock. Thereafter, any remaining assets of the Company
are shared ratably by holders of common stock, calculated assuming the
conversion of all outstanding preferred stock.
F-16
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
Warrants to Purchase Common Stock
From April 20 through July 5, 1995, the Company issued warrants to purchase
181,876 shares of Class A common stock to certain preferred shareholders in
connection with the Series A convertible preferred stock financing. The
warrants expire three years from issuance and are exercisable at $11.00 per
share.
In connection with the capital lease agreements discussed in Note 3, the
Company issued warrants to purchase 67,388 shares of Class A common stock at
an exercise price of $3.75. The warrants expire over a term from July 20, 1998
to February 15, 2000. In 1995, the Company recorded deferred interest of
$61,000 to reflect the value of these warrants using the Black-Scholes option
pricing method. Amortization of deferred interest totaled $25,000 for the year
ending December 31, 1996 and $16,000 and $3,000 for the three-month periods
ended March 31, 1996 and 1997, respectively.
Stock Option Plans
The Company maintains the 1993 Incentive Stock Option Plan (the 1993 Plan),
the 1995 Plan and the 1996 Stock Plan (the 1996 Plan), collectively referred
to as the Plans. The 1996 Plan was approved by the Board of Directors on
December 30, 1996 and calls for shareholder approval within one year. The 1995
Plan was approved by the Board of Directors and shareholders in September
1995. In October 1995, the Company offered to exchange options issued under
the 1993 Plan for options under the 1995 Plan. With the inception of the 1996
Plan, no further options will be granted under the 1993 and 1995 Plans.
Among other things, the 1996 Plan provides for granting of incentive stock
options, nonstatutory stock options, and stock appreciation rights to
employees and consultants. Unless terminated sooner, the 1996 Plan will
terminate automatically in December 2006. A total of 700,000 shares of common
stock may be issued under the 1996 Plan of which 520,700 shares are available
for grant at December 31, 1996. See Note 10 for amendment and restatement of
the 1996 Plan. Options under all plans generally vest over a four-year period,
25% after one year and the remaining portion in equal monthly increments over
the remaining three years. Options generally expire within ninety days of
termination of employment or five years after full vesting has occurred.
In August 1994, the Company granted nonqualified options under individual
option agreements to purchase 106,667 shares of common stock at a per share
price of $3.75 to two of the Company's executives and majority shareholders
(53,333 options each) to settle a note payable of $400,000. This transaction
also resulted in compensation expense of $400,000 at the grant date. These
options were fully vested at the time of issuance; however, they may not be
exercised if the holder has any other unexercised options that were previously
granted to that individual. In addition, during 1994, the Company granted
other nonqualified stock options to various individuals under separate option
agreements. These options vest over periods of up to one year and expire over
periods of up to five years.
In April 1995, an additional 53,333 options to purchase Class A common stock
for $30.00 per share were issued to two of the Company's executives in
connection with their employment by the Company. These options were fully
vested upon issuance and are exercisable over five years.
In October 1995 and August 1996, the exercise price of options to purchase
182,375 shares and 46,673 shares of Class A common stock, respectively, were
repriced to $3.75 per share, the then fair value of the common stock, as
determined by the Company's Board of Directors.
The Company issued options to purchase 179,300 shares of Class A common
stock in December 1996 and 40,267 shares of common stock in January 1997. The
Company recorded deferred compensation, for financial
F-17
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
reporting purposes, of approximately $188,000 in 1996 and $97,000 for the
three-month period ended March 31, 1997, with respect to such option grants to
reflect the difference between the exercise price and the deemed fair value
for financial reporting purposes of these shares. Amortization of this
deferred compensation was $0 in 1996 and $18,000 in the three-month period
ended March 31, 1997. The amortization of this deferred compensation will
continue over the four year vesting period of the associated stock options.
The following table summarizes stock option activity under all of the Plans:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
--------- ---------------
<S> <C> <C>
Balance at January 1, 1994...................... 38,333 $3.75--$30.00
Granted....................................... 319,722 $3.75--$33.00
Exercised..................................... (4,933) $3.75
Canceled...................................... (666) $3.75
---------
Balance at December 31, 1994.................... 352,456 $3.75--$33.00
Granted....................................... 642,075 $3.75--$33.00
Exercised..................................... (133) $9.00
Canceled...................................... (187,315) $11 .25--$12.45
---------
Balance at December 31, 1995.................... 807,083 $3.75--$33.00
Granted....................................... 421,620 $3.75
Exercised..................................... (4,483) $3.75--$9.00
Canceled...................................... (95,218) $3.75--$30.00
---------
Balance at December 31, 1996.................... 1,129,002 $3.75--$33.00
Granted....................................... 392,014 $3.75--$15.00
Exercised..................................... (2,880) $3.75
Canceled...................................... (4,860) $3.75--$15.00
---------
Balance at March 31, 1997....................... 1,513,276 $3.75--$33.00
=========
</TABLE>
At March 31, 1997, vested options totaled 613,130.
Stock-Based Compensation
Pro forma information regarding results of operations and loss per share is
required by FAS 123 for awards granted after December 31, 1994 as if the
Company had accounted for its stock-based awards to employees under a
valuation method permitted by FAS 123. The value of the Company's stock-based
awards to employees in 1995 and 1996 was estimated using the minimum value
method. Should the Company complete an initial public offering (IPO) of its
stock, options granted after the IPO will be valued using the Black-Scholes
option pricing model. Among other things, the Black-Scholes model considers
the expected volatility of the Company's stock price, determined in accordance
with FAS 123, in arriving at an option valuation. The minimum value method
does not consider stock price volatility. Further, certain other assumptions
necessary to apply the Black-Scholes model may differ significantly from
assumptions used in calculating the value of options granted in 1995 and 1996
under the minimum value method.
F-18
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
The minimum value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following weighted average
assumptions:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Expected life.......................................... 8.5 years 8.5 years
Risk-free interest rate................................ 6.2% 6.3%
</TABLE>
The weighted average minimum value of stock options granted during 1995 and
1996 was $0.10. Exercise prices for options outstanding as of December 31,
1996 ranged from $3.75 to $30.00. The weighted average remaining contractual
life of those options is 9.1 years. In 1996, certain options were issued at an
exercise price less than the stock price for which the weighted average
minimum value was $4.65. For pro forma purposes, the estimated minimum value
of the Company's stock-based awards to employees is amortized over the
options' vesting period. The results of applying FAS 123 to the Company's
option grants in 1995 and 1996 was not material to the results of operations
or loss per share for those years reported in the accompanying statements of
operations. Because FAS 123 is applicable only to awards granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
approximately 1998.
7. EMPLOYEE BENEFIT PLANS
Retirement Savings Plan
The Company maintains a contributory 401(k) plan that covers substantially
all employees. The Company contributes $0.30 for every $1.00 contributed by
the participant up to a maximum of 1.5% of the participants' compensation. The
Company contributed $5,000, $6,000, $45,000, $7,000, and $26,000 to the plan
during the years ended December 31, 1994, 1995, and 1996, and the three-month
periods ended March 31, 1996 and 1997, respectively.
8. INCOME TAXES
Due to the Company's loss position, the Company has not recorded a provision
for income taxes for the years ended December 31, 1994, 1995, and 1996.
As of December 31, 1996, the Company had federal and state net operating
loss carryforwards of approximately $86,000,000 and $59,000,000, respectively.
The net operating loss carryforwards will expire at various dates beginning in
the years 2003 through 2011, if not utilized.
Utilization of the net operating losses are subject to a substantial annual
limitation due to the "change in ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions. The annual limitation may result in
the expiration of the net operating losses before utilization.
F-19
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes of December 31, 1995 and 1996 are as
follows:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $8,500,000 $32,000,000
Write-off of network equipment.................. -- 5,000,000
Other, net...................................... 500,000 1,000,000
---------- -----------
Total deferred tax assets......................... 9,000,000 38,000,000
---------- -----------
Deferred tax liabilities:
Other, net...................................... -- 1,000,000
---------- -----------
Net deferred tax assets........................... 9,000,000 37,000,000
Valuation allowance............................... (9,000,000) (37,000,000)
---------- -----------
$ -- $ --
========== ===========
</TABLE>
The Company has provided a full valuation allowance against its deferred tax
assets due to uncertainties regarding the timing and amount of future taxable
income to be generated by the Company.
The net valuation allowance increased by approximately $7,000,000 in 1995
and $28,000,000 in 1996.
9. OTHER MATTERS
An officer of the Company is a majority shareholder of a vendor of the
Company. The Company incurred marketing fees to the vendor totaling $95,000,
$920,000, $2,450,000, $792,000, and $494,000 in the years ended December 31,
1994, 1995, 1996, and the three-month periods ended March 31, 1996 and 1997,
respectively.
10. SUBSEQUENT EVENTS
Initial Public Offering and Direct Placements
In May 1997, the Company's Board of Directors approved the filing of a Form
S-1 Registration Statement with the Securities and Exchange Commission
covering the proposed sale by the Company of up to 3,000,000 shares of its
common stock to the public plus an overallotment option for the underwriters.
Concurrently with the closing of this offering, certain strategic investors
have agreed to purchase directly from the Company shares of Common Stock
having an aggregate purchase price of approximately $15,000,000. All of such
shares will be unregistered shares purchased at the initial public offering
price.
On May 1, 1997, and May , 1997 the Company's Board of Directors took the
following actions which were approved by the Company's shareholders on June ,
1997:
(i) Approved the reincorporation of the Company under the laws of the
state of Delaware (effective May 1, 1997)
(ii) Subject to the filing of the Amended and Restated Certificate of
Incorporation with the Secretary of the State of Delaware (which took place
on May , 1997) authorized a reverse stock split of one for 15 of the
Company's common stock and the conversion of all previously issued and
outstanding shares of Class B common stock into voting shares of common
stock, amended the definition of a Qualified Public Offering that would
F-20
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
trigger the automatic conversion of the shares of Series A, B, C, and D
convertible preferred shares and authorized the issuance additional shares
of Series B convertible preferred shares. (All capital accounts, share and
per share data in these financial statements have been retroactively
restated to reflect the stock split.)
(iii) Amended and restated the 1996 Stock Plan to increase the shares
reserved for grant thereunder to 793,333.
(iv) Adopted and approved the 1997 Stock Plan (the 1997 Plan) which
provides for the granting of incentive stock options to employees and the
granting of nonstatutory stock options and stock purchase rights to
employees, directors, and consultants of the Company. A total of 1,500,000
shares of the Company's common stock has been reserved for issuance
pursuant to the 1997 Plan. Unless terminated sooner, the 1997 Plan will
terminate automatically in 2007.
(v) Adopted and approved the 1997 Employee Stock Purchase Plan (the 1997
Purchase Plan) under which 500,000 shares of common stock have been
reserved for issuance. The 1997 Purchase Plan allows for eligible employees
to purchase stock at 85% of the lower of the fair market value of the
Company's common stock as of the first day of each six-month offering
period or at the end of the current purchase period. The Plan has 24-month
offering periods, with each offering period divided into four consecutive
six-month purchase periods. The initial offering period will commence on
the first trading day on or after the closing of the initial public
offering.
Exercise of Warrants
On April 18, 1997, certain preferred stockholders holding warrants to
purchase an aggregate number of 181,876 shares of Class A common stock and
66,688 shares of Series B convertible preferred stock at $11.00 per share,
exercised such warrants at a discounted price of $6.60 per share in
consideration of their early exercise. Additionally, certain preferred
stockholders exercised warrants to purchase an aggregate number of 233,660
shares of Series D convertible preferred stock at a price of $12.24,
discounted from the original price of $20.40. The Company received total
consideration of $4.5 million related to the exercise of these warrants.
Litigation
On April 22, 1997, a complaint was filed in the Los Angeles County,
California Superior Court against the Company and other unnamed defendants by
Sattel Communications LLC (Sattel). The complaint alleges claims for breach of
contract, breach of the covenant of good faith and fair dealing, unfair
business practices, fraud and negligent misrepresentation. Sattel claims that
the Company is in breach of an agreement to pay for up to $4.2 million of DSS
Switches from Sattel for use in the Company's network. The Complaint also
seeks unspecified consequential and punitive damages. On April 29, 1997,
Sattel served the Company with an Application for Writ of Attachment, seeking
to secure a lien on the Company's assets up to an amount of $3.6 million. At a
hearing on June 17, 1997, the court indicated its intention to grant the writ
of attachment, but deferred issuing a final ruling until another hearing can
be held on June 25, 1997.
In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana Corporation (Diana), the parent corporation of
Sattel, alleging securities fraud related to plaintiffs' purchase of shares of
Diana Common Stock in reliance upon allegedly misleading statements made by
defendants, Diana, Sattel and certain of their respective affiliates, officers
and directors. Concentric was named as a defendant in the complaint in
connection with certain statements made by Diana and officers of Diana related
to Concentric's purchase of network switching equipment from Diana's Sattel
subsidiary. The complaints do not appear to allege that Concentric made any
false or misleading statements. The plaintiffs seek unspecified compensatory
damages.
F-21
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct
vigorous defenses. An unfavorable outcome in these matters could have a
material adverse effect on the Company's financial condition. In addition,
even if the ultimate outcomes are resolved in favor of the Company, the
defense of such litigation could entail considerable cost and the diversion of
efforts of management, either or which could have a material adverse effect on
the Company's results of operations.
F-22
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any in-
formation or to make any representation not contained in this Prospectus and,
if given or made, such information or representations must not be relied upon
as having been authorized by the Company or any Underwriter. This Prospectus
does not constitute an offer to sell or the solicitation of any offer to buy
any of the securities offered hereby in any jurisdiction to any person to whom
it is unlawful to make such offer in such jurisdiction. Neither the delivery
of this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information herein is correct as of any time
subsequent to the date hereof or that there has been no change in the affairs
of the Company since such date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Direct Placements........................................................ 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 31
Management............................................................... 47
Certain Transactions..................................................... 56
Principal Stockholders................................................... 60
Description of Capital Stock............................................. 62
Rescission Offers........................................................ 65
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 67
Legal Matters............................................................ 68
Experts.................................................................. 68
Additional Information................................................... 69
Glossary................................................................. G-1
Index to Financial Statements............................................ F-1
</TABLE>
---------------
Until 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 SHARES
[LOGO]
CONCENTRIC NETWORK CORPORATION
COMMON STOCK
---------------
PROSPECTUS
, 1997
---------------
UBS SECURITIES
WHEAT FIRST BUTCHER SINGER
UNTERBERG HARRIS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale
of the Common Shares being registered. All of the amounts shown are estimates
except for the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 12,545
NASD Filing Fee.................................................... 4,640
Nasdaq National Market Listing Fee................................. 40,000
Blue Sky Qualification Fees and Expenses........................... 5,000
Printing and Engraving Expenses.................................... 100,000
Legal Fees and Expenses............................................ 350,000
Accounting Fees and Expenses....................................... 175,000
Transfer Agent and Registrar Fees.................................. 10,000
Miscellaneous...................................................... 52,815
--------
Total............................................................ $750,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In May 1997, the Registrant entered into indemnification agreements with its
directors and officers providing for limitations on a director's and officer's
liability for judgments, settlements, penalties, fines and expenses of defense
(including attorneys' fees, bonds and costs of investigation) arising out of
or in any way related to acts or omissions as a director or an officer, or in
any other capacity in which services are rendered to the Registrant. The
Registrant believes its indemnification agreements will assist it in
attracting and retaining qualified individuals to serve as directors and
officers. The agreements provide that a director or officer is not entitled to
indemnification under such agreements (i) if the director or officer is not
relieved of liability under applicable law, (ii) for violations of certain
securities laws, or (iii) for certain claims initiated by the officer or
director. Due to the lack of applicable case law, it is not clear whether
indemnification is available in case of a breach of securities laws of the
U.S.
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Amended and Restated Certificate of Incorporation to be effective
upon completion of the offering include a provision that eliminates the
personal liability of its directors for monetary damages for breach or alleged
breach of their duty of care. In addition, as permitted by Section 145 of the
Delaware General Corporation Law, the Bylaws, as amended, of the Registrant to
be effective upon completion of the offering provide that: (i) the Registrant
is required to indemnify its directors and officers and persons serving in
such capacities in other business enterprises (including, for example,
subsidiaries of the Registrant) at the Registrant's request, to the fullest
extent permitted by Delaware law, including in those circumstances in which
indemnification would otherwise be discretionary; (ii) the Registrant may, in
its discretion, indemnify employees and agents in those circumstances where
indemnification is not required by law; (iii) the Registrant is required to
advance expenses, as incurred, to its directors and officers in connection
with defending a proceeding (except that it is not required to advance
expenses to a person against whom the Registrant brings a claim for breach of
the duty of loyalty, failure to act in good faith, intentional misconduct,
knowing violation of law or deriving an improper personal benefit); (iv) the
rights conferred in the Bylaws, as amended, are not exclusive, and the
Registrant is authorized to enter into indemnification agreements with its
directors, officers and employees; and (v) the Registrant may not
retroactively amend the Bylaw provisions in a way that is adverse to such
directors, officers and employees.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and officers that provide the maximum indemnity allowed
to directors and officers by Section 45 of the Delaware General Corporation
Law and the Bylaws, as amended, as well as certain additional procedural
protections.
II-1
<PAGE>
The indemnification provisions in the Bylaws, as amended, and the
indemnification agreements entered into between the Registrant and its
directors and officers may be sufficiently broad to permit indemnification of
the Registrant's directors and officers for liabilities arising under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the three years preceding the date hereof, the Company has made the
following sales of securities that were not registered under the Securities
Act (share numbers are approximate and actual numbers of shares may differ as
a result of rounding calculations related to the one-for-15 reverse split):
1. From June 1993 to March 1995, the Company sold to various investors
convertible debentures and convertible subordinated debentures
(collectively, the "Convertible Debentures") in the aggregate principal
amount of $4,260,000. As of March 31, 1997, all of the Convertible
Debentures had been converted into shares of Class A Common Stock at prices
ranging from $3.75 per share to $11.25 per share.
2. From June 1993 to March 1995, the Company sold to various investors
29,673 shares of Class A Common Stock at $30.00 per share, for an aggregate
consideration of $890,200.
3. Since June 1993 the Company has issued 24,611 shares of Class A Common
Stock, at prices from $11.25 to $30.00, to individuals or other entities on
account of services rendered by them to the Company.
4. In October 1994, the Company issued 30,917 shares of Class A Common
Stock to Linkon Corporation ("Linkon") in exchange for 66,170 shares of the
Company's Common Stock held by Linkon and Linkon's forgiveness of the
Company's debt to Linkon.
5. In connection with the 1994 master lease agreement with Racal, the
Company granted to Racal warrants to purchase 44,935 shares of the
Company's Class A Common Stock exercisable through September 1, 1998 at
$15.00 per share subject to adjustment. As a result of the options granted
to certain members of management in October 1995, the exercise price of the
warrants was decreased to $3.75 per share.
6. In February 1995, the Company granted to Racal warrants to purchase
5,000 shares of the Company's Class A Common Stock in consideration for
securing the Company's loan from Sun Bank South Florida, National
Association (the "Sun Bank Loan"). The Company has since repaid the Sun
Bank Loan. Racal may exercise the warrants through February 15, 2000, at a
price equal to the lowest of (i) $30.00 per share, (ii) the lowest price
per share at which the Company may sell shares of Common Stock (or
securities convertible into or exchangeable for shares of its Common
Stock), and (iii) the lowest price at which the holder of the warrant,
option or other Company security entitling the holder to purchase shares of
the Company's Common Stock may purchase such shares on or after February
15, 1995.
7. In connection with the 1995 master lease agreement between the Company
and Comdisco, Inc., the Company has issued to Comdisco a warrant to
purchase up to 17,453 shares of Class A Common Stock for a purchase price
of $10.82 subject to adjustment.
8. On April 20, 1995, the Company sold to GS Capital Partners L.P.
("GSCP"), Kleiner Perkins Caufield & Byers VII ("KPCB"), and KPCB VII
Founders Fund (together with KPCB, "KP") an aggregate of 906,453 shares of
the Company's Series A Preferred Stock ("Series A Preferred Shares") and
warrants to purchase an aggregate of 181,876 Class A Common Stock for an
aggregate consideration of approximately $10,000,000 pursuant to a
preferred stock and warrant purchase agreement (the "Series A Agreement").
The warrants issued pursuant to the Series A Agreement had an initial
exercise price of $11.00 for each share of Class A Common Stock. On April
18, 1997, the Investors exercised the warrants at a discounted price of
$6.60 per share. See "Certain Transactions" and "Description of Capital
Stock."
9. The Series A Agreement provided that in the event that the book value
of the shares of the Company decreased an amount in excess of $100,000 as a
result of certain events, including the breach of any representation or
warranty in the Series A Agreement, GSCP and KP would be entitled to
receive indemnification, in the form of additional shares of Class A Common
Stock. In consideration of GSCP's and KP's waiver of their right to be
indemnified in the future the Company agreed, in October 1995, to issue to
GSCP and KP an aggregate of 61,678 shares of Class A Common Stock.
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10. In connection with the alliance between Intuit and the Company, on
December 11, 1995, Intuit received warrants to purchase $1.5 million worth
of Series B Preferred Stock at an initial exercise price of $11.00 per
share and warrants to purchase $3.5 million worth of Series B Preferred
Stock at the closing sale price of the Company's next preferred stock sale,
which was $27.30 per share. Also in connection with the arrangements with
Intuit, GSCP and the Kleiner Entities made bridge loans totaling $2 million
to the Company on October 16, 1995, which were rolled over into bridge
loans totaling $4 million on November 6, 1995. On November 29, 1995, GSCP
made a further bridge loan of $3 million. In consideration of these loans,
GSCP and the Kleiner Entities received warrants to purchase shares of
Series B Preferred Stock at an exercise price of $11.00 per share.
Effective as of December 20, 1995, GSCP and the Kleiner Entities converted
the principal and interest due under their $2 million promissory notes into
a total of 366,947 shares of Series B Preferred Stock at a price of $11.00
per share. Also effective as of December 20, 1995, GSCP converted the
entire amount of principal and interest on its $3 million bridge note into
123,297 Series C Shares at an exercise price of $24.57 per share.
11. On December 20, 1995, the Company issued a total of 804,945 shares of
Series C Preferred Stock ("Series C Shares") at a price of $27.30 per
share. An additional 123,297 Series C Shares were issued to GSCP at $24.57
per share when it converted its $3 million bridge loan in January 1996.
12. On June 6, 1996, the Company closed a Bridge Loan from Sattel
Communications, LLC ("Sattel") for $5,000,000 evidenced by a convertible
Promissory Note dated June 6, 1996. The Company issued Sattel a warrant
dated June 6, 1996, to purchase 36,765 shares of the Company's Series D
Preferred Stock at an exercise price of $20.40 per share. On August 21,
1996, Sattel converted the bridge loan into shares of Series D Preferred
Stock at $20.40 per share.
13. On July 31, 1996, the Company closed a Bridge Loan from Matthew Bross
for $50,000 evidenced by a convertible Promissory Note dated July 29, 1996.
The Company issued Matthew Bross a warrant dated July 31, 1996, to purchase
2,451 shares of Series D Preferred Stock at an exercise price of $20.40 per
share. On August 21, 1996, the Company repaid the loan.
14. On July 31, 1996, the Company closed a Bridge Loan from Maritime
Capital Partners, L.P. for $500,000, evidenced by a convertible Promissory
Note dated July 29, 1996. The Company issued Maritime a warrant dated July
31, 1996, to purchase 14,706 shares of Series D Preferred Stock at an
exercise price of $1.36 per share. On August 21, 1996, the Company repaid
the loan.
15. On July 31, 1996, the Company closed a Bridge Loan from GSCP for
$300,000, evidenced by a convertible Promissory Note dated July 29, 1996.
The Company issued GSCP a warrant dated July 31, 1996, to purchase 24,510
shares of Series D Preferred Stock at an exercise price of $20.40 per
share. The Company repaid the loan on August 21, 1996.
16. On July 31, 1996, the Company closed a Bridge Loan from KPCB for
$300,000 evidenced by a convertible Promissory Note dated July 29, 1996.
The Company issued to KPCB a warrant dated July 31, 1996, to purchase
14,706 shares of Series D Preferred Stock at an exercise price of $20.40
per share. The Company repaid the loan on August 21, 1996.
17. On July 31, 1996, the Company closed a Bridge Loan from Henry
Nothhaft for $100,000 evidenced by a Promissory Note dated July 29, 1996.
The Company issued Henry Nothhaft a warrant dated July 31, 1996, to
purchase 4,902 shares of Series D Preferred Stock at an exercise price of
$20.40 per share. The Company repaid the loan on August 21, 1996.
18. On July 31, 1996, the Company closed a Bridge Loan from John Peters
for $50,000 evidenced by a Promissory Note dated July 29, 1996. The Company
issued John Peters a warrant dated July 31, 1996, to purchase 2,451 shares
of Series D Preferred Stock at an exercise price of $20.40 per share. The
Company repaid the loan on August 21, 1996.
19. On August 16, 1996, the Board of Directors amended the vesting
provisions of options to purchase 14,000 shares issued to Henry Nothhaft,
President, Chief Executive Officer and a director of the Company, on
October 31, 1995, and an option to purchase 11,900 shares issued to John
Peters, Executive Vice President
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and General Manager, Network Services Division, on October 31, 1995, so the
options would fully vest as of the closing date of the sale of at least
$29,000,000 of Series D Preferred Stock of the Company, which occurred on
August 21, 1996.
20. On August 21, 1996, the Company exchanged four options previously
issued to Randy Maslow, a director of the Company, for new options
exercisable for an aggregate of 46,673 shares of Class A Common Stock at
$3.75 per share. The four-year vesting schedule accelerates so that all
shares vest immediately in the event of an initial public offering or a
change of control. The options may be exercised through their expiration
date regardless of when Mr. Maslow ceases being an employee or consultant.
Mr. Maslow's employment with the Company ended on October 31, 1996.
21. On August 21, 1996, the Company sold 1,670,176 shares of Series D
Preferred Stock at $20.40 per share for an aggregate price of $34,000,000.
22. Between October 25, 1996 and November 5, 1996, the Company sold an
additional 1,029,412 shares of Series D Preferred Stock at $20.40 per share
for an aggregate price of $21,000,000.
23. In December 1996, the Company issued options for the purchase of
60,000 shares of Class A Common Stock to employees of Critical Technologies
Incorporated ("CTI"), a company that provides network operations services
to the Company. The options were issued pursuant to the Company's Employee
Staffing and Services Agreement with CTI, dated November 1, 1995. In
October 1996, the Board ratified an amendment to the Company's agreement
with CTI to provides that performance conditions applicable to 13,334 of
the 60,000 optioned shares will be deemed satisfied.
24. On March 5, 1997, in consideration of distribution agreements with
the Company, TMI Telemedia International, Ltd. was issued a warrant for
176,678 shares of Series D Preferred Stock at an exercise price of $20.40
per share.
25. On April , 1997, the Company entered into warrant amendment
agreements with TMI, GSCP, and the Kleiner Entities to reduce the exercise
price of certain of their warrants in return for the immediate exercise of
such warrants. The exercise price of warrants for 181,876 shares of Class A
Common Stock and 66,888 shares of Series B Preferred Stock held by GSCP and
the Kleiner Entities was reduced from $11.00 to $6.60 per share. The
exercise price of warrants for 233,660 shares of Series D Preferred Stock
held by GSCP, KPCB and TMI was reduced from $20.40 per share to $12.24 per
share. Also, in connection with the reduction of the exercise price of the
GSCP and Kleiner Entities' Common Stock warrants, the exercise price of
Intuit's $1.5 million warrant was similarly reduced to $0.44 per share, and
the expiration date was extended to December 31, 2000.
26. In May 1997, in consideration for Marc Collins-Rector agreeing to
convert his Class B Common Stock into Series A Preferred Stock and to vote
his shares to approve the reincorporation of the Company into Delaware and
certain other matters, GSCP, the Kleiner entities and Intuit agreed to vote
in favor of granting Mr. Collins-Rector certain registration rights with
respect to the shares of Common Stock held by Mr. Collins-Rector or
issuable upon conversion of the Series A Preferred. Additionally, the
Company granted Mr. Collins-Rector the right to designate a member of the
Board of Directors of the Company. Currently, Mr. Collins-Rector's designee
is Mr. Robert Doede.
27. Between May 31, 1996, and March 18, 1997, nonplan options to purchase
a total of 3,418 shares of Common Stock were exercised by three optionees
at prices ranging from $3.75 to $9.00 per share.
28. 1993 Incentive Stock Option Plan. The Company's 1993 Incentive Stock
Option Plan (the "1993 Plan") provides for the grant to employees of the
Company of incentive stock options. As of May 15, 1997, options to purchase
5,067 shares of Common Stock had been exercised at an exercise price of
$3.75 per share under the 1993 Plan by three optionees, and options to
purchase 54,007 shares of Class A Common Stock at a weighted average
exercise price of $12.45 per share were outstanding. No future grants will
be made under the 1993 Plan. The exercise price of all stock options
granted under the 1993 Plan must be at least equal to the fair market value
of the Common Stock on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all classes
of stock of the Company, the exercise price of any stock option granted to
such person must be at least 110% of the fair market value on the grant
date, and the maximum term of such option is five years. The term of all
other options granted under the 1993 Plan may be up to 10 years. Options
granted under the 1993 Option Plan must be exercised before the optionee
terminates his or her
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status as an employee of the Company, or within three months after such
optionee's termination by disability, or within 12 months after termination
by death. In October 1995, the Board approved an exchange offer pursuant to
which all employees would exchange their options for options granted under
the 1995 Stock Incentive Plan for Employees and Consultants (the "1995
Plan").
29. 1995 Stock Incentive Plan for Employees and Consultants. The
Company's 1995 Plan provides for the granting to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and for the granting to employees
and consultants of nonstatutory stock options, stock appreciation rights
("SARs") and restricted stock awards ("RSAs"). No SARs or RSAs have been
granted under the 1995 Plan. The 1995 Plan was approved by the Board of
Directors and Stockholders in September 1995, and an amendment decreasing
the number of shares thereunder from 840,000 to 762,600 was approved by the
Board of Directors in February 1996. The 1995 Plan was terminated effective
October 4, 1996, and no further grants are being made thereunder except to
the extent that an exchange of options under the Company's 1993 Plan for
options under the 1995 Plan, which exchange was begun in October 1995, is
continuing and has not yet been completed. A total of 762,600 shares of
Common Stock are reserved for issuance pursuant to the 1995 Plan. As of May
15, 1997, options to purchase 344,951 shares of Common Stock at a weighted
exercise price of $3.75 per share were outstanding. Nine optionees have
exercised 3,612 shares of Common Stock under the 1995 Plan at an exercise
price of $3.75 per share.
