<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1997
REGISTRATION NO. 333-27241
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
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
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
----------------
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
VICTOR H. SIM 2200 GENG ROAD
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 JULY , 1997
3,000,000 SHARES
[LOGO OF 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," subject to official notice of
issuance.
Williams Communications Group, Inc. and Bay Networks, Inc. have agreed to
purchase directly from the Company, in a private placement that will occur
concurrently with the closing of this offering, shares of Common Stock having
an aggregate purchase price of approximately $18.0 million. All of such shares
will be unregistered shares purchased at the per share 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 $1,000,000.
(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
UNTERBERG HARRIS
WHEAT FIRST BUTCHER SINGER
, 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 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 14 major metropolitan areas and 132
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 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.
3
<PAGE>
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. ("Netscape"), 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, ConcentricHost, 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.. 12,356,055 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 1,636,363 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 3,154,447 shares issuable upon exercise of options and warrants
outstanding at June 30, 1997 at a weighted average exercise price of $10.27
per share. See "Description of Capital Stock--Warrants."
DIRECT PLACEMENTS
Williams Communications Group, Inc. and Bay Networks, Inc. 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 $18.0 million (including approximately $3.0
million in cancellation of indebtedness). 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" and "Certain Transactions--
Williams Transaction."
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)............... $ (11.92) $ (1.98)
======== =========
Weighted average shares
used in computing pro
forma net loss per
share(2)............... 5,567 7,398
======== =========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------
PRO FORMA
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................ $(24,705) $ 22,355
Property and equipment, net.......................... 53,227 53,227
Total assets......................................... 61,438 108,498
Long-term debt and capital lease obligations, less
current portion..................................... 35,349 35,349
Stockholders' equity (deficit)....................... (10,619) 36,441
</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)
======== ======== ======== ======== ========
</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) Adjusted to reflect the receipt by the Company of the estimated aggregate
net proceeds of $47.1 million (including approximately $3.0 million in
cancellation of indebtedness) from the sale of 3,000,000 shares of Common
Stock offered hereby and an assumed 1,636,363 shares offered in the Direct
Placement at an assumed initial public offering price of $11.00 per share.
See "Use of Proceeds" and "Direct Placements."
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 at least through 1998, although the Company's ability to
achieve profitability and positive cash flow from operations is dependent upon
the Company's ability to substantially grow its revenue base and achieve other
operating efficiencies. 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,
profitability or positive cash flow on either a quarterly or an annual basis.
At December 31, 1996, the Company had approximately $37.0 million of gross
deferred tax assets comprised primarily of net operating loss carryforwards.
The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the Company's history of net losses since its
inception and the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology. The
Company believes that, based on the current available evidence, it is more
likely than not that the Company will not generate taxable income through
1998, and possibly beyond, and accordingly will not realize the Company's
deferred tax assets through 1998 and possibly beyond. In addition, the
utilization of net operating losses may be 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 Company will continue to assess
the realizability of the deferred tax assets based on actual and forecasted
operating results. 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
6
<PAGE>
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; 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. The Company's current agreement to provide services to WNI expires on
December 1, 1997 and, although the Company currently is negotiating a new
agreement with WNI, there can be no assurance such negotiations will be
successfully concluded. While the Company expects revenue from WNI to decrease
as a percentage of revenue in future periods, the Company believes that
revenue derived from a limited number of current and future customers may
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 47 independent
contractors, and as of December 31, 1996, the Company had 246 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.
7
<PAGE>
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 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," "-- Dependence upon New and Enhanced
Services," and "-- 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. 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. See
"Business -- Services."
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
8
<PAGE>
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.
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. 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. See "Business -- The Concentric Network."
9
<PAGE>
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 currently plans to apply 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,
10
<PAGE>
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 December 1998 and the Microsoft agreement
expires in March 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 may be terminated at the election of Intuit upon six months prior
notice of an election to terminate. 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 Communications Group, 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 2000. 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
11
<PAGE>
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. At a
hearing held on June 25, 1997, the Court granted 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.
12
<PAGE>
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. See "Business -- The Concentric Network."
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 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
13
<PAGE>
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" and "Management."
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 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."
14
<PAGE>
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 or
planned. 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 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.
15
<PAGE>
Competitive Local Exchange Carriers. The Company currently plans to apply
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 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
16
<PAGE>
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
35.0% of the outstanding shares of Common Stock (33.8% 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
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 California, Florida, Illinois, Missouri, Ohio, Texas, 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 78,835 shares as of
June 30, 1997 (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 $1.0 million plus the aggregate amount of interest thereon as
described above, if all offerees accept the offer. The Company currently
expects to use a portion of the proceeds from this offering to make such
payments, if any are required. 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 or 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 $1.0 million plus statutory
interest of approximately $200,000.
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, Washington 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 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 could be required to make an aggregate
payment of up to approximately $767,000 for such grants. The Company currently
expects to use a portion of the proceeds from this offering to make such
payments, if any are required.
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 and grants, 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 Offer will provide it with additional
meritorious defenses to any such future claims. See "Risk Factors--Rescission
Offers," "Use of Proceeds," "Shares Eligible for Future Sale" and Note 5 of
Notes to the Financial Statements.
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
18
<PAGE>
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," "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 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. Prior to this offering there has been no public market for the Company's
securities. 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
7,296,253 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 $7.86 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 $29,690,000 (approximately $34,294,000 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 $17.4 million (including
approximately $3.0 million in cancellation of indebtedness).
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, $3.0 million
to pay license fees to a strategic partner and $2.0 million to repay the
promissory notes issued to a stockholder of the Company in June 1997. See
"Certain Transactions--Bridge Loans." 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 $1.0 million plus approximately $200,000 of statutory interest
with respect to shares of Common Stock issued upon conversion of the
convertible debentures and an amount up to $767,000 with respect to the
options issued under the 1995 Plan. See "Rescission Offer." A portion of the
proceeds will be used to purchase approximately 141,390 shares of common stock
from a stockholder who is not an officer, director or affiliate of the
Company. 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 or planned. 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
Williams Communications Group, Inc. and Bay Networks, Inc. have agreed to
purchase directly 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 $18.0
million (including approximately $3.0 million in cancellation of
indebtedness). All of such shares will be unregistered and will be purchased
at a per share amount equal to the per share 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 1,636,363 shares of Common Stock.
Such 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.
See "Certain Transactions--Williams Transaction."
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 (based on the
conversion ratios then in effect), 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 1,636,363 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;
4,901,231 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; 6,410,836 shares
outstanding pro forma; 11,047,199
shares outstanding pro forma as
adjusted)............................ 1,958 98,281 145,341
Deferred compensation................. (267) (267) (267)
Accumulated deficit................... (108,633) (108,633) (108,633)
--------- --------- ---------
Total stockholders' equity (deficit).. (10,619) (10,619) 36,441
--------- --------- ---------
Total capitalization.................... $ 24,730 $ 24,730 $ 71,790
========= ========= =========
</TABLE>
- --------
(1) Excludes 483,749 shares of Common Stock issued after March 31, 1997 and
3,154,447 shares issuable upon exercise of options and warrants
outstanding at June 30, 1997 at a weighted average exercise price of
$10.27 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 1,636,363 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
approximately $(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 (based on the conversion
ratios then in effect). After giving effect to the sale of 3,000,000 shares of
Common Stock offered hereby and an assumed 1,636,363 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
approximately $34,738,000, or $3.14 per share. This represents an immediate
increase in net tangible book value of $5.06 per share to existing stockholders
and an immediate dilution of $7.86 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.................................................. 5.06
------
Net tangible book value per share after the offering and
Direct Placements........................................... 3.14
------
Dilution per share to new investors.......................... $ 7.86
======
</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)..... 6,410,836 58.0% $ 98,281,000 65.8% $15.33
Direct placements............ 1,636,363 14.8 18,000,000 12.1 11.00
Investors in the offering.... 3,000,000 27.2 33,000,000 22.1 11.00
---------- ----- ------------ -----
Total...................... 11,047,199 100.0% $149,281,000 100.0%
========== ===== ============ =====
</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 483,749 shares
of Common Stock after March 31, 1997 pursuant to the exercise of options and
warrants, (ii) assume no exercise of the Underwriters' over-allotment option
and (iii) exclude 3,154,447 shares that were issuable upon exercise of options
and warrants outstanding at June 30, 1997 at a weighted average exercise price
of $10.27 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)............... $ (11.92) $ (1.98)
======== ========
Weighted average shares
used in computing pro
forma net loss per
share(2)............... 5,567 7,398
======== ========
</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. 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 at least through 1998, although the
Company's ability to achieve profitability and positive cash flow from
operations is dependent upon the Company's ability to substantially grow its
revenue base and achieve other operating efficiencies. 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. At December 31, 1996, the Company had approximately $37.0 million of
gross deferred tax assets comprised primarily of net operating loss
carryforwards. The Company believes that, based on a number of factors, the
available objective evidence creates sufficient uncertainty regarding the
realizability of the deferred tax assets such that a full valuation allowance
has been recorded. These factors include the Company's history of net losses
since its inception and the fact that the market in which the Company competes
is intensely competitive and characterized by rapidly changing technology. The
Company believes that, based on the current available evidence, it is more
likely than not that the Company will not generate taxable income through
1998, and possibly beyond, and accordingly will not realize the Company's
deferred tax assets through 1998, and possibly beyond. In addition, the
utilization of net operating losses maybe 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 Company will continue to assess
the realizability of the deferred tax assets based on actual and forecasted
operating results. See Note 8 of Notes to Financial Statements.
24
<PAGE>
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. This increased revenue
reflects growth in revenue from the Company's broadened product offerings to
its enterprise customers and through the Company's leveraged marketing
arrangements with its strategic partners, as well as continued growth in
revenue derived from Internet access customers. 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.
25
<PAGE>
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.
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. This increase reflects continued growth in revenue
derived from Internet access customers, as well as revenue from the Company's
broadened enterprise product offerings and through the Company's leveraged
marketing arrangements with its strategic partners.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 1995 reflects its first full year of providing network services.
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 $2.5 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 $47.7 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 which currently authorizes 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 $1.0 million plus statutory interest of
approximately $200,000 with respect to shares issued on conversion of the
convertible debentures and an amount of approximately $767,000 with respect to
certain options issued by the Company. See Note 5 of Notes to Financial
Statements and "Risk Factors--Rescission Offers."
Since the Company expects to incur additional operating losses, 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 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 14 major metropolitan areas and 132
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.
32
<PAGE>
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, commissions 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, 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.
Additionally, the Company entered into a roaming services agreement in June
1997 with NTT PC Communications, Inc. ("NTT PC"), a leading provider of IP
services in Japan. The roaming services agreement allows Concentric customers
to use the NTT PC network to access their internet accounts in Japan and
allows members of the NTT PC network to access their internet accounts in the
United States and Canada. While the Company does not expect to generate
significant revenue from deployment of international network services until at
least 1998, the Company believes that the ability to deliver network solutions
globally will be a key competitive factor in its industry.
33
<PAGE>
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.
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
34
<PAGE>
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.
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
35
<PAGE>
offering gives a lower cost, lower performance network service for those
customers for whom performance is less imperative.
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 services.
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 $6,000.00
Setup Fee $1,000.00
</TABLE>
Pursuant to a Co-Marketing Services Agreement, a Trademark License Agreement
and a Software License Agreement executed as of June 23, 1997 (the
"Agreements"), the Company entered into a strategic business arrangement with
Netscape to design, develop and operate Netscape Virtual Office by Concentric,
to offer customers hosted private Intranet services that can be accessed from
anywhere on the Internet. The service is being adapted from Concentric's
ConcentricHost product and will use Netscape's SuiteSpot software features.
These Intranet services are designed to give an individual or small business
with an Internet connection the ability to establish a "Virtual Office" that
is accessible through Netscape's Internet site. Launch of the service
currently is planned for late 1997. The Agreements have an initial term of two
years, which may be renewed for up to two additional one year terms. Pursuant
to the Agreements, the Netscape Virtual Office by Concentric will feature the
latest versions of Netscape SuiteSpot server software family for Web,
messaging and collaboration applications. The service is to be jointly
designed by the Company and Netscape and will be developed, hosted and
maintained by the Company. Upon execution of the Agreements the Company made a
$2.0 million down payment to Netscape. See "Certain Transactions--Bridge
Loans."
Netscape Virtual Office by Concentric is being designed to give individual
professionals, small businesses and project groups a private online presence
that can be shared with co-workers or other specified users. This online
Intranet center would serve as a user's entry point to a wide variety of
online information management services, such as HTML email accounts, internal
and external Web sites, private discussion forums and project collaboration,
36
<PAGE>
without the cost of extensive hardware, software and technical personnel. To
take advantage of these services, the user would only need Internet access and
Netscape Communicator client software. In order to create a "Virtual Office,"
the user or office manager would sign up for the monthly service on the
Netscape Internet site. The user would initially specify basic information,
project parameters, a list of people who can access the Virtual Office, and
credit card information for payment. Once all information is specified, the
user's Virtual Office would be automatically configured.
Remote Access Service. The Company's remote access services ("RAS"), are
marketed as Concentric RemoteLink, and were released commercially in mid-1997.
RemoteLink services are targeted at businesses that have employees in remote
locations. RemoteLink enables an enterprise's salespeople and other mobile
employees, telecommuters and business partners to dial into an enterprise's
corporate network resources and use them 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 has the ability to
interface with existing Company network infrastructure. 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 utilizes
Concentric's high-performance network, combined with T1 or fractional T1 links
to the enterprise LAN, offering more reliable and faster access. Concentric
RemoteLink offers 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
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.
37
<PAGE>
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. and QuadraCom, LLC. 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.
Game Gateway. Concentric launched its Game Gateway in June 1997 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 Game Gateway is offered to the
public via the Internet and provides access to 27 online games from 4 game
networks, including Engage, Gamestorm (Kesmai), Oceanline (Infogrames) and
Online Entertainment PLC.
The Game Gateway offers a unified packaged solution of major online game
networks focusing on ease of use and advanced functionality. Game Gateway
customers are offered a free CD-ROM with additional value added offerings
including free content, game software and free time online. The Company's
relationship with Unified Gamers Online, LLC provides the Game Gateway with
experts that manage tournaments and other game-oriented activities like chats
and message boards. Concentric currently charges $1.75 per hour for all games
accessed through the Game Gateway.
CUSTOMERS
The following is a representative list of the Company's customers during the
last 12 months.
<TABLE>
<S> <C>
Acer America Corporation Netlink, LTD
Ameritech Services, Inc. Netscape Communications Corporation
Bascom Global Internet Services, Inc. On Command Corporation
Bay Networks, Inc. Peapod L.P.
Books That Work PictureTel Corporation
Corel Corporation SCP Communications
Electronic Data Systems Corporation SMC Communications LLC
ENGAGE Games Online, Inc. Scopus Technology, Inc.
The Groovey Corporation Sega of America, Incorporated
Hewlett-Packard Company Surfers Unlimited LLC
Imagesoft Technologies, Inc. Toshiba America Information Systems
Investools, Inc. Total Entertainment Network
Infonautics Corporation WebTV Networks, Inc.
Intuit, Inc. You Bet! On-Line Entertainment
Microsoft Corporation Ziff-Davis Publishing Co.
</TABLE>
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."
38
<PAGE>
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
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
39
<PAGE>
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, 14 SuperPOPs in many major metropolitan areas plus a
total of 132 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 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.
40
<PAGE>
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.
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 direct sales, sales-support and network
services 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.
41
<PAGE>
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.
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
42
<PAGE>
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 currently plans to apply 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 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
43
<PAGE>
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
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 currently plans to apply
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
44
<PAGE>
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.
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. 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. 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.
45
<PAGE>
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, seeking
to secure a lien on the Company's assets up to an amount of $3.6 million. At a
hearing held on June 25, 1997, the Court granted 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" and
Note 10 of Notes to Financial Statements.
46
<PAGE>
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
Mark W. Fisher................ 36 Vice President of Corporate Marketing
Louis P. Bender, III(1)....... 50 Director
Robert W. Doede(1)............ 57 Director
Vinod Khosla(2)............... 42 Director
Randy A. Maslow............... 42 Director
Terence M. O'Toole............ 38 Director
Franco Regis(1)............... 41 Director
Gary E. Rieschel(2)........... 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.
47
<PAGE>
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.
Mark W. Fisher joined the Company in June 1997 as Vice President of
Corporate Marketing. From September 1996 to June 1997, Mr. Fisher was General
Manager and Vice President, Marketing of Pacific Bell Internet Services, a
wholly owned subsidiary of Pacific Bell. From June 1995 to August 1996, Mr.
Fisher was Vice President, Marketing of Pacific Bell Internet Services. From
1989 to May 1995, Mr. Fisher held various data product marketing and data
center operations positions at Pacific Bell. Mr. Fisher has an M.B.A. from the
University of California at Berkeley and an engineering degree from the U.S.
Naval Academy.
48
<PAGE>
Louis P. Bender, III has been a Director of the Company since June, 1997.
Since November 1996 he has been President, Americas Region of Racal Data
Group. Prior to such time, Mr. Bender served as Vice President, Business
Development at Bull Electronics, a business unit of Group Bull in Angers,
France. Prior to Bull Electronics, Mr. Bender held the position of Vice
President, Worldwide Sales at AVEX Electronics. Mr. Bender has bachelor's
degrees in Electrical Engineering and Business Administration from the State
University of New York and Monroe College, respectively.
Robert W. Doede has been a Director of the Company since June 1997. Mr.
Doede is chairman of FundMinder Inc., an investment advisory firm, and has
served in that position since December 1991. He holds a B.A. degree from Yale
College and a doctorate of economics from the University of Chicago.
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.
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.
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.
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.
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
49
<PAGE>
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 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. The
Compensation Committee currently consists of Messrs. Khosla and Rieschel.
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. The Audit Committee currently consists of
Messrs. Bender, Regis and Doede.
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 (#) ($)(3)
- --------------------------- ---------- --------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Henry R. Nothhaft....... 184,808 -- -- -- 3,105
President and Chief
Executive Officer
John K. Peters.......... 184,273 -- -- -- 3,076
Executive Vice
President and General
Manager, Network
Services Division
Michael F. Anthofer..... 136,336 20,000 155,212(2) 43,333(4) 1,545
Senior Vice President
and Chief Financial
Officer
George D. Carr.......... 105,000 25,897(1) -- 6,666(4) 1,761
Vice President of Field
Sales
Scott G. Eagle.......... 114,337 -- 82,396(2) 30,000(4) 1,347
Vice President of
Marketing
</TABLE>
- --------
(1) Reflects sales commissions.
(2) Reflects relocation expense payments.
(3) Reflects Company contributions to an employee 401(k) plan and term life
insurance premiums paid by the Company.
(4) Includes certain options that were granted at higher fair market values
earlier in 1996 and repriced by amendment in April 1996 to reflect lower
fair market values at that time.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
INDIVIDUAL GRANTS(3) ASSUMED ANNUAL
----------------------------------------------------------- RATES OF STOCK
PERCENT OF MARKET PRICE
NUMBER OF TOTAL PRICE OF APPRECIATION
SECURITIES OPTIONS SECURITIES FOR OPTIONS
UNDERLYING GRANTED TO EXERCISE UNDERLYING TERM(2)
OPTIONS EMPLOYEES PRICE OPTIONS ON EXPIRATION --------------
NAME GRANTED(1)(3) IN 1996 PER SHARE DATE OF GRANT DATE 5%($) 10%($)
---- ------------- ---------- --------- ------------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry R. Nothhaft....... -- -- -- -- -- -- --
John K. Peters.......... -- -- -- -- -- -- --
Michael F. Anthofer..... 33,333 7.9% $3.75 $3.75 12/31/2004 59,681 142,947
10,000 2.4 $3.75 $4.80 12/31/2006 40,687 87,000
George D. Carr.......... 3,333 0.8 $3.75 $3.75 2/28/2005 6,891 16,973
3,333 0.8 $3.75 $4.80 12/31/2006 13,561 28,997
Scott G. Eagle.......... 30,000 7.1 $3.75 $3.75 3/31/2005 62,024 152,769
</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.
(3) Excludes 74,666, 63,466, 43,333, 16,666 and 3,333 shares subject to
options granted to Messrs. Nothhaft, Peters, Anthofer, Carr and Eagle,
respectively, subsequent to 1996.
(4) These options were granted at an exercise price determined by the Board of
Directors to be equal to the fair market value of the Company's shares on
the date of grant. The Company's Common Stock was not traded publicly at
the time of the option grants to the Named Officers. The options were
granted at higher fair market values earlier in 1996 and repriced by
amendment in April to reflect fair market values at that time.
51
<PAGE>
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 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 June 30, 1997, options to purchase 346,500
shares of Common Stock at a weighted exercise price of $3.75 per share were
outstanding under the 1995 plan.
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 June 30, 1997, options to purchase
627,780 shares of Common Stock at a weighted average exercise price of $6.30
per share were outstanding, and 165,553 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 impair the rights of any optionee or Right holder without such
person's consent under the 1997 Plan.
Except in connection with his or her initial engagement with the Company, no
employee, director or consultant may be granted options or Rights for more
than 500,000 shares in any one fiscal year. 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 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
54
<PAGE>
on the first trading day on or after February 15 and August 15 of each year,
except for the first such offering period, which commences on the first
trading day on or after the Company's initial public offering effective date
of the and ends on the last trading day. Each offering period contains four
six-month purchase periods. 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. No employee may purchase more than
25,000 shares in any purchase period. 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 June 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 that 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): 906,454
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; 928,243 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)................ 167,246 453,227 216,819 123,297 14,706 57,595
Kleiner Perkins Caufield
& Byers entities(2).... 167,246 453,227 216,819 -- 14,706 148,504
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) Louis P. Bender III, a director of the Company, is the President, Americas
Region of Racal Data Group of Racal.
(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.
56
<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
February 1996, 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.
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.
On June 27, 1997, the Company closed a bridge loan with Kleiner Perkins
Caufield & Byers VII and KPCB Information Sciences Zaibatsu Fund VII for
$1,950,000 and $50,000, respectively, evidenced by promissory notes dated June
27, 1997. The Company issued each of the noteholders a warrant exercisable for
that number of shares of Common Stock equal to 50% of the principal amount of
the respective note divided by the Price to Public. The exercise price per
share for each of the warrants is 50% of the Price to Public. The proceeds
from the bridge loan will be used to finance a down-payment payable to
Netscape under agreements entered into between the Company and Netscape on
June 23, 1997. See "Business--Services."
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.
57
<PAGE>
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
such warrants. The exercise price of warrants for 181,876 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 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 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.
58
<PAGE>
In July 1996, 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 to decrease the exercise price to $3.75 per share and
remove certain conditions precedent to vesting of such options.
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.
WILLIAMS TRANSACTION
On May 30, 1997, the Company signed a non-binding Memorandum of
Understanding ("MOU") with Williams Communications Group, Inc. ("WCG"), the
parent company of Critical Technologies, Inc. ("CTI"). The MOU sets forth the
terms of a two-phase investment in the Company by WCG consisting of (i) a
bridge loan made by WCG to the Company as part of phase one, (ii) WCG's
participation in the Direct Placements which are to close concurrently with
this offering as part of phase two and (iii) an expanded strategic business
relationship between the parties to be implemented in both phases. The first
phase, which closed on June 19, 1997, consisted of a $3 million loan to the
Company by WCG evidenced by a 10% convertible secured promissory note (the
"WCG Note") and the issuance to WCG of a warrant to purchase shares of the
Company's Common Stock. The WCG Note will automatically convert into shares of
the Company's Common Stock upon the closing of the offering made hereby at a
per share conversion price equal to the Price to Public in the offering made
hereby. The warrant is exercisable for that number of shares of Common Stock
equal to 25% of the shares issuable upon conversion of the WCG Note at a per
share exercise price of 50% of the Price to Public. In addition to the WCG
Note and the warrant, as part of the first phase of the investment the parties
amended and restated the Employee Services and Staffing Agreement between CTI
and the Company (the "CTI Agreement") and amended the Co-location Services
Agreement between CTI and the Company to, among other things, extend the
respective terms of such agreements until December 31, 2000 and forego a $1.1
million acquisition fee to be paid by CTI to the Company in connection with
the acquisition of CTI in exchange for the issuance by WCG of $1.1 million in
telecommunications service credits to the Company. The parties also executed a
term sheet reflecting the basic terms of a distribution agreement and an
agency agreement to be executed as part of the first phase of the investment
by which WCG may sell CTI products and services for an initial term of two
years.
The MOU contemplates that the second phase of the WCG investment will take
place concurrently with the closing of this offering and will consist of the
purchase by WCG of at least $12 million of unregistered shares of the
Company's Common Stock as part of the Direct Placements. WCG will also provide
an additional $2 million in service credits to the Company in exchange for the
Company's Common Stock which will be issued to WCG as services are rendered.
The service credits granted to the Company in both phases of this transaction
will be applied to each monthly invoice from WCG for telecommunications
services provided to the Company at a rate of 50% of the face value of
services rendered until the credits have been consumed or until five years
from the closing of this offering. The Company will also issue warrants to WCG
to purchase that number of shares of the Company's Common Stock equal to 25%
of the shares issuable in connection with the phase two investment. The
exercise price of the phase two warrants will be 50% of the Price to Public in
the offering made hereby. The MOU also provides that in the event of a change
in control of the Company, WCG shall have the right to purchase a
nonexclusive, perpetual license to use, distribute and modify all of the
intellectual property of the Company, including any copyright, patent,
license, trademark or trade secret which the Company has or obtains the right
to transfer. Under the MOU, so long as WCG owns at least 5% of the outstanding
Common Stock of the Company, WCG will be entitled to name a nominee of its
choice to a seat on the Board of Directors to be recommended to the
stockholders of the Company. Finally, upon completion of this offering, the
MOU provides that WCG and the Company will enter into an agreement whereby the
Company will agree to use its best efforts to purchase a total of at least
$21.2 million in telecommunications equipment and services from WCG during the
five year period following the offering. The terms of this MOU are non-binding
and subject to further negotiations prior to the signing of definitive
agreements for the second phase.
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.
59
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of June 30, 1997, and assuming
conversion of Preferred Stock to Common Stock, and as adjusted to reflect the
sale of the 3,000,000 shares of Common Stock offered hereby and an assumed
1,636,363 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. 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)........................ 1,580,968 19.6% 12.5%
Viale del Campo Boario, 56D
00153 Rome, Italy
The Goldman Sachs Group,
L.P.(3)........................ 1,089,645 14.0 8.8
85 Broad Street
New York, NY 10004
Racal-Datacom, Inc.(4).......... 1,025,349 12.5 8.0
1601 North Harrison Parkway
Sunrise, FL 333233-2899
Yoshitaka Kitao SOFTBANK
Holdings, Inc. ................ 1,026,179 13.3 8.3
10 Langley Road, Suite 403
Newton Center, MA 02159
Kleiner Perkins Caufield & Byers
Entities(5).................... 1,014,453 12.9 8.1
2750 Sand Hill Road
Menlo Park, CA 94025
Marc Collins-Rector(6).......... 649,562 8.3 5.2
2000 Benedict Canyon
Beverly Hills, CA 90210
Henry R. Nothhaft(7)............ 100,896 1.3 *
John K. Peters(8)............... 69,669 * *
Michael F. Anthofer(9).......... 15,741 * *
Scott G. Eagle(10).............. 11,667 * *
George D. Carr(11).............. 6,667 * *
Louis P. Bender III(12)......... 1,025,349 12.5 8.0
Robert W. Doede................. -- -- --
Vinod Khosla(13)................ 1,014,453 12.9 8.1
Randy Maslow(14)................ 37,507 * *
Terence M. O'Toole(15).......... -- -- --
Franco Regis(16)................ 1,580,968 19.6 12.5
Gary E. Rieschel(17)............ 1,026,179 13.3 8.3
All current executive officers
and directors as a group
(16 persons)(18)............... 4,685,685 53.5% 35.0%
</TABLE>
- -------
*Less than 1%.
** Upon closing of the initial public offering and the Direct Placements,
Williams Communications will beneficially own a total of 1,704,545 shares
and exercisable warrants, or 13.4% of the Company.
(1) Applicable percentage ownership after this offering reflects the issuance
of 3,000,000 shares in the offering and an assumed 1,636,363 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.
60
<PAGE>
(2) Includes warrants to purchase 341,001 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 58,523 shares of stock.
(4) Includes warrants to purchase 512,259 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 149,432 shares held by the KCPB
Entities.
(6) Includes 80,007 shares of Common Stock issuable upon exercise of
outstanding stock options.
(7) Includes 100,896 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants.
(8) Includes 69,669 shares of Common Stock issuable upon exercise of
outstanding stock options and (ii) warrants.
(9) Includes 15,741 shares of Common Stock issuable upon exercise of
outstanding stock options.
(10) Includes 11,667 shares of Common Stock issuable upon exercise of
outstanding stock options.
(11) Includes 6,667 shares of Common Stock issuable upon exercise of
outstanding stock options.
(12) Includes 1,025,349 shares and exercisable warrants held by Racal-Datacom,
Inc. See note (4). Mr. Bender is the President of Racal-Datacom, Inc. Mr.
Bender disclaims beneficial ownership of such shares.
(13) Represents shares beneficially owned by the KCPB Entities. Mr. Khosla is
an affiliate of such entities. See note (5). Mr. Khosla disclaims
beneficial ownership of such shares, except to the extent of his
pecuniary interest therein.
(14) Includes 37,507 shares of Common Stock issuable upon exercise of
outstanding stock options.
(15) Excludes 1,089,645 shares and exercisable warrants that 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.
(16) Includes 1,580,968 shares and exercisable warrants 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.
(17) Represents 1,026,179 shares held by Yoshitaka Kitao SOFTBANK Ventures,
Inc. Mr. Rieschel is a Senior Vice President at SOFTBANK Holdings, Inc.
Mr. Rieschel disclaims beneficial ownership of such shares.
(18) Includes shares of Common Stock issuable upon exercise of outstanding
options and warrants, and shares beneficially owned by entities
associated with Messrs. Regis, Bender, Rieschel and Khosla, as to which
they disclaim beneficial ownership. See Notes (7)-(17).
61
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of the offering and the Direct Placements, the
outstanding Common Stock of the Company will consist of 12,356,055 shares,
$0.001 par value. At July 1, 1997, there were 7,719,692 shares of Common Stock
outstanding held of record by approximately 342 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 Restated 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 June 30, 1997, the following warrants were outstanding (warrants noted
at items (iv) through (vii) currently are for Preferred Stock and will be
exercisable for the number of shares of Common Stock indicated below upon
conversion of Preferred Stock that will automatically occur immediately prior
to the closing of the offering):
(i) Warrants to purchase 44,935 shares of Common Stock at an exercise
price of $15.00 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 a nominal exercise price.
62
<PAGE>
(iii) Warrants to purchase 25,536 shares of Common Stock at an exercise
price of $7.40 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on July 20, 1998.
(iv) Warrants to purchase 117,046 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 December 11, 1998.
(v) Warrants to purchase 230,938 shares of Common Stock at an exercise
price of $6.50 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on December 31, 2000.
(vi) Warrants to purchase 130,273 shares of Common Stock at an exercise
price of $26.87 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on December 31, 2000.
(vii) Warrants to purchase 38,482 shares of Common Stock at an exercise
price of $19.49 per share (subject to adjustment for stock splits, stock
dividends and the like), which expires on June 6, 1999. Warrants to
purchase 35,915 shares of Common Stock at an exercise price of $19.49 per
share (subject to adjustment for stock splits, stock dividends and the
like), which expire on July 31, 1999. Warrant to purchase 156,072 shares of
Common Stock at an exercise price of $19.49 per share (subject to
adjustment for stock splits, stock dividends and the like), which expires
on August 21, 1999. Warrants to purchase 462,324 shares of Common Stock at
an exercise price of $19.49 per share (subject to adjustment for stock
splits, stock dividends and the like), which expire on October 31, 1999.
Warrant to purchase 184,930 shares of Series D Preferred Stock at an
exercise price of $19.49 per share (subject to adjustment for stock splits,
stock dividends and the like), which expires on March 5, 2000.
(viii) Warrants to purchase shares of Common Stock equal to 25% of the
number of shares of Common Stock issuable upon conversion of the promissory
note issued to Williams Communications Group, Inc. Such warrants are
exercisable after the close of this offering at an exercise price per share
equal to 50% of the Price to Public and expires on June 19, 2002.
(ix) Warrants to purchase 90,909 shares of Common Stock at an exercise
price per share equal to 50% of the Price to Public, which expire on June
27, 2003.
REGISTRATION RIGHTS
Pursuant to the agreement between the Company and holders of approximately
7,296,253 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 60,000 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
63
<PAGE>
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.
64
<PAGE>
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 California, Florida, Illinois, Missouri, Ohio, Texas, 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 78,835 shares as of
June 30, 1997 (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 Company currently expects to use a portion of the proceeds from the
offering to make such payments, if any. 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 $1.0 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 or 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 $1.0 million plus statutory
interest of approximately $200,000.
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, Washington 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 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 could be required to make an aggregate
payment of up to approximately $767,000. The Company currently expects to use
a portion of the proceeds from the offering to make such payments, if any.
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,"
"Use of Proceeds," "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
12,356,055 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 3,154,447 shares of Common Stock.
65
<PAGE>
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 9,356,055 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
302,410 of the outstanding shares of Common Stock that 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 8,097,364 shares of Common Stock held by
existing stockholders are subject to lock-up agreements with the
Representatives. Of the shares of Common Stock subject to lock-up agreements,
approximately 8,097,364 shares may not be sold or transferred until 360 days
after the Effective date, approximately 803,142 shares may not be sold or
transferred until 180 days after the Effective Date and approximately 153,139
shares may not be sold or transferred until 90 days after the Effective Date.
None of the shares subject to such lock-up agreements may be sold or
transferred during the applicable lock-up period without the consent of the
underwriters 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 either
360, 180 or 90 days, respectively, 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 124,000 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 June 30, 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, of which approximately 1,412,334 of the shares underlying such options
are subject to 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 1997 Stock Plan and 1997
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."
66
<PAGE>
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 7.3 million shares are entitled to certain
registration rights with respect to their shares. See "Description of Capital
Stock--Registration Rights."
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom UBS Securities LLC,
Unterberg Harris and Wheat, First Securities, Inc. 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..............................................
Unterberg Harris................................................
Wheat, First Securities, Inc. ..................................
---------
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 Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
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.
67
<PAGE>
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. 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.
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 $18.0 million (including $3.0 in
cancellation of indebtedness). The Representatives will receive a commission
payable by the Company on the sale of the shares related to the Direct
Placements equal to one-half of the underwriting discounts and commissions
payable on the shares offered in the offering. All of the shares purchased in
the Direct Placements will be purchased at the Price to Public set forth on the
cover page of this Prospectus. See "Direct Placements" and "Certain
Transactions--Williams Transaction."
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. Brobeck, Phleger & Harrison LLP
has represented the Company with respect to certain legal matters and may
continue to represent the Company from time to time.
68
<PAGE>
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 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.
G-1
<PAGE>
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.
Latency.................... The time that elapses between the moment when a
command is sent to the time that a response is
received. On a network, latency is due to delays
in routers or switches, congestion delays on a
crowded backbone, and the time required for
electrons to travel a great distance between
nodes on a network.
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.
A data communications circuit capable of
T-3........................ 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.
Webserver............. 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
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 5, as to which the date is June 30, 1997,
and Note 10, as to which the date is July , 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 30, 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,
4,901 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; 6,411 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...................... $ (11.92) $ (1.98)
======== ========
Shares used in computing pro
forma net loss per share... 5,567 7,398
======== ========
</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)....... -- -- 906 10,147 62 117 -- -- 10,264
Issuance of Series C preferred stock (net of
issuance costs)............................ -- -- 805 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 2,078 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).............. -- -- 123 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 4,901 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 4,901 $ 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 65 193
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) 49
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).
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)
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.
Commissions and other obligations to strategic partners through marketing
and distribution arrangements are expensed as incurred, at the time the
associated revenue is recognized.
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.
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)
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).
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...... $ (2.18) $ (11.22) $ (32.85) $ (5.14) $ (7.25)
========= ========= ========= ========= =========
Shares used in computing
net loss per share..... 1,971,950 1,961,403 2,020,814 2,018,794 2,024,661
========= ========= ========= ========= =========
</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 5,692,750 shares of common stock based on the number of shares of
convertible preferred stock outstanding at June 25, 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.
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," effective January 1, 1996. The Company continually reviews
long-lived assets to assess recoverability based upon undiscounted cash flow
analysis. Impairments,
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)
if any, are recognized in operating results in the period in which a permanent
diminution in value is determined (see Note 3).
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), a stockholder of
the Company. 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. 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 $890,000. 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. Subsequent to March 31, 1997, an analysis was performed
of the statutes of limitations under federal and state securities laws
applicable to the shares which may have been issued without securities laws
exemptions and it was determined that a number of such statute of limitations
had lapsed. While the Company will offer to rescind the shares and options
pursuant to the Rescission Offer, there can be no assurances that the Company
will not otherwise be subject to possible statutory remedies for return of the
purchase price of such securities plus interest thereon totaling, as of June
23, 1997, approximately $1,200,000 related to the issuance of the stock and an
amount equal to approximately $767,000 with respect to options.
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...... 1,000,000 906,454 $0.001 $10,146,987 $10,000,000
Series B convertible...... 866,667 366,946 $0.001 4,857,130 4,035,130
Series C convertible...... 933,333 928,243 $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
--------- ----------- -----------
4,904,136 $95,214,996 $89,797,520
========= =========== ===========
</TABLE>
In April 1995, the Company agreed to sell 906,454 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
366,946 shares of Series B convertible preferred stock (see Note 4). In
October 1995, the Company agreed to sell 928,243 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.
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED AVERAGE NUMBER
EXERCISE NUMBER REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE AND VESTED EXERCISE PRICE
-------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$3.75 1,062,707 8.42 $ 3.75 513,110 $ 3.75
$6.00 210,414 9.76 $ 6.00 -- --
$8.25 - $33.00 240,155 8.78 $10.19 100,020 $12.87
--------- -------
Total 1,513,276 613,130
========= =======
</TABLE>
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
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)
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.
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 $33.00. 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
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.
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 believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the Company's history of net losses since
inception and the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology. The
Company believes that, based on the currently available evidence, it is more
likely than not that the Company will not generate taxable income through
1998, and possibly beyond, and accordingly will not realize the Company's
deferred tax assets through 1998 and possibly beyond. The Company will
continue to assess the realizability of the deferred tax assets based on
actual and forecasted operating results. In addition, the utilization of net
operating losses may be 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 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 $18,000,000. All of such
shares will be unregistered shares purchased at the initial public offering
price.
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)
On May 1, 1997, and June 6, 1997 the Company's Board of Directors took the
following actions which were approved by the Company's shareholders on June
30, 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 July , 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
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 $4.3 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. At a
hearing held on June 25, 1997, the Court granted the writ. The Company has
reserved approximately $5,791,000 as of March 31, 1997 for such lawsuit in
case the Company is unsuccessful in its defense (see Note 3).
F-21
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
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. The Company is currently unable to estimate a range of possible
losses associated with such lawsuits.
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.
Bridge Loans
In June 1997, the Company borrowed $3 million from a third-party in the form
of a 10% convertible secured promissory note (the Secured Note) which is due
on November 30, 1997. In connection with the Secured Note, the Company will
issue a warrant to purchase shares of the Company's Common Stock (the
Warrant). The Note will automatically convert into shares of the Company's
Common Stock upon the closing of the initial public offering at a per share
conversion price equal to the initial public offering price. The Warrant,
which will expire five years from the date of grant, is exercisable for a
number of shares of Common Stock equal to 25% of the shares issuable upon
conversion of the Note at a per share exercise price of 50% of the initial
public offering price.
In June 1997, the Company borrowed $2 million from a stockholder in the form
of a 10% unsecured promissory note (the Unsecured Note). The Unsecured Note is
due no later than five days following the initial public offering. In
connection with the Unsecured Note, the Company will issue a warrant, which
will expire five years from the date of grant, to purchase shares of the
Company's Common Stock (the Warrant). The Warrant is exercisable for a number
of shares of Common Stock determined by multiplying the principal amount of
the loan by 50% and dividing that sum by the initial public offering price per
share. The exercise price will be equal to 50% of the initial public offering
price.
The Company deemed the fair value of the above warrants, using the Black-
Scholes valuation method, to be approximately $950,000, which will be recorded
as a discount to the above promissory Notes. Such discount will be amortized
to interest expense over the estimated term of the Notes.
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.................................................................. 69
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 OF CONCENTRIC NETWORK CORPORATION]
COMMON STOCK
---------------
PROSPECTUS
, 1997
---------------
UBS SECURITIES
UNTERBERG HARRIS
WHEAT FIRST BUTCHER SINGER
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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......................... 10,000
Printing and Engraving Expenses.................................. 100,000
Legal Fees and Expenses.......................................... 500,000
Accounting Fees and Expenses..................................... 250,000
Transfer Agent and Registrar Fees................................ 10,000
Miscellaneous.................................................... 72,815
----------
Total.......................................................... $1,000,000
==========
</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 and
do not reflect, in the case of Preferred Stock and warrants exercisable
therefor, the conversion of Preferred Stock into Common Stock that will occur
automatically immediately prior to the closing of the offering):
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
II-2
<PAGE>
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.
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 February 1996, 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 24,510 shares of Series D Preferred Stock at an
exercise price of $20.40 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 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.
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
II-3
<PAGE>
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 $29,000,000 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 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
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, the Company issued an aggregate of 106,754 shares of
Series A Preferred Stock to two shareholders of the Company in exchange for
106,754 shares of Class B Common Stock then held by them.
27. Between March 31, 1996, and May 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 June 25, 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 53,346 shares of Class A Common Stock at a weighted
average exercise price of $12.38 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 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").
II-4
<PAGE>
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
June 30, 1997, options to purchase 346,500 shares of Common Stock at a
weighted exercise price of $3.75 per share were outstanding. Nine optionees
have exercised 6,151 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 June 30, 1997, options to purchase 627,780 shares of Class A Common
Stock at a weighted average exercise price of $6.30 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 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.
II-5
<PAGE>
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.
31. On June 19, 1997, the Company closed a Bridge Loan from Williams
Communications Group, Inc. ("WCG") for $3,000,000 evidenced by a Promissory
Note which will automatically convert into shares of Common Stock upon the
closing of this offering at a conversion price equal to the initial Price to
Public made in the offering hereby. In connection with this Bridge Loan, the
Company issued WCG a warrant to purchase shares of Common Stock equal to 25%
of the number of shares of Common Stock issuable upon conversion of the
Promissory Note. Such warrant is exercisable after the close of this offering
at an exercise price per share equal to 50% of the Price to Public and expires
on June 19, 2002.
32. On June 27, 1997, the Company closed a bridge loan with Kleiner Perkins
Caufield & Byers VII and KPCB Information Sciences Zaibatsu Fund VII for
$1,950,000 and $50,000, respectively, evidenced by promissory notes dated June
27, 1997. The Company issued each of the noteholders a warrant exercisable for
that number of shares of Common Stock equal to 50% of the principal amount of
the respective note divided by the Price to Public. The exercise price per
share for each of the warrants is 50% of the Price to Public.
II-6
<PAGE>
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 plus interest. No claims for any such rescission have been
asserted against the Company. The effective price per share of Common Stock 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 $1,200,000 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 Common Stock
to certain 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 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,
Missouri, Virginia, Washington 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 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 could be required to make an aggregate payment of
up to approximately $767,000. 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 could provide it with
additional meritorious defenses to any such future claims. See "Risk Factors--
Rescission Offers," "Use of Proceeds," "Rescission Offers," "Shares Eligible
for Future Sale" and Note 5 to the Financial Statements.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<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.
</TABLE>
II-7
<PAGE>
<TABLE>
<C> <S>
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.
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.
</TABLE>
II-8
<PAGE>
<TABLE>
<C> <S>
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., 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.
("WCG")
10.35 Service Credits Letter Agreement, dated June 19, 1997, by and between
the Registrant and WCG.
10.36 $1,100,000 Obligation Letter Agreement, dated June 19, 1997, between
the Registrant and WCG.
10.37 Agency Agreement and Distribution Agreement, dated June 19, 1997,
between the Registrant and WCG.
10.38+ Co-Marketing Service Agreement, dated June 23, 1997 between the
Registrant and Netscape Communications, Inc. ("Netscape")
10.39+ Trademark License Agreement, dated June 23, 1997, between the
Registrant and Netscape.
10.40+ Software License Order Form, dated June 23, 1997, between the
Registrant and Netscape.
10.41 Note and Warrant Purchase Agreement, dated June 23, 1997, between the
Registrant, Kleiner Perkins, Caufield & Byers VII and KPCB
Information Science Zaibatsu Fund VII.
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.
II-9
<PAGE>
(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.
(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 1933, 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. 3 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 30TH DAY OF JUNE, 1997.
Concentric Network Corporation
/s/ Henry R. Nothhaft
By: _________________________________
HENRY R. NOTHHAFT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 3 TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON JUNE 30,
1997, BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Henry R. Nothhaft President and Chief July 1, 1997
- ------------------------------------- Executive Officer
HENRY R. NOTHHAFT (Principal
Executive Officer),
Director
/s/ Michael F. Anthofer Chief Financial July 1, 1997
- ------------------------------------- Officer (Principal
MICHAEL F. ANTHOFER Financial and
Accounting Officer)
* Director July 1, 1997
- -------------------------------------
TERENCE M. O'TOOLE
* Director July 1, 1997
- -------------------------------------
VINOD KHOSLA
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director
- ------------------------------------
RANDY A. MASLOW
* Director July 1, 1997
- ------------------------------------
FRANCO REGIS
Director
- ------------------------------------
LOUIS P. BENDER III
* Director July 1, 1997
- ------------------------------------
GARY E. RIESCHEL
Director
- ------------------------------------
ROBERT W. DOEDE
*By: /s/ Henry R. Nothhaft
---------------------------------
HENRY R. NOTHHAFT
ATTORNEY-IN-FACT
</TABLE>
II-12
<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+ Revised Virtual Private Network Services, dated February 1, 1997,
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.
("WCG")
10.35 Service Credits Letter Agreement, dated June 19, 1997, by and between
the Registrant and WCG.
10.36 $1,100,000 Obligation Letter Agreement, dated June 19, 1997, between
the Registrant and WCG.
10.37 Agency Agreement and Distribution Agreement, dated June 19, 1997,
between the Registrant and WCG.
10.38+ Co-Marketing Service Agreement, dated June 23, 1997 between the
Registrant and Netscape Communications, Inc. ("Netscape")
10.39+ Trademark License Agreement, dated June 23, 1997, between the
Registrant and Netscape.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.40+ Software License Order Form, dated June 23, 1997, between the
Registrant and Netscape.
10.41 Note and Warrant Purchase Agreement, dated June 27, 1997, between the
Registrant, Kleiner Perkins Caufield & Byers VII and KPCB Information
Science Zaibatsu Fund VII.
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 10.11
AMENDED AND RESTATED
EMPLOYEE SERVICES AND STAFFING AGREEMENT
This Amended and Restated Employee Services and Staffing Agreement
("Agreement") dated as of June 19, 1997 by and between Concentric Network
Corporation ("CNC"), a Florida corporation with principal offices at 10590 N.
Tantau Avenue, Cupertino, California 95014 and Critical Technologies
Incorporated ("CTI"), a Delaware corporation with principal offices at 944
Anglum, Hazelwood, Missouri 63042.
WITNESSETH
----------
WHEREAS, CTI currently assists CNC with planning and implementation of
Points of Presences, network operations, implementation of network improvements
and the opening of "Virtual Local Access" calling areas in accordance with the
terms and conditions of the Employee Services and Staffing Agreement, as
amended, between the parties dated as of November 1, 1995 ("1995
Agreement");
WHEREAS, the needs of CNC and the capabilities of CTI have evolved since
November 1, 1995;
WHEREAS, CTI was acquired by Williams Communications Group, Inc. ("WCG"), a
Delaware corporation on March 6, 1997;
WHEREAS, WCG has agreed to invest an aggregate of $17 million as further
described and subject to the conditions set forth in that certain Memorandum of
Understanding dated May 30, 1997, between CNC and WCG; and
WHEREAS, CNC has agreed to modify the 1995 Agreement in recognition of its
current business requirements, CTI's current capabilities and the $3 million
loan.
NOW, THEREFORE, in consideration of the respective covenants and agreements
of the parties contained herein, the parties hereto agree as follows.
1. Definitions
-----------
For purposes of this agreement, certain words and phrases are defined as
follows.
(a) POP: "Point of Presence" is a local access network node on a
network.
(b) Staff Month: One calendar month of staff time including sick
time, weekends, holidays and vacation time. There are 12 such periods in each
calendar year.
(c) Loaned Employee: An employee of CTI, the services of which are
utilized by CNC to facilitate the goals and purposes of this Agreement.
<PAGE>
(d) "Local Access Network Engineering and Design Services" and "Local
Access Network Design and Analysis": The modeling of traffic patterns and
expenses to determine the most effective method for expanding and modifying a
network's dial-in access nodes.
(e) Network Expansion Plan and Network Operations Plan: A series of
mutually agreed upon objectives and goals that are exhibits to this
Agreement.
(f) Existing POP Site Contract: The existing location management
contract between CNC and CTI, titled Collocations Services Agreement, dated
November 1, 1994, as amended, and attached as an exhibit to this contract.
(g) Reasonably Attainable: Tasks that could be completed by a group
of similar size and experienced individuals with the same capital flexibility
allowed by CNC. Additionally, the sum total of activities must also be able to
be completed by the group.
(h) Provisioning: The process of contracting for the physical
facility where a POP will be located and coordinating the telephone and other
equipment orders necessary to bring this site live or into production use by the
network.
(i) Co-locate: The ability of CTI to place equipment on a POP site
which is owned by CNC. The concept being that both organizations can utilize the
space which is owned or leased by CNC.
(j) Confidential Information: All information marked as
"Confidential" shall be considered "Confidential Information." It shall be the
responsibility of the originator of the Confidential Information (the
"Originator") to clearly mark the information as confidential to be received by
the Recipient ("Recipient"). When information deemed to be Confidential is
provided orally, the Originator shall, at the time of disclosure, identify the
information as Confidential and provide the Recipient a dated written summary of
the Confidential Information so disclosed promptly after such oral disclosure.
Confidential Information shall not include (a) information previously known by
the Recipient, (b) information that is publicly available or becomes publicly
available other than through unauthorized disclosure by the Recipient, (c)
information that is received from a third party whose disclosure does not
violate any confidentiality obligation to the Originator, (d) information
developed by or on behalf of the Recipient independent of the Confidential
Information received from the Originator or information required to be disclosed
pursuant to the Federal securities disclosure laws.
(k) Financing Event: An initial public offering by CNC or, in the
alternative, some other private financing in either event totaling no less than
$40 million (including for such purposes an aggregate of $15 million to be
invested in CNC by WCG as further described in this sentence) to be completed no
later than October 31, 1997 in which WCG agrees to purchase at least $12 million
of CNC common stock and, if requested by CNC, to convert the $3 million loan in
accordance with the Convertible Promissory Note of even date herewith. In the
event that an initial public offering is not consummated, but a private
Financing Event occurs, WCG will, subject to the satisfactory completion of due
diligence and the receipt of necessary corporate and other approvals,
-2-
<PAGE>
invest $12 million and, if requested by CNC, convert the $3 million loan, if the
terms and conditions as set by the lead investor of the private Financing Event
are acceptable to WCG. WCG's investment participation in the Financing Event is
expressly contingent upon CNC's satisfaction of all the conditions set forth in
Sections 3, 4, 5, and 6 of the Memorandum of Understanding between CNC and WCG
dated May 30, 1997.
(l) Best Efforts: A "best efforts" obligation shall mean the
highest level of commercial effort without requiring a party to incur a loss or
an extraordinary expense in performing such efforts.
2. CTI's Responsibilities and Objectives
-------------------------------------
Loaned Employees - Additional Responsibilities
2.1 CTI hereby agrees to use its best efforts to provide certain key
employees of CTI, whose names are set forth on Exhibit A hereto (the "Loaned
Employees"), to perform functions for CNC.
Although each Loaned Employee shall at all times remain an employee of CTI,
he or she will perform duties and be under the general direction of CNC for the
term of this Agreement, or until such Loaned Employee's assignment is otherwise
terminated as provided in Section 4 hereof. The Loaned Employees hereunder
shall be located in St. Louis, Missouri, unless noted in Exhibit A.
The parties hereto agree that the position and title with respect to each
Loaned Employee are as set forth on Exhibit A hereto. Exhibit A hereto may be
amended in writing from time to time by the parties hereto to add Loaned
Employees to fill positions provided for under the Network Expansion Plan and
Network Operations Plan previously submitted by CTI to CNC, and any other plans
submitted by CTI and agreed to by CNC. Copies of said Network Expansion Plan
and Network Operations Plan, marked Exhibits B and C respectively, are attached
hereto and incorporated by reference as if fully set out herein. Exhibit A may
also be amended to reflect the termination of a Loaned Employee's assignment
pursuant to Sections 4.1 and 4.3 hereof, to replace a Loaned Employee whose
assignment is terminated pursuant to Section 4.1 of this Agreement, or to alter,
amend or revise the title, salary and duties of any Loaned Employee.
2.2 CTI and CNC acknowledge that it is important for CNC to have long term
control and ownership of the Network Operations function being performed, in
part, by loaned CTI employees under this Agreement. CTI and CNC further
acknowledge that CTI has current and prospective customers for which a 24x7x365
day network operations infrastructure is required. The parties further
acknowledge that in order to meet CNC's timetable for implementation of its new
Network Operations function, CTI was utilized to hire staff and implement the
technology necessary to provide CNC with a 24x7x365 day network operations
function. To accomplish this objective, CTI recruited a number of people who
had been identified as being members of the planned CTI network operations
center.
-3-
<PAGE>
In recognition of the facts that a) CTI had intended to build its own
network operations center around some of the core staff hired by CTI to support
CNC's requirements, b) CNC funded virtually all of the build out expense for the
Network Operations Center in St. Louis as well as the monthly operating expense
for this center, c) CNC requires the flexibility of controlling this function as
a core asset of CNC, and d) CTI desires the ability to service non-CNC customers
with its own dedicated staff plus some portion of the CNC staff, equipment,
software, and other resources funded by CNC on an "as available" basis, the
parties agree that the following terms will apply with respect to the Network
Operations staff as identified on Exhibit A and with respect to the resources
that are covered by this Agreement.
A) CTI will reimburse CNC for a proportionate share of the costs of a)
Loaned Employees, b) CNC employees who have been converted from CTI-to-CNC
employment, and c) supporting resources that have been or are being paid for by
CNC when these people or supporting resources are used to support non-CNC
customer networks. The amount of reimbursement will be computed as TCxAC1 /
(AC1+C2):
NOTE: A negative result, product, or sum will not result in payment to
CTI.
TC= Monthly expense paid to CTI for Network Operations Loaned
Employees, plus Monthly expenses of any/all CNC hired Network
Operations employees, plus Monthly amortization/depreciation (48
months) of the Network Operations capital equipment, software,
and site preparation expenses paid for by CNC, plus any other
expenses associated with Network Operations paid for by CNC.
C1= Total number of help/trouble calls taken by Network Operations
from Non-CNC customers.
C2= Total number of help/trouble calls taken by Network Operations
from CNC customers.
CP= Calls per employee (Total calls divided by total of Network
Operations personnel paid for by CTI and CNC).
NR= Number of CTI Network employees not reimbursed by CNC.
AC1= C1-(NRxCP).
2.3 Loaned Employees, who will be made available to CNC, will be
available only after they have executed Letters of Agreement in the form
attached hereto as Exhibit D, which form the parties hereto expressly
approve.
-4-
<PAGE>
2.4 CTI agrees to exercise due diligence in overseeing those with access
to the Confidential Information. CTI agrees to limit the number of its
associates, officers, or employees, who are exposed to the Confidential
Information. The standard of care to be used in preventing disclosure of the
Confidential Information shall be at least as great as that care CTI would take
in preserving the confidentiality of its own trade secrets and proprietary
information.
2.5 The parties hereby acknowledge and agree that Intellectual Property
Rights, as defined in Exhibit B, created, written, developed or made by each
Loaned Employee while performing services for CNC pursuant to this Agreement
shall be subject to the addendum to the Loaned Employee Letter of Agreement
(Exhibit D).
2.6 In addition to the other terms and conditions of this Agreement, CTI
and CNC agree and stipulate, as further consideration for the promises made by
each party hereunder, that CTI will use its best efforts to ensure that a
properly trained network control center is developed in St. Louis, Missouri.
This will include developing the staffing requirements, interviewing and hiring
the staff, and training the staff as required.
3. Agreement Scope and Term
------------------------
The term of this Agreement shall be for a period commencing June 19, 1997,
and terminating on December 31, 2000. The parties agree that this Agreement may
be terminated prior to December 31, 2000 by the mutual, written consent of both
parties. Such contract period referred to herein shall be referred to as the
"Agreement Term". This Agreement shall automatically renew for an additional
two-year period unless either party shall give one-hundred twenty (120) days
notice prior to the expiration of this Agreement to the other party that said
party does not wish to extend the terms of this Agreement. Notwithstanding the
foregoing, if WCG elects not to participate in the Financing Event, even though
CNC has satisfied all conditions set forth in the definition of Financing Event,
this Agreement may be terminated by CNC on October 31, 1999, if CNC provides CTI
ninety (90) days prior written notice.
4. Termination of Assignments
--------------------------
A Loaned Employee's assignment to CNC may be terminated by CTI for the
following reasons:
4.1 Termination of Employment with CTI. In the event a Loaned Employee's
----------------------------------
employment with CTI terminates for any reason, the Loaned Employee's assignment
to CNC hereunder shall also terminate. Subject to Section 9, nothing in this
Agreement shall require CTI to retain the Loaned Employee in its employment for
any period of time, and CTI shall be free to terminate any Loaned Employee at
any time during the term of this Agreement.
4.2 Payments Due Upon Termination of Loaned Employee's Assignment. Upon
-------------------------------------------------------------
the termination of the assignment of a Loaned Employee, CNC shall reimburse CTI
for any amount which had accrued and remains unpaid as of the date such
assignment terminated and for which CTI is
-5-
<PAGE>
entitled to reimbursement under Section 5 below. CNC shall make any payments due
under this Subsection in accordance with said Subsection 5.6.
4.3 Replacement of Loaned Employees. In the event a Loaned Employee's
-------------------------------
assignment is terminated pursuant to Subsection 4.1 above, unless the position
held by the Loaned Employee has been eliminated, CTI shall select a replacement
employee mutually satisfactory to CNC who will become a Loaned Employee for
purposes of this Agreement.
5. CNC's Obligations - Compensation, Benefits and Other Human Resource Plans
-------------------------------------------------------------------------
and Programs and Reimbursement of Expenses
------------------------------------------
5.1 Loaned Employees Generally. Except as otherwise set forth below in
--------------------------
Subsection 5.4, there shall be no change, from the date of this Agreement, in
the amount, terms and conditions of CTI's compensation, benefit and other Human
Resource ("HR") plans and programs (currently [*] of Base Salary Rate as
defined below) as they relate to the Loaned Employees during the term of this
Agreement without consultation with and the written consent of CNC, except such
changes as may be made in the ordinary course of business consistent with WCG's
past practices. CNC recognizes that CTI Loaned Employees participate in plans
and programs sponsored by WCG.
5.2 Base Salary. CTI shall continue to compensate each of the Loaned
-----------
Employees for his or her services to CNC under the terms of this Agreement at
the rate per annum as set forth in the monthly CTI invoices paid by CNC and as
adjusted annually in accordance with the next sentence, plus overtime and
bonuses, if any, ("Base Salary Rate"), less appropriate deductions (including
withholding taxes and deductions for participation in benefit programs), and in
accordance with CTI's general payroll practices. Any increase in such Base
Salary Rate may only be implemented with the approval of CNC.
5.3 Benefits and Perquisites. Each Loaned Employee shall be eligible to
------------------------
continue in, or receive benefits under the benefits plans, arrangements,
practices, and programs made available from time to time to similarly situated
employees of CTI, subject to, and on a basis consistent with, the terms of such
plans, arrangements, practices, and programs.
5.4 Incentive Compensation. Each Loaned Employee may be considered for
----------------------
participation in any incentive compensation, deferred compensation or bonus
arrangement, plan, policy and practice of CTI during the Agreement Term in the
sole discretion of CTI, subject (1) to and on a basis consistent with the terms
of any such arrangement, plan, policy, and practice and (2) to the prior written
approval of CNC which shall be given in CNC's sole discretion.
5.5 Reimbursement of Loaned Employee Expenses. During the Agreement
-----------------------------------------
Term, CNC shall reimburse CTI on a monthly basis for all reasonable ordinary and
necessary out-of-pocket employment related expenses of all Loaned Employees,
including, but not limited to travel, meals, lodging, mileage, moving expenses,
telephone calls, out-of-pocket advances made by the Loaned Employee on behalf of
CNC, and any other reasonable employment related expense, including any personal
income tax liability that is a direct result of relocating. This provision shall
also include all network operations employees hired in St. Louis, Missouri.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
-6-
<PAGE>
5.6 Reimbursement of Direct Costs of Network Operation. CNC shall also
--------------------------------------------------
reimburse CTI for the direct costs of Network Operation. CNC shall reimburse
CTI, on a monthly basis, for office rent, electricity, telephone service,
including base service and long distance, necessary office furniture and
equipment, ongoing network communications cost, software, insurance, and any
other direct, reasonably necessary expense.
5.7 Reimbursement of CTI
--------------------
A) During the Agreement Term, CTI shall invoice CNC monthly for one-
twelfth (1/12) of the annual compensation, benefits and administrative costs
incurred by CTI with respect to the Loaned Employees, as referenced in
Subsections 5.1, 5.2, 5.3 and 5.4 and as determined by CTI, and CNC shall pay
such amount to CTI in accordance with its normal payment practices, but in no
event later than thirty (30) days following receipt of such invoice for such
amount. Any discrepancies between amounts billed and paid and actual costs
incurred by CTI shall be reconciled and paid within thirty (30) days following
CTI's submission to CNC after the end of the relevant calendar year of a Year
End Reconciliation. CNC shall be responsible for reimbursement of the items set
forth in this Section including the following: Loaned Employees' salaries, FICA,
state and federal unemployment tax, worker's compensation insurance premiums and
deductibles, medical/health insurance premiums and dental insurance premiums,
including coverage for spouses and family, long-term disability insurance
premiums, life insurance premiums, seminars and training costs related to
Network Operations, local and long distance travel expenses, pagers. CNC shall
be responsible for reimbursement of other costs or expenses which CNC deems
reasonable and necessary.
B) CNC shall also pay to CTI, as reimbursement, an amount equal to
[*] of the base salary for those Loaned Employees who were working for CNC as
of November 1, 1995, and an amount equal to [*] of the base salary for those
Loaned Employees who began working for CNC after November 1, 1995. These rates
reflect a [*] and [*] mark-up, respectively, of the base salaries of the
Loaned Employees, plus an imputed benefits rate of [*].
C) CNC shall have the right to audit, at CNC's expense, CTI's
expenses, costs and billings under the Section 5 within sixty (60) days of the
date of the Year End Reconciliation. If CNC does not contest the Year End
Reconciliation within ninety (90) days of the date of the Year End
Reconciliation, then CNC will be deemed to have agreed with the Year End
Reconciliation and shall waive any right to contest or challenge any cost,
expense, payment, markup or other charge incurred or calculated by CTI for the
period covered by the Year End Reconciliation.
6. Agreement Transition
--------------------
In order to provide an orderly transition at the end of the Agreement, CTI
agrees that, prior to the Agreement's termination, to locate all personnel and
resources used to support CNC to a new subsidiary and transfer that entity to
CNC according to the following plan:
A. CTI will create a wholly-owned subsidiary. CTI will transfer all Loaned
Employees to this entity.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
-7-
<PAGE>
B. CTI will transfer the lease (including leasehold improvements) to 3324
Hollenberg Drive to this new subsidiary. Said lease to have at least five
(5) years remaining at the termination of this Agreement at a cost not to
exceed $12 per square foot (triple net). Any office equipment currently
owned by CTI and used exclusively by the subsidiary employees will also be
transferred. Additional office equipment for current or future employees of
the subsidiary will be paid for by CNC and remain their assets.
C. CTI will transfer a nonexclusive, nontransferable, non revocable license to
its proprietary software for network modeling, site management, and telco
reconciliation to this new entity. Such license will restrict the use of
the software to CNC internal business needs and the licensed software shall
not be sublicensed or used in a "service bureau" capacity.
D. CNC shall acquire title to this new subsidiary at the end of this Agreement
and CTI will vacate the premise on 3324 Hollenberg Drive. Both parties
agree to execute such documents as may be necessary to minimize the tax
effect to both entities.
E. CNC shall pay CTI [*] for relocation expenses and the assets of the
new subsidiary. This amount will be paid to CTI as needed to reimburse CTI
for its costs in relocating its other business to other facilities. CTI
will provide to CNC on at least a quarterly basis their projected needs for
the next six months. All of these funds could be paid in advance of the
completion of this Agreement. Any funds not so advanced will be paid at the
point where ownership of the subsidiary transfers to CNC.
F. CTI agrees to reimburse CNC an amount equal to 35% of the annual salary of
any CNC employee (acquired through the acquisition of the subsidiary) that
returns to WCG, CTI or their affiliates within one year of said
acquisition.
G. CTI agrees to use its best efforts to ensure that all employees of the
subsidiary stay with the entity when the transfer to CNC occurs.
7. Consulting Services
-------------------
CTI agrees to provide other consulting services to CNC as requested by CNC
at a rate not to exceed the lowest offered by CTI to other unaffiliated
customers requiring similar services (including duration or quantity of such
services). Both parties agree to work in good faith to negotiate and agree to
the other material terms and conditions of the consulting services
provided.
8. Mutual Recommendation
---------------------
Each party agrees to recommend the other party as business opportunities
arise. In this regard, CNC will recommend CTI services, as appropriate, to
STET/TMI.
9. Agency and Authority
--------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
-8-
<PAGE>
The Loaned Employees shall remain, and shall be advised by the parties that
they will at all times during the Agreement Term, continue as employees of CTI;
provided, that notwithstanding anything to the contrary contained in this
Agreement, CTI may, at any time, with cause, terminate employment of such Loaned
Employee with CTI. If a Loaned Employee is to be terminated without cause, such
termination shall be approved by CNC prior to CTI's termination of such
employee. CNC shall be responsible for directing the Loaned Employees'
performance of duties associated with the position titles set forth on Exhibit A
hereto. The parties hereto agree that until further agreement, the Loaned
Employees are not, nor will they become, employees of CNC for tax purposes or
any other purpose whatsoever. The Loaned Employees have no authority to make
commitments or enter into contracts on behalf of, or to bind or otherwise
obligate CNC in any matter whatsoever, except as expressly provided herein.
10. Indemnification
---------------
10.1 In the event of any liability, claim or cause of action of any kind
against CNC arising out of any action or inaction (or alleged action or
inaction) of a Loaned Employee, which is outside the scope of such employee's
services for CNC or as contemplated hereunder, or arising out of any action or
inaction (or alleged action or inaction) of a Loaned Employee which is outside
of the scope of such employee's services for CTI, CTI shall indemnify CNC from
and against any and all losses, damages, claims, penalties, liabilities or
expenses (including reasonable attorneys' fees and expenses) ("Losses") incurred
by CNC. CTI shall be informed immediately by CNC of any alleged action or
inaction by any CTI employee which might give rise to a claim for losses by
CNC.
10.2 In the event of any claim or cause of action of any kind against CTI
by any Loaned Employee for violation of any employment law, the Americans with
Disabilities Act, the Family and Medical Leave Act, or any act or law designed
to protect the rights of employees, arising out of any action or inaction (or
alleged action or inaction of CNC or any of its employees, principals, agents,
or representatives), CNC shall indemnify CTI from and against any and all losses
or costs, damages, claims, penalties, liabilities, or expenses (including
reasonable attorneys' fees and expenses).
10.3 CTI shall indemnify and hold harmless CNC from and against any and
all Losses incurred by CNC arising out of, or resulting from or relating to any
action by CTI relating to termination, salary continuation, indemnity, notice
pay or severance pay or benefits payable by reason of termination of employment
of any Loaned Employee with CTI or termination of the assignment of any Loaned
Employee with CNC, unless said claim or loss is the result of a reduction in
force for employees specifically hired at the request of CNC, or results from
termination because such employee is hired by CNC.
11. Successors and Assigns
----------------------
This Agreement and all rights hereunder shall inure to the benefit of and
be enforceable by each party's successors and permitted assigns. No party may
assign or transfer this Agreement or transfer its rights or obligations
hereunder without the prior written consent of the other party (which consent
shall not be unreasonably withheld) except to an affiliate.
-9-
<PAGE>
12. Governing Law and Jurisdiction
------------------------------
This Agreement shall be governed by, and construed in accordance with, the
laws of California, without regard to the principles of conflicts of laws
thereof.
13. Notices
-------
For the purposes of this Agreement, notices and all other communications
provided for in this Agreement shall be in writing and shall be deemed to have
been duly given or delivered upon receipt after personal delivery or mailing by
registered mail, return receipt requested, postage prepaid, address as
follows:
(a) If to CTI:
Critical Technologies Incorporated
Attn: Gordon Martin
111 East First Street
Tulsa, OK 74103-2808
Phone:
with a copy to:
General Counsel
Williams Telecommunications Group, Inc.