The 1995 Plan may be administered by the Board of Directors or a
committee of the Board of Directors, which committee is required, once the
Company's Common Stock becomes publicly traded, to be constituted to comply
with Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as
amended, and applicable laws. The administrator has the power to determine
the terms of the options granted, including the exercise price, the number
of shares subject to the option and the exercisability thereof, and the
form of consideration payable upon exercise. Options granted under the 1995
Plan are not generally transferable by the optionee, and each option is
exercisable during the lifetime of the optionee only by such optionee.
Options granted under the 1995 Plan must be exercised within three months
of the end of such optionee's status as an employee or consultant of the
Company, or within 12 months after such optionee's termination by death or
disability, but in no event later than the expiration of the option's term,
which may not exceed ten years. The exercise price of all options granted
under the 1995 Plan must be at least equal to the fair market value of the
Common Stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any option must
equal at least 110% of the fair market value on the grant date and the term
of the option must not exceed five years. The term of all other options
granted under the 1995 Plan may not exceed 10 years.
The 1995 Plan provides that in the event of a recapitalization, stock
split, stock dividend, combination or reclassification or other increase or
decrease in the number of issued shares of Common Stock without
consideration, the Committee shall adjust the number of shares subject to
each outstanding stock option, as well as the exercise price. In the event
of dissolution or liquidation of the Company, unexercised stock options
will terminate immediately prior to such event, after advance notice to
participants. In the event of a merger or the sale of substantially all
assets of the Company, each option shall be assumed or substituted. Options
not assumed or substituted shall terminate on the date of closing of the
merger.
30. Amended and Restated 1996 Stock Plan. The Company's Amended and
Restated 1996 Stock Plan (the "Restated 1996 Plan") provides for the
granting to employees of incentive stock options within the meaning of
Section 422 of the Code, and for the granting to employees, directors and
consultants of nonstatutory stock options and stock purchase rights
("Rights"). The 1996 Plan was initially approved by the Board of Directors
effective as of December 1996. It was amended and restated in May 1997 and
will be presented to the Stockholders for their approval at the 1997 annual
meeting. Unless terminated sooner, the Restated 1996 Plan will terminate
automatically in December 2006. A total of 793,333 shares of Common Stock
are currently reserved for issuance pursuant to the Restated 1996 Plan. As
of May 15, 1997, options to purchase 595,580 shares of Class A Common Stock
at a weighted average exercise price of $10.35 per share were outstanding,
and shares of Class A Common Stock remained available for future grant
under the Restated 1996 Stock Plan.
The Restated 1996 Plan may be administered by a committee of the Board of
Directors constituted to comply with applicable laws (the "Committee") or
by the Board itself. The Board or Committee (the "Administrator") has the
power to determine the terms of the options or Rights granted, including
the exercise price, the number of shares subject to each option or Right,
the exercisability thereof, or any vesting acceleration
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or waiver of forfeiture conditions. The Administrator may determine the
form of payment upon exercise, including cash, check, promissory note,
other shares, cashless exercise or a combination of the foregoing. The
Board has the authority to amend, suspend or terminate the Restated 1996
Plan, provided that no such action may impair the rights of any optionee or
Right holder without that person's consent.
Options and Rights granted under the Restated 1996 Plan are not generally
transferable by the optionee or Right holder other than by will or the laws
of descent and distribution, and each option and Right is exercisable
during the lifetime of the optionee or Right holder only by such optionee
or Right holder. The form of option agreement currently in use provides
that options generally must be exercised within 90 days of the end of
optionee's status as an employee, director or consultant of the Company.
Under the Plan, options must be exercised within twelve months after such
optionee's termination by death or disability, but in no event later than
the expiration of the option's term. In the case of Rights, unless the
Administrator determines otherwise, the Restricted Stock Purchase Agreement
shall grant the Company a repurchase option exercisable upon the voluntary
or involuntary termination of the purchaser's service with the Company for
any reason (including death or disability). The purchase price for shares
repurchased pursuant to the Restricted Stock Purchase Agreement shall be
the original price paid by the purchaser and may be paid by cancellation of
any indebtedness of the purchaser to the Company. The repurchase option
shall lapse at a rate determined by the Administrator but in no case more
slowly than 20% per year over five years. Generally, options vest 25% after
one year and 1/36 per month thereafter. The exercise price of all incentive
stock options granted under the Restated 1996 Plan must be at least equal
to the fair market value of the Common Stock on the date of grant. The
exercise price of nonstatutory stock options and Rights must at least be
equal to 85% of the fair market value of the Common Stock on the date of
grant. With respect to any participant who owns stock possessing more than
10% of the voting power of all classes of the Company's outstanding capital
stock, the exercise price of any incentive or nonstatutory stock option
granted must equal at least 110% of the fair market value on the grant
date. The term of an incentive stock option granted to such a 10%
Stockholder must not exceed five years. The term of other options granted
under the Restated 1996 Plan may not exceed ten years.
The Restated 1996 Plan provides that in the event of a merger of the
Company with or into another corporation, a sale of substantially all of
the Company's assets or a like transaction involving the Company, each
option shall be assumed or an equivalent option substituted by the
successor corporation. If the outstanding options are not assumed or
substituted as described in the preceding sentence, the Administrator shall
provide for the optionee or Right holder to have the right to exercise the
option or Right as to all of the optioned stock, including shares as to
which it would not otherwise be exercisable. If the Administrator makes an
option or Right exercisable in full in the event of a merger or sale of
assets, the Administrator shall notify the optionee or Right holder that
the option or Right shall be fully exercisable for a period of fifteen days
from the date of such notice, and the option or Right will terminate upon
the expiration of such period. The forms of option agreement and restricted
stock purchase agreement currently in use provide for a 180-day lockup of
the optionee's or Right holder's shares in the event of the Company's
initial public offering. The option exercise notice and the restricted
stock purchase agreement also grant the Company a right of first refusal
(prior to the initial public offering) on the sale or transfer of any
shares purchased pursuant to an option or Right, other than transfers by
gift, operation of law or certain family transfers.
The sales and issuances of securities in the transactions described in
paragraphs 4-27 above were deemed to be exempt from registration under the Act
in reliance upon (i) Section 4(2) of the Securities Act and Regulation D
promulgated thereunder as transactions by an issuer not involving any public
offering, or (ii) Rule 701 promulgated thereunder as transactions pursuant to
a compensatory benefit plan or a written contract relating to compensation.
The issuances described in paragraphs 1, 2 and 3 were not made pursuant to a
registration statement under the Act, nor were the offer and sale registered
or qualified under any state securities laws. Although the Company believed at
the time that such offers, sales and conversion were exempt from such
registration or qualification, they may not have been exempt. As a result,
purchasers of such securities may have the right under the Act or such state
securities laws, to rescind their purchases, and thereby be entitled to return
such securities to the Company and receive back from the Company the full
consideration paid by such purchasers. No claims for any such rescission have
been asserted against the Company. The effective price per share of Class A
Common Stock and Class A Common Stock equivalents
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of such purchases ranged from $3.75 to $30.00. The Company expects to initiate
a rescission offer to all such holders simultaneous with this offering. If all
such holders accept such rescission offer, the Company would be required to
apply up to $5,150,000 of the proceeds of this placement towards such
rescission. The repurchase of shares pursuant to the rescission offer may give
rise to an obligation of the Company to issue additional shares of Class A
Common Stock to the holders of Series A Preferred Stock.
In addition, options issued pursuant to the Company's 1995 Stock Incentive
Plan for Employees and Consultants (the "1995 Plan") and nonplan options for
the purchase of Class A Common Stock were issued to approximately 150 to 200
people in California in 1995 and 1996 for which the Company was unable to rely
on the exemption provided by Section 25102(f) of the California Corporations
Code. In March 1996, the Company was denied a permit for these issuances by
the California Commissioner of Corporations as a result of the Company's two
classes of Common Stock with differing voting rights. In addition, a smaller
number of options were issued to optionees in other states, including Michigan
and Florida, for which the Company may not have had available an exemption
from qualification. Also, the November 17, 1995, grant of options for the
purchase of 60,000 shares of Class A Common Stock to employees of Critical
Technologies Incorporated was not qualified and may not have had an exemption
available under the blue sky laws of California. The aforementioned options
are potentially subject to rescission, and the Company intends to include them
in its planned rescission offer previously discussed. As of the date hereof,
management is not aware of any claims for rescission against the Company.
While the Company will offer to rescind the securities sales, there are no
assurances that the Company will not otherwise be subject to possible
penalties or fines relating to these issuances. The Company believes the
Rescission Offers will provide it with additional meritorious defenses to any
such future claims. See "Shares Eligible for Future Sale."
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
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1.1 Form of Underwriting Agreement.
2.1 Merger Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation of Registrant
prior to completion of this offering.
3.2 Form of Amended and Restated Certificate of Incorporation of Registrant
to be effective upon completion of this offering.
3.3 Amended and Restated Bylaws of Registrant prior to completion of this
offering.
3.4 Amended and Restated Bylaws of Registrant to be effective upon
completion of this offering.
4.1* Form of Registrant's Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
regarding legality of the securities being issued.
10.1** Amended and Restated Registration Rights Agreement, as amended and
restated as of August 21, 1996, by and among the Registrant, GS Capital
Partners, L.P., Kleiner Perkins Caufield & Byers VII, Comdisco, Inc.,
Intuit, Inc., certain listed holders of Series C Convertible Preferred
Stock, certain listed holders of Common Stock, certain listed holders
of Series D Convertible Preferred Stock, and Racal-Datacom, Inc.
10.2** Preferred Stock and Warrant Purchase Agreement, dated as of April 20,
1995, by and among the Registrant, GS Capital Partners, L.P., and
Kleiner Perkins Caufield & Byers VII and KPCB Information Sciences
Zaibatsu Fund II, as amended.
10.3** Form of Director and Officer Indemnification Agreement.
10.4** 1995 Stock Incentive Plan for Employees and Consultants, as amended
February 21, 1996.
10.5** Amended and Restated 1996 Stock Plan.
</TABLE>
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<TABLE>
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10.6 1997 Stock Plan.
10.7 1997 Employee Stock Purchase Plan.
10.8** Termination of Services and Indemnification Agreement, dated as of
February 15, 1996, by and between the Registrant and Marc Collins-
Rector and Chad Shackley.
10.9** Agreement, dated as of February 15, 1996, by and between the
Registrant and Randy Maslow.
10.10** Governance Agreement, dated May 15, 1997, by and among the
Registrant, Marc Collins-Rector, Chad Shackley, GS Capital Partners,
L.P., Kleiner Perkins Caufield & Byers VII, KPCB VII Founders Fund,
KPCB Information Sciences Zaibatsu Fund II, and Intuit, Inc.
10.11+* Amended and Restated Employee Services and Staffing Agreement, dated
June 19, 1997, between the Registrant and Critical Technologies,
Inc., as amended on September 30, 1996, and October 23, 1996,
including Colocation Services Agreement, dated as of November 1,
1994, between the Registrant and Critical Technologies, Inc. and
amendments thereto.
10.12+** Internet-Sign Up Wizard Referral and Microsoft Internet Explorer
License and Distribution Agreement, dated March 28, 1997, between
the Registrant and Microsoft Corporation.
10.13+** OEM License Agreement dated July 27, 1995, between the Registrant and
Netscape Communications Corporation, as amended by First Amendment,
dated January 2, 1996, Second Amendment, effective January 2, 1996,
and Third Amendment, dated May 21, 1996.
10.14+** "Dial up Client" Agreement, dated August 21, 1995, between the
Registrant and Netscape Communications Corporation.
10.15+** "Internet Account Server" Participation Agreement, dated as of
January 14, 1997, between the Registrant and Netscape Communications
Corporation.
10.16+** Special Customer Arrangement, dated May 17, 1996, between MCI
Telecommunications Corporation and Sattel Communications LLC, as
amended by First Amendment, dated July 2, 1996; assigned to
Registrant by Assignment and Novation Agreement #2, dated as of
August 7, 1996.
10.17+** Master Agreement for MCI Enhanced Services, effective November 1,
1996, between the Registrant and MCI Telecommunications Corporation.
10.18 [Reserved]
10.19 [Reserved]
10.20+** Contract for Services, dated June 17, 1996, by and between the
Registrant and MFS Telephone, Inc.
10.21+** AT&T Contract Tariff Order, dated June 17, 1996, and Addendum of even
date therewith.
10.22+** Master Lease Agreement Number CONO1C Between Concentric Research
Corporation and Racal-Datacom, Inc. ("Racal"), dated August 4, 1994,
as Supplemented by Letter Agreement, dated March 30, 1995, Between
the Corporation and Racal.
10.23+** Lease Agreement Number CON04C between Concentric Network Corporation
and Racal-Datacom, Inc., dated June 26, 1996.
10.24+** Master On-site Maintenance Plan Agreement Number CONO2C Between
Concentric Research Corporation and Racal-Datacom, Inc., dated
August 24, 1994.
10.25** Lease Agreement, dated November 1, 1996, effective March 11, 1996, by
and between the Registrant and Saginaw Video Associates, d.b.a.
Saginaw Conference Center.
10.26** Amended and Restated Lease Agreement, dated as of October 7, 1996,
between the Registrant and Larry Shackley.
10.27** (Master) Lease, dated January 26, 1988, between Tandem Computers
Incorporated and Spieker-French #130, Limited Partnership, as
amended by Lease Amendment No. 1, effective February 5, 1990, and
Extension Agreement, dated March 23, 1993.
</TABLE>
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<TABLE>
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10.28* Sublease, dated June 22, 1995, between the Registrant and Tandem
Computers Incorporated.
10.29** Sublease, dated April 25, 1995, between Tandem Computers Incorporated
and Passage Systems, Inc.
10.30** Assignment Agreement, dated December 6, 1996, by and between the
Registrant and Passage Systems, Inc.
10.31+** Internet Access Service Agreement, dated December 11, 1995, effective
as of August 1, 1995, between the Registrant and Intuit, Inc., as
amended.
10.32+* Virtual Private Network Services, dated August 16, 1996, between the
Registrant and WebTV Networks, Inc.
10.33+** Support Services Agreement, dated March 31, 1997, by and between the
Registrant and MCI Telecommunications Corporation.
10.34* Note and Warrant Purchase Agreement, dated June 19, 1997, by and
between the Registrant and Williams Communications Group, Inc.
10.35* Letter Credits Agreement, dated June 19, 1997, by and between the
Registrant and Williams Communications Group, Inc.
11.1** Statement of computation of earnings per share.
21.1 List of Subsidiaries.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of Ernst & Young, LLP, Independent Auditors.
24.1** Power of Attorney (see signature page).
27.1** Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment.
**Previously filed.
+ Certain information in these exhibits has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. (S)(S) 200.80(b)(4), 200.83 and 230.46.
++ The Registrant has determined that these exhibits are not material and will
not be filed with this Registration Statement.
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS
(a) The Registrant hereby undertakes to provide to the underwriter at the
closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-9
<PAGE>
(c) The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(ii) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-10
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1944, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL THE REQUIREMENTS FOR FILING ON FORM S-1 AND HAS DULY CAUSED THIS AMENDMENT
NO. 2 TO REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CUPERTINO, STATE OF
CALIFORNIA, ON THE 23RD DAY OF JUNE, 1997.
Concentric Network Corporation
/s/ Henry R. Nothhaft
By: _________________________________
HENRY R. NOTHHAFT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1944, AS AMENDED, THIS
AMENDMENT NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON JUNE 23,
1997, BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Henry R. Nothhaft President and Chief June 23, 1997
- ------------------------------------- Executive Officer
HENRY R. NOTHHAFT (Principal
Executive Officer),
Director
/s/ Michael F. Anthofer Chief Financial June 23, 1997
- ------------------------------------- Officer (Principal
MICHAEL F. ANTHOFER Financial and
Accounting Officer)
* Director June 23, 1997
- -------------------------------------
TERENCE M. O'TOOLE
* Director June 23, 1997
- -------------------------------------
VINOD KHOSLA
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director , 1997
- -------------------------------------
RANDY MASLOW
* Director June 23, 1997
- -------------------------------------
FRANCO REGIS
Director , 1997
- -------------------------------------
L. ROD MANNING
* Director June 23, 1997
- -------------------------------------
GARY E. RIESCHEL
*By: /s/ Henry R. Nothhaft
---------------------------------
HENRY R. NOTHHAFT
ATTORNEY-IN-FACT
</TABLE>
II-12
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Financial Data" and to the use of our report dated March 14, 1997
(except for Note 1 "The Company" and Note 10, as to which the date is June ,
1997), in Amendment No. 2 to the Registration Statement (Form S-1) and the
related Prospectus of Concentric Network Corporation for the registration of
3,450,000 shares of its common stock.
Ernst & Young LLP
San Jose, California
June , 1997
- -------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion
of the reincorporation of the Company under the laws of the State of Delaware
and the restatement of capital accounts described in Note 10 to the financial
statements.
/s/ Ernst & Young LLP
San Jose, California
June 23, 1997
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Merger Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation of
Registrant prior to completion of this offering.
3.2 Form of Amended and Restated Certificate of Incorporation of
Registrant to be effective upon completion of this offering.
3.3 Amended and Restated Bylaws of Registrant prior to completion of this
offering.
3.4 Amended and Restated Bylaws of Registrant to be effective upon
completion of this offering.
4.1* Form of Registrant's Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, regarding legality of the securities being issued.
10.1** Amended and Restated Registration Rights Agreement, as amended and
restated as of August 21, 1996, by and among the Registrant, GS
Capital Partners, L.P., Kleiner Perkins Caufield & Byers VII,
Comdisco, Inc., Intuit, Inc., certain listed holders of Series C
Convertible Preferred Stock, certain listed holders of Common Stock,
certain listed holders of Series D Convertible Preferred Stock, and
Racal-Datacom, Inc.
10.2** Preferred Stock and Warrant Purchase Agreement, dated as of April 20,
1995, by and among the Registrant, GS Capital Partners, L.P., and
Kleiner Perkins Caufield & Byers VII and KPCB Information Sciences
Zaibatsu Fund II, as amended.
10.3** Form of Director and Officer Indemnification Agreement.
10.4** 1995 Stock Incentive Plan for Employees and Consultants, as amended
February 21, 1996.
10.5** Amended and Restated 1996 Stock Plan.
10.6 1997 Stock Plan.
10.7 1997 Employee Stock Purchase Plan.
10.8** Termination of Services and Indemnification Agreement, dated as of
February 15, 1996, by and between the Registrant and Marc Collins-
Rector and Chad Shackley.
10.9** Agreement, dated as of February 15, 1996, by and between the
Registrant and Randy Maslow.
10.10** Governance Agreement, dated May 15, 1997, by and among the
Registrant, Marc Collins-Rector, Chad Shackley, GS Capital Partners,
L.P., Kleiner Perkins Caufield & Byers VII, KPCB VII Founders Fund,
KPCB Information Sciences Zaibatsu Fund II, and Intuit, Inc.
10.11+* Amended and Restated Employee Services and Staffing Agreement, dated
June 19, 1997, between the Registrant and Critical Technologies,
Inc., as amended on September 30, 1996, and October 23, 1996,
including Colocation Services Agreement, dated as of November 1,
1994, between the Registrant and Critical Technologies, Inc. and
amendments thereto.
10.12+** Internet-Sign Up Wizard Referral and Microsoft Internet Explorer
License and Distribution Agreement, dated March 28, 1997, between
the Registrant and Microsoft Corporation.
10.13+** OEM License Agreement dated July 27, 1995, between the Registrant and
Netscape Communications Corporation, as amended by First Amendment,
dated January 2, 1996, Second Amendment, effective January 2, 1996,
and Third Amendment, dated May 21, 1996.
10.14+** "Dial up Client" Agreement, dated August 21, 1995, between the
Registrant and Netscape Communications Corporation.
10.15+** "Internet Account Server" Participation Agreement, dated as of
January 14, 1997, between the Registrant and Netscape Communications
Corporation.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.16+** Special Customer Arrangement, dated May 17, 1996, between MCI
Telecommunications Corporation and Sattel Communications LLC, as
amended by First Amendment, dated July 2, 1996; assigned to
Registrant by Assignment and Novation Agreement #2, dated as of
August 7, 1996.
10.17+** Master Agreement for MCI Enhanced Services, effective November 1,
1996, between the Registrant and MCI Telecommunications Corporation.
10.18 [Reserved]
10.19 [Reserved]
10.20+** Contract for Services, dated June 17, 1996, by and between the
Registrant and MFS Telephone, Inc.
10.21+** AT&T Contract Tariff Order, dated June 17, 1996, and Addendum of even
date therewith.
10.22+** Master Lease Agreement Number CONO1C Between Concentric Research
Corporation and Racal-Datacom, Inc. ("Racal"), dated August 4, 1994,
as Supplemented by Letter Agreement, dated March 30, 1995, Between
the Corporation and Racal.
10.23+** Lease Agreement Number CON04C between Concentric Network Corporation
and Racal-Datacom, Inc., dated June 26, 1996.
10.24+** Master On-site Maintenance Plan Agreement Number CONO2C Between
Concentric Research Corporation and Racal-Datacom, Inc., dated
August 24, 1994.
10.25** Lease Agreement, dated November 1, 1996, effective March 11, 1996, by
and between the Registrant and Saginaw Video Associates, d.b.a.
Saginaw Conference Center.
10.26** Amended and Restated Lease Agreement, dated as of October 7, 1996,
between the Registrant and Larry Shackley.
10.27** (Master) Lease, dated January 26, 1988, between Tandem Computers
Incorporated and Spieker-French #130, Limited Partnership, as
amended by Lease Amendment No. 1, effective February 5, 1990, and
Extension Agreement, dated March 23, 1993.
10.28* Sublease, dated June 22, 1995, between the Registrant and Tandem
Computers Incorporated.
10.29** Sublease, dated April 25, 1995, between Tandem Computers Incorporated
and Passage Systems, Inc.
10.30** Assignment Agreement, dated December 6, 1996, by and between the
Registrant and Passage Systems, Inc.
10.31+** Internet Access Service Agreement, dated December 11, 1995, effective
as of August 1, 1995, between the Registrant and Intuit, Inc.
10.32+* Virtual Private Network Services, dated August 16, 1996, between the
Registrant and WebTV Networks, Inc.
10.33+** Support Services Agreement, dated March 31, 1997, by and between the
Registrant and MCI Telecommunications Corporation.
10.34* Note and Warrant Purchase Agreement, dated June 19, 1997, by and
between the Registrant and Williams Communications Group, Inc.
10.35* Letter Credits Agreement, dated June 19, 1997, by and between the
Registrant and Williams Communications Group, Inc.
11.1** Statement of computation of earnings per share.
21.1 List of Subsidiaries.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of Ernst & Young, LLP, Independent Auditors.
24.1** Power of Attorney (see signature page).
27.1** Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Certain information in these exhibits has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. (S)(S) 200.80(b)(4), 200.83 and 230.46.
++ The Registrant has determined that these exhibits are not material and will
not be filed with this Registration Statement.
<PAGE>
EXHIBIT 1_1
3,000,000 Shares
CONCENTRIC NETWORK CORPORATION
Common Stock
UNDERWRITING AGREEMENT
----------------------
, 1997
UBS Securities LLC
Wheat First Butcher Singer
Unterberg Harris
As Representatives of the Several Underwriters
c/o UBS Securities LLC
299 Park Avenue
New York, NY 10171
Ladies and Gentlemen:
Concentric Network Corporation, a Delaware corporation (the "Company"),
proposes to issue and sell 3,000,000 shares (the "Firm Shares") of its
authorized but unissued Common Stock, $0.001 par value per share (the "Common
Stock"), to the several underwriters listed on Schedule A to this Agreement
----------
(collectively, the "Underwriters"). The Company also proposes to grant to the
Underwriters an option to purchase up to 450,000 additional shares (the "Option
Shares") of Common Stock on the terms and for the purposes set forth in Section
3(c). The Firm Shares and the Option Shares are hereinafter collectively
referred to as the "Shares."
The Company wishes to confirm as follows its agreements with you (the
"Representatives") and the other Underwriters on whose behalf you are acting in
connection with the several purchases by the Underwriters of the Shares.
1. REGISTRATION STATEMENT. A registration statement on Form S-1 (File No.
333-27241) including a prospectus relating to the Shares and each amendment
thereto has been prepared by the Company in conformity with the requirements of
the Securities
<PAGE>
Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules
and Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission. Copies of such registration
statement and amendments (including exhibits) and of the related preliminary
prospectus have been delivered to you in such reasonable quantities as you have
requested for each of the Underwriters. If such registration statement has not
become effective, a further amendment to such registration statement, including
a form of final prospectus, necessary to permit such registration statement to
become effective will be filed promptly by the Company with the Commission. If
such registration statement has become effective, a final prospectus containing
all Rule 430A Information (as hereinafter defined) will be filed by the Company
with the Commission in accordance with Rule 424(b) of the Rules and Regulations
on or before the second business day after the date hereof (or such earlier time
as may be required by the Rules and Regulations).
The term "Registration Statement" as used in this Agreement shall mean such
registration statement (including all exhibits and financial statements at the
time such registration statement becomes or became effective and, in the event
any post-effective amendment thereto becomes effective prior to the Closing Date
(as hereinafter defined), shall also mean such registration statement as so
amended; provided, however, that such term shall include all Rule 430A
-------- -------
Information deemed to be included in such registration statement at the time
such registration statement becomes effective as provided by Rule 430A of the
Rules and Regulations and shall also mean any registration statement filed
pursuant to Rule 462(b) of the Rules and Regulations with respect to the Shares.
The term "Preliminary Prospectus" shall mean any preliminary prospectus referred
to in the preceding paragraph and any preliminary prospectus included in the
Registration Statement at the time it becomes effective that omits Rule 430A
Information. The term "Prospectus" as used in this Agreement shall mean the
prospectus relating to the Shares in the form in which it is first filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no
filing pursuant to Rule 424(b) of the Rules and Regulations is required, shall
mean the form of final prospectus included in the Registration Statement at the
time such registration statement becomes effective. The term "Rule 430A
Information" means information with respect to the Shares and the offering
thereof permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A of the Rules and Regulations. The term "Offering
Memorandum" as used in this Agreement shall mean the Offering Memorandum
consisting of the Prospectus and a Canadian wrap-around used in connection with
the offering of the Shares in Canada.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants as follows:
(a) The Company has not received, and has no notice of, any order of
the Commission preventing or suspending the use of any Preliminary Prospectus,
or instituted proceedings for that purpose, and each Preliminary Prospectus, at
the time of filing thereof, conformed in all material respects to the
requirements of the Act and the
2.
<PAGE>
Rules and Regulations. When the Registration Statement became or becomes, as the
case may be, effective (the "Effective Date") and at all times subsequent
thereto up to and at the Closing Date (as hereinafter defined), any later date
on which Option Shares are to be purchased (the "Option Closing Date") and when
any post-effective amendment to the Registration Statement becomes effective or
any amendment or supplement to the Prospectus is filed with the Commission, (i)
the Registration Statement and Prospectus, and any amendments or supplements
thereto, will contain all statements which are required to be stated therein by,
and will comply with the requirements of, the Act and the Rules and Regulations,
and (ii) neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, will include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. The foregoing
representations and warranties in this section 2(a) do not apply to any
statements or omissions made in reliance on and in conformity with the
information contained in the fourth paragraph of the section of the Prospectus
entitled "Underwriting" and the information in the last paragraph on the front
cover page of the Prospectus. The Company has not distributed any offering
material in connection with the offering or sale of the Shares other than the
Registration Statement, the Preliminary Prospectus, the Prospectus , the
Offering Memorandum or any other materials, if any, permitted by the Act.
(b) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware, with
full corporate power and authority to own, lease and operate its properties and
conduct its business as described in the Registration Statement. The Company is
duly qualified to do business as a foreign corporation in good standing in each
jurisdiction where the ownership or leasing of its properties or the conduct of
its business requires such qualification, except where the failure to so qualify
would not have a material adverse effect on the business, properties, financial
condition or results of operations of the Company (a "Material Adverse Effect")
. The Company has no subsidiaries (as defined in the Rules and Regulations). The
Company does not own, directly or indirectly, any shares of stock or any other
equity or long-term debt securities of any corporation or have any equity
interest in any firm, partnership, joint venture, association or other entity.
Complete and correct copies of the certificates of incorporation and of the
bylaws of the Company and all amendments thereto have been delivered to the
Representatives, and except as set forth in the exhibits to the Registration
Statement no changes therein will be made subsequent to the date hereof and
prior to the Closing Date or, if later, the Option Closing Date.
(c) The Company has full power and authority (corporate and
otherwise) to enter into this Agreement and to perform the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement on the part of the
Company, enforceable against the Company in accordance with its terms, except as
rights to indemnity and contribution hereunder may be limited by applicable laws
or equitable principles and except as enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization or
3.
<PAGE>
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles. The performance of this Agreement by the Company
and the consummation by the Company of the transactions herein contemplated will
not result in a breach or violation of any of the terms and provisions of, or
constitute a default under, (i) any indenture, mortgage, deed of trust, loan
agreement, bond, debenture, note agreement or other evidence of indebtedness, or
any lease, contract or other agreement or instrument to which the Company is a
party or by which its properties are bound, or (ii) the certificate of
incorporation or bylaws of the Company or (iii) any law, order, rule,
regulation, writ, injunction or decree of any court or governmental agency or
body to which the Company is subject. The Company is not required to obtain or
make (as the case may be) any consent, approval, authorization, order,
designation or filing by or with any court or regulatory, administrative or
other governmental agency or body as a requirement for the consummation by the
Company of the transactions herein contemplated, except such as may be required
under the Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act") or under state securities or blue sky ("Blue Sky") laws or under the rules
and regulations of the National Association of Securities Dealers, Inc. ("NASD")
or under applicable Canadian securities law.
(d) Except as set forth in the Prospectus, there is not pending or,
to the Company's knowledge, threatened, any action, suit, claim, proceeding or
investigation against the Company or any of its officers or any of its
properties, assets or rights before any court or governmental agency or body or
otherwise which might result in a Material Adverse Effect or have a material
adverse effect on the Company's properties, assets or rights, or prevent
consummation of the transactions contemplated hereby. There are no statutes,
rules, regulations, agreements, contracts, leases or documents that are required
to be described in the Prospectus, or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations that have not
been accurately described in all material respects in the Prospectus or filed as
exhibits to the Registration Statement.
(e) Except as set forth in the Prospectus, all outstanding shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, were not issued in violation of any
preemptive right, resale right, right of first refusal or similar right. The
authorized and outstanding capital stock of the Company conforms in all material
respects to the description thereof contained in the Registration Statement, the
Offering Memorandum and the Prospectus (and such description correctly states
the substance of the provisions of the instruments defining the capital stock of
the Company). The Shares have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by the
Company against payment therefor in accordance with the terms of this Agreement,
will be duly and validly issued and fully paid and nonassessable. Except as set
forth in the Prospectus, no preemptive right, co-sale right, right of first
refusal or other similar rights of securityholders exists with respect to any of
the Shares or the issue and sale thereof other than those that have been
expressly waived prior to the date hereof. No holder of securities of the
Company has the right to cause the
4.
<PAGE>
Company to include such holder's securities in the Registration Statement. No
further approval or authorization of any securityholder, the Board of Directors
or any duly appointed committee thereof or others is required for the issuance
and sale or transfer of the Shares, except as may be required under the Act, the
Exchange Act or under state securities or Blue Sky laws. Except as disclosed in
or contemplated by the Prospectus, the Offering Memorandum and the financial
statements of the Company, and the related notes thereto, included in the
Prospectus, and the Offering Memorandum the Company does not have outstanding
any options or warrants to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option and other plans or arrangements, and the options
or other rights granted and exercised thereunder, set forth in the Prospectus
and the Offering Memorandum accurately and fairly presents, in all material
respects, the information required to be shown with respect to such plans,
arrangements, options and rights.
(f) Ernst & Young LLP (the "Accountants"), who have examined the
financial statements, together with the related schedules and notes, of the
Company filed with the Commission as a part of the Registration Statement, which
are included in the Prospectus, are independent public accountants within the
meaning of the Act and the Rules and Regulations. The financial statements of
the Company, together with the related notes, forming part of the Registration
Statement, the Offering Memorandum and the Prospectus, fairly present the
financial position and the results of operations of the Company at the
respective dates and for the respective periods to which they apply. All
financial statements, together with the related notes, filed with the Commission
as part of the Registration Statement have been prepared in accordance with
generally accepted accounting principles as in effect in the United States
consistently applied throughout the periods involved except as may be otherwise
stated in the Registration Statement. The selected and summary financial and
statistical data included in the Registration Statement present fairly the
information shown therein and have been compiled on a basis consistent with the
financial statements presented therein. No other financial statements or
schedules are required by the Act or the Rules and Regulations to be included in
the Registration Statement.
(g) Subsequent to the respective dates as of which information is
given in the Registration Statement, the Offering Memorandum and the Prospectus,
there has not been (i) any material adverse change, or any development which, in
the Company's reasonable judgment, is likely to cause a material adverse change,
in the business, properties or assets described or referred to in the
Registration Statement, or the results of operations, condition (financial or
otherwise), business or operations of the Company, (ii) any transaction which is
material to the Company, except transactions in the ordinary course of business,
(iii) any obligation, direct or contingent, incurred by the Company, which is
material to the Company, except obligations incurred in the ordinary course of
business, (iv) any change in the capital stock or outstanding indebtedness of
the Company, or (v) any dividend or distribution of any kind declared, paid or
made on the capital stock of the
5.
<PAGE>
Company. The Company does not have any material contingent obligation which is
not disclosed in the Registration Statement.
(h) Except as set forth in the Prospectus and the Offering
Memorandum, (i) the Company has good and marketable title to all material
properties and assets described in the Prospectus and the Offering Memorandum as
owned by it, free and clear of any pledge, lien, security interest, charge,
encumbrance, claim, equitable interest, or restriction, (ii) the agreements to
which the Company is a party described in the Prospectus and the Offering
Memorandum are valid agreements, enforceable against the Company in accordance
with their terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles, and,
to the Company's knowledge, the other contracting party or parties thereto are
not in material breach or default under any of such agreements and (iii) the
Company has valid and enforceable leases for the properties described in the
Prospectus and the Offering Memorandum as leased by it, and such leases conform
in all material respects to the description thereof, if any, set forth in the
Registration Statement.
(i) The Company now holds and at the Closing Date and any later Option
Closing Date, as the case may be, will hold, all licenses, certificates,
approvals and permits from all state, United States, foreign and other
regulatory authorities, including but not limited to the United States Food and
Drug Administration (the "FDA") and any foreign regulatory authorities
performing functions similar to those performed by the FDA, that are material to
the conduct of the business of the Company (as such business is currently
conducted), except for such licenses, certificates, approvals and permits the
failure of which to hold would not have a Material Adverse Effect), all of which
are valid and in full force and effect (and there is no proceeding pending or,
to the knowledge of the Company, threatened which may cause any such license,
certificate, approval or permit to be withdrawn, cancelled, suspended or not
renewed). The Company is not in violation of its certificate of incorporation or
bylaws, or, except for defaults or violations which would not have a Material
Adverse Effect, in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any bond, debenture, note or other
evidence of indebtedness or in any contract, indenture, mortgage, loan
agreement, joint venture or other agreement or instrument to which it is a party
or by which it or any of its properties are bound, or in violation of any law,
order, rule, regulation, writ, injunction or decree of any court or governmental
agency or body.
(j) The Company has filed on a timely basis all necessary federal,
state and foreign income, franchise and other tax returns and has paid all taxes
shown thereon as due, and the Company has no knowledge of any tax deficiency
which has been or might be asserted against the Company which might have a
Material Adverse Effect. All material tax liabilities are adequately provided
for within the financial statements of the Company.
6.
<PAGE>
(k) The Company maintains insurance of the types and in the amounts
adequate for its business and consistent with insurance coverage maintained by
similar companies in similar businesses, including, but not limited to,
insurance covering clinical trial liability, product liability and real and
personal property owned or leased against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
(l) The Company is not involved in any labor dispute or disturbance
and, to the knowledge of the Company, no such dispute or disturbance is
threatened.
(m) The Company owns or possesses adequate licenses or other rights
to use all patents, patent applications, trademarks, trademark applications,
service marks, service mark applications, tradenames, copyrights, manufacturing
processes, formulae, trade secrets, know-how, franchises, and other material
intangible property and assets (collectively, "Intellectual Property") necessary
to the conduct of its businesses as conducted and as proposed to be conducted as
described in the Prospectus and the Offering Memorandum. The Company has no
knowledge that it lacks or will be unable to obtain any rights or licenses to
use any of the Intellectual Property necessary to conduct the business now
conducted or proposed to be conducted by it as described in the Prospectus and
the Offering Memorandum, except as described in the Prospectus and the Offering
Memorandum. The Prospectus and the Offering Memorandum fairly and accurately
describe[s] the Company's rights with respect to the Intellectual Property. The
Company has not received any notice of infringement or of conflict with rights
or claims of others with respect to any Intellectual Property. The Company is
not aware of any patents of others which are infringed upon by potential
products or processes referred to in the Prospectus and the Offering Memorandum
in such a manner as to materially and adversely affect the Company, except as
described in the Prospectus and the Offering Memorandum.
(n) The Company is conducting its business in compliance with all of
the laws, rules and regulations of the jurisdictions in which it is conducting
business.
(o) The Company is not an "investment company," or a "promoter" or
"principal underwriter" for a registered investment company, as such terms are
defined in the Investment Company Act of 1940, as amended.
(p) The Company has not incurred any liability for a fee, commission,
or other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement other than the
underwriting discounts and commissions contemplated hereby.
(q) The Company is (i) in compliance with any and all applicable
United States, state and local environmental laws, rules, regulations, treaties,
statutes and codes promulgated by any and all governmental authorities relating
to the protection of human health and safety, the environment or toxic
substances or wastes, pollutants or
7.
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contaminants ("Environmental Laws"), (ii) has received all permits, licenses or
other approvals required of it under applicable Environmental Laws to conduct
its business as currently conducted, and (iii) is in compliance with all terms
and conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permit
licenses or other approvals would not, individually or in the aggregate, have a
Material Adverse Effect. No action, proceeding, revocation proceeding, writ,
injunction or claim is pending or threatened relating to the Environmental Laws
or to the Company's activities involving Hazardous Materials. "Hazardous
Materials" means any material or substance (iv) that is prohibited or regulated
by any environmental law, rule, regulation, order, treaty, statute or code
promulgated by any governmental authority, or any amendment or modification
thereto, or (v) that has been designated or regulated by any governmental
authority as radioactive, toxic, hazardous or otherwise a danger to health,
reproduction or the environment.
(r) The Company has not engaged in the generation, use, manufacture,
transportation or storage of any Hazardous Materials on any of the Company's
properties or former properties, except where such use, manufacture,
transportation or storage is in compliance with Environmental Laws. No Hazardous
Materials have been treated or disposed of on any of the Company's properties or
on properties formerly owned or leased by the Company during the time of such
ownership or lease, except in compliance with Environmental Laws. No spills,
discharges, releases, deposits, emplacements, leaks or disposal of any Hazardous
Materials have occurred on or under or have emanated from any of the Company's
properties or former properties.
(s) The Company has not at any time during the last five years (i)
made any unlawful contribution to any candidate for foreign office, or failed to
disclose fully any contribution in violation of law, or (ii) made any payment to
any foreign, United States or state governmental officer or official, or other
person charged with similar public of quasi-public duties, other than payments
required or permitted by the laws of the United States.
(t) The Common Stock has been approved for quotation on the Nasdaq
National Market, subject to official notice of issuance.
(u) Neither the Company nor, to its knowledge, any of its officers,
directors or affiliates has taken, and at the Closing Date and at any later
Option Closing Date, neither the Company nor, to its knowledge, any of its
officers, directors or affiliates will have taken, directly or indirectly, any
action which has constituted, or might reasonably be expected to constitute, the
stabilization or manipulation of the price of sale or resale of the Shares.
(v) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date, or any later Option Closing Date, as the case
may be, and (ii) completion of the distribution of the Shares, any offering
material in connection
8.
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with the offering and sale of the Shares other than any Preliminary Prospectus,
the Prospectus, the Registration Statement and other materials, if any,
permitted by the Act.
(w) The Company has not at any time during the last five (5) years
(i) made any unlawful contribution to any candidate for foreign office or failed
to disclose fully any contribution in violation of law, or (ii) made any payment
to any federal or state governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments required
or permitted by the laws of the United States or any jurisdiction thereof.
(x) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(y) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
(z) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
6. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
the Firm Shares to the several Underwriters, and each of the Underwriters agrees
to purchase from the Company the respective aggregate number of Firm Shares set
forth opposite its name on Schedule A, plus such additional number of Firm
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Shares which such Underwriter may become obligated to purchase pursuant to
Section 3(b) hereof. The price at which such Firm Shares shall be sold by the
Company and purchased by the several Underwriters shall be $_____ per share. In
making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number of Firm
Shares specified on Schedule A.
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9.
<PAGE>
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 10 hereof) to purchase and pay
for the number of Shares agreed to be purchased by such Underwriter or
Underwriters, the non-defaulting Underwriters shall have the right within
twenty-four (24) hours after such default to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the Shares which such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such Shares
and portion, the number of Shares which each non-defaulting Underwriter is
otherwise obligated to purchase under this Agreement shall be automatically
increased on a pro rata basis (as adjusted by you in such manner as you deem
advisable to avoid fractional shares) to absorb the remaining shares and portion
which the defaulting Underwriter or Underwriters agreed to purchase; provided,
--------
however, that the nondefaulting Underwriters shall not be obligated to purchase
- -------
the Shares and portion which the defaulting Underwriter or Underwriters agreed
to purchase if the aggregate number of such Shares exceeds 10% of the total
number of Shares which all Underwriters agreed to purchase hereunder. If the
total number of Shares which the defaulting Underwriter or Underwriters agreed
to purchase shall not be purchased or absorbed in accordance with the two
preceding sentences, the Company shall have the right, within twenty-four (24)
hours next succeeding the 24-hour period referred to above, to make arrangements
with other underwriters or purchasers reasonably satisfactory to you for
purchase of such Shares and portion on the terms herein set forth. In any such
case, either you or the Company shall have the right to postpone the Closing
Date determined as provided in Section 5 hereof for not more than seven business
days after the date originally fixed as the Closing Date pursuant to said
Section 5 in order that any necessary changes in the Registration Statement, the
Offering Memorandum, the Prospectus or any other documents or arrangements may
be made. If the aggregate number of Shares which the defaulting Underwriter or
Underwriters agreed to purchase exceeds 10% of the total number of Shares which
all Underwriters agreed to purchase hereunder, and if neither the non-defaulting
Underwriters nor the Company shall make arrangements within the 24-hour periods
stated above for the purchase of all the Shares which the defaulting Underwriter
or Underwriters agreed to purchase hereunder, this Agreement shall be terminated
without further act or deed and without any liability on the part of the Company
to any non-defaulting Underwriter and without any liability on the part of any
nondefaulting Underwriter to the Company. Nothing in this paragraph and no
action taken hereunder, shall relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase all or any
portion of the Option Shares from the Company at the same price per share as the
Underwriters shall pay for the Firm Shares. Said option may be exercised only to
cover over-allotments in the sale of the
10.
<PAGE>
Firm Shares by the Underwriters and may be exercised in whole or in part at any
time (but not more than once) on or before the 30th day after the date of this
Agreement upon written or telegraphic notice by you to the Company setting forth
the aggregate number of shares of the Option Shares as to which the several
Underwriters are exercising the option. Delivery of certificates for the shares
of Option Shares, and payment therefor, shall be made as provided in Section 5
hereof. Each Underwriter will purchase such percentage of the Option Shares as
is equal to the percentage of Firm Shares that such Underwriter is purchasing,
the exact number of shares to be adjusted by you in such manner as you deem
advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering of the Shares in the
United States by the Underwriters shall be as set forth in the Prospectus. The
terms of the private placement of the Shares in Canada by the Underwriters shall
be as set forth in the Offering Memorandum. The Underwriters may from time to
time change the public offering and private placement price[s] after the closing
of the initial public offering and the private placement, respectively and
increase or decrease the concessions and discounts to dealers as they may
determine.
(b) You, on behalf of the Underwriters, represent and warrant that
(i) the information set forth in the last paragraph of the text on the front
cover page of the Prospectus, under the paragraph on page 2 concerning
stabilization and over-allotment by the Underwriters, and the fourth paragraph
of the section entitled "Underwriting" in the Registration Statement, the
Offering Memorandum, any Preliminary Prospectus and the Prospectus relating to
the Shares (insofar as such information relates to the Underwriters) constitutes
the only information furnished by the Underwriters to the Company for inclusion
in the Registration Statement, the Offering Memorandum, any Preliminary
Prospectus, and the Prospectus, and that the statements made therein are correct
and do not omit to state any material fact required to be stated therein or
necessary to make the statements made therein in light of the circumstances
under which they were made not misleading, and (ii) the Underwriters have not
distributed and will not distribute prior to the Closing Date or on any Option
Closing Date, as the case may be, any of offering material in connection with
the offering and sale of the shares other than the Preliminary Prospectus, the
Prospectus, the Registration Statement, the Offering Memorandum and other
materials permitted by the Act and applicable Canadian securities law.
5. DELIVERY OF AND PAYMENT FOR THE SHARES.
(a) Delivery of certificates for the Firm Shares and the Option
Shares (if the option granted pursuant to Section 3(c) hereof shall have been
exercised not later than 9:00 a.m., San Francisco time, on the date at least two
business days preceding the Closing Date) shall be made against receipt of a
wire transfer reference number issued by the Federal Reserve System evidencing
payment of the purchase price therefor by the
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several Underwriters by wire transfer of immediately available funds, to an
account specified in writing by the Company, at the offices of Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304 (or at such
other place as may be agreed upon among the Representatives and the Company), at
7:00 a.m., San Francisco time, (a) on the third business day after the date of
this Agreement, (b) if this Agreement is executed and delivered after 1:30 p.m.,
San Francisco time, the fourth full business day after the date of this
Agreement, or (c) at such time on such other day, not later than seven full
business days after the date of this Agreement, as shall be agreed upon in
writing by the Company and you (the "Closing Date").
(b) If the option granted pursuant to Section 3(c) hereof shall be
exercised after 9:00 a.m., San Francisco time, on the date two business days
preceding the Closing Date, and on or before the 30th day after the date of this
Agreement, delivery of certificates for the Option Shares shall be made against
receipt of a wire transfer reference number issued by the Federal Reserve System
evidencing payment of the purchase price therefor by the several Underwriters by
wire transfer of immediately available funds, to an account specified in writing
by the Company, at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page
Mill Road, Palo Alto, California 94304 (or at such other place as may be agreed
upon among the Representatives and the Company), at 7:00 a.m., San Francisco
time, on the third business day after the exercise of such option.
(c) Certificates for the Shares to be delivered to you shall be
registered in such name or names and shall be in such denominations as you may
request at least three business days before the Closing Date, in the case of
Firm Shares, and at least two business days prior to the Option Closing Date, in
the case of the Option Shares. Such certificates will be made available to the
Underwriters for inspection, checking and packaging at a location in New York,
New York, designated by the Underwriters not less than one full business day
prior to the Closing Date or, in the case of the Option Shares, by 3:00 p.m.,
New York time, on the business day preceding the Option Closing Date. If the
Representatives so elect, delivery of the Shares purchased from the Company may
be made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose wire transfer funds shall
not have been received by you on the Closing Date or any later Option Closing
Date. Any such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees as
follows:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this
12.
<PAGE>
Agreement is executed and delivered by the parties hereto, to become effective
as promptly as possible; it will notify you, promptly after it shall receive
notice thereof, of the time when the Registration Statement or any subsequent
amendment to the Registration Statement has become effective or any supplement
to the Prospectus has been filed. If the Company omitted information from the
Registration Statement at the time it was originally declared effective in
reliance upon Rule 430A(a), the Company will provide evidence satisfactory to
you that the Prospectus contains such information and has been filed, within the
time period prescribed, with the Commission pursuant to subparagraph (l) or (4)
of Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
is declared effective by the Commission. If for any reason the filing of the
final form of Prospectus is required under Rule 424(b) (3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed. The Company will notify you promptly of any request by the
Commission for the amending or supplementing of the Registration Statement or
the Prospectus or for additional information. Promptly upon your request, it
will prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the reasonable opinion of counsel
to the several Underwriters ("Underwriters' Counsel"), may be necessary or
advisable in connection with the distribution of the Shares by the Underwriters.
The Company will promptly prepare and file with the Commission, and promptly
notify you of the filing of, any amendments or supplements to the Registration
Statement or Prospectus which may be necessary to correct any statements or
omissions, if, at any time when a prospectus relating to the Shares is required
to be delivered under the Act, any event shall have occurred as a result of
which the Prospectus or any other prospectus relating to the Shares as then in
effect would include an untrue statement 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. In case any
Underwriter is required to deliver a prospectus within the nine-month period
referred to in Section 10(a) (3) of the Act in connection with the sale of the
Shares, the Company will prepare promptly upon request, but at the expense of
such Underwriter, such amendment or amendments to the Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a) (3) of the Act. The Company will file no
amendment or supplement to the Registration Statement or Prospectus that shall
not previously have been submitted to you a reasonable time prior to the
proposed filing thereof or to which you shall reasonably object in writing or
which is not in compliance with the Act and Rules and Regulations or the
provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge thereof of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or the use
of the Prospectus or of the initiation or threat of any proceeding for that
purpose; and it will promptly use its best efforts to prevent the issuance of
any such stop order or to obtain its withdrawal at the earliest possible moment
if such stop order should be issued.
13.
<PAGE>
(c) The Company will cooperate with you in endeavoring to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation, or to execute a general consent to service
of process in any jurisdiction, or to make any undertaking with respect to the
conduct of its business. In each jurisdiction in which the Shares shall have
been qualified, the Company will make and file such statements, reports and
other documents in each year as are or may be reasonably required by the laws of
such jurisdictions so as to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Shares, or as
otherwise may be required by law.
(d) The Company will furnish to you, as soon as available, copies of
the Registration Statement (three of which will include all exhibits), each
Preliminary Prospectus, the Prospectus, the Offering Memorandum and any
amendments or supplements to such documents, including any prospectus prepared
to permit compliance with Section 10(a) (3) of the Act, all in such quantities
as you may from time to time reasonably request.
(e) The Company will make generally available to its stockholders as
soon as practicable, but in any event not later than the 45th day following the
end of the fiscal quarter first occurring after the first anniversary of the
effective date of the Registration Statement, an earnings statement (which will
be in reasonable detail but need not be audited) complying with the provisions
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and
covering a twelve-month period beginning after the effective date of the
Registration Statement, and will advise you in writing when such statement has
been made available.
(f) During a period of five years after the date hereof, the Company,
as soon as practicable after the end of each respective period, will furnish to
its stockholders annual reports (including financial statements audited by
independent certified public accountants) and will furnish to its stockholders
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year, and will, upon request, furnish to you and the other several
Underwriters hereunder (i) concurrently with making such reports available to
its stockholders, statements of operations of the Company for each of the first
three quarters in the form made available to the Company's stockholders; (ii)
concurrently with the furnishing thereof to its stockholders, a balance sheet of
the Company as of the end of such fiscal year, together with statements of
operations, of stockholders' equity and of cash flow of the Company for such
fiscal year, accompanied by a copy of the certificate or report thereon of
nationally recognized independent certified public accountants; (iii)
concurrently with the furnishing of such reports to its stockholders, copies of
all reports (financial or other) mailed to stockholders; (iv) as soon as they
are available, copies of all reports and financial statements furnished to or
filed with the Commission, any securities exchange or the Nasdaq National Market
by the Company (except for documents for which confidential treatment is
requested); and (v) every material
14.
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press release and every material news item or article in respect of the Company
or its affairs which was generally released to stockholders or prepared for
general release by the Company. During such five-year period, if the Company
shall have any active subsidiaries, the foregoing financial statements shall be
on a consolidated basis to the extent that the accounts of the Company are
consolidated with any subsidiaries, and shall be accompanied by similar
financial statements for any significant subsidiary that is not so consolidated.
(g) Prior to the execution and delivery of this Agreement, the
Company will obtain agreement from each beneficial owner of the Company's Common
Stock listed on Schedule B to this Agreement providing that such person will
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not, without the prior written consent of UBS Securities LLC, offer, sell,
contract to sell, pledge, encumber, assign, transfer, grant any option to sell,
or otherwise dispose of, directly or indirectly, any shares of Common Stock or
securities convertible, or exchangeable for, Common Stock, or warrants or other
rights to purchase shares of Common Stock beneficially owned, except as to
shares of the Company's Common Stock (i) acquired through the Company's directed
shares program, (ii) acquired on the open market, or (iii) transferred by gift,
will, or intestacy, to the stockholder's immediate family or to a trust the
beneficiaries of which are exclusively the stockholder and/or a member or
members of his or her immediate family; provided, however, that in any such case
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it shall be a condition to any such transfer that any such transferee execute an
agreement stating that the transferee is receiving and holding such Common Stock
subject to this restriction. Each such person or entity shall also agree and
consent to the placing of legends and/or the entry of stop transfer instructions
with the Company's transfer agent against the transfer of shares of Common Stock
held by such person or entity, except in compliance with the foregoing
restriction.
(h) The Company shall not, during the 360 days following the
effective date of the Registration Statement, except with your prior written
consent as Representatives, file a registration statement covering any of its
shares of capital stock, except that one or more registration statements on Form
S-8 may be filed at any time following the effective date of the Registration
Statement.
(i) The Company shall not, during the 360 days following the
effective date of the Registration Statement, except with your prior written
consent as Representatives, issue, sell, offer or agree to sell, grant,
distribute or otherwise dispose of, directly or indirectly, any shares of Common
Stock, or any options, rights or warrants with respect to shares of Common
Stock, or any securities convertible into or exchangeable for Common Stock,
other than (i) the sale of Shares hereunder, (ii) the grant of options or the
issuance of shares of Common Stock under the Company's stock option plans or
stock purchase plan, as the case may be, existing on the date hereof, (iii) the
issuance of shares of Common Stock upon exercise of the currently outstanding
options or warrants described in the Registration Statement.
15.
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(j) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(k) The Company will file a Form SR in conformity with the
requirements of the Act and the Rules and Regulations.
(l) The Company will maintain a Transfer Agent and, if necessary
under the jurisdiction of incorporation of the Company, a Registrar (which may
be the same entity as the Transfer Agent) for its Common Stock.
(m) The Company will use its best efforts to designate the Common
Stock for quotation as a national market system security on the Nasdaq National
Market.
(n) The Company is familiar with the Investment Company Act of 1940,
as amended, and the rules and regulations thereunder, and has in the past
conducted its affairs, and will in the future conduct its affairs, in such a
manner so as to ensure that the Company was not and will not be an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
(o) If at any time during the 180-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your reasonable
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus) the Company will,
after written notice from you advising the Company to the effect set forth above
consult with you in good faith regarding the necessity of disseminating a press
release or other public statement responding to or commenting on such rumor,
publication or event and, if the Company in its reasonable judgment determines
that such a press release or other public statement is appropriate, the
substance of any press release or other public statement.
7. EXPENSES.
The Company agrees with each Underwriter that:
(a) The Company will pay and bear all costs, fees and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), the Offering
Memorandum (including fees relating to the filing of reports in Canada),
Preliminary Prospectuses and the Prospectus and any amendments or supplements
thereto; the reproduction of this Agreement, the Agreement Among Underwriters,
the Selected Dealer Agreement, the Preliminary Blue Sky Memoranda and any
Supplemental Blue Sky Memoranda and any instruments related to any of the
foregoing; the issuance and delivery of the Shares hereunder to the several
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Underwriters, including transfer taxes, if any; the cost of all stock
certificates representing the Shares and Transfer Agents' and Registrars' fees;
the fees and disbursements of corporate, patent and regulatory counsel for the
Company; all fees and other charges of the Company's independent public
accountants; the cost of furnishing to the several Underwriters copies of the
Registration Statement (including appropriate exhibits), the Offering
Memorandum, Preliminary Prospectuses and the Prospectus, and any amendments or
supplements to any of the foregoing; NASD filing fees and expenses incident to
securing any required review and the cost of qualifying the Shares under the
laws of such jurisdictions within the United States as you may designate
(including filing fees and fees and disbursements of Underwriters' Counsel in
connection with such NASD filings and Blue Sky qualifications); listing
application fees of the Nasdaq National Market; and all other expenses directly
incurred by the Company in connection with the performance of its obligations
hereunder.
(b) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company to
perform any agreement on its part to be performed hereunder or to fulfill any
condition of the Underwriters' obligations hereunder, the Company will, in
addition to paying the expenses described in clause (a) above, reimburse the
several Underwriters for all out-of-pocket expenses (including reasonable fees
and disbursements of Underwriters' Counsel) incurred by the Underwriters in
reviewing the Registration Statement and the Prospectus and in preparing the
Offering Memorandum and in otherwise investigating, preparing to market or
marketing the Shares. The Company will in no event be liable to any of the
several Underwriters for any loss of anticipated profits from the sale by them
of the Shares.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS.
The obligations of the several Underwriters to purchase and pay for the
Shares, as provided herein, shall be subject to the accuracy, as of the date
hereof and the Closing Date and any later Option Closing Date, as the case may
be, of the representations and warranties of the Company herein, to the
performance by the Company of its obligations hereunder and to the following
additional conditions:
(a) The Registration Statement shall have become effective not later
than 9:00 a.m., New York City time, on the date following the date of this
Agreement, or such later time or date as shall be consented to in writing by
you. If the filing of the Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b) and Rule 430A of the Rules and Regulations, the
Prospectus shall have been filed in the manner and within the time period
required by Rule 424(b) and Rule 430A of the Rules and Regulations. No stop
order suspending the effectiveness of the Registration Statement shall have been
issued and no proceeding for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the
17.
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Prospectus or otherwise) shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement , the Offering
Memorandum and the Prospectus, and the registration, authorization, issue, sale
and delivery of the Shares shall have been reasonably satisfactory to
Underwriters' Counsel, and such counsel shall have been furnished with such
papers and information as they may reasonably have requested to enable them to
pass upon the matters referred to in this subsection.
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, there shall not have been any change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company from that set forth in the Registration Statement or Prospectus,
which in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus.
(d) You shall have received, at no cost to you, on the Closing Date
and on any later Option Closing Date, as the case may be, the opinion of Wilson
Sonsini Goodrich & Rosati, corporate counsel to the Company, dated the Closing
Date or such later Option Closing Date, in the form attached hereto on
Appendix A, addressed to the Underwriters and with reproduced copies of signed
- ----------
counterparts thereof for each of the Representatives.
(e) You shall have received from Brobeck, Phleger & Harrison LLP,
Underwriters' counsel, an opinion or opinions, dated the Closing Date or on any
later Option Closing Date, as the case may be, in form and substance reasonably
satisfactory to you, with respect to the sufficiency of all corporate
proceedings undertaken by the Company and other legal matters relating to this
Agreement and the transactions contemplated hereby as you may reasonably
require, and the Company shall have furnished to such counsel such documents as
it may have reasonably requested for the purpose of enabling it to pass upon
such matters.
(f) You shall have received on the Closing Date and on any later
Option Closing Date, as the case may be, a letter from the Accountants addressed
to the Company and the Underwriters, dated the Closing Date or such later Option
Closing Date, as the case may be, confirming that it is an independent certified
public accountant with respect to the Company within the meaning of the Act and
the Rules and Regulations thereunder and based upon the procedures described in
its letter delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not more than
three days prior to the Closing Date or any such later Option Closing Date, as
the case may be, (i) confirming that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later Option
Closing Date, as the case may be; and (ii) setting forth any revisions and
additions to the
18.
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statements and conclusions set forth in the Original Letter that are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change, or
any development involving a prospective change, in or affecting the business or
properties of the Company which, in your reasonable judgment, makes it
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus. In addition, you shall have received from the
Accountants a letter addressed to the Company and made available to you for the
use of the Underwriters stating that its review of the Company's system of
internal accounting controls, to the extent it deemed necessary in establishing
the scope of its latest examination of the Company's financial statements, did
not disclose any weaknesses in internal controls that it considered to be
material weaknesses. All such letters shall be in a form reasonably satisfactory
to the Representatives and their counsel.