One Williams Center
Suite 4000
Tulsa, OK 74172
Phone:
Facsimile:
-10-
<PAGE>
(b) If to CNC:
Concentric Network Corporation
10590 N. Tantau Avenue
Cupertino, CA 95014
Attention: Chief Financial Officer
Phone: (408) 342-2800
Facsimile: (408) 342-2810
with a copy to:
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attention: David J. Segre
Facsimile: (415) 493-6811
or to such other address as any party may have furnished to the other in writing
in accordance herewith.
14. Amendment
---------
No amendment or modification of this Agreement or any of its provisions
shall be binding upon any party unless made in writing and signed by all of the
parties hereto.
15. Validity
--------
The invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
16. Waiver
------
The performance of any condition or obligation imposed hereunder upon any
party hereto may be waived only upon the written consent of the parties hereto.
Such waiver shall be limited to the terms thereof and shall not constitute a
waiver of any condition or obligation of the other party under this Agreement.
Any failure by any party to this Agreement to enforce any provision shall not
constitute a waiver of that or any other provision of this Agreement.
17. Third Party Rights
------------------
This Agreement shall not inure to the benefit of any third party other than
CTI and CNC and valid successors or assigns of a party hereto or thereto.
-11-
<PAGE>
18. Remedies Upon Default
---------------------
The parties agree that they will attempt to resolve disputes arising in
connection with this Agreement through good faith consultation. In the event of
a default by either party, the other party shall notify the defaulting party, in
writing, of the default, setting forth the nature thereof. Said notice shall be
mailed to the company at the designated address for notices as provided in
Section 13 above. The defaulting party shall have thirty (30) days from the
date of the notice to cure said defect or default. In the event said defect or
default is not cured within thirty (30) days as provided herein, the non-
defaulting party may declare this contract in breach and may pursue any legal or
equitable remedy, including specific performance, provided that, except as
expressly and specifically set forth in another paragraph to this Agreement,
neither party shall be liable to the other party for any lost profits; any loss
of business; any cost of replacement services; or any indirect, consequential,
incidental or special losses or damages of any kind or nature whatsoever, due to
such default or defect. The parties agree that in the event of such a breach of
contract action, the losing party shall be responsible for the payment of all
costs, including the reasonable attorney's fees of the prevailing party.
19. Headings
--------
The heading references are for convenience purposes only and do not have
any meaning with respect to the terms and conditions of this Agreement.
20. Force Majeure
-------------
Neither CNC or CTI shall be considered in default in performance of their
obligations hereunder (except the payment of monetary obligations) if
performance of such obligations is prevented or delayed by acts of God or
government, labor disputes, failure or delay of transportation, or by vendors or
subcontractors, or any other similar cause or causes beyond the reasonable
control of either party. Time of performance of either party's obligations
hereunder shall be extended by the time period reasonably necessary to overcome
the effects of such force majeure occurrences.
-12-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement by their duly
authorized representatives as of June __, 1997.
CONCENTRIC NETWORK CRITICAL TECHNOLOGIES
CORPORATION INCORPORATED
By: /s/ (Signature Appears Here) By: /s/
-------------------------- --------------------------
Name: Name:
------------------------ ------------------------
Title: Title:
----------------------- -----------------------
-13-
<PAGE>
LIST OF EXHIBITS AND SCHEDULES TO EMPLOYEE
------------------------------------------
SERVICES AND STAFFING AGREEMENT
-------------------------------
EXHIBITS
--------
<TABLE>
<S> <C>
A. List of Loaned Employees
A(1). Stock Grant Recipients and Amounts
B. Employee Letter of Agreement
B.(addendum) Confidentiality Agreement
C. Network Expansion Plan
D. Performance (Stretch) Objectives
E. Network Operations Plan
F. Form for Notice of Election of Exercise of Grant Option
G. Form of Option Agreement
H. Collocations Services Agreement
I. Software Development Plan
</TABLE>
SCHEDULES
---------
1. Additional Covenants and Agreements regarding the grant and exercise
of Option Shares.
2. Disclosure by CNC of grants of other options, warrants or other rights
to acquire shares of CNC stock or other equity securities of CNC.
<PAGE>
[***] EXHIBIT A
- -------------------------
[***]Certain information in this exhibit has been omitted and filed
separately with the Securities and Exchange Commission. A total of 3 pages
containing such information has been omitted from this exhibit. Confidential
treatment has been requested with respect to the omitted portions.
<PAGE>
"EXHIBIT B (ADDENDUM)"
CONFIDENTIALITY, NON-COMPETITION, AND COPYRIGHT AGREEMENT
THIS AGREEMENT is made as of the _____ day of __________, 1995, between
CONCENTRIC RESEARCH CORPORATION, a Florida corporation (hereinafter referred to
as "CRC"), and __________________________ (hereinafter referred to as
"Employee").
WITNESSETH:
WHEREAS, CRC owns and operates the Concentric Research Information System
("CRIS"), a computerized, on-line interactive network that provides information,
entertainment and telecommunication services; and
WHEREAS, in connection therewith CRC develops proprietary computer software
and uses proprietary know-how in such business, and now has and expects to
develop confidential information relating thereto and in connection with other
software products or services CRC develops or offers in the future; and
WHEREAS, the parties hereto desire to set forth certain agreements and
understandings regarding ownership of intellectual property by CRC and
confidentiality and non-competition on the party of Employee, which agreements
and understandings are for the benefit of both CRC and Employee.
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises
herein contained, and of other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, it is hereby agreed as follows:
1. Confidential Information.
------------------------
a. The term "Confidential Information" shall refer to any
information, not generally known in the relevant trade or industry, which was
obtained from CRC, or which was learned, discovered, developed, conceived,
originated or prepared during or as a result of the performance hereunder on
behalf of CRC and which falls within the following general categories:
i. information relating to trade secrets of CRC;
ii. information relating to existing or contemplated products,
services, technology, designs, processes, formulae; computer
systems, computer software, algorithms and research or
developments of CRC;
<PAGE>
iii. information relating to business plans, sale or marketing methods,
methods of doing business, customer lists, customer usages and/or
requirements, names of sales representatives, and vendor and
supplier information or CRC;
iv. information relating to proprietary computer software not
generally known to the public and related unpublished
documentation of proprietary computer programs;
v. information relating to new developments;
vi. any other information that CRC may wish to protect by patent,
copyright or by keeping it secret and confidential.
b. Employee agrees not to divulge to anyone, at any time during or
after the termination of his employment by CRC, any Confidential Information or
any other trade secrets of CRC. Upon the termination of his employment by CRC,
Employee agrees to deliver up to CRC all notebooks, computer files and any other
data in any tangible form whatsoever in relation thereto, containing, embodying
or evidencing any of the Confidential Information described herein.
2. Non-Competition Covenant.
------------------------
a. The term "Competitor" shall refer to any person, firm,
corporation, partnership or other business entity of any type whatsoever engaged
in or about to become engaged in the production, licensing, sale or marketing of
any product or service:
i. which is similar to or competitive with CRIS or CRC's proprietary
computer software or any product or service of CRC with which
Employee has been directly concerned through his work with CRC
during the preceding two (2) years;
ii. with respect to which the Employee has acquired Confidential
Information.
b. As material inducement to CRC's willingness to employ Employee,
Employee covenants and agrees that, for a period of two years following the
termination of his employment, whether such termination be with or without
cause, he shall not enter the employ of any Competitor, nor himself engage
during such period, directly or indirectly as principal, agent, officer,
employee or otherwise, in any such business in competition with CRC, within any
area in which CRC is itself carrying on business at the time of such
termination. Employee also covenants and agrees that for a period of two years
following termination of his employment, he shall not recruit or attempt to
recruit any of CRC's other employees, or to contact either directly or
indirectly, any client of CRC for the purpose of soliciting such client from
CRC.
3. Copyright Assignment. Employee hereby acknowledges that all works,
--------------------
including all program code and supporting documentation and all other
copyrightable materials, written in whole
-2-
<PAGE>
or in part by Employee, shall be deemed to be works made for hire. To the extent
that any such writing may not, by operation of law, be works make for hire,
Employee hereby assigns to CRC the ownership of copyright in such works, whether
published or unpublished. Employee agrees to give CRC or its designees all
assistance reasonably required to perfect such rights, including but not limited
to, the identification of the works and supporting documentation and the
execution of any instruments required to register copyrights.
4. Remedies. The parties hereto recognize that the services to be
--------
performed hereunder by Employee are special and unique. It is understood and
agreed that Employee's disclosure of Confidential Information, breach of the
Non-Competition Covenant, and/or breach of the Copyright Assignment, may give
rise to irreparable injury to CRC, which may not be adequately compensated by
damages. Accordingly, in the event of Employee's breach or threatened breach of
this Agreement, CRC shall be entitled to preliminary and permanent injunctive
relief, without bond, restraining Employee from disclosing, in whole or in part,
the Confidential Information protected by this Agreement, or from rendering any
services to any person, firm, corporation, association, or other entity to whom
such Confidential Information, in whole or in part, has been disclosed or is
threatened to be disclosed, or from marketing, selling, or otherwise exercising
proprietary rights to copyrightable material referenced in this Agreement.
Nothing herein shall be construed as prohibiting CRC from pursing any other
recovery of damages. These undertakings shall survive the termination or
cancellation of this Agreement or of Employee's employment with CRC.
5. Miscellaneous Provisions.
------------------------
a. Employee acknowledges that he has no employment agreement of any
type whatsoever, whether oral, written, expressed, or implied, that would alter
the "at will" status of Employee's employment with CRC. Both CRC and Employee
therefore have the right to terminate this employment relationship at any time
for any reason, with no obligation to provide advance notice of such termination
to the other party. Employee hereby acknowledges receipt of the CRC employment
manual and agrees that CRC shall have the unilateral right to modify its
employment policies therein described at any time. Employee further agrees and
acknowledges that these employment policies or other similar provisions are
reasonable and agrees not to contest them by way of unjust dismissal proceedings
otherwise. By signing this Agreement, however, Employee is not agreeing to forgo
or waive any rights that he has or may have under federal, state and local
employment laws or regulation.
b. Employee represents to CRC, which relies on this representation,
that Employee is free to enter into this Agreement in that he is not under any
restrictions from a former employer or business that would preclude him from
making these arrangements. Employee acknowledges that CRC does not want him to
disclose to it any confidential information that he may have obtained from a
former employer.
c. This Agreement will be binding upon, shall inure to the benefit
of, CRC and Employee, and their respective heirs, personal and legal
representatives, successors and assigns.
-3-
<PAGE>
d. This Agreement contains the entire agreement and understanding
between the parties hereto, and no modification hereof shall be binding unless
in writing and signed by the parties hereto.
e. The provisions of this Agreement shall be deemed severable, and
the invalidity or unenforceability of any provision shall not effect the
validity or enforceability of the other provisions hereof.
f. This Agreement is executed in, and it is the intention of the
parties hereto that it shall be governed by the law of the State of Michigan.
IN WITNESS WHEREOF, CRC has caused this Agreement to be executed by a duly
authorized officer and Employee has duly executed this Agreement on the date and
year above written.
CONCENTRIC RESEARCH CORPORATION, EMPLOYEE/CONTRACTOR:
a Florida Corporation
By:____________________________ ___________________________
Witness:_______________________
Witness:_______________________
-4-
<PAGE>
EXHIBIT B
Loaned Employee Letter of Agreement
Concentric Network Corporation
Critical Technologies Incorporated
c/o CNC
Re: Conditions of Employment While Performing Services
Concentric Network Corporation
Dear __________:
I have agreed, as of ____________, 1995, to accept an assignment to
Concentric Network Corporation ("CNC") to perform services for the Concentric
Network Corporation in the capacity of ____________. I understand that during
the period in which I am performing services for CNC, I will still be an active
full-time employee of Critical Technologies Incorporated ("CTI"). As such, I
will be entitled to receive and be subject to the CTI compensation, benefits,
and other Human Resources plans and programs. I will not be considered an
employee of CNC and I further agree that I will not make any claim of
entitlement to any compensation, benefits or other Human Resources plans and
programs of CNC, if any.
I further agree that any intellectual property rights as defined in the
addendum to this employee loan letter of agreement, created, written, developed
or made by me while performing services for CNC shall be and shall continue to
be the property of CTI, as set forth in the addendum to this letter.
I understand and agree that neither the provisions of my assignment to CNC
nor this Letter of Agreement constitute a contract of employment or set forth
employment terms between me and CTI. I understand that my employment
relationship with CTI is by mutual consent (employment at will) and that I have
the right at any time to terminate my employment for any reason. I also
understand that CTI reserves the right to terminate my employment on the same
basis.
Sincerely,
________________________________________
-5-
<PAGE>
EXHIBIT C
CONCENTRIC RESEARCH CORPORATION
CRC 1995 EXPANSION PLAN
<PAGE>
SCOPE - EXPANSION PLAN
- --------------------------------------------------------------------------------
MANAGE THE SUCCESSFUL IMPLEMENTATION OF THE 1995 NETWORK EXPANSION UPGRADES.
PROVIDE THE BASIS FOR MANAGEMENT OF FUTURE NETWORK EXPANSION.
. Implement Xylogics terminal server technology
. Install V.34 technology
. Immediately bring all T1 facilities to full utilization
. Implement CMS diagnostic upgrade
. Create basic statistics document
. Ongoing capacity requirement (i.e. Affinity Programs)
. Create change control procedures
<PAGE>
OBJECTIVES - EXPANSION PLAN
- --------------------------------------------------------------------------------
. Formulate all current and future (1995) capacity data
. Model capacity data against current network provisioning
. Develop budget requirements
. Procure all hardware, software and services
. Manage the implementation and capacity upgrades
. Quality assurance testing
. Document process and solutions
<PAGE>
METHODOLOGY - EXPANSION PLAN
- --------------------------------------------------------------------------------
The Rapid Expansion of existing network facilities is possible due to the
immediate availability of all required components.
. AT&T Frame-Relay services have been expanded to 600% of last
year's capacity. This allows for rapid acquisition of additional
resources.
. Frame Ports
. Frame Circuits
. Frame Committed Information Rates
. Racal-Datacom product availability is excellent for the specific
networking components required in the expansion plan.
. Networking Engineering and Operations personnel are well versed
in the coordination of the required LEC facilities. POP
locations are all currently provisioned with T1 facilities
capable of immediate expansion.
<PAGE>
METHODOLOGY - EXPANSION PLAN
- --------------------------------------------------------------------------------
. CRC and Vendor(s) Organizational Chart
Functional Responsibilities
. Existing Statistics/Hardware
. Future Documentation Implementation
Plan
. Network diagrams Define
. Budget approval Requirements
. Define management requirements Define
. Document process and findings Change Control
. Quality Assurance review
<PAGE>
[This page intentionally left blank]
<PAGE>
METHODOLOGY - EXPANSION PLAN
. Deliver Requirements to Vendors Hardware
Procurement Procedures
Document
. Project Management Begin Phased
Installation
Close Project
. Quality Assurance Review Network
Testing
. As Built Network Documentation Network
Documentation
<PAGE>
METHODOLOGY - EXPANSION PLAN
DEVELOP & DRIVE THE CAPACITY PLANNING METHODOLOGY AND PERFORM THE FOLLOWING
ACTIVITIES TO ENSURE NETWORK PERFORMANCE.
. Define the hardware/ statistics report formatting
. Coordinating all activities with associated vendors
. Create change control procedures
. Define and document the detailed requirements
. Develop working design document
. Create detailed port cost contribution
. Manage to predictable implementation plan
. Provide detailed progress updates to mangement and the board as required
. Overall project management
This approach will ensure that ongoing requirements be handled in a timely,
cost effective manner insuring superior customer support.
<PAGE>
SCOPE - NETWORK EVOLUTION PLAN
. FINALIZE THE NETWORK RFP PROCESS AND WORKING NETWORK DESIGN. THIS
EFFORT WILL ENSURE COMPETITIVE COST STRUCTURES EXIST FOR THE NETWORK.
WHILE ENSURING HIGH CAPACITY, LOW LATENCY NETWORK PERFORMANCE
. Methodology and approach
. Vendor(s) selection
. Working network design
. Manage the implementation and migration
. Document process and solutions
<PAGE>
OBJECTIVES - NETWORK EVOLUTION PLAN
. Rapid completion of RFP process
. Provide a working network design that meets tactical and strategic
requirements
. Facilitate vendor "Proof Of Concept" against network design
. Define and analyze vendor pilot program(s)
. Implement final solution
<PAGE>
[This page intentionally left blank]
<PAGE>
METHODOLOGY - PHASE 1 NETWORK EVOLUTION PLAN
. Complete Requires
Document
. Complete Solicit
Vendors
Select Finalists
. Complete Vendor
Responses
. Define scoring criteria
. Determine selection committee Vendor
. Evaluate vendors Scoring
. Document process and findings
. Quality assurance review
. Management update
<PAGE>
METHODOLOGY - PHASE 2 NETWORK EVOLUTION PLAN
. Develop design vision Finalists
. Update detailed requirements Requirements Develop
. Present requirements to vendors Pilot Plan
. Joint working design Conceptual
Designs Pilot
Solution(s)
. Vendor(s) proof of concept
. Vendor(s) presentations Vendor Proof
of Concept
Evaluate
Pilots
. Define scoring criteria
. Evaluate vendors Vendor
. Document process and findings Scoring
. Quality assurance review
. Management update
<PAGE>
METHODOLOGY - NETWORK EVOLUTION PLAN
FINAL WORKING DESIGNS AND PROOF OF CONCEPT WILL ENCOMPASS DETAILS RELATED TO:
. Cost
. Functionality
. Reliability
. Performance
. Management Capabilities
This approach ensures that a working design can be implemented for a "Leading
Edge" network solution prior to large financial commitments.
<PAGE>
METHODOLOGY - NETWORK EVOLUTION PLAN
MANAGE THE METHODOLOGY AND PERFORM THE FOLLOWING ACTIVITIES TO ENSURE ITS
SUCCESS.
. Define the scoring matrix
. Manage the selection committee
. Document phased results
. Define and document the detailed requirements
. Develop working design document
. Define the pilot and facilitate vendor implementation
. Overall project management
<PAGE>
EXHIBIT "D"
Concentric Network Corporation and Critical Technologies, Inc.
PERFORMANCE OBJECTIVES
1. Develop and establish the network control center in Critical's St. Louis
facility.
2. Design, build and implement the seven (7) Canadian POP sites.
3. Rapidly harden the Bay City POP site.
4. Rapidly bring live seventy-one (71) local markets utilizing the LA (Virtual
Local Access) techniques.
5. Develop and implement a plan to segregate the CNC host systems.
6. Rapidly develop the Intuit Registration Server.
7. Deploy a total of [*] local and virtual access ports at a
targeted average cost/port of [*].
8. Successfully demonstrate the new network architecture. Included in this
demonstration will be the attainment of the following objectives:
a) A latency factor of not more than _______. (to be determined by
2/10/96)
b) A through-put purport of _________. (to be determined by 2/10/96)
c) The ability to reconfigure inbound port on a call-by-call basis.
d) The ability to provide best-fit routing on the back bone network.
9. Develop a field trial of a BRI ISDN connectivity.
10. Develop a monthly network management report.
11. Develop and implement on-line credit card authorization.
12. Implement the Portal Back Office System or an equivalent next generation
"back office system".
13. Implement a proactive capacity management system that ensures we maintain a
mutually agreeable target grade-of-service.
- -----------------
[*]Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT E
CONCENTRIC RESEARCH CORPORATION
PLAN FOR
NETWORK OPERATIONS
<PAGE>
NETWORK OPERATIONS
MISSION STATEMENT
Provide convenient and cost effective
operations of customer networks while
controlling the rising and hidden costs
of network management and support
[LOGO APPEARS HERE]
<PAGE>
[LOGO APPEARS HERE]
OBJECTIVE
Pro-actively monitor and resolve network
conditions before they negatively affect
network users
<PAGE>
NETWORK OPERATIONS
SCOPE
DEVICE MANAGEMENT PHYSICAL MANAGEMENT
. Logical & Physical . Moves/Adds/Changes
. LAN & WAN
. Routers, Hubs, Servers
. Threshold Monitoring
TROUBLESHOOTING ADMINISTRATION
. Fault Detection . Problem Management
. Event to Alarm . Trouble Tickets
. Correlation . Thresholds
. Impact Analysis . Security
. Corrective Action . Agents
. Backup
ASSET MANAGEMENT
. Equipment Assignments
. Configuration Information
. Firmware & Software
<PAGE>
NETWORK OPERATIONS
SERVICES
. Continuous 7x24x365 day proactive network monitoring
. Problem determination, tracking and resolution
. Problem impact analysis
. Vendor dispatch and service performance monitoring
. System performance and availability reporting
. Equipment configuration and database management
. Coordination of network adds, deletes and changes
<PAGE>
NETWORK OPERATIONS
STAFF EXPERIENCE
. 2-5 years experience in data communications
. Operations training on all network management systems
. Operations training on communications equipment
. Network troubleshooting and restoration procedural training
. General operation training to include; trouble ticketing, escalation
procedures, vendor dispatch, report generation
[LOGO APPEARS HERE]
<PAGE>
NETWORK OPERATIONS
SENIOR SUPPORT STAFF
. Consists of trained and experienced technical specialists who assist
network operators with problem diagnosis on an exception basis.
. These specialists become involved in those problems requiring
engineering investigation or software reconfiguration
<PAGE>
NETWORK OPERATIONS
SENIOR SUPPORT EXPERIENCE
. 5-15 years experience in data communications
. Broad experience in data communication concepts and curriculum
. Emphasis on product and system specialization
[LOGO APPEARS HERE]
<PAGE>
NETWORK OPERATIONS
[LOGO APPEARS HERE]
MONTHLY REPORTING:
. Network performance and availability
. Trouble tickets processed
. Network adds, changes and deletes
. Network failure trend analysis
. Vendor maintenance call performance
<PAGE>
ORGANIZATION OVERVIEW
[FLOWCHART APPEARS HERE]
<PAGE>
EXHIBIT I
SCOPE
. SOFTWARE DEVELOPMENT MANAGEMENT
. Manage registration server development effort for Intuit
. Manage host system software upgrades required for escalating
subscriber base
-Business requirements
-Technical requirements
-General analysis and design
-Detailed analysis and design
-Coding
-Integration and QA testing
-Beta testing
-Implementation / Certification
<PAGE>
14. Implement a proactive network management process that achieves an average
time-to-response of less than ______ hours on urgent trouble tickets and
less than ______ hours on priority trouble tickets.
-2-
<PAGE>
EXHIBIT F
[not included]
<PAGE>
EXHIBIT G
---------
CONCENTRIC NETWORK CORPORATION
------------------------------
OPTION AGREEMENT
----------------
THIS OPTION AGREEMENT is entered into effective ____________, 19__, between
CONCENTRIC NETWORK CORPORATION, a Florida corporation (the "Company"), and
_________________________ (the "Optionee").
WHEREAS, the Company and CRITICAL TECHNOLOGIES INCORPORATED ("CTI") are
parties to an Employee Services and Staffing Agreement (the "Employee
Agreement") pursuant to which, among other things, CTI has leased certain
employees to the Company and the Company has agreed to issue options to purchase
an aggregate of 900,000 shares of Common Stock of the Company ("Option Shares")
to certain employees of CTI which, pursuant to the Employee Agreement, will be
leased to the Company, and to certain other principals and employees of CTI and
to CTI; and
WHEREAS, an aggregate of ________ of the Option Shares (the "Performance
Option Shares") are subject to forfeit in the event certain performance
objectives set forth in an exhibit to the Employee Agreement are not timely
achieved (the balance of an aggregate of ________ Option Shares are referred to
herein as "Regular Option Shares"); and
WHEREAS, the Optionee is one of the persons selected by CTI to receive an
option pursuant to the Employee Agreement;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the parties hereto do hereby agree as follows:
1. Grant of Option. The Company hereby grants to the Optionee the
---------------
right and option (the "Option") to purchase all or any part of the number of
Option Shares set forth below, at a purchase price of $.25 per share and on the
other terms and conditions herein set forth.
Total number of Regular Option Shares: _________
Total number of Performance Option Shares: _________
2. Dates When Option Exercisable.
-----------------------------
a. Except as otherwise provided in paragraph 2(d), Options for
each of the Regular Option Shares and the Performance Option Shares (if any)
will vest and become exercisable ratably over twelve (12) months, at the end of
each month after the date hereof, with Options for one-twelfth (1/12) of the
shares subject to Option (rounded to the nearest whole share) becoming
exercisable at the end of each such month.
<PAGE>
b. Except as otherwise provided in paragraph 2(e) and paragraph
8, the Option shall expire, to the extent it has not already been exercised, at
the close of business on ____________, 2005 (the tenth (10th) anniversary of the
Employee Agreement) (the "Expiration Date").
c. Except as otherwise provided in paragraph 2(e), the Option
with respect to all Regular and Performance Option Shares not then vested will
automatically be assigned to CTI if the Optionee ceases to be an employee of CTI
prior to the time all Option Shares are vested hereunder. It is expressly
understood and agreed that nothing herein is intended or shall be construed as
an employment contract or as implying any obligation on the part of CTI or the
Company to continue the Optionee's employment for any period of time after the
date hereof.
d. Notwithstanding paragraph 2(a), the Option shall immediately
become exercisable in full upon the effective date of any merger or
consolidation of the Company with or into any other entity, at which time the
Option shall automatically become an Option on exercise to purchase, with
respect to each Option Share purchasable hereunder (whether vested or not)
immediately before the consolidation or merger becomes effective, the securities
or other consideration to which a holder of one share of Common Stock is
entitled in the consolidation or merger without any change in or payment in
addition to the Exercise Price in effect immediately prior to the merger or
consolidation. The Company shall take any necessary steps in connection with a
consolidation or merger to assure that the provisions of this Option shall
thereafter be applicable, as nearly as reasonably may be, to any securities or
other consideration so deliverable on exercise of this Option. The Company shall
not consolidate or merge unless, prior to consummation, the successor entity (if
other than the Company) assumes the obligations of this paragraph by written
instrument executed and mailed to the Optionee at the address of the Optionee on
the books of the Company.
e. Notwithstanding paragraphs 2(b) and 2(c), in the event of
(i) the death of the Optionee, or (ii) termination of the Optionee's employment
by reason of his or her disability or incapacity, then in any of such events the
Option may be exercised (but only to the extent it was exercisable by the
Optionee on the date of his or her death or of such termination of employment),
by the Optionee, or the Optionee's personal representative, conservator (if any)
or guardian (if any), respectively, in the manner set forth below, for a period
of twelve (12) months (but not later than the Expiration Date) after the date of
the Optionee's death or of such termination of employment.
3. Method of Exercising Option. The Optionee (or representative as
---------------------------
provided above) may exercise the Option hereby granted on one or more occasions
at his or her discretion, on each occasion for all or any part of the Option
Shares for which the Option is then exercisable, by each time delivering to the
main business office of the Company, addressed to the attention of its Chief
Executive Officer or Secretary, (i) a written notice stating his or her election
to exercise the Option and the number of Regular and Performance (if any) Option
Shares to be purchased, together with (ii) cash or check in full payment of the
purchase price of the Option Shares to be purchased plus the amount of any
Federal and state withholding taxes payable by the Company as a result of such
exercise. The Option shall be deemed to be exercised only upon receipt of such
notice and payment
-2-
<PAGE>
by the Chief Executive Officer or Secretary. The Company will advise the
Optionee, upon the Optionee's reasonable prior request, of the required amount
of such taxes.
4. Non-Transferability of Option. The Option may be exercised only
-----------------------------
by the Optionee or as otherwise provided above or by the Employee Agreement. The
rights granted by this Option may not be assigned, transferred, pledged or
hypothecated in any way, other than by will or by operation of law, and except
for automatic transfer to CTI pursuant to Section 2(c), above, and further
assignment by CTI, pursuant to the terms of the Employee Agreement. Such rights
shall not be subject to execution, attachment or similar process. In the event
of the bankruptcy of the Optionee, or in the event of any prohibited assignment,
transfer, pledge, hypothecation or other disposition of the Option, or the levy
of any execution, attachment or similar process upon the Option, the Option
shall automatically expire and shall be null and void. Notwithstanding the
foregoing, however, with prior notice to the Company the rights granted by this
Option may be transferred between the Optionee in his or her personal capacity
and the Optionee as trustee of a trust (A) of which the Optionee is both sole
trustee and sole beneficiary during his or her lifetime, and (B) all of which is
treated under subpart E of Part I of Subchapter J of Chapter 1 of Subtitle A of
the Internal Revenue Code of 1986, as amended, as owned by the Optionee.
5. Share Adjustments. In the event of any stock dividend on,
-----------------
reclassification, split-up or combination of, or other change in, the Company's
Common Stock, then the number or kind of Option Shares shall be correspondingly
added to, reclassified, increased, diminished or changed proportionately,
without increase or decrease in the aggregate purchase price of all Option
Shares.
6. No Rights of Optionee as Shareholder. The Optionee shall have no
------------------------------------
rights respecting this Option or the Option Shares except as expressly set forth
herein or in the Employee Agreement; and the Optionee shall have no rights as a
shareholder with respect to any Option Shares until this Option has been duly
exercised as to such Option Shares in accordance with the terms hereof. The
grant of this Option shall not affect in any way the right or power of the
Company to make adjustments, reclassifications, reorganizations or changes of
its common stock or its capital or business structure, or to merge or to
consolidate, or to dissolve or liquidate, or to sell or transfer any or all of
its business or assets.
7. Securities Laws. Neither this Option nor any of the Option Shares
---------------
have been registered under the Securities Act of 1933, as amended, or the
securities laws of any state, in reliance on exemptions from the registration
provisions thereof. By acceptance hereof, the Optionee acknowledges such fact
and agrees that, unless the Option Shares are so registered prior to exercise
hereof, this Option and any Option Shares will be held for investment and not
with a view to distribution or resale, and may not be made subject to a security
interest, pledged, hypothecated, or otherwise transferred without either an
effective registration statement under such Act and compliance with applicable
state securities laws, which may not be possible, or an opinion of legal counsel
satisfactory to the attorneys for the Company that such registration is not
required under such Act and that applicable state securities laws will not be
violated by such action; and the Optionee further agrees that the certificates
for such Option Shares shall bear a legend substantially to such effect.
-3-
<PAGE>
8. Performance Option Termination and Repurchase Provisions. If
--------------------------------------------------------
performance objectives set forth in Exhibit E to the Employee Agreement have not
been achieved within twelve (12) months after the date of the Employee
Agreement, the Option for Performance Option Shares shall automatically
terminate and no longer be exercisable and the Company shall repurchase from the
Optionee at the purchase price of $.25 per share all Performance Option Shares
theretofore purchased by the Optionee upon partial exercise of this Option.
9. General. The Company shall at all times during the term of the
-------
Option reserve and keep available a number of shares of common stock equal to
the number of Option Shares, and shall pay all original issue and transfer taxes
with respect to the issue of Option Shares pursuant hereto and all other fees
and expenses necessarily incurred by the Company incurred in connection
therewith.
IN WITNESS WHEREOF, the Company and the Optionee have executed this Option
Agreement as of the date first above written.
Company: CONCENTRIC NETWORK CORPORATION
By:___________________________________
President
Optionee: ______________________________________
-4-
<PAGE>
EXHIBIT H
Colocation Services Agreement
This Colocation Services Agreement between Critical Technologies, a Missouri
corporation with principal offices at 1300 Baur Blvd., St. Louis, Missouri 83132
(hereinafter referred to as "Critical"), and Concentric Research Corporation
(hereinafter referred to as "CRC") with offices located 400 Forty first Street,
Bay City, Michigan 48708, is entered into this 1st day of November, 1994.
WHEREAS, Critical is a provider of colocation services; and
WHEREAS, CRC desires to engage Critical to provide colocation services as
described herein; and
WHEREAS, Critical desires to accept such engagement upon the terms and
conditions set forth herein.
NOW THEREFORE, in consideration of the mutual promises herein contained and
other good and valuable consideration, the receipt of which is hereby
acknowledged, CRC and Critical agree as follows:
I. DEFINITIONS
-----------
a. Colocation sites ("Sites")
Physical space which shall have the characteristics specified on
Appendix A, and shall be fit for the purposes of containing the Racks
and Equipment, as hereinafter defined, in an environment that will
enable the Racks and Equipment to operate according to Racal-Data Com,
Inc. specifications.
b. Optimum Locations
Optimum Locations shall be geographic locations (within which a Site
may be selected) which locations shall be identified by Critical as
most closely matching the criteria provided by CRC from time to time
for purposes of Modeling and in the Optimum Location Requests, as
provided in Article V of this Agreement. In identifying Optimum
Locations, Critical shall consider:
1. which metropolitan areas have the greatest potential customer
base
2. the determination of which physical location provides the
greatest number of callers with a local dial-access number
3. conclusions or indications from Modeling based upon CRC's
expressed criteria.
<PAGE>
Critical shall provide a mathematical justification for each Optimum
Location to CRC, which mathematical justification shall be approved by
CRC.
c. Modeling services ("Modeling")
The creation of a mathematical model built and maintained by Critical
which shall enable Critical to recommend to CRC and CRC to select
Optimum Locations pursuant to the criteria submitted by CRC. The Model
shall incorporate data, including but not limited to; CRC's research
in the desired markets and/or market places, the existing 800 number
service network traffic data ordered geographically, and existing
point of presence Site network traffic data.
d. Colocation services ("Services")
The services being offered to CRC by Critical shall consist of
Modeling, locating, qualifying and providing Optimum Locations and
Sites, pursuant to Optimum Location Requests and Site Orders as
described in Article V of this Agreement, providing supervision for
any and all construction necessary at the Sites, accommodating
installation of Equipment and Racks as hereinafter defined, insuring
compliance with all codes, ordinances, rules and regulations,
providing consolidated billing for the Sites. Critical shall provide
communication with respect to the Services with the TM as hereinafter
defined.
e. Industrial Telecommunications Racks ("Racks")
The industrial telecommunication Racks which contain the Equipment, as
hereinafter defined, including but not limited to:
Excal Rackmounts
ALM 2332 Rackmounts
INX Rackmount Shelves
f. Colocation equipment ("Equipment")
All of the Equipment, other than Racks, owned by Racal and leased to
CRC which are located at the Sites, which Equipment includes but is
not limited to that type described on Appendix B.
g. Racal-Data Com, Inc. ("Racal")
A Florida corporation with principal offices located at 1601 North
Harrison Parkway, Sunrise, Florida 33323-2899, which is the owner of
all or part of the Equipment and Racks and leases those Equipment and
Racks to CRC.
-2-
<PAGE>
h. Primary Entity
Any entity through which Critical leases or otherwise holds an estate
in the Site.
i. CRC Telecommunications Manager (the "TM")
CRC shall designate a single employee as its telecommunication manager
for purposes of this Agreement and as a primary CRC contact for
Critical with respect to this Agreement. The TM shall be designated by
CRC, in writing, upon execution of this Agreement and Critical shall
be notified, in writing within 48 hours, in the event that CRC
appoints a new TM.
II. AFFIRMATION
-----------
Critical shall provide Services, Optimum Locations and Sites pursuant to
Orders (as defined in Article V) to CRC.
III. TERM OF AGREEMENT
-----------------
This Agreement shall be effective upon the date first written above
("Effective Date") and shall continue for a period of twenty-four (24)
months from the Effective Date. Thereafter, this Agreement shall
automatically renew itself in twelve (12) month increments unless either
party notifies the other of its decision to terminate this Agreement by
providing the other party with sixty (60) days written notice prior to the
expiration of the period then in effect ("Renewal Period"). This Agreement
shall govern all Orders for Services which are received by Critical within
twenty-four (24) months from the Effective Date or any Renewal Period.
Notwithstanding anything contained herein, in the event that CRC shall fail
to renew after the first twenty-four (24) months of the Agreement, and in
the further event CRC shall have ordered more than 100 Sites which are
subject to this Agreement ("Additional Sites"), CRC shall pay the sum of
[*] for each Additional Site for each month less than twenty-four (24)
months which has expired from the time the Additional Site was ordered to
the date of termination of the Agreement under this paragraph.
IV. PAYMENT FOR SERVICES AND COMMENCEMENT
-------------------------------------
CRC shall pay to Critical the sum of [*] per Site per month, for the first
Rack, and [*] for each additional Rack at each Site, per month, up to a
total of three (3) Racks. With respect to the first Order, billing shall
commence on October 15, 1994. In addition, with respect to the first order,
CRC shall pay the sum of [*] upon execution of this Agreement. Thereafter,
- ---------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commisssion. Confidential treatment has been
requested with respect to the omitted portions.
-3-
<PAGE>
commencement of billing for each Site shall begin upon execution of the
Site Order as provided in Article V of this Agreement (hereinafter referred
to as the "Commencement Date"). Payments are due monthly, on the first day
of each calendar month. If the Commencement Date of each Site or additional
Rack is other than the first day of each month, the first payment due
hereunder shall be equal to one-thirtieth (1/30) of the monthly rate set
forth for each day from and including the Commencement Date through and
including the last day of the month prior to the beginning of the term and
the monthly rate for the full initial month. Certain of the Sites shall be
located at Racal property or leaseholds ("Racal Sites") and CRC may elect
to obtain Sites. Notwithstanding anything else contained within this
Article IV, CRC shall only be required to pay the sum of [*] per month
per site for Racal Sites or where the site is obtained by CRC. In the event
that number of Sites subject to this Agreement shall drop below 90 Sites,
then CRC shall be required to pay the sum of [*] per month per Site for
Racal Sites or where the Site is obtained by CRC.
V. ORDERING PROCEDURE
------------------
a. Optimum Location Request
CRC, acting through the TM, shall make a written request to Critical
to identify Optimum Locations from time to time in order to enable CRC
and Critical to select new Sites or move existing Sites.
1. The TM shall identify the number of Optimum Locations which it
desires Critical to identify.
2. The TM shall further specify the number of days, but not less
than 30 days, within which CRC expects Critical to provide a
written response ("Identification Period").
(i) In the event that Critical is unable to respond within the
Identification Period, it shall notify the TM, before the
expiration of 75 percent of the respective Identification
Period, that it will be unable to comply within the
Identification Period. CRC may then elect to cancel the
Optimum Location Request or issue an amendment to the
Request to provide a new Identification Period.
b. Site Order
The TM shall, from time to time, direct Critical, in writing, to
identify a Site within an Optimum Location. The TM shall further
specify the number of days, but not less than thirty days unless
agreed in writing between the parties, within which CRC expects
Critical to provide a Site Order ("Order Period").
-4-
- ------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
1. In the event that Critical is unable to respond within the Order
Period it shall notify the TM, before the expiration of 75% of
the respective Order Period, that it will be unable to comply
with the Order Period. CRC may then elect to cancel the Site
Order or issue an amendment to the Site Order to provide a new
Order Period.
2. Upon identification of a Site by Critical, Critical shall prepare
a Site Order with the address of the Site and deliver the Site
Order to the TM. The TM shall execute the Site Order on behalf of
CRC, confirming the Site Order.
(i) Subsequent to the execution of a Site Order, Critical
shall deliver to the TM, in electronic form, a list of all
exchanges which are a local call to the exchange from the
Site.
(ii) Subsequent to the execution of the Site Order by the TM,
if CRC ships Racks or Equipment to the address on the Site
Order or incurs any charges, including AT&T or local
exchange carrier charges, and the address on the Site
Order is incorrect or the Site cannot be used, for any
reason which is not the fault of CRC or Racal, Critical
shall be liable for all expenses incurred or related to
the Site address being incorrect or the Site not being
available for use by CRC, including Equipment and Cabinet
shipment charges.
c. Replacement Site
In the event that a Site Order is made, and after not less than 120
days subsequent thereto, CRC determines that the Site does not meet
its marketing criteria ("Nonconforming Site"), CRC may terminate the
Nonconforming Site and order a Replacement Site unless the Site is
selected by CRC without Critical's advice.
1. The Replacement Site must be leased for the balance of the term
of the Nonconforming Site.
2. The Replacement Order procedure shall be as follows:
(i) The TM shall, in writing, request a Replacement Site,
identifying the Nonconforming Site, and specifying a new
Optimum Location. The TM shall further specify the Order
Period. The term of this Order Period in such event shall
not be less than 30 days.
(ii) In the event that Critical is unable to respond within the
Order Period it shall notify the TM before the expiration
of 75% of the respective Order Period, that it will be
unable to comply with the Order Period.
-5-
<PAGE>
CRC may then elect to cancel the Replacement Order or
issue an amendment to the Replacement Order to provide a
new Order Period.
(iii) Upon indemnification of a Replacement Site by Critical,
Critical shall prepare a Replacement Order with the
address of the Replacement Site and deliver the
Replacement Site Order to the TM. The TM shall execute the
Replacement Site Order on behalf of CRC confirming the
Replacement Site Order.
1) Subsequent to the execution of a Replacement Site
Order, Critical shall deliver to the TM, in electronic
form, a list of all exchanges which are a local call
to the exchange of the Site.
2) Subsequent to the execution of the Replacement Site
Order by the TM, if CRC ships Racks or Equipment to
the address on the Replacement Site Order or incurs
any charges, including AT&T or local exchange carrier
charges, and the address on the Replacement Site Order
is incorrect or the Site cannot be used, for any
reason which is not the fault of CRC or Racal,
Critical shall be liable for all expenses incurred or
related to the Site address being incorrect or the
Site not being available for use by CRC, including
Equipment and Cabinet shipment charges.
VI. WARRANTY
--------
Critical warrants that the Services shall be provided to the best of its
ability, skill and knowledge. Critical further warrants that the Sites will
meet the requirements set forth on Appendix A and that the Services will be
of the kind and quality and fulfill the purposes defined in Article I of
this Agreement and will be performed by qualified personnel. Critical
warrants to CRC peaceful possession of all of the Sites. THE FOREGOING
WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES EXPRESS, IMPLIED, OR STATUTORY,
INCLUDING WARRANTY OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE
AND NO REPRESENTATIVE OF CRITICAL IS AUTHORIZED TO ALTER OR ENLARGE THIS
WARRANTY.
VII. INSURANCE
---------
Critical shall maintain in force during the term of this Agreement a policy
of insurance issued by a company authorized to engage in the insurance
business in all of the states in which the Sites are located. The policy
shall insure the Racks and Equipment against the perils of fire, extended
coverage, vandalism, malicious mischief, special extended coverage ("All
Risk"), and sprinkler coverage. Further, Critical shall provide a
comprehensive general liability insurance policy insuring CRC against any
liability arising out of the use, occupancy or maintenance of the Site and
all access areas appurtenant thereto. Each policy shall be on an occurrence
basis
-6-
<PAGE>
and shall insure not less than Three Million Dollars ($3,000,000.00) per
occurrence. The insurance policy shall insure the hazards of the Site and
operations conducted in and on the Site, independent contractors,
contractual liability, and shall name CRC and Racal as insured parties.
CRC shall be furnished with a copy of the certificate of insurance.
VIII. FORCE MAJEURE
-------------
Neither Critical or CRC shall be considered in default in performance of
their obligations hereunder if performance of such obligations is
prevented or delayed by acts of God or government, labor disputes, failure
or delay of transportation, or by vendors or subcontractors, or any other
similar cause or causes beyond the reasonable control of either party.
Time of performance of either party's obligations hereunder shall be
extended by the time period reasonably necessary to overcome the effects
of such force majeure occurrences.
IX. CASUALTY
--------
In the event that a Site shall be destroyed or rendered unusable by fire
or other casualty, Critical shall have 30 days to relocate the Site.
X. TITLE AND LOCATION
------------------
Nothing contained herein shall give or convey to Critical any right, title
or interest in or to any of the Racks or Equipment, and Critical
represents and agrees that it shall furnish to CRC such documentation as
CRC requires to confirm said title in CRC or Racal.
Critical shall notify all Primary Entities of the interest of Racal and
CRC in the Racks and Equipment. Further, Critical shall file, on behalf of
CRC and Racal, a UCC financing statement in each respective state where a
Site is being provided pursuant to this Agreement, Critical shall provide
to CRC the names and addresses of the Primary Entities and CRC shall
prepare the UCC financing statements, Critical shall obtain the signatures
of the Primary Entities and file the UCC financing statements in the
appropriate state offices. CRC shall pay all filing fees. Each UCC
financing statement shall identify the Primary Entity with respect to the
Site, address of the Primary Entity, the identity of Racal and/or CRC as
the owners of the Racks or Equipment. The UCC shall be in a form which CRC
deems advisable to secure the interests of CRC and Racal. Without limiting
the foregoing, Critical shall obtain the signature of each of the Primary
entities on one or more financing statements in a form and substance
satisfactory to CRC covering all of the Racks and Equipment to be located
at the Sites pursuant to this Agreement.
XI. OWNERSHIP RIGHTS
----------------
a. Racks and Equipment
-7-
<PAGE>
The Racks and Equipment shall at all times remain the property of CRC
and/or Racal. Critical agrees that it shall allow the Equipment and
Rack to be labeled as property of CRC and Racal. Critical shall
replace any such stenciling tag or plate which may be removed or
destroyed or become illegible. Critical shall keep all Racks and
Equipment free from any marking or labeling which might be interpreted
as a claim of ownership thereof by Critical or any Primary Entity, or
might be interpreted as a claim of anyone so claiming through Critical
or any Primary Entity.
1. Upon termination or expiration of this Agreement, Critical shall
provide immediate access to the Sites to remove all Equipment and
Racks.
b. Modeling
With respect to the Modeling, Critical shall retain ownership of the
analytical process. CRC shall retain ownership of all data provided
for the Modeling and all results of the application of the analytical
process to the data. Critical shall not, without prior written
permission of CRC, transfer, disclose or otherwise provide the data or
results of the Modeling to any person outside of Critical. Critical
agrees that it shall thoroughly safeguard the confidentiality of the
data in the Modeling results, and in no event shall it be to a lesser
extent than Critical safeguards its own proprietary information.
Critical agrees that access to such data and the Modeling results will
be given only to employees of Critical who require access in the
course of Critical's business, and such employees will be informed of
the confidential nature thereof and shall be required to observe
provisions of confidence as set forth herein.
1. Within seven days following termination or expiration of this
Agreement, Critical shall return all data provided by CRC for the
Modeling and all Modeling results. Thereafter, within said seven
day period, Critical shall destroy all copies of the Modeling
Data provided by CRC and the Modeling results which Critical has
in its possession.
XII. DEFAULT
-------
a. By CRC:
-------
1. An Event of Default by CRC shall occur hereunder if: (i) CRC
fails to make payments as defined herein or to perform any other
condition of this Agreement, which shall continue for a period
thirty (30) business days following written notice thereof, (ii)
CRC fails within forty-five (45) days after the commencement of
any proceeding against CRC seeking any reorganization
arrangement, composition, readjustment, liquidation, dissolution,
or similar relief under any present or future statute, law,
regulation, to obtain the dismissal of such proceeding or (iii)
if a trustee or receiver is appointed or liquidation proceedings
are initiated with respect to all or a substantial portion
-8-
<PAGE>
of the properties of CRC, without the consent of Critical, and
CRC is unable to vacate such appointment within forty-five (45)
days.
b. By Critical:
------------
1. An Event of Default by Critical shall occur hereunder if: (i)
Critical fails to provide Services as defined in Article I or
Sites as set forth in Appendix A for reasons other than force
majeure, or the acts or omission of CRC, or fails to perform any
other covenant or condition of this Agreement, and Critical is
unable to cure or remedy any such deficiency within thirty (30)
business days following receipt of written notice of such
deficiency by CRC, (ii) Critical fails within forty-five (45)
days after the commencement of any proceeding against Critical
seeking any reorganization arrangement, composition,
readjustment, liquidation, dissolution, or similar relief under
any present or future statute, law, regulation, to obtain the
dismissal of such proceeding or, (iii) if a trustee or receiver
is appointed or liquidation proceedings are initiated with
respect to all or a substantial portion of the properties of
Critical, without the consent of CRC, and Critical is unable to
vacate such appointment within forty-five (45) days.
XIII. SITE CASUALTY
-------------
CRC shall use its best efforts to maintain a minimum of 80 sites subject
to this Agreement.
XIV. REMEDY IN THE EVENT OF DEFAULT
------------------------------
a. By CRC:
-------
Upon the occurrence of an Event of Default or in case of breach by
CRC, Critical may cancel this Agreement, declare the entire amount of
any unpaid balance due under this Agreement due and payable, and use
all available remedies to remove CRC and its Racks and Equipment from
possession of the Sites by ejectment or otherwise. This remedy of
Critical is in addition to all other remedies at law or in equity.
b. By Critical:
------------
Upon the occurrence of an Event of Default by Critical, CRC may:
1. Terminate this Agreement without further liability; and
(i) exercise any other right or remedy which may be available
at law or in equity;
-9-
<PAGE>
(ii) elect, in its sole discretion, to retain possession of all
or a part of the Sites, on the condition that it assumes
Critical's lease obligations with the Primary Entity for
each respective Site that CRC retains possession of.
Critical may seek compensation in a court of law for any
leases not assumed by CRC.
XV. ASSIGNMENT
----------
a. By Critical:
------------
Any assignment of this Agreement by Critical without the written
consent of CRC shall be void, such consent shall not be unnecessarily
withheld.
b. By CRC:
-------
CRC shall not assign this Agreement, except to Racal, without first
obtaining the written consent of Critical, which consent will not be
unreasonably withheld, conditioned, or delayed. Critical's consent
shall be conditioned on Critical's approval of the economic viability
of the proposed assignee.
Notwithstanding anything to the contrary contained herein, any
transfer of this Agreement from CRC by merger, consolidation or
liquidation or any change in the ownership or power to both the
majority of the outstanding stock of CRC shall not constitute an
assignment for the purposes of this section.
XVI. GOVERNING LAW: FORM
-------------------
This Agreement shall be governed and construed in accordance with the
laws of the State of Michigan. The parties hereby consent and submit the
exclusive jurisdiction of the appropriate state or federal court serving
Bay County, Michigan, as to any dispute or controversy arising either
directly or indirectly, under or in connection with this Agreement.
XVII. WAIVER
------
No waiver by either party of any default shall operate as a waiver of any
other default or of the same default on a future occasion. No delay,
course of dealing or omission on the part of either party in exercising
any right or remedy shall operate as a waiver thereof, and no single or
partial exercise by either party of any right or remedy shall preclude
any other or further exercise thereof or the exercise of any other right
or remedy.
XVIII. SEVERABILITY
------------
If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in
-10-
<PAGE>
any way be affected or impaired thereby, provided such provision still
expresses the intent of the parties. If the intent of the parties cannot be
preserved, the Agreement shall either be renegotiated or rendered null and
void.
XIX. NOTICES
-------
Any notices or communications given or required under this Agreement shall
be sufficiently given if delivered personally, in writing or sent by telex
or facsimile, federal express, registered or certified mail, postage
prepaid, to the other party at the following address:
TO: Critical Technologies
---------------------
St. Louis, MO
-------
Attn:
Timothy R. Huff
131 Jefferson Street
Charleston, MO 63301
TO: Concentric Research Corporation
400 Forty First Street
Bay City, MI 48708
Attn: President
With a copy to:
Susan M. Cook
Lambert, Leser, Cook, Schmidt & Giunta, P.C.
309 Davidson Building, P.O. Box 835
Bay City, MI 48707-0835
Such notice or other communications shall be deemed received (a) on the
date delivered, if delivered personally; or (b) upon receipt, if sent by telex
or facsimile, federal express or (c) three (3) business days after being sent,
if sent registered or certified mail.
XX. ENTIRE AGREEMENT
----------------
The terms and conditions contained in this Agreement, and the referenced
------------------
Addendums which are hereby incorporated herein, shall be applicable to all
----------------------------------------------
Optimum Location Requests and Site Orders during the effectiveness of this
Agreement whether referenced in same or not. This Agreement expresses the
entire understanding and agreement of the parties with reference to the
subject matter hereof, and is a complete and exclusive statement of the
terms of this Agreement, and no representations or agreements modifying or
supplementing the terms of
-11-
<PAGE>
this Agreement shall be valid unless in writing, signed by persons
authorized to sign agreements on behalf of both parties.
-12-
<PAGE>
IN WITNESS THEREOF, this Agreement was entered into as of the day and year
first written above.
CRITICAL TECHNOLOGIES
BY: /s/ James F. Crowe
-------------------------------
ITS: President, as President
------------------------------
DATE: November 1, 1994
-----------------------------
CONCENTRIC RESEARCH CORPORATION
BY: /s/ Donald I. Schutt
-------------------------------
ITS: Chief Operating Officer
------------------------------
DATE: November 1, 1994
-----------------------------
-13-
<PAGE>
APPENDIX
A. Electrical
1. One 30 Amp 120 Volt Single phase dedicated circuit with MEMA space LB-
30R for each communication equipment rack. Additional circuits required for
an independent air conditioning unit should the site's air conditioning be
turned off for any amount of time.
2. The service must by 24 hours per day, seven days a week, every day of
the year without interruption.
B. Physical space
1. Each telecommunications rack needs 24" width, 26" depth, 6' height.
2. Each telecommunications rack shall have 2' front and rear access at
all times.
3. Each telecommunications rack requires at least 1' clearance between
the interior ceiling and the top of the rack.
4. Each closet shall have a 4' x 4'3/4" plywood backboard (or equivalent
as per the Local Exchange Carrier's specifications) painted black to be
within 5' of the telecommunications rack(s).
C. Environment
1. Air conditioning is a requirement for all telecommunications racks and
should be on at all times.
2. The operating environment shall comply with all environmental
specifications as published in Racal's technical documentation.
3. There shall be suitable electrical lighting as required for service.
4. There shall be a key entry lock on the cabinet door to restrict access
to the cabinet.
D. Access
1. Access to the telecommunications closet shall be provided on a 7 day a
week 24 hour a day basis all days of the year.
<PAGE>
2. Access to the telecommunications closet shall be provided to (a) CRC
authorized personnel (b) Racal authorized personnel and (c) Local Exchange
Carrier personnel within 4 hours of notification.
ANY CHANGES REQUIRING OR PERTAINING TO INSIDE WIRING, WHETHER REQUESTED OR
DIRECTED BY A LOCAL EXCHANGE CARRIER OR OTHERWISE, SHALL BE THE
RESPONSIBILITY OF CRITICAL TECHNOLOGIES.
-2-
<PAGE>
EXHIBIT I
Scope
- ------
. Software Development Management
. Manage registration development for Intrust
. Manage host system software upgrade required for escalating subscriber base
- Business requirements
- Technical requirements
- General Analysis and design
- Coding
- Integration and testing
- Beta testing
- Implementation testing
<PAGE>
SCHEDULE 1
to Employee Services and Staffing Agreement
Dated as of the _____ day of _____________, 1995
by and between Concentric Network Corporation ("CNC") and
Critical Technologies Incorporated ("CTI") (the "Agreement")
The following provisions dealing with Share Options (as defined in the
Agreement) shall be deemed part of the Agreement as if fully set forth therein.
1. Compliance with SEC Rule 504. CNC agrees that it will take all
----------------------------
reasonable steps to comply with Rule 504 of Regulation D ("Regulation D")
promulgated by the Securities and Exchange Commission ("SEC") under the
Securities Act of 1933 (the "Act") so long as CNC is not subject to the
reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"). These steps will include, but not be limited to:
a. CNC will timely file a notice on Form D with the SEC.
b. CNC will, on an ongoing basis, provide to holders of Options
financial and other information concerning CNC reasonably necessary to
enable holders of Options to make fully informed decisions concerning
exercise of their Options and investment in shares of CNC Common Stock
("Shares").
2. At such time as CNC becomes subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, CNC shall:
a. Register with the SEC on Form S-8 those Options and Shares
subject to Options held by leased employees hereunder or other principals
or employees of CTI who are advisors or consultants to CNC;
<PAGE>
b. take all steps reasonably necessary to comply with Rule 505 of
Regulation D with respect to Options and Shares subject to Options held by
persons who are not leased employees hereunder or otherwise advisors or
consultants to CNC. Such compliance will include providing to such Option
holders on a timely basis copies of all reports and proxy materials filed
by CNC with the SEC, all Annual Reports and other materials provided by CNC
generally to its shareholders, and any other information reasonably
necessary to comply with the information requirements of Rules 502 and 505
of Regulation D.
3. "Piggy-Back" Registration Rights. If, prior to the second anniversary
--------------------------------
of the date on which CNC becomes subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, CNC files with the SEC a Registration
Statement to register Shares under the Act (other than a Registration Statement
on Form S-4 or S-8), holders of Shares purchased upon exercise of Options which
Shares have, at the time of filing of such Registration Statement, been held for
less than two years and are "restricted securities" (as defined in Rule 144
promulgated by the SEC), shall be given the right to include such Shares in
CNC's Registration Statement and sell such Shares in the offering made pursuant
to such Registration Statement ("Registration Rights") on substantially the
following terms:
a. CNC will bear the expenses of registration of such Shares other
than underwriters' discounts and commissions with respect thereto, and fees
and expenses of counsel to the selling shareholders.
b. Such selling shareholders will execute the Underwriting Agreement
pursuant to which Shares are sold in the registered offering, which
Underwriting Agreement may contain indemnification and other provisions in
substantially the form normally contained in such agreements.
-2-
<PAGE>
c. The Registration Rights will be available only with respect to
the number of Shares the underwriters indicate, in their judgment, will not
adversely impact the registered offering.
-3-
<PAGE>
September 30, 1996
Mr. Mike Anthofer
Vice President & CFO
Concentric Network Corp.
10590 N. Tantau
Cupertino, California 95014
C R I T I C A L
TECHNOLOGIES
Fax No. 408-342-2876 I N C O R P O R A T E D
Dear Mike:
Below I have outlined the changes to our agreement. Please indicate your
concurrence with these modifications by signing below. The specific changes for
our "Employee Service and Staffing Agreement" are:
1) Delete paragraph 1d, subsections 4 and 5.
2) Waive the notice of an extension in paragraph 2.0 and extend the agreement
for an additional two (2) years (October 31, 1999).
3) Change section 4f (second paragraph) so that the upcharge Is changed to
[*] instead of [*] for staff positions currently on board as of the
signing of the agreement (see attached listing). Change the upcharge to be
only on base salaries, payroll taxes and benefits. Other expenses
associated with hiring will be passed through at cost. Said taxes and
benefits are currently billed at [*] of base salaries; therefore, the
total markup over base salaries is [*]. Additional hiring over those
positions noted on the attached list will be at a [*] upcharge or
currently [*] over base salaries. Additionally, CNC commits to a
minimum level of staffing equal to the staffing level as of the date of
signing of this document.
4) Delete paragraph 6(a).
5) Delete 8(a)(4) and change 8(a)(3) so that said fees are no longer due
unless sites are added after Installation of the super POPs currently
scheduled.
6) As a consideration of this agreement, the CNC board must agree that all
"performance shares" or options have been earned (see attached
"Performance Summary"). Said options and all other
- --------------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
options under the original agreement to be granted and delivered within 10
days of the first board meeting following the signing of this agreement.
Additionally, CNC shall provide an option agreement acceptable to CTI with
which an option holder may execute such options. Said option agreement to
be provided within 10 days of the board meeting following the signing of
this agreement. Failure of the CNC board to approve these two items will
nullify this agreement.
7) It is agreed that paragraph 10 of the existing contract shall provide that
CTI shall have the right to assign or transfer their duties, obligations
and all benefits under the contract to a merger or acquiring entity so
long as that entity is not Netcom, PSI, UUNET, ANS, ATT Worldcom, MFB,
GTE, Ameritech, PAC Bell, SBC, US West, NYNEX, BellSouth, Bell Atlantic,
Sprint Internet/Intranet Services, MCI Internet/Intranet Services, and
CompuServe Network Services. Should CTI be acquired by one of the named
competitors, CNC may at Its option exercise the "buy out option" and pay
CTI a cash payment equal to [*] of the remaining value (an a present
value basis at prime) of its profit and any unpaid relocation expenses
(see "e" below). Said option to be exercised with ninety (90) days of
notice by CTI of intention to merge with a competitor of CNC.
8) CTI further agrees to limit access to CNC proprietary information to only
those CTI employees who have a need to know.
9) In order to provide an orderly transition at the end of the agreement, CTI
agrees to locate all personnel and resources used to support CNC to a new
subsidiary and transfer that entity to CNC according to the following
plan:
a. CTI will create a wholly owned subsidiary. CTI will transfer all
existing CNC staff to this entity. Additionally, all new CNC related
staff will be hired by this subsidiary for those CNC operations
housed in St. Louis, Missouri.
b. CTI will transfer its rights (including leasehold improvements)
under Its lease to 3324 Hollenberg Drive to this new subsidiary.
Said lease to have at least five (5 years remaining at the
termination of this agreement at a cost not to exceed [*] per
square foot (triple net). Any office equipment currently owned by
CTI and used exclusively by the subsidiary employees will also be
transferred. Additional office equipment for current or future
employees of the subsidiary will be paid for by CNC and remain their
assets.
c. CTI will transfer a nonexclusive license to its software for network
modeling, site management. and telco reconciliation to this new
entity.
- -------------------------
[*]Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
d. CNC shall acquire title to this new subsidiary at the and of this
agreement and CTI will vacate the promise on 3324 Hollenberg Drive.
Both parties agree to execute such documents as may be necessary to
minimize the tax effect to both entities.
e. CNC shall pay CTI [*] for relocation expense and the assets of
the new subsidiary. This amount will be paid for costs as needed by
CTI to relocate its other business to other facilities. CTI will
provide to CNC on at least a quarterly basis their projected needs
for the next six months. All of these funds could be paid in advance
of the completion of this agreement. Any funds not so advanced will
be paid at the point where ownership of the subsidiary transfers to
CNC.
f. CTI agrees to reimburse CNC an amount equal to 35% of the annual
salary of any CNC employee (acquired through the acquisition of the
subside") that returns to CTI or its other subsidiaries within one
year of said acquisition.
g. CTI agrees to use its best efforts to ensure that all employees of
the subsidiary stay with the entity when the transfer to CNC occurs.
10) Sections 4 and 7 shall be modified to require joint agreement by both CTI
and CNC on all matters relating to the hiring and compensation of the
employees employed by the subsidiary.
11) In the event CNC determines that it requires additional local access POP
locations, before CNC executes an agreement with any other person to
provide such locations to CNC, CTI will negotiate for a period of thirty
(30) days with CNC for CTI to provide such locations. In the event that
CTI and CNC are unable to reach agreement within such 30 days, CNC shall
thereafter be free to execute an agreement with any other person to
provide such locations to CNC so long as the terms of such agreement when
considered in the aggregate (including such matters as price, facilities,
response times and other relevant factors bearing on the overall value of
such an arrangement to CNC), are no more favorable to such other person
that the most favorable terms offered by CNC in writing to CTI during such
30 days of negotiation.
12) CTI agrees to provide other consulting services to CNC at a rate not to
exceed the lowest offered by CTI to other customers requiring similar
services (including duration or quantity of such services).
- -------------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
13) CNC and CTI agree to mutually recommend each other as business
opportunities arise. Specifically, CNC will recommend CT1 services, as
appropriate, to STET/TMI.
14) Effective upon the closing of any Acquisition of CTI, CTI shall pay, or
cause the person acquiring CTI to pay, to CNC the sum of [**] Such
sum shall be paid in cash unless the consideration paid to CTI or the
shareholders of CTI in the Acquisition consist solely or partly of
securities of the acquirer which can be traded on the NASDAQ National
Market, the New York Stock Exchange or the American Stock Exchange, in
which case the acquirer shall have the right to pay such amount to CNC in
a combination of cash and such securities in the same proportion and
manner that such cash and securities is paid to CTI or the shareholders of
CTI. Such securities shall be valued for the purposes of this agreement at
the average of the closing sale price of such securities for the 30
trading days preceding the closing of such Acquisition. In the event that
the total consideration for the Acquisition is paid in two or more
increments, the [*] to be paid to CNC shall be paid concurrently with
each such increment. The proportion of the [*] paid at each Increment
shall be the same proportion as the consideration paid at such increment
represents as a portion of the total consideration paid in all increments.
For purposes of this Agreement, an "Acquisition" shall mean any of
transactions or series of transactions in which all or substantially all
the business of CTI is transferred to another person, whether the form of
such transaction is a stock sale by the shareholders of CTI, a merger, a
consolidation or a transfer of assets.
- -------------------------
[*]Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
If you agree with these changes, please note your acceptance below. If I can
clarify any of the items notes, please contact me.
Accepted and Agreed: Accepted and Agreed:
Critical Technologies, Inc. Concentric Network Corporation
<TABLE>
<S> <C>
By: /s/ Matthew W. Bross By: /s/ Michael Anthofer
---------------------------- ----------------------------
Matthew W. Bross Michael Anthofer
Vice President & CEO Vice President & CFO
Date: 9-30-96 Date: 9-30-96
-------------------------- --------------------------
</TABLE>
cc: James A. Wootten
Michael Fallon
Paul W. Noblett
John Peters
-26-
<PAGE>
EMPLOYEE SERVICES AND STAFFING AGREEMENT
SECOND AMENDMENT
WHEREAS: Concentric Network Corporation, a Florida corporation ("CNC"), and
Critical Technologies Incorporated, a Missouri corporation ("CTI"), are parties
to that certain Employee Services and Staffing Agreement (the "Staffing
Agreement dated as of November 1, 1995, and
WHEREAS: CNC and CTI entered into an Extension and Amendment of the Staffing
Agreement on September 30, 1996 (the "Extension and Amendment"), which provides,
among other things, that the CNC Board of Directors must agree that all
"performance shares" or options to be granted under the Staffing Agreement have
been earned, and CNC must grant and deliver all option agreements under the
Staffing Agreement within 10 days of the first Board meeting following the
signing of the Extension and Amendment, which Board meeting was held on October
4,1996, and
WHEREAS: The Extension and Agreement further provides that failure of the CNC
Board to approve said two items will nullify the Extension and Amendment, and
WHEREAS: CTI and CNC agree that said option agreements should not be issued or
delivered until CNC has obtained from the State of Missouri appropriate waiver,
exemption, clearance or qualification for such options, the obtaining of which
will require more time than 10 days from October 4, 1996, and wish to amend the
Staffing Agreement, as amended, to enable CNC to obtain the appropriate Blue Sky
clearance without adverse effect on the Extension and Amendment,
NOW THEREFORE, CTI and CNC hereby agree as follows:
1. The Extension and Amendment is hereby amended to provide that CNC will
promptly apply for the necessary Missouri waiver, exemption, clearance or
qualification for the options and the 900,000 shares of Class A Common Stock
issuable upon exercise of such options, and will promptly issue option
agreements with respect to such options within five business days of receipt of
such waiver, exemption, clearance or qualification from the State of Missouri;
provided that the vesting of such shares over the 12-month period provided in
the Staffing Agreement shall not be postponed on account of the Missouri
application but shall continue as provided for in the Staffing Agreement.
2. As amended by the foregoing, the Staffing Agreement and the Extension and
Amendment shall remain in full force and effect and shall not be nullified on
account of delays related to obtaining Missouri Blue Sky approval; provided,
however, that if such options are not issued on or before December 21, 1996,
this Second Amendment to the Staffing Agreement shall terminate and the rights
of the parties shall be determined in accordance with the terms of the Employee
Servicing and Staffing Agreement and the First Amendment thereto, as if this
Second Amendment had not been executed.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Second Amendment by
their duly authorized representatives as of the date set forth below.
<TABLE>
<CAPTION>
CONCENTRIC NETWORK CRITICAL TECHNOLOGIES
CORPORATION INCORPORATED
<S> <C>
By: /s/ Mike Anthofer By: /s/ Matthew W. Bross
-------------------------------- -------------------------------
Name: Mike Anthofer Name: Matthew W. Bross
------------------------------ -----------------------------
Title: Vice President & CFO Title: Vice President
----------------------------- ----------------------------
Date: 10-23-96 Date: 10-21-96
------------------------------ -----------------------------
</TABLE>
<PAGE>
AMENDMENT No. 1 TO THE COLOCATION SERVICES AGREEMENT DATED NOVEMBER 1, 1994
BETWEEN CONCENTRIC RESEARCH CORPORATION AND CRITICAL TECHNOLOGIES, INC.
This Amendment No.1 ("Amendment") dated as of June ___, 1997 by and between
Concentric Network Corporation ("CNC"), a Florida corporation with principal
offices at 10590 N. Tantau Avenue, Cupertino, California 95014 and Critical
Technologies Incorporated ("CTI"), a Delaware corporation with principal offices
at 944 Anglum, Hazelwood, Missouri 63042.
WITNESSETH
----------
WHEREAS, On November 1, 1994, CTI entered into the Colocation Services
Agreement (the "Agreement") with Concentric Research Corporation, now known as
Concentric Network Corporation;
WHEREAS, the Agreement has been modified by the parties in the past and
needs to be modified to reflect the May 30, 1997 Memorandum of Understanding
("MOU") between CNC and Williams Communications Group, Inc. ("WCG"), the parent
company of CTI;
WHEREAS, the parties have agreed to incorporate all prior modifications and
the modifications contemplated in the MOU in this Amendment.
NOW, THEREFORE, in consideration of the respective covenants and agreements
of the parties contained herein, the parties hereto agree as follows.