(g) You shall have received on the Closing Date and on any later
Option Closing Date, as the case may be, a certificate of the President and the
Chief Financial Officer of the Company, dated the Closing Date or such later
date, to the effect that as of such date (and you shall be satisfied that as of
such date):
(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the
Closing Date or any later Option Closing Date, as the case may be; and
the Company has complied with all of the agreements and satisfied all
of the conditions on its part to be performed or satisfied at or prior
to the Closing Date or any later Option Closing Date, as the case may
be;
(ii) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration
Statement or preventing or suspending the use of the Prospectus has
been issued, and no proceedings for that purpose have been instituted
or are pending or, to the best of their knowledge, threatened under the
Act;
(iii) They have carefully reviewed the Registration Statement,
the Offering Memorandum and the Prospectus; and, when the Registration
Statement became effective and at all times subsequent thereto up to
the delivery of such certificate, the Registration Statement and the
Prospectus and any amendments or supplements thereto contained all
statements and information required to be included therein or necessary
to make the statements therein not misleading; and when the
Registration Statement became effective, and at all times subsequent
thereto up to the delivery of such certificate, none of the
Registration Statement, the Prospectus or the Offering Memorandum or
any amendment or supplement thereto included 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; and, since the effective date of the Registration
Statement, there has
19.
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occurred no event required to be set forth in an amended or
supplemented Prospectus or Offering Memorandum that has not been so set
forth; and
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement, the Offering Memorandum and the
Prospectus, there has not been (A) any material adverse change in the
properties or assets described or referred to in the Registration
Statement, the Offering Memorandum and the Prospectus or in the
condition (financial or otherwise), operations, business or prospects
of the Company, (B) any transaction which is material to the Company,
except transactions entered into in the ordinary course of business,
(C) any obligation, direct or contingent, incurred by the Company,
which is material to the Company taken as a whole, (D) any change in
the capital stock or outstanding indebtedness of the Company which is
material to the Company taken as a whole or (E) any dividend or
distribution of any kind declared, paid or made on the capital stock of
the Company.
(h) The Company shall have obtained and delivered to you an agreement
from each beneficial owner of the Company's Common Stock listed on Schedule B to
this Agreement providing that such person will not, for a period of 360 days
after the date of the Prospectus, without the prior written consent of UBS
Securities LLC, offer, sell, contract to sell, pledge, encumber, assign,
transfer, grant any option to sell, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or securities convertible, or
exchangeable for, Common Stock, or warrants or other rights to purchase shares
of Common Stock beneficially owned, except as to shares of the Company's Common
Stock (i) acquired through the Company's directed shares program, (ii) acquired
on the open market, or (iii) transferred by gift, will, or intestacy, to the
stockholder's immediate family or to a trust the beneficiaries of which are
exclusively the stockholder and/or a member or members of his or her immediate
family; provided, however, that in any such case it shall be a condition to any
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such transfer that any such transferee execute an agreement stating that the
transferee is receiving and holding such Common Stock subject to this
restriction.
(i) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request as to the accuracy of
the representations and warranties of the Company herein, as to the performance
by the Company of its obligations hereunder and as to the other conditions
concurrent and precedent to the obligations of the Underwriters hereunder.
(j) The Firm Shares and the Option Shares, if any, shall have been
approved for designation upon notice of issuance on the Nasdaq National Market.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
20.
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9. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (f) below, the Company
agrees to indemnify and hold harmless each Underwriter and each person
(including each partner or officer thereof) who controls any Underwriter within
the meaning of Section 15 of the Act from and against any and all losses,
claims, damages or liabilities, joint or several, to which such indemnified
parties or any of them may become subject under the Act, the Exchange Act, or
the common law or otherwise, and the Company agrees to reimburse each such
Underwriter and controlling person for any legal or other out-of-pocket expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any breach of any representation,
warranty, agreement or covenant of the Company herein contained, (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any 462(b)
registration statement) or in the Offering Memorandum or any post-effective
amendment thereto (including any 462(b) registration statement), or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or (iii) any
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or in the Offering Memorandum or the omission or alleged omission to
state therein a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
and agrees to reimburse each Underwriter for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage or liability; provided, however, that the indemnity
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agreements of the Company contained in this paragraph (a) shall not apply to any
such losses, claims, damages, liabilities or expenses if such statement or
omission is contained in the last paragraph of text on the front cover page of
the Prospectus, under the paragraph on page 2 concerning stabilization and over-
allotment by the Underwriters, or in the fourth paragraph of the section of the
Prospectus entitled "Underwriting" and provided further that the indemnity
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agreement contained in this paragraph (a) with respect to any Preliminary
Prospectus or Offering Memorandum shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Shares which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Shares a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (a) of Section 6 hereof. The indemnity agreements of
the Company contained in this paragraph (a) and the representations and
warranties of the
21.
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Company contained in Section 2 hereof shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of any payment for the Shares.
This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its executive officers, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Act, from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Act, the Exchange Act, or the common law or
otherwise and to reimburse each of them for any legal or other expenses
including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any breach of any representation,
warranty, agreement or covenant of such Underwriter herein contained, (ii) any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or in the Offering Memorandum or any post-
effective amendment thereto (including any 462(b) registration statement) or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or
(iii) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus or the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
thereof or supplement thereto) or in the Offering Memorandum or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that in the cases of clauses (ii) and
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(iii) above, such statement or omission is contained in the last paragraph of
text on the front cover page of the Prospectus, under the paragraph on page 2
concerning stabilization and over-allotment by the Underwriters, or in the
fourth paragraph of the section of the Prospectus entitled "Underwriting." The
indemnity agreement of each Underwriter contained in this paragraph (b) shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any indemnified party and shall survive the delivery of
and payment for the Shares. This indemnity agreement shall be in addition to any
liabilities which each Underwriter may otherwise have.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 9 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against it, in respect of which
indemnity may be sought on account of any indemnity agreement
22.
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contained in such paragraphs, it will promptly give written notice (a "Notice")
of such service or notification to the party or parties from whom
indemnification may be sought hereunder. No indemnification provided for in such
paragraphs shall be available to any party who shall fail so to give the Notice
if the party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its own
expense to participate in the defense of any action, suit or proceeding against,
or investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (the "Notice of Defense") to the indemnified
party, to assume (alone or in conjunction with any other indemnifying party or
parties) the entire defense of such action, suit, investigation, inquiry or
proceeding, in which event such defense shall be conducted, at the expense of
the indemnifying party or parties, by counsel chosen by such indemnifying party
or parties and reasonably satisfactory to the indemnified party or parties;
provided, however, that (i) if the indemnified party or parties reasonably
- -------- -------
determine that there may be a conflict between the positions of the indemnifying
party or parties and of the indemnified party or parties in conducting the
defense of such action, suit, investigation, inquiry or proceeding or that there
may be legal defenses available to such indemnified party or parties different
from or in addition to those available to the indemnifying party or parties,
then counsel for the indemnified party or parties shall be entitled to conduct
the defense to the extent reasonably determined by such counsel to be necessary
to protect the interests of the indemnified party or parties and (ii) in any
event, the indemnified party or parties shall be entitled, at its or their own
expense to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. It is understood that the indemnifying parties
shall not, in respect of the legal defenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for (a) the fees and expenses of more than one separate firm (in
addition to any local counsel) for all of the Underwriters and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act,
and (b) the fees and expenses of more than one separate firm (in addition to any
local counsel) for the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act. If, within a reasonable time after receipt
of the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 9 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have
23.
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authorized to be incurred by the indemnified party or parties. If, within a
reasonable time after receipt of the Notice, no Notice of Defense has been
given, the indemnifying party or parties shall be responsible for any legal or
other expenses incurred by the indemnified party or parties in connection with
the defense of the action, suit, investigation, inquiry or proceeding. The
indemnifying party or parties shall not be liable for any settlement of any
proceeding effected without its or their written consent, provided such consent
has not been unreasonably withheld.
(d) If the indemnification provided for in this Section 9 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 9, then each indemnifying party shall, in
lieu of indemnifying such indemnified party, contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 9 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company, on the one hand, and the Underwriters, on the other, shall be deemed to
be in the same respective proportions as the total net proceeds from the
offering of the Shares received by the Company and the total underwriting
discount received by the Underwriters, as set forth in the table on the cover
page of the Prospectus, bear to the aggregate public offering price of the
Shares. Relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by each indemnifying party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparation to defend or defense against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
24.
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Underwriters' obligations in this paragraph (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 9).
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of such Underwriter and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.
(f) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof, including without limitation the
provisions of this Section 9 and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 9 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act, or in the Offering Memorandum as required by Canadian securities law.
10. TERMINATION. This Agreement may be terminated by you at any time on or
prior to the Closing Date or on or prior to any later Option Closing Date, as
the case may be, (i) if the Company shall have failed, refused or been unable,
at or prior to the Closing Date, or on or prior to any later Option Closing
Date, as the case may be, to perform any agreement on its part to be performed,
or because any other condition of the Underwriters' obligations hereunder
required to be fulfilled by the Company is not fulfilled, or (ii) if trading on
the New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market shall have been suspended, or minimum or maximum prices for trading shall
have been fixed, or maximum ranges for prices for securities shall have been
required on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market, by such trading exchanges or by order of the Commission
or any other governmental authority having jurisdiction, or if a banking
moratorium shall have been declared by federal or New York authorities, or (iii)
if the Company shall have sustained a loss by strike, fire, flood, accident or
other calamity of such character as to have a Material Adverse Effect regardless
of whether or not such loss shall have been insured, or
25.
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(iv) if there shall have been a material adverse change in the general political
or economic conditions or financial markets in the United States as in the
judgment of the Representatives makes it inadvisable or impracticable to proceed
with the offering, sale and delivery of the Shares, or (v) if there shall have
occurred an outbreak or escalation of hostilities between the United States and
any foreign power or of any other insurrection or armed conflict involving the
United States or other national or international calamity, hostilities or crisis
or the declaration by the United States of a national emergency which, in the
judgment of the Representatives, adversely affects the marketability of the
Shares, or (vi) if since the respective dates as of which information is given
in the Registration Statement, the Offering Memorandum and the Prospectus, there
shall have occurred any material adverse change or any development involving a
prospective material adverse change in or affecting the condition, financial or
otherwise, of the Company or the business affairs, management, or business
prospects of the Company, whether or not arising in the ordinary course of
business, or (vii) if any foreign, federal or state statute, regulation, rule or
order of any court or other governmental authority shall have been enacted,
published, decreed or otherwise promulgated which in the judgment of the
Representatives materially and adversely affects or will materially and
adversely affect the business or operations of the Company, or trading in the
Common Stock shall have been suspended, or (viii) there shall have occurred a
material adverse decline in the value of securities generally on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market or (v)
action shall be taken by any foreign, federal, state or local government or
agency in respect of its monetary or fiscal affairs which, in the judgment of
the Representatives, has a material adverse effect on the securities markets in
the United States. If this Agreement shall be terminated in accordance with this
Section 10, there shall be no liability of the Company to the Underwriters and
no liability of the Underwriters to the Company; provided, however, that in the
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event of any such termination the Company agrees to indemnify and hold harmless
the Underwriters from all costs or expenses incident to the performance of the
obligations of the Company under this Agreement, including all costs and
expenses referred to in Section 7.
If you elect to terminate this Agreement as provided in this Section 10,
the Company shall be notified promptly by you by telephone, telecopy or
telegram, confirmed by letter.
11. REIMBURSEMENT OF CERTAIN EXPENSES.
(a) In addition to their other obligations under Section 9 of this
Agreement, the Company hereby agrees to reimburse on a quarterly basis the
Underwriters for all reasonable legal and other expenses incurred in connection
with investigating or defending any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in paragraph (a) of Section 9 of this
Agreement, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section 11 and the
possibility that such payments might later be held to be improper; provided,
--------
however,
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26.
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that (i) to the extent any such payment is ultimately held to be improper, the
persons receiving such payments shall promptly refund them and (ii) such persons
shall provide to the Company, upon request, reasonable assurances of their
ability to effect any refund, when and if due.
(b) In addition to their other obligations under Section 9 of this
Agreement, the Underwriters hereby agree to reimburse on a quarterly basis the
Company for all reasonable legal and other expenses incurred in connection with
investigating or defending any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in paragraph (b) of Section 9 of this
Agreement, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section 11 and the
possibility that such payments might later be held to be improper; provided,
--------
however, that (i) to the extent any such payment is ultimately held to be
- -------
improper, the Company shall promptly refund it and (ii) the Company shall
provide to the Underwriter, upon request, reasonable assurances of its ability
to effect any refund, when and if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company and the several Underwriters and, with respect to
the provisions of Section 9 hereof, the several parties (in addition to the
Company and the several Underwriters) indemnified under the provisions of said
Section 9, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Shares from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to:
UBS Securities LLC
299 Park Avenue
New York, NY 10171
Attn: Mr. Robert Nolan
and to
UBS Securities LLC
555 California Street
Suite 4660
San Francisco, CA 94104
Attn: Mr. Jim Feuille
27.
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with a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Attn: Thomas A. Bevilacqua, Esq.
Notices to the Company shall be mailed, telegraphed or delivered to:
Concentric Network Corporation
10590 North Tantau Avenue
Cupertino, CA 95014
Attn: Mr. Henry R. Nothhaft
with a copy to:
Wilson Sonsini Goodrich & Rosati,
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304
Attn: David J. Segre, Esq.
All notices given by telegraph shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(i) any investigation made by or on behalf of any Underwriter or controlling
person thereof, or by or on behalf of the Company or its respective directors of
officers, and (ii) delivery of and payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
You will act as Representatives of the several Underwriters in all dealings
with the Company under this Agreement, and any action under or in respect of
this Agreement taken by you jointly or by UBS Securities LLC, as
Representatives, will be binding upon all of the Underwriters.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of New York.
28.
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[INTENTIONALLY LEFT BLANK]
29.
<PAGE>
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement among the Company
and the several Underwriters in accordance with its terms.
Very truly yours,
CONCENTRIC NETWORK CORPORATION
By:
-------------------------------------
Henry R. Nothhaft
President and Chief Executive Officer
The foregoing Agreement is hereby
confirmed and accepted as of the date
first above written.
UBS SECURITIES LLC
WHEAT FIRST BUTCHER SINGER
UNTERBERG HARRIS
By: UBS SECURITIES LLC
By:
-------------------------------------
Title: Authorized Signatory
Acting on behalf of the several Underwriters,
including themselves, named on Schedule A
----------
hereto.
30.
<PAGE>
SCHEDULE A
UNDERWRITERS
Number of
Shares
to be
Underwriters Purchased
------------ ---------
UBS Securities LLC.........................................
Wheat First Butcher Singer.................................
Unterberg Harris...........................................
Total...................................................... 3,000,000
=========
<PAGE>
SCHEDULE B
Lock-Up Agreements
------------------
<PAGE>
APPENDIX A
FORM OF COMPANY COUNSEL OPINION
(PURSUANT TO SECTION 8(d) OF THIS AGREEMENT)
You shall have received on the Closing Date and on any later Option
Closing Date, as the case may be, the following opinion of counsel for the
Company, dated the Closing Date or such later Option Closing Date addressed to
the Underwriters and with reproduced copies or signed counterparts thereof for
each of the Underwriters, to the effect that:
1. The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the State of Delaware;
2. The Company has the corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus;
3. The Company is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction, if
any, in which the ownership or leasing of its properties or the conduct
of its business requires such qualification, except where the failure
to be so qualified or be in good standing would not have a material
adverse effect on the condition (financial or otherwise), earnings,
operations or business of the Company. To such counsel's knowledge, the
Company does not own or control, directly or indirectly, any
corporation, association or other entity;
4. The authorized, issued and outstanding capital stock
of the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein, the issued and
outstanding shares of capital stock of the Company have been duly and
validly issued and are fully paid and nonassessable, and, to such
counsel's knowledge, unless otherwise described in the Prospectus, will
not have been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first refusal or
other similar right;
5. The offer and sale of the Common Stock and warrants
to purchase Common Stock to Williams Communications Group pursuant to
the terms of the Stock Purchase Agreements dated as of June 9, 1997 and
June 20, 1997 are exempt from the registration requirements of Section
5 of the Act, by virtue of Section 4(2) thereof;
6. The Firm Shares or the Option Shares, as the case
may be, to be issued by the Company pursuant to the terms of this
Agreement have been duly
<PAGE>
authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and
fully paid and nonassessable, and will not have been issued in
violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right of
stockholders;
7. The Company has the corporate power and authority to
enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by it hereunder;
8. This Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been duly
executed and delivered by the Company and, assuming due authorization,
execution and delivery by you, is a valid and binding agreement of the
Company, enforceable in accordance with its terms, except insofar as
indemnification provisions may be limited by applicable law and except
as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
9. The Registration Statement has become effective
under the Act and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
pending or threatened under the Act;
10. The Registration Statement and the Prospectus, and
each amendment or supplement thereto (other than the financial
statements (including supporting schedules) and financial data derived
therefrom as to which such counsel need express no opinion), as of the
effective date of the Registration Statement, complied as to form in
all material respects with the requirements of the Act and the
applicable Rules and Regulations;
11. The information in the Prospectus under the caption
"Description of Capital Stock," to the extent that it constitutes
matters of law or legal conclusions, has been reviewed by such counsel
and is a fair summary of such matters and conclusions; and the forms of
certificates evidencing the Common Stock and filed as exhibits to the
Registration Statement comply with the law of the State of Delaware;
12. The description in the Registration Statement and
the Prospectus of the charter and bylaws of the Company and of statutes
are accurate and fairly present the information required to be
presented by the Act and the applicable Rules and Regulations;
<PAGE>
13. To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a
character required to be described or referred to in the Registration
Statement or Prospectus or to be filed as an exhibit to the
Registration Statement which are not described or referred to therein
or filed as required;
14. The performance of this Agreement and the
consummation of the transactions herein contemplated (other than
performance of the Company's indemnification obligations hereunder,
concerning which no opinion need be expressed) will not (a) result in
any violation of the Company's charter or bylaws or (b) to such
counsel's knowledge, result in a material breach or violation of any of
the terms and provisions of, or constitute a default under, any bond,
debenture, note or other evidence of indebtedness, or under any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel to which
the Company is a party or by which its properties are bound, or any
applicable statute, rule or regulation known to such counsel or, to
such counsel's knowledge, any order, writ or decree of any court,
government or governmental agency or body having jurisdiction over the
Company or over any of their properties or operations;
15. No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body
having jurisdiction over the Company, or over any of its properties or
operations is necessary in connection with the consummation by the
Company of the transactions herein contemplated, except such as have
been obtained under the Act or such as may be required under state or
other securities or Blue Sky laws in connection with the purchase and
the distribution of the Shares by the Underwriters;
16. To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus by the Act or the Rules and Regulations, other than those
described therein;
17. To such counsel's knowledge, the Company is not
presently (a) in material violation of its charter or bylaws, or (b) in
material breach of any applicable statute, rule or regulation known to
such counsel or, to such counsel's knowledge, any order, writ or decree
of any court or governmental agency or body having jurisdiction over
the Company or over any of its properties or operations; and
18. To such counsel's knowledge, except as set forth in
the Registration Statement and Prospectus, no holders of Common Stock
or other securities of the Company have registration rights with
respect to securities of the Company and, except as set forth in the
Registration Statement and Prospectus, all holders of
<PAGE>
securities of the Company having rights known to such counsel to
registration of such shares of Common Stock or other securities,
because of the filing of the Registration Statement by the Company
have, with respect to the offering contemplated thereby, waived such
rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration
Statement.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto (other than the financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, the Prospectus and any amendment
or supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States, the State of Delaware or the State
of New York upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company, and of government
officials, in which case their opinion is to state that they are so relying and
that they have no knowledge of any material misstatement or inaccuracy in any
such opinion, representation or certificate. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
OF CONCENTRIC NETWORK CORPORATION
A DELAWARE CORPORATION,
AND
CONCENTRIC NETWORK CORPORATION
A FLORIDA CORPORATION
THIS AGREEMENT AND PLAN OF MERGER dated as of July __,1997 (the
"Agreement") is between Concentric Network Corporation, a Delaware corporation
("CNC Delaware"), and Concentric Network Corporation, a Florida corporation
("CNC Florida"). CNC Delaware and CNC Florida are sometimes referred to herein
as the "Constituent Corporations."
RECITALS
A. CNC Delaware is a corporation duly organized and existing under the
laws of the State of Delaware and has 41,000,000 shares, $.001 par value, of
authorized capital stock of which 24,000,000 shares are designated "Common
Stock", 1,000,000 are designated "Series A Preferred Stock", 915,156 are
designated "Series B Preferred Stock", 933,334 are designated "Series C
Preferred Stock", and 4,533,334 are designated "Series D Preferred Stock", and
9,618,176 shares are undesignated Preferred Stock. As of July __, 1997, 1,000
shares of Common Stock were issued and outstanding, all of which are held by CNC
Florida, and no shares of Preferred Stock were issued and outstanding.
B. CNC Florida is a corporation duly organized and existing under the laws
of the State of Florida and has 615,000,000 shares, $0.01 par value, of
authorized capital stock of which 360,000,000 shares are designated "Common
Stock", 15,000,000 shares are designated "Series A Preferred Stock", 13,727,328
are designated "Series B Preferred Stock", 14,000,000 shares are designated
"Series C Preferred Stock", and 68,000,000 shares are designated "Series D
Preferred Stock", and 144,272,672 shares are undesignated Preferred Stock. As
of July __, 1997, 30,381,307 shares of Common Stock, 13,703,542 shares of Series
A Preferred Stock, 6,504,520 shares of Series B Preferred Stock, 13,923,638
shares of Series C Preferred Stock and 43,998,714 shares of Series D Preferred
Stock, were issued and outstanding.
C. The Board of Directors of CNC Florida has determined that, for the
purpose of effecting the reincorporation of CNC Florida in the State of
Delaware, it is advisable and in the best interests of CNC Florida and its
shareholders that CNC Florida merge with and into CNC Delaware upon the terms
and conditions herein provided.
D. The respective Boards of Directors of CNC Delaware and CNC Florida have
approved this Agreement and have directed that this Agreement be submitted to a
vote of their respective shareholders and executed by the undersigned officers.
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, CNC Delaware and CNC Florida hereby agree, subject to the terms
and conditions hereinafter set forth, as follows:
<PAGE>
I
MERGER
1.1 Merger. In accordance with the provisions of this Agreement, the
Delaware General Corporation Law and the Florida Business Corporation Act, CNC
Florida shall be merged with and into CNC Delaware (the "Merger"), the separate
existence of CNC Florida shall cease and CNC Delaware shall survive the Merger
and shall continue to be governed by the laws of the State of Delaware, and CNC
Delaware shall be, and is herein sometimes referred to as, the "Surviving
Corporation," and the name of the Surviving Corporation shall be Concentric
Network Corporation.
1.2 Filing and Effectiveness. The Merger shall become effective when the
following actions shall have been completed:
(a) This Agreement and the Merger shall have been adopted and approved
by the shareholders of each Constituent Corporation in accordance with the
requirements of the Delaware General Corporation Law and the Florida
Business Corporation Act;
(b) All of the conditions precedent to the consummation of the Merger
specified in this Agreement shall have been satisfied or duly waived by the
party entitled to satisfaction thereof; and
(c) An executed Certificate of Merger or an executed, acknowledged and
certified counterpart of this Agreement meeting the requirements of the
Delaware General Corporation Law shall have been filed with the Secretary
of State of the State of Delaware.
The date and time when the Merger shall become effective, as aforesaid, is
herein called the "Effective Date of the Merger."
1.3 Effect of the Merger. Upon the Effective Date of the Merger, the
separate existence of CNC Florida shall cease and CNC Delaware, as the Surviving
Corporation, (i) shall continue to possess all of its assets, rights, powers and
property as constituted immediately prior to the Effective Date of the Merger,
(ii) shall be subject to all actions previously taken by its and CNC Florida's
Boards of Directors, (iii) shall succeed, without other transfer, to all of the
assets, rights, powers and property of CNC Florida in the manner as more fully
set forth in Section 259 of the Delaware General Corporation Law, (iv) shall
continue to be subject to all of its debts, liabilities and obligations as
constituted immediately prior to the Effective Date of the Merger, and (v) shall
succeed, without other transfer, to all of the debts, liabilities and
obligations of CNC Florida in the same manner as if CNC Delaware had itself
incurred them, all as more fully provided under the applicable provisions of the
Delaware General Corporation Law and the Florida Business Corporation Act.
-2-
<PAGE>
II
CHARTER DOCUMENTS, DIRECTORS AND OFFICERS
2.1 Certificate of Incorporation. Upon the effectiveness of the Merger,
the Certificate of Incorporation of CNC Delaware as in effect immediately prior
to the effective Date of the Merger shall continue in full force and effect as
the Certificate of Incorporation of the Surviving Corporation until duly amended
in accordance with the provisions thereof and applicable law.
2.2 Bylaws. The Bylaws of CNC Delaware as in effect immediately prior to
the Effective Date of the Merger shall continue in full force and effect as the
Bylaws of the Surviving Corporation until duly amended in accordance with the
provisions thereof and applicable law.
2.3 Directors and Officers. The directors and officers of CNC Delaware
immediately prior to the Effective Date of the Merger shall be the directors and
officers of the Surviving Corporation until their respective successors shall
have been duly elected and qualified or until as otherwise provided by law, or
the Certificate of Incorporation of the Surviving Corporation or the Bylaws of
the Surviving Corporation.
III
MANNER OF CONVERSION OF SECURITIES
3.1 CNC Florida Common Stock. Upon the Effective Date of the Merger, each
fifteen shares of CNC Florida Common Stock, $0.01 par value, outstanding
immediately prior thereto shall, by virtue of the Merger and without any action
by the Constituent Corporations, the holder of such shares or any other person,
be changed and converted into and exchanged for one fully paid and nonassessable
share of Common Stock, $0.001 par value, respectively, of the Surviving
Corporation.
3.2 CNC Florida Preferred Stock. Upon the Effective Date of the Merger,
each fifteen shares of CNC Florida Series A Preferred Stock, $0.01 par value,
Series B Preferred Stock, $0.01 par value, Series C Preferred Stock $0.01 par
value and Series D Preferred Stock $0.01 par value, issued and outstanding
immediately prior thereto shall, by virtue of the Merger and without any action
by the Constituent Corporations, the holder of such shares or any other person,
be changed and converted into and exchanged for one fully paid and nonassessable
share of Series A Preferred Stock, $0.001 par value, Series B Preferred Stock,
$0.001 par value Series C Preferred Stock, $0.001 par value or Series D
Preferred Stock, $0.001 par value, respectively, of the Surviving Corporation.
3.3 CNC Florida Options, Warrants and Convertible Securities. Upon the
Effective Date of the Merger, the Surviving Corporation shall assume and
continue the obligations of CNC Florida under option plans of CNC Florida and
all other employee benefit plans of CNC Florida, including outstanding stock
options of CNC Florida. Each outstanding and unexercised option, warrant or
other right to purchase or security convertible into CNC Florida Common Stock or
Preferred Stock shall become an
-3-
<PAGE>
option, warrant, right to purchase or a security convertible into the Surviving
Corporation's Common Stock or Preferred Stock, respectively, on the basis of one
share of the Surviving Corporation's Common Stock or Preferred Stock for each
fifteen shares of CNC Florida Common Stock or Preferred Stock, respectively,
issuable pursuant to any such option, warrant, right to purchase or convertible
security, on the same terms and conditions and at an exercise price per share
equal to fifteen times the exercise price applicable to such CNC Florida option,
warrant, right to purchase or a security convertible at the Effective Date of
the Merger.
A number of shares of the Surviving Corporation's Common Stock or Preferred
Stock, as the case may be, shall be reserved for issuance upon the exercise of
options, warrants, stock purchase rights or convertible securities equal to the
number of shares of CNC Florida Common Stock and Preferred Stock so reserved
immediately prior to the Effective Date of the Merger.
3.4 Fractional Shares. No fractional shares shall be issued by the
Surviving Corporation upon the conversion of any share of Common Stock,
Preferred Stock or any stock option, warrant, stock purchase right or
convertible security of CNC Florida into Common Stock, Preferred Stock or any
stock option, warrant, stock purchase right or convertible security,
respectively, of the Surviving Corporation. If the conversion would result in
the issuance of a fractional share of Common Stock, Preferred Stock or any stock
option, warrant, stock purchase right or convertible security , the Surviving
Corporation shall, in lieu of issuing the fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to the fair market value
of such fraction on the date of conversion (as determined in good faith by the
Board of Directors of the Corporation).
3.5 CNC Delaware Common Stock. Upon the Effective Date of the Merger,
each share of Common Stock, $.001 par value, of CNC Delaware issued and
outstanding immediately prior thereto shall, by virtue of the Merger and without
any action by CNC Delaware, the holder of such shares or any other person, be
canceled and returned to the status of authorized but unissued shares.
3.6 Exchange of Certificates. After the Effective Date of the Merger,
each holder of an outstanding certificate representing shares of CNC Florida
Common Stock or Preferred Stock may, at such shareholder's option, surrender the
same for cancellation to the transfer agent and registrar for the Common Stock
of the Surviving Corporation, as exchange agent (the "Exchange Agent"), and each
such holder shall be entitled to receive in exchange therefor a certificate or
certificates representing the number of shares of the appropriate class and
series of the Surviving Corporation's capital stock into which the surrendered
shares were converted as herein provided. Until so surrendered, each
outstanding certificate theretofore representing shares of CNC Florida capital
stock shall be deemed for all purposes to represent the number of whole shares
of the appropriate class and series of the Surviving Corporation's capital stock
into which such shares of CNC Florida capital stock were converted in the
Merger.
The registered owner on the books and records of the Surviving Corporation
or the Exchange Agent of any shares of stock represented by such outstanding
certificate shall, until such certificate shall have been surrendered for
transfer or conversion or otherwise accounted for to the Surviving Corporation
or the Exchange Agent, have and be entitled to exercise any voting and other
rights with respect to and
-4-
<PAGE>
to receive dividends and other distributions upon the shares of capital stock of
the Surviving Corporation represented by such outstanding certificate as
provided above.
Each certificate representing capital stock of the Surviving Corporation so
issued in the Merger shall bear the same legends, if any, with respect to the
restrictions on transferability as the certificates of CNC Florida so converted
and given in exchange therefor, unless otherwise determined by the Board of
Directors of the Surviving Corporation in compliance with applicable laws.
If any certificate for shares of CNC Delaware stock is to be issued in a
name other than that in which the certificate surrendered in exchange therefor
is registered, it shall be a condition of issuance thereof that the certificate
so surrendered shall be properly endorsed and otherwise in proper form for
transfer, that such transfer otherwise be proper and that the person requesting
such transfer pay to CNC Delaware or the Exchange Agent any transfer or other
taxes payable by reason of the issuance of such new certificate in a name other
than that of the registered holder of the certificate surrendered or establish
to the satisfaction of CNC Delaware that such tax has been paid or is not
payable.
IV
GENERAL
4.1 Covenants of CNC Delaware. CNC Delaware covenants and agrees that it
will, on or before the Effective Date of the Merger:
(a) Qualify to do business as a foreign corporation in the State of
California and in connection therewith irrevocably appoint an agent for
service of process as required under the provisions of Section 2105 of the
California Corporations Code;
(b) File any and all documents with the appropriate Florida tax
authorities necessary for the assumption by CNC Delaware of all of the
franchise tax liabilities of CNC Florida; and
(c) Take such other actions as may be required by the Florida Business
Corporation Act.
4.2 Further Assurances. From time to time, as and when required by CNC
Delaware or by its successors or assigns, there shall be executed and delivered
on behalf of CNC Florida such deeds and other instruments, and there shall be
taken or caused to be taken by CNC Delaware and CNC Florida such further and
other actions, as shall be appropriate or necessary in order to vest or perfect
in or conform of record or otherwise by CNC Delaware the title to and possession
of all the property, interests, assets, rights, privileges, immunities, powers,
franchises and authority of CNC Florida and otherwise to carry out the purposes
of this Agreement, and the officers and directors of CNC Delaware are fully
authorized in the name and on behalf of CNC Florida or otherwise to take any and
all such action and to execute and deliver any and all such deeds and other
instruments.
-5-
<PAGE>
4.3 Abandonment. At any time before the filing of this Agreement with the
Secretary of State of the State of Delaware, this Agreement may be terminated
and the Merger may be abandoned for any reason whatsoever by the Board of
Directors of either CNC Florida or CNC Delaware, or both, notwithstanding the
approval of this Agreement by the shareholders of CNC Florida or by the sole
stockholder of CNC Delaware, or by both.
4.4 Amendment. The Boards of Directors of the Constituent Corporations
may amend this Agreement at any time prior to the filing of this Agreement (or
certificate in lieu thereof) with the Secretaries of State of the States of
Florida and Delaware, provided that an amendment made subsequent to the adoption
of this Agreement by the shareholders of either Constituent Corporation shall
not: (1) alter or change the amount or kind of shares, securities, cash,
property and/or rights to be received in exchange for or on conversion of all or
any of the shares of any class or series thereof of such Constituent
Corporation, (2) alter or change any term of the Certificate of Incorporation of
the Surviving Corporation to be effected by the Merger, or (3) alter or change
any of the terms and conditions of this Agreement if such alteration or change
would adversely affect the holders of any class of shares or series thereof of
such Constituent Corporation.
4.5 Registered Office. The registered office of the Surviving Corporation
in the State of Delaware is located at 15 East North Street, Dover, Delaware
19901, County of Kent and Incorporation Services Ltd. is the registered agent of
the Surviving Corporation at such address.
4.6 Agreement. Executed copies of this Agreement will be on file at the
principal place of business of the Surviving Corporation at 10590 N. Tantau
Avenue, Cupertino, California 95014 and copies thereof will be furnished to any
shareholder of either Constituent Corporation, upon request and without cost.
4.7 Governing Law. This Agreement shall in all respects be construed,
interpreted and enforced in accordance with and governed by the laws of the
State of Delaware and, so far as applicable, the merger provisions of the
Florida Business Corporation Act.
4.8 Counterparts. In order to facilitate the filing and recording of this
Agreement, the same may be executed in any number of counterparts, each of which
shall be deemed to be an original and all of which together shall constitute one
and the same instrument.
-6-
<PAGE>
IN WITNESS WHEREOF, this Agreement and Plan of Merger, having first been
approved by resolutions of the Boards of Directors of CNC Delaware and CNC
Florida, is hereby executed on behalf of each of such two corporations and
attested by their respective officers thereunto duly authorized.
CONCENTRIC NETWORK CORPORATION
a Delaware corporation
By: ______________________________________
Henry R. Nothhaft
President and Chief Executive Officer
ATTEST:
________________________________
Michael F. Anthofer
Senior Vice President and Chief
Financial Officer
CONCENTRIC NETWORK CORPORATION
a Florida corporation
By: _____________________________________
Henry R. Nothhaft
President and Chief Executive Officer
ATTEST:
_______________________________
Michael F. Anthofer
Senior Vice President and Chief
Financial Officer
-7-
<PAGE>
CONCENTRIC NETWORK CORPORATION
(a Florida Corporation)
OFFICERS' CERTIFICATE
Henry R. Nothhaft and Michael F. Anthofer certify that:
1. They are the President, Chief Executive Officer and Senior Vice
President, Chief Financial Officer, respectively, of Concentric Network
Corporation, a corporation organized under the laws of the State of Florida.
2. The corporation has authorized two classes of stock, designated
"Common Stock" and "Preferred Stock."
3. There are 30,381,307 shares of Class A Common Stock, 13,703,542 shares
of Series A Preferred Stock, 6,504,520 shares of Series B Preferred Stock,
13,923,638 shares of Series C and 43,998,714 shares of Series D Preferred Stock
issued and outstanding as of July _____, 1997, the Filing Date for the Agreement
and Plan of Merger attached hereto (the "Merger Agreement"). All shares of
Class A Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock are entitled to vote on the
merger.
4. The principal terms of the Merger Agreement were approved by the Board
of Directors and by the vote of a number of shares of each class and series of
stock that equaled or exceeded the vote required.
5. The percentage vote required was greater than 50% of the votes
entitled to be cast by holders of all shares of Class A Common Stock, Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock outstanding as June 9, 1997, voting together as a single class.
6. The undersigned further declare under penalty of perjury under the
laws of the State of Florida that each has read the foregoing certificate and
knows the contents thereof and that the same is true of their own knowledge.
-8-
<PAGE>
SIGNATURES
Executed in Cupertino, California, on ____________ __, 1997.
_______________________________________
Henry R. Nothhaft
President and Chief Executive Officer
_________________________________________
Michael F. Anthofer
Senior Vice President and Chief Financial
Officer
SIGNATURE PAGE FOR OFFICERS' CERTIFICATE
CNC FLORIDA
-9-
<PAGE>
CONCENTRIC NETWORK CORPORATION
(Surviving Corporation)
OFFICERS' CERTIFICATE
Henry R. Nothhaft and Michael F. Anthofer certify that:
1. They are the President, Chief Executive Officer and Senior Vice
President, Chief Financial Officer, respectively, of Concentric Network
Corporation, a corporation organized under the laws of the State of Delaware.
2. The corporation has authorized two classes of stock, designated
"Common Stock" and "Preferred Stock."
3. There are 1,000 shares of Common Stock outstanding and entitled to
vote on the Agreement and Plan of Merger attached hereto (the "Merger
Agreement"). There are no shares of Preferred Stock outstanding.
4. The principal terms of the Merger Agreement were approved by the Board
of Directors and by the vote of 100% of the outstanding shares of Common Stock
of the Corporation.
5. The percentage vote required was more than 50% of the votes entitled
to be cast by holders of outstanding shares of Common Stock.
6. The undersigned further declare under penalty of perjury under the
laws of the State of Delaware that each has read the foregoing certificate and
knows the contents thereof and that the same is true of their own knowledge.
-10-
<PAGE>
SIGNATURES
Executed in Cupertino, California, on ___________ __, 1997.
_____________________________________
Henry R. Nothhaft
President and Chief Executive Officer
_________________________________________
Michael F. Anthofer
Senior Vice President and Chief Financial
Officer
SIGNATURE PAGE FOR OFFICERS' CERTIFICATE
CNC DELAWARE
-11-
<PAGE>
EXHIBIT 3.1
FIRST AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CONCENTRIC NETWORK CORPORATION
A Delaware Corporation
Concentric Network Corporation, a corporation organized and existing under the
laws of the State of Delaware, does hereby certify:
1. The name of the corporation is Concentric Network Corporation.
Concentric Network Corporation was originally incorporated under the
same name, and the original Certificate of Incorporation was filed
with the Secretary of State of the State of Delaware on February 9,
1996.
2. Pursuant to Sections 242 and 228 of the General Corporation Law of the
state of Delaware, the amendments and restatement herein set forth
have been duly approved by the Board of Directors and the sole
stockholder of Concentric Network Corporation.
3. Pursuant to Section 245 of the General Corporation Law of the state of
Delaware, this Amended and Restated Certificate of Incorporation
restates and integrates and further amends the provisions of the
Certificate of Incorporation of this corporation.
4. The text of the Certificate of Incorporation is hereby restated and
amended to read in its entirety as follows:
FIRST: The name of the Corporation is Concentric Network Corporation (the
"Corporation").
SECOND: The address of the Corporation's registered office in the State of
Delaware is 15 East North Street, Dover, Delaware 19901, County of
Kent. The name of its registered agent at such address is
Incorporating Services, L.P.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH:
1. AUTHORIZED CAPITAL. The total number of shares of all classes of
capital stock which the Corporation has authority to issue is 41,000,000 shares,
par value $.001 per share, consisting of (i) 24,000,000 shares of Common Stock,
par value $.001 per share (the "Common Stock") and (ii) 17,000,000 shares of
Preferred Stock, par value $.001 per share (the "Preferred Stock"). The Board of
Directors of the Corporation by vote of a majority of its members, is authorized
in accordance with and subject to limitations prescribed by law and this
Certificate of Incorporation, as amended, to provide by
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resolution for the issuance of additional shares of Preferred Stock in series,
to establish from time to time the number of shares to be included in each such
series and to fix the designations, powers, preferences and rights of the shares
of each such series and the qualifications, limitation or restrictions thereof.
For any series of Preferred Stock having issued and outstanding shares, the
Board of Directors is further authorized to increase or decrease (but not below
the number of shares of such series then outstanding) the number of shares of
such series that were originally fixed by the Board of Directors, but such
increase or decrease shall be subject to the limitations and restrictions stated
in the resolution of the Board of Directors originally fixing the number of
shares of such series, if any. If the number of shares of any series is so
decreased, then the shares constituting such decrease shall resume the status
that they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
2. TERMS OF THE COMMON STOCK.
2.1 DIVIDENDS. Subject to the rights of the Preferred Stock
described in Section 3.2 of this Article Fourth, dividends may be paid on the
Common Stock as and when declared by the Board of Directors of the Corporation
out of the assets or funds of the Corporation legally available therefor.
2.2 RATABLE TREATMENT. The Corporation shall not pay a dividend,
make a distribution (as defined in Section 3.10), or effect a stock split,
combination, reclassification or recapitalization, in each case, with respect to
its outstanding shares of Common Stock, unless all of its outstanding shares of
Common Stock participate on the same basis (except in the case of a
reclassification or recapitalization, with respect to voting rights) in such
dividend, distribution, split, combination, reorganization, reclassification or
recapitalization.
2.3 VOTING RIGHTS. Each holder of Common Stock shall be entitled to
one vote for each share of Common Stock held. Except as required by law, or as
otherwise set forth in this Article Fourth or as provided by the Board of
Directors in its designation of any series of Preferred Stock pursuant to
Section 3.1 of this Article Fourth, the holders of shares of Preferred Stock and
Common Stock shall vote together as a single class and not as separate classes.
The holders of the Common Stock and Series C Preferred Stock shall vote as a
class to elect the members of the Board of Directors (the "Common Directors"),
other than (x) the Series A Directors (as defined below), (y) the Series B
Director (as defined below), and (z) the Series D Directors (as defined below).
2.4 LIQUIDATION RIGHTS. Subject to the rights of the holders of the
Preferred Stock described in Section 3.5 of this Article Fourth and any other
prior and/or superior rights of such holders as provided by law, upon any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation, the holders of Common Stock shall be entitled to receive an
amount equal to the Aggregate Preference Amount (as defined in Section 3.5)
payable out of any remaining funds and other assets of the Corporation to be
distributed. Such funds and other assets shall be distributed to holders of the
Common Stock on a ratable basis. After the payment to the holders of Common
Stock of an amount equal to the Aggregate Preference Amount, the remaining
assets of the Corporation available for distribution to stockholders shall be
distributed ratably to the holders of Common Stock (treating for
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purposes of this calculation all shares of convertible Preferred Stock as having
been converted into Common Stock).
2.5 FRACTIONAL SHARES. A fractional share of Common Stock shall be
entitled to an equivalent fractional percentage of all of the rights and
privileges associated with a whole share of such Common Stock. Any reference to
a share of Common Stock in the Amended and Restated Certificate of Incorporation
shall be a reference to a whole or fractional share, as applicable, of Common
Stock.
3. TERMS OF THE SERIES A PREFERRED STOCK, SERIES B PREFERRED STOCK,
SERIES C PREFERRED STOCK AND SERIES D PREFERRED STOCK.
3.1 DESIGNATION AND NUMBER. There are hereby designated four series
of Preferred Stock to be known as "Series A Preferred Stock," "Series B
Preferred Stock," "Series C Preferred Stock" and "Series D Preferred Stock." The
number of shares constituting the Series A Preferred Stock shall be 1,000,000.
The number of shares constituting the Series B Preferred Stock shall be 915,156.
The number of shares constituting the Series C Preferred Stock shall be 933,334.
The number of shares constituting the Series D Preferred Stock shall be
4,533,334.
3.2 DIVIDENDS.
(a) The Corporation shall not declare or pay any dividend or
make any other distribution to the holders of the Common Stock unless the
holders of the Series A Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock and the Series D Preferred Stock participate with the
holders of the Common Stock in any such dividend or distribution, and a dividend
or distribution is prior thereto or simultaneously therewith declared or paid,
as the case may be, to the holders of the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock
as set forth in the immediately succeeding sentence. In the case of a dividend
or distribution to the holders of the Common Stock, the holder of each share of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock shall receive the same dividend or distribution that
such holder would be entitled to receive if all of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
held by such holder were exchanged for Common Stock at the applicable Conversion
Ratio (as defined below).
(b) The Corporation shall not declare or pay any dividend or make
any other distribution to the holders of the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock or the Series D Preferred
Stock, respectively, unless the holders of each of the other Series A Preferred
Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series
D Preferred Stock, as the case may be, participate with the holders of such
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or
Series D Preferred Stock, as the case may be, in any such dividend or
distribution, and a dividend or distribution is prior thereto or simultaneously
therewith declared or paid, as the case may be, to the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
Preferred
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Stock, as the case may be, as set forth in the immediately succeeding sentence.
In the case of a dividend or distribution to the holders of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or
the Series D Preferred Stock, as the case may be (the "Dividend"), the holder of
each share of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock shall receive the same dividend or
distribution that such holder would be entitled to receive if (i) the Dividend
were deemed to have been made to holders of Common Stock, and (ii) all of the
outstanding Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock were converted into Common Stock at
the applicable Conversion Ratio.
3.3 VOTING RIGHTS.
(a) In addition to any voting rights provided by law, the
holder of each share of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock shall be entitled to vote
on all matters and shall be entitled to the number of votes equal to the number
of votes a holder of the shares of Common Stock, whole or fractional, into which
such share of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock is convertible pursuant to Section
3.6 of this Article Fourth is entitled to, at the record date for the
determination of the shareholders entitled to vote on such matters or, if no
such record date is established, at the date such vote is taken or any written
consent of shareholder is solicited, provided that the holders of Series A
Preferred Stock shall not be entitled to vote on any matters relating to the
election of the Common Directors, the Series B Director or the Series D
Directors, the holders of Series B Preferred Stock shall not be entitled to vote
on any matters relating to the election of the Common Directors, the Series A
Directors or the Series D Directors, the Series C Preferred Stock shall not be
entitled to vote on any matters relating to the election of the Series A
Directors, Series B Director or the Series D Directors, and the Series D
Preferred Stock shall not be entitled to vote on any matters relating to the
election of the Series A Directors, Series B Director or Common Directors. The
holders of Series A Preferred Stock shall be entitled to vote as a class to
elect the Series A Directors (as defined below) in accordance with Section
3.3(b) hereof; the holders of Series B Preferred Stock shall be entitled to vote
as a class to elect the Series B Director (as defined below) in accordance with
Section 3.3(b) hereof; and the holders of the Series D Preferred Stock shall be
entitled to vote as a class to elect the Series D Directors (as defined below)
in accordance with Section 3.3(b) hereof.
(b) Series A Directors, Series B Director and Series D
Directors.
(i) The holders of Series A Preferred Stock shall be
entitled to vote as a class to elect two persons to the Corporation's Board of
Directors. Each person elected to be a director by the holders of Series A
Preferred Stock pursuant to this Section 3.3(b)(i) shall be referred to as a
"Series A Director."
(ii) The holders of Series B Preferred Stock shall be
entitled to vote as a class to elect one person to the Corporation's Board of
Directors. The person elected to be a director by the holders of Series B
Preferred Stock pursuant to this Section 3.3(b)(ii) shall be referred to as the
"Series B Director."
(iii) So long as at least 2,126,667 shares of Series D
Preferred Stock are outstanding, the holders of Series D Preferred Stock shall
be entitled to vote as a class to elect four
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persons to the Corporation's Board of Directors. In the event that less than
2,126,667, shares of Series D Preferred Stock are outstanding, the holders of
the Series D Preferred Stock shall be entitled to vote as a class to elect three
persons to the Corporation's Board of Directors. In the event the Corporation's
Board of Directors is increased to 15 or more persons and at least 2,126,667
shares of Series D Preferred Stock are outstanding, the holders of Series D
Preferred Stock shall be entitled to vote as a class to elect five persons to
the Corporation's Board of Directors. Each person elected to be a director by
the holders of Series D Preferred Stock pursuant to this Section 3.3(b)(iii)
shall be referred to as a "Series D Director."
(iv) At any meeting (or in a written consent in lieu
thereof) held for the purpose of electing directors, the presence in person or
by proxy (or the written consent) of the holders of a majority of the shares of
Series A Preferred Stock, Series B Preferred Stock or Series D Preferred Stock
then outstanding shall constitute a quorum for the election of the Series A
Directors, the Series B Director or the Series D Directors, respectively. Series
A Directors may be removed only by vote or written consent of the holders of the
Series A Preferred Stock. The Series B Director may be removed only by the vote
or written consent of the holders of the Series B Preferred Stock. The Series D
Directors may only be removed by the vote or written consent of the holders of
the Series D Preferred Stock.
3.4 REACQUIRED SHARES. Any shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock
converted, purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
None of such shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock shall be reissued by the
Corporation. The status of shares of Preferred Stock canceled through the
conversion thereof into Common Stock shall be governed by the second paragraph
of Section 1 of this Article Fourth and not by this Section 3.4.
3.5 LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) Upon the voluntary or involuntary dissolution, liquidation
or winding up (each, a "Liquidation") of the Corporation, the holders of the
shares of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock shall be entitled to receive and to
be paid out of the assets of the Corporation available for distribution to its
shareholders, before any payment or distribution shall be made on any Junior
Stock (as defined in Section 3.10), the applicable Preferred Distribution
Preference Per Share (as defined below) with respect to each outstanding share
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
or Series D Preferred Stock.
(b) If upon any such Liquidation, whether voluntary or
involuntary, the assets to be distributed to the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock shall be insufficient to permit payment of the full amount of
the Preferred Distribution Preference Per Share with respect to each share of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock, then the entire assets of the Corporation to be
distributed among the holders of the Series A Preferred Stock, Series B
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Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be
distributed among such holders pro rata in proportion to the full amounts to
which they would respectively be entitled.
(c) After the payment to the holders of shares of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock of the full amount of the liquidating distribution to which they
are entitled under this Section 3.5 and to any other holders of shares of
Preferred Stock in accordance with the terms provided by the resolution pursuant
to which such Preferred Stock is issued (collectively, the "Aggregate Preference
Amount"), an amount equal to the Aggregate Preference Amount shall be
distributed ratably to the holders of the Common Stock out of the assets of the
Corporation. After the payment to the holders of Common Stock of an amount equal
to the Aggregate Preference Amount, the remaining assets of the Corporation
available for distribution to shareholders shall be distributed ratably to the
holders of Common Stock (treating for purposes of this calculation all shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock as having been converted into Common Stock) and to any
other holders of shares of Preferred Stock in accordance with the terms provided
by the resolution pursuant to which such Preferred Stock is issued.
(d) Neither the consolidation, merger or other business
combination of the Corporation with or into any other Person or Persons nor the
sale of all or substantially all the assets of the Corporation shall be deemed
to be a Liquidation for purposes of this Section 3.5 of this Article Fourth.
(e) "Preferred Distribution Preference Per Share" shall mean,
(i) with respect to each share of Series A Preferred Stock, $11.03 (subject to
adjustment for any stock splits or recombinations of the Series A Preferred
Stock), (ii) with respect to each share of Series B Preferred Stock, $11.00 per
share (subject to adjustment for any stock splits or recombinations of the
Series B Preferred Stock), (iii) with respect to each share of Series C
Preferred Stock, $27.30 per share (subject to adjustment for any stock splits or
recombinations of the Series C Preferred Stock) and (iv) with respect to each
share of Series D Preferred Stock, $20.40 per share (subject to adjustment for
any stock splits or recombinations of the Series D Preferred Stock).
3.6 CONVERSION.
(a) Each share of Series A Preferred Stock, each share of
Series B Preferred Stock, each share of Series C Preferred Stock and each share
of Series D Preferred Stock issued or issuable with respect to the exercise or
conversion of any Series A Equivalents, Series B Equivalents, Series C
Equivalents or Series D Equivalents (as defined in Section 3.9) shall
automatically be converted into the applicable number of shares of Common Stock
at the then-effective applicable Conversion Ratio (as defined in Section 3.10)
immediately prior to the closing of a Qualified Public Offering. In addition, at
the option of the holder of any Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock or Series D Preferred Stock, such holder shall
have the right, at any time and from time to time prior to a Qualified Public
Offering, by written notice to the Corporation, to convert any share of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
Preferred Stock owned by such holder into the number of applicable shares of
Common Stock at the then-effective
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applicable Conversion Ratio. A "Qualified Public Offering" shall mean the sale
of shares of the Company's Common Stock in a bona fide, firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, resulting in at least $15,000,000
of gross proceeds to the Corporation before deducting underwriting discounts and
commissions and offering expenses, and reflecting a Corporation Valuation (as
defined below) of at least $50,000,000 (or such lesser amount as the holders of
a majority of the outstanding Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock, each voting as
separate classes, otherwise agree). The term "Corporation Valuation" means, with
respect to any public offering of Common Stock, the amount obtained by
multiplying the total number of shares of Common Stock outstanding immediately
prior to such public offering (treating for purposes of this calculation all
Common Stock Equivalents (as defined in Section 3.10) as having been converted,
exchanged or exercised) multiplied by the per share offering price for such
public offering.
(b) The Corporation shall at all times reserve and keep
available for issuance upon the conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock,
free from any preemptive rights, such number of its authorized but unissued
shares of Common Stock as will from time to time be necessary to permit the
conversion of all outstanding shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock into
shares of Common Stock, and shall take all action required to increase the
authorized number of shares of Common Stock if necessary to permit the
conversion of all outstanding shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock. For
purposes of this paragraph (b) of this Section 3.6 of this Article Fourth, all
Series A Equivalents, Series B Equivalents, Series C Equivalents and Series D
Equivalents (as defined in Section 3.9) shall be deemed, at any given time, to
be fully exercised, converted or exchanged for shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred
Stock, respectively.
(c) The Conversion Ratio (as defined in Section 3.10)
applicable to the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock, respectively, will be subject to
adjustment from time to time as follows:
(i) In case the Corporation shall at any time or from
time to time after the Filing Date (as defined in Section 3.10) (A) pay any
dividend, or make any distribution on the outstanding shares of Common Stock in
shares of Common Stock, (B) subdivide the outstanding shares of Common Stock,
(C) combine the outstanding shares of Common Stock into a smaller number of
shares or (D) issue by reclassification of the shares of Common Stock any shares
of capital stock of the Corporation, then, and in each such case, the applicable
Conversion Ratio in effect immediately prior to such event or the record date
therefor, whichever is earlier, shall be adjusted so that the holder of any
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock or Series D Preferred Stock thereafter convertible into Common Stock
pursuant to this Section 3.6 of this Article Fourth shall be entitled to receive
the number and type of shares of Common Stock or other securities of the
Corporation which such holder would have owned or have been entitled to receive
after the happening of any of the events described above, had such shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or
Series D Preferred Stock been converted into Common
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Stock immediately prior to the happening of such event or the record date
therefor, whichever is earlier. An adjustment made pursuant to this clause (i)
shall become effective (x) in the case of any such dividend or distribution,
immediately after the close of business on the record date for the determination
of holders of shares of Common Stock entitled to receive such dividend or
distribution, or (y) in the case of such subdivision, reclassification or
combination, at the close of business on the day upon which such corporate
action becomes effective.
(ii) Except with respect to the Excluded Securities (as
defined below) applicable in the case of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock or Series D Preferred Stock,
respectively, in case the Corporation shall issue any shares of Common Stock or
Common Stock Equivalents (as defined in Section 3.10) after the Filing Date, at
a price per share (or having a conversion or exercise price per share) less than
the then-applicable Preferred Distribution Preference Per Share, then in each
such case, the applicable Conversion Ratio shall be adjusted by multiplying (A)
the applicable Conversion Ratio in effect on the day immediately prior to the
date of issuance of such shares (or Common Stock Equivalents) by (B) a fraction,
the numerator of which shall be the sum of (1) the number of shares of Common
Stock outstanding on such date prior to such issuance and (2) the number of
additional shares of Common Stock issued (or issuable upon conversion, exchange
or exercise of such Common Stock Equivalents), and the denominator of which
shall be the sum of (x) the number of shares of Common Stock outstanding on such
date prior to such issuance and (y) the number of shares of Common Stock
purchasable at the then- applicable Preferred Distribution Preference Per Share
upon payment of the aggregate consideration receivable by the Corporation for
the total number of shares of Common Stock (or such Common Stock Equivalents) so
issued. An adjustment made pursuant to this clause (ii) shall be made on the
next Business Day following the date on which any such issuance is made and
shall be effective retroactively to the close of business on the date of such
issuance. For purposes of this clause (ii), the aggregate consideration
receivable by the Corporation in connection with the issuance of shares of
Common Stock or of Common Stock Equivalents shall be deemed to be equal to the
sum of the aggregate offering price (before deduction of underwriting discounts
or commissions and expenses payable to third parties, if any) of all such Common
Stock and/or Common Stock Equivalents plus the minimum aggregate amount, if any,
payable upon conversion, exchange or exercise of any such Common Stock
Equivalents. The issuance or reissuance of any shares of Common Stock (whether
treasury shares or newly issued shares) pursuant to a dividend or distribution
on, or subdivision, combination or reclassification of, the outstanding shares
of Common Stock requiring an adjustment in the Conversion Ratio pursuant to
clause (i) of this paragraph (c) of this Section 3.6 of this Article Fourth
shall not be deemed to constitute an issuance of Common Stock or Common Stock
Equivalents by the Corporation to which this clause (ii) applies. Upon the
expiration of any unconverted, unexchanged or unexercised Common Stock
Equivalents for which an adjustment has been made pursuant to this clause (ii),
the adjustments shall forthwith be reversed to effect such Conversion Ratio as
would have been in effect at the time of such expiration or such termination had
such Common Stock Equivalents, to the extent outstanding immediately prior to
such expiration or termination, never been issued. "Excluded Securities" shall
mean all shares of (w) Common Stock or Common Stock Equivalents issued and
outstanding on Filing Date, (x) Common Stock issued upon the conversion or
exercise of any such Common Stock Equivalent, (y) Common Stock or Common Stock
Equivalents issued pursuant to the Corporation's 1993 Incentive Stock Option
Plan, as amended, the 1995 Stock Incentive Plan For Employees and Consultants,
as amended, and the non-plan options as in effect through
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the Filing Date, (z) up to a total of 1,100,000 shares of Common Stock to be
issued pursuant to the Corporation's Amended and Restated 1996 Stock Plan or any
other stock plan adopted by the Corporation's Board of Directors, and (aa)
Common Stock or Common Stock Equivalents issued in connection with any bona fide
loans or lease financings approved by the Corporation's Board of Directors.
(iii) For purposes of this paragraph (c) of this Section
3.6 of this Article Fourth, the number of shares of Common Stock at any time
outstanding shall mean the aggregate of all shares of Common Stock then
outstanding (other than any shares of Common Stock then owned or held by or for
the account of the Corporation), treating for purposes of this calculation all
Common Stock Equivalents as having been converted, exchanged or exercised.
(iv) If the Corporation shall take a record of the
holders of its Common Stock for the purpose of entitling them to receive a
dividend or other distribution and shall thereafter, and before such dividend or
distribution is paid or delivered to stockholders entitled thereto, legally
abandon its plan to pay or deliver such dividend or distribution, then no
adjustment in the Conversion Ratio then in effect shall be made by reason of the
taking of such record, and any such adjustment previously made as a result of
the taking of such record shall be reversed.
(d) The issuance of certificates for shares of Common Stock
upon conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock shall be made without
charge to the holders thereof for any issuance tax in respect thereof, provided
that the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred
Stock which is being converted.
(e) The Corporation will at no time close its transfer books
against the transfer of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock or of any shares of Common
Stock issued or issuable upon the conversion of any shares of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
Preferred Stock, in any manner which interferes with the timely conversion of
the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
or Series D Preferred Stock, except as may otherwise be required to comply with
applicable securities laws.
(f) As used in this Section 3.6, the term "Common Stock" shall
mean and include the Corporation's authorized Common Stock, par value $.001 per
share, as constituted on the Filing Date (as defined below), and shall also
include any capital stock of any class of the Corporation thereafter authorized
which shall neither be limited to a fixed sum or percentage in respect of the
rights of the holders thereof to participate in dividends nor be entitled to a
preference in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, provided that the
shares of Common Stock receivable upon conversion of shares of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock shall include only shares designated as Common Stock of the
Corporation on the Filing Date, or in case of any
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reorganization or reclassification of the outstanding shares thereof, the stock,
securities or assets to be issued in exchange for such Common Stock pursuant
thereto.