1. Prior Modifications and Amendments
----------------------------------
CTI and CNC agree that this Amendment shall supersede and replace any prior
amendments or modifications to the Agreement in their entirety. Such prior
modifications and amendments shall be of no further force or effect.
2. Amendments
----------
2.1 The term of the Agreement shall be extended until December 31, 2000.
The Agreement may be terminated prior to December 31, 2000 by the mutual,
written consent of both parties. The Agreement shall automatically renew for an
additional two-year period unless either party shall give one-hundred twenty
(120) days notice prior to the expiration of this Agreement to the other party
that said party does not wish to extend the terms of this Agreement.
Notwithstanding the foregoing, if WCG elects not to participate in the
"Financing Event", even though CNC has satisfied all conditions set forth in the
definition of "Financing Event", the Agreement may be terminated by CNC on
October 31, 1999, if CNC provides CTI ninety (90) days prior written notice.
The term "Financing Event" shall have the meaning set forth in the Amended and
Restated Employee Staffing and Services Agreement of even date herewith.
<PAGE>
2.2 At the termination of the Agreement, CTI will assign its rights to the
POPs under the Agreement to CNC. The assignment shall be subject to CTI's right
to colocate equipment.
2.3 CNC may close any POP or, with the mutual agreement of CTI, migrate
any POP to a new location (i) not owned by WCG or its subsidiaries or (ii) not
managed by CTI during the term of the Agreement by paying to CTI the net present
value (at prime) of the remaining CTI profit on such POPs and by reimbursing CTI
for any out-of-pocket costs associated with leaving the former POP location
prior to the end of the term of the Agreement. Notwithstanding the foregoing,
if CNC and CTI agree to migrate a CNC POP to a new location either (i) owned by
WCG or its subsidiaries or (ii) managed by CTI during the term of the Agreement,
then CNC shall only be required to reimburse CTI for any out-of-pocket costs
associated with leaving the former POP location prior to the end of the term of
the Agreement. In this regard, CTI and CNC will work together to migrate a POP
or POPs, as identified by CNC, to new central office quality colocate space
under the Agreement as soon as commercially reasonable. Further, CTI agrees
that the new central office quality colocate space shall be charged to CNC at
commercially competitive rates.
2.4 CNC will pay the amounts set forth in the Agreement based upon a
minimum of one hundred (100) POP sites at all times during the term of the
Agreement.
2.5 CTI will continue to be responsible for provisioning new POP sites for
CNC. CTI will be paid [*] for each installation. All direct costs of any new
POP shall be paid by CNC.
2.6 CTI shall be allowed to colocate equipment in the CNC POPs controlled
by CNC based upon a percentage of floor space utilized. Such cost to CTI to be
that percentage of the Colocate cost plus twenty percent [*] of the fees paid
by CNC to the party leasing the colocate space for square footage in the POP
locations.
2.7 In the event that CNC determines that it requires additional local
access POP locations, before CNC executes an agreement with any other person to
provide such locations to CNC, CTI will negotiate for a period of thirty (30)
days with CNC for CTI to provide such locations. In the event that CTI and CNC
are unable to reach agreement within such 30 day period, CNC shall thereafter be
free to execute an agreement with any other person to provide such locations to
CNC so long as the terms of such agreement, when considered in the aggregate
(including such matters as price, facilities, response times and other relevant
factors bearing on the overall value of such an arrangement to CNC), are no more
favorable to such other person than the most favorable terms offered by CNC in
writing to CTI during such 30 days of negotiation.
2.8 New paragraphs c. and d. shall be added to Article XIV of the
Agreement. These paragraphs shall read as follows:
c. Procedure:
---------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
-2-
<PAGE>
An Event of Default by either party shall not have occurred until the
non-defaulting party shall notify the defaulting party, in writing, of the
default, setting forth the nature thereof. Said notice shall be mailed to
the company at the designated address for notices as provided in Section 4
of the Amendment. The defaulting party shall have thirty (30) days from the
date of the notice to cure said defect or default.
d. Limitation of Liability:
-----------------------
Except as expressly and specifically set forth in another paragraph to this
Agreement, neither party shall be liable to the other party for any lost
profits; any loss of business; any cost of replacement services; or any
indirect, consequential, incidental or special losses or damages of any
kind or nature whatsoever, due to an Event of Default.
3. Successors and Assigns
----------------------
The Agreement, as amended, and all rights hereunder shall inure to the
benefit of and be enforceable by each party's successors and permitted assigns.
No party may assign or transfer this Agreement or transfer its rights or
obligations hereunder without the prior written consent of the other party
(which shall not be unreasonably withheld) except to an affiliate.
4. Notices
-------
For the purposes of this Agreement and the Amendment, notices and all other
communications provided for in the Agreement and Amendment shall be in writing
and shall be deemed to have been duly given or delivered upon receipt after
personal delivery or mailing by registered mail, return receipt requested,
postage prepaid, address as follows:
(a) If to CTI:
Critical Technologies Incorporated
Attn: Gordon Martin
111 East First Street
Tulsa, OK 74103-2808
Phone:
with a copy to:
General Counsel
Williams Telecommunications Group, Inc.
One Williams Center
Suite 4000
Tulsa, OK 74172
Phone:
Facsimile:
-3-
<PAGE>
(b) If to CNC:
Concentric Network Corporation
10590 N. Tantau Avenue
Cupertino, CA 95014
Attention: Chief Financial Officer
Phone: (408) 342-2800
Facsimile: (408) 342-2810
with a copy to:
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attention: David Segre
Facsimile:
or to such other address as any party may have furnished to the other in writing
in accordance herewith.
5. Amendment
---------
No amendment or modification of this Agreement, as amended, or any of its
provisions shall be binding upon any party unless made in writing and signed by
all of the parties hereto.
6. Waiver
------
The performance of any condition or obligation imposed hereunder upon any
party hereto may be waived only upon the written consent of the parties hereto.
Such waiver shall be limited to the terms thereof and shall not constitute a
waiver of any condition or obligation of the other party under this Amendment.
Any failure by any party to this Amendment to enforce any provision shall not
constitute a waiver of that or any other provision of this Amendment.
7. Third Party Rights
------------------
This Amendment shall not inure to the benefit of any third party other than
CTI and CNC and valid successors or assigns of a party hereto or thereto.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment by their duly
authorized representatives as of June 19, 1997.
CONCENTRIC NETWORK CRITICAL TECHNOLOGIES
CORPORATION INCORPORATED
By: /s/ By: /s/
------------------------------- -------------------------------
Name: Name:
----------------------------- -----------------------------
Title: Title:
---------------------------- ----------------------------
-5-
<PAGE>
EXHIBIT 10.28
SUBLEASE
This Sublease, dated June 22, 1995, is made between Tandem Computers
Incorporated, a Delaware Corporation, having an office at 19333 Vallco Parkway,
Cupertino, California 95014 ("Sublandlord") and Concentric Research Corporation,
a Florida Corporation ("Subtenant").
THIS SUBLEASE IS MADE WITH REFERENCE TO THE FOLLOWING FACTS:
(A) Speiker French #130, Limited Partnership, a Texas Limited Partnership,
("Master Landlord") and Tandem Computers, Inc., entered into a written Lease and
Amendment Number One dated January 26, 1988 and February 5, 1990, respectively,
and subsequently amended by, Extension Agreement dated March 23, 1993, for the
Premises located at 10590 North Tantau Avenue, Cupertino, California. Said
Lease, Amendment Number One and Extension Agreement are herein collectively
referred to as the "Master Lease" and is attached hereto as Exhibit "A-1".
(B) Sublandlord desires to lease to Subtenant a portion of the Building
leased by Master Landlord to Sublandlord, and Subtenant desires to lease such
portion of the Building from Sublandlord
(C) Master Landlord desires to consent to this Sublease by executing the
"Consent of Master Landlord" provision at the end of this Sublease.
Therefore, Sublandlord and Subtenant agree as follows:
1. SUBJECT TO MASTER LEASE: This Sublease is subject to terms and conditions
of the Master Lease and Subtenant shall not permit any act or omission to act
that will violate any provision of the Master Lease; provided that such act or
omission is within the reasonable control of Subtenant. Subtenant shall comply
with the terms and conditions of the Master Lease and shall promptly perform all
obligations of Tenant under the Master Lease to the extent that terms,
conditions and obligations are incorporated herein and applicable to the
Premises. Sublandlord does not assume the obligations of the Master Landlord
under the Master Lease, but shall exercise due diligence in attempting to cause
the Master Landlord to perform its obligations under the Master Lease for the
benefit of Subtenant. Except to the extent caused by the negligence or willful
misconduct of Sublandlord, its agents, employees, contractors or invitees, or a
breach of Sublandlord's obligations as tenant under the Master Lease (to the
extent those obligations are not Subtenant's under this
<PAGE>
Lease) Sublandlord shall not be liable to Subtenant for Master Landlord's
failure to perform any of Master Landlord's obligations under the Master Lease,
nor shall Sublandlord have any obligations to bring legal proceedings or take
any other action against Master Landlord to assure performance of Master
Landlord's obligations under the Master Lease. After giving Sublandlord a
reasonable opportunity to enforce the Master Lease,, Subtenant may, at its
expense, enforce the Master Lease in the name of Sublandlord.
1.1 INCORPORATION BY REFERENCE: The terms and conditions of this Sublease
shall include various sections of the Master Lease, which are incorporated into
this Sublease as if fully set forth, except as modified in this paragraph and
except that; (i) each reference in such incorporated sections to "Lease" shall
be deemed a reference to "Sublease"; (ii) each reference to the "Premises" shall
be deemed a reference to the Premises as defined in this Sublease; (iii) each
reference to "Landlord and "Tenant" shall be deemed a reference to "Sublandlord"
and "Subtenant" respectively, except as otherwise expressly set forth herein;
and (iv) with respect to work, services, repairs, restoration, insurance or the
performance of any other obligation of Master Landlord under the Master Lease,
the sole obligation of Sublandlord shall be to request the same in writing from
Master Landlord as and when requested to do so by Subtenant, and to use
Sublandlord's reasonable efforts (without requiring Sublandlord to spend more
than a nominal sum) to obtain Master Landlord's performance.
The following paragraphs of the Master Lease hereby are incorporated into
this Sublease:
PARAGRAPH 1: except that references to "Premises" shall be as defined
-----------
below in Paragraph 2 of Sublease Agreement.
PARAGRAPH 4.A AND 4.B: except that references to Landlord" shall mean
---------------------
either "Master Landlord" or Sublandlord";
PARAGRAPH 4.C:
--------------
PARAGRAPH 5.: except that references to "Landlord" shall mean "Master
------------
Landlord only;
PARAGRAPH 7:
------------
PARAGRAPH 8.A: except that references to "Landlord" shall mean only "Master
-------------
Landlord";
<PAGE>
PARAGRAPHS 8.B AND 8.C: except that references to "Landlord" shall mean
----------------------
both "Master Landlord" and "Sublandlord";
PARAGRAPHS 10: except that (a) references to "Landlord" in the first and
-------------
fourth sentences shall mean only "Master Landlord" (b) the fifth sentence
of this paragraph shall be deleted; and (c) references to "Landlord" in the
seventh sentence shall mean either "Master Landlord" or "Sublandlord";
PARAGRAPH 11: except that Sublandlord will enter into a regularly
------------
scheduled preventive maintenance/service contract for the heating and air
conditioning systems. Subtenant is responsible for the cost of said
maintenance/service contract and shall reimburse Sublandlord on a monthly
basis.
PARAGRAPH 12: except that (a) references to "Landlord" in the first
------------
through fifth sentences shall mean both "Master Landlord" and
"Sublandlord", and (b) references to "Tenant's Proportionate Share of Basic
Operating Costs" shall mean Operating Expenses;
PARAGRAPH 13: except that references to "Landlord" shall mean both "Master
------------
Landlord" and Sublandlord";
PARAGRAPH 14: except that (a) the first three references to "Landlord" in
------------
the first sentence shall mean either "Master Landlord" or "Sublandlord";
(b) the fourth and last reference to "Landlord" in the first sentence shall
mean both "Master Landlord" and "Sublandlord"; (c) the reference to
"Landlord" in the third sentence shall mean either "Master Landlord" or
Sublandlord"; and (d) the references
<PAGE>
to "Landlord" in the fourth and fifth sentences shall mean both "Master
Landlord" and "Sublandlord";
PARAGRAPH 15:
-------------
PARAGRAPH 16: except that references to "Landlord" shall mean only
------------
"Master Landlord";
PARAGRAPH 18 AND 20: except that reference to
-------------------
"Landlord" shall mean only "Master Landlord";
PARAGRAPH 21: except that (a) the references to "Landlord" in the first
------------
through third sentences shall mean both "Master Landlord" and
"Sublandlord"; (b) the first two references to "Landlord" in the fourth
sentence shall mean either "Master Landlord" or "Sublandlord"; (c) the
third reference to "Landlord" in the fourth sentence shall mean both
"Master Landlord" and "Sublandlord"; and (d) the reference to "Landlord" in
the fifth sentence shall mean either "Master Landlord" or "Sublandlord";
PARAGRAPH 22: except that the second reference to "Landlord" shall mean
-------------
either "Master Landlord" or "Sublandlord";
PARAGRAPH 23: EXCEPT that all references to "Landlord" shall mean only
------------
"Master Landlord";
PARAGRAPHS 24.A. B. D. AND E: except that all references to "Landlord"
----------------------------
shall mean "Master Landlord";
PARAGRAPH 24.C:B
----------------
PARAGRAPH 26:
-------------
PARAGRAPH 27:
-------------
PARAGRAPH 30, 31, 32.A, 32.9, 33, 34, 35, AND 36:
-------------------------------------------------
PARAGRAPH 38: except that reference to "Landlord" shall mean both "Master
------------
Landlord" and "Sublandlord";
ADDENDUM NO. 3. 4 AND 5.
------------------------
<PAGE>
ADDENDUM NO. 9:
---------------
ADDENDUM NOS. 10 AND 11: except that references to "Landlord" shall mean
-----------------------
both "Master Landlord" and "Sublandlord";
EXHIBIT "A": and
-----------
EXTENSION AGREEMENT: except for Paragraphs 1), 2) and 3).
-------------------
All other paragraphs of the Master Lease not specifically incorporated in
this paragraph, either in full or as modified, or not otherwise referenced
in this Sublease are hereby excluded.
2. PREMISES Approximately Twenty-Three Thousand Seven Hundred Seventy-
Eight (23,778) square feet in the subject
<PAGE>
Building ("Premises"), further described as 10590 North Tantau Avenue,
Cupertino, California. The Premises are shown on attached Exhibit "B-l", which
by this reference is incorporated herein.
3. USE: Subtenant shall use the Premises for general office,
administration, sales, related uses associated with providing data
communications and interactive on-line services, and any related lawful purpose
in conformity with municipal zoning requirements
4. TERM: The term ("Term") of the Sublease shall be for a period of Thirty-
Four (34) months commencing on July 1, 1995 (or upon the substantial completion
of Tenant Improvements outlined in Exhibit "C-1" (whichever occurs later), and
shall end on April 30, 1998, (Ending Date"), unless sooner terminated by the
provision of this Sublease. In the event that Sublandlord permits Subtenant to
occupy the Premises prior to the commencement of the Term, such occupancy shall
be subject to all provisions of this Sublease.
5. COMMENCEMENT DATE: In the event the Tenant Improvements outlined in
Exhibit "C-l" are not completed on or before July 1, 1995 ("Commencement Date"),
then the Commencement Date shall be deemed to be the date on which said Tenant
Improvements are substantially completed. Said Tenant Improvements shall be
deemed to be substantially completed when all of the following have occurred:
a. The Tenant Improvements have been substantially completed except for:
(i)punch list items which do not prevent Subtenant from using the
Premises for its intended use;
b. Sublandlord has delivered possession of the Premises to Subtenant.
6. DELAY IN COMMENCEMENT: Notwithstanding said commencement date, if for
any reason Sublandlord cannot deliver possession of the Premises to Subtenant on
said date, Sublandlord shall not be subject to any liability therefore, nor
shall such failure affect the validity of this Sublease or the obligations of
Subtenant hereunder or extend the term hereof, but in such case Subtenant shall
not be obligated to pay rent until possession of the Premises is tendered to
Subtenant; provided, however, that if Sublandlord shall not have delivered
possession of the Premises within sixty (60) days from said Commencement Date,
Subtenant may, at Subtenant's option, by notice in writing to Sublandlord within
twenty (20) days thereafter, cancel this
<PAGE>
Sublease, in which event the parties shall be discharged from all obligations
thereunder and all monies previously paid by Subtenant to Sublandlord and the
Security Deposit shall be promptly returned to Subtenant.
7. EARLY OCCUPANCY: Upon full execution of this Sublease, Subtenant shall
have the right to occupy the front office portion of the Premises (see attached
Exhibit "B-i") prior to the commencement date. If Subtenant occupies said
portion of Premises, such occupancy shall not advance the Commencement Date or
the termination date. No rent and no building expenses shall be due during this
early occupancy period.
8. CONDITION OF PREMISES: As of the Commencement Date Sublandlord warrants
to Subtenant that the Premises including sidewalks, driveways, parking lot,
truck doors and mechanical, electrical, plumbing, roof and roofing systems will
be in good operating condition and repair. In addition, Sublandlord has no
information that would lead it to believe that the Premises do not comply in any
material respect with any underwriter's requirements or with applicable laws,
ordinances, codes, rules, orders, directions and regulations of lawful
government authorities, including, without limitation, the Americans with
Disabilities Act of 1990.
Should Subtenant subsequently elect to undertake any alterations, additions or
construction to the Premises, Subtenant shall be solely responsible for any
liability as a result of any non-compliance with applicable legal regulations in
connection with Subtenant's work; further, Sublandlord's approval of any of
Subtenant's plans or specifications shall not relieve Subtenant of any such
responsibility, or liability to Sublandlord under this Sublease.
9. EASE MONTHLY RENT: Subtenant shall pay to Sublandlord as Base Monthly
Rent, without deduction, off-set, notice, or demand except as specifically
provided for in this Sublease, at the location specified in Paragraph 34
(Notices) of this Sublease or at such other place as Sublandlord shall designate
from time to time by notice to Subtenant, the Monthly Rent in advance on the
first day of each month of the Term. If the Term begins or ends on a day other
than the first or last day of a month, the rent for the partial month shall be
prorated on a per diem basis. The Subtenant shall pay Base Monthly Rent as
follows:
<TABLE>
<CAPTION>
Months Base Monthly Rent
------ -----------------
<S> <C>
Months 1 through 34 $20,449.00 (Twenty Thousand,
Four Hundred Forty-Nine
Dollars)
</TABLE>
<PAGE>
10. OPERATING EXPENSE INCREASE: Subtenant shall pay to Sublandlord during
the Sublease term hereof, in addition to the Base Monthly Rent, Subtenant's
Share, as hereinafter defined, of the amount by which all Operating Expenses, as
hereinafter defined, for each Comparison Year exceeds the amount of all
Operating Expenses for the Base Year (adjusted to reflect a fully occupied
building), such excess being hereinafter referred to as "Operating Expense
Increase" in accordance with the following provisions:
(a) "Subtenant's Share" is defined, for the purposes of the Sublease, as
Fifty-Eight percent (58%). This percentage has been determined by dividing
the appropriate square footage of the Premises by the total approximate
square footage of the rentable space contained in the building. It is
understood and agreed the square footage figures set forth in Paragraph 2
are approximations which Sublandlord and Subtenant agree are reasonable and
shall not be subject to revision except in connection with an actual change
in the size of the Premises or a change in the space available for lease in
the building.
(b) "Base Year" is defined as the calendar year in which Sublease term
commences.
(c) "Comparison Year" is defined as each calendar year during the term of
this Sublease subsequent to the Base Year; provided, however, Subtenant
shall have no obligation to pay a share of the Operating Expense Increase
applicable to the first twelve (12) months of the Sublease Term (other than
such as are mandated by a governmental authority due to Subtenant's
particular use of the Premises, as to which government mandated expenses
Subtenant shall pay Subtenant's Share, notwithstanding they occur during
the first twelve (12) months) . Subtenant's Share of the Operating
Expenses for the first and last Comparison Years of the Sublease Term shall
be prorated according to that portion of such Comparison Year as to which
Subtenant is responsible for a share of such increases.
(d) "Operating Expenses" is defined, for the purposes of this Sublease as
the sum of the following: (i) "Tenant's Proportionate Share" of "Basic Operating
Cost" as defined in the Master Lease (including, without limitation, Paragraph 7
and Addendum Nos. 3, 4, and 5 of the Master Lease.
(e) Notwithstanding anything to the contrary stated herein or in the Master
Lease, Operating Expenses shall not include and
<PAGE>
Subtenant shall in no event have any obligation to pay directly or to reimburse
Sublandlord for any of the following costs; (i) costs occasioned by the act,
omission or violation of any law by Sublandlord, any other occupant of the
building or their respective agents, employees or contractors; (ii) costs
occasioned by fire, acts of God, or other casualties or by the exercise of
eminent domain; (iii) costs to correct any construction defect in the Premises
or the building or to comply with any covenant, condition, restriction,
underwriter's requirement or law applicable to the Premises or the building on
the Commencement Date; (iv) costs of any renovation, improvement, painting or
redecorating of any portion of the building not made available for Subtenant's
use; (v) costs incurred in connection with negotiations or disputes with any
other occupant of the building and costs arising from the violation by
Sublandlord or any other occupant of the building (other than Subtenant) of the
terms and conditions of any lease or other agreement; (vi) increases in
insurance costs caused by the activities of another occupant of the building
(including, without limitation, Sublandlord), insurance deductibles, and co-
insurance payments, (vii) costs to investigate, remediate, remove or dispose of
Hazardous Materials which were not caused by Subtenant's activities on the
Premises or the building; (viii) costs relating to the repair, maintenance and
replacement of the structural elements of the building (including, without
limitation, the roof); (ix) costs for which Sublandlord has a right of
reimbursement from others, or costs which Subtenant pays directly to a third
person; and (x) costs which could properly be capitalized under generally
accepted accounting principles and which relate to repairs, alterations,
improvements, equipment and tools to the extent that Subtenant's Share of the
total cost of such capital item exceeds in any Comparison Year, the annual
amortized cost of the item based on its useful life determined in accordance
with generally accepted accounting principles.
(f) Subtenant's share of Operating Expenses Increase shall be payable by
Subtenant within thirty (30) days after a reasonably detailed statement of
actual expenses is presented to Subtenant by Sublandlord. At Sublandlord's
option, however, an amount may be estimated by Sublandlord from time to time in
advance of Subtenant's Share of Operating Expenses Increase for any Comparison
Year, and the same shall be payable monthly or quarterly, as Sublandlord shall
designate, during each Comparison Year of the Sublease term, on the same day as
the Base Monthly Rent is due hereunder. In the Event Subtenant pays
Sublandlord's estimate of Subtenant's Share of Operating Expense Increase as
aforesaid, Sublandlord shall deliver to Subtenant within sixty (60) days after
the expiration of each Comparison Year a reasonable detailed statement showing
Subtenant's Share of the
<PAGE>
actual Operating Expense Increase incurred during such year. If Subtenant's
payments under this paragraph during said Comparison Year exceeds Subtenant's
Share as indicated on said statement, Subtenant shall be entitled to credit the
amount or such overpayment against Subtenant's Share of Operating Expense
Increase next falling due. If Subtenant's
<PAGE>
payments under this paragraph during said Comparison Year were less than
Subtenant's Share as indicated on said statement, Subtenant shall pay to
Sublandlord the amount of the deficiency within ten (10) days after the delivery
by Sublandlord to Subtenant shall forthwith adjust between them by cash payment
any balance determined to exist with respect to that portion of the last
Comparison Year for which Subtenant is responsible as to Operating Expense
Increases, notwithstanding that the Sublease term may have terminated before the
end of such Comparison Year.
Sublandlord shall promptly provide any additional supporting documentation
with respect to the foregoing expenses that Subtenant shall reasonably
request. Subtenant shall have the right to cause an audit of Sublandlord's
books and records for the sole purpose of determining the accuracy of any
Sublandlord's statement of Operating Expense Increases. If such audit
reveals that the actual direct expenses for any given year were less than
the amount that Subtenant paid for Operating Expenses for any such year,
then Sublandlord shall pay to Subtenant the excess. If such audit reveals
a discrepancy of more than ten percent (10%) of the actual amount of
Operating Expenses, then Sublandlord shall pay the cost of such audit. If
such audit reveals that the actual direct expenses for any given year were
more than the amount that Subtenant paid for Operating Expenses for any
such year, then Subtenant shall pay to Sublandlord the balance and
Subtenant shall pay the cost of such audit. In addition, at the written
request of Subtenant, Sublandlord shall perform an audit of Master
Landlord's books pursuant to Paragraph 7.E of the Master Lease for the
purposes of verifying the calculation of Operating Expenses; provided,
however, that Subtenant shall bear any reasonable costs incurred by
Sublandlord (and not recovered from Master Landlord) in connection
therewith.
11. TENANT IMPROVEMENTS: Prior to the Commencement Date, Sublandlord, at
Sublandlord's expense shall provide the building improvements to the existing
interiors as described on Exhibit "C-l" (Tenant Improvements) . Subtenant is
responsible for all costs of Tenant Improvements exceeding $128,877.00 (One
Hundred Twenty-Eight Thousand, Eight Hundred Seventy-Seven and no/100 Dollars);
provided, however, that no costs shall be incurred by Sublandlord in excess of
such amount without the prior written consent of Subtenant.
The Tenant Improvements shall be constructed in accordance with all applicable
laws, in a good and workmanlike manner, free of defects and using new materials
and equipment of good quality.
<PAGE>
Sublandlord shall obtain at least two (2) competitive bids for the Tenant
Improvement work and Subtenant shall have the right to approve the contractor
engaged to perform such work. Within thirty (30) days after the Commencement
Date, Subtenant shall have the right to submit a written "punch-list" to
Sublandlord setting forth any defective item of construction, and Sublandlord
shall promptly cause such items to be corrected. Subtenant's acceptance of the
Premises or submission of a "punch-list" shall not be deemed a waiver of
Subtenant's right to have defects in the Tenant Improvements or the Premises
repaired at no cost to Subtenant. Subtenant shall give notice to Sublandlord
whenever any such defect becomes reasonable apparent, and Sublandlord shall
repair such defect as soon as practicable.
Notwithstanding anything to the contrary set forth herein, the cost of the
Tenant Improvements shall not include (and Subtenant shall have no
responsibility for) any of the following: (i) costs attributable to improvements
installed outside the demising walls of the Premises unless (1) necessitated by
Tenant Improvements made inside the demising walls of the Premises, or (2)
requested by Subtenant or as described in Exhibit C-1; (ii) costs for
-----------
improvements which are not described in Exhibit C-l unless otherwise approved
-----------
by Subtenant; (iii) attorney's fees incurred in connection with negotiation of
construction contracts, and attorney's fees, experts' fees and other costs of
legal and arbitration proceedings to resolve construction defects; (iv)loan
fees, mortgage brokerage fees, interest and other costs of financing
construction costs; (v) costs included as a consequence of delay (unless the
delay is caused by Subtenant, its agents, contractors, licenses, or invitees) or
construction disputes with third parties; (vi) penalties and late charges
attributable to the failure to pay construction costs in accordance with the
Sublease except to the extent that such penalties and late charges arise due to
delays caused by Subtenant, its agents, contractors, licensees or invitees;
(vii) any mark-up charged by Sublandlord in connection whit the construction of
the Tenant Improvements; and (viii) any costs due to the negligence or willful
misconduct of any party (other than Subtenant or its employees or agents),
including, without limitation, Sublandlord, Sublandlord's architects and
contractors, and their respective employees and agents.
12. TAXES: Subtenant shall pay any taxes or fees (not otherwise included in
Operating Expenses) that might be directly imposed by any governmental authority
upon Subtenant or as a result of this Sublease or the transfer of any property
or interests in property under this Sublease.
13. CONDITION OF PREMISES AT TIME OF SURRENDER:
<PAGE>
Notwithstanding anything to the contrary contained herein, Subtenant's
obligation with respect to the surrender of the Premises shall be fulfilled if
Subtenant surrenders possession of the Premises in the condition existing at the
Commencement Date, ordinary wear and tear, acts of God, casualties,
condemnation, Hazardous Materials (other than those released or emitted by
Subtenant in or about the Premises), and alterations or other interior
improvements made by Subtenant which Sublandlord states in writing may be
surrendered at the termination of the Sublease, excepted.
14. OBLIGATIONS OF SUBLANDLORD: Sublandlord agrees to maintain the Master
Lease during the Term of this Sublease, subject, however to any termination of
the Master Lease without fault of Sublandlord. Sublandlord agrees to comply
with or perform all of its obligations under the Master Lease that Subtenant has
not assumed under this Sublease. Sublandlord will maintain the HVAC Systems at
Subtenant's expense. Provided, however, Sublandlord does not assume the
obligations required to be kept or performed by the Master Landlord under the
Master Lease.
15. BASE RENTAL DEPOSIT: Upon Subtenant's execution of this
Sublease, Subtenant shall deposit with Sublandlord the sum of
$20,449.00 (Twenty Thousand. Four Hundred Forty-Nine and no/100 Dollars. Said
deposit shall constitute as Base Monthly Rent for the first (1st) month of the
Sublease term.
16. SECURITY DEPOSIT: Subtenant shall provide Sublandlord, upon execution
hereof, with access to a one year Certificate of Deposit issued by Silicon
Valley Bank in the amount of $80,000 as security for Subtenant's faithful
performance of Subtenant's obligations hereunder. Interest earned by this
Certificate of Deposit shall accrue to the account of Subtenant. In the event
of any breach of any of the terms of this Sublease, Sublandlord shall have the
unrestricted right, upon five (5) days written notice to both Subtenant and to
Silicon Valley Bank, to payment from Silicon Valley Bank to the account of
Sublandlord of so much of the Certificate of Deposit as is then due and unpaid
from Subtenant to Sublandlord, together with any other damages incurred by
Sublandlord as a result of the breach. Subtenant shall immediately replace any
such amount with another Silicon Valley Bank Certificate of Deposit with the
same terms. Failure to so replace the Certificate of Deposit shall be a
material breach of this Sublease.
Upon expiration of the one year Certificate of Deposit, Subtenant shall provide
Sublandlord with a cash security deposit in the amount of (Twenty-One Thousand
and no/100 Dollars ($21.000) as
<PAGE>
security for Subtenant's faithful performance of Subtenant's obligations
hereunder. If Subtenant fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Sublease, Sublandlord
may use, apply or retain all or any portion of said deposit for the payment of
any rent or other charge in default to for the payment of any other sum to which
Sublandlord may become obligated by reason of Subtenant's default, or to
compensate Sublandlord for any loss or damage which Sublandlord may suffer
thereby. If Sublandlord so uses or applies all or any portion of said deposit,
Subtenant shall within ten (10) days after Written demand therefore deposit cash
with Sublandlord in an amount sufficient to restore said deposit to the full
amount herein above stated and Subtenant's failure to do so shall be a material
breach of this Sublease. Sublandlord shall not be required to keep said deposit
separate from its general accounts. If Subtenant performs all of Subtenant's
obligations hereunder, said deposit, or so much thereof as has not theretofore
been applied by Sublandlord, shall be returned, without payment of interest or
other increment for its use to Subtenant (or at Sublandlord's option, to the
last assignee, if any, of Subtenant's interest hereunder) at the expiration of
the term hereof, and after Subtenant has vacated the Premises. No trust
relationship is created herein between Sublandlord and Subtenant with respect to
said Security Deposit.
17. CASUALTY DAMAGE AND CONDEMNATION: To the extent the Master Lease gives
Sublandlord any right to terminate the Master Lease in the event of a casualty
or condemnation affecting the Premises, Sublandlord shall not cancel or
terminate the Master Lease without the prior written consent of Subtenant.
18. PARKING: Notwithstanding anything to the contrary contained in the Master
Lease, Subtenant shall only have the non-exclusive right to park in those
certain designated areas of the 'Exterior Area" as shown in the site plan
attached hereto as Exhibit "B-2", maximum of ninety-five (95) parking spaces
(its pro-rata share) within said designated areas.
19. NO OPTION TO EXTEND: Subtenant shall not have any option of extend the
term of this Subtenant beyond its original Term.
20. INDEMNIFICATION: Except to the extent caused by the negligence or willful
misconduct of Sublandlord, its agents, employees, contractors or invitees,
Subtenant shall indemnify, defend with counsel reasonably acceptable to
Sublandlord, protect and hold Sublandlord harmless from and against any and all
claims, liabilities, judgments, causes of action, damages, costs and expenses
(including reasonable attorneys' and experts' fees) caused by or arising in
connection with (i) the negligence or
<PAGE>
willful misconduct of Subtenant or its employees, contractors, agents or
invitees, or (ii) a breach of Subtenant's obligations under this Sublease or the
provisions of the Master Lease assumed by Subtenant hereunder. Subtenant's
indemnification of Sublandlord shall survive the termination of this Sublease.
Except to the extent caused by the negligence or willful misconduct of
subtenant, its agents, employees, contractors or invitees, Sublandlord shall
indemnify, defend with counsel reasonably acceptable to Subtenant, protect and
hold Subtenant harmless from and against any and all reasonable claims,
liabilities, judgments, causes of action, damages, costs and expenses (including
reasonable attorney's and expert's fees) caused by or arising in connection
with; (i) a breach of Sublandlord's obligations under this Sublease; (ii) a
breach of Sublandlord's obligations as tenant under the Master Lease to the
extent those obligations are not assumed by Subtenant under this Sublease; or
(iii) the negligence or willful misconduct of Sublandlord or its agents,
employees, contractors or invitees occurring on or about the Premises.
Sublandlord's indemnification of Subtenant shall survive the termination of this
Sublease.
21. TERMINATION OF MATER LEASE: If the Master Lease is terminated for any
reason beyond the reasonable control of Sublandlord, this Sublease shall
terminate simultaneously, and any unearned rent paid in advance and the Security
Deposit shall be promptly refunded to the Subtenant.
Under no circumstance shall this sublease be extended beyond the
expiration, surrender termination of the Master Lease. Whether the Master Lease
expires by its own terms, is terminated for Sublandlord's default, is terminated
or surrendered by agreement of Master Landlord and Subtenant, or is terminated
for any other reason.
22. HOLDOVER: If Subtenant shall holdover and retain possession of the
Premises or any part of the Premises after the termination of this Sublease,
without Master Landlord's consent, it shall constitute a default by subtenant
and entitle Sublandlord to reenter and take possession of the Premises.
Subtenant shall pay Sublandlord for each day of such retention, the amount of
the daily rental for the last month prior to the date of expiration or
termination. Subtenant shall also pay all damages (including consequential
damages) sustained by Sublandlord to Master Landlord on or otherwise on account
of such holding-over.
23. RIGHT TO CURE DEFAULT: If Subtenant fails to do any act
<PAGE>
required of itunder the Sublease Sublandlord may, after the passage of the
applicable notice and cure period, do so, and Subtenant shall promptly pay the
cost thereof plus interest at the rate of twelve percent (12%) per annum from
the date Sublandlord made payment for such act.
If Sublandlord fails to do any act required of it hereunder, Subtenant may,
after thirty (30) days after the date of Subtenant's written notice to
Sublandlord identifying the failure, and after the passage of the applicable
notice and cure period, do so, and Sublandlord shall promptly pay the cost
thereof plus interest at the rate of twelve percent (12%) per annum from the
date Subtenant made payment for such act.
24. BINDING ON SUCCESSORS: The provision of this Sublease shall extend to and
shall bind and inure to the benefit of Sublandlord and Subtenant and of their
respective successors and assigns.
25. SEVERABILITY: The unenforceability, invalidity, or
illegality of any provision of this Sublease shall not render the other
provisions unenforceable, invalid, or illegal.
26. NOTICES: All notices shall be in writing, mailed certified mail, postage
prepaid, addressed to the parties as follows:
Sublandlord: Subtenant:
Tandem Computers Inc. Concentric Research Corporation
19333 Vallco Parkway
Cupertino, CA 95014
Attn: Corporate Real Estate
and Construction
with Copy of Default Master Landlord:
Notice To:
Tandem Computers Inc. Speiker-French #130, Limited
19333 Vallco Parkway Partnership
Cupertino, CA 95014 2180 Sand Hill Rd., Suite 200
Attn: General Counsel
Menlo Park, CA 94025
Either party may, by notice, change the address to which notices are to be sent.
27. APPROVAL OF MASTER LANDLORD: If Sublandlord fails to obtain Master
Landlord's consents within ten (10) days after execution of this Sublease by
Sublandlord, than Sublandlord or Subtenant may terminate this Sublease by giving
the other party
<PAGE>
written notice thereof, and Sublandlord shall return to Subtenant its payment of
the first month's Base Monthly Rent and the Security Deposit paid by Subtenant.
28. ENVIRONMENTAL CONDITION: Sublandlord hereby represents and warrants to
Subtenant that to the best of Sublandlord's knowledge, that no hazardous, toxic
or radioactive materials that are currently regulated under state or federal law
(collectively, "Hazardous Materials") have been introduced to the Premises by
Sublandlord which may affect the condition of the Premises.
Indemnification by Sublandlord: Sublandlord shall indemnify, defend,
protect and hold Subtenant, its employees, agents, officers and directors,
harmless from and against all claims, accidents, suits, proceedings, judgments,
losses, costs, damages, liabilities (including, without limitation, sums paid in
settlement of claims), deficiencies, fines, penalties, punitive damages or
expenses, (including, without limitation, reasonable attorneys', experts', and
consultants' fees, investigation and laboratory fees, court costs and litigation
expenses) directly or indirectly resulting from the presence of any Hazardous
Materials in, on or under the Property caused by Sublandlord, unless such
Hazardous Materials were introduced by Subtenant or by anyone other than
Sublandlord.
Subtenant's Obligations: Subtenant shall comply with all applicable laws
regarding Hazardous Materials.
Indemnification by Subtenant: Subtenant shall indemnify, defend, protect
and hold Sublandlord, its employees, agents, officers and directors, harmless
from ad against all claims, accidents, suits, proceedings, judgments, losses,
costs, damages, liabilities (including, without limitation, reasonable
attorneys', experts', and consultants' fees, investigation and laboratory fees,
court costs and litigation expenses) , directly or indirectly resulting from the
presence of any Hazardous Materials in, on or under the Property that were
introduced on the Property by Subtenant, or its agents, employees, vendors,
subcontractors or others working with or on behalf of Subtenant.
Survival of Obligation: All obligations of Sublandlord and subtenant
under this Paragraph 28 shall survive the expiration or earlier termination of
the Sublease.
29. SUBLANDLORD DATA LINES: Subtenant acknowledges that Sublandlord
currently has active data communication lines consisting of fiber and copper
distribution cables running into and out of Room #1099 (see attached floor
plan). Sublandlord will "flag" these lines that are located above the ceiling
<PAGE>
tiles. Subtenant agrees not to remove or disturb these lines.
30. ENTIRE AGREEMENT: This Sublease together with the terms of the Master Lease
incorporated herein, and all exhibits and attachments mentioned herein, contains
the entire agreement of the parties with respect to the subject matter of this
Sublease and supersedes all prior agreements and understandings between the
parties.
31. CONSENT OF MASTER LESSOR: This Sublease is made and entered into with the
full knowledge and agreement of Master Lessor which, by executing this sublease
in the space below, hereby accepts this Sublease. By consenting to this
Sublease, Master Lessor agrees to give Sublandlord notification of any breach of
the Master Lease which might reasonable be expected to effect Subtenant's use of
the Premises. This consent shall apply to this Sublease only, and shall not be
deemed Master Lessor's consent to any other sublease.
32. CONFLICT OF PROVISIONS: In the event of a conflict between the provisions of
this Sublease and those of the Master Lease, as between Sublandlord and
Subtenant the provisions of this Sublease shall control.
33. SUBLANDLORD'S COVENANTS: Sublandlord covenants and agrees that it shall not
enter, without the prior written consent of Subtenant, which consent may be
withheld in Subtenant's sole discretion, any amendment to the Master Lease which
prevents or materially adversely affects the use by Subtenant of the Premises in
accordance with the terms of this Sublease, materially increases the obligations
of Subtenant under this Sublease or materially restricts Subtenant's rights
under this Sublease.
34. ASSIGNMENT OF RIGHTS: Sublandlord hereby assigns to Subtenant all warranties
given and indemnities made by Master Landlord to Sublandlord under the Master
Lease with respect to the Premises, and any sums or proceeds received by
Sublandlord on account of Sublandlord's enforcement of any such warranties or
indemnities, which would reduce Subtenant/'/s obligations hereunder, and shall
cooperate with Subtenant to enforce all such warranties and indemnities.
35. WAIVER OF SUBROGATION: Notwithstanding anything to the contrary contained in
this Sublease of the Master Lease, the parties hereto, including Master Landlord
by reason of its consent hereto, each release the other and their respective
agents, employees, successors, assignees and subtenants from
<PAGE>
all liability for injury to any person or damage to any property that is caused
by or results from a risk is actually insured against, which is required to be
insured against under the Master Lease or the Sublease, or which would normally
be covered by the standard form of full replacement value "all-risk, extended
coverage" casualty insurance, without regard to the negligence or willful
misconduct of the entity so released. Each party shall use its best efforts to
cause each insurance policy it obtains to provide that the insurer thereunder
waives all right of subrogation as required herein in connection with any injury
or damage covered by the policy. If such insurance policy cannot be obtained
with such waiver of subrogation, or
<PAGE>
if such waiver of subrogation is only available or additional cost and the party
for whose benefit the waiver is not obtained does to pay such additional cost,
then the party obtaining such insurance shall immediately notify the other
parties of that fact.
SUBLANDLORD SUBTENANT
----------- ---------
TANDEM COMPUTERS INCORPORATED CONCENTRIC RESEARCH
CORPORATION a Florida Corporation
/s/ Frank Robinson /s/ Bergeron
_______________________________ ________________________
By By
Vice President, Corporate,
Real Estate & Site Services Controller
_______________________________ ________________________
Title Title
6/29/95 6/28/95
_______________________________ ________________________
Date Date
MASTER LANDLORD
---------------
SPIEKER FRENCH #130
Limited Partnership, a
Texas Limited Partnership
By /s/
_______________________________
Title
_______________________________
Date
<PAGE>
EXTENSION AGREEMENT
-------------------
EXTENSION AGREEMENT to be attached to and form a part of lease (which together
with any amendments, modifications and extensions thereof is hereinafter called
the Lease) made the 23rd day of March, 1993 between SPIEKER FRENCH #130, LIMITED
PARTNERSHIP A TEXAS LIMITED PARTNERSHIP, as Landlord and TANDEM COMPUTERS
INCORPORATED, A DELAWARE CORPORATION, as Tenant covering the premises known as
10590 N. Tantau Avenue, Cupertino, California.
Witnesseth that the Lease is hereby renewed and extended for a further term of
five(5) years to commence on the first day of May, 1993, and to end on the
thirtieth day of April, 1998, on condition that Landlord and Tenant comply with
all the provisions of the covenants and agreements contained in the Lease,
except:
1) Rental: Rental for the premises shall be:
Months 1-30: $41,151.00 per month plus operating expenses per
Paragraph 7 and Addendum 5 of this Lease
Agreement.
Months 31-60: $46,089.00 per month plus operating expenses per
Paragraph 7 and Addendum 5 of this Lease
Agreement.
2) Term and Possession: Landlord shall not be required to provide tenant
improvements.
3) Additional Paragraph 37 shall be amended to read as follows:
Provided Tenant is not, and has not been, in default of its obligations under
this Lease, Tenant shall have an option to re-lease the Premises in "as-is"
condition for a term of five (5) years at the then current market rent (for
comparable one-story office space in the ValIco Park, Cupertino area). In no
event will the monthly rental be less than the rental for the last month of the
previous term.
Tenant shall give Landlord written notice of its intent to exercise its option
at least one hundred eighty (180) days prior to the expiration of the current
lease term. Within fifteen (15) days after Tenant exercises its option to re-
lease, Landlord will provide Tenant with the current market rental, as
determined by Landlord for the extended term. Tenant shall have forty five (45)
days from notification by Landlord of option rent to accept Landlord's current
market rent.
The parties are obligated to negotiate in good faith to agree on the market
rental for the five (5) year rental adjustment. If the parties have not mutually
agreed on the market rental adjustment for the five (5) year period provided
herein within forty five (45) days from notification by Landlord to Tenant of
Landlord's rental determination, each party hereon shall appoint one
representative who shall be a licensed real estate broker experienced in the
leasing of office space in the County of Santa Clara to act as an arbitrator.
The two (2) arbitrators so appointed shall determine the current rental value
for the subsequent five (5) years for the use to which Tenant is then utilizing
the leased Premises pursuant to the terms and conditions of this Lease. The
determination of said current rental value shall be made by said two (2)
arbitrators within ninety (90) days from notification by Landlord to Tenant of
Landlord's rental determination and they shall submit said determination in
writing and signed by said arbitrators in duplicate. One of the written
notifications shall be delivered to Landlord and the other to Tenant.
<PAGE>
In the event the two (2) arbitrators of the parties hereto cannot agree on the
current rental value for the Premises herein, said two (2) arbitrators shall
appoint a third arbitrator who shall be a licensed real estate broker
experienced in the leasing of office space in the County of Santa Clara to act
as an arbitrator. The current rental value for the subsequent five (5) year
period shall be independently determined by the third of said arbitrators, which
said determination shall be made within one hundred twenty (120) days from
notification by Landlord to Tenant of Landlord's rental determination. The role
of the third arbitrator shall then be to immediately select from the proposed
resolution of arbitrators #1 and #2 the one that most closely approximates the
third arbitrator's determination of market rental value. The third arbitrator
shall have no right to adopt a compromise or middle ground or any modification
of either of the two final proposed resolutions. The resolution the third
arbitrator chooses as most closely approximating his determination of the
questions in issue shall constitute the decision and award of the arbitrators
and be final and binding upon the parties.
<PAGE>
The parties hereto shall pay the charges of the arbitrator appointed by him and
any expenses incurred by such arbitrator, The charges and expenses of the third
arbitrator, as provided herein, shall be paid by the parties herein in equal
shares.
In the event either arbitrator #1 or arbitrator #2 fails to present a market
rental figure within the thirty (30) day period, the rental presented by the
other arbitrator shall be considered final and binding on both parties.
In the event the third arbitrator fails to present a current market rent within
the thirty (30) day period, then by mutual consent of Landlord and Tenant:
(a) The time period shall be extended, or
(b) If Landlord or Tenant do not wish to extend the period, a fourth
arbitrator shall be selected by arbitrator #1 and arbitrator #2 and a new
thirty (30) day period shall begin.
Notwithstanding anything to the contrary herein contained, Tenant's right
to extend the term by exercise of the foregoing option shall be conditioned
upon the following: at the time of exercise of the option, and at the time
of the commencement of the extended term, Tenant shall be in possession of
and occupying the Premises for the conduct of its business therein and the
same shall not be occupied by any assignee, subtenant or licensee. In no
event will the monthly rental be less than the rental for the last month of
the previous term.
4) Addendum No. 3 to Paragraph 7A(1) Basic Operating Costs of the Lease
Agreement dated January 26, 1988 shall be amended to read as follows:
Notwithstanding anything to the contrary contained herein, Tenant shall
not, during the term of the Lease, be liable for increases in real property
taxes that result from a sale of the Project by Landlord. This cap on real
property taxes shall he applicable only to this sixty (60) month period and
shall not be applicable in the event of a sale of the Project to Tandem
Computers, Inc. during this period.
IT WITNESS WHEREOF, the parties hereto have signed and sealed this Extension
Agreement this 23rd day of March, 1993.
LANDLORD: TENANT:
Spieker French #130, Limited Partnership, Tandem Computers Incorporated,
a Texas Limited Partnership a Delaware Corporation
By: ___/s/____________________________ By: ___/s/_____________________________
Its: General Partner Its Manager of Corporate Real Estate
--------------------------------- ---------------------------------
<PAGE>
[Exhibit B-1
Floorplan of 10590 Tantau Avenue]
<PAGE>
[Exhibit B-2
Exterior Area]
<PAGE>
TENANT IMPROVEMENTS
10590 N. TANTAU AVENUE, CUPERTINO, CA
EXHIBIT "C-1'
(SEE ATTACHED FLOOR PLAN)
1. Lobby #1000 - Install new carpet as provided by Tandem. Base board
included.
2. Leave 1003-1005, and 1118-1125 as is. with the exception of demolition of
the wall and doors between offices 1123 &1 124 and place an entrance door at the
end of the hall. between 1122 & 1125. Rework ceiling, lighting, and mechanical
for even distribution of services. Carpet to be patched as needed. Base board
included.
3. Remove wall between (7) offices 1140-1146 to create warehouse office,
strip carpet down to concrete. Finish concrete to warehouse standard. Fill and
patch (5) doors, add double doors for new entrance. Rework ceiling. lighting and
mechanical for even distribution of services. Add power at perimeter for general
purpose use.
4. Demo (3) offices in the following area to provide open office space: 1171-
1173. Rework ceiling, lighting and mechanical for even distribution of services.
Provide power in ceiling for 2 power poles. Remove and replace carpet.
5. Demo (5) offices in the following area to provide open office space: 1179-
1183. Rework ceiling, lighting and mechanical for even distribution of services.
Provide power in ceiling for 4 power poles. Remove and replace carpet.
6. Provide separate electrical metering capacity for the Computer Room.
Relocate communication cables to adjacent wall in room 1126 for exclusive use of
Subtenant.
7. Patch & paint where name plates have been removed and damaged walls from
previous tenant.
8. Replace damaged or stained ceiling tiles throughout.
9. Test existing plumbing fixtures, doors closers, and light fixtures to be in
working order, repair or replace if required.
10. Kitchen/Break Room: Demo wall between 1129 & 1230, and remove the door in
1229, on the south side. Install new linoleum for entire kitchen area.
11. Board Room: Demo wall between 1218 & 1224, remove entry door of room 1224.
and patch carpet.
<PAGE>
12. Conference/Reception Room: Demo wall between 1001 & 1002. Leave all
existing doors and install one door on west wall in room 1002. In addition,
place floor to ceiling accordion wall to allow for subdivision of this room.
Accordion wall location would be located between existing doors (running east &
west). Patch carpet.
13. Shower: Install one unisex shower facility on the back side of rooms 1151 &
1152.
14. Bathrooms: Women's rest room-1152. replace linoleum, and repair damaged
counter top (counter is perforated just below the mirror & above the sinks).
Paint rest room walls.
Men's restroom- 1151, repair leaking "wall urinal" and replace damaged
panel on which the urinal is attached. Repair and/or replace toilet
dispenser's. Paint rest room walls.
<PAGE>
[Exhibit C-1
Subject Premises]
<PAGE>
LEASE AMENDMENT NUMBER ONE TO THE LEASE AGREEMENT DATED
JANUARY 26, 1988, BETWEEN SPIEKER FRENCH #130, LIMITED
PARTNERSHIP, A TEXAS LIMITED PARTNERSHIP, AS LANDLORD, AND
TANDEM COMPUTERS INCORPORATED, A DELAWARE CORPORATION, AS
TENANT, FOR PREMISES LOCATED AT 10590 TANTAU AVENUE, CUPERTINO,
CALIFORNIA.
Effective February 5, 1990, the above described Lease Agreement shall be
modified as follows.
1. Addendum 6. Paragraph 8C. Indemnification of the Lease Agreement
shall be deleted in its entirety and replaced with Addendum 6 below.
Addendum 6. Paragraph Sc. Indemnification for Toxic/Hazardous Materials
------------------------------------------------------------------------
Landlord shall indemnify Tenant, and hold harmless Tenant , its
officers, agents. employees, shareholders, parent, subsidiary and
affiliate organizations against all liability, claims, loss, cost
damages, charges and expenses (including reasonable attorneys' fees,
clean-up costs, cost of court and expenses necessary in the prosecution
or defense of any litigation) by reason of injury to person or property,
including any liability for injury to person or property of Landlord,
its agents, servants, employees or invitees, while in or on the leased
Premises during the term of this Lease resulting from the negligence of
Landlord, its agents, servants, employees, invitees or authorized
representatives.
Tenant shall indemnify Landlord and hold harmless Landlord, its
officers, agents, employees, partners, subsidiary and affiliate
organizations against any claims, suits, loss, costs (including
attorneys' fees and clean-up costs), damage or liability by reason of
property damage (including the property of Landlord) or personal injury,
(including death) to alt extent the same results from pollution or toxic
contamination present, used, generated, manufactured, released,
discharged, stored or disposed of on the Premises regardless of who
caused the same, except for pollution or toxic contamination (i) (A)
originating on property which is not leased, owned or otherwise used or
controlled by Tenant and (B) which migrated through the air, groundwater
or otherwise to the Premises, or (ii) which was present on the Premises
on the date of Tenant's first occupancy of the Premises and was not
caused by Tenant or its agents.
As used in this section, "Premises" means the real property which is the
subject matter of this lease and the adjoining real property, commonly
known as 10600 North Tantau Avenue/10290 Pruneridge Avenue, Cupertino,
which adjoining real property is also currently leased to Tenant.
2. The following sentence shall become the last sentence of Paragraph
7A(4):
Tenant shall be permitted, at its option, to perform landscape
maintenance, so long as such maintenance is performed to Landlord's
complete satisfaction.
Dated: February 5,1990
<PAGE>
WITNESS WHEREOF, this Amendment has been duly executed by the parties hereto
as of the day and year first above written.
LANDLORD: SPIEKER-FRENCH #130 TENANT: TANDEM COMPUTERS, INC.
/s/ John K French /s/ Frank Robinson
__________________________________ ______________________________________
By: John K French, General Partner By Frank Robinson, Director, Corporate
Real Estate and Construction
<PAGE>
BASIC LEASE INFORMATION
LEASE DATE: January 26th, 1988
TENANT; Tandem Computers Incorporated, a Delaware Corporation
ADDRESS OF TENANT: 19191 Vallco Parkway, LOC 4-04 Cupertino, CA 95014 -0708
LANDLORD: Spieker-French #130, Limited Partnership, a Texas Limited Partnership
ADDRESS OF LANDLORD; 2180 Sand Hill Road, Suite 200 Menlo Park, CA 94025
Project Description: That two (2) building complex totaling 64,680 rentable
square feet situated on 4.46 acres of land commonly known as the Cupertino
Technology Center, Cupertino, California, The project is shown outlined in
green
Building Description: on Exhibit "A"
That 41,151 square foot one story building known as 10590 Tantau Avenue,
The Building is shown outlined
Premises: in blue on Exhibit "A".
The entire 41,151 square foot one story building known as 10590 Tantau
Avenue, The Premises are Permitted Use: outlined in red on Exhibit "A",
General Office, including computer sales, service
and other related legal purposes.
Occupancy Density: One person per 250 rentable square feet
Scheduled Term Commencement Date: April 1, 1988
Length of Term: Sixty (60) months
Rent:
Base Rent; See Addendum 2 $ _______________ per month
Estimated First Year Basic Operating Cost: $ 9.835 per month
-----
Security Deposit: None
Tenant's Proportionate Share: 63.62%
<PAGE>
The foregoing Basic Lease Information Is Incorporated Into and made a part of
this Lease. Each reference In this Lease to any of the Basic Lease Information
shall mean the respective Information above and shall be construed to
Incorporate all of the terms provided under the particular Lease paragraph
pertaining to such Information. In the event of any conflict between the Basic
Lease Information and the Lease, the latter shall control.
<PAGE>
Exhibit A-1
Master Lease incorporated herein by reference from Exhibit 10.27.
<PAGE>
EXHIBIT 10.31
INTERNET ACCESS SERVICES AGREEMENT
THIS INTERNET ACCESS SERVICES AGREEMENT is effective as of August 1, 1995
(the "Effective Date"), by and between Intuit Inc., a Delaware corporation
("Intuit"), and Concentric Network Corporation, a Florida corporation formerly
known as Concentric Research Corporation ("CNC"), with reference to the
following facts:
RECITALS
--------
A. Intuit creates, markets and distributes certain financial, tax and
other software products and services.
B. CNC is an on-line telecommunications services and Internet access
provider that offers various services through the CNC Network, as defined below,
including non-Internet telecommunications, access to the Internet, electronic
mail, USENET news, Telnet and various Internet Protocols, as defined below.
C. Intuit desires to offer Internet Services on the terms and conditions
set forth in this Agreement to persons who license the Products defined below
("Customers") by (i) incorporating the Internet Features into the Products and
(ii) obtaining the CNC Services from CNC to permit access to the Internet, and
CNC is willing to perform the Development Project and provide the CNC Services
to support Intuit's provision of the Internet Services to the Customers and
other communications requirements.
D. The parties hereto agree and acknowledge that this Agreement
memorializes actions that occurred, or obligations undertaken, on or after the
Effective Date, and reflects their agreement with respect to future performance
as set forth herein.
NOW, THEREFORE, for valuable consideration, the parties hereto agree as
follows:
1. Definitions. In addition to any other capitalized terms defined in
-----------
this Agreement, the following terms shall have the meanings provided below:
1.1 "Access" shall mean the provision of telecommunications transport
and/or an interconnection to the Internet Services via the CNC Network using a
POP Access or a Non-POP Access, as the case may be.
1.2 "Agreement" shall mean this Internet Access Services Agreement,
including its exhibits and attachments, all by this reference incorporated into
and made a part hereof.
1.3 "Browser" shall mean the client access software including the
dialer, registration wizard, image viewer, TCP/IP stack and other software
permitting the establishment of a point-to-point protocol (PPP) connection with
the Internet through the CNC Network.
1.4 "Commitment Agreements" shall mean that certain Stand-By
Financing Agreement and that certain Warrant Issuance Agreement by and between
the parties hereto, and certain CNC shareholders, dated as of the Execution Date
and their related agreements.
1.5 "CNC Code" shall mean the POP, login server, registration server,
encryption, data security and other software, including object code and source
code, described or referred to
<PAGE>
in this Agreement, and developed by CNC to support the Internet Services
provided by Intuit, including any related documentation.
1.6 "CNC Network" shall mean the computing, information services,
hardware, software (including the CNC Code), telecommunications, access and
provisioning provided by CNC as further described in this Agreement and in that
certain CNC Private Placement Memorandum dated November 3, 1995, as such network
may be modified, improved and expanded during the Term of this Agreement.
1.7 "CNC Services" shall mean any and all of the services rendered
and support that CNC is required to provide under the terms of this Agreement
including, but not limited to, those relating to the provision of Internet
Services, Non-Internet Traffic Services, customer support, billing and
collection, and ongoing System development.
1.8 "Customer Charge(s)" shall mean the charges set by Intuit from
time to time and payable by the Customers for the Internet Services as further
described in Section 4.3.
1.9 "Customer Information" shall mean all the information and records
collected, processed or compiled by CNC, including (without limitation) lists of
Customer names, addresses, and telephone numbers; registration, credit and
financial information; information respecting Customer needs, usage and demands;
product; entry point; and such other marketing information as may be useful to
or desired by Intuit to promote or improve the Internet Services or its
Products.
1.10 "Development Project" shall mean the activities of CNC and Intuit
to develop and test the CNC Network's ability to support the Internet Services
as further described in Section 3 and Exhibit "B".
-----------
1.11 "Full Internet Service(s)" shall mean a service that provides a
Customer with access to the Intuit Areas via the CNC Network and unrestricted
access via the CNC Network to all generally accessible locations and services on
the Internet.
1.12 "Information Statements" shall mean monthly statements prepared
and made available by CNC to the Customers and Intuit for on-line viewing on the
CNC Network pursuant to Section 4.3 and Exhibit "D" attached hereto.
-----------
1.13 "Internet" shall mean the network of computers, information
systems and communications systems using the TCP/IP protocols and commonly
referred to as the Internet.
1.14 "Internet Connection Services" shall mean providing general
access to the Intuit Areas to persons who are connected to the Internet via any
mechanism other than through the Access provided by CNC.
1.15 "Internet Features" shall mean the Browser, CNC Services,
topology, schematics, hardware and software, and other systems and features
offered by or through Intuit in conjunction with the Products that enable a
Customer to gain access to and use the Internet Services through the Products.
1.16 "Internet Protocols" shall mean file transfer protocol (FTP),
Internet Relay Chat (IRC), World Wide Web access and other current and future
protocols.
1.17 "Internet Services" shall mean the Full Internet Services, the
Restricted Internet Services and the Internet Connection Services.
2
<PAGE>
1.18 "Intuit Areas" shall mean locations on various host computers,
including those which may be operated by CNC, which provide various information
and services to various Customers accessing such host computers by using
Internet Protocols including, without limitation, World Wide Web sites operated
by Intuit. Intuit will determine, in its sole discretion, which information and
services to provide to which Customers in the Intuit Areas.
1.19 "Intuit Systems" shall mean Intuit's host computers which are not
providing the Internet Areas.
1.20 "Network Plan" shall mean the CNC Network deployment plan
described in Exhibit "A".
-----------
1.21 "Network Specifications" shall mean the description, performance
standards, topology and specifications for the CNC Network as described in this
Agreement.
1.22 "Non-Internet Traffic Services" shall mean telecommunications
access other than continuous session-based services using Internet Protocols
such as the World Wide Web, e.g., the burst disconnect asynchronous
----
communications of banking data is non-Internet traffic.
1.23 "Non-POP Access" shall mean that a Customer in a given geographic
location may gain access to the CNC Network through a long distance or 800#
phone number, and not through a local POP.
1.24 "Performance Standards" shall mean the established target and
minimum performance measurements for the CNC Network and the CNC Services as
described in this Agreement.
1.25 "POP" or "Point of Presence" shall mean the hardware (such as
modems, terminal servers and routers), software, networks and telecommunications
connections operated by CNC at a local facility or site through which a Customer
may gain access to the Internet through a dial-up TCP/IP link with the CNC
Network.
1.26 "POP Access" shall mean that a Customer in a given geographic
location can gain access to the Internet through a link with the CNC Network
through a local phone number. CNC may provide POP Access either through a
physical POP or through any mechanism by which a local-access telephone
connection is re-routed to the CNC Network at no charge to the Customer.
1.27 "Port" shall mean a modem connection on a terminal server at a
POP.
1.28 "Products" shall mean Intuit's Quicken personal financial
software product, Quickbooks small business accounting software product,
ProSeries professional tax preparation software product, and TurboTax personal
tax preparation software product, and such other Intuit software products as
shall be added to the coverage of this Agreement at the sole discretion of
Intuit by an addendum hereto executed and delivered between CNC and Intuit.
1.29 "Restricted Internet Service(s)" shall mean a service that
provides a Customer with access via the CNC Network to various Intuit Areas and
to certain other Internet locations and services as Intuit shall specifically
authorize for such Customer from time to time.
1.30 "Service Charge(s)" shall mean the charges for CNC Services to be
paid by Intuit to CNC as provided in Section 4.3 hereof.
3
<PAGE>
1.31 "Term" shall mean from and after the Effective Date until the
expiration or termination of the Service Term.
1.32 "URL" or "Uniform Resource Location" shall mean the address of a
resource on the Internet, e.g., "http://www.cris.com".
----
1.33 Certain other terms used herein are defined in the following
provisions:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Effective Date Preamble
Customer(s) Recital "C"
Integrated Browser 2.4
Alternate Services 2.4
System 3.1
Release Date 4.1
Service Term 4.1
Contract Year 4.1
Customer Support Center 4.2.4
Confidential Information 5.1.1
License Agreement 5.4
Transition Period 6.4
Execution Date Signature Page
Minimum Performance Standard(s) Exhibit "A"
Target Performance Standard(s) Exhibit "A"
Monthly Reconciliation Exhibit "D"
</TABLE>
2. Concept of Operations and General Agreement.
-------------------------------------------
2.1 Concept of Operations. Intuit desires to make available the
---------------------
Internet Services to its Customers by the distribution of certain Internet
Features with any or all of the Products as Intuit may determine in its sole
discretion, and to obtain Non-Internet Traffic Services from CNC from time to
time. As a part of the CNC Services, CNC shall provide the following: Customer
logon and registration in a format provided or approved by Intuit, service
upgrades, account management, credit approvals, Customer billing; reporting
network and infrastructure management, operation and maintenance; Access;
provision of Internet Services and Non-Internet Traffic Services; and
4
<PAGE>
customer and technical support. CNC will charge Intuit for the CNC Services in
accordance with Section 4.3. Intuit will independently establish its charges to
Customers for the Internet Services, and CNC will bill the Customers on behalf
of Intuit on such terms and conditions as Intuit may determine in its sole
discretion.
2.2 CNC Network Structure. The current and proposed structure of the
---------------------
CNC Network is described in Exhibit "A" attached hereto. CNC has established
-----------
and is implementing the Network Plan to expand, improve and enhance the
capabilities of the CNC Network to facilitate its support of Intuit.
2.3 General Agreement. Intuit and CNC will perform the Development
-----------------
Project pursuant to Section 3 to support CNC's ability to provide the Internet
Services. Thereafter, subject to the terms of this Agreement, CNC will provide
during the Service Term, and Intuit will use, the CNC Services in the
continental United States and Canada so long as CNC is not in breach of this
Agreement. CNC will perform the CNC Services in accordance with the highest
professional and technical standards for services of this nature, and will
strictly comply with any related performance capabilities, accuracy,
completeness, characteristics, specifications, configurations, standards and
requirements set forth in this Agreement. However, notwithstanding anything to
the contrary in this Agreement, Intuit shall have the right to determine which,
if any, Internet Services to include with each of its Products.
2.4 Qualified Exclusivity. During the Service Term (except during
---------------------
any Transition Period), Intuit will offer any Intuit-branded Internet access
services to Customers in the continental United States and Canada using Internet
browsers integrated into the Products exclusively through CNC. However, the
foregoing exclusivity provision shall not apply to high band width access
services (such as interactive television, cable modem, ISDN, or other services
which operate at speeds greater than 28.8 Kbps). Furthermore, the foregoing
exclusivity provision shall not prevent or prohibit any of the following
activities, provided that Intuit does not provide an Integrated Browser in
conjunction with such activities: (a) Intuit from providing general access to
the Intuit Areas from, by or through the Internet or any other networks, content
areas, content providers, on-line services or access service providers (for the
purposes of this Section 2.4, collectively referred to as "Alternate Services")
(b) Intuit's customers from using any other Alternate Services in any manner
they choose, (c) Intuit from maintaining content areas on or through other
Alternate Services, (d) Intuit from providing links to the Intuit Areas from, by
or through other Alternate Services, or (e) Intuit from engaging in marketing or
promotional activities (including but not limited to joint product distribution)
with other Alternate Services. An Integrated Browser shall be defined as an
Internet browser which is both (a) distributed with an Intuit Product and (b)
integrated with such Product so that it is installed via the same installation
routine and can be launched from directly within such Product. Upon (i) the
termination or expiration of this Agreement or (ii) CNC's Net Working Capital
(as defined in the Stand-By Financing Agreement) falling below [*], the
foregoing exclusivity provision shall cease to be effective and in any event
shall not apply to any Transition Period during which Intuit uses CNC Services
pursuant to Section 6.4.
3. System Development and Tests.
----------------------------
3.1 System Development. In accordance with the Development Project
------------------
Work Statement attached hereto as Exhibit "B", the parties shall perform their
-----------
respective Development Project obligations (at their own cost) to develop,
implement, execute, integrate and test the software code (including the CNC
Code), hardware and software systems, procedures and installation to develop an
overall system to offer the Internet Services (collectively, the "System").
During the Term of this Agreement, CNC (i) warrants that the CNC Code shall meet
all its specifications to support Intuit's provision of the Internet Services,
(ii) will provide to Intuit at no
- ----------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
5
<PAGE>
charge unlimited telephone access to CNC's technical support staff to obtain
assistance relating to the CNC Code, and (iii) will develop and deliver to
Intuit at no charge any maintenance or feature releases, and related
documentation, to correct a programming error or other defect or to increase or
enhance the features or functionality of the CNC Code which CNC makes available
as a standard feature of its standard commercial release during the Term.
3.2 System Tests. Upon completion of the development phase, Intuit
------------
and CNC shall jointly test the System and CNC Network to ensure compliance with
the Network Specifications and the Performance Standards. The tests and related
acceptance procedures for the System and CNC Network are set forth in the
Development Project Work Statement.
4. Post-Development Provision of Services.
--------------------------------------
4.1 Introduction of Services. Once the development and testing of
------------------------
the CNC Services and the System is completed to Intuit's satisfaction, then
Intuit may announce the availability of the Internet Services in connection with
the release of one or more of the Products in a manner that Intuit shall
determine. If Intuit elects to offer the availability of the Internet Services,
the date that Intuit sets for the release of its first Product offering the
Internet Services shall be the "Release Date," which the parties acknowledge is
October 26, 1995. For an initial period of three years from and after the
Release Date plus the length of any Transition Period pursuant to Section 6.4
(together, the "Service Term"), CNC shall provide the CNC Services and Intuit
shall pay for the CNC Services in accordance with this Agreement. Thereafter,
the Service Term may be extended at the option of Intuit in successive one-year
periods up to a maximum of three additional years, provided that Intuit notifies
CNC in writing of Intuit's election to extend this Agreement at least 120 days
prior to the expiration of the Service Term then in effect. Each twelve month
period during the Service Term commencing on the Release Date, or its
anniversary, shall be known as a "Contract Year," i.e., First Contract Year,
----
Second Contract Year, etc.
---
4.2 Ongoing Operations and Customer Support. With respect to
---------------------------------------
Internet Services offered by Intuit, CNC shall perform the following obligations
during the Service Term:
4.2.1 Customer Logon, Registration and Upgrades. CNC shall logon,
-----------------------------------------
register and upgrade Customers in accordance with the procedures set forth in
Exhibit "C" attached hereto or as the parties may otherwise agree. CNC shall
- -----------
collect and maintain Customer Information in a form available for electronic
access by Intuit and as Intuit may from time to time direct. CNC shall
periodically provide to Intuit Customer Information collected by CNC in a scope
and format reasonably requested by Intuit.
4.2.2 Customer Information. Notwithstanding anything to the
--------------------
contrary in this Agreement, Intuit shall be the sole owner of all Customer
Information, including any and all associated intellectual property rights. CNC
acknowledges that (i) the Customer Information is a "trade secret" under the
Uniform Trade Secrets Act of California, (ii) Intuit has maintained and intends
to maintain the Customer Information as proprietary and confidential
information, and (iii) the unauthorized use, loss or disclosure of such Customer
Information will cause irreparable harm to Intuit. Therefore, notwithstanding
anything to the contrary in this Agreement, during and after the Term hereof,
CNC shall (i) use and copy the Customer Information only for purposes reasonably
related to and as permitted by this Agreement, and not, directly or indirectly,
use the Customer Information for its benefit or the benefit of anyone else, or
in any way against Intuit's interest, and (ii) diligently safeguard the Customer
Information and shall not permit or authorize the disclosure of any of the
Customer Information to any third person or entity, either directly or
indirectly, without Intuit's prior written authorization. Notwithstanding the
above, CNC shall have the right to maintain and use general network usage
statistics including the usage by the Intuit Customers, provided that
6
<PAGE>
such aggregated data does not contain information on individual Customers. CNC
shall return or destroy (and provide a written officer's certificate to such
effect) any Customer Information, and all copies thereof, in any form upon
Intuit's request and, in any event, upon the termination or expiration of this
Agreement. CNC acknowledges that a breach of this section would cause
irreparable harm to Intuit, which would entitle Intuit to seek the relief
described in Section 5.1.3.
4.2.3 Customer Account Management. CNC shall use reasonable
---------------------------
efforts to make detailed usage and billing information available in electronic
format on line to each Customer and Intuit. CNC is responsible for verifying
all Customer credit and billings, and bears the risk of loss for any subsequent
credits given to Customers where such credits are caused by CNC's failure to
perform in accordance with this Agreement.
4.2.4 CNC Customer Support Center. CNC shall establish and
---------------------------
maintain, or cause to be established and maintained, facilities, equipment,
staffing and programming, collectively making up the "Customer Support Center,"
as necessary to collect and maintain the Customer Information, and provide
Internet Services and technical and account support to the Customers and Intuit.
In this regard, CNC shall do each of the following:
4.2.4.1 Plan for, provide, maintain, operate, and manage the
Customer Support Center, including space, equipment, utilities, personnel and
systems. The Customer Support Center shall include a telephonic help desk for
Customers, which will be staffed by knowledgeable CNC employees and/or
subcontractors capable of providing assistance relating to Access and use of the
Internet Services. Such telephone assistance shall be available to Customers on
a continuous basis, twenty-four (24) hours per day, seven (7) days per week.
4.2.4.2 Plan for, acquire, install, maintain, repair, operate,
manage, and expand, improve, or replace hardware as necessary or appropriate to
support and operate the Customer Support Center, including any computer systems,
direct access storage devices, tape units, communications control units, and
associated equipment.
4.2.4.3 Plan for, obtain, install, maintain, operate, and enhance
the operating system software, languages, utilities, and other system software
as necessary or appropriate to support and operate the Customer Support Center.
4.2.4.4 Maintain the Customer Information, including related
Customer Information structures; provide back-up measures, recovery procedures,
file maintenance and expansion, updating, tape storage, management, and control
of space utilization; and provide related data security and administration.
4.2.4.5 Establish and administer change controls, problem
resolution management, and provide planning, availability management,
performance reporting, implementation procedures, and other controls.
4.2.4.6 Notify Intuit reasonably in advance of making any
material changes to the Customer Support Center or CNC Network.
4.2.4.7 Meet as requested with Intuit and evaluate the Customer
Support Center and related Customer technical support services with a view
toward enhancing them to meet the needs and demands of Customers.
4.2.5 CNC Network Performance, Maintenance and Upgrades.
-------------------------------------------------
7
<PAGE>
4.2.5.1 CNC Network Performance. During the Term, the CNC Network
-----------------------
shall perform at a level satisfying or exceeding the Performance Standards.
During the Service Term, upon request, CNC will meet with Intuit to review the
network performance. Subsequent to such a review, Intuit may request that CNC
(i) improve and enhance the CNC Services and operation of the CNC Network
(including increasing capacity and coverage by the addition of Ports and POPs)
in excess of the improvements and enhancements set forth in the Network Plan, or
(ii) develop and maintain the CNC Network so that it is at least comparable to
and competitive with the functions and features available from other Internet
access providers. If CNC declines to make improvements reasonably requested by
Intuit in a timely manner, Intuit may elect to terminate the Agreement as
provided in Section 6.1. Periodic reports on the CNC Network's operations and
performance shall be developed and provided to Intuit as it may reasonably
request, in addition to any other reports required by this Agreement.
4.2.5.2 General Network Maintenance. During the Service Term, CNC
---------------------------
shall do each of the following:
(a) Plan for, obtain, provide, operate, and maintain the CNC Network
facilities and hardware, whether at its central sites or at POPs, hubs or remote
nodal sites or central location sites, including ordering, installing and
maintaining owned or leased telecommunications lines, backbones, tail circuits,
dial-switched services and satellite services, modems, multiplexers,
concentrators, control computers, switching devices, and satellite transmitting
and receiving equipment.
(b) Develop and maintain Internet Protocol interfaces, and
configuration, and provide capacity planning, technology evaluation and
selection, communications tariff evaluation, topology planning, network control
planning and related software development, interface standards development,
protocol conversion and development of protocol converters.
(c) Operate and maintain the CNC Network on a twenty-four hour a day
seven days a week basis, including monitoring the network; provide necessary
repairs, network back-up, problem resolution, and testing; and provide for
recovery of the CNC Network and the physical security of the CNC Network and its
related operating facilities.
(d) Provide and maintain any interfaces between the Intuit Areas and
the Customers (provided that Intuit is responsible for the cost of any direct
phone lines between CNC and Intuit).
(e) Provide library and address maintenance, management, and
administration and such other resources as may be reasonably necessary or
appropriate for the development and maintenance of the database containing the
Customer Information.
4.2.5.3 Telephone Assistance Provided to Intuit. CNC shall maintain
---------------------------------------
a technical help desk for Intuit, which will be staffed by knowledgeable CNC
employees capable of providing technical assistance regarding the CNC Services,
CNC Network and Customer Information. Such telephone assistance shall be
available to Intuit on a continuous basis, twenty-four (24) hours per day, seven
(7) days per week. The help desk also will administer resolution of network
problems encountered by Intuit and the Customers and keep Intuit apprised of the
efforts to be taken to remedy such problems until complete restoration of
service.
4.2.5.4 Annual Service Plans. At least ninety days before the
--------------------
beginning of each Contract Year, Intuit shall prepare and deliver to CNC a non-
binding services
8
<PAGE>
forecast that identifies Intuit's estimated usage and demand requirements for
such period, including estimated capacity requirements and resource use in terms
(for example) of the estimated number of Customers and usage volumes, and
additional Customer Information that will be required by Intuit. CNC and Intuit
shall meet and confer for the purpose of refining the services forecast on a
basis that reasonably takes into account the Customers' expected needs and CNC's
existing and planned resources. CNC shall use its reasonable best efforts to
make available the resources at the level required to support Intuit's
forecasted annual services.
4.2.5.5 Priorities and Response Time. In the event of any
----------------------------
unscheduled downtime of the CNC Network or the System, or problems affecting
the functioning or productivity thereof or the provision of Internet Services or
the CNC Services, CNC shall provide installation and emergency maintenance and
repair service as determined in accordance with the following priority
classifications:
(a) Priority 1: Any problem that interrupts the continued
availability of the CNC Network or CNC Services to Intuit or the Customers, or
causes severe user disservice. In such event, CNC shall take immediate
corrective action regarding the problem, on a continuous basis, twenty-four
hours per day, seven days per week, until the problem is resolved.
(b) Priority 2: A critical problem involving any application or
system of the CNC Network that does not yet, but could if not corrected,
interrupt the continued availability of the CNC Services or cause severe user
disservice. CNC shall take immediate corrective action regarding the problem,
on a continuous basis during normal business hours (eight hours per day, five
days per week), until the problem is resolved.
(c) Priority 3: A problem that does not impair the availability of
the CNC Services or CNC Network significantly, because temporary procedures are
in place to provide acceptable alternative operation of functionality. CNC
shall schedule and work on the class of problem on a time-available basis.
4.2.5.6 Scheduled Downtime. CNC shall provide at least ten days
------------------
advance written notice to Intuit and affected Customers of any
scheduled downtime of the CNC Network or other events that may affect the
availability of the CNC Services. CNC shall schedule major upgrades, downtime,
repairs, or maintenance to the CNC Network during times mutually agreeable with
Intuit.
4.3 Charges for CNC Services.
------------------------
4.3.1 Quarterly Usage Forecasts. Each month, Intuit shall provide
-------------------------
CNC with a non-binding monthly usage forecast for the subsequent three calendar
months containing the information set forth in Exhibit "D" (e.g. in October,
----------- ----
Intuit would provide a usage forecast for each of November, December and
January). The forecasts will be based, in part, on the usage data made
available by CNC.
4.3.2 Service and Customer Charges.
----------------------------
4.3.2.1 Service Charges. The Service Charges are the fees
---------------
payable by Intuit to CNC for the CNC Services based on the Customers' connect
time. If Intuit systematically and fundamentally alters the way it offers and/or
prices Internet access to its Customers, the parties will negotiate in good
faith regarding appropriate adjustments to this Agreement. CNC and Intuit shall,
pursuant to the procedures in Exhibit "D", perform the Monthly Reconciliation to
-----------
determine the Service Charges payable by Intuit. Any delinquent payments by
9
<PAGE>
either party under this Agreement shall bear interest at the rate of 1.5% per
month commencing thirty days after such payment is due.
4.3.2.2 Most Favorable Treatment. During the Service Term but
------------------------
excluding the Transition Period, CNC warrants to Intuit on a continuing basis
that the rates and terms under this Agreement for the CNC Services shall not
exceed those offered by CNC to other CNC customers purchasing the same or fewer
quantities of connect hours for the same or similar services. If CNC offers to
any other similarly situated customer similar work, services, or products at
lesser rates or on more favorable terms, CNC shall immediately notify Intuit of
such circumstances and, thereafter, CNC shall charge Intuit such lesser service
charges and offer such more favorable terms for all remaining CNC Services under
this Agreement.
4.3.3 Customer Charges, Billing and Collection. The Customer
----------------------------------------
Charges are the fees payable by the Customers for the Internet Services provided
by Intuit. Intuit reserves the right, exercised in its sole discretion, to
charge and may charge the Customers additional fees (i.e., an amount greater
----
than the Service Charges) for their access to and use of the Internet Services.
The initial procedures for such charges are set forth in Exhibits "B" and "D"
---------------------
hereto. CNC assumes sole responsibility and risk for establishing credit
accounts, verifying and billing Customers' credit card accounts and billing and
initiating processing for all Customer Charges for the Internet Services as
described in Exhibits "B" and "D". Processing fees paid to third parties for
---------------------
the purpose of processing credit card, debit card or other payment transactions
shall be Intuit's responsibility.
4.3.4 Record Keeping and Audits. CNC shall maintain complete and
-------------------------
accurate books, records and accounts relating to the CNC Services and Internet
Services to support and document all charges, billings, mark-up amounts, and
credits, in accordance with standard accounting principles consistently applied
with respect to prior periods. Intuit's representatives, including any
independent auditor or accounting organization retained by Intuit, shall have
access to such books, records and accounts, upon reasonable notice to CNC, for
purposes of reviewing, verifying and copying such books, records and accounts.
Intuit shall have the right to demand such an audit up to two times in any given
12 month period. If such an audit discloses an under calculation in excess of
five percent (5%) of the amount payable to Intuit, then CNC shall bear the cost
of such examination, and shall promptly correct the calculation of amounts
payable and pay any underpaid amount, plus interest for delinquent payments as
set forth in Section 4.3.2.1 from the date such amount was due and payable.
4.3.5 No Other Payment, Etc. Except as otherwise expressly
---------------------
provided in this Agreement, neither party shall be entitled to payment, cost
reimbursement, or other compensation from the other party in respect of its
performance, and each party shall bear all its own expenses incurred in
rendering performance, including facilities, work space, utilities, management,
personnel, communications, clerical, supplies, and the like.
4.3.6 Taxes. CNC is responsible for promptly collecting and
-----
paying all federal, state, county, services or other taxes, however designated
and whether levied or based upon the CNC Services, exclusive however of taxes
based on Intuit's net income.
4.4 Customer Information and CNC Network Security. CNC shall develop
---------------------------------------------
and implement systems and procedures to maintain strict security of all Customer
Information (including credit card information). Guidelines on the security of
such information is set forth in Exhibit "E" attached hereto. Intuit's
-----------
representatives, upon reasonable advance notice to CNC, may conduct periodic
security audits of CNC's sites and the systems relating to the Internet Services
and CNC Services to determine whether the security mechanisms (physical,
processes, etc.) are sufficient to protect the applicable data.
---
10
<PAGE>
5. Related Covenants.
-----------------
5.1 Confidential Information.
------------------------
5.1.1 Confidential Nature. During the course of this relationship,
-------------------
the parties may disclose to the other certain confidential information orally,
in writing or through facility visits, which information may include, but is not
limited to, financial information or projections; lists of and information about
agents, vendors, suppliers, dealers, customers, potential customers, and
statistical and financial information associated therewith; specifications and
uses of products and services; product research; sales, marketing and strategic
plans; pricing policies; products and availability information; and information
otherwise defined as "trade secrets" under the Uniform Trade Secrets Act of
California (collectively, "Confidential Information"); provided, however, that
Confidential Information does not include information that can be documented as
being known within the industry prior to the Effective Date or information that
becomes publicly available thereafter through no breach of this Agreement by any
party hereto. The parties have maintained and will continue to maintain the
Confidential Information as their own private, proprietary and confidential
information and as their business trade secrets. Sometimes this information may
be stamped "Trade Secret," "Confidential," or with a similar designation, but
failure to do so will not in and of itself impair the classification of
information as Confidential Information.
5.1.2 Restrictions. The Confidential Information contains
------------
valuable business and technical information and constitutes trade secrets, and
the parties acknowledge that the unauthorized use, loss or disclosure of such
Confidential Information will cause irreparable harm to the owner of such
Confidential Information. The parties shall use the Confidential Information
only for purposes relative to and as permitted by this Agreement. During the
Term and for a period of two years thereafter, neither party shall directly or
indirectly use the Confidential Information for its benefit or the benefit of
anyone else, except as otherwise permitted in writing, or in any way against the
other party's interest. Each party shall diligently safeguard the Confidential
Information and shall not, during the Term and for a period of two years
thereafter, disclose, permit the disclosure of, or authorize the disclosure of
any of the Confidential Information to any third person or entity, either
directly or indirectly, unless prior written authorization is granted by the
owner thereof. The parties shall not make any copies of any of the Confidential
Information, except as reasonably required to perform its obligations under this
Agreement, and shall return any such Confidential Information including, without
limitation, all notes, memoranda, records, plans, sketches, or other documents,
and all copies thereof, embodying, regarding or derived from any Confidential
Information, upon oral or written request, and, in any event, upon the
termination or expiration of this Agreement.
5.1.3 Injunctive Relief. The parties acknowledge that a breach of
-----------------
this Section 5.1 would cause irreparable harm to an owning or injured party,
which would not have an adequate remedy at law with respect to disclosure or
threatened disclosure of the Confidential Information. Therefore, in the event
of a breach or threatened breach of the obligations contained in this Section
5.1, either party is entitled to seek the immediate issuance, without notice,
hearing, or bond, of a temporary restraining order precluding the continuance of
the conduct in question and may pursue other injunctive relief.
5.2 Publicity. CNC shall not issue press releases, conduct
---------
promotional efforts or engage in any other publicity of any nature regarding
this Agreement or CNC's relationship with Intuit or disclose any of the terms of
this Agreement without the prior written approval of Intuit, except to the
extent required for regulatory or statutory public reporting purposes.
11
<PAGE>
5.3 Relationship of Parties. The parties acknowledge and
-----------------------
agree that each party has entered into this Agreement as an independent
contractor. Nothing in this Agreement shall be construed as creating any other
relationship between the parties including, but not limited to, any partnership
or joint venture between Intuit and CNC.
5.4 Grant of License. Concurrent with the execution and
----------------
delivery of this Agreement, Intuit and CNC shall execute and deliver a License
Agreement substantially in the form of Exhibit "F" attached hereto (the "License
-----------
Agreement").
5.5 Future Network Services. CNC acknowledges and agrees that
-----------------------
implementation of the CNC Services as contemplated in this Agreement will
require a significant percentage of CNC's available resources. CNC therefore
agrees that from the Effective Date until February 28, 1996, CNC shall not
provide, or enter into any material agreement to provide, telecommunications or
access services to any other companies or engage in any public financing
activities without Intuit's express written consent exercised in its sole
discretion, not to be unreasonably withheld, based on Intuit's evaluation of the
effect of such services or activities on CNC's ability to perform its
obligations under this Agreement. Intuit shall indicate its consent or lack
thereof within five working days of being provided with sufficient information
to make an informed judgment.
5.6 Branding of Services. The Internet Services offered by
--------------------
Intuit, directly or indirectly, shall be branded according to Intuit's
directions, i.e., screen logos, written or electronic communications with
----
Customers, customer service phone announcements, etc.; provided, however, that
----
the welcome pages in the registration process shall provide an attribution that
the network connection services are being provided by and are the responsibility
of CNC. CNC's reproduction or use of any Intuit copyrighted materials,
trademarks or service marks shall be strictly in accordance with the guidelines
provided by Intuit from time to time. CNC hereby acknowledges receipt of
Intuit's current copyright and trademark guidelines. CNC's use of Intuit's
proprietary rights is limited solely in relation to its provision of the CNC
Services pursuant to this Agreement.
5.7 Compliance With Laws and Regulations. Each party shall,
------------------------------------
at its own expense, comply with any governmental law, statute, ordinance,
administrative order, rule, or regulation relating to its duties, obligations,
and performance under this Agreement and shall procure all governmental licenses
and pay all fees and other charges required thereby.
5.8 Appointment of CNC as Billing and Collections Agent. Intuit
---------------------------------------------------
hereby appoints CNC as its agent to bill and collect amounts pursuant to the
procedures set forth in this Agreement owing to Intuit from Customers who have
registered to receive Internet Services; provided, however, that such billings,
receivables and amounts shall be the sole property of Intuit. Intuit may
terminate this appointment and make other arrangements for Customer billing and
collections in its sole discretion.
5.9 Project Manager and Project Technical Coordinators. Each
--------------------------------------------------
party shall designate an initial Project Manager and Project Technical
Coordinator within ten (10) business days of the Effective Date (and such other
managers and coordinators as may be reasonably required), with such changes as
either Party may notify to the other from time to time.
5.10 Financial Information. During the Term, CNC shall provide
---------------------
to Intuit the financial reports and information described in Section 5 of that
certain Warrant Issuance Agreement for Warrants to Purchase Series B Preferred
Stock between the parties hereto.
6. Term and Termination.
--------------------
12
<PAGE>
6.1 Termination on Notice for Intuit Dissatisfaction. If, in
------------------------------------------------
Intuit's judgment, CNC's performance is not satisfactory for any reason
(including but not limited to network access and reliability, features and
capabilities, host operations, customer satisfaction, programming support,
management strength and financial condition) at any time, Intuit may terminate
this Agreement by providing six month written notice of such intention to
terminate.
6.2 Immediate Termination by Intuit for CNC Failure to Meet
--------------------------------------------------------
Minimum Performance Standards. If, in any given month, CNC fails to meet the
- -----------------------------
Minimum Performance Standards for any performance measurement, then Intuit may
terminate this Agreement by providing written notice of such intention to
terminate. Upon receipt of such notice, CNC may immediately provide Intuit with
a detailed corrective action plan and timetable to correct the default and
request a period of 30 days in which to cure the default. Unless Intuit
reasonably believes that CNC cannot or will not promptly and permanently correct
the deficiency and restore the CNC Services, then Intuit will delay the
termination of the Agreement during such 30-day period. If, however, CNC fails
to correct such deficiency during such 30-day period or Intuit subsequently
determines during such period that CNC's proposed corrective action plan will
not be completed within such 30 day period, then Intuit may immediately
terminate the Agreement on further written notice to CNC.
6.3 Mutual Termination Rights Upon Default and Breach.
-------------------------------------------------
6.3.1 Upon the occurrence of any of the following events of
default, after giving written notice to the defaulting party and following the
completion of the cure period set forth in Section 6.3.2, the non-defaulting
party may declare the other party to be in breach of this Agreement and may
immediately terminate this Agreement:
6.3.1.1 the failure of either party substantially
to perform or comply with any material provision of this Agreement;
6.3.1.2 the admission in writing by either party
of its inability to pay its debts as they mature, or the making by either party
of an assignment for the benefit of its creditors;
6.3.1.3 the party becomes insolvent as evidenced
by the fact that the party is generally not paying its debts as they become due
(unless such debts are the subject of a bona fide dispute) and/or the sum of
such party's debts is greater than all of such party's property valued at fair
market value;
6.3.1.4 the filing of a petition under any
bankruptcy act, receivership statute or like law or statute as they now exist or
may be subsequently amended by either party, or the filing of such a petition by
any third party against either party, or the making of an application for a
receiver by either party, where such petition or application is not dismissed or
otherwise favorably resolved within sixty days; or
6.3.1.5 in addition to the foregoing, with respect
to CNC, the breach by CNC or any of its majority shareholders of their
respective obligations under the Commitment Agreements if such breach is not
cured within the applicable cure period contained in the Commitment Agreements.
6.3.2 Upon receipt of a notice of default, the defaulting
party will have a period of thirty days in which to cure the default. If the
non-defaulting party does not believe that the default has been cured during the
foregoing cure period, then the non-defaulting party may
13
<PAGE>
terminate this Agreement immediately upon written notice to the defaulting
party. If a defaulting party repeatedly defaults under this Agreement (as
evidence by the issuance of a notice of default by the other party two or more
times in a twelve month period), then the non-defaulting party may elect to
terminate this Agreement on thirty days advance written notice without the
defaulting party having a right to cure. During any notice and cure period,
both parties shall continue to be bound by all the terms and conditions of this
Agreement.
6.3.3 The rights and remedies of the non-defaulting party
are not exclusive and are in addition to any other rights and remedies it may
have available under law or equity. Notwithstanding anything to the contrary
contained herein, the rights and obligations of the parties pursuant to Sections
1, 2.3, 4.2.2, 4.3, 4.4, 5.1, 5.2, 5.4, 5.6, 6.4, 7.3, 7.4, 7.5, 7.6 and 8 will
survive any termination or expiration of this Agreement.
6.4 Transition Period. Notwithstanding the expiration or
-----------------
termination of this Agreement for any reason, at its election, Intuit may
request, and CNC shall continue to provide, the CNC Services on a non-exclusive
basis for a period of up to one year beyond such expiration or termination on
the terms and conditions in effect at that such time (the "Transition Period").
In the event of a termination or expiration of this Agreement, CNC shall
cooperate in planning and executing with Intuit (each party to bear its own
costs) a transition plan for the transfer of the Internet access services from
CNC to Intuit or Intuit's designee, and Intuit shall be entitled to use such CNC
Confidential Information as may be necessary to effect such transition. Each
party shall take any actions or deliver any documents reasonably requested by
the other party to effect the expiration or termination of this Agreement, and
the transfer of access services.
6.5 Force Majeure Extension.
-----------------------
6.5.1 Definitions. For the purposes of this Section 6.5, the
-----------
following definitions shall apply:
6.5.1.1 A "Force Majeure Event" shall be a delay by CNC
in its performance of, or a failure by CNC to perform pursuant to, this
Agreement where such delay or failure is caused by an act of God, acts of civil
or military authority, fire, flood, strikes, war, epidemics or some other
unforeseeable cause beyond CNC's reasonable control and without its fault or
negligence that adversely affects the availability of services by all
telecommunications and/or Internet access services providers like CNC, such as a
major malfunction of a public telecommunications network in the Northeastern
region of the United States.
6.5.1.2 A "Termination Event" shall mean a circumstance
in which Intuit has given notice of default to CNC pursuant to Section 6.2 or
Section 6.3.1.1 because of CNC's failure to provide the CNC Services in
accordance with this Agreement.
6.5.2 Extension of Cure Period. If the primary cause of the
-------------------------
Termination Event is a Force Majeure Event, then Intuit agrees to provide CNC
with an overall cure period of sixty days from the date of Intuit's notice of
default or termination (the "Extended Cure Period") subject to CNC's
satisfaction of the following conditions: (1) CNC shall immediately notify
Intuit of any circumstances which result (or may result) in a Force Majeure
Event (in advance when the situation permits), (2) CNC shall (i) immediately
develop and implement a corrective action plan designed to promptly reestablish
the CNC and Internet Services to Intuit and the Customers, and (ii) use its best
efforts to avoid, mitigate or remove such circumstances and to reestablish the
CNC and Internet Services at its expense by providing alternate access services
to Intuit and its Customers, e.g., the establishment of toll free 800# service,
----
(3) CNC shall provide detailed updates upon request to Intuit of CNC's progress
in executing the corrective action plan and restoring the
14
<PAGE>
CNC and Internet Services, and (4) CNC shall immediately continue its
performance in accordance with this Agreement whenever such conditions are
removed.
6.5.3 Consequences of Continuing Default. Notwithstanding the
----------------------------------
provisions of Section 6.5.2, Intuit may immediately terminate this Agreement in
accordance with the original time periods and procedures set forth in Section
6.2 or 6.3.1.1, as applicable, if (1) CNC fails to cure any breach or default
within the Extended Cure Period, or (2) CNC otherwise breaches the conditions
for Intuit's grant of the Extended Cure Period, such as where CNC fails to use
its best efforts to reestablish services to Intuit and its Customers in the case
of a Force Majeure Event.
7. Representations, Warranties and Indemnities.
-------------------------------------------
7.1 No Conflicts. Each party hereto represents and warrants to the
------------
other that the execution, delivery, and performance of this Agreement by such
party will not conflict with or result in any breach of, or constitute a default
under, any material agreement, instrument or undertaking to which it is a party
or by which any of its property is bound.
7.2 Authority. Each party hereto represents and warrants to the
---------
other that it has the power to make and carry out the terms of this Agreement
and each has taken, and will take, all actions, corporate or otherwise,
necessary or advisable to authorize the execution, delivery and performance of,
and to perform, its respective obligations under this Agreement.
7.3 No Infringement. CNC represents and warrants on a continuing
---------------
basis that neither the CNC Code, nor the exercise by Intuit of any of the rights
granted under this Agreement, will infringe any intellectual property right of
any third party and that there is no litigation or claim pending or, to CNC's
knowledge, threatened relating thereto. CNC shall and hereby does indemnify and
defend Intuit and hold it harmless from and against any and all claims,
liabilities, losses, costs and expenses including, but not limited to,
reasonable attorneys' fees and costs of suit, incurred by Intuit as a result of
or arising from any claim or proceeding made or brought against Intuit that the
use, reproduction, marketing, sale, sublicensing or distribution of CNC Code or
use of the CNC Services, infringes any patent, copyright or other rights of any
third party, or that the CNC Code or CNC Services are defective. This indemnity
shall not apply to the extent such claims result from Intuit's own modification
or alteration of the CNC Code. Intuit shall promptly notify CNC of any such
claim(s) and shall, at CNC's request and expense, cooperate in the investigation
and defense of such claim(s).
7.4 Indemnification by Intuit. Intuit shall and hereby does
-------------------------
indemnify and hold harmless CNC and its officers, directors, stockholders,
employees and any other agents from any claim, demand, liability, cost or
expense they may incur to any third party relating in any manner to the use of
the CNC Network by Intuit or its Customers (except to the extent such claims or
demands result from CNC's negligence, gross negligence or willful misconduct or
are otherwise indemnifiable by CNC pursuant to this Agreement). CNC agrees to
give Intuit prompt notice of any claim or demand to which it becomes aware as to
which this Section may apply and to cooperate with Intuit in the defense of such
claim or demand.
7.5 Indemnification by CNC. CNC shall and hereby does indemnify and
----------------------
hold harmless Intuit and its officers, directors, stockholders, employees and
any other agents from any claim, demand, liability, cost or expense they may
incur to any third party relating in any manner to the use, operation or
malfunction of the CNC Network by CNC or customers of CNC (except to the extent
such claims or demands result from Intuit's negligence, gross negligence or
willful misconduct or are otherwise indemnifiable by Intuit pursuant to Section
7.4 of this Agreement). Intuit agrees to give CNC prompt notice of any claim or
demand to which it becomes aware as to
15
<PAGE>
which this Section may apply and to cooperate with CNC in the defense of such
claim or demand. During the Service Term, CNC shall use commercially reasonable
efforts to obtain, maintain and provide a reasonable amount of insurance against
claims covered by this indemnification provision naming Intuit as an additional
named insured and, if obtained, provide evidence of the same to Intuit.
7.6 Limitation of Liability. EXCEPT PURSUANT TO THEIR RESPECTIVE
-----------------------
INDEMNIFICATION OBLIGATIONS SET FORTH IN SECTIONS 7.3, 7.4 AND 7.5 ABOVE,
NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR INCIDENTAL, CONSEQUENTIAL,
INDIRECT, OR SPECIAL DAMAGES OF THE OTHER PARTY ARISING OUT OF THIS AGREEMENT.
8. Miscellaneous.
-------------
8.1 Notices. Except as otherwise specified herein, all notices,
-------
requests, demands or communications required hereunder shall be in writing and
delivered personally, or sent either by the equivalent of U.S. certified mail,
postage prepaid return receipt requested or by overnight delivery air courier
(e.g., Federal Express), or sent by facsimile (if such facsimile notice is
- -----
followed immediately by a letter delivered personally or by overnight delivery
air courier), to the parties at their respective addresses set forth on the
signature page hereto. All notices, requests, demands, or communications shall
be deemed effective immediately upon the earlier of personal delivery or
confirmed facsimile transmission, three days following deposit in the mails as
set forth above, or one day following delivery to the overnight delivery air
courier in accordance with this Section. The parties may change their
respective points of contact, or addresses or phone or facsimile numbers for
notification from time to time on five days advance written notice pursuant to
the procedures set forth in this section.
8.2 Entire Agreement. This Agreement will not be effective unless
----------------
and until the parties have fully executed and delivered this Agreement. This
Agreement may be executed by the parties in separate counterparts, each of which
when so executed and delivered shall be an original, but all such counterprats
shall together constitute one and the same instrument. This Agreement
constitutes the entire understanding between the parties with respect to the
provision of the CNC Services contemplated herein and supersedes all prior
agreements, written or oral, between the parties hereto with respect thereto.
The provisions of the exhibits to this Agreement are supplementary to the body
of the Agreement and shall be interpreted in such a manner; provided, however,
that in the event of an irreconcilable conflict arising between the provisions
of the exhibits and the body of this Agreement, the exhibits shall prevail.
This Agreement shall not be modified except in a writing signed by and exchanged
between both of the parties and expressly referencing this Agreement. Any
additional or different terms in the parties communications, whether
acknowledgments, invoices or otherwise, are hereby deemed to be material
alterations and notice of objection to them and rejection of them is hereby
given. No waiver of any provision of the Agreement or any right or obligations
of either party hereunder shall be effective, except pursuant to a writing
signed and delivered by the party waiving compliance. Any such written waiver
shall not be construed as, or constitute, a continuing waiver of such breach, or
of other breaches of the same or other provisions of this Agreement. Neither
party shall by mere lapse of time without giving notice or taking other action
hereunder be deemed to have waived any breach by the other party of any of the
provisions of this Agreement.
8.3 California Law. This Agreement shall be governed by and
--------------
construed in accordance with the substantive laws of the State of California
(not including its choice of law provisions).
16
<PAGE>
8.4 No Assignment. Neither party shall assign its rights or delegate
-------------
its obligations under this Agreement without the prior written consent of the
other party hereto; provided, however, that Intuit may assign this Agreement, in
whole or in part, to any subsidiary or affiliate. This Agreement shall be
binding on all successors and permitted assigns of the parties.
8.5 Severability. If any provisions of this Agreement shall be held
------------
by a court, arbitrator or other tribunal of competent jurisdiction to be invalid
or unenforceable, such provisions shall be deemed valid and enforced to the
maximum extent permissible and the remaining portions of this Agreement shall
remain in full force and effect.
8.6 No Third Party Beneficiaries. Except for permitted assigns, this
----------------------------
Agreement does not create, and shall not be construed as creating, any rights
enforceable by any person or entity not a party to this Agreement; provided,
however, that any subsidiary or affiliate of Intuit may use the CNC Services or
offer Internet Services using the CNC Network on the terms and conditions set
forth in this Agreement.
8.7 Construction. The parties acknowledge and agree that the terms
------------
hereof reflect extensive negotiations between the parties and that this
Agreement shall not be deemed, for the purpose of construction and
interpretation, that either party drafted this Agreement. Each party is
responsible for paying its own legal and professional fees and costs with
respect to the negotiations, execution and performance of the Agreement. The
headings used in this Agreement are for convenience only and shall not be
considered in its interpretation.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
on the Execution Date and agree that is shall be effective as of the Effective
Date and it shall be deemed accepted and made in San Diego, California.
Execution Date: December 11, 1995
INTUIT INC. CONCENTRIC NETWORK CORPORATION
By: /s/ William Harris By: /s/ Henry Nothhaft
------------------------------ ---------------------------------
William Harris, Executive Vice Henry Nothhaft, President and CEO
President
Address: 6256 Greenwich Drive Address: 10590 N. Tantau Avenue
San Diego, CA 92122 Cupertino, CA 95014
17
<PAGE>
<TABLE>
<CAPTION>
LIST OF EXHIBITS
- ----------------
<S> <C>
A - CNC Network
B - Development Project Work Statement
C - CNC Network Operations and Customer Service
D - Service and Customer Charges
E - Security Guidelines
F - License Agreement
</TABLE>
18
<PAGE>
EXHIBIT "A"
-----------
CNC NETWORK
A. Current CNC Network Structure: The general description of the CNC
-----------------------------
Network is depicted in Attachment A-1 hereto and in that certain CNC Private
Placement Memorandum dated November 3, 1995 (the "PPM"). Additionally, an
identification of certain material equipments and systems comprising the CNC
Network are identified in that certain Master Lease between CNC and Racal-
Datacom, Inc., dated August 4th, 1994. For the purposes of this Agreement, the
CNC Network shall be deemed to be the end-to-end communications and related
information systems (a) beginning at either the local number of a POP, or the
local exchange number in the case of someone using a Non-POP Access, and (B)
ending at the Intuit Systems or Intuit Areas.
B. Points of Presence. A list of the current POPs (and their associated
------------------
Ports) operated by CNC in the continental United States and Canada is set forth
in the PPM and in Attachment A-1 hereto, which information shall be updated and
--------------
provided to Intuit as it changes. Further, pursuant to the terms of this
Agreement, CNC shall do each of the following:
1 Increase the number of Ports in the CNC Network in the
continental United States to at least [*] Ports by January 1, 1996; provided,
that CNC shall use all commercially reasonable efforts to increase the number of
such Ports to at least [*] by January 1, 1996.
2 Expand, improve and maintain on an ongoing basis the CNC
Network to cover the top 150 metropolitan areas in the continental United States
(determined by personal computer ownership statistics developed and published by
International Data Corporation (IDC) from time to time) and, within each such
metropolitan area, provide "local access" (i.e., without message unit charges)
----
for at least 92% of the general population. CNC has used commercially
reasonable efforts to accomplish the foregoing expansion by the Execution Date
of the Agreement and, within ten days of the Execution Date, shall accomplish
the foregoing expansion of coverage. In the United States, a "metropolitan
area" shall mean the metropolitan/geographic regions used by IDC in publishing
its statistics.
3 Provide local access to the CNC Network for the Intuit Customers
in the seven largest Canadian metropolitan areas (as measured by population) by
November 1, 1995; provided, that CNC shall use all commercially reasonable
efforts to provide such local access to such Canadian metropolitan areas by
October 1, 1995. In Canada, a "metropolitan area" shall mean the geographic
areas as mutually agreed between the parties or, in the absence of an agreement,
based on Canadian government census areas.
4 Cause the CNC Network to consistently support modem speeds up to
28,800 bps, and to be enhanced to be competitive with industry standards that
develop over time and that reflect the modem speeds used by Intuit's Customers.
Notes:
(1) Local access commitments made by CNC above may be provided either
via the installation of a physical POP or by use of a Virtual Local Access
("VLA") arrangement, at CNC's option. A VLA is defined as the provision of
local dial access for a customer to gain local access to the CNC Network via a
local phone number that is call forwarded to a modem facility that is centrally
located. The total number of modems (ports) at the central facility shall be
sized to support the aggregate of all VLAs being supported (i.e., as if each VLA
----
is a POP).
- ----------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
19
<PAGE>
(2) In calculating the number of Ports serving an area, the parties
shall take into account any "Port equivalents" offered by a VLA arrangement,
i.e., CNC may have fewer physical Ports in a VLA arrangement then it would
- ----
otherwise require if it deployed physical POPs to serve VLA territories. (For
example: 50 POPs with 10 Ports each may be sufficiently served by a single
central VLA termination point of 250 Ports.)
C. Performance Standards.
---------------------
1 General Concept. CNC acknowledges that Intuit requires access
---------------
for its Customers to the Intuit Areas and Internet that is reliable and rapid,
has the ability to handle peak demands, is flexible in terms of future expansion
for geographic coverage, functional enhancements and capacity increases, and can
rapidly and accurately handle all registration, billing and customer service.
The parties have established the Performance Standards set forth in this
Agreement as a benchmark for initial operations, but CNC acknowledges and agrees
that such standards may increase in the future as customer expectations heighten
and the Internet access/services industry develops. Therefore, during the Term,
the parties shall cooperate and act in good faith in evaluating, developing and
agreeing on such changes in the Performance Standards.
2 Performance Standards.
---------------------
a. Network Accessibility Performance Standard. The CNC Network
------------------------------------------
will exhibit an average busy rate below the following Performance Standard for
Intuit Customers attempting to access the CNC Network:
Target Performance Standard: [*]%
Minimum Performance Standard: [*]%
Comments:
--------
(1) The busy rate at each POP will be determined statistically by
comparing (A) the average hourly traffic load for each of CNC's
three busiest hours during a month to (B) the POP's traffic
capacity at [*] grade-of-service using standard Erlang B traffic
statistics for the number of active Ports at the POP. The average
of this data will yield that POP's average busy rate for the
month. By way of example, assume the average hourly traffic load
for the 3 busiest hours for the San Francisco POP (with an average
of 72 ports ) during June 1995 was 61.0, 58.0, and 53.5 Erlangs (#
of hours of traffic through that POP per hour), resulting in an
average of 57.5 Erlangs over the three busiest hours of the month.
Using the standard Erlang B tables, a 72 port hunt-group
supporting 57.5 Erlangs of traffic extrapolates to 0.97% which
produces a P.01 grade of service, i.e., the POP's average busy
----
rate for the month. (sample Erlang B tables are attached hereto
as Attachment A-2.)
--------------
(2) Then, the weighted average busy rate for the CNC Network will be
computed across all POPs. The weighted average will be calculated
based on the number of Ports at each POP. By way of example,
assume the CNC Network only had 5 POPs with the following number
of ports and average monthly busy rates as calculated in 2a(1):
- ----------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
20
<PAGE>
<TABLE>
<CAPTION>
POP Ports Avg Busy
- ----- ----- --------
<S> <C> <C>
1 24 .035
2 36 .015
3 48 .025
4 10 .005
5 72 .010
</TABLE>
The weighted average busy rate for this 190 port network as a
whole is .01763 (or 1.763%).
(3) The weighted average busy rate calculated above will yield a
number which will be compared to the applicable Performance
Standard to determine whether or not CNC has met its Network
Accessability performance goal for the month. By way of example,
comparing the weighted average busy rate of P=.01763 to the Target
Performance Standard of [*] reflects that CNC has performed better
than targeted on this performance metric for the month of June.
b. Network Processing Capacity Performance Standards (Latency).
-----------------------------------------------------------
At peak periods of the day, the CNC Network latency shall meet the following
Performance Standards as measured on a monthly basis:
Target Performance Standard: [*] milliseconds .
Minimum Performance Standard: [*] milliseconds.
Comments:
--------
(1) CNC will test the CNC Network for latency at least 3 days per
week during the three busiest hours of the day as determined either a) by the
prior month's three busiest hours EST (e.g., 10, 11, 12 PM EST) of the CNC
----
Network in general, or b) by the three busiest hours of use by Intuit
subscribers) if CNC can calculate the Intuit-specific busy hours. Each day's
test will include a series of 10 or more ICMP "Ping" tests containing 50 bytes
of payload from a CNC host in either Bay City, MI or Cupertino, CA to a router
in each of at least 50 of CNC's U.S. POP sites. The average round-trip
latency of each sampled POP (minimum of 10 samples per POP per test) will be
computed. Once a month, the average, 95th, and 90th percentile of all sampled
POP's average latencies will be computed and compared against the Performance
Standards.
(2) By way of example, assume the network only had 5 POP sites. A
sample of 10 Ping tests are run at 11PM EST on September 15th from Bay City to
each of these 5 POPS with the following results:
<TABLE>
<CAPTION>
POP Ping Samples (in milliseconds) Average
- ----- --------------------------------------- -------
<S> <C> <C>
1 100 120 150 200 275 150 120 120 100 090 142.5
2 085 095 100 120 110 175 300 100 090 105 128.0
3 110 145 090 100 095 080 095 100 110 105 103.0
4 200 220 250 190 275 245 255 280 200 275 239.0
5 100 090 095 105 095 100 105 100 110 105 100.5
-----
</TABLE>
- ----------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
<TABLE>
<S> <C> <C>
Overall Average 142.6
</TABLE>
Assume a similar test was conducted on 15 other days during the month
yielding a total of 80 sample averages. At the end of the month, the
average (A) and standard deviation (SD) of the 80 data samples would
be computed. Using elementary statistics, the 95th percentile can be
computed as "A / (1.65 x SD)", and the 90th percentile would equal "A
/ (1.25 x SD)".
c. Customer Service/Support Performance Standards. Within ten
----------------------------------------------
days of its receipt of CNC's monthly usage reports, Intuit will develop and
provide to CNC a non-binding forecast of anticipated customer service volumes
(i.e., number of calls) for the following month. So long as actual call volumes
- -----
are not more than [*] greater than Intuit's forecasted call volumes, the
following Performance Standards shall apply.
(1) Occurrence of Busy Signals on Customer Calls
--------------------------------------------
Service calls by the Customers to the CNC service center (or its
chosen outsourcer) shall experience a busy signal no more often than
the following Performance Standards:
Target Performance Standard: [*] of the total calls received.
Minimum Performance Standard: [*] of the total calls received.
Comments:
--------
(a) The busy rate will be determined by a) actual busies as
reported by the PBX delivering calls to the Intuit hunt group at CNC,
or b) by a statistical estimate of busies based on traffic volume
delivered to Intuit trunk group on a weighted average basis across the
month's two busiest hours of each day (i.e., approximately 60 samples
----
per month).
(b) CNC shall advise Intuit of its automatic call dispatch (ACD)
system's ability to produce this information in the format
required for analysis, provided that CNC will provide any
additional analysis not performed by the ACD.
(2) Average Speed of Answer (ASA)
-----------------------------
Service calls to the CNC service center (or its outsourcer) shall,
once answered by CNC's ACD system, experience an ASA no longer than
the following Performance Standards:
Target Performance Standard: within [*] minutes
Minimum Performance Standard: within [*] minutes
Comments:
--------
(a) First, the ASA will be computed for Intuit's trunks on a
daily basis. Then, the ASA for each month will be computed as the
weighted
- ----------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
22
<PAGE>
average of the daily ASAs where the weighted average of the daily ASAs
is the total number of calls offered each day compared to the total
number of calls for the month. By way of example, assume the
following statistics for a given month:
<TABLE>
<CAPTION>
Day Calls Offered ASA Calls Offered x ASA
- ---- ------------- --- -------------------
<S> <C> <C> <C>
1 100 1.25 mins 125.0 call-mins
2 120 2.12 mins 254.4
3 150 1.97 mins 295.5
"
"
"
30 220 1.75 mins 385.0
--- -----
590 calls 1,059.9 call-mins/590 calls = 1.80 min ASA
------------
</TABLE>
If this data represented all 30 days, then the ASA for the month
would be 1.8 minutes which would be compared against the [*] Target
Performance Standard.
(3) Customer Satisfaction Ratings
-----------------------------
Customers shall report a satisfaction with CNC's customer
service (provided directly or indirectly) meeting or exceeding
the following Performance Standards:
Target Performance Standard: [*] on a scale of [*], or the
standard set for either internal or external call centers supporting this
service.
Minimum Performance Standard: [*] on a scale of [*], or the
standard set for either internal or external call centers supporting this
service.
Comments:
--------
(a) Intuit and CNC shall jointly develop and agree on a
customer satisfaction survey and survey methodology, and
update it as required during the Term of the Agreement
to reflect changes in customer expectations and the
market for Internet Services.
(b) The survey will be conducted periodically (but no less
often than monthly), as jointly agreed between CNC and
Intuit.
(c) Intuit will bear the cost of developing and
administering the survey. If Intuit fails to administer
the survey in any given month, CNC shall be assumed to
have satisfied the Target Performance Standard for that
month.
D. Corrective Action and Financial Penalties. If CNC fails to satisfy
-----------------------------------------
the Performance Standards set forth in Section C (above), then it shall take the
corrective actions and be subject to the financial penalties described below.
However, the corrective actions and financial penalties described in this
Exhibit "A" are in addition to, and not in limitation of, any other rights that
Intuit has
23
- ----------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
pursuant to the Agreement including, but not limited to its termination rights
pursuant to Section 6 of the Agreement.
1 Corrective Action. If CNC's actual performance in any given
-----------------
month falls below the Target Performance Standard for any of the aforementioned
performance standards, then CNC will use its best efforts to enhance and improve
the CNC Network and its operations so as to reasonably assure that the Target
Performance Standard will be met in the next following and subsequent months.
Such corrective action, by way of example and not of limitation, could include
CNC making available 800# access numbers to Customers who are experiencing
excessive busies when accessing local POPs or adding additional incoming lines
for Customers who are experiencing excessive busies on customer service calls.
2 Financial Penalty.
-----------------
a. Background. The parties acknowledge that problems will
----------
occur in the start-up of the CNC and Internet Services in projecting customer
requirements and in adjusting to differences in actual versus forecasted usage
levels. The assessment of immediate financial penalties to CNC may not serve
either party's best interests because of the potential adverse effect on the
ability of CNC to improve the CNC Services in the short term. Additionally, the
parties' desire to implement a mechanism to ensure that CNC is motivated to
devote the effort required to correct deficiencies in its actual versus targeted
performance, but not to inhibit a motivated CNC from achieving the Performance
Standards. Therefore, the parties will develop mutually satisfactory
forecasting, tracking, reporting and review mechanisms consistent with the
procedures set forth in Section b. below during the initial months of the
Agreement. By May 1, 1996, the parties shall also agree on a methodology to set
and assess financial penalties for CNC's failure to achieve the Performance
Standards. The structure to assess such financial penalties against CNC will
include the consideration of the following factors: (i) CNC's past and current
performance, (ii) the rate of progress CNC has/is making toward achievement of
the Target Performance Standards, (iii) the impact of missed targets on the
Customers and Intuit, (iv) the root causes of CNC's performance deficiencies,
and (v) the willingness, motivation and attitude of CNC in promptly remedying
any performance deficiencies.
b. Review Process.
--------------
(1) CNC and Intuit will conduct a joint Operations
Review of the CNC Network and CNC Services on a monthly basis during the first
six months of the First Contract Year (the "Implementation Phase") at a mutually
agreed location. At this Operations Review, CNC will present Intuit with the
status of the CNC Network, Performance Standards and Customer Service
performance for the prior month, a trend line showing the history of each
Performance Standard, an analysis of the root cause of any Performance Standard
that fell below the Target Performance Standard and an action plan for
correction of any such deficiency. These Operations Reviews are intended to be
a joint learning session whereby the parties can continuously improve the
quality of the overall CNC Services and Internet Services.
(2) Intuit may, at its option, request CNC to alter
its action plan for the correction of deficiencies if, in Intuit's judgment, the
proposed action plan is insufficient to correct the deficiency in a timely
manner.
(3) During the Implementation Phase, CNC and Intuit
shall cooperate and work diligently in performing their respective
responsibilities under the Agreement, including the correction of problems
causing CNC to fail to satisfy the Performance Standards and addressing
excessive or unacceptable levels of Customer complaints. If CNC does not
correct or,
24
<PAGE>
in Intuit's good faith judgment, make sufficient progress to correct such
performance deficiencies or resolve such customer complaints despite the
parties' cooperation, then Intuit may terminate the Agreement, in addition to
exercising any of its rights provided in the Agreement. In such event, CNC
agrees to assist Intuit in transitioning the CNC Services to Intuit or its
designee consistent with the transition procedures set forth in the Agreement.
During the first four months following the commencement of the Transition
Period, Intuit's payments to CNC for Service Charges shall be reduced to [*]
per hour for all Customers/Service Categories. If the transition is not
completed by Intuit within the first four months of the Transition Period, then
the Service Charges will revert to the levels specified in Exhibit D until the
transition is completed. If Intuit chooses to terminate the Agreement, then CNC
will promptly deliver to Intuit the source code for all Intuit registration
server software (except to the extent such source code is owned by third parties
and cannot be delivered by CNC, as may be the case with certain software
development tools) at no cost to Intuit and otherwise perform its obligations
set forth in the Agreement.
(4) By the end of the Implementation Phase, Intuit and
CNC will jointly agree to continue the Operations Reviews as outlined above, or
agree on some other mutually acceptable review and improvement process.
(5) By the end of the Implementation Phase, Intuit and
CNC will jointly agree on (i) a process for determining what and how financial
penalties will be assessed by Intuit against CNC for CNC's failure to achieve
the Performance Standards, and (ii) the amount of the penalty. Any financial
penalties assessed by Intuit against CNC will be made only after a penalty
review conference attended by senior managers of both CNC and Intuit and the
setting of such penalties shall give due consideration to the factors described
above. CNC will not be subject to financial penalties for failure to meet
Performance Standards in any month that the actual CNC Network usage or customer
service call volume relating to Intuit Customers exceeds Intuit's initial
forecast for such month by more than [*]. For example, if Intuit's December 1995
forecast for January, February and March estimates that March 1996 CNC Network
usage will be [*] hours and the actual CNC Network usage by the Customers is [*]
hours, then CNC will not be subject to financial penalties based on its failure
to achieve the applicable Performance Standards for March.
5. Significant Service Interruptions. In addition to its rights to
---------------------------------
terminate the Agreement pursuant to Section 6, Intuit may immediately give
notice of termination of the Agreement if either of the following Service
Interruptions occur, subject only to CNC's rights relating to a Force Majeure
Event pursuant to Section 6.5 (if applicable):
1 A "Network Availability Service Interruption" which shall mean a
service interruption whereby the CNC Network is available for less than ten
hours during any given 48 hour period to more than [*] of the Customers.
2 A "Customer Support Service Interruption" which shall mean a
service interruption whereby customer service or support is available for less
than ten hours during any given 96 hour period to more than [*] of the
Customers.
Attachments:
- -----------
A-1: Network Description (3 pages); List of current CNC POPs and related Ports
(5 pages)
A-2: Sample Erlang B Table (2 pages)
25
- ----------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT "B"
-----------
DEVELOPMENT PROJECT WORK STATEMENT
1. Project Coordination
--------------------
Project Managers:
----------------
Intuit: Jennifer Jones-Hall
CNC: John Peters
The Project Manager of each party shall be responsible for arranging all
meetings, visits and consultations between the parties that are of a non-
technical nature. They shall also be responsible for receiving all notices
under this Agreement and for all administrative matters such as invoicing
and payments. All amendments to the Agreement must be signed by an officer
of the respective party.
Technical Coordinators:
----------------------
Intuit: Kim MacPherson
CNC: Mike Sharmon
The Technical Coordinator of each party shall be responsible for technical
and system performance matters, and the transmission and receipt of
deliverables and technical information between the parties.
The designation of a party's Project Manager or Technical Coordinator may
be changed from time to time by written notice to the other party.
2. Project Description. The parties will perform the activities associated
-------------------
with hardware, software and systems development related to the actions generally
described and on the timetable set forth in "Production Schedules" developed by
Intuit based, in part, on supporting production schedules developed and provided
to Intuit by CNC, an example of which is attached hereto as Attachment B-1. The
--------------
Production Schedule shall be modified and updated by the parties as requirements
change. Each party is responsible for providing the number of trained
personnel, facilities and other resources necessary to support the deliverable
deadlines. Each party will be responsible for its own expenses associated with
its performance. Because of the short deadlines associated with the initial
Development Project, the parties will work diligently and in good faith to
develop on a continuing basis all necessary functional and technical
specifications of devices, software code and other deliverables, including any
specific enhancements that may be sought. Each party will cooperate in
developing, performing and/or delivering any reports, reviews, inspections, and
tests to be conducted.
3. Beta Testing Procedures. The description of and schedule for Beta testing
-----------------------
of the System and its components shall be described in "Test Schedules"
developed by Intuit based, in part, on supporting production schedules developed
and delivered to Intuit by CNC . Test Schedules shall be modified and updated
as requirements change. On an ongoing basis, the parties shall review, inspect
and test the deliverables and the performance of the System (including the CNC
Network, e.g., internal quality assurance testing of CNC components such as
----
registration server, billing and account management systems, reconciliation
process, security, etc.) in order to determine whether
---
27
<PAGE>
such comply with the specifications and performance standards therefor. To the
extent that any deliverables fail beta testing, the parties shall use their
reasonable best efforts to correct any problems or defects, which corrections
shall not be deemed completed until the parties determine in good faith that
such meet all applicable specifications and performance standards. Each party
will be responsible for its own expenses associated with its performance.
4. Ongoing System Development. CNC acknowledges that the Internet Services
--------------------------
offered by Intuit will be developed, modified and enhanced during the Term of
the Agreement as, for example, when any supplier of Intuit's Internet browser
software revises its software. Therefore, consistent with its other obligations
pursuant to the Agreement, CNC shall work with Intuit and Intuit's other
suppliers or consultants to improve, modify or take other actions necessary or
reasonable to support the Internet Services over the Term of the Agreement.
Among other things, this support may involve subsequent development projects,
beta testing and service or product introductions on the following terms:
a. CNC will agree to pass-through [*] any network/system
improvements made available to customers at large.
b. CNC will agree to maintain/fix-bugs in the existing Intuit
registration server and "free" account login/screening servers for the First
Contract Year of the Agreement [*]. CNC maintenance for the Second and Third
Contract Years will be offered on a T&M basis at the rates indicated below
c. New feature development (including the registration server) requested
by Intuit will be provided at the rate of [*] per staff-month or [*] for
the First Contract Year, increased by no more than [*]/year for the Second and
Third Contract Years of the Agreement. These charges will become effective as
of the Execution Date of this Agreement (i.e., CNC will eat the development
costs-to-date on the registration/login servers).
d. If CNC and Intuit can not agree on the price, schedule or scope of the
new feature development for the registration server software, then Intuit may
purchase a non-exclusive source code license of the software for [*] and request
CNC to provide facilities management of an Intuit-owned server for a fee of [*]
per server. CNC will provide, at Intuit's request, up to two engineering staff
weeks of time at [*] to assist in the transition of the source code to Intuit's
engineers. It is understood that the source code and any accompanying
documentation is being delivered "as is" on the date of requested delivery.
e. CNC agrees to implement the Netscape "Cookie" functionality at no
additional charge in a mutually agreeable timeframe (target date is December 1,
1995).
(f) CNC will advise Intuit in advance if CNC believes that development or
support services requested by Intuit are chargeable to Intuit.
Attachments:
- -----------
B-1 - Example of Production Schedule
28
- ----------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT "C"
-----------
CNC NETWORK OPERATIONS AND CUSTOMER SERVICE
1. Network Operation. CNC is responsible for all ongoing on-line network and
-----------------
related operations such as customer logon procedures, registration, customer
database management, isolation of Customer Information from other data,
procedures regarding access/services upgrades, system maintenance, network
monitoring, surveillance, capacity planning, failure and contingency procedures,
etc.
- ---
2. Customer Service. Intuit's goal is to provide exceptional customer support
----------------
with respect to the Internet Services. The parties acknowledge that the
customer support model initially implemented may change over time as they better
understand the customers' needs and problem areas. Initially, customer support
will be categorized into the following areas:
Category # Description of Customer Support
---------- -------------------------------
1 Customer support relating to Intuit software
applications, e.g., Quicken, Quickbooks, TurboTax,
----
etc.
---
2 Customer support prior to registration, i.e.,
----
"getting started" help (such as browser install,
network configuration and modem setup)
3 Registration support (on-line connection to
registration server for Restricted and Full Internet
Access)
4 Network connection support (i.e., cannot establish
----
connection, routine network trouble calls, busies,
etc.)
---
5 Full Internet Access Support (7 days/week by 24
hours/day)
Initially, Intuit will provide customer support in Categories 1 and 2 at its
expense, and CNC shall provide customer support in Categories 3, 4 and 5 at its
expense. CNC is authorized, with Intuit's prior written consent, to subcontract
technical support to a qualified third party. Subsequently, Intuit (or its
subcontractor), at its election, may assume responsibility for customer support
in Category 3. In such event, CNC shall be responsible for paying Intuit the
cost of all customer support provided by Intuit in Category 3 at a rate agreed
to between the parties based on prevailing outsourcer rates (or, if no agreement
is reached, at the rate of [*]/minute per phone call). Additionally, if
Intuit receives customer service calls in Categories 3, 4 or 5 because of CNC's
inability to service the level of customer calls being received or because
malfunctions on the CNC Network are causing increased customer problems, then
CNC shall, as a part of the Monthly Reconciliation Process described in Exhibit
-------
"D" to the Agreement, reimburse Intuit at a rate agreed to between the parties
- ---
based on prevailing outsourcer rates (or, if no agreement is reached, at the
rate of [*]/minute per call). Conversely, Intuit shall be responsible for
paying CNC the cost of all customer support provided by CNC in Categories 1 or 2
at the rate of [*] per call.
29
- ----------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
Intuit and CNC will jointly develop call answering, call transfer and other
customer service related procedures, e.g., use of Intuit brand names. In this
----
regard, CNC will provide technical support training at its expense to Intuit's
call centers (whether call services are performed by Intuit or subcontracted).
3. Customer Support Managers.
-------------------------
Intuit: Jim Bishop
CNC: Eileen Curtis
The Customer Support Manager of each party shall be responsible for arranging
all meetings, visits and consultations between the parties relating to customer
service including forecast reviews, satisfaction of performance standards
relating to customer service and support, implementation plans, escalation
procedures for problems, call flows, call categories, and similar matters
affecting customer support and service. The designation of a party's Customer
Support Manager may be changed from time to time by written notice to the other
party.
4. Customer Billings and Credits.
-----------------------------
A. Background. The parties acknowledge that additional operating experience
----------
with the Internet Services and Customer feedback is required in order to fully
develop effective billing and credit procedures. Therefore, during the period
prior to February 1, 1996, Intuit and CNC will define, develop and implement
customer billing and credit procedures. The following sections identify the
initial procedures prior to February 1, 1996.
B. Customer Billing Procedures. During the initial phase of operations, the
---------------------------
parties will handle Customer billings as follows:
1. When a Customer upgrades from Restricted Internet Service to Full
Internet Service (or such other levels or types of services established in the
future), CNC will promptly conduct a billing account validation pursuant to
customary industry procedures, e.g., confirmation of the card number and
----
expiration date. If the Customer satisfactorily completes the billing account
validation process, then CNC will register the Customer for Full Internet
Service (or such other levels or types of services established in the future)
and store this information in the appropriate data files (an "Upgrade Account").
CNC and Intuit will develop mutually acceptable procedures to refine the billing
account validation process, such as determining the number of times that a
Customer may attempt to upgrade before being denied upgrade because of
validation problems.
2. Shortly after midnight every night, CNC will transfer the Upgrade
Accounts to the appropriate data files and run Customer billings. Customers
shall be billed monthly on their anniversary date in advance for any service
plan-related charges (e.g., where Customers have taken a package billing
----
approach such as seven hours for $9.95), and in arrears for any charges relating
to usage in excess of service plan amounts or where the Customer has elected to
be billed on an hourly basis. The monthly billing information shall be
transmitted to the credit card processor designated by Intuit (the "Processor").
In selecting any Processors, Intuit shall in good faith consider CNC's
recommendations and observations, e.g., the difficulty of working with such
----
Processor, the requirement for CNC to establish new procedures or systems, and
the economic effect on CNC of such changes.
3. All Customer Charges processed by the Processor shall be deposited into
an Intuit account, and shall be Intuit's sole property.
30
<PAGE>
C. Customer Credit Procedures. During the initial phase of operations, the
--------------------------
parties will handle Customer credits as follows:
1. Improper or Inaccurate Billings. If CNC determines that it has
-------------------------------
improperly or inaccurately charged a Customer's credit card for Internet
Services that were not provided to or used by the Customer, then CNC shall file
and process appropriate credits for the Customer with the Processor to correct
the error. If the improper or inaccurate billing also resulted in inaccurate or
improper Service Charges being assessed to Intuit, then CNC shall provide Intuit
with appropriate credits to its Service Charges as a part of the next Monthly
Reconciliation performed pursuant to Exhibit "D."
2. Fraudulent Billings. If a Customer contacts CNC to request a credit
-------------------
because the Customer claims that his/her credit card was stolen or fraudulently
used, then CNC shall refer the Customer to his/her credit card company for
appropriate handling of the matter.
3. Discretionary Usage Credits. Intuit and CNC acknowledge that the
---------------------------
long-term economic success of the Internet Services is affected substantially by
Customers' ongoing use of the Internet Services. Therefore, CNC may exercise its
reasonable judgment and grant usage credits to Customers where it believes such
action is in the best interests of Intuit. By way of example, if a Customer
expresses surprise at receiving a large bill but acknowledges that he or she
actually used that amount of time, then CNC might elect to give the Customer a
partial usage credit (i.e., a dollar amount equivalent to a reasonable number
----
of "free" hours of use on his or her next bill). Intuit, with CNC's assistance,
shall establish guidelines on granting such credits from time to time. CNC shall
not grant usage credits in contravention of such guidelines without Intuit's
written consent. In its monthly reports to Intuit, CNC shall report its grant of
such usage credits.
5. Bad Debts. Initially, upon notification that a Customer's credit
---------
charges will not be paid or have been denied, CNC will take steps to have a
notification of such sent to the affected Customer the next time he/she logs on
to the CNC Network that advises the Customer to contact CNC to resolve the
credit problem and to obtain payment. During the Term, CNC and Intuit will work
together to develop and implement bad debt procedures as the need arises.
31
<PAGE>
EXHIBIT "D"
-----------
SERVICE AND CUSTOMER CHARGES
A. SERVICE CHARGES.
1. Service Charges. The Service Charges during the First
---------------
Contract Year payable to CNC for the CNC Services (subject to any adjustments
pursuant to the Agreement) shall be as follows:
Amount Customer/Service Category
------ -------------------------
[*]
2. Monthly Reconciliation Process. Within 3 business days of the end of each
------------------------------
calendar month, CNC shall conduct a "Monthly Reconciliation" as follows:
a. Prepare and deliver to Intuit a report containing (A) the usage,
customer service and performance information described in Exhibit "A",
and (B) the "Cumulative Service Charges" chargeable to Intuit for the
applicable calendar month, net of all applicable penalties, credits and
reimbursements calculated as follows: (i) the chargeable time and
related cumulative Service Charges for each Customer/Service Category
(Full, Restricted, Non-Internet Traffic, and Off Peak Access) plus (ii)
----
the amount of any Forecast Shortfall Penalty (calculated pursuant to
Item (1) below), if any, minus (iii) financial penalties for CNC's
failure to meet Performance Standards (see Item (2) below), if any, plus
----
(iv) any amounts owed to Intuit for Customer Service Charges
32
- ----------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
reimbursable by CNC pursuant to Exhibit "C" of the Agreement, minus (v)
-----
any amounts owed by Intuit to CNC for Customer Service charges
reimbursable by Intuit pursuant to Exhibit "C" of the Agreement, plus or
-------
minus (vi) any other adjustments agreed to between the parties. CNC
-----
shall also include an invoice for the Cumulative Service Charges, as
adjusted pursuant to this Agreement, and Intuit shall pay such invoice
within thirty days of its receipt.
(1) Forecast Shortfall Penalty. Within ten days of its receipt of
--------------------------
CNC's Monthly Reconciliation, Intuit will develop and provide to
CNC a non-binding rolling forecast of anticipated CNC Network usage
by the Customers for the next three calendar months. To the extent
that the actual volume of forecasted hours of a given month is less
than [*] of Intuit's most recent estimate of forecasted hours for
such month, Intuit will pay CNC the difference between the actual
volume and [*] of the most recent estimate for such month using the
then effective Restricted Internet Services hourly charge. By way
of illustration, if Intuit's most recent forecast in December,
1995, estimates an aggregate total Customer usage for January, 1996
of [*] hours and the actual usage for January was [*] hours, then
Intuit would be required to compensate CNC at the foregoing rate
for the difference between [*] hours and [*] hours (i.e., [*] of
the most recent estimate of [*] hours).
(2) CNC Performance Financial Penalty. This credit will be an amount
---------------------------------
equal to the financial penalties payable by CNC to Intuit
established pursuant to Exhibit "A" of the Agreement.
b. Prepare and deliver (or make available for Intuit's ready on-line
access) to Intuit a Customer Charge report reflecting the number of
connect hours for each Customer, the amount of Customer Charges billed
to Customers, the amount of payments billed to and received from
Customers, the amount of any credits given to Customers, and other
related billing or financial information reasonably requested by Intuit.
Additionally, CNC will deliver or make available on-line to Intuit a
report showing all charges to and collections from Customers on a
cumulative basis ("Monthly Customer Collections") including names,
billing numbers, Internet name, anniversary date, time used per billing
period and connection, payment plan, e-mail preference, pay type, and
other information reasonably requested by Intuit.
3. CNC Termination Right. If the average hourly usage of the Full Internet
---------------------
Services Customers is less than five hours per month at the end of the
Implementation Phase, then CNC may request Intuit to enter into an arrangement
to compensate CNC for the difference between the actual average usage of such
Full Internet Services Customers and CNC's desired usage for such Customer of at
least five hours per month. If Intuit declines to enter into such an
arrangement, then CNC may elect to terminate the Agreement effective after the
next major revision and release date for all of the Products covered by the
Agreement subject to CNC's obligation to assist Intuit in transitioning to a new
Internet access services provider pursuant to this Agreement.
B. CUSTOMER CHARGES AND INFORMATION STATEMENTS
Intuit will establish the Customer Charges from time to time in its sole
discretion. As a part of the CNC Services, CNC shall deliver or make available
by December 31, 1995 usage, account and billing information on a continuous
basis to Intuit and all Customers (whether for Restricted or Full Internet
Services) through on-line access such as hours/month usage, charges/credits, and
other information reasonably requested by Intuit (the "Information Statement").
Additionally, upon
33
- ----------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
Customer request, CNC shall mail a hard copy of the Information Statement to
such Customer. Prior to December 31, 1995, Customers may call CNC to obtain
their billing and account status.
C. CNC REPORTING
1. Initial Reporting. During the period prior to January 1, 1996, CNC
-----------------
and Intuit will define, develop and implement reporting requirements. During
this initial period, CNC will use its reasonable best efforts to provide Intuit
with requested information, but Intuit acknowledges that CNC's initial reporting
will be minimal.
2. Ongoing Reporting. Not later than January 1, 1996, CNC will implement
-----------------
the report set agreed to between the parties on a monthly basis including
information such as:
<TABLE>
<CAPTION>
<S> <C> <C>
New Subscribers/month (Actual) - Restricted Access, Full Access accounts
with price option 1, and Full Access account
with price option 2
Total # Base Subscribers/month - (same breakdown as above)
(including New)
Average Personal Usage/month - (same breakdown as above)
Peak hours/day - Number of subscribers (same breakdown),
number of hours
Peak day/week - (same breakdown as "per day" report)
Number of inactive accounts - not used in a month per Customer/Service
- category
Customer Service Calls - (breakdown to be developed)
</TABLE>
D. INTUIT FORECASTING
1. Initial Forecasting. During January 1, 1996, CNC and Intuit will
-------------------
define, develop and implement forecasting requirements. During this initial
period, Intuit will use its reasonable best efforts to provide CNC with
requested information, but CNC acknowledges that Intuit's initial reporting will
be minimal.