(g) In the case of a Sale of the Corporation (as defined in
Section 3.10 below) or a proposed reorganization of the Corporation or a
proposed reclassification or recapitalization of the capital stock of the
Corporation (except as a transaction for which provision for adjustment is
otherwise made in this Section 3.6), each share of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
shall thereafter be convertible into the number of shares of stock or other
securities or property to which a holder of the number of shares of Common Stock
of the Corporation deliverable upon conversion of such Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock
would have been entitled upon such Sale of the Corporation, reorganization,
reclassification or recapitalization; and, in any such case, appropriate
adjustment (as determined by the Board of Directors) shall be made in the
application of the provisions herein set forth with respect to the rights and
interest thereafter of the holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, to the
end that the provisions set forth herein (including provisions with respect to
changes in and other adjustments of the applicable Conversion Ratio) shall
thereafter be applicable, as nearly as reasonably may be, in relation to any
shares of stock or other property thereafter deliverable upon the conversion of
the Series A Preferred Stock, Series B Preferred Stock, the Series C Preferred
Stock or Series D Preferred Stock. The Corporation shall not effect any such
Sale of the Corporation unless prior to or simultaneously with the consummation
thereof the successor corporation or purchaser, as the case may be, shall assume
by written instrument the obligation to deliver to the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock such shares of stock, securities or assets as, in accordance
with the foregoing provisions, each such holder is entitled to receive.
(h) The Corporation will not, by amendment of its Amended and
Restated Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 3.6 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock against
impairment.
3.7 REPORTS AS TO ADJUSTMENT. Upon any adjustment of the Conversion
Ratio then in effect pursuant to the provisions of Section 3.6 of this Article
Fourth, then, and in each such case, the Corporation shall promptly deliver to
the Transfer Agent(s) of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Common Stock and to each
of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock, a certificate signed by the
President or a Vice President and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary of the Corporation setting forth in
reasonable detail the event requiring the adjustment, the method by which such
adjustment was calculated and the Conversion Ratio then in effect following such
adjustment. Where appropriate, such notice to
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<PAGE>
holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock may be given in advance.
3.8 CERTAIN COVENANTS. Any registered holder of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred
Stock may proceed to protect and enforce its rights and the rights of any other
holders of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock, as the case may be, with any and
all remedies available at law or in equity.
3.9 PROTECTIVE PROVISIONS. So long as shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred
Stock (or securities convertible into, or exchangeable or exercisable for,
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock or Series D Preferred Stock, as the case may be, which are called "Series
A Equivalents," "Series B Equivalents," "Series C Equivalents" and "Series D
Equivalents," respectively) are outstanding, the Corporation shall not without
first obtaining the approval (by vote or written consent, as provided by law) of
the holders of at least a majority of the then- outstanding shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
Preferred Stock, as the case may be (treating for purposes of this calculation
all Series A Equivalents, Series B Equivalents, Series C Equivalents and Series
D Equivalents as having been converted, exchanged or exercised), voting as a
single class:
(a) alter or change the rights, preferences or privileges of
the shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock, as the case may be, or except as
provided in subsection (c) of this Section 3.9, otherwise amend this Amended and
Restated Certificate of Incorporation (in any case, whether by merger,
consolidation or otherwise) so as to affect adversely the shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
Preferred Stock, respectively; or
(b) increase the authorized number of shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
Preferred Stock, as the case may be; or
(c) create or designate, or authorize the issuance of any new
class or series of stock (including, without limitation, the issuance of any
additional shares of Preferred Stock by the Board of Directors pursuant to
Section 1 of this Article Fourth) (i) ranking senior to or having a preference
over, or being on a parity with, Series A Preferred Stock with respect to
dividends or upon liquidation, (ii) ranking senior or having a preference over
the Series C Preferred Stock, (iii) ranking senior to or having a preference
over, or being on a parity with, the Series D Preferred Stock or (iv)
convertible into any such class or series of stock, provided that the
Corporation may create or designate or authorize the issuance of a new class or
series of stock (a) ranking senior to or having preference over, or being on a
parity with, the Series B Preferred Stock or (b) being on a parity with the
Series C Preferred Stock, in each case with respect solely to dividends or upon
liquidation, without obtaining the approval of the holders of any of the Series
B Preferred Stock or the Series C Preferred Stock, as the case may be.
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<PAGE>
3.10 DEFINITIONS. In addition to any other terms defined herein, for
purposes of this Article Fourth, the following terms shall have the meanings
indicated:
"Business Day" shall mean any day other than a Saturday,
Sunday, or a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
"Commission" shall mean the Securities and Exchange Commission,
and any successor agency.
"Common Stock Equivalent" shall mean securities convertible
into, or exchangeable or exercisable for, shares of Common Stock or for other
securities that are otherwise convertible into, or exchangeable or exercisable
for shares of Common Stock.
"Conversion Ratio," determined as of any date, shall equal the
number of shares of Common Stock into which one share of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred
Stock, as the case may be, is convertible pursuant to Section 3.6 of this
Article Fourth. The Conversion Ratio as of the date of filing of this Amended
and Restated Certificate of Incorporation shall be: 1.0152678 as to the Series A
Preferred Stock; 1.0119240 as to the Series B Preferred Stock; 1.3382350 as to
the Series C Preferred Stock; and 1.0403606 as to the Series D Preferred Stock;
subject to adjustment in each case as provided in paragraph (c) of Section 3.6
of this Article Fourth.
The term "distribution" shall include the transfer of cash or
property to the holders of a class of capital stock of the Corporation, without
consideration, whether by way of dividend or otherwise, or the purchase or
redemption of shares of the Corporation, for cash or property, including such
transfer, purchase or redemption by a subsidiary of the Corporation. The time of
any distribution by way of dividends shall be the date of declaration thereof,
and the time of any distribution by purchase or redemption of shares shall be
the date on which cash or property is transferred by the Corporation, whether or
not pursuant to a contract of an earlier date; provided that, where a debt
security is issued in exchange for shares, the time of the distribution is the
date when the Corporation acquires the shares for such exchange.
"Filing Date" shall mean the date of filing of this First
Amended and Restated Certificate of Incorporation.
"Junior Stock" shall mean any capital stock of the Corporation
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Preferred Stock.
"Person" shall mean any individual, firm, corporation,
partnership or other entity, and shall include any successor (by merger or
otherwise) of such entity.
"Sale of the Corporation" shall mean consolidation or merger of
the Corporation with or into any other corporation or corporations (other than a
consolidation or merger in which the
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<PAGE>
Corporation is the continuing corporation), or a sale, conveyance or disposition
of all or substantially all of the assets of the Corporation or the effectuation
by the Corporation of a transaction or series of related transactions in which
more than fifty (50%) percent of the voting power of the Corporation is disposed
of.
FIFTH: The Corporation is to have perpetual existence. The business and
affairs of the Corporation shall be managed by the Board of Directors
of the Corporation.
SIXTH: Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and
before voting begins.
SEVENTH: The number of directors that constitute the whole Board of Directors
of the Corporation shall be designated in the Bylaws of the
Corporation. Vacancies occurring on the Board of Directors for any
reason may be filled by vote of a majority of the remaining members of
the Board of Directors, although less than a quorum, at any meeting of
the Board of Directors or by unanimous written consent of such
remaining directors. A person so elected by the Board of Directors to
fill a vacancy shall hold office until the next succeeding annual
meeting of stockholders of the Corporation and until his or her
successor shall have been duly elected and qualified.
EIGHTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make,
alter, amend or repeal the Bylaws of the Corporation.
NINTH: To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or as it may hereafter be amended, no director
of the Corporation shall be personally liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as
a director.
Neither any amendment nor repeal of this Article, nor the adoption of
any provision of this Amended and Restated Certificate of
Incorporation inconsistent with this Article, shall eliminate or
reduce the effect of this Article in respect of any matter occurring,
or any cause of action, suit or claim that, but for this Article,
would accrue or arise, prior to such amendment, repeal or adoption of
an inconsistent provision.
TENTH: Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may
be kept (subject to any provision contained in the statutes) outside
of the State of Delaware at such place or places as may be designated
from time to time by the Board of Directors or in the Bylaws of the
Corporation.
ELEVENTH: Pursuant to Section 203(b) of the Delaware General Corporation Law,
the stockholders of this Corporation expressly elect not to be
governed by Section 203(a) of the Delaware Corporation laws.
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<PAGE>
IN WITNESS WHEREOF, Concentric Network Corporation, has caused this Amended
and Restated Certificate of Incorporation to be executed by Henry R. Nothhaft,
its President and Chief Executive Officer attested by Peter J. Bergeron, its
Secretary, this ____ day of ____, 1997.
CONCENTRIC NETWORK CORPORATION
______________________________________________
Henry R. Nothhaft,
President and Chief Executive Officer
Attest:
________________________________
Peter J. Bergeron, Secretary
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<PAGE>
EXHIBIT 3.2
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
CONCENTRIC NETWORK CORPORATION
A DELAWARE CORPORATION
Concentric Network Corporation., a corporation organized and existing under
and by virtue of the General Corporation Law of Delaware (the "Corporation"),
does hereby certify as follows:
FIRST: The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of Delaware on February 9, 1996.
SECOND: This Second Amended and Restated Certificate of Incorporation has
been duly adopted in accordance with the provisions of Section 242 and 245 of
General Corporation Law of the State of Delaware by the Board of Directors of
the Corporation.
THIRD: This Second Amended and Restated Certificate of Incorporation was
approved by written consent of the stockholder of the Corporation pursuant to
Section 228 of the General Corporation Law of the State of Delaware.
FOURTH: The First Amended and Restated Certificate of Incorporation of
this Corporation is amended and restated in its entirety to read as follows:
"I.
The name of the Corporation is Concentric Network Corporation (hereinafter
sometimes referred to as the "Corporation").
II.
The address of the registered office of the Corporation in the State of
Delaware is 15 East North Street, Dover, Delaware 19901, County of Kent. The
name of its registered agent at such address is Incorporating Services, L.P.
III.
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
<PAGE>
IV.
The Corporation is authorized to issue a total of 110,000,000 shares of
stock in two classes designated respectively "Preferred Stock" and "Common
Stock." The total number of shares of Preferred Stock the Corporation shall
have authority to issue is 10,000,000, par value $0.001 per share, and the total
number of shares of Common Stock the Corporation shall have authority to issue
is 100,000,000, par value $0.001 per share.
The shares of Preferred Stock authorized by this Second Amended and
Restated Certificate of Incorporation may be issued from time to time in one or
more series. For any wholly unissued series of Preferred Stock, the Board of
Directors is hereby authorized to fix and alter the dividend rights, dividend
rates, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), redemption prices, liquidation preferences,
the number of shares constituting any such series and the designation thereof,
or any of them.
For any series of Preferred Stock having issued and outstanding shares, the
Board of Directors is further authorized to increase or decrease (but not below
the number of shares of such series then outstanding) the number of shares of
such series when the number of shares of such series was originally fixed by the
Board of Directors, but such increase or decrease shall be subject to the
limitations and restrictions stated in the resolution of the Board of Directors
originally fixing the number of shares of such series, if any. If the number of
shares of any series is so decreased, then the shares constituting such decrease
shall resume the status that they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
V.
The following provisions are inserted for the management of the business
and the conduct of the affairs of the Corporation, and for further definition,
limitation and regulation of the powers of the Corporation and of its directors
and stockholders:
1. The business of the Corporation shall be managed by or under the
direction of the Board of Directors.
2. Special meetings of stockholders of the Corporation may be called
only by the President or the Chairman of the Board or by the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board for
adoption) or by the holders of shares entitled to cast not less than 10% of the
votes at the meeting.
<PAGE>
VI.
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit.
If the Delaware General Corporation Law is hereafter amended to authorize
corporate action further eliminating or limiting the personal liability of a
director, then the liability of a director of the Corporation, without any
further corporate action on the part of the Corporation, shall be eliminated or
limited to the fullest extent permitted by the Delaware General Corporation Law,
as so amended.
Any repeal or modification of the foregoing provisions of this Article VI
by the stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
VII.
The number of directors shall be fixed from time to time by the Board of
Directors pursuant to a resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board for adoption). The directors shall be divided into three classes, as
nearly equal in number as possible, with the term of office of the first class
to expire at the first annual meeting of stockholders after the Corporation is
subject to the Securities Exchange Act of 1934, as amended, the term of office
of the second class to expire at the second annual meeting of stockholders and
the term of office of the third class to expire at the third annual meeting of
stockholders. At each annual meeting of stockholders following such initial
classification and election, directors elected to succeed those directors whose
terms expire shall be elected to serve three-year terms and until their
successors are elected and qualified, so that the term of one class of directors
will expire each year. When the number of directors is changed, any newly
created directorships, or any decrease in directorships, shall be apportioned
among the classes so as to make all classes as nearly equal as possible,
provided that no decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Vacancies occurring on the Board of Directors for any reason may be filled
by vote of a majority of the remaining members of the Board of Directors,
although less than a quorum, at any meeting of the Board of Directors or by
unanimous written consent of the Board of Directors. A person so elected by the
Board of Directors to fill a vacancy shall hold office until the next succeeding
annual meeting of stockholders of the Corporation and until his or her successor
shall have been duly elected and qualified.
<PAGE>
VIII.
The Board of Directors is expressly empowered to adopt, amend or repeal
Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of the
Corporation by the Board of Directors shall require the approval of a majority
of the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any resolution
providing for any such adoption, amendment or repeal is presented to the Board).
The stockholders shall also have power to adopt, amend or repeal the Bylaws of
the Corporation.
IX.
Whenever a compromise or arrangement is proposed between the Corporation
and its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for the Corporation under the provisions of
section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
the provisions of section 279 of Title 8 of the Delaware Code, order a meeting
of the creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, to be summoned in such
manner as said court directs. If a majority in number representing three-
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
Corporation as a consequence of such compromise or arrangement, said compromise
or arrangement and said reorganization shall, if sanctioned by the court to
which said application has been made, be binding on all the creditors or class
of creditors, and/or on all the stockholders or class of stockholders, of the
Corporation, as the case may be, and also on this Corporation.
X.
Stockholders of the Corporation may not take action by written consent in
lieu of a meeting but must take any actions at a duly called annual or special
meeting.
XI.
Pursuant to Section 203(b) of the Delaware General Corporation Law, the
stockholders of this Corporation expressly elect not to be governed by Section
203(a) of the Delaware General Corporation Law.
<PAGE>
XII.
Notwithstanding any other provision of this Second Amended and Restated
Certificate of Incorporation or any provision of law that might otherwise permit
a lesser vote or no vote, but in addition to any affirmative vote of the holders
of the capital stock required by law or this Second Amended and Restated
Certificate of Incorporation, the affirmative vote of the holders of at least
two-thirds (2/3) of the combined voting power of all of the then-outstanding
shares of the Corporation entitled to vote shall be required to alter, amend or
repeal Articles VII, X, XI or XII or any provision thereof.
XIII.
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Second Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
<PAGE>
IN WITNESS WHEREOF, the undersigned Henry R. Nothhaft and Peter J. Bergeron
have signed this Second Amended and Restated Certificate of Incorporation as
President and Secretary, respectively, of said Concentric Network Corporation
this _____ day of _____________, 1997.
___________________________________
Henry R. Nothhaft, President
___________________________________
Peter J. Bergeron, Secretary
<PAGE>
EXHIBIT 3.3
AMENDED AND RESTATED
--------------------
CORPORATE BYLAWS OF
-------------------
CONCENTRIC NETWORK CORPORATION
------------------------------
a Delaware corporation
ARTICLE I
MEETING OF STOCKHOLDERS
-----------------------
Section 1. Annual Meeting. The annual stockholder meeting of this
--------------
corporation will be held on the 1st day of September of each year or at such
other time and place as designated by the Board of Directors of the corporation,
provided that if said day falls on a Sunday or legal holiday, then the meeting
will be held on the first business day thereafter. Business transacted at said
meeting will include the election of directors of the corporation.
Section 2. Special Meetings. Special meetings of the stockholders will
----------------
be held when directed by the President, Board of Directors or the holders of not
less than 10 percent of all the shares entitled to be cast on any issue proposed
to be considered at the proposed special meeting; provided that said persons
sign, date and deliver to the corporation one or more written demands for the
meeting describing the purpose(s) for which it is to be held. A meeting
requested by stockholders of the corporation will be called for a date not less
than 10 nor more than 60 days after the request is made, unless the stockholders
requesting the meeting designate a later date. The call for the meeting will be
issued by the Secretary, unless the President, Board of Directors or
stockholders requesting the meeting designate another person to do so. Special
meetings of the holders of Series A Preferred Stock may be called by the holders
of a majority of the shares of Series A Preferred Stock.
Section 3. Place. Meetings of stockholders will be held at the
-----
principal place of business of the corporation or at such other place as is
designated by the Board of Directors.
Section 4. Record Date and List of Stockholders. The Board of
------------------------------------
Directors of the corporation shall fix the record date; however, in no event
may a record date fixed by the Board of Directors be a date prior to the date on
which the resolution fixing the record date is adopted.
After fixing a record date for a meeting, the Secretary shall prepare an
alphabetical list of the names of all the corporation's stockholders who are
entitled to notice of a stockholders' meeting, arranged by voting group with the
address of and the number and class and series, if any, of shares held by each.
Said list shall be available for inspection in accordance with the General
Corporation Law of Delaware.
Section 5. Notice. Written notice stating the place, day and hour of
------
the meeting, and the purpose(s) for which said special meeting is called, will
be delivered not less than 10 nor more than 60 days before the meeting, either
personally or by first class mail, by or at the direction of the President,
<PAGE>
the Secretary or the officer or persons calling the meeting, to each stockholder
of record entitled to vote at such meeting. If mailed, such notice will be
deemed to be effective when deposited in the United States mail and addressed to
the stockholder at the stockholder's address as it appears on the stock transfer
books of the corporation, with postage thereon prepaid.
The corporation shall notify each stockholder entitled to a vote at the
meeting of the date, time and place of each annual and special stockholders'
meeting no fewer than 10 or more than 60 days before the meeting date. Notice
of a special meeting shall describe the purpose(s) for which the meeting is
called. A stockholder may waive any notice required hereunder either before or
after the date and time stated in the notice; however, the waiver must be in
writing, signed by the stockholder entitled to the notice and be delivered to
the corporation for inclusion in the minutes or filing in the corporate records.
Attendance of a stockholder at a meeting of stockholders shall constitute a
waiver of notice of such meeting, except when the stockholder attends the
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened.
Section 6. Notice of Adjourned Meeting. When a meeting is adjourned to
---------------------------
another time or place, it will not be necessary to give any notice of the
adjourned meeting, provided that the time and place to which the meeting is
adjourned are announced at the meeting at which the adjournment is taken. At
such an adjourned meeting, any business may be transacted that might have been
transacted on the original date of the meeting. If, however, a new record date
for the adjourned meeting is made or is required, then, a notice of the
adjourned meeting will be given on the new record date as provided in this
Article to each stockholder of record entitled to notice of such meeting.
Section 7. Stockholder Quorum and Voting. Except as otherwise required
-----------------------------
by law, by the Certificate of Incorporation or by these Bylaws, a majority of
the shares entitled to vote, represented in person or by proxy, will constitute
a quorum, at a meeting of stockholders.
If a quorum, as herein defined, is present, the affirmative vote of a
majority of the shares represented at the meeting and entitled to vote on the
subject matter thereof will be the act of the stockholders unless otherwise
provided by law.
Section 8. Proxies. A stockholder may vote either in person or by
-------
proxy, provided that any and all proxies are executed in writing by the
stockholder or the stockholder's duly authorized attorney-in-fact. No proxy
will be valid after the duration of 11 months from the date thereof unless
otherwise provided in the proxy.
Section 9. Action by Stockholders Without a Meeting. Any action
----------------------------------------
required or permitted by law, these Bylaws, or the Certificate of Incorporation
of this corporation to be taken at any annual or special meeting of stockholders
may be taken without a meeting, without prior notice and without a vote,
provided that the action is taken by the holders of outstanding stock of each
voting group entitled to vote thereon having not less than the minimum number of
votes with respect to each voting group that would be necessary to authorize or
take such action at a meeting at which all voting groups and shares entitled to
vote thereon were present and voted, as provided by law. The
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<PAGE>
foregoing action(s) shall be evidenced by written consents describing the action
taken, dated and signed by approving stockholders having the requisite number of
votes of each voting group entitled to vote thereon and delivered to the
corporation in accordance with the General Corporation Law of Delaware. Within
10 days after obtaining such authorization by written consent, notice shall be
given to those stockholders who have not consented in writing or who are not
entitled to vote. Said notice shall fairly summarize the material features of
the authorized action, and if the action requires the providing of dissenters'
rights, said notice shall comply with the disclosure requirements pertaining to
dissenters' rights of the General Corporation Law of Delaware.
ARTICLE II
DIRECTORS
---------
Section 1. Function. All corporate powers, business, and affairs will
--------
be exercised, managed and directed under the authority of the Board of
Directors.
Section 2. Qualification. Directors must be natural persons 18 years
-------------
of age or older but need not be residents of Delaware and need not be
stockholders of this corporation.
Section 3. Compensation. The Board of Directors will have authority to
------------
fix the compensation for directors of this corporation.
Section 4. Presumption of Assent. A director of the corporation who is
---------------------
present at a meeting of the Board of Directors at which action on any corporate
matter is taken will be presumed to have assented to the action taken unless
such director votes against such action or abstains from voting in respect
thereto because of an asserted conflict of interest.
Section 5. Number. This corporation will have eight directors and
------
shall include the Series A, Series B and Series D Directors as provided for in
the Certificate of Incorporation. The size of the Board shall not be reduced
below the number necessary to ensure that the holders of Series A Preferred
Stock, Series B Preferred Stock and Series D Preferred Stock may exercise their
rights to Board representation as set forth in Section 3.3 of Article Fourth of
the Amended and Restated Certificate of Incorporation.
Section 6. Election and Term. Each person named in the Certificate of
-----------------
Incorporation as a member of the initial Board of Directors will hold office
until said directors will have been qualified and elected at the first annual
meeting of stockholders, or until said director's earlier resignation, removal
from office or death.
At the first annual meeting of stockholders and at each annual meeting
thereafter, the stockholders will elect directors to hold office until the next
annual meeting. Each director will hold office for a term for which said
director is elected until said director's successor will have been
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<PAGE>
qualified and elected, said director's prior resignation, said director's
removal from office or said director's death.
Section 7. Vacancies. Except as set forth in the Certificate of
---------
Incorporation, any vacancy occurring in the Board of Directors will be filled by
the affirmative vote of a majority of the stockholders or of the remaining
directors even though less than a quorum of the Board of Directors. A director
elected to fill a vacancy will hold office only until the next election of
directors by the stockholders.
Section 8. Removal and Resignation of Directors. Except as set forth
------------------------------------
in the Certificate of Incorporation, at a meeting of stockholders called
expressly for that purpose, any director or the entire Board of Directors may be
removed, with or without cause, by a vote of the holders of a majority of the
shares then entitled to vote at an election of directors.
A director may resign at any time by delivering written notice to the Board
of Directors or its chairman or to the corporation by and through one of its
officers. Such a resignation is effective when the notice is delivered unless a
later effective date is specified in said notice.
Section 9. Quorum and Voting. A majority of the number of directors
-----------------
fixed by these Bylaws shall constitute a quorum for the transaction of business.
The act of a majority of the directors present at a meeting at which a quorum is
present will be the act of the Board of Directors.
Section 10. Executive and Other Committees. The Board of Directors, by
------------------------------
resolution adopted by a majority of the full Board of Directors, may designate
from among the Board's members an executive committee and/or other committee(s)
that will have and may exercise all the authority of the Board of Directors to
the extent provided in such resolution, except as is provided by law. Each
committee must have at least two members, who serve at the pleasure of the Board
of Directors. The Board may, by resolution adopted by a majority of the full
Board of Directors, designate one or more directors as alternate members of any
such committee who may act in the place and stead of any absent member or
members at any meeting of such committee. The Board shall maintain a
compensation committee consisting of at least two board members, which committee
shall execute all of the authority of the Board of Directors to determine
compensation of employees and the issuance of stock options and other stock-
related awards and be the Stock Option Committee for purposes of administration
of the Corporation's various stock plans.
Section 11. Place of Meeting. Special or regular meetings of the Board
----------------
of Directors will be held within or without the State of Delaware.
Section 12. Notice, Time and Call of Meetings. Regular meetings of the
---------------------------------
Board of Directors will be held without notice on such dates as are designated
by the Board of Directors. Written notice of the time and place of special
meetings of the Board of Directors will be given to each director by either
personal delivery, facsimile, overnight delivery, telegram or cablegram at least
7 days before the meeting or by notice mailed to the director at least 10 days
before the meeting; provided, however, that in the event the Series A Directors
-------- -------
waive this notice requirement, then a
-4-
<PAGE>
special meeting of the Board of Directors may be called on at least 2 days'
notice or 5 days' notice, as the case may be, to each director.
Notice of a meeting of the Board of Directors need not be given to any
director who signs a waiver of notice either before or after the meeting.
Attendance of a director at a meeting will constitute a waiver of notice of such
meeting and waiver of any and all objections to the place of the meeting, the
time of the meeting, or the manner in which it has been called or convened,
except when a director states, at the beginning of the meeting, any objection to
the transaction of business because the meeting is not lawfully called or
convened.
Neither the business to be transacted nor the purpose of regular or special
meetings of the Board of Directors need be specified in the notice or waiver of
notice of such meeting.
A majority of the directors present, whether or not a quorum exists, may
adjourn any meeting of the Board of Directors to another time and place. Notice
of any such adjourned meeting will be given to the directors who were not
present at the time of the adjournment.
Meetings of the Board of Directors may be called by the Chairman of the
Board, the President of the corporation or any two directors.
Members of the Board of Directors may participate in a meeting of such
Board by means of a conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other at
the same time. Participation by such means shall constitute presence in person
at a meeting.
Section 13. Action Without a Meeting. Any action required to be taken
------------------------
at a meeting of the Board of Directors or any action that may be taken at a
meeting of the Board of Directors or a committee thereof may be taken without a
meeting if a consent in writing, setting forth the action to be so taken, signed
by all the directors, or all the members of the committee, as the case may be,
is filed in the minutes of the proceedings of the Board or of the committee.
Such consent will have the same effect as a unanimous vote.
ARTICLE III
OFFICERS
--------
Section 1. Officers. The officers of this corporation will consist of
--------
a president, a vice president, a secretary and a treasurer, each of whom will be
elected by the Board of Directors. Such other officers and assistant officers
and agents as may be deemed necessary may be elected or appointed by the Board
of Directors from time to time. Any two or more offices may be held by the same
person.
Section 2. Duties. The officers of this corporation will have the
------
following duties:
-5-
<PAGE>
The President will be the chief executive officer of the corporation, who
generally and actively manages the business and affairs of the corporation
subject to the directions of the Board of Directors. Said officer will preside
at all meetings of the stockholders and Board of Directors.
The Vice President will, in the event of the absence or inability of the
President to exercise his or her office, become acting president of the
organization with all the rights, privileges and powers as if said person had
been duly elected president.
The Secretary will have custody of and maintain all of the corporate
records except the financial records. Furthermore, said person will record the
minutes of all meetings of the stockholders and Board of Directors, send all
notices of meetings and perform such other duties as may be prescribed by the
Board of Directors or the President. Furthermore, said officer shall be
responsible for authenticating records of the corporation.
The Treasurer shall retain custody of all corporate funds and financial
records, maintain full and accurate accounts of receipts and disbursements and
render accounts thereof at the annual meetings of stockholders and whenever else
required by the Board of Directors or the President, and perform such other
duties as may be prescribed by the Board of Directors or the President.
Section 3. Removal and Resignation of Officers. An officer or agent
-----------------------------------
elected or appointed by the Board of Directors may be removed by the Board of
Directors whenever in the Board's judgment the best interests of the corporation
will be served thereby.
Any officer may resign at any time by delivering notice to the corporation.
Said resignation is effective upon delivery unless the notice specifies a later
effective date.
Any vacancy in any office may be filled by the Board of Directors.
ARTICLE IV
STOCK CERTIFICATES
------------------
Section 1. Issuance. Every holder of share(s) in this corporation will
--------
be entitled to have a certificate representing all share(s) to which he or she
is holder. No certificate representing share(s) will be issued until such
share(s) is/are fully paid.
Section 2. Form. Certificates representing share(s) in this
----
corporation will be signed by the President or Vice President and the Secretary
or an Assistant Secretary and will be sealed with the seal of this corporation.
Section 3. Transfer of Stock. The corporation will register a stock
-----------------
certificate presented for transfer if the certificate is properly endorsed by
the holder of record or by his or her duly authorized agent.
-6-
<PAGE>
Section 4. Lost, Stolen or Destroyed Certificates. If a stockholder
--------------------------------------
claims that a stock certificate representing shares issued and recorded by the
corporation has been lost or destroyed, a new certificate will be issued to said
stockholder, provided that said stockholder presents an affidavit claiming the
certificate of stock to be lost, stolen or destroyed. At the discretion of the
Board of Directors, said stockholder may be required to deposit a bond or other
indemnity in such amount and with such sureties, if any, as the board may
require.
ARTICLE V
BOOK AND RECORDS
----------------
Section 1. Books and Records. The corporation shall keep as permanent
-----------------
records minutes of all meetings of its stockholders and Board of Directors, a
record of all action taken by the stockholders or Board of Directors without a
meeting, and a record of all actions taken by a committee of the Board of
Directors in place of the Board of Directors on behalf of the corporation.
Furthermore, the corporation shall maintain accurate accounting records.
Furthermore, the corporation shall maintain the following:
(i) a record of its stockholders in a form that permits preparation
of a list of the names and addresses of all stockholders in alphabetical order
by class of shares showing the number and series of shares held by each;
(ii) the corporation's Certificate or Restated Certificate of
Incorporation and all amendments thereto currently in effect;
(iii) the corporation's Bylaws or Restated Bylaws and all amendments
thereto currently in effect:
(iv) resolutions adopted by the Board of Directors creating one or
more classes or series of shares and fixing their relative rights, preferences
and limitations if shares issued pursuant to those resolutions are outstanding;
(v) the minutes of all stockholders' meetings and records of all
actions taken by stockholders without a meeting for the past 3 years:
(vi) written communications to all stockholders generally or all
stockholders of a class or series within the past 3 years, including the
financial statements furnished for the past 3 years to stockholders as may be
required under the General Corporation Law of Delaware;
(vii) a list of the names and business street addresses of the
corporation's current directors and officers; and
-7-
<PAGE>
(viii) a copy of the corporation's most recent annual report delivered
to the Department of State.