2. Ongoing Forecasting. Not later than January 1, 1996, Intuit will
-------------------
implement the forecasting set agreed to between the parties including
information such as:
<TABLE>
<CAPTION>
<S> <C> <C>
Estimated New Subscribers/month - Restricted Access, Full Access accounts
Estimated Total # Base - (same breakdown as above)
Subscribers/month
Estimated Average Personal - (same breakdown as above)
Usage/month
</TABLE>
Intuit's forecast shall be a rolling 90 day forecast updated on a monthly basis.
For example, in December 1995, Intuit will make its forecast for the immediately
following January, February and March 1996. Then, in January 1996, Intuit will
issue an updated forecast for the immediately following February and March, and
makes its initial forecast for April. As noted in Section D.2.(b)(5) of Exhibit
"A", CNC shall not be held responsible for failing to achieve those Performance
Standards adversely affected by a situation where Intuit's initial [*] forecast
for a month underestimates actual network usage or customer service calls by
more than [*]; provided, however, that CNC will use its reasonable best efforts
to adjust to changes in Intuit's forecasts and the actual volumes experienced at
any given time so as to attempt to achieve such Performance Standards.
34
- ----------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT "E"
-----------
SECURITY GUIDELINES
CNC acknowledges that the security of Customer Information is an absolute
requirement. During the Implementation Phase, the parties will develop all
necessary or advisable systems, practices, guidelines and procedures to achieve
this requirement, and continue to do so during the Term of the Agreement.
35
<PAGE>
EXHIBIT "F"
-----------
LICENSE AGREEMENT
THIS LICENSE AGREEMENT ("Agreement") is effective as of August 1, 1995
(the "Effective Date"), by and between Intuit Inc., a Delaware corporation
("Intuit"), and Concentric Network Corporation, a Florida corporation formerly
known as Concentric Research Corporation ("CNC"), with reference to the
following facts:
RECITALS
--------
A. CNC and Intuit have entered into that certain Internet Access Services
Agreement effective as of August 1, 1995 (the "Access Agreement") pursuant to
which CNC has agreed to license the use of the CNC Code to Intuit.
NOW, THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. "CNC Code" shall mean the POP, login server, registration
-----------
server, encryption, data security and other software described in or relating to
the performance of the Access Agreement, including any related documentation,
developed during the Term of the Access Agreement. Any other capitalized terms
not defined herein shall have the meaning given them in the Access Agreement.
2. Grant of License.
----------------
2.1 CNC hereby grants to Intuit (or its designee, e.g., a replacement
Internet access service provider) a world-wide, non-exclusive, fully paid,
perpetual right and license (i) to use all or any portion of the CNC Code in
connection with the production, copying, license, distribution and sale of the
Products, including any portion of the CNC Code which may be distributed or made
available to the Customers in order for them to properly access the CNC Network,
and (ii) to sublicense the copying and use of the CNC Code to the Customers in
connection with the Customers' use of the Products, provided that Intuit's right
to distribute the CNC Code to its Customers shall extend only during the Term
and Transition Period. However, nothing in this Agreement or the Access
Agreement shall affect the continuing right (i) of Intuit to distribute Product
containing the CNC Code that may be in the process of manufacture or held in
inventory at the time that the Term of the Access Agreement terminates or
expires, or (ii) of the Customers to use the CNC Code that is contained in any
Product that they may acquire.
2.2 The grant to Intuit in Section 2.1 includes the right to use, modify,
adapt, copy, display and otherwise exploit the CNC Code in any manner reasonably
necessary or advisable for Intuit (or its designee) to provide Internet services
or access to the Customers during or after the Term of the Access Agreement.
2.3 CNC and Intuit intend that the license granted to Intuit pursuant to
this Agreement shall ensure (A) that Intuit is able (i) to smoothly, quickly,
cost-effectively and efficiently transition the CNC Services from CNC to another
access services provider and (ii) to provide high quality services at the
performance levels specified in the Access Agreement to the Customers on a
continuous basis in the event of such a transition, and (B) that the Customers
are able to use the Internet Services during, from and after such a transition.
However, the definition of the CNC Code and the scope and the duration of the
license and rights granted in this Agreement are not intended to extend beyond
the definition, scope and duration, as applicable, that Intuit reasonably
determines in good faith to be necessary or advisable to accomplish the
intention of the parties as expressed in the foregoing sentence or in the Access
Agreement.
36
<PAGE>
3. No Infringement. CNC represents and warrants on a continuing basis that
---------------
neither the CNC Code, nor the exercise by Intuit of any of the rights granted
under this Agreement, will infringe any intellectual property right of any third
party and that there is no litigation or claim pending or, to CNC's knowledge,
threatened relating thereto. CNC shall and hereby does indemnify and defend
Intuit and hold it harmless from and against any and all claims, liabilities,
losses, costs and expenses including, but not limited to, reasonable attorneys'
fees and costs of suit, incurred by Intuit as a result of or arising from any
claim or proceeding made or brought against Intuit that the use, reproduction,
marketing, sale, sublicensing or distribution of CNC Code infringes any patent,
copyright or other rights of any third party, or that the CNC Code is defective.
This indemnity shall not apply to the extent such claims result from Intuit's
own modification or alteration of the CNC Code. Intuit shall promptly notify
CNC of any such claim(s) of which it becomes aware and shall, at CNC's request
and expense, cooperate in the investigation and defense of such claim(s).
4. Miscellaneous.
-------------
4.1 Entire Agreement. This Agreement shall be governed by and construed
----------------
in accordance with the substantive laws of the State of California (not
including its choice of law provisions). This Agreement, as supplemented by the
Access Agreement, constitutes the entire understanding between the parties with
respect to the licensing of the CNC Code contemplated herein. This Agreement
shall not be modified except in a writing signed by and exchanged between both
of the parties and expressly referencing this Agreement. No waiver of any
provision of the Agreement or any right or obligations of either party hereunder
shall be effective, except pursuant to a writing signed and delivered by the
party waiving compliance. Any such written waiver shall not be construed as, or
constitute, a continuing waiver of such breach, or of other breaches of the same
or other provisions of this Agreement. Neither party shall by mere lapse of
time without giving notice or taking other action hereunder be deemed to have
waived any breach by the other party of any of the provisions of this Agreement.
This Agreement shall be binding on all successors and assigns of the parties.
4.2 No Executory Obligation. CNC acknowledges that this Agreement is not
-----------------------
an "executory contract" within the meaning of the U.S. Bankruptcy Code and shall
not be subject to rejection by any debtor-in-possession, bankruptcy trustee or
the like.
4.3 Severability. If any provisions of this Agreement shall be held by a
------------
court, arbitrator or other tribunal of competent jurisdiction to be invalid or
unenforceable, such provisions shall be deemed valid and enforced to the maximum
extent permissible and the remaining portions of this Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, this Agreement shall be effective as of the Effective
Date and it shall be deemed accepted and made in San Diego, California.
Execution Date: December 11, 1995
INTUIT INC. CONCENTRIC NETWORK
CORPORATION
By: /s/ William Harris By: /s/ Henry Nothhaft
------------------------- ----------------------------------
William Harris, Executive Henry Nothhaft, President and CEO
Vice President
Address: 6256 Greenwich Drive Address: 10590 N. Tantau Avenue
San Diego, CA 92122 Cupertino, CA 95014
37
<PAGE>
AMENDMENT NO. 1 TO
INTERNET ACCESS SERVICES AGREEMENT
THIS AMENDMENT NO. 1 TO INTERNET ACCESS SERVICES AGREEMENT ("Amendment") is made
and effective as of August 15, 1996 (the "Effective Date"), by and between
Intuit Inc., a Delaware corporation ("Intuit"), and Concentric Network
Corporation, a Florida corporation ("CNC"), with reference to the following
facts:
RECITALS
--------
A. Intuit and CNC are parties to that certain Internet Access Services
Agreement effective as of August 1,1995 (the "Agreement").
B. Intuit and CNC desire to expand the types of pricing plans available
to the Customers and, hereby, agree to amend the Agreement as set forth herein.
NOW, THEREFORE, for valuable consideration, the parties hereto agree as
follows:
1. Except as otherwise defined herein, capitalized terms shall have the
meaning given them in the Agreement.
2. Exhibit "D" entitled "SERVICE AND CUSTOMER CHARGES" is hereby revised
and restated in its entirety as follows:
"A. SERVICE CHARGES.
1. Service Charges. Intuit may, at its discretion, offer pricing plans to
---------------
the Customers of various types. As of the date of this Amendment, Intuit intends
to offer plans in the following general categories.
a. Standard Plans.
--------------
(1) "Standard Plans" are arrangements whereby Customers are
charged on an hourly basis, or charged a specified dollar amount for a certain
number of hours of "free" usage per month with monthly usage in excess of the
free amount chargeable at a specified hourly rate, and CNC is compensated on a
hours usage basis. An example of this type of plan is Intuit's current "Frequent
User Plan" under which the Customer receives seven hours of usage for $9.95 per
month, and pays $1.95 for each hour of usage in excess of seven hours in the
specified month. The Service Charges during the First Contract Year payable to
CNC for the CNC Services (subject to any adjustments pursuant to the Agreement)
under Standard Plans shall be as follows:
Amount Customer/Service Category
------ -------------------------
[*] Full Internet Services Customers
[*] Restricted Internet Services Customers
- ------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
* Non-Internet Traffic
[*] "Off-Peak Access" (from 2:00 a.m. to
6:00 a.m. local time, where local is
the respective time zone of the
Customer)
* CNC agrees to provide Intuit the most favored pricing on future Non-
Internet Traffic based on equivalent services offered, terms and
conditions of such offering.
Service Charges for Standard Plans will be calculated pro rata on a one
second incremental basis (rounded to four decimal places). For example, Intuit
would be charged unadjusted total Service Charges of [*] in a Monthly
Reconciliation Report (see below) reflecting a total of 750.7 connection hours
for such period for Full Internet Service Customers (peak time), 1,825.2
connection hours for Restricted Internet Services Customers (peak time), and
2,015.6 connection hours for all Off-Peak Access". A "connection" shall begin
when the CNC Network has validated a name and password, and terminate when the
modem "carrier dropped" message occurs whether triggered by a customer-initiated
disconnect or a shutdown of the connecting application. All Service Charges
under Standard Plans for all Customer/Service Categories for the Second Contract
Year commencing on the first anniversary of the Release Date shall be reduced
[*] for Full Internet Services Customers and from [*] for Restricted Internet
Services Customers. All Service Charges under Standard Plans for all
Customer/Service Categories for the Third Contract Year shall be reduced an
additional [*] from the rates charged in the Second Contract Year, e.g., from
----
[*] for Full Internet Customer Services Customers and from [*]/hour to [*]/hour
for Restricted Internet Services Customers.
(2) Option to Convert Frequent User Standard Plan. After the date of
---------------------------------------------
this Amendment, Intuit by written notice to CNC may elect to convert its current
Frequent User Plan from a Standard Plan to a Package Plan on the following terms
and conditions for Customers that subscribe to such converted plan:
(a) Usage and Customer Charges. The Customer will pay Intuit
--------------------------
[*] in advance for seven hours of usage, and [*] in arrears for each hour of
usage in excess of seven hours in the specified month.
(b) Service Charges. As a part of the Monthly Reconciliation
---------------
Process, CNC will invoice Intuit for, and Intuit will pay CNC, (i) [*] for
each Intuit Frequent User Plan Customer that subscribed to such plan during the
applicable month, and (ii) [*] charged to such Customer for each hour of
"excess" usage by such Customer during the applicable month.
(c) Additional Intuit Compensation. Additionally, as a part of the
------------------------------
Monthly Reconciliation Process, CNC will pay Intuit a [*] "commission" for
each Customer who previously signed up for the Intuit Frequent User Plan and has
paid for at least two successive full months of service under the new Package
Plan arrangement.
2
- ------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
b. Package Plans. "Package Plans" are new arrangements implemented
-------------
under this Amendment whereby Full Internet Services Customers are charged a
specified dollar amount for a certain number of hours of "free" usage per month
with monthly usage in excess of the free amount chargeable at a specified hourly
rate, and CNC is compensated as specified below. In the case that a given
package plan is "unlimited," the Customer may use an unlimited number of hours
for a specified monthly rate. Under Package Plans, CNC will not be paid its
normal hourly Service Charges (as noted above for Standard Plans) but, instead,
Intuit will pay Service Charges in another form to CNC as follows:
(1) Usage and Customer Charges. The Customer will pay Intuit a
--------------------------
specified monthly rate in advance for a designated period of usage on a month-
to-month basis, and in arrears for any usage in excess of the "free" or included
monthly usage amount.
(2) Service Charges. As a part of the Monthly Reconciliation
---------------
Process, CNC will invoice Intuit for, and Intuit will pay CNC, a specified
monthly Service Charge for each Intuit Unlimited Plan Customer that subscribed
to such plan during the applicable month.
(3) Additional Intuit Compensation. Additionally, as a part of the
------------------------------
Monthly Reconciliation Process, CNC will pay Intuit a "commission" (sometimes
referred to as a "bounty") for each Customer who previously signed up for the
applicable Package Plan (including both former Standard Plan Customers and new
Customers) and has paid for at least a specified number of successive full
months of service. Commissions or bounties will be paid once during the
"lifetime" of a Customer when the Customer makes his/her first change from a
Standard Plan to a Package Plan. Additionally, CNC and Intuit will from time to
time review the amount and timing of the payment of the commission to determine
its fairness, and make such changes as the parties may mutually agree.
c. Prepaid Plans. "Prepaid Plans" are new arrangements implemented
-------------
under this Amendment whereby Full Internet Services Customers can purchase a
specified level (which may be unlimited) of monthly usage effectively at a
discounted monthly fee if Customer pre-pays for a specified period. Under a
Prepaid Plan, CNC will not be paid its normal hourly Service Charges (as noted
above for Standard Plans) but, instead, Intuit will pay Service Charges in
another form to CNC as follows:
(1) Usage and Customer Charges. The Customer will pay Intuit a
--------------------------
specified monthly rate in advance for the specified level of (or unlimited)
usage for a designated period of time, e.g.. pre-pay for six months at a monthly
----
rate discounted from the normal "Package Plan" rate for unlimited monthly usage.
(2) Service Charges. As a part of the Monthly Reconciliation
---------------
Process, CNC will invoice Intuit for, and Intuit will pay CNC, a specified
amount per each Intuit Prepaid Plan Customer who subscribed to such plan during
the applicable month.
(3) Additional Intuit Compensation. Additionally, as a part of the
------------------------------
Monthly Reconciliation Process, CNC will pay Intuit a "commission" (sometimes
referred to as a "bounty") for each Customer (including both former Standard
Plan
3
<PAGE>
Customers and new Customers) who previously subscribed for the Prepaid Plan if
such Customer has not canceled such subscription during a specified number of
full months of service under such plan. Commissions or bounties will be paid
once during the "lifetime" of a Customer when the Customer makes his/her first
change from a Standard Plan to a Prepaid Plan. Additionally, CNC and Intuit will
from time to time review the amount and timing of the payment of the commission
to determine its fairness, and make such changes as the parties may mutually
agree.
(4) Cancellation. A Prepaid Plan may be cancelable by the
------------
Customer. Any cancellation adjustments or penalties shall be set forth in the
applicable Plan Amendment (see subsection "d" below).
(5) Continuation Services. In the event that a Customer does not
---------------------
notify CNC or Intuit that he/she intends to extend his/her Prepaid Plan, the
Customer will be notified (at the time of initially signing up for the Prepaid
Plan) that his/her service plan shall automatically revert to the comparable
Package Plan at the end of the applicable prepaid period.
d. Implementation of Plans. A list of the Package Plans and Prepaid
-----------------------
Plans Intuit intends to implement as of the date of this Amendment is attached
hereto as Attachment "D-1". Subsequent changes to these new plans or the
creation of new Package and Prepaid Plans shall be implemented by the parties
through the execution and exchange of ""Plan Amendments" substantially in the
form of Attachment "D-2" hereto.
e. 800# Telephone Services. CNC shall provide 800# telephone services
-----------------------
to the Customers under Standard, Package and Prepaid Plans as a method for the
Customers to gain access to Intuit's Services. Intuit will charge the Customers
at an initial rate of [*] per hour for this service as a part of the periodic
billing of such Customers. Then, as a part of the Monthly Reconciliation
Process, CNC will invoice Intuit for, and Intuit will pay CNC, [*] at the
foregoing hourly charge for each hour of 800# service billed to the Customers
during the applicable month. Intuit and CNC will modify Customer charges, and
any amounts payable by Intuit related thereto, to account for changes in the
cost or pricing of 800# telephone services. Any 800# telephone charges shall be
in addition to any usage charges under the Customer's applicable Standard,
Package or Prepaid Plan.
2. Monthly Reconciliation Process. Within 3 business days of the end of
------------------------------
each calendar month, CNC shall conduct a "Monthly Reconciliation" as follows:
a. Prepare and deliver to Intuit a report containing (A) the usage,
customer service and performance information described in Exhibit "A", and (B)
the "Cumulative Service Charges" chargeable to Intuit for the applicable
calendar month, net of all applicable penalties, credits and reimbursements
calculated as follows: (i) the chargeable time and related cumulative Service
Charges for each Plan/Customer/Service Category (Full, Restricted, Non-Internet
Traffic, and Off Peak Access) plus (ii) the amount of any Forecast Shortfall
----
Penalty (calculated pursuant to Item (1) below), if any, minus (iii) financial
-----
penalties for CNC's failure to meet Performance Standards (see Item (2) below),
if any, plus (iv) any amounts owed to Intuit for Customer Service Charges
----
reimbursable by CNC pursuant to Exhibit "C" of the Agreement, minus (v) any
-----
amounts owed by Intuit to CNC for Customer Service charges
4
- ------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
reimbursable by Intuit pursuant to Exhibit "C" of the Agreement, plus or minus
-------------
(vi) any other adjustments agreed to between the parties. CNC shall also include
an invoice for the Cumulative Service Charges, as adjusted pursuant to this
Agreement, and Intuit shall pay such invoice within thirty days of its receipt.
(1) Forecast Shortfall Penalty. Within ten days of its receipt of
--------------------------
CNC's Monthly Reconciliation, Intuit will develop and provide to CNC a non-
binding rolling forecast of anticipated CNC Network usage by the Customers
subscribing to Standard Plans for the next three calendar months. To the extent
that the actual volume of forecasted hours under Standard Plans for a given
month is less than [*] of Intuit's most recent estimate of forecasted hours for
such month, Intuit will pay CNC the difference between the actual volume of
usage under Standard Plans and [*] of the most recent estimate for Standard Plan
usage for such month using the then effective Restricted Internet Services
hourly charge; provided, however, that Intuit shall not be subject to the
foregoing Forecast Shortfall Penalty if the actual number of Customers who
subscribe for Package and Prepaid Plans for the applicable month is at least [*]
of the number forecasted by Intuit in its most recent monthly forecast for such
month. By way of illustration, if (i) Intuit's most recent forecast in December,
1995, estimated an aggregate total Customer usage under Standard Plans for
January, 1996 of [*] hours and the actual usage for January was [*] hours
and (ii) Intuit achieved only [*] of its aggregate estimate for forecasted users
under both its Package Plans and Prepaid Plans, then Intuit would be required to
compensate CNC at the foregoing rate for the difference between [*] hours and
[*] hours (i.e., [*] of the most recent estimate of [*] hours).
(2) CNC Performance Financial Penalty. This credit will be an amount
---------------------------------
equal to the financial penalties payable by CNC to Intuit established pursuant
to Exhibit "A" of the Agreement.
b. Prepare and deliver (or make available for Intuit's ready on-line
access) to Intuit a Customer Charge report reflecting the number of connect
hours for each Customer, the amount of Customer Charges billed to Customers, the
amount of payments billed to and received from Customers, the amount of any
credits given to Customers, and other related billing or financial information
reasonably requested by Intuit. Additionally, CNC will deliver or make available
on-line to Intuit a report showing all charges to and collections from Customers
on a cumulative basis ("Monthly Customer Collections") including names, billing
numbers, Internet name, anniversary date, time used per billing period and
connection, payment plan, e-mail preference, pay type, and other information
reasonably requested by Intuit.
3. CNC Termination Right. DELETED (no longer applicable)
---------------------
B. CUSTOMER CHARGES AND INFORMATION STATEMENTS
Intuit will establish the Customer Charges from time to time in its sole
discretion. As a part of the CNC Services, CNC shall deliver or make available
by December 31, 1995 usage, account and billing information on a continuous
basis to Intuit and all Customers (whether for Restricted or Full Internet
Services) through on-line access such as hours/month usage, charges/credits, and
other information reasonably requested by Intuit (the "lnformation Statement").
Additionally, upon Customer request,
5
- ------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
CNC shall mail a hard copy of the Information Statement to such Customer. Prior
to December 31, 1995, Customers may call CNC to obtain their billing and account
status.
C. CNC REPORTING
1. Initial Reporting. During the period prior to January 1, 1996, CNC and
-----------------
Intuit will define, develop and implement reporting requirements. During this
initial period, CNC will use its reasonable best efforts to provide Intuit
with requested information, but Intuit acknowledges that CNC's initial reporting
will be minimal.
2. Ongoing Reporting. Not later than January 1, 1996, CNC will implement
-----------------
the report set agreed to between the parties on a monthly basis including
information such as:
<TABLE>
<S> <C>
New Subscribers/month (Actual) - Standard Plans (Restricted
Access, Full Access accounts by
type of usage plan), Package
Plans, and Prepaid Plans.
Total # Base Subscribers/month - (same breakdown as above)
(including New)
Average Personal Usage/month - (same breakdown as above)
Peak hours/day - Number of subscribers (same
breakdown), number of hours
Peak day/week - (same breakdown as "per day"
report)
Number of inactive accounts - not used in a month per
Customer/Service category
Customer Service Calls - (breakdown to be developed)
</TABLE>
D. INTUIT FORECASTING
1. Initial Forecasting. On an ongoing basis during the term of this
-------------------
Agreement, CNC and Intuit will define, develop and implement forecasting
requirements.
2. Ongoing Forecasting. Not later than January 1, 1996, Intuit will
-------------------
implement the forecasting set agreed to between the parties including
information such as:
<TABLE>
<S> <C>
Estimated New Subscribers/month - Standard Plans (Restricted
Access, Full Access
accounts by type of plan),
Package Plans and Prepaid
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Plans
Estimated Total # Base - (same breakdown as above)
Subscribers/month
Estimated Average Personal - Standard Plans Only
Usage/month
</TABLE>
Intuit's forecast shall be a rolling 90 day forecast updated on a monthly basis.
For example, in December 1995, Intuit would make its forecast for the
immediately following January, February and March 1996. Then, in January 1996,
Intuit would issue an updated forecast for the immediately following February
and March, and makes its initial forecast for April. As noted in Section
D.2.(b)(5) of Exhibit "A", CNC shall not be held responsible for failing to
achieve those Performance Standards adversely affected by a situation where
Intuit's initial forecast for a month underestimates actual network usage or
customer service calls by more than 20%; provided, however, that CNC will use
its reasonable best efforts to adjust to changes in Intuit's forecasts and the
actual volumes experienced at any given time so as to attempt to achieve such
Performance Standards."
3. The parties acknowledge and agree that the reconciliation, reporting
and forecasting of procedures described in Exhibit D shall be deemed amended to
include applicable information for the Package and Prepaid Plans.
4. Intuit's address for notifications given pursuant to Section 8.1 of
the Agreement is hereby modified to the address specified below.
5. Except as otherwise provided in this Amendment, the terms and
conditions of the Agreement remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed and delivered this Amendment
as of the Effective Date and it shall be deemed accepted and made in San Diego,
California.
INTUIT INC. CONCENTRIC NETWORK
CORPORATION
By: /s/ WILLIAM HARRIS By: /s/ MICHAEL ANTHOFER
-------------------------- ------------------------
William Harris Michael Anthofer
Executive Vice President Chief Financial Officer
6220 Greenwich Drive 10590 North Tantau Avenue
San Diego, CA 92122 Cupertino, CA 95014
7
<PAGE>
ATTACHMENT "D-1"
PACKAGE AND PREPAID PRICING PLANS
A. PACKAGE PLAN
1. "lntuit Unlimited Plan"
---------------------
(a) Usage and Customer Charges. The Customer will pay Intuit
--------------------------
[*]/month in advance for unlimited usage on a month-to-month basis.
(b) Service Charges. As a part of the Monthly Reconciliation Process,
---------------
CNC will invoice Intuit for, and Intuit will pay CNC, [*] for each Intuit
Unlimited Plan Customer that subscribed to such plan during the applicable
month.
(c) Additional Intuit Compensation. Additionally, as a part of the
------------------------------
Monthly Reconciliation Process, CNC will pay Intuit a [*] "commission" for
each Customer who previously signed up for the Intuit Unlimited Plan and has
paid for at least two successive full months of service.
8
- ------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
ATTACHMENT "D-2"
FORM OF PLAN AMENDMENT UNDER
INTERNET ACCESS SERVICES AGREEMENT DATED AUGUST 1, 1995
Name of Plan:
- -------------
Category of Plan (circle one): Standard Package Prepaid
- -----------------------------
Usage and Customer Charges: [TBD]
- --------------------------
Service Charges: As a part of the Monthly Reconciliation Process, CNC will
- ---------------
invoice Intuit for, and Intuit will pay CNC, $___ per each Intuit Plan Customer
who subscribed to such plan during the applicable month.
Additional Intuit Compensation. Additionally, as a part of the Monthly
- ------------------------------
Reconciliation Process, CNC will pay Intuit a $__ commission for each Customer
who previously subscribed for the Plan if such Customer has not canceled such
subscription during the first _____ full months of service under such plan. The
amount and timing of the payment of this commission will be reviewed, and if
mutually agreed upon, reset by CNC and Intuit every ___ months.
Cancellation Provisions: [TBD]
- -----------------------
Former Plan replaced by this Plan (if applicable): [TBD]
Other terms and conditions: [TBD]
- --------------------------
This Plan Amendment is effective as of ______________, 199_, and subject to all
of the terms and conditions of the Agreement.
INTUIT INC. CONCENTRIC NETWORK
CORPORATION
By: By:
--------------------------- ---------------------------
Officer: Officer:
------------------- --------------------
Title: Title:
--------------------- ----------------------
6256 Greenwich Drive, Suite 100 10590 North Tantau Avenue
San Diego, CA 92122 Cupertino, CA 95014
9
<PAGE>
AMENDMENT NO. 2 TO
INTERNET ACCESS SERVICES AGREEMENT
THIS AMENDMENT NO. 2 TO INTERNET ACCESS SERVICES AGREEMENT ("Amendment") is made
and effective as of October 31, 1996 (the "Effective Date"), by and between
--
Intuit Inc., a Delaware corporation ("Intuit"), and Concentric Network
Corporation, a Florida corporation ("Concentric" or "CNC"), with reference to
the following facts:
RECITALS
--------
A. Intuit and CNC are parties to that certain Internet Access Services
Agreement effective as of August 1, 1995, as amended by that certain
Amendment No. 1 to Internet Access Services Agreement dated August 15,
1996, and as the meaning of certain of its provisions were confirmed
pursuant to that certain Acknowledgment and Limited Waiver dated August
20, 1996 (collectively, the "Agreement").
B. Intuit and CNC desire to amend the Agreement to incorporate an additional
network performance standard regarding network accessibility.
NOW, THEREFORE, for valuable consideration, the parties hereto agree as
follows:
1. Except as otherwise defined herein, capitalized terms shall have the meaning
given them in the Agreement.
2. Exhibit "A", Section C, sub-sections 2b and 2c entitled "Network Processing
Capacity Performance Standards (Latency)" and "Customer Service/Support
Performance Standards," respectively, are hereby re-labeled as sub-sections
2c and 2d, respectively.
3. Exhibit "A", Section C, sub-section 2 entitled "Performance Standards" is
hereby amended to include the following sub-section 2b:
"b. Network Connection Success Performance Standard. The CNC Network shall
-----------------------------------------------
achieve average successful connection rates at or above the following
Performance Standards for Intuit Customers attempting to access the CNC Network:
Target Performance Standard:
---------------------------
[*] "successful connection" rate for VLA-type POP sites
[*] "successful connection" rate for physical-type POP sites
1
- ------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
Minimum Performance Standard:
----------------------------
[*] "successful connection" rate for VLA-type POP sites
[*] "successful connection" rate for physical-type POP sites
Comments:
- --------
(1) CNC shall employ a PC-based dial/connection-tool software acceptable to
Intuit to measure the successful connection rates of the CNC Network.
(2) CNC shall conduct testing of the successful connection rates for the
CNC Network on a regularly scheduled basis, but no less often than once per
calendar month. During the monthly test period, each POP site in the CNC Network
shall be tested at least once as specified in Comment (3) below.
(3) The duration of the test period shall be at least a continuous 24 hour
period to satisfy the parties' intention of testing the CNC Network during both
daily peak and off-peak hours. CNC shall use a PC based dial/connection tool
similar to the Gage Access ISP poll software using a Windows 95 PC
configuration, with a standard TCP/IP stack/dialer and a mutually acceptable
consumer modem. The network will be tested by accessing at least [*] of the CNC
local access phone numbers in the continental United States and Canada during
the testing period.
(4) A "successful connection" is defined as a test call in which the
dial/connection-tool software calls into a designated CNC Network POP site,
negotiates a connection session, logs into the CNC Network, accesses a www html
test page or pings a designated web site, and disconnects from the CNC Network.
Further, CNC shall use commercially reasonable efforts to ensure that the test
sessions are structured so that the dial/connection-tool software accurately
recreates the Intuit customer experience, e.g., by incorporating variables in
connection rates for different modem types, dialers, times of day, POP types
(VLA and physical), modem speed and Intuit-specific login procedures. Although
Modem incompatibility problems will be excluded from the final test results, CNC
will implement a mutually acceptable action plan to correct modem
incompatibility problems that occur with the modem types that account for the
top [*] of all units sold in the United States and Canada, as applicable.
(5) The test call shall be excluded from the calculation of overall test
results if the dial/connection-tool software establishes a connection but
experiences an error condition. By way of example, a call in which a Windows95
remote access Service error condition is logged would not be counted as an
attempted call in the tabulation of test results.
(6) The successful connection rates shall be calculated as follows:
2
- ------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
(a) First, the overall "successful connection" rate for each physical
and VLA-type POP sites shall be determined on a POP-by-POP basis by (A)
tabulating the total number of test calls initiated by the dial/connection-tool
software and the corresponding number of successful connections reported by the
dial/connection-tool software, (B) adjusting the total number of test calls
downward for any dial/connection tool software error conditions, and (C)
dividing the number of test calls that achieved successful connections by the
total number of test calls. By way of example, assume the CNC Network had only
2 physical-type POPs and the dial/connection-tool software tests yielded the
following results:
<TABLE>
<CAPTION>
POP Total Adjusted Successful Successful
Test Total Connections Connection
Calls Test Rate
Calls
<S> <C> <C> <C> <C>
#1 30 29 27 93.1
#2 38 38 36 94.7
Totals 68 67 63 94.0
</TABLE>
(b) Second, the weighted average of the "successful connection" rate
shall be calculated for all POPs of one type in the CNC Network. This weighted
average shall be calculated based on the number of ports at each POP. By way of
example, assuming the CNC Network only had 2 physical-type POPs with the
following number of ports and achieved the successful connection rates as
calculated in Comment (6)(a) above, the weighted average for this 120 port
physical POP network as a whole would be 0.9406 (or 94.06%) as indicated in the
following table:
<TABLE>
<CAPTION>
POP POP Port Weighting Weighted
Successful Count at Factor Average
Connection applicable (based on Successful
Rate POP number Connection
of ports) Rate
<S> <C> <C> <C> <C>
#1 93.1 48 .4 37.24
#2 94.7 72 .6 56.82
Totals 94.0 120 1.0 94.06%
</TABLE>
A separate weighted average calculation would be performed for VLA-type POPs in
the CNC Network.
(c) Finally, the overall weighted average successful connection rate
for the CNC Network as calculated above would be compared to the applicable
3
<PAGE>
Performance Standard to determine whether or not CNC had achieved its Network
Connection Success performance goal for the applicable calendar month. By way of
example, a comparison of the weighted average successful connection rate of
[*] for the above physical POPs to the physical-type POP Target Performance
Standard of [*] and the Minimum Performance Standard of [*] reflects that CNC
has satisfied both performance standards in this performance metric.
(7) The monthly CNC Network successful connection test results will be
reported to Intuit as required pursuant to the Agreement. Each POP-type category
(i.e., VLA and physical) must satisfy its respective performance standard for
the CNC Network to satisfy this performance standard.
(8) CNC will develop within one week and execute a corrective action plan
acceptable to Intuit to bring into conformance with the applicable Performance
Standard any Point of Presence that falls below a [*] successful connection
rate. If CNC's corrective action plan requires that it obtain network services
from third parties, then the timetable for the execution of such plan will take
into consideration the delivery dates for such third party services. CNC's
failure or inability to execute the corrective action plan to remedy the problem
shall be deemed to be a failure to satisfy the applicable Performance Standard
for this measure.
(9) From time to time, the parties shall evaluate the level of this
performance standard compared to the network successful connection rates
achieved by other high quality Internet service providers as provided in Exhibit
"A", Section C.1."
4. Except as otherwise provided in this Amendment, the terms and conditions of
the Agreement remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed and delivered this Amendment
as of the Effective Date and it shall be deemed accepted and made in San Diego,
California.
INTUIT INC. CONCENTRIC NETWORK
CORPORATION
By: /s/ WILLIAM HARRIS By: /s/ MICHAEL ANTHOFER
-------------------------- ---------------------------
William Harris Michael Anthofer
Executive Vice President Vice President and CFO
6220 Greenwich Drive 10590 North Tantau Avenue
San Diego, CA 92122 Cupertino, CA 95014
4
- ------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
PRICING PLAN ADDENDUM NO. 1 PURSUANT
TO INTERNET ACCESS SERVICES AGREEMENT
Name of Plan: "Intuit 6 Month Prepaid Plan"
---------------------------
(a) Usage and Customer Charges. Intuit will charge a new Customer
--------------------------
(i.e., one who is not currently registered with Intuit for full Internet access)
[*] in advance for [*] months of unlimited network usage, apportionable to one
free month of full Internet access followed by 6 months of full Internet access
at the rate of [*]/month. Existing full Internet access Customers switching
from another Intuit plan to this Prepaid Plan will be charged [*] in advance
for 6 months of full Internet access, apportionable at the rate of [*]/month.
(b) Service Charges. As a part of the Monthly Reconciliation Process,
---------------
CNC will invoice Intuit for, and Intuit will pay CNC, [*] for each Intuit
Customer that subscribes to this Prepaid Plan during the applicable month.
(c) Additional Intuit Compensation. Additionally, as a part of the
------------------------------
Monthly Reconciliation Process, CNC will pay Intuit an [*] "commission" for
each Customer who previously signed up for this Prepaid Plan and has been active
on the service for at least three successive full months of service. Customers
who have converted from a Package Plan to this Prepaid Plan after 60 days of
active paid service will not be included in the calculation of the foregoing
commission payable by CNC for this Prepaid Plan.
(d) Cancellation. If a Customer under this Prepaid Plan cancels before
------------
the completion of the full six month "paid" term, then they will be treated as
an Intuit Unlimited Package Plan customer (i.e., [*]/month for unlimited use)
and refunded accordingly. By way of example, an existing Customer who canceled
on or before the third anniversary date would be refunded [*]. A new Customer
will receive credit for the first free month, so if they canceled on or before
the third anniversary date they would be refunded [*] for the four remaining
months that were not used.
(e) Continuation of Services. When customers sign up for this Prepaid
------------------------
plan they will be notified that they will revert to Intuit's Unlimited Package
Plan at the end of the subscription period (i.e., currently [*]/month for
unlimited use).
Effective Date: October 15, 1996
INTUIT INC. CONCENTRIC NETWORK
CORPORATION
By: /s/ WILLIAM HARRIS By: /s/ MICHAEL F. ANTHOFER
---------------------------- -----------------------------
Name: Bill Harris Name: Michael F. Anthofer
-------------------------- ---------------------------
Title: Executive Vice President Title: VP & CFO
------------------------- --------------------------
6220 Greenwich Drive 10590 North Tantau Avenue
San Diego, CA 92122 Cupertino, CA 95014
- ------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
AMENDMENT NO. 3 TO
INTERNET ACCESS SERVICES AGREEMENT
THIS AMENDMENT NO. 3 TO INTERNET ACCESS SERVICES AGREEMENT ("Amendment") is
made and effective as of August 23, 1996 (the "Effective Date"), by and between
Intuit Inc., a Delaware corporation ("Intuit"), and Concentric Network
Corporation, a Florida corporation ("Concentric or "CNC"), with reference to the
following facts:
RECITALS
--------
A. Intuit and CNC are parties to that certain Internet Access Services
Agreement effective as of August 1, 1995, as amended by that certain Amendment
No. 1 to Internet Access Services Agreement dated August 15, 1996, and that
certain Amendment No. 2 to Internet Access Services Agreement dated October 31,
1996, and as the meaning of certain of its provisions were confirmed pursuant to
that certain Acknowledgment and Limited Waiver dated August 20, 1996
(collectively, the "Access Agreement").
B. The Access Agreement includes a license of the CNC Software, as
defined therein.
C. CNC has entered into an ISP and Software OEM Agreement (the
"Quarterdeck Agreement") with Quarterdeck Corporation ("Quarterdeck") dated
August 23, 1996, by which CNC has access to Quarterdeck's stack and dialer
software, which is useful for Internet access in conjunction with the CNC
Software.
D. The parties desire to add the Quarterdeck stack and dialer program to
the CNC Software sublicensed to Intuit pursuant to the Access Agreement.
NOW, THEREFORE, for valuable consideration, the parties hereto desire to
memorialize their past agreements on the subject matter hereof and agree as
follows:
1. Except as otherwise defined herein, capitalized terms shall have
the meaning given them in the Access Agreement.
2. CNC hereby represents and warrants that it has all necessary rights
and licenses to grant to Intuit the sublicense for the use, reproduction and
distribution of the Quarterdeck Product as contemplated by this Amendment.
3. The Access Agreement is hereby amended as follows:
a. Section 1.5 is hereby deleted and replaced in its entirety with the
following: ""CNC Code" shall mean the POP, login server, registration server,
Quarterdeck Product, encryption, data security and other software, including
object code and source code, described or referred to in this Agreement, and
developed by CNC or its suppliers to support the Internet Services provided by
Intuit, including any related documentation."
b. Section 7.3 is hereby amended to add the following provisions at
the end of such section: "CNC represents and warrants that the Quarterdeck
Agreement provides that Quarterdeck will indemnify CNC's sublicensees (such as
Intuit) with respect to losses, costs or expenses incurred by such sublicensee
(the "Quarterdeck Indemnity") as a result of a claim that the Quarterdeck
Product by itself infringes any patent, copyright or other intellectual property
right of
1
<PAGE>
any third party (as used herein, a "Quarterdeck Product Claim"). Therefore,
notwithstanding the foregoing indemnity obligation of CNC in favor of Intuit, so
long as Quarterdeck performs its obligations as provided in the Quarterdeck
Indemnity in favor of Intuit, CNC shall not be required to indemnify Intuit for
any Quarterdeck Product Claim."
c. Exhibit F is hereby deleted in its entirety and replaced with the
Amended and Restated License Agreement in the form of Exhibit F attached hereto.
References in the Access Agreement to the "License Agreement" from and after the
Effective Date of this Amendment shall be understood to refer to the attached
Exhibit F. Concurrent with the execution and delivery of this Amendment, Intuit
and CNC shall execute and deliver to the other party the Amended and Restated
License Agreement attached hereto.
4. Except as otherwise provided in this Amendment, the terms and
conditions of the Access Agreement remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed and delivered this Amendment
as of the Effective Date and it shall be deemed accepted and made in San Diego,
California.
INTUIT INC. CONCENTRIC NETWORK
CORPORATION
By: /s/ WILLIAM HARRIS By: /s/ MICHAEL ANTHOFER
--------------------------- ---------------------------
William Harris Michael Anthofer
Executive Vice President Senior President & Chief Financial
Officer
6220 Greenwich Drive 10590 North Tantau Avenue
San Diego, CA 92122 Cupertino, CA 95014
2
<PAGE>
EXHIBIT "F"
AMENDED AND RESTATED LICENSE AGREEMENT
THIS AMENDED AND RESTATED LICENSE AGREEMENT ("Agreement") is effective as
of August 23, 1996 (the "Effective Date"), by and between Intuit Inc., a
Delaware corporation ("Intuit"), and Concentric Network Corporation, a Florida
corporation formerly known as Concentric Research Corporation ("CNC"), with
reference to the following facts:
RECITALS
--------
A. CNC and Intuit have entered into that certain Internet Access Services
Agreement effective as of August 1, 1995, as amended by that certain Amendment
No. 1 to Internet Access Services Agreement dated August 15, 1996, and that
certain Amendment No. 2 to Internet Access Services Agreement dated October 31,
1996, and as the meaning of certain of its provisions were confirmed pursuant to
that certain Acknowledgment and Limited Waiver dated August 20, 1996
(collectively, the "Access Agreement") pursuant to which CNC agreed to license
the use of the CNC Code to Intuit.
B. CNC has entered into an ISP and Software OEM Agreement (the
"Quarterdeck Agreement") with Quarterdeck Corporation ("Quarterdeck") dated
August 23, 1996, by which CNC has access to Quarterdeck's stack and dialer
software, which is useful for Internet access in conjunction with the CNC
Software.
C. The parties desire to add the Quarterdeck stack and dialer program
to the CNC Software sublicensed to Intuit pursuant to the Agreement.
NOW, THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. Definitions.
-----------
1.1 "CNC Code" shall mean the POP, login server, registration server,
Quarterdeck Product, encryption, data security and other software described in
or relating to the performance of the Access Agreement, including any related
documentation, and developed by CNC or its suppliers during the Term of the
Access Agreement to support the Internet Services provided by Intuit, including
any related documentation.
1.2 "Quarterdeck Product" is Quarterdeck software, in object code form,
as further described in Attachment 1 attached hereto.
1.3 Any other capitalized terms not defined herein shall have the meaning
given them in the Access Agreement.
2. Grant of License.
----------------
2.1 Subject to Sections 2.4 and 2.5 below, CNC hereby grants to Intuit
(or its designee, e.g., a replacement Internet access service provider) a world-
wide, non-exclusive, fully paid, perpetual right and license (i) to use all or
any portion of the CNC Code in connection with the production, copying, license,
distribution and sale of the Products, including any portion of the CNC
3
<PAGE>
Code which may be distributed or made available to the Customers in order for
them to properly access the CNC Network, and (ii) to sublicense the copying and
use of the CNC Code to the Customers in connection with the Customers' use of
the Products, provided that Intuit's right to distribute the CNC Code to its
Customers shall extend only during the Term and Transition Period. However,
nothing in this Agreement (except, with respect to the Quarterdeck Product, as
otherwise set forth in Sections 2.4 or 2.5 herein) or the Access Agreement shall
affect the continuing right (i) of Intuit to distribute Product containing the
CNC Code that may be in the process of manufacture or held in inventory at the
time that the Term of the Access Agreement terminates or expires, or (ii) of the
Customers to use the CNC Code that is contained in any Product that they may
acquire.
2.2 The grant to Intuit in Section 2.1 includes the right to use, modify,
adapt, copy, display and otherwise exploit the CNC Code in any manner reasonably
necessary or advisable for Intuit (or its designee) to provide Internet services
or access to the Customers during or after the Term of the Access Agreement.
2.3 CNC and Intuit intend that the license granted to Intuit pursuant
to this Agreement shall ensure (A) that Intuit is able (i) to smoothly, quickly,
cost-effectively and efficiently transition the CNC Services from CNC to another
access services provider and (ii) to provide high quality services at the
performance levels specified in the Access Agreement to the Customers on a
continuous basis in the event of such a transition, and (B) that the Customers
are able to use the Internet Services during, from and after such a transition.
However, the definition of the CNC Code and the scope and the duration of the
license and rights granted in this Agreement are not intended to extend beyond
the definition, scope and duration, as applicable, that Intuit reasonably
determines in good faith to be necessary or advisable to accomplish the
intention of the parties as expressed in the foregoing sentence or in the Access
Agreement.
2.4 Notwithstanding anything to the contrary in this Agreement (including
the last sentence of Section 2.1) or in the Access Agreement, Intuit's license
with respect to the Quarterdeck Product shall be governed by the restrictions
set forth in this Section 2.4 and the following Section 2.5. Intuit shall have
no right to modify, adapt or otherwise exploit the Quarterdeck Product except to
incorporate the Quarterdeck Product into or bundle the Quarterdeck Product with
the Products and to reproduce, market and distribute the resulting bundled
product ("Bundled Product") and associated end user documentation, provided that
the following provisions are adhered to:
a. Bundling Requirements. The software application with which the
---------------------
Quarterdeck Product is bundled or incorporated must offer substantial
functionality over and above that of the Quarterdeck Product, and Intuit must
market and promote the Bundled Product in a manner that primarily emphasizes the
functionality and features of the Product rather than those of the Quarterdeck
Product. The Bundled Product must be configured in such a manner that the
Quarterdeck Product can only be used by Intuit's end user customers to permit
them to utilize CNC as an Internet Service Provider to access the Internet or
world wide web generally, or in such other manner of configuration as
Quarterdeck may approve in writing from time to time in accordance with the
Quarterdeck Agreement.
b. End-User License and Proprietary Rights. Copies of the Quarterdeck
---------------------------------------
Product distributed by Intuit as part of a Bundled Product must contain such
proprietary rights notices in the name of Quarterdeck as Quarterdeck reasonably
designates, and copies of the Quarterdeck Product distributed by Intuit as part
of a Bundled Product must be accompanied by and licensed pursuant to Attachment
2 hereto such that the terms and conditions of Attachment 2 are displayed
4
<PAGE>
to the user and the user must affirmatively manifest its consent and agreement
to such terms by clicking on an "accept" button on the display before the
installation and configuration of the Quarterdeck Product is completed and the
Quarterdeck Product is rendered fully usable.
c. Royalties for Software OEM Distributed Copies.
---------------------------------------------
(1) Intuit shall pay to CNC royalties in an amount of [*] for
each copy of the Quarterdeck Product sublicensed by Intuit to an end User
customer who remains a registered user of CNC as an Internet Service Provider
for a period of greater than thirty (30) days subsequent to the effective date
of such customer subscribing for Full Internet Services.
(2) Advance. Intuit will pay to CNC on or before the Effective Date
-------
of this Agreement the sum of [*] (the "Advance"), which shall constitute an
advance fully creditable against license fees for the Quarterdeck Product
otherwise payable to CNC by Intuit pursuant to Section 2.4(c)(1). By way of
example, if Intuit issued a total of 15,000 sublicenses during the first three
calendar quarters pursuant to Section 2.4(d) below, then the effective amount
of the Advance against which credits would be applied for future quarters
would be reduced to [*].
d. Timing And Reports. For each calendar quarter during the period
------------------
wherein CNC is permitted to distribute the Quarterdeck Product and subsequent to
January 31, 1997, and commencing with respect to the first such calendar
quarter, Intuit shall submit to CNC, within fifteen (15) days following the end
of each quarter a royalty report which shall specify the number of units of the
Quarterdeck Product sublicensed by Intuit during the previous quarter based on
the number of subscribers for Full Internet Access; provided, that CNC will
cooperate with Intuit and provide any information that Intuit may require in
order to submit such report. CNC shall have the right to charge interest on any
payment which is more than ninety (90) days past due, at a rate equal to the
lesser of (i) one and one half percent (1 1/2%) per month; or (ii) the maximum
rate allowed by law.
e. Audit Rights. Intuit shall allow Quarterdeck's representatives
------------
and/or independent auditors to audit and analyze appropriate and relevant
accounting records of Intuit's premises solely to verify accurate and full
accounting for and payment of all moneys due Quarterdeck under this Agreement
and Intuit's other compliance with the terms of this Agreement. Any discrepancy
in the amount of royalties due shall be corrected promptly by Intuit, in the
case of an underpayment, or by Quarterdeck, in the case of an overpayment, and
if any such audit discloses a discrepancy of more than ten percent (10%) of the
amount due from Intuit for the period as to which the discrepancy has arisen,
Intuit shall pay the cost of the audit. Any such audit shall be during Intuit's
normal business hours, upon ten (10) business days written notice by
Quarterdeck. No audit (other than the first audit) may be conducted less than
twelve (12) months after the previous audit.
f. Termination of Quarterdeck Agreement.
------------------------------------
(1) Intuit's rights under Section 2.1 of this Agreement with
respect to the Quarterdeck Product shall cease upon termination of the
Quarterdeck Agreement except that Intuit may sell any copies of the Quarterdeck
Product in its inventory for a period of ninety (90) days after such
termination; provided, however, that CNC shall notify Intuit if CNC's rights
under the Quarterdeck Agreement's related sell-off provisions are extended or
improved in any way and, in such case, such extended or improved rights shall
automatically be deemed to be granted to Intuit
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
5
<PAGE>
pursuant to this section (although the parties shall execute an amendment to
this Agreement at either party's request to memorialize such new or revised
terms).
(2) During the Term of the Access Agreement and so long as Intuit is
using the Quarterdeck Product, CNC hereby covenants that:
(a) CNC shall fully perform its obligations under the Quarterdeck
Agreement; provided, however, that if CNC fails to perform any of its material
obligations under the Quarterdeck Agreement or is notified by Quarterdeck to
that effect, then CNC shall give Intuit immediate written notice of such
occurrence and use its best efforts to remedy such failure so that the
Quarterdeck Agreement shall not be terminated;
(b) CNC shall not without Intuit's written consent take action to
terminate the Quarterdeck Agreement with or without cause; and
(c) CNC shall give Intuit written notice within three days if
Quarterdeck notifies CNC of Quarterdeck's intention to terminate the Quarterdeck
Agreement.
g. Taxes. Intuit shall be solely responsible for any federal, state,
-----
provincial or local sales, use, value added or other tax, tariff, duty or
assessment customarily levied or imposed on a sublicensor arising out of or
related to the payment of royalties by Intuit to CNC under this Section 2.4,
other than any tax based on the revenues or income of Quarterdeck or CNC. Intuit
shall pay directly, or reimburse Quarterdeck or CNC for, the amount of such
sales, use, value added or other tax, tariff, duty or assessment which
Quarterdeck or CNC are at any time obligated to pay or collect.
h. Reverse Engineering. Intuit may not modify any Quarterdeck Product, any
-------------------
copies of any of the Quarterdeck Products or any documentation associated with
any of the Quarterdeck Products, except as expressly and clearly permitted by
this Agreement. Intuit shall not disassemble, decompile or otherwise reverse
engineer all or any part of any of the Quarterdeck Products or assist any third
party to do any of the foregoing.
i. U.S. Export Control. Intuit understands and acknowledges that the
-------------------
Quarterdeck Product is subject to regulation by agencies of the U.S. Government,
including, but not limited to, the U.S. Department of Commerce, which prohibit
export or diversion of certain products and technology to certain countries.
Intuit warrants that it will comply with the Export Administration Regulations
and other United States laws and regulations governing exports in effect from
time to time."
2.5 In addition to its rights granted pursuant to Section 2.4 relating to
the Quarterdeck Product, CNC hereby grants to Intuit a limited non-exclusive
license before the termination of the Quarterdeck Agreement to use the
Quarterdeck Materials (as defined in the Quarterdeck Agreement) and to
manufacture and use internally, solely for purposes of marketing, promotion,
demonstration and technical support to end users, a number of copies of the
Quarterdeck Product equal to one (1) for each Intuit employee and a reasonable
number of copies solely for back-up or archival purposes. Intuit shall reproduce
on all copies of the Quarterdeck Product reproduced by Intuit pursuant to this
Section 2.5 such proprietary rights notices in the name of Quarterdeck as
Quarterdeck reasonably designates. All such copies used by Intuit shall be
governed by and subject to the terms of the standard Quarterdeck License And
Limited Warranty supplied with the Quarterdeck Product, a copy of which is
attached as Attachment 2 to this Agreement.
6
<PAGE>
3. No Infringement. CNC represents and warrants on a continuing basis that
---------------
neither the CNC Code, nor the exercise by Intuit of any of the rights granted
under this Agreement, will infringe any intellectual property right of any third
party and that there is no litigation or claim pending or, to CNC's knowledge,
threatened relating thereto. CNC shall and hereby does indemnify and defend
Intuit and hold it harmless from and against any and all claims, liabilities,
losses, costs and expenses including, but not limited to, reasonable attorneys'
fees and costs of suit, incurred by Intuit as a result of or arising from any
claim or proceeding made or brought against Intuit that the use, reproduction,
marketing, sale, sublicensing or distribution of CNC Code infringes any patent,
copyright or other rights of any third party, or that the CNC Code is defective.
This indemnity shall not apply to the extent such claims result from Intuit's
own modification or alteration of the CNC Code. Intuit shall promptly notify CNC
of any such claim(s) of which it becomes aware and shall, at CNC's request and
expense, cooperate in the investigation and defense of such claim(s).
4. Miscellaneous.
-------------
4.1 Entire Agreement. This Agreement shall be governed by and construed in
----------------
accordance with the substantive laws of the State of California (not including
its choice of law provisions). This Agreement, as supplemented by the Access
Agreement, constitutes the entire understanding between the parties with respect
to the licensing of the CNC Code contemplated herein. This Agreement shall not
be modified except in a writing signed by and exchanged between both of the
parties and expressly referencing this Agreement. A waiver of any provision of
the Agreement or any right or obligations of either party hereunder shall be
effective only if made pursuant to a writing signed and delivered by the party
waiving compliance. Except as provided therein, any such written waiver shall
not be construed as, or constitute, a continuing waiver of such breach, or of
other breaches of the same or other provisions of this Agreement. Neither party
shall by mere lapse of time without giving notice or taking other action
hereunder be deemed to have waived any breach by the other party of any of the
provisions of this Agreement. This Agreement shall be binding on all successors
and assigns of the parties.
4.2 No Executory Obligation. CNC acknowledges that this Agreement is not
-----------------------
an "executory contract" within the meaning of the U.S. Bankruptcy Code and shall
not be subject to rejection by any debtor-in-possession, bankruptcy trustee or
the like.
4.3 Severability. If any provisions of this Agreement shall be held by a
------------
court, arbitrator or other tribunal of competent jurisdiction to be invalid or
unenforceable, such provisions shall be
7
<PAGE>
deemed valid and enforced to the maximum extent permissible and the remaining
portions of this Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, this Agreement shall be effective as of the Effective
Date and it shall be deemed accepted and made in San Diego, California.
<TABLE>
<S> <C>
INTUIT INC. CONCENTRIC NETWORK
CORPORATION
By: By:
-------------------------- --------------------------
William Harris Michael Anthofer
Executive Vice President Senior President & Chief Financial
Officer
6220 Greenwich Drive 10590 N. Tantau Avenue
San Diego, CA 92122 Cupertino, CA 95014
</TABLE>
8
<PAGE>
EXHIBIT F - ATTACHMENT 1
------------------------
DESCRIPTION OF QUARTERDECK PRODUCT
The Quarterdeck Product consists of Quarterdeck's current version as of the date
of this Agreement of:
MPKERNEL.EXE -- The Winsock dialer and protocol stack that Quarterdeck uses to
dial out via a modem and standard telephone line to obtain a PPP connection.
The following ".dll" files that are required to enable to Winsock dialer to
work: MPLANG.DLL, INIFILES.DLL, MPCOMM.DLL, MPIAP.DLL, MPSCRIPT.DLL, MPSLIP.DLL,
MPTCPIP.DLL, WINSOCK.DLL.
With the following changes:
(a) Menu selection in mpkernel.exe and icon for 'location manager',
'help', 'ping' to be removed.
(b) The "About Winsock" licensing information and serial number to be
changed."
9
<PAGE>
EXHIBIT F - ATTACHMENT 2
------------------------
END USER LICENSE
This License is your proof of license. Please treat it as valuable property.
QUARTERDECK END USER LICENSE AGREEMENT
("AGREEMENT")
NOTICE TO END USER: CAREFULLY READ THIS AGREEMENT. USE OF THE SOFTWARE
("SOFTWARE") AND FONTS, IF ANY, PROVIDED WITH THIS AGREEMENT CONSTITUTES YOUR
ACCEPTANCE OF THE TERMS OF THIS AGREEMENT. IF YOU DO NOT AGREE TO THE TERMS OF
THIS AGREEMENT, PROMPTLY RETURN THE SOFTWARE AND THE ACCOMPANYING ITEMS
(INCLUDING WRITTEN MATERIALS, BINDERS AND CONTAINERS) TO THE LOCATION WHERE YOU
OBTAINED THEM FOR A FULL REFUND.
1. License Grant. Quarterdeck Corporation, ("QUARTERDECK"), hereby grants to
-------------
you (either as an individual or entity) a nonexclusive sublicense subject to the
provisions of this AGREEMENT, to use the SOFTWARE solely for your own internal
personal or business purposes on a single computer (whether a standard computer
or a workstation component of a multi-user network). You may not copy the
written materials accompanying the SOFTWARE. This AGREEMENT is effective until
the year 2040.
2. Proprietary Rights. You acknowledge that the SOFTWARE is proprietary to
------------------
QUARTERDECK and its suppliers. You agree to hold the SOFTWARE in confidence,
disclosing the SOFTWARE only to authorized employees having a need to use the
SOFTWARE as permitted by this AGREEMENT and to take all reasonable precautions
to prevent disclosure to other parties.
3. Other Copies. You will not make, have made or permit to be made any copies
------------
of the SOFTWARE or portions of the SOFTWARE, except as necessary for its use
with a single licensed computer system under the terms and conditions of this
AGREEMENT. You agree that any such copies shall contain the same proprietary
notices which appear on or in the SOFTWARE.
4. Ownership. Except as stated above, this AGREEMENT does not grant you any
---------
rights to patents, copyrights, trade secrets, trade names, trademarks (whether
registered or unregistered), or any other rights, franchises or licenses in
respect of the SOFTWARE. Title to and ownership of the SOFTWARE, any
reproductions and any documentation of the SOFTWARE, shall remain with
QUARTERDECK and its suppliers. You will not adapt or use any trademark or trade
name which is likely to be similar to or confusing with that of QUARTERDECK or
any of its suppliers or take any other action which impairs or reduces the
trademarks rights of QUARTERDECK or its suppliers.
5. Other Restrictions. This AGREEMENT is your proof of license to use the
------------------
SOFTWARE in accordance with the terms of this AGREEMENT, and must be retained by
you. You may not rent or lease the SOFTWARE, but you may permanently assign your
rights under this AGREEMENT to an assignee of all of your right, title and
interest in and to the SOFTWARE, provided you transfer this AGREEMENT, all
copies of the SOFTWARE and all accompanying written materials, and such assignee
agrees to be bound by all the terms and conditions of this AGREEMENT. YOU MAY
NOT ALTER, MODIFY, REVERSE, ENGINEER, DECRYPT, DECOMPILE OR DISASSEMBLE THE
SOFTWARE.
10
<PAGE>
6. Content. Title, ownership rights and intellectual property rights in and
-------
to the content accessed through the SOFTWARE is the property of the applicable
content owner and may be protected by applicable copyright or other law. This
License grants you no rights to such content.
7. Limited Warranty. QUARTERDECK warrants that the SOFTWARE will perform
----------------
substantially in accordance with the accompanying written materials and that the
printed materials and diskettes are free from any physical defects for a period
of ninety (90) days from the date of purchase. Any implied warranties on the
SOFTWARE, printed materials or diskettes are limited to ninety (90) days.
8. Customer Remedies. QUARTERDECK's entire liability and your sole and
-----------------
exclusive remedy shall be, at QUARTERDECK's option, either to: (a) correct the
error; (b) help you work around or avoid the error; or (c) authorize a refund,
so long as the SOFTWARE, printed materials or diskettes are returned to
QUARTERDECK with a copy of your receipt. This Limited Warranty is void if
failure of the SOFTWARE has resulted from accident, abuse or misapplication. Any
replacement SOFTWARE will be warranted for the remainder of the original
warranty period.
9. No Other Warranties. QUARTERDECK DOES NOT WARRANT THAT THE SOFTWARE IS
-------------------
ERROR FREE, AND QUARTERDECK DISCLAIMS ALL OTHER WARRANTIES, EITHER EXPRESS OR
IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT OF THIRD PARTY RIGHTS WITH
RESPECT TO THE SOFTWARE, THE ACCOMPANYING WRITTEN MATERIALS OR DISKETTES. SOME
JURISDICTIONS DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES OR LIMITATIONS ON
HOW LONG AN IMPLIED WARRANTY MAY LAST, OR THE EXCLUSION OR LIMITATION OF
INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THE ABOVE LIMITATIONS OR EXCLUSIONS MAY
NOT APPLY TO YOU. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS AND YOU MAY ALSO
HAVE OTHER RIGHTS WHICH VARY FROM JURISDICTION TO JURISDICTION.
10. Export. You acknowledge that the laws and regulations of the United States
------
restrict the export and re-export of commodities and technical data of United
States origin, including the SOFTWARE. You agree that you will not export or re-
export the SOFTWARE in any form without the appropriate United States and
foreign government licenses. You agree that your obligations pursuant to this
Section of this AGREEMENT shall survive and continue after any termination or
expiration of rights under this AGREEMENT.
11. Severability. In the event of invalidity of any provision of this
------------
AGREEMENT, such invalidity shall not affect the validity of the remaining
portions of this AGREEMENT. The United Nations Convention on Contracts for the
International Sale of Goods is specifically disclaimed.
12. No Liability For Consequential Damages. IN NO EVENT SHALL QUARTERDECK BE
--------------------------------------
LIABLE TO YOU FOR ANY CONSEQUENTIAL, SPECIAL, INCIDENTAL OR INDIRECT DAMAGES OF
ANY KIND ARISING OUT OF THE USE OF THE SOFTWARE, EVEN IF QUARTERDECK HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND IN NO EVENT WILL QUARTERDECK'S
LIABILITY FOR ANY CLAIM, WHETHER IN CONTRACT, TORT OR ANY OTHER THEORY OF
LIABILITY, EXCEED THE LICENSE FEE FOR THE SOFTWARE PAID BY YOU.
13. U.S. Government Restricted Rights. If this product is acquired under the
---------------------------------
terms of a: (a) DoD contract, use, duplication or disclosure by the Government
is subject to restrictions as set forth in subparagraph (c)(1)(ii) of 252.227-
7013; or (b) agency contract, use, reproduction or disclosure is
11
<PAGE>
subject to 52.227-19 (a) through (d) and restrictions set forth in the
accompanying end user agreement. Unpublished-rights reserved under the
copyright laws of the United States. Quarterdeck Corporation, 150 Pico
Boulevard, Santa Monica, California 90405-1018.
14. Governing Law. This AGREEMENT is governed by the laws of the United States
-------------
of America and the State of California.
15. Entire Agreement. This is the entire agreement between you and QUARTERDECK
----------------
which supersedes any prior agreement, whether written or oral, relating to the
subject matter of this AGREEMENT.
Should you have any questions concerning this AGREEMENT, or if you desire to
contact QUARTERDECK for any reason, please write: Quarterdeck Corporation, 150
Pico Boulevard, Santa Monica, California 90405-1018."
12
<PAGE>
EXHIBIT 10.32
Revised Virtual Private Network Services Agreement
--------------------------------------------------
This agreement is made and entered into effective as of the 1st day
of February, 1997 ("Effective Date") by and between Concentric
Network Corporation ("CNC"), a Florida corporation with offices at
10590 N. Tantau Avenue, Cupertino CA 95014, and WebTV Networks Inc.
("WNI"), a California corporation located at 275 Alma Street, Palo
Alto, CA 94301.
WHEREAS CNC currently provides local access by telephone to a
significant portion of the personal computer user population in the
top geographical markets in the United States and Canada;
WHEREAS CNC plans to expand, improve and enhance the capabilities of
its network;
WHEREAS WNI has developed a "WebTV" television set top appliance
which allows its customers to use their televisions to access
Internet services such as E-mail, World Wide Web, chat, and UseNet,
and WebTV proprietary on-line services;
WHEREAS WNI plans to operate computers that will act as servers to
facilitate such Internet access, as well as registration, account
verification, technical support, billing, collection, and inquiry
functions;
WHEREAS WNI wishes to obtain from CNC, and CNC wishes to provide to
WNI, dial-up access and network services to implement WebTV Services,
as defined herein; and
WHEREAS the parties entered into a Virtual Private Network Services
Agreement dated August 16, 1996, as supplemented by the Addendum
dated December 1, 1996 and as amended by the Amendment dated January
7, 1997, and wish this Agreement to supersede such documents.
NOW, THEREFORE, in consideration of the mutual promises set forth
herein, the parties agree as follows:
1. DEFINITIONS
The following capitalized terms shall have the following meaning when
used in this Agreement:
1
<PAGE>
1.1. "800 Service" shall have the meaning set forth in Section 2.9.
1.2. "Agreement" shall mean this Revised Virtual Private Network Services
Agreement, including its exhibits and attachments, all by this reference
incorporated into and made a part hereof.
1.3. "CNC Equipment" shall be the computer and telecommunications equipment
set forth in Exhibit A under the corresponding caption.
1.4. "Customer Information" shall mean all the information and records
collected, processed or compiled by CNC, including without limitation, lists of
customer names, addresses, and telephone numbers; registration, credit and
financial information, and information respecting customer needs, usage and
demands.
1.5. "Dedicated Access Facilities" shall have the meaning set forth in
Section 2.7.
1.6. "Engineering Unit" shall have the meaning set forth in Section 2.3.
1.7. "Point of Presence" shall mean the hardware (such as modems, terminal
servers and routers), software, networks and telecommunications connections at a
local facility or site through which an end user may gain access to the Internet
through a telephone TCP/IP link with the Virtual Private Network Services.
1.8. "Project Manager" shall have the meaning set forth in Section 2.4.
1.9. "Third Party Software" shall have the meaning set forth in Section 2.5.
1.10. "Subscribers" shall mean customers who utilize WebTV Services.
1.11. "Subscriber Minute" shall be a minute or a portion thereof when a WNI
Subscriber is using the 800 Service.
1.12. "Term" shall have the meaning set forth in Section 6.1.
1.13. "Transition Date" shall have the meaning set forth in Section 2.7.
1.14. "Virtual Port" shall mean the simultaneous modem connection of a
Subscriber to the Virtual Private Network Services.
1.15. "Virtual Port Commitment" shall mean the minimum number of Virtual Ports
for which WNI will pay Virtual Port Fees each month pursuant to Section 4 and 5.
1.16. "Virtual Port Fees" shall mean fees payable to CNC by WNI for the use of
Virtual Ports as set forth in Section 5.
2
<PAGE>
1.17. "Virtual Private Network Services" shall mean the computing, information
services, hardware, software, telecommunications, access and provisioning
provided by CNC as further described in this Agreement, as such network may be
enhanced, improved and/or expanded during the Term, including without limitation
the software and technology enabling a Point of Presence, and other software,
including object code and source code, and including any related documentation.
1.18. "WebTV Equipment" shall be the computer and telecommunications equipment
set forth on Exhibit A under the corresponding caption.
1.19. "WebTV Services" shall mean the Internet access and other computing and
information services, provided by WNI in connection with its WebTV service, as
such service may be modified, improved and expanded during the Term.
2. CNC SERVICES/RESPONSIBILITIES
-----------------------------
2.1. CNC Access. CNC shall provide the Virtual Private Network Services
----------
through its Points of Presence, which shall at all times include Points of
Presence in no less than [*] of the top [*] metropolitan areas in the United
States.
2.2. UseNet. CNC will provide WNI with a UseNet newsfeed. The price of the
------
newsfeed will be included in the monthly service fees of the Dedicated Access
Facilities. However, upon WNI's request, CNC shall provide the alt.* hierarchy
at an additional fee of [*] per month.
2.3. Information and Operational Support System Interfaces. The parties
-----------------------------------------------------
acknowledge that CNC has delivered software tools by which WNI can monitor the
usage and performance of CNC's network as used in the Virtual Private Network
Services. Subject to mutual agreement as to the specifications therefore, CNC
shall, at WNI's request, perform additional development and maintenance of
related software at the rate of [*].
2.4. Project Manager. CNC shall assign WNI a dedicated project manager
---------------
for the Term to serve as CNC's primary contact to WNI ("Project Manager"). The
Project Manager shall be available during business hours as needed by WNI to
assist WNI in problem resolution, monthly reviews, and process improvement
efforts. [*].
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
3
<PAGE>
2.5. Third Party Software. The parties acknowledge that each party is and
--------------------
will be using its own software to verify the identity and account of Subscribers
("Third Party Software"). The parties further acknowledge that any rights or
licenses in the Third Party Software shall be directly between any applicable
third party and the applicable party.
2.6. General Network Operation. CNC shall use [*] efforts to operate the
-------------------------
Virtual Private Network Services seven (7) days per week, twenty four (24)
hours per day, three hundred sixty-five (365) days per year. CNC shall provide
services under this Agreement which meet [*]. CNC will respond to any network
outages pursuant to the escalation procedures set forth in Exhibit C and, as
part of such responses, CNC will use all commercially reasonable efforts to
implement such actions as are appropriate so as to maintain the services under
the terms of this Agreement.