Any books, records and minutes may be in written form or in any other form
capable of being converted into written form.
Section 2. Stockholders' Inspection Rights. A stockholder of the
-------------------------------
corporation (including a beneficial owner whose shares are held in a voting
trust or a nominee on behalf of a beneficial owner) may inspect and copy, during
regular business hours at the corporation's principal office, any of the
corporate records required to be kept pursuant to Section 1 of this Article of
these Bylaws, if said stockholder gives the corporation written notice of such
demand at least 5 business days before the date on which the stockholder wishes
to inspect and copy. The foregoing right of inspection is subject, however, to
such other restrictions as are applicable under the General Corporation Law of
Delaware, including, but not limited to, the inspection of certain records being
permitted only if the demand for inspection is made in good faith and for a
proper purpose (as well as the stockholder describing with reasonable
particularity the purpose and records desired to be inspected and such records
are directly connected with the purpose).
Section 3. Financial Information. Unless modified by resolution of the
---------------------
stockholders within 120 days of the close of each fiscal year, the corporation
shall furnish the stockholders annual financial statements, which may be
consolidated or combined statements of the corporation and one or more of its
subsidiaries as appropriate, that include a balance sheet as of the end of the
fiscal year, an income statement for that year, and a statement of cash flow for
that year. If financial statements are prepared on the basis of generally
accepted accounting principles, the annual financial statements must also be
prepared on that basis. If the annual financial statements are reported on by a
public accountant, said accountant's report shall accompany said statements. If
said annual financial statements are not reported on by a public accountant,
then the statements shall be accompanied by a statement of the president or the
person responsible for the corporation's accounting records (a) stating his or
her reasonable belief as to whether the statements were prepared on the basis of
generally accepted accounting principles and, if not, describing the basis of
preparation; and (b) describing any respects in which the statements were not
prepared on a basis of accounting consistent with the statements prepared for
the preceding year. The annual financial statements shall be mailed to each
stockholder of the corporation within 120 days after the close of each fiscal
year or within such additional time as is reasonably necessary to enable the
corporation to prepare same, if, for reasons beyond the corporation's control,
said annual financial statements cannot be prepared within the prescribed
period.
Section 4. Other Reports to Stockholders. The corporation shall report
-----------------------------
any indemnification or advanced expenses to any director, officer, employee, or
agent (for indemnification relating to litigation or threatened litigation) in
writing to the stockholders with or before the notice of the next stockholders
meeting, or prior to such meeting if the indemnification or advance occurs after
the giving of such notice but prior to the time such meeting is held, which
report shall include a statement specifying the persons paid, the amounts paid,
and the nature and status at the time of such payment of the litigation or
threatened litigation.
-8-
<PAGE>
Additionally, if the corporation issues or authorizes the issuance of
shares for promises to render services in the future, the corporation shall
report in writing to the stockholders the number of shares authorized or issued
and the consideration received by the corporation, with or before the notice of
the next stockholders meeting.
ARTICLE VI
DIVIDENDS
---------
The Board of Directors of this corporation may from time to time declare
dividends on the corporation's shares in cash, property or its own shares,
except when the corporation is insolvent or when the payment thereof would
render the corporation insolvent, subject to the General Corporation Law of
Delaware.
ARTICLE VII
CORPORATE SEAL
--------------
The Board of Directors will provide a corporate seal, which will be in
circular form embossing in nature and stating "Corporate Seal," "Delaware," year
of incorporation and name of said corporation.
ARTICLE VIII
AMENDMENT
---------
These Bylaws may be altered, amended or repealed, and altered, amended or
new Bylaws may be adopted by a majority vote of the full Board of Directors,
except that Article II, Section 5 of these Bylaws may not be altered, amended or
repealed, except by a unanimous vote of the full Board of Directors.
ARTICLE IX
CORPORATE INDEMNIFICATION PLAN
------------------------------
Section 1. Indemnification. The corporation shall indemnify and advance
---------------
expenses to, and may purchase and maintain insurance on behalf of, its officers
and directors to the fullest extent permitted by law.
Without in any manner or way whatsoever restricting the right or power of
the corporation to indemnify persons in any proper case even though not
specifically provided herein:
-9-
<PAGE>
(1) The corporation shall indemnify and hold harmless any person who
was or is a party, or is threatened to be made a party, to any threatened,
pending or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by, or in the right of,
the corporation) by reason of the fact that he or she is or was a director,
officer, employee, or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise (including
employee benefit plans) (hereinafter an "indemnitee"), to the fullest extent
authorized by the General Corporation Law of Delaware, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the corporation to provide broader indemnification
than permitted prior thereto), against any liability, expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such indemnitee in connection with such action, suit or
proceeding, including any appeal thereof, if the indemnitee acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe such conduct was unlawful. The
termination of the proceeding, whether by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner that he or she reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had reasonable cause to believe such conduct was unlawful.
(2) The corporation shall indemnify and hold harmless any person who
was or is party, or is threatened to be made a party, to any threatened,
pending, or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he or she is or was a
director, officer, employee, or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise
(including employee benefit plans), to the fullest extent authorized by the
General Corporation Law of Delaware, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the corporation to provide broader indemnification than
permitted prior thereto), against any liability, expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with such action, suit or proceeding,
including any appeal thereof, if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the corporation and except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable to the corporation unless and only to the extent that the court in
which such suit or action was brought shall determine, upon application, that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which such court shall deem proper.
Section 2. Expenses. Expenses incurred in defending a civil or
--------
criminal action, suit or proceeding may be paid by the corporation in advance of
the final disposition of such action, suit or proceeding by the Board of
Directors upon receipt of an undertaking by or on behalf of the directors,
officer, employee or agent to repay such amount unless it shall ultimately be
determined that he or she is entitled to be indemnified by the corporation.
-10-
<PAGE>
Section 3. Non-Exclusivity. The rights accruing to any person under
---------------
the provisions of this Article IX shall be in addition to and shall not exclude
any other right that any person may have or hereafter acquire under any statute,
the Certificate of Incorporation, a bylaw of the corporation, agreement, vote of
stockholders or disinterested Directors or otherwise, nor shall anything herein
contained restrict the right of the corporation to indemnify or reimburse such
person in any proper case even though not specifically herein provided for.
Section 4. Binding Effect. The indemnification and advancement of
--------------
expenses provided by this article shall continue as to a person who has ceased
to be a Director, officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such person.
Section 5. Insurance. The officers of the corporation are authorized,
---------
in their discretion and at the cost and expense of the corporation, to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise or on behalf
of any other person to whom the corporation might lawfully pay compensation,
against any liability asserted against him or her and incurred by him or her in
any such capacity or arising out of his or her status as such.
-11-
<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
CONCENTRIC NETWORK CORPORATION
The undersigned hereby certifies that he is the duly elected, qualified,
and Secretary of Concentric Network Corporation and that the foregoing Bylaws,
comprising eleven (11) pages, were adopted as the Amended and Restated Bylaws of
the corporation on June 6, 1997, by the Board of Directors and by the
stockholders of the corporation on ____________, 1997.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this ______ day of _______________ 1997.
_______________________________
Peter Bergeron, Secretary
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<PAGE>
EXHIBIT 3.4
- --------------------------------------------------------------------------------
AMENDED AND RESTATED BYLAWS
OF
CONCENTRIC NETWORK CORPORATION
a Delaware corporation
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES..................................... 1
1.1 REGISTERED OFFICE........................................... 1
1.2 OTHER OFFICES............................................... 1
ARTICLE II - MEETINGS OF STOCKHOLDERS............................. 1
2.1 PLACE OF MEETINGS........................................... 1
2.2 ANNUAL MEETING.............................................. 1
2.3 SPECIAL MEETING............................................. 3
2.4 NOTICE OF STOCKHOLDERS' MEETINGS............................ 3
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................ 4
2.6 QUORUM...................................................... 4
2.7 ADJOURNED MEETING; NOTICE................................... 4
2.8 VOTING...................................................... 5
2.9 WAIVER OF NOTICE............................................ 5
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT
WITHOUT A MEETING........................................... 5
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING;
GIVING CONSENTS............................................. 6
2.12 PROXIES..................................................... 6
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE....................... 7
ARTICLE III - DIRECTORS........................................... 7
3.1 POWERS...................................................... 7
3.2 NUMBER OF DIRECTORS......................................... 7
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE
OF DIRECTORS................................................ 7
3.4 RESIGNATION AND VACANCIES................................... 8
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.................... 9
3.6 FIRST MEETINGS.............................................. 9
3.7 REGULAR MEETINGS............................................ 9
3.8 SPECIAL MEETINGS; NOTICE....................................10
3.9 QUORUM......................................................10
3.10 WAIVER OF NOTICE............................................10
3.11 ADJOURNED MEETING; NOTICE...................................11
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A
MEETING.....................................................11
3.13 FEES AND COMPENSATION OF DIRECTORS..........................11
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
3.14 APPROVAL OF LOANS TO OFFICERS.............................. 11
3.15 REMOVAL OF DIRECTORS....................................... 11
ARTICLE IV - COMMITTEES.......................................... 12
4.1 COMMITTEES OF DIRECTORS.................................... 12
4.2 COMMITTEE MINUTES.......................................... 12
4.3 MEETINGS AND ACTION OF COMMITTEES.......................... 12
ARTICLE V - OFFICERS............................................. 13
5.1 OFFICERS................................................... 13
5.2 ELECTION OF OFFICERS....................................... 13
5.3 SUBORDINATE OFFICERS....................................... 13
5.4 REMOVAL AND RESIGNATION OF OFFICERS........................ 13
5.5 VACANCIES IN OFFICES....................................... 13
5.6 CHAIRMAN OF THE BOARD...................................... 14
5.7 PRESIDENT.................................................. 14
5.8 VICE PRESIDENT............................................. 14
5.9 SECRETARY.................................................. 14
5.10 CHIEF FINANCIAL OFFICER.................................... 15
5.11 ASSISTANT SECRETARY........................................ 15
5.12 ADMINISTRATIVE OFFICERS.................................... 15
5.13 AUTHORITY AND DUTIES OF OFFICERS........................... 16
ARTICLE VI - INDEMNITY........................................... 16
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.................. 16
6.2 INDEMNIFICATION OF OTHERS.................................. 16
6.3 INSURANCE.................................................. 16
ARTICLE VII - RECORDS AND REPORTS................................ 17
7.1 MAINTENANCE AND INSPECTION OF RECORDS...................... 17
7.2 INSPECTION BY DIRECTORS.................................... 17
7.3 ANNUAL STATEMENT TO STOCKHOLDERS........................... 18
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS............. 18
ARTICLE VIII - GENERAL MATTERS................................... 18
8.1 CHECKS..................................................... 18
8.2 EXECUTION OF CORPORATE CONTRACTS AND
INSTRUMENTS................................................ 18
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES..................... 19
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
8.4 SPECIAL DESIGNATION ON CERTIFICATES........................ 19
8.5 LOST CERTIFICATES.......................................... 19
8.6 CONSTRUCTION; DEFINITIONS.................................. 20
8.7 DIVIDENDS.................................................. 20
8.8 FISCAL YEAR................................................ 20
8.9 SEAL....................................................... 20
8.10 TRANSFER OF STOCK.......................................... 20
8.11 STOCK TRANSFER AGREEMENTS.................................. 21
8.12 REGISTERED STOCKHOLDERS.................................... 21
ARTICLE IX - AMENDMENTS.......................................... 21
ARTICLE X - DISSOLUTION.......................................... 21
ARTICLE XI - CUSTODIAN........................................... 22
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES................ 22
11.2 DUTIES OF CUSTODIAN........................................ 23
</TABLE>
iii
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
CONCENTRIC NETWORK CORPORATION
a Delaware corporation
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be in the City of Dover,
County of Kent, State of Delaware. The name of the registered agent of the
corporation at such location is Incorporating Services, L.P.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the last Friday
in May at 10:00 a.m. However, if such day falls on a legal holiday, then the
meeting shall be held at the same time and place on the next succeeding full
business day. At the meeting, directors shall be elected and any other proper
business may be transacted.
<PAGE>
(a) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the board of directors, (B) otherwise properly brought before the meeting by
or at the direction of the board of directors, or (C) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not less than sixty (60) days nor
more than ninety (90) days prior to the meeting; provided, however, that in the
event that less than seventy (70) days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice to be timely must
be so received not later than the close of business on the tenth (10th) day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. A stockholder's notice to the Secretary shall
set forth as to each matter the stockholder proposes to bring before the annual
meeting: (i) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and address, as they appear on the corporation's books,
of the stockholder proposing such business, (iii) the class and number of shares
of the corporation that are beneficially owned by the stockholder, (iv) any
material interest of the stockholder in such business and (v) any other
information that is required to be provided by the stockholder pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934
Act"), in the stockholder's capacity as a proponent of a stockholder proposal.
Notwithstanding the foregoing, in order to include information with respect to a
stockholder proposal in the proxy statement and form of proxy for a stockholders
meeting, stockholders must provide notice as required by the regulations
promulgated under the 1934 Act. Notwithstanding anything in these bylaws to the
contrary, no business shall be conducted at any annual meeting except in
accordance with the procedures set forth in this paragraph (b). The chairman of
the annual meeting shall, if the facts warrant, determine and declare at the
meeting that business was not properly brought before the meeting in accordance
with the provisions of this paragraph (b), and, if the chairman should so
determine, he or she shall so declare at the meeting, and any such business not
properly brought before the meeting shall not be transacted.
(b) Only persons who are nominated in accordance with the procedures
set forth in this paragraph (b) shall be eligible for election as directors.
Nominations of persons for election to the board of directors of the corporation
may be made at a meeting of stockholders by or at the direction of the board of
directors or by any stockholder of the corporation entitled to vote in the
election of directors at the meeting who complies with the notice procedures set
forth in this paragraph (b). Such nominations, other than those made by or at
the direction of the board of directors, shall be made pursuant to timely notice
in writing to the Secretary of the corporation in accordance with the provisions
of paragraph (a) of this Section 2.2. Such stockholder's notice shall set forth
(i) as to each person, if any, whom the stockholder proposes to nominate for
election or re-election as a director: (A) the name, age, business address and
residence address of such person, (B) the principal occupation or employment of
such person, (C) the class and number of shares of the corporation that are
beneficially owned by such person, (D) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming
2
<PAGE>
such person or persons) pursuant to which the nominations are to be made by the
stockholder, and (E) any other information relating to such person that is
required to be disclosed in solicitations of proxies for elections of directors,
or is otherwise required, in each case pursuant to Regulation 14A under the 1934
Act (including without limitation such person's written consent to being named
in the proxy statement, if any, as a nominee and to serving as a director if
elected); and (ii) as to such stockholder giving notice, the information
required to be provided pursuant to paragraph (a) of this Section 2.2. At the
request of the board of directors, any person nominated by a stockholder for
election as a director shall furnish to the Secretary of the corporation that
information required to be set forth in the stockholder's notice of nomination
that pertains to the nominee. No person shall be eligible for election as a
director of the corporation unless nominated in accordance with the procedures
set forth in this paragraph (b). The chairman of the meeting shall, if the facts
warrant, determine and declare at the meeting that a nomination was not made in
accordance with the procedures prescribed by these bylaws, and if the chairman
should so determine, he or she shall so declare at the meeting, and the
defective nomination shall be disregarded.
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption) or the president or the
chairman of the board or by one or more stockholders holding shares in the
aggregate entitled to cast not less than ten percent (10%) of the votes at that
meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail, by express courier, or by telegraphic or
other facsimile transmission to the chairman of the board, the president, any
vice president or the secretary of the corporation. The officer receiving the
request shall cause notice to be promptly given to the stockholders entitled to
vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws,
that a meeting will be held at the time requested by the person or persons
calling the meeting, so long as that time is not less than thirty-five (35) nor
more than sixty (60) days after the receipt of the request. If the notice is
not given within twenty (20) days after receipt of the request, then the person
or persons requesting the meeting may give the notice. Nothing contained in
this paragraph of this Section 2.3 shall be construed as limiting, fixing or
affecting the time when a meeting of stockholders called by action of the board
of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting and (i) in the case of a special meeting,
the purpose or purposes for which the meeting is called (no business other than
that specified in the
3
<PAGE>
notice may be transacted) or (ii) in the case of the annual meeting, those
matters that the board of directors, at the time of giving the notice, intends
to present for action by the stockholders (but any matter properly brought
before the meeting may be presented at the meeting for such action). The notice
of any meeting at which directors are to be elected shall include the name of
any nominee or nominees whom, at the time of the notice, the board intends to
present for election.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at the stockholder's address as it appears on the records of the
corporation. An affidavit of the secretary or an assistant secretary or of the
transfer agent of the corporation that the notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
2.6 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present or represented. At such adjourned meeting at which a quorum is present
or represented, any business may be transacted that might have been transacted
at the meeting as originally noticed.
The stockholders present at a duly called or held meeting at which a quorum
is present may continue to do business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
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2.8 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgers and joint owners
of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder.
2.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action that is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
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2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(a) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(b) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting (if permitted), when no
prior action by the board of directors is necessary, shall be the day on which
the first written consent is expressed.
(c) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.12 PROXIES
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
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2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The authorized number of directors shall be eight (8). This number may be
changed by a duly adopted amendment to the certificate of incorporation or by an
amendment to this bylaw adopted by the vote or written consent of the holders of
a majority of the stock issued and outstanding and entitled to vote or by
resolution of a majority of the board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall hold
office until the expiration of the term for which elected. Directors need not
be stockholders unless so required by the certificate of incorporation or these
bylaws, wherein other qualifications for directors may be prescribed. Each
director, including a director elected to fill a vacancy, shall hold office
until his or her successor is elected and qualified or until his or her earlier
resignation or removal.
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Effective as of the date of the first regularly scheduled annual meeting of
the stockholders following the closing date of this corporation's initial public
offering (the "Closing Date"), the directors of the corporation shall be divided
into three classes as nearly equal in size as is practicable, hereby designated
Class I, Class II and Class III. The term of office of the initial Class I
directors shall expire at the first annual meeting of the stockholders following
the Closing Date; the term of office of the initial Class II directors shall
expire at the second annual meeting of the stockholders following the Closing
Date; and the term of office of the initial Class III directors shall expire at
the third annual meeting of the stockholders following the Closing Date. At
each annual meeting of stockholders, commencing with the second regularly
scheduled annual meeting of stockholders following the Closing Date, each of the
successors elected to replace the directors of a class whose term shall have
expired at such annual meeting shall be elected to hold office until the third
annual meeting next succeeding his or her election and until his or her
respective successor shall have been duly elected and qualified. If the number
of directors is hereafter changed, any newly created directorships or decrease
in directorships shall be so apportioned among the classes as to make all
classes as nearly equal in number as is practicable, provided that no decrease
in the number of directors constituting the board of directors shall shorten the
term of any incumbent director.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
-------------------------
(a) Any director may resign at any time upon written notice to the
corporation. When one or more directors so resigns and the resignation is
effective at a future date, unless otherwise provided in the certificate of
incorporation, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office as provided in this
section in the filling of other vacancies.
(b) Unless otherwise provided in the certificate of incorporation or
these bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
(c) If at any time, by reason of death or resignation or other cause,
the corporation should have no directors in office, then, as provided in Article
II, Section 2.3 hereto, the president or one or more stockholders holding shares
in the aggregate entitled to cast not less than ten percent
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(10%) of the votes for the relevant director seats may call a special meeting of
stockholders in accordance with the provisions of the certificate of
incorporation or these bylaws, or any officer or stockholder may apply to the
Court of Chancery for a decree summarily ordering an election as provided in
Section 211 of the General Corporation Law of Delaware.
(d) If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
--------------
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting, and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.7 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
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3.8 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone or facsimile to each director or sent by first-class
mail or telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4) days
before the time of the holding of the meeting. If the notice is delivered
personally or by telephone, facsimile or telegram, it shall be delivered
personally or by telephone or facsimile or to the telegraph company at least
forty-eight (48) hours before the time of the holding of the meeting. Any oral
notice given personally or by telephone or facsimile may be communicated either
to the director or to a person at the office of the director who the person
giving the notice has reason to believe will promptly communicate it to the
director. The notice need not specify the purpose or the place of the meeting,
if the meeting is to be held at the principal executive office of the
corporation.
3.9 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute, or by the certificate of
incorporation or in these bylaws. If a quorum is not present at any meeting of
the board of directors, then the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum is present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
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3.11 ADJOURNED MEETING; NOTICE
-------------------------
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.15 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute or by the certificate of
incorporation, any director or the entire board of directors may be removed only
for cause by the holders of a majority of the shares then entitled to vote at an
election of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
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ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he, she
or they constitute a quorum, may unanimously appoint another member of the board
of directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the board of directors or in the bylaws of the corporation, shall
have and may exercise all the powers and authority of the board of directors in
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority to (i) approve, adopt, or
recommend to the stockholders, any action or matter expressly required by the
Delaware General Corporation Law to be submitted to stockholders for approval,
or (ii) adopt, amend or repeal any bylaw of the corporation.
4.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
Section 3.12 (action without a meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
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ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, one or more vice
presidents, a secretary, and a chief financial officer. The corporation may
also have, at the discretion of the board of directors, a chairman of the board,
one or more assistant vice presidents, assistant secretaries and any such other
officers as may be appointed in accordance with the provisions of Section 5.3 of
these bylaws. Any number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 of these bylaws, shall be
chosen by the board of directors, subject to the rights, if any, of an officer
under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
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5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him or her
by the board of directors or as may be prescribed by these bylaws. If there is
no president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
or she shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He or she shall have the general powers and duties of management
usually vested in the office of president of a corporation and shall have such
other powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENT
--------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
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The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He or she shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these bylaws.
5.11 ASSISTANT SECRETARY
-------------------
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.12 ADMINISTRATIVE OFFICERS
-----------------------
In addition to the corporate officers of the corporation as provided in
Section 5.1 of these bylaws and such subordinate corporate officers as may be
appointed in accordance with Section 5.3 of these bylaws, there may also be such
administrative officers of the corporation as may be designated and appointed
from time to time by the president of the corporation. Administrative officers
shall perform such duties and have such powers as from time to time may be
determined by the president or the board of directors in order to assist the
corporate officers in the furtherance of their duties. In the performance of
such duties and the exercise of such powers, however, such administrative
officers shall have limited authority to act on behalf of the corporation as the
board of directors shall establish, including but not limited to limitations on
the dollar amount and on the scope of agreements or commitments that may be made
by such administrative officers on behalf of the corporation, which limitations
may not be exceeded by such individuals or altered by the president without
further approval by the board of directors.
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5.13 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
---------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation or any subsidiary, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation that was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation that was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint
16
<PAGE>
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under the provisions of the General
Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine
17
<PAGE>
whether a director is entitled to the inspection sought. The Court may summarily
order the corporation to permit the director to inspect any and all books and
records, the stock ledger, and the stock list and to make copies or extracts
therefrom. The Court may, in its discretion, prescribe any limitations or
conditions with reference to the inspection, or award such other and further
relief as the Court may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
18
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8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he or she were such officer, transfer
agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the
19
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same time. The corporation may issue a new certificate of stock or
uncertificated shares in the place of any certificate theretofore issued by it,
alleged to have been lost, stolen or destroyed, and the corporation may require
the owner of the lost, stolen or destroyed certificate, or his or her legal
representative, to give the corporation a bond sufficient to indemnify it
against any claim that may be made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained in
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
----
The corporate seal shall have the name of the corporation inscribed thereon
and shall be in such form as may be approved from time to time by the board of
directors.
8.10 TRANSFER OF STOCK
-----------------
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
20
<PAGE>
8.11 STOCK TRANSFER AGREEMENTS
-------------------------
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
-----------------------
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
----------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
shall it limit their power to adopt, amend or repeal bylaws. Any amendment by
stockholders of Article II, Section 2.3 or Article IX of these bylaws or any
provision thereof shall require the affirmative vote of the holders of at least
two-thirds (2/3) of the combined voting power of all of the then-outstanding
shares of the Corporation entitled to vote, notwithstanding any other provision
of these bylaws or any provision of law that might otherwise permit a lesser
vote of such stockholders.
ARTICLE X
DISSOLUTION
-----------
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
21
<PAGE>
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall
have attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
ARTICLE XI
CUSTODIAN
---------
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
-------------------------------------------
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(a) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(b) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the stockholders are unable to
terminate this division; or
(c) the corporation has abandoned its business and has failed within
a reasonable time to take steps to dissolve, liquidate or distribute its assets.
22
<PAGE>
11.2 DUTIES OF CUSTODIAN
-------------------
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
23
<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
CONCENTRIC NETWORK CORPORATION
The undersigned hereby certifies that he is the duly elected, qualified,
and Secretary of Concentric Network Corporation and that the foregoing Bylaws,
comprising twenty-three (23) pages, were adopted as the Amended and Restated
Bylaws of the corporation on June 6, 1997, by the Board of Directors and by the
stockholders of the corporation on ____________, 1997.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this ______ day of _______________ 1997.
_______________________________
Peter Bergeron, Secretary
24
<PAGE>
EXHIBIT 10.6
CONCENTRIC NETWORK CORPORATION
1997 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are:
--------------------
. to attract and retain the best available personnel for positions
of substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as
-------------
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the
---------
Board in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means Concentric Network Corporation, a Delaware
-------
corporation.
(h) "Consultant" means any person, including an advisor, engaged by
----------
the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
--------
<PAGE>
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between any of the Company, its Parent, any Subsidiary, or any
successor. For purposes of Incentive Stock Options, no such leave may exceed
ninety days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract. If reemployment upon expiration of a leave of absence
approved by the Company is not so guaranteed, on the 181st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option. Neither service as a Director nor payment of a director's fee by
the Company shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
-2-
<PAGE>
(p) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
--------------
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this Concentric Network Corporation 1997 Stock Plan.
----
(y) "Restricted Stock" means shares of Common Stock acquired
----------------
pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
-------------
(cc) "Service Provider" means an Employee, Director or Consultant.
----------------
-3-
<PAGE>
(dd) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 1,500,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares that were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be
------------------------------
administered by the Board and/or different Committees with respect to different
groups of Service Providers.
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
----------
hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder
shall be structured to satisfy the requirements for exemption under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the
--------------------
Plan shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
-4-
<PAGE>
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or Stock Purchase Right of the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option or Stock Purchase Right that number of Shares having a Fair Market
Value equal to the amount required to be withheld.
-5-
<PAGE>
The Fair Market Value of the Shares to be withheld shall be determined on the
date that the amount of tax to be withheld is to be determined. All elections by
an Optionee to have Shares withheld for this purpose shall be made in such form
and under such conditions as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the Company
any instrument required to effect the grant of an Option or Stock Purchase Right
previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of
the Company, Options to purchase more than 500,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 500,000 Shares
that shall not count against the limit set forth in subsection (i) above.
-6-
<PAGE>
(iii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 13.
(iv) If an Option is canceled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the canceled Option will be counted against the limits
set forth in subsections (i) and (ii) above. For this purpose, if the exercise
price of an Option is reduced, the transaction will be treated as a cancellation
of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall
------------
become effective upon its adoption by the Board. It shall continue in effect for
a term of ten years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten years
from the date of grant or such shorter term as may be provided in the Option
Agreement. Moreover, in the case of an Incentive Stock Option granted to an
Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent of the total combined voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to
--------------
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the per Share exercise price shall be no less than 110% of the Fair Market Value
per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
-7-
<PAGE>
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price of less than 100% of the Fair Market Value per Share
on the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions that must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares that (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) other consideration and method of payment for the issuance
of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
-8-
<PAGE>
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an
-------------------------------------------------
Optionee ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence of
a specified time in the Option Agreement, the Option shall remain exercisable
for three months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later
-9-
<PAGE>
than the expiration of the term of such Option as set forth in the Notice of
Grant), by the Optionee's estate or by a person who acquires the right to
exercise the Option by bequest or inheritance, but only to the extent that the
Option is vested on the date of death. In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for twelve months
following the Optionee's termination. If, at the time of death, the Optionee is
not vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall immediately revert to the Plan. The Option may be
exercised by the executor or administrator of the Optionee's estate or, if none,
by the person(s) entitled to exercise the Option under the Optionee's will or
the laws of descent or distribution. If the Option is not so exercised within
the time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash, Shares or otherwise an Option previously granted
based on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
(f) Other Provisions. The Option Agreement shall contain such other
----------------
terms, provisions and conditions not inconsistent with the Plan as may be
determined by the Administrator in its sole discretion.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash, Shares or otherwise an Option previously granted
based on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
-10-
<PAGE>
(d) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(e) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. An Option
--------------------------------------------------------
or Stock Purchase Right may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time
-11-
<PAGE>
and in the manner contemplated. To the extent it has not been previously
exercised, an Option or Stock Purchase Right will terminate immediately prior to
the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen days from the date of such notice, and the Option or Stock
Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Company shall obtain stockholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
-12-
<PAGE>
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Stockholder Approval. The Plan shall be subject to approval by the
--------------------
stockholders of the Company within twelve months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-13-
<PAGE>
CONCENTRIC NETWORK CORPORATION
1997 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number ___________________________
Date of Grant ___________________________
Vesting Commencement Date ___________________________
Exercise Price per Share $__________________________
Total Number of Shares Granted ___________________________
Total Exercise Price $___________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
----------------
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
Twenty-five percent of the Shares subject to the Option shall vest twelve
months after the Vesting Commencement Date, and thereafter the Shares subject to
the Option shall vest in 36 equal increments over 36 months, at the end of each
month, subject to the Optionee continuing to be a Service Provider on such
dates.
<PAGE>
Termination Period:
------------------
This Option may be exercised for three months after Optionee ceases to be a
Service Provider. Upon the death or Disability of the Optionee, this Option may
be exercised for such longer period as provided in the Plan. In no event shall
this Option be exercised later than the Term/Expiration Date as provided above.