2.7. Dedicated Access Facility. The parties acknowledge that prior to the
-------------------------
Effective Date, CNC has delivered, and will continue to provide, the Dedicated
Access Facility and the CNC Equipment, which shall mean the [*] and other
mutually agreed upon access solutions set forth in Exhibits A and B, pursuant to
the terms and conditions set forth in Exhibit B. [*]. CNC acknowledges that such
listed WNI Equipment will be sufficient to allow CNC to provide the services
which it is obligated to provide under this Agreement. CNC's response to any
problems in the Dedicated Access Facilities will be pursuant to the procedures
set forth in Exhibit D. And, as part of such response, CNC shall use all
commercially reasonable responses to implement such actions as are appropriate
so as to maintain the services under the terms of the Agreement.
2.8. Connectivity to the Internet. The parties acknowledge that CNC has
----------------------------
provided and will continue to provide direct access between WNI's data centers
and the Internet, pursuant to the terms and conditions set forth in Exhibit B
including the terms and conditions specified under the caption "Additional
Explanations".
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
4
<PAGE>
2.9. 800 Service. In addition to the Point of Presence access described in
-----------
Section 2.1, CNC shall make available to WNI Virtual Private Network Services
that access a Point of Presence through a toll-free 800 line to be provided by
CNC, which shall be available in the 48 contiguous states of the United States
in areas where there is no local CNC Point of Presence ("800 Service"), subject
to the fees set forth in Section 5.3.
3. MUTUAL RESPONSIBILITIES
-----------------------
3.1. Improving Performance. CNC and WNI shall work together to define
---------------------
programs to continually improve the performance of the Virtual Private Network
Services for Subscribers, and CNC shall, upon mutual, prior written agreement,
implement such programs. The parties shall share the expense for such programs
in a manner to be mutually determined.
3.2. Technical Support. WNI shall provide first tier support directly to
-----------------
Subscribers. CNC shall provide second tier technical support to WNI pursuant to
the provisions of this Section 3.2 and the escalation policies described in
Exhibit C and Exhibit D. CNC shall provide to WNI a telephone support line
connected to CNC's network operations desk, staffed by CNC employees
knowledgeable regarding the network services offered by CNC. CNC shall operate
such telephone support line twenty four (24) hours per day, seven (7) days per
week, three hundred sixty five (365) days per year.
3.3. Publicity. WNI and CNC will jointly develop and agree on an appropriate
---------
set of responses and/or statements to be used when responding to press or other
third-party inquiries regarding the WNI/CNC relationship described in this
Agreement, with the objective of providing positive referral and support for
each company in these communications. Each party shall restrict its public
comments to such agreed upon responses, except as otherwise mutually agreed or
as required by law. [*].
3.4. Statistical Information. WNI and CNC will disclose to each other to
-----------------------
the extent that it is reasonably available statistical information [*]. Such
information shall be subject to the terms of Sections 8.2 and 8.3.
4. VIRTUAL PORT FORECASTS AND COMMITMENTS
--------------------------------------
4.1. Rolling Forecasts. Each calendar quarter after the Effective Date,
-----------------
WNI shall provide CNC a non-binding rolling forecast of the Virtual Ports it
anticipates it will use during the ensuing twelve (12) month period. CNC and WNI
shall meet and discuss these Virtual Port Forecasts on a quarterly basis.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
5
<PAGE>
4.2. Virtual Port Commitment. For the period February through [*]
-----------------------
WNI's minimum Virtual Port Commitment shall be [*] Virtual Ports per month.
For the period [*] the minimum Virtual Port Commitment shall be [*] Virtual
Ports per month. The parties will negotiate in good faith to determine the
Virtual Port Commitment for the period after [*].
5. VIRTUAL PORT FEES.
-----------------
5.1. Virtual Port Fees. WNI shall pay CNC Virtual Port Fees based on
-----------------
Virtual Port Commitment and actual usage as follows:
<TABLE>
<CAPTION>
Time Period Virtual Port Commitment Additional Virtual Ports
----------- ----------------------- ------------------------
<S> <C> <C>
February - [*] [*] [*]
[*] [*] [*]
</TABLE>
For February and March 1997, WNI will pay CNC for the Virtual Port Commitment
listed above, or actual peak simultaneous users, whichever is higher. For the
months of [*], WNI will pay CNC for either the Virtual Port
Commitment listed above or [*].
5.2. Renegotiation. WNI and CNC agree to negotiate in good faith new
-------------
pricing, terms, and conditions by [*]. If the parties cannot agree on new
pricing, terms and conditions by [*] WNI increases its [*] over levels in
effect on the Effective Date or adds an hourly component to its pricing, then
CNC reserves the right to request an immediate re-negotiation of the fees it
charges WNI, and if such re-negotiation is not satisfactorily completed within
[*] of such request, CNC reserves the right to cancel this Agreement upon [*]
prior notice to WNI.
5.3. 800 Service. For 800 Service rendered from the Effective Date until
-----------
[*] WNI shall pay CNC at [*] per Subscriber Minute. For 800 Service rendered
from May 1, 1997 until September 30, 1997, WNI shall pay CNC at the rate of
[*] per Subscriber Minute. In each case, such fees shall be in addition to the
Virtual Port Fees due under Section 5.1. The parties will negotiate in good
faith to determine the 800 Service fees to be effective after [*].
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
6
<PAGE>
5.3.1. Daytime Surcharges. In the event that more than [*]
------------------
of Subscriber Minutes occur [*], Pacific Time, WNI shall pay CNC an
additional [*] for each such Subscriber Minute.
5.3.2. Intrastate Surcharges. WNI shall pay CNC an additional
---------------------
[*] for each Subscriber Minute that consists of an intrastate call
(from a Subscriber to a Point of Presence in the same state). CNC will
reroute traffic to avoid Intrastate Surcharges wherever possible. If
CNC is not able to reroute traffic then WNI will be responsible for any
Intrastate Surcharges that are accrued.
5.4. Taxes. WNI shall reimburse CNC for all Taxes related to the 800 service,
-----
and Dedicated Access Facilities; except any taxes based on the net income of
CNC. All other taxes shall be borne by CNC.
5.5. Payment. CNC shall invoice WNI for Virtual Port Fees and 800 Service
-------
fees as follows. In advance for each month, on the first day of each month, CNC
shall invoice WNI based on the Virtual Port Commitment applicable for that month
(for Virtual Port Fees) and the last month's actual usage (for 800 Service
fees). On the first of the following month, CNC will bill WNI for any adjustment
necessary (plus or minus) to reconcile the prior month's billing with the prior
month's actual usage. All payment terms will be net thirty (30) days. If bill
has not been paid by the due date, CNC will give WNI written notice with ten
(10) days to cure. [*]. If WNI fails to pay an invoice for 800 Service when
due, CNC reserves the right to discontinue 800 Service until payments are
made, after WNI has been given written notice of failure to pay and has failed
to cure within 10 days.
5.6. Dedicated Access Facilities. [*].
---------------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
7
<PAGE>
6. TERM AND TERMINATION.
--------------------
6.1. Term. The term of this Agreement shall commence on the Effective Date and
----
continue until [*], unless earlier terminated in accordance with
this Section 6. At the expiration of this initial term, this Agreement shall
continue in effect indefinitely, unless and until terminated in accordance with
Section 6.2. The initial term and any continuing term shall collectively be the
"Term."
6.2. Termination By Either Party. This Agreement may be terminated by
---------------------------
either WNI or CNC as follows:
6.2.1. Termination At Will. At any time on or after [*],
-------------------
either party may terminate this Agreement, for any reason or no reason,
upon [*].
6.2.2. Uncured Material Breach. Either party may terminate this
-----------------------
Agreement upon written notice for any material breach of this Agreement
which the other party fails to cure within thirty (30) days following
written notice of such breach by the non-breaching party.
6.2.3. Insolvency. Either party may, upon ten (10) days' written notice,
----------
terminate this Agreement in the event that the other party becomes
insolvent, liquidates, makes an assignment for the benefit of creditors,
or ceases to do business in the ordinary course for a continuous period
of more than one (1) week.
6.3. Effect of Termination and Survival of Terms. Termination of this
-------------------------------------------
Agreement shall be without prejudice to any rights or remedies available to
either party arising prior to such termination by reason of breach of this
Agreement. The provisions of Sections 1, 7, and 8 shall survive expiration or
termination of this Agreement for any reason.
7. INDEMNIFICATION
---------------
7.1. Indemnification by WNI: WNI agrees to, and shall, defend and hold
----------------------
harmless CNC, and its and their directors, shareholders, officers, agents and
employees, from and against any and all suits, actions, damages, costs, losses,
expenses (including attorneys' fees) and other liabilities arising in whole or
in part from or in connection with (a) WNI's breach of this Agreement or (b) any
claim or allegation that WebTV Services or the use of WebTV Services violates
any U.S. patent or other U.S. intellectual property rights of a third party.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
8
<PAGE>
7.2. Indemnification by CNC: CNC agrees to, and shall, defend and hold harmless
----------------------
WNI, and its and their directors, shareholders, officers, agents and employees
from and against any and all suits, actions, damages, costs, losses, expenses
(including attorneys' fees) and other liabilities arising in whole or in part
from or in connection with (a) CNC's breach of this Agreement or (b) any claim
or allegation that the Virtual Private Network Services or the use of the
Virtual Private Network Services violates any U.S. patent or other U.S.
intellectual property rights of a third party.
7.3. Conditions: The indemnities set forth in Sections 7.1 and 7.2 shall be
----------
conditioned upon the indemnified party promptly notifying the indemnifying party
in writing of any such claim, suit, expense or the like. The indemnifying party
shall bear full responsibility for the defense (including any settlements),
provided, however, that (a) the indemnifying party shall keep the indemnified
party informed of, and consult with the indemnified party in connection with,
the progress of any litigation or settlement, (b) the indemnified party shall
cooperate with the indemnifying party, at the indemnified party's expense, in
defending such claim, suit, expenses or the like; except that the indemnifying
party shall reimburse the indemnified party for any out-of-pocket expenses
resulting from cooperation specifically requested by the indemnifying party, and
(c) the indemnifying party shall not have the right, without the indemnified
party's consent, to settle any such claim if such settlement arises from or is
part of any criminal action, suit or proceeding or contains a stipulation or
admission or acknowledgment of any liability or wrongdoing (whether in contract,
tort or otherwise) on the part of the indemnified party or any of its
affiliates.
8. OTHER PROVISIONS
----------------
8.1. Intellectual Property Ownership. As between the parties, CNC shall own and
-------------------------------
retain all of its right, title and interest in the Virtual Private Network
Services and its Third Party Software, and all patent, copyright, trademark,
trade secret, and any other intellectual property rights thereto, and WNI shall
own and retain all of its right, title and interest in WebTV Services and its
Third Party Software, and all patent, copyright, trademark trade secret and any
other intellectual property rights thereto.
8.2. Confidentiality. The rights and obligations of the parties with respect to
---------------
confidentiality shall continue to be governed by the terms of that certain
Mutual Non-Disclosure Agreement between Artemis Research, Inc. (the predecessor
to WNI) and CNC dated as of April 2, 1996.
9
<PAGE>
8.3. Representations And Warranties. Each party warrants that by entering into
------------------------------
this Agreement the party will not violate, conflict with or result in a material
default under any other contract, agreement, indenture, decree, judgment,
undertaking, conveyance, lien or encumbrance to which the party is a party or by
which it or any of its property is or may become subject or bound. Each party
shall not grant any rights under any future agreement, nor will it permit or
suffer any lien, obligation or encumbrances that will conflict with the full
enjoyment of either party of its rights under this Agreement. Each party further
represents and warrants that it has, and during the Term will have all necessary
rights, licenses, permits, governmental authorizations and the like to carry out
its obligations under this Agreement; and that it is in compliance with, and
during the Term continue to comply with, all material governmental laws,
regulations, orders and the like applicable to its provision of the services
contemplated by this Agreement.
8.4. Nonrestrictive Relationship: Nothing in this Agreement shall prevent CNC
---------------------------
from providing Virtual Private Network Services to other on-line services.
Nothing in this Agreement shall prevent WNI from engaging other network service
providers to provide services similar to those provided by CNC under this
Agreement.
8.5. LIMITATION OF LIABILITY. IN ANY ACTIONS ARISING FROM THE ALLEGED BREACH OF
-----------------------
THIS AGREEMENT, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR SPECIAL,
INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OF ANY NATURE, FOR ANY REASON,
INCLUDING WITHOUT LIMITATION THE BREACH OF THIS AGREEMENT OR ANY TERMINATION OF
THIS AGREEMENT, WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT,
TORT (INCLUDING NEGLIGENCE OR STRICT LIABILITY) OR OTHERWISE, EVEN IF THE OTHER
PARTY HAS BEEN WARNED OF THE POSSIBILITY OF SUCH DAMAGES.
8.6. Force Majeure: Neither party shall be deemed in default or liable under
-------------
this Agreement, nor shall it hold the other party responsible for, any
cessation, interruption, delay or failure in the performance of its obligations
hereunder, except for any payment obligations, due to circumstances beyond its
reasonable control, including but not limited to earthquake, flood, fire, storm
or other natural disaster, epidemic, accident, explosion, casualty, act of God,
lockout, strike, labor controversy or threat thereof, riot, insurrection, civil
disturbance or commotion, boycott, disruption of the public markets, war or
armed conflict (whether or not officially declared), sabotage, act of a public
enemy, embargo, delay of a common carrier or any change in or the adoption of
any law, ordinance, rule, regulation, order, judgment or decree, provided that
the party relying upon this Section 8.7 shall have given the other party written
notice thereof promptly and in any event within fifteen (15) days after
discovery thereof and (b) shall take all steps reasonably necessary under the
circumstances to mitigate the effects of the force majeure upon which such
notice is based.
10
<PAGE>
8.7. Non-Assignment. This agreement shall be binding upon, and inure to the
--------------
benefit of, the parties hereto and their respective successors and assigns.
Notwithstanding the above, neither party may assign this Agreement or any rights
or obligations under this Agreement without the prior written consent of the
other party, except that either party may assign this Agreement, and its rights
and obligations hereunder, to any entity that agrees in writing to be bound by
the terms and conditions of this Agreement, and succeeds to substantially all of
such party's assets or business in connection with a merger, reorganization or
sale or transfer of, unless such entity is a competitor of the other party. For
clarity, the parties acknowledge that WNI has entered into an definitive
agreement with Microsoft Corporation ("MS") and certain shareholders of WNI
which provides for a recapitalization of WNI and related transactions such that,
subject to certain conditions, WNI will become a subsidiary of MS; and that same
shall not violate this Agreement.
8.8. Independent Contractors. The parties shall have the status of
-----------------------
independent contractors, and nothing in this Agreement shall be deemed to place
the parties in the relationship of employer-employee, principal-agent, or
partners or joint ventures.
8.9. DISCLAIMER. EXCEPT AS IS EXPRESSLY SET FORTH HEREIN, EACH PARTY DISCLAIMS
----------
ANY WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE SOFTWARE OR SERVICES IT
SHALL PROVIDE PURSUANT TO THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO ANY
WARRANTY OF DESIGN, TITLE, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR
NON-INFRINGEMENT, EVEN IF SUCH PARTY HAS BEEN INFORMED OF SUCH PURPOSE. EACH
PARTY ALSO DISCLAIMS ANY WARRANTY THAT SUCH SOFTWARE OR SERVICE SHALL BE WITHOUT
INTERRUPTION OR ERROR-FREE.
8.10. Payment Terms. Unless otherwise set forth in this Agreement, terms
-------------
for all payments are net thirty (30) days.
8.11. Non-Waiver. Failure of either party to enforce any of its rights
----------
hereunder shall not be deemed to constitute a waiver of its future enforcement
of such rights or any other rights.
8.12. Severability. If any provision of this Agreement is held to be invalid,
------------
illegal, or unenforceable under present or future laws, such item shall be
struck from this Agreement; however, such invalidity or enforceability shall not
affect the remaining provisions or conditions of this Agreement. The parties
shall remain legally bound by the remaining terms of this Agreement, and shall
strive to reform this Agreement in a manner consistent with the original intent
of the parties.
11
<PAGE>
8.13. Governing Law. This Agreement shall be deemed to have been made in
-------------
the State of California, and the provisions and conditions of this Agreement
shall be governed by and interpreted in accordance with the substantive laws of
the State of California, without regard to conflict of laws provisions.
8.14. Arbitration. Any dispute or claim arising out of or in connection with
-----------
this Agreement or the performance, breach or termination thereof, shall be
finally settled by binding arbitration in San Jose, California under the Rules
of Arbitration of the American Arbitration Association by an arbitrator
appointed in accordance with those rules. Judgment on the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
Notwithstanding the foregoing, either party may apply to any court of competent
jurisdiction for injunctive relief without breach of this arbitration provision.
8.15. Integration. This Agreement expresses the complete and final understanding
-----------
of the parties with respect to the subject matter hereof, and supersedes all
prior communications between the parties, whether written or oral with respect
to the subject matter hereof. No modification of this Agreement shall be binding
upon the parties hereto, unless evidenced by a writing duly signed by authorized
representatives of the respective parties hereto. For avoidance of doubt, the
Virtual Private Network Services Agreement dated August 16, 1996, and as amended
on December 1, 1996 and January 7, 1997, shall govern the provision of Virtual
Private Network Services until the Effective Date of this Agreement, and this
Agreement shall govern thereafter.
8.16. Notices. Any required notices hereunder shall be given in writing by
-------
certified mail or overnight express delivery service (such as DHL) at the
address of each party below, or to such other address as either party may from
time to time substitute by written notice. Notice shall be deemed served when
delivered or, if delivery is not accomplished by reason or some fault of the
addressee, when tendered.
12
<PAGE>
If to CNC:
Concentric Network Corporation, Inc.
North Tantau Ave.
Cupertino, CA 95014
Attn.: John Peters
If to WebTV Networks, Inc.:
Alma Street
Palo Alto, CA 94301
Attn.: William Yundt
IN WITNESS WHEREOF, the duly authorized representatives of each of the
parties hereto have executed this Agreement as of the Effective Date.
CONCENTRIC NETWORK WEB TV NETWORKS, INC. CORPORATION
By: /s/ Michael F. Anthofer By: /s/ William H. Yundt
--------------------------------- ---------------------------------
(authorized signature) (authorized signature)
Printed Name: Michael F. Anthofer Printed Name: William H. Yundt
----------------------- -----------------------
Title: SUP & CFO Title: Vice President
------------------------------ ------------------------------
13
<PAGE>
EXHIBIT A
---------
Concentric Fees
- ---------------
As set forth in Section 5 of the Agreement.
Backbone and Internet Backup Fee During Term
- --------------------------------------------
[*], as set forth in Section 5 of the Agreement.
Prior to Transition Date
- ------------------------
<TABLE>
<CAPTION>
CNC Equipment [*] [*]
- ---------------------------------------------------------------------------
<S> <C> <C>
[*] Router [*] [*]
Modems [*] [*]
[*] CSU/DSU [*] [*]
</TABLE>
Post Transition Date:
- ---------------------
<TABLE>
<CAPTION>
CNC Equipment [*] [*]
- ---------------------------------------------------------------------------
<S> <C> <C>
[*] Router [*] [*]
Modems [*] [*]
[*] CSU/DSU [*] [*]
</TABLE>
WNI Equipment
-------------
Post Transition Date:
- ---------------------
[*]
Modems
[*] CSU/DSU
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
14
<PAGE>
Exhibit B
---------
Dedicated Access Line Pricing
-----------------------------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions. A total of 2 pages has been
omitted from this exhibit.
15
<PAGE>
Additional explanations:
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions. A total of 2 pages has been
omitted from this exhibit.
16
<PAGE>
[GRAPHIC OMITTED]
17
<PAGE>
Exhibit C
---------
Network Escalation Procedures
-----------------------------
CNC Customer Support Operations Desk
Escalation Procedures
Version 1.1
March 28, 1997
Table of Contents
<TABLE>
<S> <C>
Objective.........................................................................................19
Notification of Outage............................................................................19
LEVEL I...................................................................................19
LEVEL II..................................................................................19
LEVEL III.................................................................................20
LEVEL IV..................................................................................20
Problem Level Definitions and Escalation..........................................................21
LEVEL I PROBLEM - Critical System Outage..................................................21
LEVEL II PROBLEM - Critical System Service Degradation/Non Redundant Server Failure.......21
LEVEL III PROBLEM - POP Site Outage.......................................................22
LEVEL IV PROBLEM - POP Site Service Degradation...........................................22
Vendor Identified Problems........................................................................22
Concentric Problem Solving Procedures.............................................................23
Operations Desk Staff Member..............................................................23
Contact List......................................................................................24
Concentric Names and Numbers..............................................................24
Vendor Names and Numbers..................................................................24
Vendor Executive Staff....................................................................24
Group E-mail Addresses....................................................................25
Group E-mail Notification to Vendor..............................................25
Group E-mail Notification to Concentric..........................................25
Emergency E-mail address.........................................................25
</TABLE>
18
<PAGE>
Objective:
The objective of this document is to describe the escalation procedures to be
used by Concentric Network Corporation (CNC) to notify WebTV of a problem with
CNC's network based on severity. Additionally, this document is to describe the
escalation procedure to be utilized when WebTV has identified a potential
problem with the CNC Network.
Notification of Outage:
CNC Customer Support Operations Desk will use the following methods to notify
WebTV for each level as described below. For Level I and Level II problems, CNC
will attempt to contact each person presented until live contact* is established
with each one.
* Either party may change designated contact information upon notice to the
other party.
LEVEL I:
For level I outages CNC operations desk will send e-mail to [*] Additionally,
CNC will make live contact with each person/group on the list.
[*]
LEVEL II:
For Level II outages CNC operations desk will send e-mail to [*].
Additionally, CNC will make live contact with each person/group on the list.
[*]
- -------------
* Definition of Live Contact: CNC Operations Desk Representative will; call
office # and leave voice mail if unanswered; call home # and leave message if
unavailable; call pager or cell phone. In order for live contact to be
successful the Operations Desk Representative must speak with the person/group
on the escalation procedure. If an attempt at live contact is unsuccessful the
Operations Desk will attempt contact 2 times per notification cycle ( i.e. Level
I, Operations Desk will call twice every hour until live contact is successful).
Note: We will attempt live contact 24 hours a day 7 days a week until successful
if the escalation procedure calls for it.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
19
<PAGE>
Level III:
For Level III outages CNC operations desk will send e-mail to [*].
Additionally, CNC will make live contact with each person/group on the list.
[*]
Level IV:
For Level IV outages CNC operations desk will send e-mail to [*] and/or to the
persons/groups specified below.
[*]
WebTV will use the following name and means to notify CNC of potential problems:
[*]
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
20
<PAGE>
Problem Level Definitions and Escalation
This section will describe the notification that will occur with CNC based
problems on the level (I. II. III, IV) of the problem identified.
Level I Problem-Critical System Outage
Data Center Equipment/Software: BCN Routers; Domain Name Servers; FDDI LAN;
Internet Access; AAA Servers; Login Servers; Public Network
. Within 15 minutes - Notify Director of NCC & Customer Services; and WebTV.
Provide WebTV with status reports every 60 minutes thereafter (live
contact) until problems are resolved.
. After 30 minutes - Notify VP Network Operations (CNC) with status reports
every 30 minutes until problems are resolved.
. After 60 minutes - Notify President Network Services (CNC) with status
reports every 30 minutes until problems are resolved.
LEVEL II PROBLEM - Critical System Service Degradation/Non Redundant Server
Failure
Data Center Equipment/Software: BCN Routers; Domain Name Servers; FDDI LAN;
Internet Access; AAA Servers; Login Servers; Public Network; Mail Servers, IRC
Server, Game Server, FTP Server, Web Server
. After 30 minutes - Notify Director of NCC & Customer Services (CNC), and
WebTV. Provide WebTV with status reports every 60 minutes thereafter until
problems are resolved.
. After 60 minutes - Notify VP Operations (CNC) with status reports every 60
minutes until problems are resolved.
. After 120 minutes - Notify President Network Services with status reports
every 60 minutes until problems are resolved.
21
<PAGE>
LEVEL III PROBLEM - POP Site Outage
POP Equipment: Modems; Terminal Servers; Routers; CSU/DSU; LEC network
. After 30 minutes - Notify WebTV, with status reports every two hours until
problems are resolved
. After 4 hours - Notify Director NCC & Customer Services and update with
status reports every 60 minutes until problems are resolved
. After 6 hours - Notify VP Network Services with status reports every two
hours until problems are resolved
LEVEL IV PROBLEM - POP Site Service Degradation
POP Equipment: Modems; Terminal Servers; Routers; CSU/DSU; LEC network
. After 2 hours - Notify WebTV, with status reports every four hours until
problems are resolved
WebTV Identified Problems
WebTV will initiate a call to the Concentric Network Corporation's Operations
Desk at the number identified with in the contact list. The Operations Desk
representative will begin the process described in the section entitled
"Concentric Problem Solving Procedures". Based on the level of problem
determined, WebTV will be updated as described in the section "Problem Level
Definitions and Escalation".
22
<PAGE>
Concentric Problem Solving Procedures
Operations Desk Staff Member:
1. Receives notification of problem from WebTV.
2. Obtains information from the WebTV contact describing the nature of the
problem, affected POP sites, any noticeable network impacts, and any
other information the contact is able to provide regarding the nature of
the problem.
3. Evaluates the problem and assigns a level (I, II, III, IV).
4. Informs the WebTV contact of the level assigned.
5. Notifies and provides appropriate departments with all documentation
based on problem level assigned.
6. Initiates Customer Notification Procedures per Priority Customer Contact
Program Guidelines.
7. Follows up to ensure resolution is accomplished.
8. Unresolved problems are escalated within Customer Support and to
Technical Support Management based on problem type and priority level.
23
<PAGE>
Contact List
Concentric Names and Numbers
<TABLE>
<CAPTION>
Name Phone Pager
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
[*]
</TABLE>
WebTV Names and Numbers
[*]
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
24
<PAGE>
Group E-mail Addresses
Group E-mail Notification to WebTV:
[*]
All communications regarding the operational status of the WebTV service should
be directed first to the WebTV Service Operations Center.
This organization is staffed [*].
Emergency email address
This email address is used to send outgoing mail by the Concentric Network
operations desk only in the event of a system wide failure:
----
[*]
Note: Please do not send email to this address.
- ----
Either party may change any designated contact information upon notice to the
other.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
25
<PAGE>
Exhibit D
DAF Escalation Procedures
DEDICATED ACCESS FACILITIES
ESCALATION PROCEDURES
Version 1.1
March 28, 1997
OBJECTIVE
The objective of this plan is to provide procedures for Concentric Network and
Dedicated Access Facility's (DAF) customers in the event of a system situation
specific to the DAF customer.
DEFINITION / CRITERIA
A system situation that warrants escalation to the DAF customer will be defined
as latency in excess of 150 milliseconds specific to the customer's dedicated
circuit, performance deviations that are atypical for the circuit, or outages
specific to the customer's dedicated circuit.
PROCEDURES
Note: If customer contact is not available (i.e. customer's operating hours),
technicians will leave a message where possible with a request to contact
Concentric Network's Customer Relations Operations desk.
. In the event of a situation that meets the criteria for escalation;
Concentric Network technicians will contact the customer to ascertain if the
outage is a result of customer initiated configuration changes, maintenance,
etc.
a. Contact primary customer contact, if no response after 5
minutes
b. Contact secondary customer contact, if no response escalation
may be halted.
. If Concentric Network is not able to interface with the customer to
eliminate customer initiated action as the cause of the situation,
Concentric Network may:
a. Continue with internal escalation if initial trouble shooting
indicates the outage is associated with Concentric Network's
system.
b. Halt escalation (until 8 am EST next business day) if trouble
shooting indicates the customer's equipment may be the root
cause of the situation.
. If the situation is not customer initiated, Concentric Network will open a
trouble ticket and begin diagnosis on CPE (Customer Premises Equipment) vs.
network failure. If situation is isolated to CPE, Concentric will assist
customer in configuration, as needed.
26
<PAGE>
1. Within 15 minutes after situation evaluation has eliminated customer
initiated or Concentric Network specific situations. Concentric Network
will initiate a trouble ticket call to Vendor (LEC/Inter-Exchange Carrier,
leased line, etc.), update the customer when possible, record vendor
trouble ticket number, and log all developments.
2. Within 30 minutes after situation evaluation Concentric Network will
request vendor to escalate internally to manager or duty supervisor. If
vendor has isolated the trouble and has ascertained ETR (Estimated Time of
Repair) is within 2 hours, Concentric Network may halt escalation. If root
cause is still undetected or if ETR is greater than 2 hours, then
escalation will proceed to next step.
3. Within 1 hour, if root cause is not yet determined, escalate to Customer
Support Team leader and Network Operations Supervisor or manager on duty.
The Network Operations Supervisor will escalate to vendor such as the
service manager.
4. Concentric Network will conduct hourly updates until a definitive ETR is
established within a 2-hour window. If the ETR is not within a 2-hour
window, Concentric will consult with the DAF customer to establish a
mutually agreeable update plan.
Upon service restoration, Concentric Network will notify the DAF customer, with
an update and post-mortem analysis.
If outage is escalated to Customer Relations management, an outage notification
will be provided to the appropriate Sales manager and Upper Management that
explains the outage duration and analysis.
27
<PAGE>
8.16.1.1. DAF Customer Contact Information
Concentric Network will use the information provided below for contacting DAF
customers. Customers may list an alternate for contacting in the event;
Concentric is unable to contact the primary contact. More information on contact
methodology and customer preferred methods of contact are on the following page.
[*]
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
28
<PAGE>
Contact Methods
H = Home Phone AH = Alternate's Home Phone
W = Work Phone AW = Alternate's Work Phone
M = Mobile Phone AM = Alternate's Mobile Phone
P = Pager AP = Alternate's Pager
E = Email AE = Alternate's Email
NA = Not available for contact
Please indicate as shown, the days and time when you will be available for
contact by Concentric Network Customer Relations operations desk. Please
indicate by the Contact Methods shown
<TABLE>
<CAPTION>
Example
- ---------------------- ---------------- ---------------
Time / Day Sunday Monday
- ---------------------- ---------------- ---------------
<S> <C> <C>
12 - 1 am H P
- ---------------------- ---------------- ---------------
1 - 2 am NA NA
- ---------------------- ---------------- ---------------
<CAPTION>
Time in Eastern Time Zone
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
Time/Day Sunday Monday Tuesday Wednesday Thursday Friday Saturday
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
12 - 1 am AP AP AP AP AP AP AP
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
1 - 2 AP AP AP AP AP AP AP
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
2 - 3 AP AP AP AP AP AP AP
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
3 - 4 AP AP AP AP AP AP AP
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
4 - 5 AP AP AP AP AP AP AP
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
5 - 6 AP AP AP AP AP AP AP
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
6 - 7 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
7 - 8 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
8 - 9 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
9 - 10 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
10 - 11 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
11 - 12 pm H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
12 - 1 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
1 - 2 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
2 - 3 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
3 - 4 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
4 - 5 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
5 - 6 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
6 - 7 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
7 - 8 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
8 - 9 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
9 - 10 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
10 - 11 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
11 - 12 H W E H W E H W E H W E H W E H W E H W E
- ----------------- ------------ ----------- ------------ ------------ ------------- ----------- ------------
</TABLE>
The Direct Access Customer will use the following name and means to notify
Concentric Network of potential problems:
Contact Point: Customer Relations Operations Desk
E-mail address: [*]
Phone Number: [*]
* Either party may change designated contact information upon notice to the
other party.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
29
<PAGE>
EXHIBIT 10.34
CONCENTRIC NETWORK CORPORATION
NOTE AND WARRANT PURCHASE AGREEMENT
-----------------------------------
THIS NOTE AND WARRANT PURCHASE AGREEMENT (this "Agreement") is made and
entered into as of the 19th day of June, 1997, by and among Concentric Network
Corporation, a Florida corporation (the "Company"), and Williams Communications
Group, Inc., a Delaware corporation (the "Purchaser").
In consideration of the mutual promises, covenants, and conditions
hereinafter set forth, the parties hereto mutually agree as follows:
1. The Loan and the Note. The Purchaser hereby agrees to lend to the
---------------------
Company, on the date hereof, and on the terms of and conditions hereof, up to an
aggregate principal amount of $3,000,000 (the "Loan"). The Loan made to the
Company by the Purchaser shall be evidenced by a secured promissory note in
substantially the form attached hereto as Exhibit A (the "Note").
---------
2. The Warrant. As an inducement to the Purchaser to make the Loan, the
-----------
Company shall issue to the Purchaser a warrant to purchase up to the number of
shares of the Common Stock of the Company set forth in the Common Stock Purchase
Warrant in substantially the form attached hereto as Exhibit B (the "Warrant").
---------
3. Representations and Warranties of the Company. Except as set forth in
---------------------------------------------
the Schedule of Exceptions attached hereto as Schedule 3, and except as
----------
otherwise disclosed in the section captioned "Business--Legal Proceedings" of
the Registration Statement on Form S-1 filed with the Securities and Exchange
Commission by the Company, the Company hereby represents and warrants to the
Purchaser as follows:
3.1 Organization and Standing. The Company is a corporation duly
-------------------------
organized and validly existing under, and by virtue of, the laws of its
jurisdiction of incorporation and is in good standing under the laws of said
jurisdiction. The Company has requisite corporate power and authority to own
and operate its properties and assets and to carry on its business as currently
conducted. The Company is qualified to do business as a foreign corporation in
each jurisdiction in which the failure to be so qualified would have a material
adverse effect on its business.
3.2 Corporate Power; Authorization. The Company has all requisite
------------------------------
legal and corporate power to execute and deliver the Transaction Documents (as
defined in Section 5.4) and to carry out and perform all of its obligations
under the Transaction Documents. The execution, delivery and performance of the
Transaction Documents by the Company have been duly authorized by all requisite
corporate action. The Transaction Documents constitute the legal, valid and
binding obligations of the Company, enforceable in accordance with their
respective terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization or similar laws relating to or affecting
<PAGE>
the enforcement of creditors' rights, and (ii) as limited by equitable
principles generally.
3.3 Non-Contravention. The execution, delivery and performance of the
-----------------
Transaction Documents and the compliance with the provisions thereof by the
Company do not (i) materially conflict with, or result in a material breach or
violation of, or constitute a material default under, or result in the creation
or imposition of any material lien, or (ii) violate, conflict with or result in
the breach of any material terms of, or result in the material modification of,
any material contract or otherwise give any other contracting party the right to
terminate a material contract, or constitute (or with notice or lapse of time
both constitute) a material default under any material contract to which the
Company is a party or by or to which it or any of its assets or properties may
be bound or subject.
3.4 Litigation. There is no material action, proceeding or
----------
investigation pending against the Company or any of its properties or assets,
nor has the Company received any threat of action, proceeding or investigation,
that questions the validity of the Transaction Documents or any action taken or
to be taken in connection herewith or therewith, or that, alone or in the
aggregate, is reasonably likely to result in any material adverse effect on the
financial condition, assets, liabilities, earnings or business of the Company
and its subsidiaries taken as a whole, nor is the Company aware that there is
any material basis for the foregoing. The Company is not a party to or subject
to the provisions of any material order, writ, injunction judgment or decree of
any court or government agency or instrumentality that will have a material
effect on the operations or business of the Company.
4. Representation and Warranties of the Purchaser. The Purchaser
----------------------------------------------
represents and warrants to the Company as follows:
4.1 Binding Obligations. The Purchaser has full legal capacity,
-------------------
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement is a valid and binding obligation of the
Purchaser, enforceable in accordance with its terms, except as limited by
bankruptcy, insolvency or other laws of general application relating to or
affecting the enforcement of creditors' rights generally and general principles
of equity.
4.2 Securities Law Compliance. The Purchaser has been advised that
-------------------------
neither the Note nor the Warrant has been registered under the Securities Act of
1933, as amended (the "Act"), or any state securities laws and, therefore,
cannot be resold unless they are registered under the Act and applicable state
securities laws or unless an exemption from such registration requirements is
available. The Purchaser is aware that Company is under no obligation to effect
any such registration with respect to the Note or to file for or comply with any
exemption from registration. The Purchaser has not been formed solely for the
purpose of making this investment and is purchasing the Note to be acquired by
the Purchaser hereunder for its own account for investment, not as a nominee or
agent, and not with a view to, or for resale in connection with, the
distribution thereof. The Purchaser has such knowledge and experience in
financial and business matters that the Purchaser is capable of evaluating the
merits and risks of such investment, is able to incur a complete loss of such
2
<PAGE>
investment and is able to bear the economic risk of such investment for an
indefinite period of time. The Purchaser is an accredited investor as such term
is defined in Rule 501 of Regulation D under the Securities Act.
4.3 Access to Information. Such Purchaser acknowledges that Company
---------------------
has given such Purchaser access to the corporate records and accounts of Company
and to all information in its possession relating to Company, has made its
officers and representatives available for interview by such Purchaser, and has
furnished such Purchaser with all documents and other information required for
such Purchaser to make an informed decision with respect to the purchase of the
Note and Warrant.
5. Conditions to Transaction. The obligation of the Purchaser to make the
-------------------------
Loan, and the obligations of the Company to issue the Note and Warrant, shall be
subject to each of the following conditions having been fulfilled on or before
such date:
5.1 Blue Sky. The Company shall have obtained all necessary Blue Sky
--------
law permits and qualifications, or have the availability of exceptions
therefrom, required by any state for the offer and sale of the Note and Warrant
and the issuance of the shares of Common Stock, par value $.001 per share, of
the Company (the "Shares") upon exercise of the Warrant.
5.2 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated hereby shall have been completed.
5.3 Consents and Waivers. The Company shall have obtained any and all
--------------------
consents and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement.
5.4 Transaction Documents. The Company shall have duly executed and
---------------------
delivered to the Purchaser the following documents (the "Transaction
Documents"):
(a) this Agreement;
(b) the Note issued hereunder;
(c) the Warrant issued hereunder;
(d) the Security Agreement in the form of Exhibit C hereto (the
---------
"Security Agreement") and any financing statements on form UCC-1
executed in connection herewith;
(f) the Technology Escrow Agreement in the form of Exhibit D
---------
hereto; and
3
<PAGE>
(g) a Term Sheet in the form of Exhibit E hereto setting forth
---------
the basic terms under which Purchaser would serve as an agent and a
reseller of the Company's products and services.
The agreement of the Purchaser to enter into this Agreement or any of the other
Transaction Documents does not obligate or require the Purchaser to enter into
any other contract, agreement or arrangement with the Company.
5.5 Accounts Payable. The Company shall have no accounts payable
----------------
outstanding to the Purchaser more than sixty days, or the Company shall have
made provision satisfactory to the Purchaser for the payment of such accounts
payable.
5.6 Opinion. The Company shall have delivered an opinion of its
-------
counsel to the Purchaser in form and substance satisfactory to the Purchaser.
6. Investment Representations; Legends.
-----------------------------------
6.1 Investment Representations of the Purchaser. The Purchaser
-------------------------------------------
hereby represents and warrants to the Company that the Purchaser is acquiring
the Note and the Warrant for its own account for investment and not with a view
toward the distribution thereof. The Purchaser understands that neither of the
Notes, the Warrant or the Shares have been registered under the Securities Act
of 1933, as amended (the "Act"), and that they are being offered and sold
pursuant to an exemption from registration contained in the Act based in part
upon the representations of the Purchaser contained herein.
6.2 Legends.
-------
(a) The Note, the Warrant, and the certificates representing any
Shares will each be stamped or otherwise imprinted with legends as set forth in
the form of Note and Warrant attached as Exhibits A and B, respectively. Such
legends shall be removed by the Company from the Notes, the Warrant, or the
certificates representing the Shares upon delivery to it of an opinion of
counsel that a registration statement under the Act is at the time in effect
with respect to the legended security or that such security can be freely
transferred without such registration statement being in effect and that such
transfer will not jeopardize the exemption or exemptions from registration
pursuant to which the Note and Warrant were issued.
(b) The Note, the Warrant, and the certificates representing the
Shares shall also bear any legends required under applicable state securities
laws.
7. Modification: Waiver. No modification or waiver of any provision of
--------------------
this Agreement or consent to departure therefrom shall be effective unless in
writing and signed by the Company and the Purchaser.
4
<PAGE>
8. Notices. Any notice or report herein required or permitted to be
-------
given shall be given by depositing the same in the United States mail, postage
prepaid and addressed or confirmed facsimile transmission to the parties as
follows:
(a) To the Company:
Concentric Network Corporation
10590 N. Tantau Avenue
Cupertino, CA 95014
Attn: Michael F. Anthofer
(b) To the Purchaser:
Williams Communications Group, Inc.
111 East 1st Street
Tulsa, Oklahoma 74103
Attn: Vice President-Finance
or to such other place or places as any of the parties shall designate by
written notice to the others.
9. Successors and Assigns. All covenants and agreements of the parties
----------------------
contained in this Agreement shall be binding and inure to the benefit of their
respective successors and assigns.
10. Governing Law. This Agreement shall in all respects be governed by
-------------
the laws of the State of California.
11. Section Headings. The section and paragraph headings contained herein
----------------
are for reference purposes only and shall not in any way affect the meaning and
interpretation of this Agreement.
12. Execution in Counterparts. This Agreement may be executed in any
-------------------------
number of counterparts, each of which when so executed and delivered shall be
deemed an original, and such counterparts together shall constitute only one
instrument.
13. Expenses of Agreement. The parties to this Agreement shall each bear
---------------------
their own expenses incurred in connection with the preparation, execution and
delivery of Transaction Documents.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
themselves
5
<PAGE>
or by their respective representatives thereunto duly authorized the day and
year first above written.
CONCENTRIC NETWORK CORPORATION
By: /s/
--------------------------------------
Henry R. Nothhaft, President and CEO
WILLIAMS COMMUNICATIONS GROUP, INC.
By: /s/
--------------------------------------
--------------------------------------
6
<PAGE>
EXHIBIT A
THIS NOTE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS
TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
CONCENTRIC NETWORK CORPORATION
10% CONVERTIBLE PROMISSORY NOTE
$3,000,000.00 June 19, 1997
Cupertino,
California
FOR VALUE RECEIVED, Concentric Network Corporation, a Florida corporation
(the "Company"), the principal office of which is located at 10590 North Tantau
Avenue, Cupertino, California 95014, hereby promises to pay to the order of
Williams Communications Group, Inc., a Delaware corporation ("Holder"), at One
Williams Center, Tulsa, Oklahoma 74172 ("Registered Address), or its registered
assigns, the sum of Three Million Dollars ($3,000,000.00), or such lesser amount
as shall then equal the outstanding principal amount hereof, on the terms and
conditions set forth hereinafter. The principal hereof and any unpaid accrued
interest hereon, unless converted, exchanged or subject to Optional Repayment
(as defined below) as set forth below, shall be due and payable on the earlier
to occur of (i) November 30, 1997 or (ii) when declared due and payable by the
Holder upon the occurrence of an Event of Default (as defined below). Payment
for all amounts due hereunder shall be made by mail to the Registered Address of
the Holder. This 10% Convertible Promissory Note ("Note"), is issued in
connection with the transactions described in the Memorandum of Understanding
(as defined below) and the Note and Warrant Purchase Agreement (as defined
below).
THE OBLIGATIONS DUE UNDER THIS NOTE ARE SECURED BY A SECURITY AGREEMENT
DATED AS OF THE DATE HEREOF AND EXECUTED BY THE COMPANY IN FAVOR OF THE HOLDER.
ADDITIONAL RIGHTS OF THE HOLDER ARE SET FORTH IN THE SECURITY AGREEMENT.
The following is a statement of the rights of the Holder of this Note and
the conditions to which this Note is subject, and to which the Holder hereof, by
the acceptance of this Note, agrees.
1. Definitions. As used in this Note, the following terms, unless the
-----------
context otherwise requires, have the following meanings:
<PAGE>
(a) Common Stock shall mean the Company's fully paid and nonassessable
------------
common stock, $0.01 par value per share, and any capital stock of the
Company which has the right to participate in the distribution of earnings
and assets of the Company without limit as to amount or percentage, into
which Common Stock may hereafter be reclassified by appropriate amendment
to the Company's Certificate of Incorporation.
(b) Company shall mean Concentric Network Corporation, a Florida
-------
corporation, and includes any corporation which shall succeed to or assume
the obligations of the Company under this Note.
(c) Convertible Securities shall mean any securities of the Company
----------------------
convertible into or exchangeable for (through one or more conversions or
exchanges) Common Stock or Options. Convertible Securities shall include
any evidences of indebtedness, any capital stock of the Company or other
securities convertible into or exchangeable for Common Stock.
(d) Direct Placements shall mean the private placement of Common Stock
-----------------
in the aggregate purchase price of approximately $15 million that will
occur concurrently with the closing of the Public Offering.
(e) Distribution Agreement shall mean, collectively, the agreement(s)
----------------------
between the Company and the Holder to be negotiated and executed pursuant
to a letter agreement of even date herewith pursuant to which the Holder is
entitled to sell some or all of the Company's network and server/host based
products and services.
(f) Holder shall mean Williams Communications Group, Inc., a Delaware
------
corporation, and includes any person who shall at the time be the
registered holder of this Note.
(g) Memorandum of Understanding shall mean the Memorandum of
---------------------------
Understanding between the Company and the Holder dated as of May 30, 1997.
(h) Note and Warrant Purchase Agreement shall mean the Note and
-----------------------------------
Warrant Purchase Agreement of even date herewith between the Company and
the Holder.
(i) Obligations shall mean and include all loans, advances, debts,
-----------
liabilities and obligations, howsoever arising, owed by the Company to the
Holder of every kind and description (whether or not evidenced by any this
Note or any note or instrument and whether or not for the payment of
money), now existing or hereafter arising under or pursuant to the terms of
this Note, the Note and Warrant Purchase Agreement and the Transaction
Documents, including all interest, fees, charges, expenses, attorneys' fees
and costs and accountants' fees and costs chargeable to and payable by the
Company hereunder and thereunder, in each case whether direct or indirect,
absolute or contingent, due or to become due, and whether or not arising
after the commencement of a proceeding under Title 11 of
-2-
<PAGE>
the United States Code (11 U.S.C. Section 101 et seq.), as amended from
time to time (including post-petition interest) and whether or not allowed
or allowable as a claim in any such proceeding.
(j) Optional Repayment shall mean the dollar for dollar reduction of
------------------
principal and interest hereunder through the application of amounts due to
the Company by the Holder under the terms of the Distribution Agreement of
even date herewith between the Company and the Holder.
(k) Options shall mean rights, options or warrants to subscribe for
-------
purchase or otherwise acquire either Common Stock or Convertible
Securities.
(l) Original Issue Date shall mean June 19, 1997.
-------------------
(m) Preferred Stock Offering shall mean a private offering of the
------------------------
Company's authorized and unissued preferred stock having a value of not
less than $40 million (inclusive of an aggregate investment of $17 million
(including $2 million of services to be provided by Holder to the Company)
to be invested by the Holder in connection with such issuance) that
contains rights, preferences, privileges, terms, and conditions reasonably
satisfactory to the Holder and that includes satisfaction of all other
conditions in Section 3.a. of the Memorandum of Understanding.
-----------
(n) Preferred Stock Offering Price shall mean the price per share of
------------------------------
Preferred Stock to be paid by the lead investor in the Preferred Stock
Offering.
(o) Public Offering shall mean the sale of Common Stock pursuant to the
---------------
Registration Statement on Form S-1 as filed with the Securities and
Exchange Commission on May 16, 1997, as amended from time to time.
(p) Public Offering Price shall mean the initial price to public set
---------------------
in the final prospectus of the Company (or in any amendment or supplement
thereto) issued in connection with the Public Offering.
(q) Security Agreement shall mean that Security Agreement even date
------------------
herewith between the Company and the Holder and securing the obligations of
the Company hereunder.
(r) Transaction Documents shall mean the Transaction Documents
---------------------
in Section 5.4 of the Note and Warrant Purchase Agreement.
-----------
-3-
<PAGE>
2. Interest.
--------
(a) The Company shall pay interest on the unpaid principal
indebtedness evidenced by this Note from the date of this Note until
payment in full of such indebtedness at a per annum rate equal to ten
percent (10%). Interest shall be calculated on the basis of a 360-day year
for the actual number of days elapsed. Except as provided in Section 7 with
---------
respect to Optional Repayments, interest payable shall be due on November
30, 1997, or at such earlier time that this Note is converted or exchanged
as hereinafter provided.
(b) All agreements between or among the Company and the Holder,
whether now existing or hereafter arising and whether written or oral, are
hereby limited so that in no contingency, whether by reason of demand or
acceleration of the maturity hereof or otherwise, shall the interest
contracted for, charged, received, paid or agreed to be paid to the Holder
exceed the maximum amount permissible under applicable law. If, from any
circumstance whatsoever, interest would otherwise be payable to the Holder
in excess of the maximum lawful amount, the interest payable to the Holder
shall be reduced to the maximum amount permitted under applicable law; and
if from any circumstance the Holder shall ever receive anything of value
deemed interest by applicable law in excess of the maximum lawful amount,
an amount equal to any excessive interest shall be applied to the reduction
of the principal hereof and not to the payment of interest, or if such
excessive interest exceeds the unpaid balance of principal hereof, such
excess shall be refunded to the Company. All interest paid or agreed to be
paid to the Holder shall, to the extent permitted by applicable law, be
amortized, prorated, allocated, and/or spread throughout the full period
until payment in full of the principal (including the period of any renewal
or extension hereof) so that the interest hereon for such full period shall
not exceed the maximum amount permitted by applicable law. This paragraph
shall control all agreements between or among the Holder and the Company.
3. Events of Default.
-----------------
3.1 Events of Default. Each of the following events shall
------------------
constitute, and be referred to herein as, an "Event of Default":
(a) the Company shall default in the payment of principal or any part
of the principal of this Note when the same shall become due and payable,
whether at any stated due date, at maturity, or by acceleration or
otherwise; or
(b) the Company shall default in the payment of any interest on this
Note when the same shall become due and payable; or
(c) the Company shall default in the payment when due of any
principal or interest or shall default under or fail to perform or observe
any material term, covenant, or agreement contained in any bank loan or
financing document evidencing an obligation of the Company in excess of
$125,000, including without limitation any obligation for borrowed money,
or
-4-
<PAGE>
any other agreement, document, or instrument evidencing an obligation in
excess of $250,000 to which the Company is a party or to which it or its
assets are bound, including without limitation any obligation for the
purchase or lease price of property, and such default or failure to perform
shall continue and remain unwaived by the Company for more than 30 days or
any applicable period of grace therein specified, whichever is longer,
except where the Company is in good faith and through appropriate
proceedings contesting such default or failure to perform; or
(d) the Company shall default in the performance of or compliance with
any material binding covenant, agreement, condition, or term contained in
the Transaction Documents, the escrow agreement described in Section 2.c of
the Memorandum of Understanding, the Employee Services and Staffing
Agreement described in Section 2.d of the Memorandum of Understanding, any
other agreement, understanding, arrangement, or concession described in the
Memorandum of Understanding in effect at any time prior to the satisfaction
of the debt evidenced by this Note, it being understood that an outstanding
account payable of up to sixty days pursuant to any such agreement will not
be deemed an Event of Default under this Section 3.1, and such default
-----------
shall not have been remedied within 10 days after written notice thereof
shall have been given to the Company by the Holder; or
(e) The Company shall make an assignment for the benefit of creditors,
or shall admit in writing its inability to pay its debts as they become
due, or any order for relief is entered against the Company or any
subsidiary under any bankruptcy laws or the Company or any subsidiary shall
file any petition or answer seeking for itself any reorganization,
arrangement, composition, readjustment, dissolution or similar relief under
any present or future statute, law or regulation, or shall file an answer
admitting the material allegation of a petition filed against the Company
in any such proceeding, or shall seek or consent to the acquiesce in the
appointment of any trustee, receiver or liquidator of the Company or of all
or any substantial part of the properties of the Company, or the Company or
its board of directors or a majority of its stockholders shall take any
action looking to the dissolution or liquidation of the Company and such
default shall not have been remedied within 60 days after written notice
thereof shall have been given to the Company; or
(f) within 60 days after the commencement of any proceeding against the
Company seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future
statute, law or regulation, such proceeding shall not have been dismissed
or, within 60 days after the appointment without the consent or
acquiescence of the Company of any trustee, receiver or liquidator of the
Company or of all or any substantial part of the properties of the Company
such appointment shall not have been vacated; or
(g) a final judgment which, together with other outstanding final
judgments against the Company, exceeds an aggregate of $125,000 shall be
rendered against the Company and, within 60 days after entry thereof, such
judgment shall not have been discharged or execution
-5-
<PAGE>
thereof stayed pending appeal or, within 10 days after the expiration of
any such stay, such judgment shall not have been discharged.
3.2 Rights of Holder Upon Event of Default. Upon the occurrence or
---------------------------------------
existence of any Event of Default and at any time thereafter during the
continuance of such Event of Default, all outstanding Obligations payable by the
Company shall be immediately due and payable without presentment, demand,
protest or any other notice of any kind, all of which are hereby expressly
waived, anything contained herein or in the other Transaction Documents to the
contrary notwithstanding. Upon the occurrence or existence of any Event of
Default, Holder may exercise any other right, power or remedy granted to it by
the Transaction Documents, including the Security Agreement, or otherwise
permitted to it by law or equity, either by suit or by action at law, or both.
4. No Prepayment. Except upon the prior written consent of the Holder,
-------------
the Company may not prepay, in whole or in part, the principal sum, or accrued
interest of this Note.
5. Conversion.
----------
5.1 Conversion. Upon the closing of the sale of Common Stock in the
----------
Public Offering totaling no less than $40 million (including, for purposes of
this amount, an aggregate of $17 million (including $2 million of services to
be provided by Holder to the Company) to be invested by Holder in connection
with this Note and a private placement to occur concurrently with the IPO), this
Note shall be automatically converted into shares of Common Sock in accordance
with the provisions of Section 5.2 hereof. The number of shares into which this
-----------
Note shall be converted shall be determined by dividing the aggregate principal
amount of this Note together with all accrued and unpaid interest to the date of
conversion by the Public Offering Price. Other than the automatic conversion of
the Note pursuant to this Section 5, it is understood that the Holder's
---------
additional investment in the Public Offering is contingent upon satisfactory
completion of due diligence by the Holder and approval by the board of directors
of the Holder.
5.2 Conversion Procedure.
--------------------
(a) The conversion of this Note pursuant to Section 5.1 hereof shall
-----------
be deemed to have been effected as of the closing of the Public Offering.
At such time as such conversion has been effected, the rights of the Holder
of this Note will cease and the Holder will be deemed to be the holder of
record of the shares of Common Stock represented thereby.
(b) As soon as possible after a conversion has been effected (but in
any event within ten business days in the case of subparagraph (i) below),
the Company will deliver to the Holder:
-6-
<PAGE>
(i) A certificate or certificates representing the number
of shares of Common Stock issuable by reason of such conversion in such
name or names and such denomination or denominations as the converting
Holder has specified; and
(ii) payment in an amount equal to the principal and
interest payable to the Holder in lieu of a fractional share of Common
Stock.
(c) The issuance of certificate(s) for shares of Common Stock upon
conversion of this Note will be made without charge to the Holder for any
issuance tax in respect thereof or other cost incurred by the Company in
connection with such conversion and the related issuance of shares of Common
Stock. Upon conversion of this Note, the Company will take all such actions
as are reasonably necessary in order to insure that the Common Stock
issuable with respect to such conversion will be validly issued, fully paid
and nonassessable.
(d) The Company will not close its books against the transfer of this
Note or of Common Stock issued or issuable upon conversion of this Note in
any manner which interferes with the timely conversion of this Note.
5.3 Reservation of Common Stock Issuable Upon Conversion. The Company shall
----------------------------------------------------
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
this Note, such number of its shares of Common Stock as shall from time to time
be sufficient to effect a conversion of this Note and if at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of this Note, the Company shall promptly seek such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose.
5.4 Payment of Taxes. The Company shall pay all issue taxes and other
----------------
governmental charges (other than income or other taxes imposed upon interest or
other profits realized by the recipient) that may be imposed in respect of the
issue or delivery of shares of Common Stock or other securities or property upon
conversion of this Note. The Company shall not be obligated to pay any tax or
other charge imposed in connection with any transfer involved in the issue and
delivery of shares of Common Stock or other securities in any name other than
that in which this Note is registered.
5.5 Reclassification; Recapitalization. In the event of any
----------------------------------
reclassification of the Common Stock or recapitalization involving Common Stock
(other than a change in par value or as a result of a stock dividend,
subdivision, or combination of shares), the Holder shall thereafter be entitled
to receive and provisions shall be made therefor in an agreement relating to the
reclassification or recapitalization, upon conversion of this Note, the kind and
number of shares of Common Stock or other securities or property (including
cash) of the Company, to which the Holder would have been entitled if he had
held the number of shares of Common Stock of the Company into which this Note
was convertible immediately prior to such reclassification or recapitalization;
and in any such case
-7-
<PAGE>
appropriate adjustment shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the Holder to
the end that the provisions set forth herein, shall thereafter be applicable, as
nearly as reasonably may be, in relation to any shares, other securities, or
property thereafter receivable upon conversion of this Note.
5.6 Fractional Shares. No fractional share shall be issued upon the
-----------------
conversion of this Note. All shares of Common Stock (including fractions
thereof) issuable upon conversion of this Note by the Holder shall be aggregated
for purposes of determining whether the conversion would result in the issuance
of any fractional share. If, after such aggregation, the conversion would
result in the issuance of a fraction of a share of Common Stock, the Company
shall, in lieu of issuing any fractional share, pay the Holder otherwise
entitled to such fraction a sum in cash equal to the remainder of principal and
interest otherwise not convertible pursuant to such conversion.
5.7 Purchase Rights. If at any time the Company grants, issues, or
---------------
sells any Options, Convertible Securities, or rights to purchase stock,
warrants, securities, or other property pro rata to the record holders of any
class of Common Stock except with respect to underwriters in the Public Offering
(the "Purchase Rights"), then the Holder will be entitled to acquire, upon the
terms applicable to such Purchase Rights, the Aggregate Purchase rights which
such Holder could have acquired if such Holder had held the number of shares of
Common Stock acquirable upon conversion of this Note immediately before the date
on which a record is taken, the date as of which the record holders of Common
Stock are to be determined for the grant, issue, or sale of such Purchase
Rights.
6. Conversion to Preferred Stock.
-----------------------------
6.1 Conversion. Upon the closing of the Preferred Stock Offering,
----------
satisfactory completion of due diligence by the Holder, and approval of the
conversion under this Section 6 by the board of directors of the Holder, this
---------
Note shall be automatically converted into shares of Preferred Stock in
accordance with the provisions of this Section 6. The number of shares of
---------
Preferred Stock into which this Note shall be converted shall be determined by
dividing the aggregate principal amount of this Note, together with all accrued
and unpaid interest to the date of conversion by the Preferred Stock Offering
Price. The conversion of the Note pursuant to this Section 6 shall be subject
only to the satisfaction of each of the following:
(a) the company shall have completed the private financing
totaling no less than $40 million (including an aggregate of $17
million (including $2 million of services to be provided by Holder to
the Company) to be provided by Holder in connection with the private
financing) by October 31, 1997, and the conversion shall be effected
in connection therewith;
(b) the Company shall have authorized shares of Preferred Stock
sufficient to effect the conversion;
(c) the Public Offering shall have been terminated and no shares
of Common Stock shall have been sold in connection therewith; and
-8-
<PAGE>
(d) the terms applicable to the conversion and the rights and
preferences of the Preferred Stock to be received by the Holder shall, in
the Holder's reasonable judgment, be reasonably satisfactory to Holder and
shall be equivalent to the terms, rights, and preferences of the shares of
Preferred Stock issued to the lead investor, directly or indirectly, in
connection with the exchange.
6.2 Procedure for Exchange. The exchange shall be effected by written
----------------------
notice to the Holder specifying (i) the date of exchange, and (ii) information
regarding the Preferred Stock and the transactions contemplated by the Company,
directly and indirectly, in connection with the exchange. On or after the date
of exchange as specified in such notice and upon the satisfaction of the
conditions set forth in Section 6.1 hereof, the Holder shall surrender to the
-----------
Company, at the place specified in such notice, this Note to effect the
exchange.
7. Optional Repayment. In the event the Note is not converted pursuant
------------------
to Sections 5 or 6 above, the Holder may elect Optional Repayment in lieu of
---------------
payment in principal and interest at maturity in accordance with the terms of
this Note. Optional Repayments shall be applied to the payment of interest
which is due and payable and thereafter to the principal balance. The Holder,
after electing to accept Optional Repayment, may terminate the election upon 30
days written notice to the Company and all remaining principal and interest
hereunder shall be immediately due and payable.
8. Assignment. Subject to the restrictions on transfer described in
-----------
Section 16 below, the rights and obligations of the Company and the Holder of
- ----------
this Note shall be binding upon and benefit the successors, assigns, heirs,
administrators and transferees of the parties.
9. Waiver and Amendment. Any provision of this Note may be amended,
--------------------
waived or modified upon the written consent of the Company and the Holder.
10. Treatment of Note. To the extent permitted by generally accepted
-----------------
accounting principles, the Company will treat, account and report the Note as
debt and not equity for accounting purposes and with respect to any returns
filed with federal, state or local tax authorities.
11. Notices. Except as otherwise provided herein, any notice, request or
-------
other communication required or permitted hereunder shall be in writing and
shall be deemed to have been duly given if personally delivered or if
telegraphed or mailed by registered or certified mail, postage prepaid, at the
respective addresses of the parties as set forth herein. Any party hereto may
by notice so given change its address for future notice hereunder. Notice shall
conclusively be deemed to have been given when personally delivered or when
deposited in the mail or telegraphed in the manner set forth above and shall be
deemed to have been received when delivered.
-9-
<PAGE>
12. No Stockholder Rights. Nothing contained in this Note shall be
---------------------
construed as conferring upon the Holder or any other person the right to vote or
to consent or to receive notice as a stockholder in respect of meetings of
stockholders for the election of directors of the Company or any other matters
or any rights whatsoever as a stockholder of the Company; and no dividends or
interest shall be payable or accrued in respect of this Note or the interest
represented hereby or the Common Stock obtainable hereunder upon conversion
until, and only to the extent that, this Note shall have been converted.
13. Course of Dealing. No course of dealing between the Company and the
-----------------
Holder or any delay on the part of the Holder in exercising any rights hereunder
shall operate as a waiver of any rights of the Holder.
14. Waiver of Notice. Except as otherwise expressly specified in this
----------------
Note, the Company and each surety, guarantor, endorser, or other party liable
for payment on his Note hereby waive diligence, presentment, demand, protest,
and notice of any kind whatsoever, and agree that their liability on this Note
shall not be affected by any renewal or extension in the time of payment hereof,
or any indulgences, or by any taking, release, or change in any security for
payment of this Note.
15. Costs and Fees. If this Note is placed in the hands of an attorney
--------------
for collection after occurrence of an Event of Default, or if it is collected
through legal or bankruptcy proceedings, the Company agrees to pay all costs of
collection, including but not limited to, court costs and reasonable attorneys'
fees.
16. Transfer. With respect to any offer, sale, or other disposition of
--------
this Note, Holder will give written notice to Company prior thereto, describing
briefly the manner thereof, together with a written opinion of Holder's counsel,
to the effect that such offer, sale, or other distribution may be effected
without registration or qualification (under any federal or state law then in
effect). Upon receiving such written notice and reasonably satisfactory
opinion, Company, within seven (7) business days, shall notify Holder that
Holder may sell or otherwise dispose of this Note or such securities, all in
accordance with the terms of the notice delivered to Company. If a
determination has been made pursuant to this Section 16 that the opinion of
----------
counsel for Holder is not reasonably satisfactory to Company, Company shall so
notify Holder promptly after such determination has been made. Each Note thus
transferred shall bear a legend as to the applicable restrictions on
transferability in order to ensure compliance with the Act, unless in the
opinion of counsel for Company such legend is not required in order to ensure
compliance with the Act. Company may issue stop transfer instructions to its
transfer agent in connection with such restrictions. Subject to the foregoing,
transfers of this Note shall be registered upon registration books maintained
for such purpose by or on behalf of Company.
17. Governing Law. This Note shall be governed by and construed in
-------------
accordance with the laws of the State of California, excluding that body of law
relating to conflict of laws.
-10-
<PAGE>
18. Heading; References. All headings used herein are sued for
-------------------
convenience only and shall not be used to construe or interpret this Note.
Except where otherwise indicted, all references herein to Sections refer to
Sections hereof.
IN WITNESS WHEREOF, the Company has caused this Note to be issued the 19th
day of June, 1997.
CONCENTRIC NETWORK CORPORATION
By: /s/ Henry Nothhaft
-------------------------------------
Henry Nothhaft, President
-11-
<PAGE>
EXHIBIT B
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE
EFFECTED WITHOUT (I) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (II) AN
OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY,
THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (III) RECEIPT OF NO-ACTION LETTERS
FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (IV) OTHERWISE COMPLYING WITH
THE PROVISIONS OF SECTION 7 OF THIS WARRANT.
June 19, 1997
CONCENTRIC NETWORK CORPORATION
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, Williams Communications Group,
Inc., a Delaware corporation, is entitled to subscribe for and purchase, subject
to the provisions and upon the terms and conditions hereinafter set forth, that
number of shares of the fully paid and nonassessable Common Stock of Concentric
Network Corporation, a Florida corporation (the "Company") equal to the quotient
obtained by dividing: (X) where X is the principal amount of the Note (as
defined below) held by the holder of this Warrant plus accrued interest thereon,
by (Y) where Y is the product of (i) 4 and (ii) (Z), where Z is the price per
share of the first to occur of the following: (a) the public offering price per
share of the Company's Common Stock having an aggregate price to the public of
at least $40 million (the "IPO") or (b), the private financing price per share
of the Company's Preferred Stock having an aggregate price of at least $40
million (including for purposes of determining the aggregate price of the
private financing, the principal amount of the Note, a $12 million equity
investment to be made by the Holder in connection with the private financing
and services to be provided by the Holder to the Company valued for purposes of
this Warrant at $2 million) (the "Private Financing"). Each such Share (as
defined below) shall be purchasable at a per share purchase price equal to fifty
percent of the public offering price per share or the private financing price
per share, as the case may be (as defined below), (such price and such other
price as shall result, from time to time, from the adjustments specified in
Section 4 hereof is herein referred to as the "Warrant Price"). As used herein,
(a) the term "Date of Grant" shall mean June 19, 1997, (b) the term "Other
Warrants" shall mean any other warrants issued by the Company in connection with
the transaction with respect to which this Warrant was issued, and any warrant
issued upon transfer or partial exercise of this Warrant, (c) the term "Shares"
shall mean the Common Stock to be issued by the Company hereunder and any stock
into or for which any such Common Stock may hereafter be converted or exchanged,
(d) the term "Warrant" as used herein shall be deemed to include Other Warrants
unless the context clearly requires otherwise, and (e) the term "Note" shall
mean the note issued by the Company to the holder of this Warrant pursuant to
the Note and Warrant Purchase Agreement dated June 19, 1997.
1. Term. The purchase right represented by this Warrant is exercisable,
----
in whole or in part, at any time and from time to time from the Date of Grant
through the earliest to occur of (i) five years after the Date of Grant, or (ii)
immediately prior to any consolidation or merger of the Company with or into any
entity, or any other corporate reorganization in which the Company shall not be
the continuing or surviving
<PAGE>
entity of such consolidation, merger or reorganization or any transaction, any
series of related transactions in which in excess of 50% of Company's voting
power is transferred, or any sale of all or substantially all of the assets of
the Company, other than the proposed reincorporation of the Company into
Delaware through the merger of the Company with and into Concentric Network
Corporation, a Delaware Corporation.
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to
----------------------------------------------------
Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part and from time to time, at
the election of the holder hereof, by (a) the surrender of this Warrant (with
the notice of exercise substantially in the form attached hereto as Exhibit A-1
-----------
duly completed and executed) at the principal office of the Company and by the
payment to the Company, by certified or bank check, or by Wire Transfer to an
account designated by the Company (a "Wire Transfer") of an amount equal to the
then applicable Warrant Price multiplied by the number of Shares then being
purchased. The person or persons in whose name(s) any certificate(s)
representing the Shares shall be issuable upon exercise of this Warrant shall be
deemed to have become the holder(s) of record of, and shall be treated for all
purposes as the record holder(s) of, the shares represented thereby (and such
shares shall be deemed to have been issued) immediately prior to the close of
business on the date or dates upon which this Warrant is exercised. In the event
of any exercise of the rights represented by this Warrant, certificates for the
shares of stock so purchased shall be delivered to the holder hereof as soon as
possible and in any event within thirty (30) days after such exercise and,
unless this Warrant has been fully exercised or expired, a new Warrant
representing the portion of the Shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be issued to the holder
hereof as soon as possible and in any event within such thirty-day period.
3. Stock Fully Paid; Reservation of Shares. All Shares that may be issued
---------------------------------------
upon the exercise of the rights represented by this Warrant will, upon issuance
pursuant to the terms and conditions herein, be fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof.
During the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized, and reserved for the
purpose of the issue upon exercise of the purchase rights evidenced by this
Warrant, a sufficient number of shares of its capital stock to provide for the
exercise of the rights represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and kind
------------------------------------------------
of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
(a) Reclassification. In case of any reclassification or change of
----------------
securities of the class issuable upon exercise of this Warrant (other than a
change in par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination), the Company shall
duly execute and deliver to the holder of this Warrant a new Warrant (in form
and substance reasonably satisfactory to the holder of this Warrant), so that
the holder of this Warrant shall have the right to receive, at a total purchase
price not to exceed that payable upon the exercise of the unexercised portion of
this Warrant, and in lieu of the Shares theretofore issuable upon exercise of
this Warrant, the kind and amount of shares of stock, other securities, money
and property receivable upon such reclassification or change by a holder of the
number of Shares then purchasable under this Warrant. Such new Warrant shall
provide for adjustments that shall be as nearly equivalent as may be practicable
to the adjustments provided for in this Section 4. The provisions of this
subparagraph (a) shall similarly apply to successive reclassifications or
changes.
(b) Subdivision or Combination of Shares. If the Company at any
------------------------------------
time while this Warrant remains outstanding and unexpired shall subdivide or
combine its outstanding shares of capital stock
- 2 -
<PAGE>
into which this Warrant is exercisable, the Warrant Price shall be
proportionately decreased in the case of a subdivision or increased in the case
of a combination, effective at the close of business on the date the subdivision
or combination becomes effective.
(c) Stock Dividends and Other Distributions. If the Company at any
---------------------------------------
time while this Warrant is outstanding and unexpired shall (i) pay a dividend
with respect to its capital stock issuable hereunder payable in the same class
or series of capital stock, or (ii) make any other distribution of capital stock
with respect to its capital stock (except any distribution specifically provided
for in Sections 4(a) and 4(b)), then the Warrant Price shall be adjusted, from
and after the date of determination of shareholders entitled to receive such
dividend or distribution, to that price determined by multiplying the Warrant
Price in effect immediately prior to such date of determination by a fraction
(i) the numerator of which shall be the total number of shares of the applicable
class or series of capital stock outstanding immediately prior to such dividend
or distribution, and (ii) the denominator of which shall be the total number of
shares of such class or series of capital stock outstanding immediately after
such dividend or distribution.
(d) Adjustment of Number of Shares. Upon each adjustment in the
------------------------------
Warrant Price, the number of Shares purchasable hereunder shall be adjusted, to
the nearest whole share, to the product obtained by multiplying the number of
Shares purchasable immediately prior to such adjustment in the Warrant Price by
a fraction, the numerator of which shall be the Warrant Price immediately prior
to such adjustment and the denominator of which shall be the Warrant Price
immediately thereafter.
5. Notice of Adjustments. Whenever the Warrant Price or the number of
---------------------
Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the
Company shall make a certificate signed by its chief financial officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Warrant Price and the number of Shares purchasable hereunder after giving effect
to such adjustment, and shall cause copies of such certificate to be mailed
(without regard to Section 12 hereof, by first class mail, postage prepaid) to
the holder of this Warrant at such holder's last known address.
6. Fractional Shares. No fractional Shares will be issued in connection
-----------------
with any exercise hereunder, but in lieu of such fractional shares the Company
shall make a cash payment therefor based on the fair market value of the Shares
on the date of exercise as reasonably determined in good faith by the Company's
Board of Directors.
7. Compliance with Act; Disposition of Warrant or Shares.
------------------------------------------------------
(a) Compliance with Act. The holder of this Warrant, by acceptance
-------------------
hereof, agrees that this Warrant, and the Shares to be issued upon exercise
hereof are being acquired for investment and that such holder will not offer,
sell or otherwise dispose of this Warrant, or any Shares except under
circumstances which will not result in a violation of the Act or any applicable
state securities laws. Upon exercise of this Warrant, unless the Shares being
acquired are registered under the Act and any applicable state securities laws
or an exemption from such registration is available, the holder hereof shall
confirm in writing that the Shares so purchased are being acquired for
investment and not with a view toward distribution or resale in violation of the
Act and shall confirm such other matters related thereto as may be reasonably
requested by the Company. This Warrant and all Shares issued upon exercise of
this Warrant (unless registered under the Act and any applicable state
securities laws) shall be stamped or imprinted with a legend in substantially
the following form:
- 3 -
<PAGE>
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE
OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION
STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE,
REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATIONS ARE NOT
REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE
GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS
OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED,
DIRECTLY OR INDIRECTLY."
Said legend shall be removed by the Company, upon the request of a holder,
at such time as the restrictions on the transfer of the applicable security
shall have terminated. In addition, in connection with the issuance of this
Warrant, the holder specifically represents to the Company by acceptance of this
Warrant as follows:
1) The holder is aware of the Company's business affairs and financial
condition, and has acquired information about the Company sufficient to
reach an informed and knowledgeable decision to acquire this Warrant. The
holder is acquiring this Warrant for its own account for investment
purposes only and not with a view to, or for the resale in connection with,
any "distribution" thereof in violation of the Act.
2) The holder understands that this Warrant has not been registered
under the Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of the
holder's investment intent as expressed herein.
3) The holder further understands that this Warrant must be held
indefinitely unless subsequently registered under the Act and qualified
under any applicable state securities laws, or unless exemptions from
registration and qualification are otherwise available. The holder is aware
of the provisions of Rule 144, promulgated under the Act.
(b) Disposition of Warrant or Shares. With respect to any offer,
--------------------------------
sale or other disposition of this Warrant or any Shares acquired pursuant to the
exercise of this Warrant prior to registration of such Warrant or Shares, the
holder hereof agrees to give written notice to the Company prior thereto,
describing briefly the manner thereof, together with a written opinion of such
holder's counsel, or other evidence, if reasonably requested by the Company, to
the effect that such offer, sale or other disposition may be effected without
registration or qualification (under the Act as then in effect or any federal or
state securities law then in effect) of this Warrant or the Shares and
indicating whether or not under the Act certificates for this Warrant or the
Shares to be sold or otherwise disposed of require any restrictive legend as to
applicable restrictions on transferability in order to ensure compliance with
such law. Promptly upon receiving such written notice and reasonably
satisfactory opinion or other evidence, if so requested, the Company, as
promptly as practicable but no later than fifteen (15) days after receipt of the
written notice, shall notify such holder that such holder may sell or otherwise
dispose of this Warrant or such Shares, all in accordance with the terms of the
notice delivered to the Company. If a determination has been made pursuant to
this Section 7(b) that the opinion of counsel for the holder or other evidence
is not reasonably satisfactory to the Company, the Company shall so notify the
holder promptly with details thereof after such determination has been made.
Notwithstanding the foregoing, this Warrant or such Shares may, as to such
federal laws, be offered, sold or otherwise disposed of in accordance with Rule
144 or 144A under the Act, provided that the
- 4 -
<PAGE>
Company shall have been furnished with such information as the Company may
reasonably request to provide a reasonable assurance that the provisions of Rule
144 or 144A have been satisfied. Each certificate representing this Warrant or
the Shares thus transferred (except a transfer pursuant to Rule 144 or 144A)
shall bear a legend as to the applicable restrictions on transferability in
order to ensure compliance with such laws, unless in the aforesaid opinion of
counsel for the holder, such legend is not required in order to ensure
compliance with such laws. The Company may issue stop transfer instructions to
its transfer agent in connection with such restrictions.
(c) Applicability of Restrictions. Neither any restrictions of any
-----------------------------
legend described in this Warrant nor the requirements of Section 7(b) above
shall apply to any transfer or grant of a security interest in, this Warrant (or
the Shares obtainable upon exercise thereof) or any part hereof (i) to a partner
of the holder if the holder is a partnership, or (ii) to a partnership of which
the holder is a partner; provided, however, in any such transfer, if applicable,
-------- -------
the transferee shall agree in writing to be bound by the terms of this Warrant
as if an original signatory hereto.
8. Rights as Shareholders; Information. No holder of this Warrant, as
-----------------------------------
such, shall be entitled to vote or receive dividends or be deemed the holder of
Shares, nor shall anything contained herein be construed to confer upon the
holder of this Warrant, as such, any of the rights of a shareholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to shareholders at any meeting thereof, or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until this
Warrant shall have been exercised and the Shares purchasable upon the exercise
hereof shall have become deliverable, as provided herein. Notwithstanding the
foregoing, the Company will transmit to the holder of this Warrant such
information, documents and reports as are generally distributed to the holders
of any class or series of the securities of the Company concurrently with the
distribution thereof to the shareholders.
9. Right to Convert Warrant into Stock: Net Issuance.
--------------------------------------------------
(a) Right to Convert. In addition to and without limiting the
----------------
rights of the holder under the terms of this Warrant, the holder shall have the
right to convert this Warrant or any portion thereof (the "Conversion Right")
into Shares as provided in this Section 9 at any time or from time to time after
the sooner of the completion of the Company's IPO or Private Financing during
the term of this Warrant. Upon exercise of the Conversion Right with respect to
a particular number of shares subject to this Warrant (the "Converted Warrant
Shares"), the Company shall deliver to the holder (without payment by the holder
of any exercise price or any cash or other consideration) (X) that number of
fully paid and nonassessable Shares equal to the quotient obtained by dividing
the value of this Warrant (or the specified portion hereof) on the Conversion
Date (as defined in subsection (b) hereof), which value shall be determined by
dividing (Y) the public offering price per share or the private financing price
per share, as the case may be, by 2.
Expressed as a formula, such conversion shall be computed as follows:
Y
X = --
2
Where: X = the number of shares of Common Stock that may
be issued to holder
Y = the IPO price per share or the Private Financing price per
share, as the case may be
- 5 -
<PAGE>
No fractional shares shall be issuable upon exercise of the Conversion
Right, and, if the number of shares to be issued determined in accordance with
the foregoing formula is other than a whole number, the Company shall pay to the
holder an amount in cash equal to the fair market value of the resulting
fractional share on the Conversion Date (as hereinafter defined). For purposes
of Section 9 of this Warrant, shares issued pursuant to the Conversion Right
shall be treated as if they were issued upon the exercise of this Warrant.
(b) Method of Exercise. The Conversion Right may be exercised by
------------------
the holder by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right and indicating the number of shares
subject to this Warrant which are being surrendered (referred to in Section 9(a)
hereof as the Converted Warrant Shares) in exercise of the Conversion Right.
Such conversion shall be effective upon receipt by the Company of this Warrant
together with the aforesaid written statement, or on such later date as is
specified therein (the "Conversion Date"), and, at the election of the holder
hereof, may be made contingent upon the closing of the sale of the Company's
Common Stock to the public in a public offering pursuant to a Registration
Statement under the Act (a "Public Offering"). Certificates for the shares
issuable upon exercise of the Conversion Right and, if applicable, a new warrant
evidencing the balance of the shares remaining subject to this Warrant, shall be
issued as of the Conversion Date and shall be delivered to the holder within
thirty (30) days following the Conversion Date.
10. Representations and Warranties. The Company represents and warrants to
------------------------------
the holder of this Warrant as follows:
(a) This Warrant has been duly authorized and executed by the
Company and is a valid and binding obligation of the Company enforceable in
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and the rules of law or
principles at equity governing specific performance, injunctive relief and other
equitable remedies;
(b) The Shares have been, or will be upon the closing of the IPO or
Private Financing, duly authorized and reserved for issuance by the Company and,
when issued in accordance with the terms hereof will be validly issued, fully
paid and non-assessable;
(c) The rights, preferences, privileges and restrictions granted to
or imposed upon the Shares and the holders thereof are as set forth in the
Amended and Restated Articles of Incorporation of the Company as they have been
and may be amended from time to time;
(d) The execution and delivery of this Warrant are not, and the
issuance of the Shares upon exercise of this Warrant in accordance with the
terms hereof will not be, inconsistent with the Company's Amended and Restated
Articles of Incorporation or Bylaws, as they have been and may be amended from
time to time, do not and will not contravene any law, governmental rule or
regulation, judgment or order applicable to the Company, and do not and will not
conflict with or contravene any provision of, or constitute a default under, any
indenture, mortgage, contract or other instrument of which the Company is a
party or by which it is bound or require the consent or approval of, the giving
of notice to, the registration or filing with or the taking of any action in
respect of or by, any Federal, state or local
- 6 -
<PAGE>
government authority or agency or other person, except for the filing of notices
pursuant to federal and state securities laws, which filings will be effected by
the time required thereby; and
(e) There are no actions, suits, audits, investigations or
proceedings pending or, to the knowledge of the Company, threatened against the
Company in any court or before any governmental commission, board or authority
which, if adversely determined, will have a material adverse effect on the
ability of the Company to perform its obligations under this Warrant.
11. Modification and Waiver. This Warrant and any provision hereof may be
-----------------------
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
12. Notices. Any notice, request, communication or other document
-------
required or permitted to be given or delivered to the holder hereof or the
Company shall be delivered, or shall be sent by certified or registered mail,
postage prepaid, to each such holder at its address as shown on the books of the
Company or to the Company at the address indicated therefor on the signature
page of this Warrant.
13. Lost Warrants or Stock Certificates. The Company covenants to the
-----------------------------------
holder hereof that, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to the Company, or in the case
of any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, the Company will make and deliver a new Warrant or stock
certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated
Warrant or stock certificate.
14. Descriptive Headings. The descriptive headings of the several
--------------------
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. The language in this Warrant shall be
construed as to its fair meaning without regard to which party drafted this
Warrant.
15. Governing Law. This Warrant shall be construed and enforced in
-------------
accordance with, and the rights of the parties shall be governed by, the laws of
the State of New York.
16. Severability. The invalidity or unenforceability of any provision of
------------
this Warrant in any jurisdiction shall not affect the validity or enforceability
of such provision in any other jurisdiction, or affect any other provision of
this Warrant, which shall remain in full force and effect.
18. Entire Agreement; Modification. This Warrant constitutes the entire
------------------------------
agreement between the parties pertaining to the subject matter contained in it
and supersedes all prior and contemporaneous agreements, representations, and
undertakings of the parties, whether oral or written, with respect to such
subject matter.
CONCENTRIC NETWORK CORPORATION
a Florida corporation
By: /s/ HENRY R. NOTHHAFT
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
Address:
------------------------------
------------------------------
- 7 -
<PAGE>
EXHIBIT A-1
NOTICE OF EXERCISE
------------------
To: CONCENTRIC NETWORK CORPORATION (the "Company")
1. The undersigned hereby:
[_] elects to purchase __________ shares of Common Stock of the Company
pursuant to the terms of the attached Warrant, and tenders herewith
payment of the purchase price of such shares in full; or
[_] elects to exercise its net issuance rights pursuant to Section 9 of
the attached Warrant with respect to __________ shares of Common
Stock.
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name or names as are specified
below:
________________________________________
(Name)
________________________________________
(Address)
________________________________________
(Address)
3. The undersigned represents that the aforesaid shares being acquired for
the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, all except as in
compliance with applicable securities laws.
_______________
(Date)
__________________________________________________
(Signature)
<PAGE>
EXHIBIT C
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement") is executed as of the 19th
day of June, 1997, by Concentric Network Corporation, a Florida corporation,
whose mailing address and principal place of business is 10590 North Tantau
Avenue, Cupertino, California 95014 ("Debtor"), in favor of Williams
Communications Group, Inc., a Delaware corporation ("Secured Party").
Section 1. Secured Indebtedness.
--------------------
1.1. This Agreement is executed to create the security interests
hereinafter created for the purpose of providing collateral and security to
secure the payment of all of the Secured Indebtedness, as defined in Section 1.2
below.
1.2. As used herein, "Secured Indebtedness" means all indebtedness,
obligations, and liabilities of Debtor of every kind and character now or
hereafter existing in favor of Secured Party and any affiliates of Secured Party
(including without limitation Critical Technologies, Inc., a Missouri
corporation, referred to herein as "CTI"), howsoever evidenced or created and
whether direct or indirect, primary or secondary, joint or several, or fixed or
contingent, including indebtedness, obligations, and liabilities at any time
evidenced by any note or agreement between Debtor and Secured Party or any of
its affiliates, including any and all extensions, renewals, modifications,
rearrangements, substitutions, and changes in form thereto (referred to
collectively as the "Debt Documents"), together with all lawful interest and
other charges thereon, including without limitation all debts and amounts owed
and default charges and fees incurred pursuant to the following Debt Documents:
a. 10% Convertible Promissory Note in the principal sum of
$3,000,000.00, by Debtor in favor of Secured Party,
dated as of the date first stated above (the "Note");
and
b. Amended and Restated Employee Services and Staffing
Agreement by and between Debtor and CTI of even date
herewith.
Section 2. Creation of Security Interest.
-----------------------------
2.1. In order to secure the prompt and unconditional payment of the
Secured Indebtedness and the performance of the obligations, covenants,
agreements, and undertakings on the part of the Debtor herein described or in
the Debt Documents, Debtor hereby grants to the Secured Party a security
interest in and to all of the property described on Exhibit "A" attached hereto
and made a part hereof, and all interests of the Debtor in and to all of such
property, howsoever and whensoever (now or hereafter) held or acquired and
wherever located (collectively, the "Collateral").
<PAGE>
Section 3. Representations and Warranties.
------------------------------
3.1. Debtor represents, warrants, and covenants that (a) Debtor is now
in a solvent condition as defined in Title 11 of the U.S. Code, as amended; (b)
no bankruptcy or insolvency proceedings are pending or contemplated by or
against Debtor; (c) Debtor is the lawful owner of good and marketable title to
the Collateral and has good right and authority to grant a security interest in
the Collateral; (d) the Collateral is free and clear from all security interests
and encumbrances except the security interest evidenced hereby; (e) there is no
financing statement (or similar statement or instrument of registration under
the laws of any jurisdiction) covering the Collateral or its proceeds on file in
any public office in any jurisdictions; (f) to the Company's knowledge, the
Collateral and the intended use thereof by Debtor comply with all applicable
laws, rules, and regulations; (g) the Collateral is free from damage caused by
fire or other casualty; (h) Debtor will warrant and forever defend the title to
the Collateral and its proceeds against the claims of all persons whomsoever
claiming or to claim the same or any part thereof; (i) the location of Debtor is
the address set forth at the beginning of this Agreement and in this regard,
Debtor's location is defined to mean (1) Debtor's place of business if Debtor
has only one such place of business or (2) Debtor's chief executive office if
Debtor has more than one place of business; (j) all of Debtor's books and
records with regard to the Collateral are maintained and kept at the address of
Debtor set forth in this Agreement; (k) Debtor has never changed its name,
whether by amendment of its organizational documents or otherwise, except
Concentric Research Corporation and Engineered Video Concepts, Inc.; (l) no part
of the Collateral is covered by a certificate of title or subject to any
certificate of title law, and (m) no part of the Collateral consists or will
consist of consumer goods, farm products, timber, minerals and the like
(including oil and gas) or accounts resulting from the sale thereof.
Section 4. Representations, Warranties, and Covenants.
------------------------------------------
4.1. The representations and warranties of Debtor set forth in Section
3 of that certain Note and Warrant Purchase Agreement of even date herewith by
and between Debtor and Secured Party and the exceptions thereto are incorporated
and made in this Agreement as if restated herein.
4.2. So long as the Secured Indebtedness or any part thereof remains
unpaid, Debtor covenants and agrees with Secured Party as follows:
a. Debtor will cause the Collateral to be maintained and
operated in a good and workmanlike manner and in accordance with all
applicable laws, rules, regulations, and orders promulgated by all duly
constituted authorities. Debtor will not use, or allow the use of, the
Collateral in any manner which constitutes a public or private nuisance or
which makes void, voidable, or cancelable, or increases the premium of, any
insurance then in force with respect thereto. Debtor will not do or suffer
to be done any act whereby the value of any part of the Collateral may be
materially lessened. Debtor will allow Secured Party or its authorized
representatives to inspect the Collateral and Debtor's books and records
pertaining thereto and Debtor will assist Secured Party or said
<PAGE>
representatives upon reasonable notice in whatever way reasonably necessary
to make such inspection. If Debtor receives notice from any federal, state,
or other governmental entity that the Collateral is not in compliance with
any applicable law, rule, regulation, or order, Debtor will promptly furnish
a copy of such notice to Secured Party.
b. Debtor will cause all debts and liabilities of any
character, including without limitation all debts and liabilities for labor,
material, and equipment, incurred in the installation, maintenance, and
operation of the Collateral to be promptly paid.
c. Debtor will cause to be paid prior to delinquency all
taxes and assessments heretofore or hereafter levied or assessed against the
Collateral, or any part thereof, or against the Secured Party for or on
account of the Secured Indebtedness or the interest created by this
Agreement and will furnish Secured Party with receipts showing payment of
such taxes and assessments at least ten days prior to the applicable default
date therefor.
d. Debtor will keep the Collateral in good order, repair,
and operating condition, causing all necessary repairs, renewals,
replacements, additions, and improvements to be promptly made, and will not
allow the Collateral to be misused, abused, or wasted or to deteriorate,
except for the ordinary wear and tear of its intended primary use. In
addition, Debtor will promptly replace all worn-out or obsolete equipment
covered by this Agreement, or components thereof, with equipment or
components comparable to the replaced equipment or components when new.
e. Debtor will keep the Collateral insured in an amount
equal to the full insurable value thereof against loss or damage by fire,
theft, collision, and other hazards as may be required by Secured Party by
policies of fire, extended coverage, and other insurance in such company or
companies, in such amounts, upon such terms and provisions, and with such
indorsements, all as may be acceptable to Secured Party. Such insurance
policies shall also contain a standard mortgagee's indorsement providing for
payment of any loss to Secured Party. All policies of insurance shall
provide for 30 days' written minimum cancellation notice to Secured Party.
All drafts or instruments of any kind evidencing payment under any such
insurance policies which come into the possession of Debtor shall be
immediately delivered to Secured Party. No such policies shall be payable to
any party other than Secured Party and Debtor. Debtor shall furnish Secured
Party with certificates or other evidence satisfactory to Secured Party of
compliance with the foregoing insurance provisions. Duplicate originals of
all policies, verifications, binders and cover notes covering any of the
Collateral shall be delivered to the Secured Party upon demand. Secured
Party may act as attorney for Debtor in obtaining, adjusting, settling and
canceling such insurance and endorsing any drafts drawn by insurers of
<PAGE>
the Collateral. Secured Party may apply any proceeds of such insurance which
may be received by it in payment on account of the obligations secured
hereby, whether due or not.
f. If the validity or priority of this Agreement or of any
rights, titles, security interests, or other interest created or evidenced
hereby shall be attacked, endangered or questioned or if any legal
proceedings are instituted with respect thereto, Debtor will give prompt
written notice thereof to Secured Party and at Debtor's own cost and expense
will diligently endeavor to cure any defect that may be developed or
claimed, and will take all necessary and proper steps for the defense of
such legal proceedings. Secured Party (whether or not named as a party to
legal proceedings with respect thereto) is hereby authorized and empowered
to take such additional steps as in its judgment and discretion may be
necessary or proper for the defense of any such legal proceedings or the
protection of the validity or priority of this Agreement and the rights,
titles, security interests, and other interests created or evidenced hereby,
and all expenses so incurred of every kind and character shall be a demand
obligation owing by Debtor and the party incurring such expenses shall be
subrogated to all rights of the person receiving such payment.
g. Debtor will, on request of Secured Party, (1) promptly
correct any defect, error, or omission which may be discovered in the
contents of this Agreement or in any other instrument executed in connection
herewith or in the execution or acknowledgment thereof; (2) execute,
acknowledge, deliver, and record or file such further instruments (including
without limitation further security agreements, financing statements, and
continuation statements) and do such further acts necessary to carry out the
purposes of this Agreement and such other instruments and to subject to the
security interests hereof and thereof any property intended by the terms
hereof and thereof to be covered hereby and thereby including specifically,
but without limitation, any renewals, additions, substitutions,
replacements, or appurtenances to the then Collateral, and (3) execute,
acknowledge, deliver, procure, and record or file any document or instrument
(including specifically any financing statement) deemed advisable by Secured
Party to protect the security interest hereunder against the rights or
interests of third persons, and Debtor will pay all costs connected with any
of the foregoing.
h. Notwithstanding the security interest in proceeds
granted herein, Debtor will not sell, assign, transfer, or otherwise dispose
of all or any part of the Collateral or any interest therein or permit the
title to the Collateral, or any interest therein, to be vested in any other
party, in any manner whatsoever, by operation of law or otherwise, without
the prior written consent of Secured Party, which consent shall not be
unreasonably withheld or delayed.
i. Debtor shall account fully and faithfully for and, if
Secured Party so elects, shall promptly pay or turn over to Secured Party
the proceeds in whatever form received from disposition in any manner of any
of the
<PAGE>
Collateral, whether the indebtedness secured hereby is mature or not,
the order and method of application to be in the sole discretion of Secured
Party, except as otherwise specifically authorized herein. Debtor shall at
all times keep the Collateral and its proceeds separate and distinct from
other property of Debtor and shall keep accurate and complete records of the
Collateral and its proceeds.
j. Debtor will not change its address, location, name,
identity, or corporate structure unless Debtor shall have taken such action,
satisfactory to Secured Party, to have caused the security interest of
Secured Party in the Collateral to be at all times fully perfected and in
full force and effect.
k. Debtor shall furnish Secured Party all such information
as Secured Party may request with respect to the Collateral.
4.3. Debtor agrees that, if Debtor fails to perform any act or to take
any action which Debtor is required to perform or take under this Agreement, or
to pay any money which Debtor is required to pay under this Agreement, then
Secured Party, in Debtor's name or in its own name, may, but shall not be
obligated to, perform or cause to be performed such act or take such action or
pay such money, and any expenses so incurred by Secured Party as well as any
money so paid by Secured Party, shall be a demand obligation owing by Debtor to
Secured Party and Secured Party, upon making such payment, shall be subrogated
to all of the rights of the person, corporation, or body politic receiving such
payment. Any amounts due and owing by Debtor to Secured Party pursuant to this
Agreement shall bear interest from the date such amount becomes due until paid
at the highest rate provided by any of the Debt Documents, or the highest rate
allowed by law, whichever is greater, and shall be a part of the Secured
Indebtedness and shall be secured by this Agreement and by any other instrument
securing the Secured Indebtedness.
Section 5. Events of Default and Remedies.
------------------------------
5.1. Debtor shall be in default under this Agreement upon the
occurrence of a breach of this agreement or an Event of Default (as such term is
----------------
defined in the Note).
5.2. Upon the occurrence of an Event of Default, and at any time
thereafter, Secured Party is authorized, in any manner authorized by law and
without breach of the peace, to take possession of the Collateral and of all
data, books, records, and accounts relating thereto and to exercise without
interference from Debtor any and all rights which Debtor has with respect to the
management, possession, operation, protection, or preservation of the
Collateral. If necessary to obtain the possession provided for above, Secured
Party may invoke any and all legal remedies to dispossess Debtor, including
specifically one or more actions for forcible entry and detainer.
5.3. In connection with any action taken by Secured Party pursuant to
this Section 5, Secured Party shall not be liable for any loss sustained by
Debtor unless such loss is caused by the willful misconduct or gross negligence
of Secured Party.
<PAGE>
5.4. Upon the occurrence of an Event of Default, and at any time
thereafter, Secured Party shall have all the rights of a secured party after
default under the Uniform Commercial Code as adopted in California and in
conjunction with, in addition to, or in substitution for those rights:
a. Secured Party may, in any legal manner and without
breach of the peace, enter upon Debtor's premises to take possession of,
assemble, and collect the Collateral or to render it unusable; and
b. Secured Party may require Debtor to assemble the
Collateral and make it available at a place Secured Party designates which
is mutually convenient to allow Secured Party to take possession or dispose
of the Collateral; and
c. written notice mailed to Debtor as provided herein ten
days prior to the date of public sale of the Collateral or prior to the date
after which private sale of the Collateral will be made shall constitute
reasonable notice; and
d. it shall not be necessary that the Secured Party take
possession of the Collateral or any part thereof prior to the time that any
sale pursuant to the provisions of this Section is conducted and it shall
not be necessary that the Collateral or any part thereof be present at the
location of such sale; and
e. prior to application of proceeds of disposition of the
Collateral to the Secured Indebtedness, such proceeds shall be applied to
the reasonable expenses of retaking, holding, preparing for sale or lease,
selling, leasing and the like and the attorneys' fees and legal expenses
incurred by Secured Party, Debtor to remain liable for any deficiency; and
f. the sale by Secured Party of less than the whole of the
Collateral shall not exhaust the rights of Secured Party hereunder, and
Secured Party is specifically empowered to make successive sale or sales
hereunder until the whole of the Collateral shall be sold; and, if the
proceeds of such sale of less than the whole of the Collateral shall be less
than the aggregate of the indebtedness secured hereby, this Agreement and
the security interest created hereby shall remain in full force and effect
as to the unsold portion of the Collateral just as though no sale had been
made; and
g. in the event any sale hereunder is not completed or is
defective in the opinion of Secured Party, such sale shall not exhaust the
rights of Secured Party hereunder and Secured Party shall have the right to
cause a subsequent sale or sales to be made hereunder; and
h. any and all statements of fact or other recitals made in
any bill of sale or assignment or other instrument evidencing any
foreclosure sale hereunder as to nonpayment of the indebtedness or as to the
occurrence of any
<PAGE>
default, or as to Secured Party having declared all of such indebtedness to
be due and payable, or as to notice of time, place, and terms of sale and
the properties to be sold having been duly given, as to any other act or
thing having been duly done by Secured Party, shall be taken as prima facie
evidence of the truth of the facts so stated and recited; and
i. Secured Party may appoint or delegate any one or more
persons as agent to perform any act or acts necessary or incident to any
sale held by Secured Party, including the sending of notices and the conduct
of sale, but in the name and on behalf of Secured Party.
5.5. All remedies expressly provided for in this Agreement are
cumulative of any and all other remedies existing at law or in equity and are
cumulative of any and all other remedies provided for in any other instrument
securing the payment of the Secured Indebtedness, or any part thereof, or any
instrument otherwise benefiting Secured Party or any of its affiliates, and the
resort to any remedy provided for hereunder or under any such other instrument
or provided for by law shall not prevent the concurrent or subsequent employment
of any other appropriate remedy or remedies.
5.6. Subordination of that portion of the Secured Indebtedness
represented by the Note shall in no way limit or delay the availability of
remedies to Secured Party under this Agreement.
5.7. Secured Party may resort to any security given by this Agreement
or to any other security now existing or hereafter given to secure the payment
of the Secured Indebtedness, in whole or in part, and in such portions and in
such order as may seem best to Secured Party in its sole discretion, and any
such action shall not be a waiver of any of the rights, benefits, or security
interests evidenced by this Agreement.
5.8. To the full extent Debtor may do so, Debtor agrees that Debtor
will not at any time insist upon, plead, claim, or take the benefit or advantage
of any law now or hereafter in force providing for any redemption, valuation,
appraisement, stay of execution, or extension and Debtor, for Debtor, Debtor's
successors, receivers, trustees, and assigns, and for any and all persons ever
claiming any interest in the Collateral, to the extent permitted by law, hereby
waives and releases all rights of redemption, valuation, appraisement, stay of
execution, extension, notice of intention to mature, and declaration that the
whole of the Secured Indebtedness is due, and all rights to a marshaling of the
assets of Debtor, including the Collateral, and to a sale in inverse order of
alienation in the event of foreclosure of the security interest hereby created.
<PAGE>
Section 6. Miscellaneous.
-------------
6.1. This Agreement shall remain in full force and effect from the date
hereof until satisfaction of the Secured Indebtedness, which shall occur upon:
(i) the payment in full, or conversion of, all obligations pursuant to the Note,
and (ii) the payment of all obligations pursuant to Debt Documents other than
the Note so that no such obligation is more than thirty days past due pursuant
to the terms of any such Debt Document. If all of the Secured Indebtedness is
satisfied as provided in the first sentence of this Section 6.1, and if all of
-----------
the covenants, warranties, undertakings, and agreements made in this Agreement
are kept and performed, then all rights under this Agreement shall terminate and
the Collateral shall become wholly clear of the security interest evidenced
hereby. Promptly following the termination of this Agreement, Secured Party
shall execute and deliver all such documents and instruments as Debtor may
reasonably request to evidence the termination of this Agreement and Secured
Party's rights hereunder.
6.2. Secured Party may remedy any default without waiving the default
remedied. Acceptance by Secured Party of any payment in an amount less than the
amount then due on any Secured Indebtedness shall be deemed an acceptance on
account only and shall not in any way affect the existence of a default under
this Agreement or any of the Debt Documents.
6.3. Secured Party may at any time and from time to time, in writing
which expressly states and describes the same, (a) waive compliance by Debtor
with any covenant made in this Agreement; (b) consent to Debtor's doing any act
which Debtor is prohibited by this Agreement from doing; (c) consent to Debtor's
failing to do any act which Debtor is required by this Agreement to do; or (d)
release any part of the Collateral, or any interest therein, from the security
interest of this Agreement. No such writing shall in any way impair the rights
of Secured Party hereunder except to the extent expressly agreed to by Secured
Party in such writing.
6.4. The security interest and other rights of Secured Party hereunder
shall not be impaired by any indulgence, moratorium, or release granted by
Secured Party, including but not limited to (a) any renewal, extension, or
modification which Secured Party may grant with respect to any Secured
Indebtedness; or (b) any surrender, compromise, release, renewal, extension,
exchange, or substitution which Secured Party may grant in respect of any item
of the Collateral, or any part thereof or any interest therein.
6.5. Secured Party or its representatives may, upon reasonable notice
to Debtor, arrange to inspect the Collateral or any part thereof and inspect,
audit, check, and make copies of the books, records, journals, orders, receipts,
correspondence, and other data relating to the Collateral or to any transaction
between Debtor and Secured Party, and Debtor shall assist Secured Party in
making any such inspection.
6.6. A carbon, photographic, or other reproduction of this Agreement or
of any financing statement relating to this Agreement shall be sufficient as a
financing statement.
6.7. Debtor will cause all financing statements and continuation
statements relating hereto to be recorded and filed in such manner and in such
places as Secured Party shall request and
<PAGE>
will pay all expenses of such recording and filing, including re-recording and
refiling taxes, fees, and other charges.
6.8. In the event the ownership of the Collateral or any part thereof
becomes vested in any entity other than Debtor, Secured Party may, without
notice to Debtor, deal with such successor or successors in interest with
reference to this Agreement and to the indebtedness secured hereby in the same
manner as with Debtor, without in any way vitiating or discharging Debtor's
liability hereunder or upon the indebtedness secured hereby. No sale of the
Collateral, no forbearance on the part of Secured Party, and no extension of the
time for the payment of the indebtedness secured hereby given by Secured Party
shall operate to release, discharge, modify, change, or affect, in whole or in
part, the liability of Debtor hereunder for the payment of the indebtedness
secured hereby or the liability of any other person hereunder for the payment of
the indebtedness secured hereby, except as agreed to in writing by Secured
Party.
6.9. If any part of the Secured Indebtedness cannot be lawfully secured
by this Agreement, or if any part of the Collateral cannot be lawfully subject
to the security interest hereof to the full extent of such indebtedness, then
all funds received by Secured Party in partial or full satisfaction of the
Secured Indebtedness shall be applied on said indebtedness first in discharge of
that portion thereof which is not secured by this Agreement.
6.10. Secured Party may assign this Agreement so that the assignee
shall be entitled to the rights and remedies of Secured Party hereunder and, in
the event of such assignment, Debtor will assert no claims or defenses it may
have against the assignee except those granted in this Agreement.
6.11. Any notice, request, demand, or other communication required or
permitted hereunder shall be given in the manner described in the Note.
6.12. This Agreement shall be binding upon Debtor, and its successors,
receivers, trustees, and assigns, including all successors in interest of Debtor
in and to all or any part of the Collateral, and shall inure to the benefit of
Secured Party and the affiliates, successors, and assigns of Secured Party.
6.13. If any one or more of the provisions of this Agreement shall be
declared invalid, illegal, or unenforceable in any respect by a court of
competent jurisdiction, then such provision or provisions shall be severed from
this Agreement and the legality and enforceability of the remaining portions of
this Agreement shall not in any way be affected or impaired thereby.
6.14. Terms in this Agreement, including Exhibit "A" attached hereto,
that are defined in the Uniform Commercial Code as adopted in California shall
have the meanings provided therein.
6.15 Whenever the context requires, the gender of all words used
herein shall include the masculine, feminine, and neuter, and the number of all
words shall include the singular and plural. The headings and captions used in
this Agreement are solely for convenient reference and shall not affect the
meaning or interpretation of any section or paragraph herein, or this Agreement.
<PAGE>
IN WITNESS WHEREOF, Debtor has executed this Agreement as of the date
first stated above.
"DEBTOR"
CONCENTRIC NETWORK CORPORATION
By: /s/Henry R. Nothhaft
---------------------------------
Henry R. Nothhaft, President
<PAGE>
EXHIBIT A
Collateral:
1. All equipment owned by Debtor, including all Sun Microsystems
file servers owned by Debtor, it being expressly understood
that the Collateral does not include equipment leased by
Debtor from Datacom, Comdisco, or Phoenix;
2. All software products licensed to Secured Party or licensed to
an escrow agent in connection with this transaction, including
without limitation the software products titled Concentric
Host, Concentric View, CityFind, The Concentric Internet
Access Kit and Registration Service, Web University,
FrontLine, Adaptive Call Processing, and Billing, and all
data, information, and material, including but not limited to
object code, source code, user and system documentation,
illustrations, models, drawings, blueprints, and text relating
to the foregoing software products; and
3. All proceeds of the foregoing.
<PAGE>
EXHIBIT 10.35
June 19, 1997
Concentric Network Corporation
10590 N. Tantau Avenue
Cupertino, CA 95014
Attention: Chief Financial Officer
Re: Service Credits - Letter Agreement
In connection with the execution of (i) the Amended & Restated Employee
Services and Staffing Agreement between Critical Technologies, Inc. ("CTI") and
Concentric Network Corporation ("CNC") of even date herewith (the "ESS
Agreement") and (ii) the $1,100,000 Obligation - Letter Agreement among Williams
Communications Group, Inc., CTI and CNC of even date herewith, Williams
Communications Group, Inc. and its affiliates (hereinafter collectively referred
to as "WCG") agree to provide CNC with credits which, under certain
circumstances, can be used to offset the purchase price of "Services" (as
hereinafter defined). The terms and conditions associated with the use of such
Service credits are set forth below.
1. "Services" are defined as inter-exchange multimedia telecommunications
carrier services provided by WCG which have not been previously provided to CNC
as of the date of this Letter Agreement. Services may include the following:
Inter-exchange Telecommunications Carrier Services
- --------------------------------------------------
Wide Area ATM
Private Line Services
Frame Relay Services
Collocation Services, existing and new
WCG Agency services
Others to be defined
Planned Services
- ----------------
CLEC services
xDSL services
Switched 1+, 1-800, 1-900, etc.
IP Voice Services
IP Video Services
However, such multi-media Services shall not include any services to be provided
under the ESS Agreement with CTI. Further, the Services provided by WCG shall
be used strictly for video
<PAGE>
transmission or multimedia applications, including, but not limited to Internet
access, web site hosting, web site mirroring, and similar Internet-related
services.
2. CNC's credit for Services will apply on all WCG charges for Services
under the Master Agreement (as hereinafter defined), but shall not apply to
Third Party Costs. Third Party Costs shall include charges reasonably necessary
to render the Services and paid by WCG to an unaffiliated entity or entities
including, but not limited to, local access charges, taxes, installation
charges, off-network charges, one time fees and other similar costs. The
Services credit will be applied to each monthly WCG invoice at a rate of fifty
percent (50%) of the face value of Services (after payment in full by CNC of all
Third Party Costs) until the credit is consumed in its entirety. No Service
credits can be utilized if CNC is past due with respect to any invoice from WCG.
All remaining charges for Services after application of the credits for WCG
Services will be paid entirely in cash by CNC. If the Services credit is not
utilized within five (5) years of the closing of the Financing Event, the
credits shall expire and CNC shall not be entitled to any refund, further credit
or other payment for any of the unused credits.
3. CNC will be entitled to utilize the Service credits on all Service
charges incurred by CNC under the Master Agreement. The Master Agreement shall
be negotiated by CNC and WCG in connection with WCG's participation in the
"Financing Event" described in the Memorandum of Understanding between WCG and
CNC dated as of May 30, 1997. The Master Agreement will set forth CNC's
obligation to purchase in the aggregate a total of at least $21.2 million of
telecommunications equipment and Services from WCG (the $21.2 million shall
include the Services credit amount). CNC will agree in this document to meet
the $21.2 million commitment by purchasing at least $16.2 million in Services
and no more than $5 million in equipment during the five (5) year period
following the closing of the Financing Event. The parties recognize that if the
Financing Event does not occur and/or the terms and conditions of the Master
Agreement can not be negotiated to each party's satisfaction that CNC will have
no purchase obligation with respect to WCG Services and equipment. In such an
event, CNC shall be entitled to utilize the Service credits to purchase Services
from WCG subject to the same terms and conditions as set forth in paragraph 2
above. CNC will not be entitled to any cash refund or other form of
reimbursement from WCG for any unused Service credits granted under this Letter
Agreement or otherwise.
4. Upon execution of this Letter Agreement by both parties, CNC will be
entitled to $1.1 million of Service credits under the Master Agreement.
Further, WCG will provide additional Service credits for the positive dollar
difference between (i) the WCG benefit rate (currently 27.2%) multiplied by the
"Base Salary Rate" of each "Loaned Employee" actually charged to CNC and (ii)
the CNC benefit rate multiplied by the "Base Salary Rate" of each "Loaned
Employee" actually charged to CNC (which CNC benefit rate shall in no event be
lower than 19.6% during the remaining term of the ESS Agreement). The amount of
such credits shall be computed monthly and allocated to CNC's account once CNC
pays CTI pursuant to Section 5.7 of the ESS Agreement for such month. The CNC
and WCG benefit rates will be reviewed and updated on January 1 of each year and
the amount of credits allocated to CNC shall be adjusted accordingly. The terms
"Base Salary Rate" and "Loaned Employees" shall have the meanings set forth in
the ESS Agreement.
<PAGE>
Page 3
The parties have executed this Letter Agreement by their duly authorized
representatives as of June 19, 1997.
WILLIAMS COMMUNICATIONS GROUP. INC.
By:/s/
----------------------------------
Its:
---------------------------------
Agreed and Accepted
CONCENTRIC NETWORK CORPORATION
By: /s/
----------------------------------
Its:
---------------------------------
<PAGE>
EXHIBIT 10.36
June 19, 1997
Critical Technologies, Inc.
3324 Hollenberg Drive
Bridgeton, Missouri 63044
Williams Communications Group, Inc.
111 East 1st Street
Tulsa, Oklahoma 74103
Re: $1,100,000 Obligation - Letter Agreement
This letter refers to the September 30, 1996, amendment (the "Amendment")
to the Employee Services and Staffing Agreement between Critical Technologies,
Inc. ("CTI") and Concentric Network Corporation ("CNC") dated as of November 1,
1995 (the "1995 Agreement"). Paragraph 14 of Amendment provides as follows:
Effective upon the closing of any Acquisition of CTI, CTI shall pay,
or cause the person acquiring CTI to pay, to CNC the sum of
$1,100,000. Such sum shall be paid in cash unless the consideration
paid to CTI or the shareholders of CTI in the Acquisition consist
solely or partly of securities of the acquirer which can be traded on
the NASDAQ National Market, the New York Stock Exchange or the
American Stock Exchange, in which case the acquirer shall have the
right to pay such amount to CNC in a combination of cash and such
securities in the same proportion and manner that such cash and
securities is paid to CTI or the shareholders of CTI. Such securities
shall be valued for the purposes of this agreement at the average of
the closing sale price of such securities for the 30 trading days
preceding the closing of such Acquisition. In the event that the total
consideration for the Acquisition is paid in two or more increments,
the $1,100,000 to be paid to CNC shall be paid concurrently with each
such increment. The proportion of the $1,100,000 paid at each
increment shall be the same proportion as the consideration paid at
such increment represents as a portion of the total consideration paid
in all increments. For purposes of this Agreement, an "Acquisition"
shall mean any of transactions or series of transactions in which all
or substantially all the business of CTI is transferred to another
person, whether the form of such transaction is a stock sale by the
shareholders of CTI, a merger, a consideration or a transfer of
assets.
On March 6, 1997, Williams Communications Group, Inc. acquired all of the
outstanding common stock of CTI which constituted an "Acquisition" for the
purposes of the Amendment, thereby creating a $1,100,000 obligation in favor of
CNC.
<PAGE>
In consideration of WCG's loan to CNC evidenced by The Concentric Network
Corporation 10% Convertible Promissory Note of even date herewith and $1,100,000
of service credits being made available to CNC under certain circumstance as set
forth in the Service Credits - Letter Agreement of even date herewith, CNC
agrees that all obligations of CTI, its parent company and/or its affiliates
under the Amendment are, as of the date of this letter, fully and finally
satisfied and no further payment or other obligation remains outstanding or
unsatisfied.
Sincerely,
CONCENTRIC NETWORK CORPORATION
By: /s/ Henry R. Nothhaft
-----------------------------------
Its:
-----------------------------------
<PAGE>
EXHIBIT 10.37
June 19, 1997
Concentric Network Corporation
10590 North Tantau Avenue
Cupertino, CA 95014
Re: Agency Agreement and Distribution Agreement
This Letter Agreement is entered into between Concentric Network Corporation
("CNC") and Williams Communications Group, Inc. ("WCG") in connection with WCG's
agreement to loan $3 Million to CNC and, under certain circumstances, acquire
equity in CNC.
CNC and WCG agree to negotiate and enter into binding agreements upon terms
mutually satisfactory to the parties that will enable WCG and its affiliates to
market CNC products and services to WCG customers. The first agreement (the
"Agency Agreement") will allow WCG to sell CNC products and services as CNC's
agent, and the second agreement (the "Distributorship Agreement") will allow WCG
to brand CNC products and services for resale as WCG's products and services.
The Agency Agreement and the Distributorship Agreement will be collectively
referred to as the "Agreements."
Term. The Agreements will have initial terms of two (2) years, with automatic
- ----
renewals of one-year terms unless terminated by either party prior to the end of
the initial term or a renewal term. The Agreements will not terminate upon the
payment of WCG's loan to CNC, nor will they be terminated as a result of WCG's
failure to acquire or maintain an equity position in CNC.
Products. WCG will have access to all current and future CNC products and
- --------
services under the Agreements, including international services, except those
which CNC is contractually or legally prohibited from making available to WCG.
Without limiting the foregoing, initial services to be included in the Agreement
will consist of CNC Dial Access services, RemoteLink, Dedicated Access
Facilities, and ConcentricHost Web Services. Future services envisioned include
Virtual Private Network, IP Video Services, and IP Telephony Services.
Pricing. Pricing to WCG will be based on Most Favored pricing such that WCG
- -------
would not be in a disadvantageous position when compared with any CNC agent or
distributor during the entire term of the agreement. The pricing to WCG will
not include minimum purchase requirements or take-or-pay provisions.
Training. CNC will, at WCG's expense, provide training on current products and
- --------
new products as and when they are made available to WCG. CNC will, at WCG's
expense, provide marketing support, as well as marketing and sales materials.
<PAGE>
Other Terms and Conditions - Agency Agreement. CNC will be responsible for all
- ---------------------------------------------
facets of product delivery, revenue collection (customer billing), warranty
fulfillment and customer service. WCG will receive a commission which will
represent a percentage of the total revenue collected by CNC.
Other Terms and Conditions - Distributorship Agreement. It is WCG's desire to
- ------------------------------------------------------
utilize WCG assets (e.g., circuits and computers) wherever and whenever
technically and operationally feasible in support of CNC services distributed by
WCG. WCG will have the option of provisioning any part or all components
required for product delivery, revenue collection (customer billing) and
customer service, where technically and operationally feasible. Also, to the
extent technically and operationally feasible with CNC's current support
systems, CNC will grant WCG access to the applications and control systems
necessary for WCG to configure, maintain and support WCG's customers of the
products and services. If necessary to enable any of the foregoing, and if
technically and operationally feasible, CNC will develop the necessary systems
or make changes to CNC services, and WCG will reimburse CNC therefor on a fully-
allocated basis. The price paid by WCG to CNC for products or services being
re-sold to WCG customers will be dependent on which components of each of the
various services WCG provides. CNC and WCG will mutually agree upon development
objectives, schedules and costs before initiating any WCG-funded development
projects.
CNC will assist WCG on an expedited basis so as to enable WCG to distribute
the CNC Dial Access service within 60 days from the date of the Agreements.
CNC will use its best reasonable efforts at all times to groom traffic
generated by WCG, or its customers, onto network facilities provided by WCG.
Agreed To:
CONCENTRIC NETWORK WILLIAMS COMMUNICATIONS CORPORATION
GROUP, INC.
By: /s/ By: /s/
-------------------------- --------------------------------
- ----------------------------- -----------------------------------
Printed Name Printed Name
- ----------------------------- -----------------------------------
Title Title
<PAGE>
EXHIBIT 10.38
CO-MARKETING SERVICES AGREEMENT
This Co-Marketing Services Agreement ("AGREEMENT"), entered into by and between
Netscape Communications Corporation ("NETSCAPE"), a Delaware corporation located
at 501 East Middlefield Road, Mountain View, California 94043, and Concentric
Network Corporation ("CONCENTRIC"), a Florida corporation with its principal
place of business at 10590 N. Tantau Avenue, Cupertino, California 95014 is
effective as of the effective date set forth below ("EFFECTIVE DATE").
RECITALS
A. Netscape is in the business of developing, manufacturing, marketing and
distributing Internet-related products and technology, provides related
services, and in connection with its marketing efforts, maintains World Wide
Web ("WEB") sites for the provision of local-language geographically-targeted
Internet content, navigation and directory services;
B. Concentric is in the business of offering certain Internet and Intranet-
related services;
C. Netscape is implementing offerings to provide hosted applications to
customers; such hosted applications will be a co-branded Service (as defined
below) that allows individual professionals, small businesses and project-
based users to quickly, easily, and economically run an Intranet for their
business; and
D. The parties wish to enter into this Agreement to specify the terms and
conditions of their development, implementation, co-marketing, and support
of the Service.
NOW, THEREFORE, in consideration of the mutual covenants contained herein, the
parties agree as follows:
1. DEFINITIONS.
For purposes of this Agreement, in addition to the capitalized terms defined
elsewhere in this Agreement, the following terms shall have the meanings set
forth below:
"APPLICATIONS" means the Intranet applications that will be provided to
Customers via the Service. Applications will include: web publishing, email,
private discussion groups operated by Customers, directory, and document
publishing, collaboration, and management. Additional applications may include,
but are not limited to: calendering, conferencing, HR handbooks, accounting and
financial, timesheet tracking and billing, sales automation, and job postings.
"CO-BRANDED" means bearing the Service Name.
"CONCENTRIC BRAND SERVICE" means the service described as "Concentric Brand
Service" in Exhibit A.
---------
"CONCENTRIC WEB SITE" means the Concentric Web site specified in Exhibit A.
---------
"CUSTOMER" means an individual, sole proprietorship, partnership, corporation,
or other legal entity that registers for the Service in accordance with the
terms and conditions of this Agreement.
<PAGE>
"NETSCAPE'S WEB SITE" means the collection of HTML documents accessible by the
public via the Internet at the URL listed on Exhibit B and/or at such other URL
---------
or URLs as Netscape may designate. For purposes of this Agreement, Netscape's
Web Site shall include, without limitation, the Netscape Services Home Page.
"NETSCAPE'S HOME PAGE" means the home page of Netscape's Web Site.
"NETSCAPE SERVICES HOME PAGE" means the first page that is linked to from
Netscape's Web Site when an end user clicks on the button described in Section
3.1.
"PAYMENT" means the amount specified as "Payment" on Exhibit C.
---------
"SERVICE" means a hosted applications service offered to customers that will:
(a) allow individual professionals and small businesses to quickly, easily, and
economically establish and run an intranet; and (b) use Netscape SuiteSpot
software features. The Service will be Co-Branded by Netscape and Concentric
pursuant to this Agreement. For purposes of this Agreement, the Netscape
Services Home Page will not be deemed a part of the Service.
"SERVICE AD INVENTORY" means the electronic advertising inventory within the
Service.
"SERVICE LAUNCH DATE" means the first date on which the Service is fully
functional and accessible to Customers, as described in this Agreement.
"SERVICE NAME" means: (i) the name initially agreed to by the parties for
purposes of co-branding the Service; and (ii) any replacement name(s) determined
by mutual agreement of the parties.
"TERM" means the period specified as "Term" on Exhibit A.
---------
"THIRD PARTY PROVIDER" means a company that provides applications for use by
Customers in the Service.
2. TERRITORY. The geographic scope of this Agreement is intended to be the
U.S. and English-speaking Canada ("Territory"). To the extent that the Service
---------
may be used by Customers outside of the Territory, such use will also be subject
to the terms and conditions of this Agreement.
3. SERVICE FEATURES. The Service shall conform with the following
requirements:
3.1. Netscape's Home Page. A menu item, with a name chosen by Netscape,
--------------------
will appear above the fold on Netscape's Home Page no later than the Service
Launch Date and for the remainder of the Term. When the button corresponding to
such menu item is selected by an end user, the end user will be linked to the
Netscape Services Home Page.
3.2. Netscape Services Home Page.
---------------------------
(a) The Netscape Services Home Page will: (i) be designed, developed,
produced and managed by Netscape, including but not limited to hiring and
managing creative and technical staff as needed to do so; (ii) be hosted and
maintained solely on Netscapes's servers; (iii) have a dedicated [*] (or such
other [*] as Netscape may determine); and (iv) be directly linked, [*], from
Netscape's Home Page. The parties acknowledge and agree that all access to the
Netscape Services Home Page shall be deemed to be via Netscape's Web Site, and
therefore [*]. The parties acknowledge that it is their intent that the
principal function of the Netscape Services Home Page will be to drive traffic
to, and generate subscribers for, the Service.
(b) On the Netscape Services Home Page, links to and information about
the Service will be accorded the majority of the [*] screen space. Within such
majority of such [*] screen space, there will be a link to Concentric's
enterprise access service, subject to the terms and conditions of this
Agreement. The remainder of such useable screen space will be the sole
responsibility of Netscape and will not be subject to the terms and conditions
of this Agreement.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
2
<PAGE>
3.3. Service Pages.
-------------
(a) The Service will: (i) be produced and managed by Concentric,
including but not limited to hiring and managing creative, technical, customer
support, and general staff as needed to do so; (ii) be hosted and maintained
solely on [*]; and (iii) have a [*] (such as [*] or such other [*] as Netscape
may determine).
(b) Concentric and Netscape will mutually agree to the design and look
and feel of the Service and its Web pages. Netscape will be responsible for
assisting Concentric with the navigational and architectural structure for
displaying the contents of the Service's Web pages (i.e., text and graphical
elements). At Netscape's expense, Netscape will provide the services of a
producer to assist with the design of the Service's Web pages.
(c) Every page of the Service will be Co-Branded above the fold.
3.4. Purchase, Implementation, Maintenance And Support. Subject to the
--------------------------------------------------
provisions of Exhibit C, Concentric expressly agrees that Concentric shall be
---------
solely responsible for the purchase, implementation, maintenance and support of
all software and hardware required to fulfill its obligations under this
Agreement.
3.5. Target Market. The Service's primary target market is as specified as
-------------
"Target Market" on Exhibit A.
---------
3.6. Name of the Service. The initial Service Name, and any subsequent
-------------------
Service Names, will be mutually agreed upon by Netscape and Concentric.
Concentric shall not independently use the Service Names without Netscape's
prior written consent unless such use occurs in connection with Concentric's
advertising sales and promotional efforts on behalf of the Service in accordance
with this Agreement. The Service Name shall be displayed on every page of the
Service and on no other locations without Netscape's prior written consent
except in connection with such advertising sales and promotional efforts on
behalf of such Service. If a Service Name includes a co-branding component,
Concentric may not use the corresponding Service Name with Netscape's name
expunged. Concentric may not use a Service Name independent of the Service
except as provided for above in this Section 3.6.
3.7. Design of Service. The Service shall be co-branded equally by
-----------------
Netscape and Concentric. Netscape shall be responsible for creating, and
Concentric shall be responsible for implementing, the graphic user interface
including navigation, architecture, look and feel as well as the tone of the
Service, taking into consideration the cultural, economic and linguistic
qualities of such Service's Territory; provided, however, that Netscape and
Concentric shall mutually agree to the initial design, and each subsequent
design, of the Service.
3.8. Netscape Products.
-----------------
(a) Except as specified in subsection (b) below, Netscape does not
grant to Concentric under this Agreement any right or license to use any
trademarks, content, products or other technology.
(b) Subject to the terms and conditions of this Agreement, Netscape
hereby grants to Concentric a non-exclusive, non-transferable license for the
Term to implement, utilize, and display to Customers and their end users within
the Service, all of Netscape's Design Contributions. "NETSCAPE'S DESIGN
CONTRIBUTIONS" means Netscape's contributions under this Agreement to the look
and feel and overall design of the Service. Upon the expiration or termination
of this Agreement, Concentric will immediately discontinue all of its use of
Netscape's Design Contributions, except as may be expressly permitted by this
Agreement.
3.9. Roll-out Schedule. The parties will use their reasonable best
-----------------
efforts to meet the phased roll-out requirements for the Service as specified in
Exhibit D.
- ----------
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
3
<PAGE>
3.10. Customer Registration. Each Customer will register for the Service
---------------------
in accordance with Exhibit E. Any and all information regarding each Customer
---------
and its end users that is obtained by Concentric through, or in connection with,
the Service will be subject to the terms and conditions of Exhibit E.
----------
3.11. Separate Servers. Concentric agrees that, beginning no later than
----------------
January 1, 1998, the primary functions and applications of the Service will be
run on dedicated hardware servers throughout the remainder of the Term.
3.12. Technical Support. During the Term:
-----------------
(a) Concentric shall provide technical support services for the
Service to Netscape on a timely basis, appoint a technical contact to whom
Netscape may address all technical questions relating to the Service, and use
its reasonable commercial efforts to promptly remedy any material misplacement
or malfunctioning of the Service; provided, however, that Concentric will
provide the foregoing no less effectively and timely than it provides such
services in connection with other Concentric services.
(b) Concentric shall be responsible for each Customer's maintenance
and support requirements in connection with the Service, which will be mutually
agreed to by Netscape and Concentric in the form of written maintenance and
support guidelines. In Concentric's performance of such obligations, the
Customers shall not be disadvantaged or suffer from inferior performance
relative to the customers of the Concentric Brand Service and other Concentric
Internet offerings.
(c) Concentric will provide front line support to the Third Party
Providers. If Concentric receives any questions from a prospective or existing
Third Party Provider relating to specific development or technical support (such
as how to develop on the Netscape platform), Concentric will refer the
prospective or existing Third Party Provider to the Netscape Developer Program
as described on Netscape's Web Site.
(d) Concentric will provide Netscape at no charge with two (2) test
accounts that will permit Netscape to access and test the functionality of the
Service at any time during the Term.
4. REPORTS.
4.1. Search Field. A field providing search functionality may be included
------------
on pages within the Service as the parties may mutually determine. The search
executed from the search field will initially only cover content within such
search field's Service itself. When the results to a search query are returned,
a user may be given the option of expanding the scope of the search to
encompass the World Wide Web using one of [*] search engines as appropriate
for the Territory. The user will also be offered the choice of executing
another search limited to the content of such Service. The terms and
conditions of this paragraph will not apply to pages created solely by
Customers without the assistance of the Service.
4.2. Search Field Positioning. The search field described in Section 4.1
------------------------
shall appear below the fold on any page in which the search field is listed.
The search engine companies which appear as expanded search options, as well as
the positioning of the search engine companies on the page served to end users
in conjunction with the end user's search results, are subject to Netscape's
approval. Concentric shall not charge any of the search engine companies for
these listings. Netscape reserves the right to review the [*] search field in
the Service as such search functionality may impact [*], and require that the
search functionality in any or all Service be [*] or [*].
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
4
<PAGE>
4.3. Monthly Search Reports. Within fifteen (15) days of the end of each
----------------------
month during the Term, Concentric shall provide Netscape with monthly reports
detailing the following information for each day during the month covered in the
report:
. any information collected in the course of operating the Service about
[*] that Concentric collects whether such information is [*] or
technology-provided.
The parties shall mutually determine the format and the date of submission for
this monthly report. The information contained in each report shall be
Netscape's and Concentric's Confidential Information.
4.4. Weekly Log Reports. On a weekly basis, Concentric shall provide
------------------
Netscape with the daily [*] logs for the Service. The information contained in
the report shall be Netscape's and Concentric's Confidential Information,
provided, however that Netscape shall have the right to use the information
contained in such reports in Netscape's private and public reporting of access
to (i) the Service in the aggregate, (ii) Netscape's Web Site, individually
and in the aggregate, and (iii) Netscape's web sites worldwide in the
aggregate.
5. APPLICATIONS FOR THE SERVICE.
5.1. Selection of Applications. Applications and content for the Service
-------------------------
will be as mutually agreed to by Netscape and Concentric in writing from time to
time.
5.2. Concentric and Netscape Applications. Any and all Applications
------------------------------------
provided by Concentric or Netscape for the Service will be accounted for solely
in accordance with Exhibit C.
---------
5.3. Third Party Provider Applications. To the extent that Netscape and
---------------------------------
Concentric mutually agree that any applications for the Service are to be
supplied by a Third Party Provider: (a) such third party will be compensated
as mutually agreed by Netscape and Concentric; and (b) Netscape will not be
excluded from, or denied any right with respect to, such third party or its
Applications. Such third party will supply such applications pursuant to an
agreement between such third party and Concentric containing terms and
conditions, and in a form, mutually agreed by Netscape and Concentric, including
at a minimum the following: (i) the Third Party Provider will fully indemnify
Concentric and Netscape against any third party claims arising from content
posted, displayed, or transmitted on the Service by Customer or its end users;
(ii) any and all liability of Netscape in connection with such agreement will be
disclaimed; and (iii) Netscape will be specified as a third party beneficiary of
such agreement.
5.4. Customer's Selection of Applications. During the registration process
------------------------------------
or thereafter, each Customer shall electronically specify which applications it
wishes to utilize in the Service. Concentric will be responsible for
configuring and maintaining each Customer's use of the Service in accordance
with Customer's requests to Concentric.
5.5. Integrated Community. Netscape and Concentric acknowledge that the
--------------------
intent of the Service is to provide an "integrated community" experience for end
users and not to provide Concentric with any [*] in listings
relative to any other Third Party Provider, unless such [*] is agreed to by
Netscape. Promotion of Concentric's web sites and Internet-related services
will be minimized to prevent diversion of user traffic from the Service.
Promotion of Concentric within a Service will be subject to Netscape's
approval.
6. MARKETING.
6.1. Netscape's Marketing. During the Term,
--------------------
[*] which is: (i) a intranet applications hosting service, (ii) [*], (iii) [*]
to (within
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
5
<PAGE>
[*] from) the then-current home page of Netscape's U.S. English-language Web
site, and (iv) is operated in the English language.
6.2. Concentric's Marketing. During the Term, and
----------------------
[*] adequately focused on developing and maintaining the Service, Concentric
[*] which is: (i) a [*], (ii) [*] users, and (iii) is operated in the English
language. Notwithstanding the foregoing, [*] as a [*] service until [*].
7. CONCENTRIC'S OBLIGATIONS.
7.1. Production, Technology and Content Programming.
----------------------------------------------
(a) Concentric shall be responsible for all hosting, production, and
programming of the Service, consistent with each Customer's specifications. The
Service shall not be [*] from [*] production, programming or performance [*].
The Service shall perform [*] standards as the Concentric Brand Service.
Concentric shall perform its duties described herein with [*] as it employs
with respect to its [*] and Web sites and the services and Web sites
Concentric may operate for third parties, and Concentric [*] own Web sites or
services, or those of any third party, [*] Service.
(b) With respect to features and functionalities offered within the
Service, Concentric shall [*] a technology which might [*] Netscape products
or services (except for technologies developed by Concentric and not covered
elsewhere in this Agreement), unless Concentric has obtained Netscape's
written approval to use such a competing technology. Concentric will ensure
that all technologies and services provided by suppliers for the Service will
be compliant and compatible with Netscape technologies. Concentric will
optimize the Service to use Netscape's most current technologies, which will
be fully operational and available to Customers [*] of each new Netscape
client product, unless the parties mutually agree that the implementation of a
certain technology is not technically feasible for the Service.
(c) Concentric's obligation to produce the Service, including without
limitation offering hosting, production services, technology and programming
which [*] established by Concentric on its own Web site or
services (or the Web site or services Concentric manages for any third party)
and [*], is a material obligation of Concentric under
this Agreement.
7.2. Advertising. Advertising and similar promotions within the Service
-----------
will be designed by mutual agreement of Netscape and Concentric. Netscape will
manage and sell all advertising and sponsorships within the Service Ad
Inventory. Netscape will manage the advertising product and services with the
[*] of professionalism Netscape exercises with respect to Netscape's own
Web sites.
7.3. Harm to Netscape.
----------------
(a) Netscape may, in its reasonable discretion, at any time [*]
or publish, or direct Concentric to refuse to accept or publish and [*]
publication of, a Third Party Provider application, an advertisement and/or
other content on the Service and any other areas related to the Service if
such content is, in Netscape's [*], including, without limitation, any
material that encourages conduct that would constitute a criminal offense,
give rise to civil liability, or otherwise violate any applicable local,
state, national or international law.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
6
<PAGE>
(b) If Netscape, in its [*], at any time determines that any of
Concentric's [*] and [*], including but not limited to the [*] contains or
presents any material that has been prepared by or for Concentric or a Third
Party Provider in a manner that Netscape [*] or an infringement of Netscape's or
a third party's rights, or unlawful in any country or territory, Netscape may
immediately terminate this Agreement if Concentric has not revised to Netscape's
reasonable satisfaction that material or presentation within three (3) business
days of notification by any means from Netscape.
(c) If Netscape, in its [*], at any time determines that any of
Concentric's [*] and [*], including but not limited to the [*] contains any
material or presents any material (other than material within the scope of
subsection (b) above) in a manner that Netscape [*] or an infringement of
Netscape's or a third party's rights, or unlawful in any country or territory,
Netscape may immediately terminate this Agreement if Concentric has not revised
to Netscape's reasonable satisfaction that material or presentation within three
(3) business days of notification by any means from Netscape.
(d) To the extent that, following a notification by Netscape to
Concentric pursuant to subsection (b) or (c) above, Concentric's good faith
actions undertaken in accordance with such notification result in a third party
affected by such actions initiating claims against Concentric for damage
allegedly caused by such actions of Concentric, then:
(i) if such actions were in connection with the Service,
Concentric's [*] paid in [*] such action will be treated as [*] of the Service
in accordance with Exhibit C;
---------
or
(ii) if such actions were in connection with any [*] other
than the Service, Concentric's [*] paid in [*] such action will
[*] by Netscape;
provided that Concentric will (A) promptly notify Netscape in writing of any
such claim and (B) if such claim is under subsection (ii) above, Concentric will
grant Netscape control of the defense and all related settlement negotiations,
and will cooperate with Netscape, at Netscape's expense, in defending or
settling such claim.
(e) Concentric will prepare, and propose to Netscape: (i) the initial
[*] that will govern the use of the Service by Customers and their end users;
and (ii) from time to time, appropriate modifications and additions to such [*]
Concentric and Netscape will [*] on such [*] and all material modifications and
additions thereto, prior to their implementation. Such [*] will govern each
Customer's, and its end users', use of the Service. Concentric will be
responsible for [*] in a manner [*] by Concentric and Netscape. Subject to
the terms and conditions hereof, Netscape and Concentric will reasonably [*]
against Customers or end users that [*] them.
7.4. Netscape Now Program Compliance on Concentric's Web Site and the
Services.