II. AGREEMENT
---------
1. Grant of Option. The Plan Administrator of the Company hereby grants
---------------
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 15(c) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option is exercisable during its term in
-----------------
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
------------------
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to the Corporate Secretary of the Company. The
Exercise Notice shall be accompanied by payment of the aggregate Exercise Price
as to all Exercised Shares. This Option shall be deemed to be exercised upon
receipt by the Company of such fully executed Exercise Notice accompanied by
such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
-2-
<PAGE>
3. Method of Payment. Payment of the aggregate Exercise Price shall be
-----------------
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash; or
(b) check; or
(c) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; or
(d) surrender of other Shares that (i) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, AND (ii) have a Fair Market Value on the date
of surrender equal to the aggregate Exercise Price of the Exercised Shares; or
(e) with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit C, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit B. The Note shall bear interest at the "applicable federal rate"
prescribed under the Code and its regulations at time of purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the Security
Agreement.
4. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal tax consequences relating to
----------------
this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) Exercising the Option.
---------------------
(i) Nonstatutory Stock Option. The Optionee may incur regular
-------------------------
federal income tax liability upon exercise of a NSO. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price. If the
Optionee is
-3-
<PAGE>
an Employee or a former Employee, the Company will be required to withhold from
his or her compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(ii) Incentive Stock Option. If this Option qualifies as an
----------------------
ISO, the Optionee will have no regular federal income tax liability upon its
exercise, although the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price will be
treated as an adjustment to alternative minimum taxable income for federal tax
purposes and may subject the Optionee to alternative minimum tax in the year of
exercise. In the event that the Optionee ceases to be an Employee but remains a
Service Provider, any Incentive Stock Option of the Optionee that remains
unexercised shall cease to qualify as an Incentive Stock Option and will be
treated for tax purposes as a Nonstatutory Stock Option on the date three months
and one day following such change of status.
(b) Disposition of Shares.
---------------------
(i) NSO. If the Optionee holds NSO Shares for at least one
---
year, any gain realized on disposition of the Shares will be treated as long-
term capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one year
---
after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the lesser of (A) the difference between the Fair Market
Value of the Shares acquired on the date of exercise and the aggregate Exercise
Price, or (B) the difference between the sale price of such Shares and the
aggregate Exercise Price. Any additional gain will be taxed as capital gain,
short-term or long-term depending on the period that the ISO Shares were held.
(c) Notice of Disqualifying Disposition of ISO Shares. If the
-------------------------------------------------
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of such disposition. The Optionee agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized from such early disposition of ISO Shares by payment in cash or out
of the current earnings paid to the Optionee.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely
-4-
<PAGE>
to the Optionee's interest except by means of a writing signed by the Company
and Optionee. This agreement is governed by the internal substantive laws, but
not the choice of law rules, of the State of California.
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: CONCENTRIC NETWORK CORPORATION
___________________________________ By: ______________________________
Signature Signature
___________________________________ __________________________________
Print Name Print Name
___________________________________ __________________________________
Residence Address Title
___________________________________
___________________________________
Telephone OPTION AGREEMENT - 1997 STOCK PLAN
-5-
<PAGE>
EXHIBIT A
---------
CONCENTRIC NETWORK CORPORATION
1997 STOCK PLAN
EXERCISE NOTICE
Concentric Network Corporation
10590 North Tantau Avenue
Cupertino, CA 95014
Attention: Corporate Secretary
1. Exercise of Option. Effective as of today, ________________, 199__,
------------------
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of Concentric Network Corporation (the
"Company") under and pursuant to the 1997 Stock Plan (the "Plan") and the Stock
Option Agreement dated _____________, 19___ (the "Option Agreement"). The
purchase price for the Shares shall be $_____________, as required by the Option
Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
----------------------------
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Stockholder. Until the issuance (as evidenced by the
---------------------
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 13 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
----------------
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
-------------------------------
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing
<PAGE>
signed by the Company and Purchaser. This agreement is governed by the internal
substantive laws, but not the choice of law rules, of the State of California.
Submitted by: Accepted by:
PURCHASER: CONCENTRIC NETWORK CORPORATION
________________________________ By:_____________________________
Signature Signature
________________________________ __________________________________
Print Name Print Name
__________________________________
Title
Address: Address:
- ------- -------
________________________________ Concentric Network Corporation
________________________________ 10590 North Tantau Avenue
________________________________ Cupertino, CA 95014
________________________________ __________________________________
Telephone Date Received
OPTION EXERCISE NOTICE - 1997 STOCK PLAN
-2-
<PAGE>
EXHIBIT B
---------
SECURITY AGREEMENT
This Security Agreement is made as of __________, 19___ between Concentric
Network Corporation, a Delaware corporation ("Pledgee"), and
_________________________ ("Pledgor").
Recitals
--------
Pursuant to Pledgor's election to purchase Shares under the Option
Agreement dated ________ (the "Option"), between Pledgor and Pledgee under
Pledgee's 1997 Stock Plan, and Pledgor's election under the terms of the Option
to pay for such shares with a promissory note (the "Note"), Pledgor has
purchased _________ shares of Pledgee's Common Stock (the "Shares") at a price
of $________ per share, for a total purchase price of $__________. The Note and
the obligations thereunder are as set forth in Exhibit C to the Option.
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of
---------------------------------------------
the transfer of the Shares to Pledgor under the Option Agreement, Pledgor,
pursuant to the California Commercial Code, hereby pledges all of such Shares
(herein sometimes referred to as the "Collateral") represented by certificate
number ______, duly endorsed in blank or with executed stock powers, and
herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"),
who shall hold said certificate subject to the terms and conditions of this
Security Agreement.
The pledged stock (together with an executed blank stock assignment for use
in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option, and the
Pledge holder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.
2. Pledgor's Representations and Covenants. To induce Pledgee to enter
---------------------------------------
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
a. Payment of Indebtedness. Pledgor will pay the principal sum of
-----------------------
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.
b. Encumbrances. The Shares are free of all other encumbrances,
------------
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
c. Margin Regulations. In the event that Pledgee's Common Stock is
------------------
now or later becomes margin-listed by the Federal Reserve Board and Pledgee is
classified as a "lender" within the
<PAGE>
meaning of the regulations under Part 207 of Title 12 of the Code of Federal
Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making
any amendments to the Note or providing any additional collateral as may be
necessary to comply with such regulations.
3. Voting Rights. During the term of this pledge and so long as all
-------------
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge
-----------------
any stock dividend, reclassification, readjustment or other changes are declared
or made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.
5. Options and Rights. In the event that, during the term of this
------------------
pledge, subscription Options or other rights or options shall be issued in
connection with the pledged Shares, such rights, Options and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and of
-------
this Security Agreement in the event:
a. Payment of principal or interest on the Note shall be delinquent
for a period of ten days or more; or
b. Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of ten days after
written notice thereof from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall have
the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee
shall thereafter be entitled to pursue its remedies under the California
Commercial Code.
7. Release of Collateral. Subject to any applicable contrary rules under
---------------------
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder hereunder upon payments of the principal of the
Note. The number of the pledged Shares that shall be released shall be that
number of full Shares that bears the same proportion to the initial number of
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.
-1-
<PAGE>
8. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
----------------------------------------
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. Term. The within pledge of Shares shall continue until the payment of
----
all indebtedness secured hereby, at which time the remaining pledged stock shall
be promptly delivered to Pledgor, subject to the provisions for prior release of
a portion of the Collateral as provided in paragraph 7 above.
10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
----------
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.
11. Pledgeholder Liability. In the absence of willful or gross
----------------------
negligence, Pledgeholder shall not be liable to any party for any of
Pledgeholder's acts, or omissions to act, as Pledgeholder.
12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that
-----------------------------------
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
13. Successors or Assigns. Pledgor and Pledgee agree that all of the
---------------------
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein
shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.
14. Governing Law. This Security Agreement shall be interpreted and
-------------
governed under the internal substantive laws, but not the choice of law rules,
of the State of California.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"PLEDGOR" _______________________________________
Signature
_______________________________________
Print Name
Address: _______________________________________
_______________________________________
_______________________________________
Telephone
"PLEDGEE" Concentric Network Corporation,
a Delaware corporation
By: ___________________________________
Signature
______________________________________
Print Name
______________________________________
Title
"PLEDGEHOLDER" ______________________________________
Corporate Secretary
Concentric Network Corporation
1997 STOCK PLAN
OPTION SECURITY AGREEMENT
EXHIBIT C
---------
<PAGE>
NOTE
$_______________ Cupertino, California
______________, 19___
FOR VALUE RECEIVED, _______________ promises to pay to Concentric Network
Corporation, a Delaware corporation (the "Company"), or order, the principal sum
of _______________________ ($_____________), together with interest on the
unpaid principal hereof from the date hereof at the rate of _______________
percent (____%) per annum, compounded semiannually.
Principal and interest shall be due and payable on __________, 19___.
Payment of principal and interest shall be made in lawful money of the United
States of America.
The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.
This Note is subject to the terms of the Option, dated as of
________________. This Note is secured in part by a pledge of the Company's
Common Stock under the terms of a Security Agreement of even date herewith and
is subject to all the provisions thereof.
The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.
In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
____________________________________
Signature
____________________________________
Print Name
-2-
<PAGE>
CONCENTRIC NETWORK CORPORATION
1997 STOCK PLAN
NOTICE OF GRANT OF STOCK PURCHASE RIGHT
Unless otherwise defined herein, the terms defined in the 1997 Stock Plan
(the "Plan") shall have the same defined meanings in this Notice of Grant.
[Grantee's Name and Address]
You have been granted the right to purchase Common Stock of the Company,
subject to the Company's Repurchase Option and your ongoing status as a Service
Provider (as described in the Plan and the attached Restricted Stock Purchase
Agreement), as follows:
Grant Number _________________________
Date of Grant _________________________
Price Per Share $________________________
Total Number of Shares Subject _________________________
to This Stock Purchase Right
Expiration Date: _________________________
YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION DATE OR
IT WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES. By
your signature and the signature of the Company's representative below, you and
the Company agree that this Stock Purchase Right is granted under and governed
by the terms and conditions of the 1997 Stock Plan and the Restricted Stock
Purchase Agreement, attached hereto as Exhibit A-1, both of which are made a
part of this document. You further agree to execute the attached Restricted
Stock Purchase Agreement as a condition to purchasing any shares under this
Stock Purchase Right.
GRANTEE: CONCENTRIC NETWORK CORPORATION
_____________________________ By: __________________________________
Signature Signature
_____________________________ ____________________________________
Print Name Print Name
_____________________________________
Title
-3-
<PAGE>
EXHIBIT A-1
-----------
CONCENTRIC NETWORK CORPORATION
1997 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Restricted Stock Purchase Agreement.
WHEREAS the Purchaser named in the Notice of Grant (the "Purchaser") is an
Service Provider, and the Purchaser's continued participation is considered by
the Company to be important for the Company's continued growth; and
WHEREAS in order to give the Purchaser an opportunity to acquire an equity
interest in the Company as an incentive for the Purchaser to participate in the
affairs of the Company, the Administrator has granted to the Purchaser a Stock
Purchase Right subject to the terms and conditions of the Plan and the Notice of
Grant, which are incorporated herein by reference, and pursuant to this
Restricted Stock Purchase Agreement (the "Agreement");
NOW THEREFORE, the parties agree as follows:
15. Sale of Stock. The Company hereby agrees to sell to the Purchaser and
-------------
the Purchaser hereby agrees to purchase shares of the Company's Common Stock
(the "Shares") at the per Share purchase price and as otherwise described in the
Notice of Grant.
16. Payment of Purchase Price. The purchase price for the Shares may be
-------------------------
paid by delivery to the Company at the time of execution of this Agreement of
cash, a check, or some combination thereof.
17. Repurchase Option.
-----------------
(a) In the event the Purchaser ceases to be a Service Provider for
any or no reason (including death or disability) before all of the Shares are
released from the Company's Repurchase Option (see Section 4), the Company
shall, upon the date of such termination (as reasonably fixed and determined by
the Company) have an irrevocable, exclusive option (the "Repurchase Option") for
a period of sixty days from such date to repurchase up to that number of shares
that constitute the Unreleased Shares (as defined in Section 4) at the original
purchase price per share (the "Repurchase Price"). The Repurchase Option shall
be exercised by the Company by delivering written notice to the Purchaser or the
Purchaser's executor (with a copy to the Escrow Holder) AND, at the Company's
option, (i) by delivering to the Purchaser or the Purchaser's executor a check
in the amount of the aggregate Repurchase Price, or (ii) by canceling an amount
of the Purchaser's indebtedness to the Company equal to the aggregate Repurchase
Price, or (iii) by a combination of (i) and (ii) so that the combined payment
and cancellation of indebtedness equals the aggregate Repurchase Price. Upon
delivery of such notice and the payment of the aggregate Repurchase Price, the
Company shall become the legal and beneficial owner of the Shares being
repurchased and all
<PAGE>
rights and interests therein or relating thereto, and the Company shall have the
right to retain and transfer to its own name the number of Shares being
repurchased by the Company.
(b) Whenever the Company shall have the right to repurchase Shares
hereunder, the Company may designate and assign one or more employees, officers,
directors or stockholders of the Company or other persons or organizations to
exercise all or a part of the Company's purchase rights under this Agreement and
purchase all or a part of such Shares. If the Fair Market Value of the Shares to
be repurchased on the date of such designation or assignment (the "Repurchase
FMV") exceeds the aggregate Repurchase Price of such Shares, then each such
designee or assignee shall pay the Company cash equal to the difference between
the Repurchase FMV and the aggregate Repurchase Price of such Shares.
18. Release of Shares From Repurchase Option.
----------------------------------------
(a) Twenty-five percent of the Shares shall be released from the
Company's Repurchase Option one year after the Date of Grant and thereafter the
Shares shall be released in 36 equal increments over 36 months, at the end of
each month, provided that the Purchaser does not cease to be a Service Provider
prior to the date of any such release.
(b) Any of the Shares that have not yet been released from the
Repurchase Option are referred to herein as "Unreleased Shares."
(c) The Shares that have been released from the Repurchase Option
shall be delivered to the Purchaser at the Purchaser's request (see Section 6).
19. Restriction on Transfer. Except for the escrow described in Section 6
-----------------------
or the transfer of the Shares to the Company or its assignees contemplated by
this Agreement, none of the Shares or any beneficial interest therein shall be
transferred, encumbered or otherwise disposed of in any way until such Shares
are released from the Company's Repurchase Option in accordance with the
provisions of this Agreement, other than by will or the laws of descent and
distribution.
20. Escrow of Shares.
----------------
(a) To ensure the availability for delivery of the Purchaser's
Unreleased Shares upon repurchase by the Company pursuant to the Repurchase
Option, the Purchaser shall, upon execution of this Agreement, deliver and
deposit with an escrow holder designated by the Company (the "Escrow Holder")
the share certificates representing the Unreleased Shares, together with the
stock assignment duly endorsed in blank, attached hereto as Exhibit A-2. The
Unreleased Shares and stock assignment shall be held by the Escrow Holder,
pursuant to the Joint Escrow Instructions of the Company and Purchaser attached
hereto as Exhibit A-3, until such time as the Company's Repurchase Option
expires.
-5-
<PAGE>
(b) The Escrow Holder shall not be liable for any act it may do or
omit to do with respect to holding the Unreleased Shares in escrow while acting
in good faith and in the exercise of its judgment.
(c) If the Company or any assignee exercises the Repurchase Option
hereunder, the Escrow Holder, upon receipt of written notice of such exercise
from the proposed transferee, shall take all steps necessary to accomplish such
transfer.
(d) When the Repurchase Option has been exercised or expires
unexercised or a portion of the Shares has been released from the Repurchase
Option, upon request the Escrow Holder shall promptly cause a new certificate to
be issued for the released Shares and shall deliver the certificate to the
Company or the Purchaser, as the case may be.
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a stockholder with respect to the Shares while they are held in
escrow, including without limitation, the right to vote the Shares and to
receive any cash dividends declared thereon. If, from time to time during the
term of the Repurchase Option, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of the Purchaser's ownership of the Shares shall be immediately subject
to this escrow, deposited with the Escrow Holder and included thereafter as
"Shares" for purposes of this Agreement and the Repurchase Option.
21. Legends. The share certificate evidencing the Shares, if any, issued
-------
hereunder shall be endorsed with the following legend (in addition to any legend
required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
22. Adjustment for Stock Split. All references to the number of Shares
--------------------------
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares that may be made by the Company after the date of this Agreement.
23. Tax Consequences. The Purchaser has reviewed with the Purchaser's own
----------------
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. The Purchaser is
relying solely on such advisors and not on any statements or representations of
the Company or any of its agents. The Purchaser understands that the Purchaser
(and not the Company) shall be responsible for the Purchaser's own tax liability
that may arise as a result of the transactions contemplated by this Agreement.
The Purchaser understands that Section 83 of the Internal Revenue Code of 1986,
as amended (the "Code"), taxes as ordinary
-6-
<PAGE>
income the difference between the purchase price for the Shares and the Fair
Market Value of the Shares as of the date any restrictions on the Shares lapse.
In this context, "restriction" includes the right of the Company to buy back the
Shares pursuant to the Repurchase Option. The Purchaser understands that the
Purchaser may elect to be taxed at the time the Shares are purchased rather than
when and as the Repurchase Option expires by filing an election under Section
83(b) of the Code with the IRS within 30 days from the date of purchase. The
form for making this election is attached as Exhibit A-4 hereto.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER'S BEHALF.
24. General Provisions.
------------------
(a) This Agreement shall be governed by the internal substantive
laws, but not the choice of law rules of the State of California. This
Agreement, subject to the terms and conditions of the Plan and the Notice of
Grant, represents the entire agreement between the parties with respect to the
purchase of the Shares by the Purchaser. Subject to Section 15(c) of the Plan,
in the event of a conflict between the terms and conditions of the Plan and the
terms and conditions of this Agreement, the terms and conditions of the Plan
shall prevail. Unless otherwise defined herein, the terms defined in the Plan
shall have the same defined meanings in this Agreement.
(b) Any notice, demand or request required or permitted to be given
by either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or
deposited in the U.S. mail, First Class with postage prepaid, and addressed to
the parties at the addresses of the parties set forth at the end of this
Agreement or such other address as a party may request by notifying the other in
writing.
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party hereto.
(c) The rights of the Company under this Agreement shall be
transferable to any one or more persons or entities, and all covenants and
agreements hereunder shall inure to the benefit of, and be enforceable by the
Company's successors and assigns. The rights and obligations of the Purchaser
under this Agreement may only be assigned with the prior written consent of the
Company.
(d) Either party's failure to enforce any provision of this Agreement
shall not in any way be construed as a waiver of any such provision, nor prevent
that party from thereafter enforcing any other provision of this Agreement. The
rights granted both parties hereunder are cumulative and shall not constitute a
waiver of either party's right to assert any other legal remedy available to it.
(e) The Purchaser agrees upon request to execute any further
documents or instruments necessary or desirable to carry out the purposes or
intent of this Agreement.
-7-
<PAGE>
(f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES
PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS A SERVICE
PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED OR
PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT
THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE
SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT
ALL, AND SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE PURCHASER'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
By Purchaser's signature below, Purchaser represents that he or she is
familiar with the terms and provisions of the Plan, and hereby accepts this
Agreement subject to all of the terms and provisions thereof. Purchaser has
reviewed the Plan and this Agreement in their entirety, has had an opportunity
to obtain the advice of counsel prior to executing this Agreement and fully
understands all provisions of this Agreement. Purchaser agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Agreement.
Purchaser further agrees to notify the Company upon any change in the residence
indicated in the Notice of Grant.
DATED: ______________________
PURCHASER: CONCENTRIC NETWORK CORPORATION
______________________________ By:___________________________
Signature Signature
______________________________ ________________________________
Print Name Print Name
________________________________
Title
1997 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
-8-
<PAGE>
EXHIBIT A-2
-----------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto
________________________________________________________________________________
________________ (__________) shares of the Common Stock of Concentric Network
Corporation standing in my name of the books of said corporation represented by
Certificate No. _____ herewith and do hereby irrevocably constitute and appoint
_____________________________________________ to transfer the said stock on the
books of the within named corporation with full power of substitution in the
premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement (the "Agreement") between________________________ and
the undersigned dated ______________, 19__.
Dated: _______________, 19__
Signature:______________________________
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise the
Repurchase Option, as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>
EXHIBIT A-3
-----------
JOINT ESCROW INSTRUCTIONS
-------------------------
_______, 19__
Corporate Secretary
Concentric Network Corporation
10590 North Tantau Avenue
Cupertino, CA 95014
Dear _________________:
As Escrow Agent for both Concentric Network Corporation, a Delaware
corporation (the "Company"), and the undersigned purchaser of stock of the
Company (the "Purchaser"), you are hereby authorized and directed to hold the
documents delivered to you pursuant to the terms of that certain Restricted
Stock Purchase Agreement ("Agreement") between the Company and the undersigned,
in accordance with the following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively as the "Company") exercises the Company's Repurchase Option set
forth in the Agreement, the Company shall give to Purchaser and you a written
notice specifying the number of shares of stock to be purchased, the purchase
price, and the time for a closing hereunder at the principal office of the
Company. Purchaser and the Company hereby irrevocably authorize and direct you
to close the transaction contemplated by such notice in accordance with the
terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's Repurchase Option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a stockholder of the Company while the
stock is held by you.
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's Repurchase Option has been exercised, you
shall deliver to Purchaser a certificate or
<PAGE>
certificates representing so many shares of stock as are not then subject to the
Company's Repurchase Option. Within 90 days after Purchaser ceases to be a
Service Provider, you shall deliver to Purchaser a certificate or certificates
representing the aggregate number of shares held or issued pursuant to the
Agreement and not purchased by the Company or its assignees pursuant to exercise
of the Company's Repurchase Option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in
good faith, and any act done or omitted by you pursuant to the advice of your
own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree, you shall
not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint a successor Escrow Agent.
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<PAGE>
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
COMPANY: Concentric Network Corporation
10590 North Tantau Avenue
Cupertino, CA 95014
PURCHASER: ________________________________
________________________________
________________________________
ESCROW AGENT: Corporate Secretary
Concentric Network Corporation
10590 North Tantau Avenue
Cupertino, CA 95014
16. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the internal substantive laws, but not the
choice of law rules, of the State of California.
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<PAGE>
Very truly yours,
CONCENTRIC NETWORK CORPORATION
By: ___________________________________
Signature
______________________________________
Print Name
______________________________________
Title
PURCHASER:
______________________________________
Signature
______________________________________
Print Name
ESCROW AGENT:
__________________________________
Corporate Secretary Signature
__________________________________
Print Name
JOINT ESCROW INSTRUCTIONS
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<PAGE>
EXHIBIT A-4
-----------
ELECTION UNDER SECTION 83(b)
----------------------------
OF THE INTERNAL REVENUE CODE OF 1986
------------------------------------
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
for the current taxable year the amount of any compensation taxable to taxpayer
in connection with his or her receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER: SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows: __________ shares (the "Shares") of the Common Stock of Concentric
Network Corporation (the "Company").
3. The date on which the property was transferred is: ______________, 19__.
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, upon certain
events. This right lapses with regard to a portion of the Shares based on
the continued performance of services by the taxpayer over time.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction that by its terms will never
lapse, of such property is:
$_______________.
6. The amount (if any) paid for such property is:
$_______________.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------
Dated: ___________________, 19_________________________________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: ___________________, 19_________________________________________________
Spouse of Taxpayer
<PAGE>
EXHIBIT 10.7
CONCENTRIC NETWORK CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1997 Employee Stock Purchase
Plan of Concentric Network Corporation.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean Concentric Network Corporation and any
-------
Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings
------------
and commissions, but exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary that has been
---------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
--------
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
---------------
Period.
<PAGE>
(i) "Exercise Date" shall mean the last day of each Purchase Period.
-------------
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the date of such determination, as reported
in The Wall Street Journal or such other source as the Board or its committee
administering the Plan deems reliable, or;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock for
the last market trading day prior to the date of such determination, as reported
in The Wall Street Journal or such other source as the Board or its committee
deems reliable, or;
(3) In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by the Board or
its committee, or;
(4) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "Offering Periods" shall mean the periods of approximately twenty-
----------------
four (24) months during which an option granted pursuant to the Plan may be
exercised, commencing on the first Trading Day on or after February 15 and
August 15 of each year and terminating on the last Trading Day in the periods
ending twenty-four months later; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and end on the last Trading Day on or before
February 14, 1999. The duration and timing of Offering Periods may be changed
pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
----
(m) "Purchase Price" shall mean an amount equal to 85% of the Fair
--------------
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
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<PAGE>
(n) "Purchase Period" shall mean the approximately six-month period
---------------
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first Purchase Period of any Offering Period shall commence on
the Enrollment Date and end with the next Exercise Date.
(o) "Reserves" shall mean the number of shares of Common Stock covered
--------
by each option under the Plan that have not yet been exercised and the number of
shares of Common Stock that have been authorized for issuance under the Plan but
not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after February 15 and August 15 each year, or on such other
date as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
February 14, 1999. The Board or its committee shall have the power to change
the duration of Offering Periods (including the commencement dates thereof) with
respect to future offerings without shareholder approval if such change is
announced at least five (5) days prior to the scheduled beginning of the first
Offering Period to be affected thereafter.
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<PAGE>
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten (10%) of the
Compensation that he or she receives on each pay day during the Offering Period.
(b) All payroll deductions made for a participant shall be credited to
his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the Plan
as provided in Section 10 hereof, or may increase or decrease the rate of his or
her payroll deductions during the Offering Period by completing or filing with
the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period that is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, that arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the
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<PAGE>
Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than
25,000 shares of the Company's Common Stock (subject to any adjustment pursuant
to Section 19) on the Enrollment Date, and provided further that such purchase
shall be subject to the limitations set forth in Sections 3(b) and 12 hereof.
Exercise of the option shall occur as provided in Section 8 hereof, unless the
participant has withdrawn pursuant to Section 10 hereof. The option shall
expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account that are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
-5-
<PAGE>
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan that
may hereafter be adopted by the Company or in succeeding Offering Periods that
commence after the termination of the Offering Period from which the participant
withdraws.
11. Termination of Employment.
-------------------------
Upon a participant's ceasing to be an Employee for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
13. Stock.
-----
(a) The maximum number of shares of the Company's Common Stock that
shall be made available for sale under the Plan shall be five hundred thousand
(500,000) shares, subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof. If, on a given Exercise Date, the
number of shares with respect to which options are to be exercised exceeds the
number of shares then available under the Plan, the Company shall make a pro
rata allocation of the shares remaining available for purchase in as uniform a
manner as shall be practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in shares
covered by her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
-6-
<PAGE>
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a beneficiary validly designated under the Plan who is living
at the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant
-------
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
--------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan that has not yet been exercised shall be
-7-
<PAGE>
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Periods then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board or its
Committee. The New Exercise Date shall be before the date of the Company's
proposed dissolution or liquidation. The Board or its committee shall notify
each participant in writing, at least ten (10) business days prior to the New
Exercise Date, that the Exercise Date for the participant's option has been
changed to the New Exercise Date and that the participant's option shall be
exercised automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the Offering Period as provided in Section 10
hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board or its committee shall notify each
participant in writing, at least ten (10) business days prior to the New
Exercise Date, that the Exercise Date for the participant's option has been
changed to the New Exercise Date and that the participant's option shall be
exercised automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the Offering Period as provided in Section 10
hereof.
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Plan is in the best
interests of the Company and its shareholders. Except as provided in Section 19
hereof, no amendment may make any change in any option theretofore granted that
adversely affects the rights
-8-
<PAGE>
of any participant. To the extent necessary to comply with Section 423 of the
Code (or any successor rule or provision or any other applicable law, regulation
or stock exchange rule), the Company shall obtain shareholder approval in such a
manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board or its committee shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board or its committee determines in its sole discretion advisable that
are consistent with the Plan.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
-9-
<PAGE>
EXHIBIT A
---------
CONCENTRIC NETWORK CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _____________________________ hereby elects to participate in the
Concentric Network Corporation 1997 Employee Stock Purchase Plan (the
"Employee Stock Purchase Plan") and subscribes to purchase shares of the
Company's Common Stock in accordance with this Subscription Agreement and
the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 1 to 10%) during the Offering
Period in accordance with the Employee Stock Purchase Plan. (Please note
that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is subject
to shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):
______________________________________________________________.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares at the time such
shares were purchased by me over the price that I paid for the shares. I
-
hereby agree to notify the Company in writing
---------------------------------------------
<PAGE>
within 30 days after the date of any disposition of my shares, and I will
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adequate provision for Federal, state or other tax withholding obligations,
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if any, that arise upon the disposition of the Common Stock. The Company
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may, but will not be obligated to, withhold from my compensation the amount
necessary to meet any applicable withholding obligation including any
withholding necessary to make available to the Company any tax deductions
or benefits attributable to sale or early disposition of Common Stock by
me. If I dispose of such shares at any time after the expiration of the 2-
year and 1-year holding periods, I understand that I will be treated for
federal income tax purposes as having received income only at the extent of
an amount equal to the lesser of (1) the excess of the fair market value of
the shares at the time of such disposition over the purchase price that I
paid for the shares, or (2) 15% of the fair market value of the shares on
the first day of the Offering Period. The remainder of the gain, if any,
recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)_________________________________________________________
(First) (Middle) (Last)
____________________________________ __________________________________
Relationship
__________________________________
(Address)
-2-
<PAGE>
Employee's Social
Security Number: __________________________________
Employee's Address: __________________________________
__________________________________
__________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:______________________ __________________________________________
Signature of Employee
__________________________________________
Name of Employee (Print or type)
__________________________________________
Spouse's Signature (If beneficiary other
than spouse)
__________________________________________
Name of Spouse (Print or type)
-3-
<PAGE>
EXHIBIT B
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CONCENTRIC NETWORK CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Concentric
Network Corporation 1997 Employee Stock Purchase Plan that began on
____________, 19____ (the "Enrollment Date") hereby notifies the Company that he
or she hereby withdraws from the Offering Period. He or she hereby directs the
Company to pay to the undersigned as promptly as practicable all the payroll
deductions credited to his or her account with respect to such Offering Period.
The undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
________________________________________
________________________________________
________________________________________
Signature:
________________________________________
Date:___________________________________
<PAGE>
EXHIBIT 21.1
The Registrant has no subsidiaries.