(a) Subject to the provisions of Section 8.6 Concentric shall display
the "Netscape Now" button [*] of the Services and on [*], on [*] Concentric's
Web site linked to the Service, and on [*] on any Concentric web site which
(except as provided under Section 8.6(c)) contains a (i) [*] or (ii) [*] or
(iii) [*] and use best efforts to include the following statement (or a
statement designated by Netscape and generally used by Netscape as a successor
to the following statement or in connection with any successor program to
Netscape's Netscape Now program) next to the Netscape Now button: "This site is
best viewed with Netscape
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
7
<PAGE>
Communicator. Download Netscape Now!" Concentric will produce each such page
such that when an end user presses or clicks on the Netscape Now button (or such
other button used in connection with any successor program to the Netscape Now
program), the end user's Internet client software will access the applicable
HTML page located at a URL supplied by Netscape. On any page on which the
Netscape Now button, or a successor button, is displayed, the Netscape Now
button shall be [*] and [*] the virtual [*] for any third party [*] or [*]
Concentric shall use reasonable commercial efforts promptly to remedy any
misplacement of the Netscape Now button on its home page or other pages or any
malfunctioning of the button, provided Netscape will fully cooperate with
Concentric to remedy any such misplacement or malfunctioning, and provided
further that Concentric shall not incur liability for any failure to remedy such
misplacement or malfunctioning if such remedy is not within the reasonable
control of Concentric. In the event that Netscape replaces the Netscape Now
program with a successor program, Netscape shall advise Concentric and
Concentric shall produce each such page to conform to such successor program,
provided Concentric's obligations under such successor program shall not be
materially increased. Netscape hereby grants Concentric a nonexclusive,
nontransferable, nonassignable, nonsublicensable, royalty-free license to
perform and display the Netscape Now button directly in connection with
fulfilling the foregoing obligation. Concentric's use of the Netscape Now button
shall be in accordance with Netscape's reasonable policies regarding advertising
and trademark usage as established from time to time by Netscape, including the
guidelines of the Netscape Now Program published on Netscape's U.S. English-
language Web Site. Concentric acknowledges that the Netscape Now button is a
proprietary logo of Netscape and contains Netscape's trademarks. In the event
that Netscape determines that Concentric's use of the Netscape Now button is
inconsistent with Netscape's quality standards, then Netscape shall have the
right to suspend immediately such use of the Netscape Now button. Concentric
understands and agrees that the use of the Netscape Now button in connection
with this Agreement shall not create any right, title or interest in or to the
use of the Netscape Now button or associated trademarks and that all such use
and goodwill associated with the Netscape Now button and associated trademarks
will inure to the benefit of Netscape. Concentric agrees not to register or use
any trademark that is similar to the Netscape Now button. Concentric further
agrees that it will not use the Netscape Now button in a misleading manner or
otherwise in a manner that could tend to reflect adversely on Netscape or its
products.
7.5. Marketing Collateral. Concentric will maintain on the Service readily
--------------------
available on-line marketing collateral for the Service. The collateral will be
updated on a timely and on an as-needed basis.
7.6. Service Enrollment Support. Concentric shall provide information and
--------------------------
application development support to Third Party Providers regarding participation
in the Service.
7.7. Use of Netscape's Menu Applets. In addition, Concentric shall, at
------------------------------
Netscape's request, implement user interface elements and interface applications
for the Service, provided that, in Concentric's reasonable judgment, such
implementation does not require extraordinary development efforts in the
operation of the Service.
8. JOINT ACTIVITIES AND OWNERSHIP.
8.1. Press Plans. Concentric and Netscape agree to participate in a joint
-----------
press announcement regarding the Service which will take place on a mutually
agreed upon date. The parties shall agree to the form and content of the joint
press release. Notwithstanding the foregoing, either party may issue its own
press release, subject to the other party's prior approval of the content within
the release; with respect to major advertising and marketing deal announcements
regarding the Service, Netscape and Concentric shall each use its reasonable
commercial efforts to respond to a request for such approval within forty-eight
(48) hours of its
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
8
<PAGE>
receipt of a copy of the proposed announcement, provided that neither party will
in any event make any such announcement without first receiving the other
party's prior approval. In any press announcement regarding any or all of the
Service, both Concentric and Netscape's name and logo shall be included in the
press release, and the names and logos shall appear with equal prominence.
Interviews with the press regarding announcement of the Service shall be
coordinated between both Netscape and Concentric.
8.2. Research. If Concentric or Netscape conducts any research regarding
--------
any or all of the Service, such research results shall be shared between both
companies on a timely basis. If Concentric or Netscape conducts a study on
their respective Web sites, both companies shall include the Service in the
study, as appropriate. Concentric will conduct substantially the same level and
as much research and data collection regarding the Service as Concentric
conducts with respect to the Concentric Brand Service and other Concentric
offerings.
8.3. Quarterly Reviews of the Service. Netscape and Concentric agree to
--------------------------------
establish quarterly reviews of the Service to evaluate the Service and agree to
modifications and improvements to the Service.
8.4. Design Reviews and Ownership.
----------------------------
(a) Design Review. Netscape and Concentric shall mutually agree to
-------------
all significant changes and enhancements to the look and feel of the Service,
including, but not limited to, significant new artwork or functional changes.
(b) Look and Feel of Collective Work and Individual Contributions.
-------------------------------------------------------------
[*] Notwithstanding the foregoing, the ownership rights of Concentric, each
Third Party Provider, and their respective licensors to the look and feel of any
and all contributions to such collective work shall not be diminished or
otherwise affected by Netscape's rights in such collective work.
(c) Ownership of Other Copyrightable Subject Matter. Copyrighted
-----------------------------------------------
elements contained in the Service shall be the property of the copyright owner.
(d) Post-Termination License. Concentric hereby grants to Netscape a
------------------------
[*] without payment or other charge therefor, to use the [*] in association with
such Service or any future service after the termination or expiration of this
Agreement.
(e) Independent Development. Subject to the terms and conditions of
-----------------------
the Non-Disclosure Agreement attached hereto as Exhibit F, nothing contained
---------
herein shall prevent Netscape or Concentric from independently developing
features or functionality which are similar to the features and functionality
owned by the other party and implemented in the Service.
8.5. Optimize for Netscape Technology.
--------------------------------
(a) Concentric will [*] to use Netscape's [*] Such [*] will be fully
operational and public [*] to the release of new Netscape client products,
unless both parties mutually agree that the implementation of a certain
technology is not technically feasible.
(b) In order to [*] support of current Internet browser technologies,
Concentric shall implement a [*] Concentric's own Web sites implementing at
least one of the following: [*] or the then current [*] technology (or
subsequent features displayable by an end user's browser). Such features shall
be positioned [*] of the Service and within at least one [*] location on
Concentric's own Web site. The [*] shall be fully operational and publicly
accessible at the [*] client products.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
9
<PAGE>
8.6. Netscape Software: In order to [*] between Concentric and Netscape
-----------------
and [*] of Netscape's products, Concentric agrees to [*] on an [*] basis.
This means that Netscape shall receive [*] to any other Internet client software
company, except as described below:
(a) On Concentric's home page, such page currently being located at
http://www.concentric.net, or any successor home page which is Concentric's
primary web site referring to their service offerings, Netscape [*] will
include, but is not limited to, the Netscape logo or other promotional
elements, subject to the terms and conditions of Section 7.4.
(b) On Concentric's enterprise web site, or such page currently being
located at http://enterprise.concentric.net, or any successor web site which is
Concentric's primary web site offering services to their enterprise customers,
Netscape will receive [*] and positioning and such [*] client or server [*].
Such [*] and [*] will be subject to the terms and conditions of Section 7.4.
(c) Notwithstanding the foregoing, the parties acknowledge that with
regard to the [*] Concentric's Web site, such portion located at the URL
http://home.concentric.net, and solely with regard to the [*] Internet browser
client software, and only until the [*] between Concentric and any [*] Netscape
may [*] which is [*] than the [*] received by a third-party Internet [*]
provider.
8.7. Advertising of the Service. Netscape will promote the Service through
--------------------------
advertising placement on its site and other sites.
8.8. InBox Direct. Netscape will promote the Service within appropriate
------------
Netscape newsletters that it manages in the InBox Direct program. Netscape will
provide, produce, and manage a Service newsletter with a premium position in
InBox Direct.
8.9. Netscape Netcaster. Netscape will provide, produce, and manage a
------------------
dedicated Service channel or a Service feature section within the Netscape
Channel.
8.10. Other Co-Marketing Activities. In addition to activities set forth
-----------------------------
in this Section 8, the parties shall participate in other co-marketing
activities related to the Service and this Agreement as agreed to by the parties
from time to time.
9. PAYMENT.
9.1. Payment Amounts. For the benefits and services provided by Netscape
---------------
to Concentric during the Term, Concentric shall remit to Netscape the Payments
of Applications Hosting Net Revenues as set forth on Exhibit C. For the
---------
benefits and services provided by Concentric to Netscape during the Term,
Netscape shall remit to Concentric the Payments or Advertising Net Revenue as
set forth on Exhibit C.
---------
9.2. Timing of Payment. Each party shall make the Payments in accordance
-----------------
with the schedule set forth on Exhibit C.
---------
9.3. Currency, Interest and Taxes. All amounts payable hereunder are
----------------------------
denominated in U.S. Dollars, and all amounts payable to Netscape hereunder shall
be remitted in U.S. Dollars. Any portion of any Payment which has not been paid
to Netscape within the applicable time set forth herein shall bear interest at
the lesser of (i) one percent (1%) per month, or (ii) the maximum
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
10
<PAGE>
amount allowed by law. All payments due hereunder are exclusive of any
applicable taxes. Concentric shall be responsible for all applicable national,
state and local taxes, value added or sales taxes, exchange, interest, banking,
collection and other charges and levies and assessments pertaining to payments,
other than U.S. taxes based on Netscape's net income. If Concentric is required
by law to make any deduction or to withhold from any sum payable to Netscape by
Concentric hereunder, (i) Concentric shall effect such deduction or withholding,
remit such amounts to the appropriate taxing authorities and promptly furnish
Netscape with tax receipts evidencing the payments of such amounts, and (ii) the
sum payable by Concentric upon which the deduction or withholding is based shall
be increased to the extent necessary to ensure that, after such deduction or
withholding, Netscape receives and retains, free from liability for such
deduction or withholding, a net amount equal to the amount Netscape would have
received and retained in the absence of such required deduction or withholding.
10. CUSTOMER BILLING. Concentric will be responsible for Customer billing.
Such billing must be Co-Branded no later than January 1, 1998 and throughout the
remainder of the Term; Concentric will use reasonable commercial efforts to
implement Co-Branded billing prior to such date. All billing procedures and
requirements will be mutually agreed by Netscape and Concentric.
11. REPORTING, AUDIT RIGHTS AND MILESTONES.
11.1 Reporting. Within fifteen (15) days after the end of each month
---------
during the Term: (i) Concentric shall provide Netscape with a report in common
log format describing the total number of hits and page impressions for each of
the pages in the Service, and such other tracking information as the parties
shall mutually agree ("Access Logs"), and (ii) Netscape shall provide Concentric
-----------
with a report describing the number of redirects of traffic to the Service from
Netscape's Web Site and such other tracking information as the parties shall
mutually agree.
11.2. Audit Rights.
------------
(a) Concentric shall retain complete, clear and accurate records
regarding its activities under this Agreement. Each June and December during
the Term, the parties shall review the financial results for the Service and
Access Logs.
(b) Netscape shall retain complete, clear and accurate records
regarding its obligation to make Advertising Net Revenue Payments to Concentric
pursuant to Exhibit C.
---------
(c) Each party shall have the right, upon no less than fifteen (15)
days prior written notice to the other party, to cause an independent Certified
Public Accountant to inspect and audit, during the audited party's normal
business hours, all relevant records of the audited party upon which its
Payments under Exhibit C are based. The costs of such audit shall be paid by
---------
the auditing party provided, however, that if said inspection shall reveal an
error in excess of five percent (5%) in monies due to the auditing party by the
audited party, the audited party shall pay for the audit. Each party's audit
rights as described herein shall continue for two (2) months after the
expiration or termination of this Agreement.
11.3. Milestones.
----------
(a) Netscape and Concentric agree to establish quarterly reviews of
the Service with the intent to review the success of the Service and agree to
modifications and improvements to the Service.
(b) Netscape and Concentric agree to review the business plan for the
Service after twelve (12) months of its operation for the purpose of mutually
agreeing to revised Customer, gross revenue targets, net revenue targets, and
any other targets mutually agreed to by the parties (collectively "Milestones").
-----------
The current targets are to reach monthly run rates of [*] per
month, [*] in gross revenues per month, and [*] in net revenues per month, by
the [*] month of the Service's operation. If the parties cannot mutually
agree to
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
11
<PAGE>
revised Milestones, then the monthly run-rate Milestones for the next review
shall be set at double the average actual monthly gross revenues for months 9-
12, and net revenues shall be at [*] of such monthly gross revenues.
(c) Netscape and Concentric agree to review the revised Milestones
three (3) months prior to the end of the Term (including any extension of the
Term) ("End-of-Term Review") for the purpose of: (i) discussing the performance
------------------
of the Service and the desirability of extending the Term; and (ii) mutually
agreeing to revised Milestones.
12. TERM AND TERMINATION.
12.1. Term. Unless earlier terminated pursuant to the provisions of
----
Section 12.2, the this Agreement shall remain in force for the Term. The Term
will automatically be extended for not more than [*] have been met. If such
Milestones [*] of the Term (including any extension of the Term), either party
may decline to extend the term by giving the other party written notice thereof
within three (3) business days following the applicable End-of-Term Review.
12.2. Termination for Cause. Either party shall have the right to
---------------------
terminate this Agreement upon a material default by the other party of any of
its material obligations under this Agreement, unless within thirty (30)
calendar days after written notice of such default the defaulting party remedies
such default.
12.3. Rights Upon Termination or Expiration.
-------------------------------------
(a) Upon expiration or termination of this Agreement, at Netscape's
option, either: (i) Concentric shall remain obligated to provide support
service and maintenance operations for the Service for a period of six (6)
months from the time of termination or expiration on the terms and conditions of
this Agreement; and (ii) Netscape will (subject to Concentric's proprietary
rights) have the right to develop [*] and Concentric [*] to produce the Service.
In either event, upon the termination of its obligations to Netscape in regard
to the Service, Concentric will (subject to Netscape's proprietary rights) have
the right to produce a similar service, but Concentric will no longer have the
right to use the Service Name or the Service's domain name.
(b) Following the expiration or termination of this Agreement,
Netscape and Concentric will provide a transition period of six (6) months to
Customers, during which time Concentric and Netscape [*] provided by either
party. Netscape and Concentric [*] to Customers about such expiration or
termination if such communications take place through the operating channels of
the Service, provided that such agreement will not be unreasonably withheld or
delayed. If after such agreement, [*] After the period of [*] the Customer
accounts [*] the similar service they prefer will [*] In this case, equitably
shall be defined as near equal in terms of: (i) [*] (ii) [*] and (iii) [*] with
the Service.
(c) Following any termination or expiration of this Agreement,
Netscape shall have the right, without any additional payment, charge or royalty
to Concentric, to produce versions of the Service which do not include
Concentric's proprietary technology, logo or name but which might employ a
graphic user interface which is substantially similar to the graphic user
interfaces of the Service.
(d) In addition to the right to receive amounts payable at the
time of the termination of expiration of this Agreement, Sections 8.4 ("Design
Reviews and Ownership"), 11.2 ("Audit Rights"), 12.3 ("Rights Upon Termination
or Expiration"), 12.4 ("No Compensation"), 13
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
12
<PAGE>
("Warranties and Indemnification"), 14 ("Limitation of Liability") and 15
("General"), and provisions on Exhibits attached hereto that provide for their
survival, shall survive the termination or expiration of this Agreement for any
reason. Provisions of other Sections which, by their nature, must remain in
effect beyond the termination or expiration of this Agreement, shall also
survive termination or expiration of this Agreement for any reason.
12.4. No Compensation. Neither party shall be entitled to any
---------------
compensation, damages or payments in respect to goodwill that has been
established or for any damages on account of prospective profits or anticipated
sales, and shall not be entitled to reimbursement in any amount for any
training, advertising, market development, investments, leases or other costs
that shall have been expended by it before the expiration or termination of this
Agreement, regardless of the reason for or method of termination of this
Agreement. Each party hereby waives its rights under applicable laws for any
such compensation, reimbursement or damages.
13. WARRANTIES AND INDEMNIFICATION
13.1 Title.
-----
(a) Concentric warrants that (i) it has the right to perform the
services set forth in this Agreement, (ii) such performance does not infringe on
any third parties' proprietary or personal rights, (iii) it owns or licenses all
rights, title and interest in and to the technology underlying the production of
the Service, (iv) Netscape shall not be obligated to pay any fees or royalties
in connection with the Service other than as specifically set forth in this
Agreement, and (v) there are no pending or threatened lawsuits concerning any
aspect of the Service or the technology underlying the Service.
(b) Netscape warrants that (i) it has the right to perform the
services set forth in this Agreement, (ii) such performance does not infringe on
any third parties' proprietary or personal rights, (iii) it owns or licenses all
rights, title and interest in and to Netscape Design Contributions, (iv)
Concentric shall not be obligated to pay any fees or royalties in connection
with the Service other than as specifically set forth in this Agreement, and (v)
to the best of Netscape's knowledge, there are no pending or threatened lawsuits
concerning any aspect of the Service or the technology underlying the Service.
13.2. Performance. Concentric warrants that the Service will function
-----------
substantially in accordance with the specifications set forth in this Agreement
and as the parties may determine from time to time. Concentric shall repair any
malfunctions of the Service within a reasonable period of time (not to exceed
two (2) days) after notice by any party of such condition.
13.3 Responsibility. Concentric represents and warrants to Netscape that
--------------
the [*] (other than the [*] which will appear on the Service or any other areas
related to the Service, and [*] will not violate any criminal laws or any rights
of any third parties, including, but not limited to, infringement or
misappropriation of any copyright, patent, trademark, trade secret, music,
image, or other proprietary or property right, false advertising, unfair
competition, defamation, invasion of privacy or rights of celebrity, violation
of any antidiscrimination law or regulation, or any other right of any person or
entity, or otherwise violate any applicable local, state, national or
international law.
13.4. Disclaimer. THE WARRANTIES PROVIDED BY CONCENTRIC HEREIN ARE THE
----------
ONLY WARRANTIES PROVIDED BY EITHER PARTY WITH RESPECT TO THE SERVICES. EACH
PARTY DISCLAIMS ANY AND ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY
IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH
RESPECT TO THE SERVICES.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
13
<PAGE>
13.5. Indemnification.
---------------
(a) Concentric agrees to indemnify Netscape and to hold Netscape
harmless from any and all liability, loss, damages, claims, or causes of action,
including reasonable legal fees and expenses that may be incurred by Netscape,
arising out of or related to Concentric's breach of any of the foregoing
representations and warranties or arising from third party claims alleging that
[*] of the Service granted by Concentric hereunder infringes any trademark,
copyright, or trade secret of any third party. In connection with such
indemnification, Netscape will (i) promptly notify Concentric in writing of any
such claim and grant Concentric control of the defense and all related
settlement negotiations, and (ii) cooperate with Concentric, at Concentric's
expense, in defending or settling such claim; provided that if any settlement
results in any ongoing liability to, or prejudices or detrimentally impacts
Netscape, and such obligation, liability, prejudice or impact can reasonably be
expected to be material, then such settlement shall require Netscape's written
consent. In connection with any such claim, Netscape may have its own counsel in
attendance at all public interactions and substantive negotiations at its own
cost and expense.
(b) Netscape agrees to indemnify Concentric and to hold Concentric
harmless from any and all liability, loss, damages, claims, or causes of action,
including reasonable legal fees and expenses that may be incurred by Concentric,
arising out of or related to Netscape's breach of any of the foregoing
representations and warranties or arising from third party claims alleging that
[*] of the Service granted by Netscape hereunder infringes any copyright or
trade secret of any third party. In connection with such indemnification,
Concentric will (i) promptly notify Netscape in writing of any such claim and
grant Netscape control of the defense and all related settlement negotiations,
and (ii) cooperate with Netscape, at Netscape's expense, in defending or
settling such claim; provided that if any settlement results in any ongoing
liability to, or prejudices or detrimentally impacts Concentric, and such
obligation, liability, prejudice or impact can reasonably be expected to be
material, then such settlement shall require Concentric's written consent. In
connection with any such claim, Concentric may have its own counsel in
attendance at all public interactions and substantive negotiations at its own
cost and expense.
14. LIMITATION OF LIABILITY. [*] IN NO EVENT WILL EITHER PARTY BE LIABLE FOR
ANY LOST PROFITS OR ANY FORM OF INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL
DAMAGES OF ANY CHARACTER FROM ANY CAUSES OF ACTION OF ANY KIND WITH RESPECT TO
THIS AGREEMENT OR THE TECHNOLOGY LICENSED HEREUNDER, WHETHER ARISING IN TORT
(INCLUDING NEGLIGENCE), CONTRACT, OR OTHERWISE, EVEN IF IT HAS BEEN INFORMED IN
ADVANCE OF THE POSSIBILITY OF SUCH DAMAGES.
15. GENERAL.
15.1. Governing Law. This Agreement shall be subject to and governed in
-------------
all respects by the statutes and laws of the State of California without regard
to the conflicts of laws principles thereof. The Superior Court of Santa Clara
County and/or the United States District Court for the Northern District of
California shall have exclusive jurisdiction and venue over all controversies in
connection herewith, and each party hereby consents to such exclusive and
personal jurisdiction and venue.
15.2. Entire Agreement. This Agreement, including the exhibits and
----------------
attachments referenced on the signature page hereto, constitutes the entire
Agreement and understanding between the parties and integrates all prior
discussions between them related to its subject matter. No modification of any
of the terms of this Agreement shall be valid unless in writing and signed by an
authorized representative of each party.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
14
<PAGE>
15.3. Assignment.
----------
(a) Concentric may not assign any of its rights or delegate any of
its duties under this Agreement, or otherwise transfer this Agreement (by
merger, operation of law or otherwise) without the prior written consent of
Netscape. Any attempted assignment, delegation or transfer in derogation hereof
shall be null and void.
(b) In the event of any Change of Control of Concentric, Netscape
will have the right to terminate this Agreement upon thirty (30) days prior
written notice to Concentric. "CHANGE OF CONTROL" means any transaction(s) as a
result of which either: (i) more than 20% of Concentric's voting securities are
held by a single individual or legal entity; or (ii) [*] For the purposes of
Subsection (ii) [*]
(c) Notwithstanding Section 15.3(a) and 15.3(b) above, Concentric
shall have the right to reincorporate under the laws of any State without the
prior consent of Netscape.
15.4. Notices. All notices required or permitted hereunder shall be
-------
given in writing addressed to the respective parties as set forth below and
shall either be (i) personally delivered, (ii) transmitted by postage prepaid
certified mail, return receipt requested, or (iii) transmitted by nationally-
recognized private express courier, and shall be deemed to have been given on
the date of receipt if delivered personally, or two (2) days after deposit in
mail or express courier. Either party may change its address for purposes hereof
by written notice to the other in accordance with the provisions of this
Subsection. The addresses for the parties are as follows:
CONCENTRIC: NETSCAPE:
Concentric Network Corporation Netscape Communications Corporation
10590 N. Tantau Avenue 501 East Middlefield Road, MV-002
Cupertino, CA 95014 Mountain View, CA 94043
Fax: (408) 342-2876 Fax: (415) 528-4123
Attn: Mike Anthofer, Attn: General Counsel
Senior Vice President
and Chief Financial Officer
15.5. Confidentiality. Subject to the terms and conditions of the
---------------
Non-Disclosure Agreement attached hereto as Exhibit F, all disclosures of
proprietary and/or confidential information in connection with this Agreement as
well as the contents of this Agreement, the financial arrangements described in
this Agreement, the Third Party Providers, advertising sales, [*] and [*]
related to the Service shall be governed by the terms of the Mutual Non-
Disclosure Agreement attached hereto as Exhibit H. The information contained in
---------
the reports provided by each party hereunder shall be deemed the Confidential
Information of the disclosing party. Notwithstanding the foregoing, Netscape
may, in its sole discretion, make publicly available the auditing of traffic
results and indicate that [*] of the information.
15.6. Force Majeure. Neither party will be responsible for any failure
-------------
to perform its obligations under this Agreement due to causes beyond its
reasonable control, including but not limited to, acts of God, war, riot,
embargoes, acts of civil or military authorities, fire, floods or accidents,
provided that (a) such party promptly notifies the other party thereof and (b)
such failure does not continue for more than three (3) days.
15.7. Waiver. The waiver, express or implied, by either party of any
------
breach of this Agreement by the other party will not waive any subsequent breach
by such party of the same or a different kind.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
15
<PAGE>
15.8. Headings. The headings to the Sections and Subsections of this
--------
Agreement are included merely for convenience of reference and shall not affect
the meaning of the language included therein.
15.9. Independent Contractors. The parties acknowledge and agree that
-----------------------
they are dealing with each other hereunder as independent contractors. Nothing
contained in this Agreement shall be interpreted as constituting either party
the joint venturer, employee or partner of the other party or as conferring upon
either party the power of authority to bind the other party in any transaction
with third parties.
15.10. Severability. In the event any provision of this Agreement is held
------------
by a court or other tribunal of competent jurisdiction to be unenforceable, such
provision shall be reformed only to the extent necessary to make it enforceable,
and the other provisions of this Agreement will remain in full force and effect.
15.11. Counterparts. 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. For purposes hereof, a
facsimile copy of this Agreement, including the signature pages hereto, shall be
deemed to be an original. Notwithstanding the foregoing, the parties shall
deliver original execution copies of this Agreement to one another as soon as
practicable following execution thereof.
The parties have duly executed this Agreement as of the later of the two (2)
dates set forth below.
CONCENTRIC: NETSCAPE:
CONCENTRIC NETWORK NETSCAPE COMMUNICATIONS
CORPORATION CORPORATION
By: /s/ By: /s/
--------------------------------- --------------------------------
Print Name: Print Name:
------------------------- ------------------------
Title: Title:
------------------------------ -----------------------------
Date: Date:
------------------------------ ------------------------------
Concentric Network Netscape Address:
Corporation
10590 N. Tantau Avenue 501 East Middlefield Road, MV-002
Cupertino, CA 95014 Mountain View, California 94043
USA USA
Attention: Mike Anthofer Attention: General Counsel
Facsimile: (408) 342-2876 Facsimile: (415) 528-4123
Email: Email:
----------------------------- -----------------------------
Effective Date: June 23, 1997
16
<PAGE>
EXHIBIT A
ADDITIONAL DEFINITIONS
"Concentric Brand Service" means the Concentric service which currently
------------------------
includes: establishing a presence on the Internet, site traffic monitor,
managing multiple email accounts, file storage and the posting of HTML pages to
the Internet. "ConcentricHost" currently consists of the following three
services: (i) ConcentricHost HomeOffice", (ii) "ConcentricHost SmallBusiness",
and (iii) "ConcentricHost Premium".
"CONCENTRIC WEB SITE" consists of Web pages managed and hosted by Concentric,
-------------------
including but not limited to the following Universal Resource Locators (URLs):
http://www.concentric.net
http://enterprise.concentric.net
http://home.concentric.net.
Target Market: [*]
- -------------
Term: [*]
- ----
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
17
<PAGE>
EXHIBIT B
NETSCAPE'S WEB SITE
URL: http://home.netscape.com
- ---
18
<PAGE>
EXHIBIT C
---------
REVENUE SPLITS AND BILLING
[*]
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions. A total of 2 pages has been
omitted from this Exhibit.
19
<PAGE>
[*]
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions. A total of 2 pages has been
omitted from this Exhibit.
20
<PAGE>
EXHIBIT D
ROLL-OUT SCHEDULE
[*]
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT E
CUSTOMER REGISTRATION
1. Registration Process.
--------------------
(a) Initially, the Service will use the [*] in conjunction with a
[*] presented to new Customers. At the time the Customer is asked
to register, the Customer will be notified as to what data is required for them
to provide, how the data will be used and who will have access to the data.
Concentric will [*] at a time interval and format to be mutually agreed upon
by the parties.
(b) The parties hereto acknowledge that it is their intent to integrate the
Service' user registration processes with Netscape's "Universal Registration"
system when such system becomes available. At such time as each registration
process is transferred to Netscape, Netscape shall use reasonable commercial
efforts [*] process as [*] by Concentric. At such time as Netscape's "Universal
Registration" system is deployed, Netscape will provide to [*] in a format and
timeframe to be mutually agreed upon by Netscape and Concentric. Netscape and
Concentric shall use reasonable commercial efforts to coordinate the [*] from
Netscape to Concentric at such time as Netscape's "Universal Registration"
system is used in connection with the Service.
2. Additional User Information. If Concentric collects information about
---------------------------
users accessing the Service, in addition to information supplied during the
registration process, such information shall be made available to Netscape in a
format and timeframe as the parties shall mutually agree.
3. Personal Data Confidential; Ownership. Except as mutually agreed by
--------------------------------------
Netscape and Concentric, [*] as well as [*] shall be the [*] of, and [*]
Netscape and Concentric, provided that:
(a) names shall not be resold or disclosed to third parties;
(b) [*]
(c) [*]
(d) [*]
(e) Netscape and Concentric must agree to user disclosure requirements
that are consistent with the Open Profiling Standard (OPS).
Both Netscape and Concentric will have rights to [*] If either party [*] while
in the Service, both Concentric and Netscape will have rights to the additional
information. In the event of an acquisition or merger of Concentric with a [*]
Netscape, Concentric will forfeit its [*] acquired through the Service. Such
named companies are [*]
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
22
<PAGE>
EXHIBIT F
MUTUAL NON-DISCLOSURE AGREEMENT
This mutual Confidential Disclosure Agreement ("Agreement") is entered into
between Netscape Communications Corporation ("Netscape") and Concentric Network
Corporation ("Company"), and is effective as of the date of execution by
Netscape ("Effective Date"). Each party (the "Receiving Party") understands
that the other party (the "Disclosing Party") may disclose certain Confidential
Information (as defined in Section 1 below) under this Agreement. Netscape and
Company agree as follows:
1. DEFINITION. "Confidential Information" shall mean (i) all information
disclosed in tangible form by the Disclosing Party and marked
"confidential" or "proprietary", and (ii) all information disclosed orally
or otherwise in intangible form by the Disclosing Party and designated as
confidential or proprietary at the time of disclosure. Confidential
Information may include, without limitation, computer programs, code,
algorithms, names and expertise of employees and consultants, know-how,
formulas, processes, ideas, inventions (whether patentable or not),
schematics and other technical, business, financial and product development
plans, forecasts, strategies and information.
2. PURPOSE. The Receiving Party shall use the Confidential Information only
for the following purpose: to fulfill each party's commitments under the
Co-Marketing Services Agreement dated June 23, 1997.
3. CONFIDENTIALITY OBLIGATION. The Receiving Party agrees to protect the
Confidential Information by using the same degree of care, but not less
than a reasonable degree of care, to prevent the unauthorized use,
dissemination or publication of the Confidential Information as the
Receiving Party uses to protect its own confidential or proprietary
Information of a like nature. The Receiving Party shall limit the use of
and access to the Disclosing Party's Confidential Information to the
Receiving Party's employees or independent contractors who need to know
such Confidential Information for the purpose set forth in Section 2 above
and who have entered into binding obligations of confidentiality
substantially similar to the obligations set forth herein.
4. TERM. The Receiving Party's obligations to protect Confidential
Information hereunder shall expire 3 years from the date of each such
disclosure of Confidential Information, except when such Confidential
Information disclosed by the Disclosing Party is source code, in which case
the Receiving Party's obligations to protect such Confidential Information
shall be perpetual.
5. EXCLUSIONS. Confidential Information as defined in Section 1 above shall
not include Confidential Information that: (i) is or becomes a matter of
public knowledge through no fault of the Receiving Party; or (ii) was in
the Receiving Party's possession or known by it prior to receipt from the
Disclosing Party; or (iii) was rightfully disclosed to the Receiving Party
by another person without restriction; or (iv) is independently developed
by the Receiving Party without access to such Confidential Information.
The Receiving Party may disclose Confidential Information pursuant to any
statutory or regulatory authority or court order, provided the Disclosing
Party is given prompt written notice of such requirement and the scope of
such disclosure is limited to the extent possible.
6. RETURN OF CONFIDENTIAL INFORMATION. Upon written request by the Disclosing
Party at any time, the Receiving Party shall: (i) turn over to the
Disclosing Party all Confidential Information of the Disclosing Party, all
documents or media containing the Confidential Information, and any and all
copies or extracts thereof, or (ii) destroy the Confidential Information,
and any and all copies or extracts thereof, and provide the Disclosing
Party with written certification of such destruction signed by an
authorized representative of the Receiving Party.
23
<PAGE>
7. EQUITABLE RELIEF. The Receiving Party acknowledges and agrees that due to
the unique nature of the Disclosing Party's Confidential Information, there
may be no adequate remedy at law for any breach of its obligations. The
Receiving Party further acknowledges that any such breach may allow the
Receiving Party or third parties to unfairly compete with the Disclosing
Party resulting in irreparable harm to the Disclosing Party, and,
therefore, that upon any such breach or any threat thereof, the Disclosing
Party shall be entitled to seek appropriate equitable relief in addition to
whatever remedies it may have at law. The Receiving Party will notify the
Disclosing Party in writing immediately upon the occurrence of any such
unauthorized release or other breach.
8. INTELLECTUAL PROPERTY RIGHTS. Neither party acquires any intellectual
property rights under this Agreement or through any disclosure hereunder,
except the limited right to use such Confidential Information in accordance
with this Agreement.
9. WARRANTY. The Confidential Information disclosed under this Agreement is
delivered "AS IS", and all representations or warranties, whether express
or implied, including warranties or conditions for fitness for a particular
purpose, merchantability, title and noninfringement are hereby disclaimed.
10. NETSCAPE SUBSIDIARIES. Netscape's wholly owned subsidiaries, by signing
this Agreement on behalf of Netscape and returning a fully executed
original or copy to the Netscape Legal Department, shall be entitled to
disclose Netscape's Confidential Information and receive Company's
Confidential Information on behalf of Netscape under this Agreement,
provided such subsidiaries comply with the terms and conditions of this
Agreement and further provided such disclosures or receipt of Confidential
Information are governed by the terms and conditions of this Agreement.
11. GENERAL. This Agreement supersedes all prior discussions and writings with
respect to the subject matter hereof, and constitutes the entire agreement
between the parties with respect to the subject matter hereof. No waiver
or modification of this Agreement will be binding upon either party unless
made in writing and signed by a duly authorized representative of each
party and no failure or delay in enforcing any right will be deemed a
waiver. The parties understand that nothing herein requires either party
to proceed with any proposed transaction or relationship in connection with
which Confidential Information may be disclosed. In the event that any of
the provisions of this Agreement shall be held by a court or other tribunal
of competent jurisdiction to be unenforceable, the remaining portions
hereof shall remain in full force and effect. This Agreement shall be
governed by the laws of the State of California without regard to conflicts
of laws provisions thereof and each party submits to the jurisdiction and
venue of California State or federal court generally serving the Santa
Clara county area with respect to the subject matter of this Agreement.
The headings to the Sections of this Agreement are included merely for
reference and shall not affect the meaning of the language included
therein. This Agreement is written in the English language only, which
language shall be controlling in all respects. Les parties aux presentes
confirment leur volonte que cette convention de meme que tous les documents
y compris tout avis qui s'y rattache, soient rediges en langue anglaise
(translation: "The parties confirm that this Agreement and all related
documentation is and will be in the English language.")
24
<PAGE>
COMPANY: NETSCAPE:
CONCENTRIC NETWORK CORPORATION NETSCAPE COMMUNICATIONS CORPORATION
By: /s/ By: /s/
--------------------------- ---------------------------
Print Name: Print Name:
------------------- --------------------
Title: Title:
------------------------ -------------------------
Date: Date:
------------------------- --------------------------
Company Address: Netscape Address:
10590 N. Tantau Avenue 501 East Middlefield Road, MV-002
Cupertino, California 95014 Mountain View, California 94043
USA USA
25
<PAGE>
EXHIBIT 10.39
TRADEMARK LICENSE AGREEMENT
This Trademark License Agreement ("AGREEMENT") is effective as of the 23rd day
of June, 1997 ("EFFECTIVE DATE") and is entered into by and between Netscape
Communications Corporation ("NETSCAPE"), a Delaware corporation located at 501
East Middlefield Road, Mountain View California 94043, and Concentric Network
Corporation ("CONCENTRIC"), a Florida corporation located at 10590 N. Tantau
Avenue, Cupertino, California 95014.
RECITALS
A. Netscape owns and uses the names and/or trademarks NETSCAPE and NETSCAPE
VIRTUAL OFFICE and any applications or registrations therefor as listed on
Exhibit A attached hereto (collectively referred to as the "MARKS"), in
---------
connection with its Internet-related software products, services and
technology;
B. Concentric is in the business of offering certain Internet and Intranet-
related services;
C. Concentric desires to use the trademarks NETSCAPE and NETSCAPE VIRTUAL
OFFICE solely in the titles set forth in Exhibit B in connection with
---------
Intranet Service in the languages and geographic territories set forth
opposite such titles in Exhibit B; and
---------
D. Netscape is willing to permit such use of the Marks under the terms and
conditions set forth in this Agreement.
NOW THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. GRANT OF LICENSE.
1.1 GRANT OF LICENSE. Netscape hereby grants to Concentric a non-
exclusive, non-transferable, license to use the Marks in the title set forth in
Exhibit B solely in conjunction with [*]
- ---------
opposite such title (the "INTRANET SERVICE") which Intranet Service: (a) shall
promote Netscape's products and services; (b) shall be jointly developed by
Netscape and Concentric; and (c) shall reside [*] at a location to be mutually
agreed upon by both parties deploying Concentric's servers and be located [*]
from Netscape's web site. Concentric may only use the Marks as a part of the
complete title specified in Exhibit B and shall not separately use any element
---------
or elements of the Marks.
1.2 RESERVATION OF RIGHTS. Netscape hereby reserves any and all rights
not expressly and explicitly granted in this Agreement, including Netscape's
right to authorize or license use of the Marks or any other trademarks or names
containing NETSCAPE, to any third party for use in connection with any goods and
services, including, but not limited to, Intranet Service. Without limiting the
rights reserved in the preceding sentence, Netscape hereby reserves any and all
rights to use, authorize use or license use of the Marks or any other trademarks
or names containing NETSCAPE in any geographic territory listed in Exhibit B in
---------
a language or language(s), or in any other territory in any language, different
from the language listed next to such geographic territory in Exhibit B. No
---------
right is provided to use any other Netscape trademark, including without
limitation the Netscape Horizon Logo.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
2. LICENSE FEE. For the rights granted to Concentric herein, Concentric shall
pay Netscape [*] license fee of [*] payable as follows:
(a) [*] payable by [*]; and
(b) [*] payable by [*].
The license fee due hereunder is exclusive of any applicable taxes. Concentric
shall be responsible for all applicable national, state and local taxes, value
added or sales taxes, exchange, interest, banking, collection and other charges
and levies and assessments pertaining to payments other than U.S. taxes based on
Netscape's net income. If Concentric is required by law to make any deduction
or to withhold from any sum payable to Netscape by Concentric hereunder, (i)
Concentric shall effect such deduction or withholding, remit such amounts to the
appropriate taxing authorities and promptly furnish Netscape with tax receipts
evidencing the payments of such amounts, and (ii) the sum payable by Concentric
upon which the deduction or withholding is based shall be increased to the
extent necessary to ensure that, after such deduction or withholding, Netscape
receives and retains, free from liability for such deduction or withholding, a
net amount equal to the amount Netscape would have received and retained in the
absence of such required deduction or withholding.
3. OWNERSHIP OF MARKS. Concentric hereby acknowledges that Netscape is the
owner of the Marks, and any trademark applications and/or registrations thereto,
agrees that it will do nothing inconsistent with such ownership and agrees that
all use of the Marks by Concentric shall solely inure to the benefit of
Netscape. Concentric agrees that nothing in this Agreement shall give
Concentric any right, title or interest in the Marks other than the right to use
the Marks in accordance with this Agreement. Concentric agrees not to register
or attempt to register the Marks as a trademark, service mark, Internet domain
name, trade name, or any similar trademarks or name, with any domestic or
foreign governmental or quasi-governmental authority or otherwise. Concentric
may not register or use the Marks or an abbreviation of the Marks as part of an
Internet domain name. The provisions of this paragraph shall survive the
expiration or termination of this Agreement.
4. USE OF THE MARKS; PROTECTION OF THE MARKS.
4.1 PROPER USE. Concentric agrees that all use of the Marks shall only
occur in connection with the Intranet Service and shall be in strict compliance
with the terms of this Agreement. Concentric may use the Marks as set forth in
Section 1.1 as well as in connection with the promotion of the Intranet Service,
excluding merchandising or any software products. Use of the Marks for
promotional purposes shall be submitted to Netscape for approval at least twenty
(20) business days prior to the promotional use of the Mark. The Marks shall
always be used in the English language; however the VIRTUAL OFFICE term portion
of the Mark may be translated, upon approval by Netscape, to the non-English
designated language(s) listed in Exhibit B, if any. No other modifications to
---------
the Marks shall be made. Concentric shall use the Marks in conformance with
Netscape's trademark guidelines ("TRADEMARK GUIDELINES"), set forth in Exhibit
-------
C, which Trademark Guidelines may be revised by Netscape from time to time.
- -
Concentric agrees not to use any other trademark or service mark in combination
with the Marks other than as described in Section 1.1. Concentric has no right
to sublicense, transfer, translate (except as provided in this Section 4.1) or
assign the use of the Marks or use the Marks for any other purpose other than
the purpose described herein. Concentric may not use the Mark in connection
with, or for the benefit of, any third party's products or services. Concentric
further agrees not to use the Marks on or in connection with any products or
services that are or could be deemed by Netscape, in its reasonable judgment, to
be obscene, pornographic, disparaging of Netscape or its products or products,
or otherwise in poor taste, or that are themselves unlawful or whose purpose is
to encourage unlawful activities by others.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
2
<PAGE>
4.2 QUALITY STANDARDS. Concentric agrees to maintain a consistent level
of quality of the Intranet Service performed in connection with the Marks
substantially equal to that found in Concentric's existing services. Concentric
further agrees to maintain a level of quality in connection with its use of the
Marks that is consistent with general industry standards.
4.3 MONITORING BY NETSCAPE. Concentric acknowledges that Netscape has no
further obligations under this Agreement other than the right to periodically
monitor Concentric's use of the Marks in conjunction with the Intranet Service.
Upon request by Netscape, Concentric shall provide Netscape with representative
samples of each such use prior to the time the Marks are utilized on the
Internet, on an Intranet or in press materials or marketing or advertising
materials. If Netscape determines that Concentric is using the Marks
improperly, and/or in connection with Intranet Service which do not meet the
standards set forth in Section 4.1 or Section 4.2, Netscape shall notify
Concentric, and Concentric shall remedy the improper use within two (2) business
days following receipt of such notice from Netscape. Use of the Marks on goods
or services other than the Intranet Service or the promotion of the Intranet
Service, or in a manner inconsistent with the Trademark Guidelines, shall
constitute material breach of this Agreement. If such material breach has not
been cured within two (2) business days following receipt of notice from
Netscape, this Agreement shall be terminated.
4.4 LEGEND; DISCLAIMER. Concentric shall include with any online
publication or publication in print containing the Marks a trademark legend
indicating that "Netscape is a trademark of Netscape Communications Corporation
registered in the US and in other jurisdictions and that the Marks are used
under license", and a disclaimer that Concentric and not Netscape has produced
the Intranet Service and is responsible for the content thereof.
4.5 NAVIGATION SERVICES. If Netscape reasonably determines that the
[*] contain or present any material that constitutes an infringement of
Netscape's trademark, patents, copyrights or trade secrets, Concentric's right
to use the Marks pursuant to the grant described in Section 1.1 shall, upon
written notice from Netscape of such determination, be suspended until
Concentric has revised, removed or removed links to such material to
Netscape's reasonable satisfaction. If such revision or removal of, or removal
of links to, such material to Netscape's reasonable satisfaction has not
occurred within thirty (30) days of the notice from Netscape described in the
preceding sentence, Netscape may immediately terminate the license grant
described in Section 1.1. If Netscape reasonably determines that the Internet
Services contains or presents any material that could reasonably constitute an
infringement of a third party's copyright, trademark, patents or trade
secrets, Netscape may immediately terminate this Agreement if Concentric has
not revised to Netscape's reasonable satisfaction that material or
presentation within one (1) business day of written notice from Netscape.
4.6 CONCENTRIC WEB SITES. If Netscape, in its sole discretion, at any
time determines that [*], or any services provided by Concentric, contain any
material or present any material in a manner that Netscape reasonably deems
inaccurate or an improper tarnishment of Netscape, the Netscape products or
the Marks, or an infringement of Netscape's or a third party's rights,
including but not limited rights under trademark, patent, trade secret or
copyright laws, or unlawful in any country or territory, Netscape may
immediately terminate this Agreement if Concentric has not revised to
Netscape's reasonable satisfaction that material or presentation within three
(3) business days of written notice from Netscape; provided, however, that
Netscape's rights and Concentric's obligations under this paragraph will not
apply to material or presentations that are not within Concentric's control.
5. CONFIDENTIAL INFORMATION AND DISCLOSURE. Unless required by law, and
except to assert its rights hereunder or for disclosures to its own employees on
a "need to know" basis, each party agrees not to disclose the terms of this
Agreement or matters relating thereto without the prior written consent of the
other party, which consent shall not be unreasonably withheld.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
3
<PAGE>
6. INDEMNIFICATION.
6.1 INDEMNIFICATION BY CONCENTRIC. Concentric agrees to indemnify
Netscape and to hold Netscape harmless from any and all liability, loss,
damages, claims or causes of action, including reasonable legal fees and
expenses that may be incurred by Netscape, arising out of performance of this
Agreement, the operation of the Intranet Service, or Concentric's use of the
Marks and content on Concentric's web sites or services linked to or presented
or offered in conjunction with the Marks, except for liability, loss, damages,
claims or causes of action arising out of third party claims (i) that
Concentric's use of the Marks infringe that third party's valid and subsisting
U.S. trademark registration in the Marks or (ii) in respect of any act or
omission of Netscape giving rise to liability. Netscape shall provide
Concentric with prompt written notice of any claim for which indemnification is
sought and cooperating fully with and allowing Concentric to control the defense
and settlement of such claim. Netscape may not settle any such claim without
Concentric's prior written consent, which consent shall not be unreasonably
withheld. Netscape shall have the right, at its own expense, to participate in
the defense of any such claim.
6.2 INDEMNIFICATION BY NETSCAPE. Netscape agrees to indemnify Concentric
and to hold Concentric harmless from any and all liability, loss, damages,
claims or causes of action, including reasonable legal fees and expenses that
may be incurred by Concentric, arising out of a third party claim that [*]
Concentric shall provide Netscape with prompt written notice of any claim for
which indemnification is sought and cooperating fully with and allowing
Netscape to control the defense and settlement of such claim. Concentric may
not settle any such claim without Netscape's prior written consent, which
consent shall not be unreasonably withheld. Concentric shall have the right,
at its own expense, to participate in the defense of any such claim.
7. TERMINATION
7.1 TERM AND TERMINATION. [*] in Section 4.3, Section 4.5 or this
Section 7.1. Netscape shall have the right to terminate this Agreement upon
the occurrence of one or more of the following: (a) any material breach by
Concentric of its obligations under this Agreement which remains uncured for
thirty (30) days or more following written notice of such breach from
Netscape, (b) use of the Marks by Concentric in a manner which is disparaging
of Netscape or its products and services and which remains uncured for two (2)
days following notice from Netscape, (c) Concentric decides not to launch the
Intranet Service, or (d) the Intranet Service are discontinued.
7.2 EFFECT OF TERMINATION. Upon termination of the Agreement,
Concentric agrees it shall immediately cease any and all use of the Marks.
8. GENERAL
8.1 GOVERNING LAW. This Agreement shall be subject to and governed in
all respects by the statutes and laws of the State of California without regard
to the conflicts of laws principles thereof. The Superior Court of Santa Clara
County and/or the United States District Court for the Northern District of
California shall have exclusive jurisdiction and venue over all controversies in
connection herewith, and each party hereby consents to such exclusive and
personal jurisdiction and venue.
8.2 ENTIRE AGREEMENT. This Agreement, including Exhibit A, Exhibit B,
--------- ---------
and Exhibit C attached hereto, constitutes the entire Agreement and
---------
understanding between the parties and integrates all prior discussions between
them related to its subject matter. No modification of any of the terms of this
Agreement shall be valid unless in writing and signed by an authorized
representative of each party.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
4
<PAGE>
8.3 ASSIGNMENT. Concentric may not assign any of its rights or delegate
any of its duties under this Agreement, or otherwise transfer this Agreement (by
merger, operation of law or otherwise) without the prior written consent of
Netscape. Any attempted assignment, delegation or transfer in derogation hereof
shall be null and void.
8.4 NOTICES. All notices required or permitted hereunder shall be given
in writing addressed to the respective parties as set forth below and shall
either be (a) personally delivered or (b) transmitted by nationally-recognized
private express courier, and shall be deemed to have been given on the date of
receipt if delivered personally, or two (2) days after deposit with such express
courier. Either party may change its address for purposes hereof by written
notice to the other in accordance with the provisions of this Subsection. The
addresses for the parties are as follows:
CONCENTRIC: NETSCAPE:
Concentric Network Corporation Netscape Communications Corporation
10590 N. Tantau Avenue 501 East Middlefield Road, MV-002
Cupertino, CA 95014 Mountain View, CA 94043
Fax: (408) 342-2876 Fax: (415) 528-4123
Attn: Mike Anthofer Attn: General Counsel
Senior Vice President and
Chief Financial Officer
8.5 FORCE MAJEURE. Neither party will be responsible for any failure to
perform its obligations under this Agreement due to causes beyond its reasonable
control, including but not limited to acts of God, war, riot, embargoes, acts of
civil or military authorities, fire, floods or accidents, provided that (a) such
party promptly notifies the other party thereof and (b) such failure does not
continue for more than three (3) days.
8.6 WAIVER. Any waiver, either expressed or implied, by either party of
any default by the other in the observance and performance of any of the
conditions, covenants of duties set forth herein shall not constitute or be
construed as a waiver of any subsequent or other default.
8.7 HEADINGS. The headings to the Sections and Subsections of this
Agreement are included merely for convenience of reference and shall not affect
the meaning of the language included therein.
8.8 INDEPENDENT CONTRACTORS. The parties acknowledge and agree that they
are dealing with each other hereunder as independent contractors. Nothing
contained in the Agreement shall be interpreted as constituting either party the
joint venture or partner of the other party or as conferring upon either party
the power of authority to bind the other party in any transaction with third
parties.
8.9 SURVIVAL. The provisions of Section 1.2 (Reservation of Rights), 3
(Ownership of Marks), 4.4 (Legend; Disclaimer), 5 (Confidential Information and
Disclosure), 6 (Indemnification), 7.2 (Effect of Termination) and 8 (General)
will survive any termination of this Agreement.
8.10 EQUITABLE RELIEF. Concentric recognizes and acknowledges that a
breach by Concentric of this Agreement will cause Netscape irreparable damage
which cannot be readily remedied in monetary damages in an action at law, and
may, in addition thereto, constitute an infringement of the Marks. In the event
of any default or breach by Concentric that could result in irreparable harm to
Netscape or cause some loss or dilution of Netscape's goodwill, reputation, or
rights in the Marks, Netscape shall be entitled to immediate injunctive relief
to prevent such irreparable harm, loss, or dilution in addition to any other
remedies available.
8.11 SEVERABILITY. Except as otherwise set forth in this Agreement, the
provisions of this Agreement are severable, and if any one or more such
provisions shall be determined to be invalid, illegal or unenforceable, in whole
or in part, the validity, legality and enforceability of any of the remaining
provisions or portions thereof shall not in any way be affected thereby and
shall nevertheless be binding between the parties hereto. Any such invalid,
illegal or unenforceable provision or portion thereof shall
5
<PAGE>
be changed and interpreted so as to best accomplish the objectives of such
provision or portion thereof within the limits of applicable law.
8.12 ATTORNEY'S FEES. In the event of any action, suit, or proceeding
brought by either party to enforce the terms of this Agreement, the prevailing
party shall be entitled to receive its costs, expert witness fees, and
reasonable attorneys fees and expenses, including costs and fees on appeal.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
CONCENTRIC NETWORK CORPORATION NETSCAPE COMMUNICATIONS CORPORATION
By: /s/Henry R. Nothhaft By: /s/ Mike Homer
--------------------------------- ----------------------------------
Name: Henry R. Nothhaft Name: Mike Homer
------------------------------- --------------------------------
Title: Pres & CEO Title: Senior Vice President Marketing
------------------------------ -------------------------------
Date: 6/23/97 Date: 6/23/97
------------------------------- -------------------------------
Exhibit A: Licensed Netscape Trademarks
- ---------
Exhibit B: Titles; Target Language and Geographic Combinations
- ---------
Exhibit C: Trademark Guidelines
- ---------
6
<PAGE>
EXHIBIT A
LICENSED NETSCAPE TRADEMARKS
NETSCAPE U.S. FEDERAL TRADEMARK REGISTRATION NO. 2,027,552
NETSCAPE VIRTUAL OFFICE
<PAGE>
EXHIBIT B
TITLES; TARGET LANGUAGE AND GEOGRAPHIC COMBINATIONS
<TABLE>
<CAPTION>
Title Target Language Geographic Territory
- --------------------------------------- --------------- --------------------------------
<S> <C> <C>
NETSCAPE VIRTUAL OFFICE BY CONCENTRIC [*] [*]
</TABLE>
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
2
<PAGE>
EXHIBIT C
TRADEMARK USE GUIDELINES
Netscape's Trademark Guidelines are published at the following URL:
http://home.netscape.com/misc/trademarks.html#trademarks
<PAGE>
EXHIBIT 10.40
SOFTWARE LICENSE
ORDER FORM
(WITH TERMS AND CONDITIONS)
NO. 002933
Concentric Network Corporation ("LICENSEE")
- --------------------------------------------------------------------------------
Full legal name of entity signing this Order Form
10590 N. Tantau Avenue
- --------------------------------------------------------------------------------
Cupertino California 95014 U.S.A.
- --------------------------------------------------------------------------------
City State Zip / Country
- ---------------------------
Contact Person: Mike Anthofer Telephone: (408) 342-2800 Fax: (408) 342-2876
------------- -------------- --------------
Licensee is incorporated in the state/country of Florida
-------------------------------
TERRITORY (Country): United States and English-speaking Canada ("TERRITORY")
IMPORTANT NOTICE: UPON EXECUTION BY THE PARTIES, LICENSEE WILL HAVE THE RIGHT TO
USE THE NETSCAPE PRODUCTS INDICATED IN ATTACHMENT A ("PRODUCTS") SOLELY IN
CONNECTION WITH PERFORMING ITS OBLIGATIONS ARISING FROM THE "CO-MARKETING
SERVICES AGREEMENT" BETWEEN NETSCAPE AND LICENSEE OF EVEN DATE HEREWITH ("CO-
MARKETING AGREEMENT"), AT THE PRICING SET FORTH HEREIN. BY SIGNING THIS ORDER
FORM, LICENSEE AGREES TO ALL THE TERMS AND CONDITIONS ATTACHED (COLLECTIVELY THE
"AGREEMENT"). THIS AGREEMENT DOES NOT ALLOW ANY FULFILLMENT BY A RESELLER. IF
LICENSEE DESIRES FULFILLMENT BY A RESELLER, LICENSEE MUST NEGOTIATE DIRECTLY
WITH A NETSCAPE AUTHORIZED RESELLER.
DEFINITIONS: ALL CAPITALIZED TERMS IN THIS AGREEMENT WILL HAVE THE MEANINGS
SPECIFIED IN THIS AGREEMENT OR, IF NOT EXPRESSLY DEFINED IN THIS AGREEMENT, THEY
WILL HAVE THE MEANINGS SPECIFIED IN THE CO-MARKETING AGREEMENT.
NETSCAPE COMMUNICATIONS CONCENTRIC NETWORK CORPORATION
CORPORATION ("NETSCAPE")
/s/Mike Homer /s/Henry R. Nothhaft
By: ________________________________ By: __________________________________
Signature Signature
Mike Homer Henry R. Nothhaft
Name: ______________________________ Name: ________________________________
Print or Type Print or Type
SVP Marketing Pres. & CEO
Title: _____________________________ Title: _______________________________
23 June 97 23 June 97
Date of Acceptance: ________________ Date: ________________________________
("EFFECTIVE DATE")
501 E. Middlefield Rd.
Address: __________________________
Mountain View, CA 94043
___________________________________
<PAGE>
AGREEMENT CONSISTS OF:
1. Software License Order Form
2. Attachment A - Products and Pricing
3. Attachment B - Terms and Conditions
4. Attachment C - Expert Alliance Support Program
2
<PAGE>
ATTACHMENT A
PRODUCTS AND PRICING
1. Products ("PRODUCTS"):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PRODUCTS (DESCRIPTION, LICENSEE
PLATFORMS & LANGUAGES) ACKNOWLEDGMENT PER USER SUBSCRIPTION
(INITIAL FOR FEE** FEE/USER **
RECEIPT OF PRODUCT)*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SERVER PRODUCT(S)
[*] [*] year
SuiteSpot
- -------------------------------------------------------------------------------
</TABLE>
* Licensee acknowledges that it has already received the Product next to its
initials and agrees that Netscape has fulfilled its delivery obligation for
such Product.
** Above pricing [*] in any end user license agreement included with the
Products. This pricing is based on a [*], Licensee will [*]. Netscape agrees
not to charge Licensee any license fees until January 1, 1998. Above pricing
applies to SuiteSpot 3.0 and the next Major Update and is valid until the
expiration of the initial Term under the Co-Marketing Agreement.
2. Support: Netscape shall provide Licensee with [*] support program [*] of
the Co-Marketing Agreement. Terms of such support are set forth in Attachment C
hereto.
3. Deliverables: Netscape will deliver to Licensee 1 master reproduction copy
of each Product above and associated documentation, in any format generally
available from Netscape as of the Effective Date. All deliveries shall be
F.C.A. Netscape origin (INCOTERMS 1990).
Ship To Address for Deliverables Bill To Address
- ---------------------------------- -------------------------
(Not a P.O. address)
10590 N. Tantau Avenue 10590 N. Tantau Avenue
Cupertino, CA 95014 Cupertino, CA 95014
Attention: Mike Anthofer Attention: Mike Anthofer
Telephone: (408) 342-2800 Telephone: (408) 342-2800
Fax: (408) 342-2876
Sales Tax Resale/Exemption
Certificate No. (if applicable): ____________________________________
(ORIGINAL CERTIFICATE MUST BE FURNISHED TO NETSCAPE)
VAT Registration No. (if Europe, Middle East or Africa):
_______________________
Netscape Sales Rep: Jeff Shardell
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
3
<PAGE>
ATTACHMENT B
TERMS AND CONDITIONS
1. FEES AND PAYMENT SCHEDULE. [*] Netscape shall invoice Licensee based on the
monthly reports submitted pursuant to Section 6. All invoiced amounts are due
and payable net 30 of date of invoice. Past due amounts shall bear interest at
the lower of 1-1/2% per month or the maximum rate allowed by law until paid in
full. All prices in Attachment A are in U.S. Dollars and exclude any applicable
taxes. Licensee is responsible for all applicable national, state and local
taxes, value added or sales taxes, levies and assessments pertaining to the sale
of the Products (except taxes based upon Netscape's net income from the sale of
the Products to Licensee) except to the extent Licensee provides Netscape with a
valid tax exemption certificate.
2. PRODUCT LICENSE. Subject to the terms and conditions in this Agreement,
Netscape grants Licensee the right to make, without change, and use internally
that number of copies of the Products necessary to meet its obligations under
the Co-Marketing Agreement to provide Services to Users of Customers. A "USER"
means any employee, consultant or other agent performing services for the
benefit of a Customer who has access in any way to any Server Product or update
thereto, as of the point in time when such Products are first made available for
access by such User. Subject to Section 3 below, Licensee may copy the Products
in any combination. Licensee may also make, without change, that number of
copies of the documentation provided with the Products necessary to support the
Products copied. All copies of Products and related documentation are for
Licensee's internal use only and may not be resold or redistributed.
"LICENSEE'S INTERNAL USE" shall mean internal use by Licensee in accordance with
the terms of this Agreement and the Co-Marketing Agreement. Each copy of
Products and related documentation must contain all notices regarding
copyrights, trademarks and other proprietary rights in the materials originally
provided to Licensee. All Products and copies hereunder are subject to the
"License Grant" terms of the then current end user license agreement included
with such Products ("EULAS"), as amended by this Agreement. The applicable
"License Grant" terms in the current EULA are set forth in this Agreement. In
the event of an inconsistency between this Agreement and any then current EULA
with respect to a subject matter other than the "License Grant" terms, the terms
of this Agreement shall govern.
3. RELATIONAL DATABASE AND NETSCAPE CLIENT PRODUCTS. If the Product licensed
hereunder includes an Informix database product, then notwithstanding Section 2
above, Licensee may only install one copy of the database product on a single
computer upon which the Product is installed. Except for the Enterprise Server
Pro and LiveWire Pro, Licensee may only use the database as a repository for the
Product's data and may not be used for any other purpose. The database may be
accessed only by tools intended for use with the Product. The Informix
database may be used only (i) for the purpose of developing Netscape web server
applications ("Web Server Applications"); and (ii) to reproduce and distribute a
single copy of the runtime version of the Informix database for use solely as a
component of a Web Server Application and only on a single computer for up to
thirty-two (32) connections (the "Deployment System"). A "connection" means a
computer process generated by the designated computer to service on-line users
of the Web Server Applications. A single connection may support a multitude of
users, the exact number of which depends on the particular circumstances.
Multiple Web Server Applications may reside on the Deployment System, provided
that all such applications access only the single copy of the Informix Developer
Database and all Web Server Applications together use no more than thirty-two
(32) connections. Licensee may use the Informix database to develop any number
of Web Server Applications, but once Licensee has distributed a single runtime
version of the Informix database in any one Web Server Application, Licensee may
not distribute the Informix database in another copy of that Web Server
Application or as part of any subsequent Web Server Application. In order to
provide a database product as part of Licensee's Web Server Application either
Licensee must purchase a separate LiveWire Pro license for each recipient, or
each recipient to whom Licensee distributes a Web Server Application must
license its own copy of a database product. Licensee may not establish direct
connections with the Informix database other than through the Enterprise Pro or
LiveWire Pro software or use the Informix database for any purpose other than
developing and executing Web Server Applications.
Licensee may use the Visigenic VisiBroker development component of the Product
on no more than one computer by no more than one developer. The single allowed
developer may use both VisiBroker for C++ and VisiBroker for Java. Licensee may
use the Visigenic runtime component of the Software to invoke object
implementations, provided that the invoking application (i) is one or more
components of the Product or (ii) interoperates with and runs on the same
computer as the Product. If the Product is Enterprise Pro, Licensee may run the
server-side JavaScript compiler on an unlimited number of computers. If the
Product contains header files, Licensee may copy and use the header files solely
to create and distribute programs to interface with the server Application
Program Interfaces. Licensee may not modify the header files. If the Product
contains Java classes other than classes which are a part of the
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
4
<PAGE>
Product's programming interface ("Sample Java Classes"), Licensee may copy and
use the Sample Java Classes solely to create and distribute programs to
interface with the Products.
The standard Netscape client product ("SNCP") or the premium Netscape client
product ("PNCP") is bundled with the Server Product ordered hereunder. Licensee
may make copies of such SNCP and/or PNCP only in the same quantities as it
copies the Server Product(s) with which such SNCP or PNCP are bundled, and all
such copies must be made for the sole purpose of using the applicable Server
Product(s) in accordance with this Agreement and not to obtain additional copies
of the SNCP or PNCP.
4. LICENSE RESTRICTIONS. Licensee may make a single copy of the Products for
archival purposes, provided such copy contains all of the original Products'
proprietary notices. Licensee shall not modify, translate, reverse engineer,
decompile, disassemble (except solely to the extent an applicable statute
expressly and specifically prohibits such restrictions), or create derivative
works based on the Products. Licensee may not copy the Products other than as
specified in this Agreement. Licensee shall not publish or provide any results
of benchmark tests run on the Products to a third party without Netscape's prior
written consent; rent, lease, grant a security interest in, or otherwise
transfer rights to the Products; or remove any proprietary notices or labels on
the Products.
5. TITLE. Title, ownership rights and intellectual property rights in the
Products shall remain in Netscape and/or its suppliers. The Products are
protected by copyright and other intellectual property laws and by international
treaties. Title and related rights in the content accessed through the Products
is the property of the applicable content owner and is protected by applicable
law.
6. RECORDS; REPORTING; AUDIT. Licensee shall maintain accurate records
reflecting the number of Customers and Users, the quantity of copies made of the
Products, a description of the Products, the version number of the Products, the
platforms and the language of the Products. In addition to the reports required
under the Co-Marketing Agreement, Licensee agrees, subject to the first sentence
in Section 1 of this Attachment B, to provide Netscape with monthly reports
which include the number of Users and number of subscriptions therefor. Such
reports shall be received by Netscape within 15 days after the end of any month
during any calendar quarter. With respect to the third month in any calendar
quarter, Licensee agrees to provide Netscape with an estimate of the number of
Users and number of subscriptions therefor in the last week of such third month,
and, within 15 days after the end of such third month, provide Netscape with a
monthly report stating the final number of Users and number of subscriptions
therefor. Netscape may conduct an audit to verify compliance with the terms of
this Agreement, which shall be conducted at Netscape's expense unless the
results establish that inaccuracies in Licensee's reports have resulted in
underpayment to Netscape of more than 5% of the amount actually due, in which
case Licensee shall pay all amounts due and bear the expense of the audit.
7. SUPPORT. Netscape will provide support to Licensee in accordance with
Netscape's then-current support terms and conditions for the support program
selected by Licensee on Attachment A, for the number of Users set forth in
Attachment A for the period for which Netscape has received payment therefor.
8. SOFTWARE SUBSCRIPTION. Licensee shall be entitled to software subscription
("SOFTWARE SUBSCRIPTION") for the number of Users reported in Licensee's monthly
report under Section 6 provided Licensee purchases subscription concurrent with
purchase of a User license. Software Subscription entitles Licensee to the
benefits set forth in Netscape's then-current Software Subscription program,
including major and minor updates and the ability to switch operating system
platforms at no additional charge. Subscriptions not purchased concurrent with
purchase of a User license and subscription fees for subsequent years shall be
at Netscape's then current charges.
9. INDEMNITY. (a) Netscape shall defend or settle, at its option, any action
brought against Licensee to the extent it is based on a claim that use or
reproduction by Licensee of the Netscape-owned portion of the Product hereunder
directly infringes any valid patent as of the Effective Date, copyright or trade
secret in the United States and/or Canada ("Intellectual Property Rights").
Netscape will pay resulting costs, damages and legal fees finally awarded
against Licensee in such action which are attributable to such claim provided
that: (i) Licensee promptly notifies Netscape in writing of any such claim; (ii)
Netscape has sole control of the defense and all related settlement
negotiations; and (iii) Licensee cooperates with Netscape, at Netscape's
expense, in defending or settling such claim. Should a Product become, or be
likely to become in Netscape's opinion, the subject of infringement of such
copyright or trade secret, Netscape may (I) procure for Licensee the right to
continue using the same or (II) replace or modify it to make it non-infringing.
Should Licensee's use of the Product under this Agreement be enjoined as a
result of any alleged infringement of an Intellectual Property Right, Netscape
will (x) procure for Licensee the right to continue using the same, (y) replace
or modify to make it non-infringing, or if (x) and (y) are not commercially
reasonable for Netscape, (z) credit Licensee a sum equal to the unamortized
amount of the license fees received by Netscape under this Agreement for the
infringing Product amortized on a straight-line basis on a monthly basis over
three years from the date such fee is accrued under Section 1 of this Attachment
B. Netscape shall have no obligation or liability for, and Licensee shall
defend, indemnify and hold Netscape harmless from and against, any claim based
upon: (A) use of other than the then-current, unaltered version of the Product,
unless the infringing portion is also in the then-current, unaltered release;
(B)
5
<PAGE>
use, operation or combination of the Product with non-Netscape programs, data,
equipment or documentation if such infringement would have been avoided but for
such use, operation or combination; (C) Licensee's or its agent's activities
after Netscape has notified Licensee that Netscape believes such activities may
result in such infringement; (D) compliance with Licensee's designs,
specifications or instructions for the Product; (E) any modifications or marking
of the Product not specifically authorized in writing by Netscape; (F) any
unauthorized use of any Netscape intellectual property; (G) any content provided
by Licensee and/or any material to which Users can link through such content; or
(H) third party software. The foregoing states the entire liability of Netscape
and the exclusive remedy of Licensee with respect to infringement of any
intellectual property right, whether under theory of warranty, indemnity or
otherwise.
(b) Licensee shall indemnify, hold harmless and, at Netscape's request, defend
Netscape and/or its suppliers from and against any and all claims, liabilities,
losses, damages, expenses and costs (including attorneys' fees and costs)
relating to Licensee's use or reproduction of the Product or Documentation,
except to the extent that Netscape is responsible under Section 9(a) above.
10. LIMITATION OF LIABILITY. (a) TO THE EXTENT ALLOWED BY APPLICABLE LAW, IN
NO EVENT SHALL NETSCAPE OR ITS SUPPLIERS BE LIABLE FOR ANY LOSS OF PROFITS, LOSS
OF BUSINESS, LOSS OF USE OR DATA, INTERRUPTION OF BUSINESS, OR FOR ANY INDIRECT,
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, EVEN IF NETSCAPE HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE
OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. (b) EXCEPT AS SPECIFIED IN THE
INDEMNITY SECTION SET FORTH ABOVE, IN NO EVENT WILL NETSCAPE OR ITS SUPPLIERS BE
LIABLE FOR ANY CLAIM AGAINST LICENSEE BY ANY END USER OR THIRD PARTY. (c) IN NO
EVENT SHALL NETSCAPE OR ITS SUPPLIERS BE LIABLE FOR (I) ANY REPRESENTATION OR
WARRANTY MADE TO ANY THIRD PARTY BY LICENSEE OR ANY OF THEIR RESPECTIVE AGENTS;
(II) FAILURE OF THE PRODUCT TO PERFORM EXCEPT AS, AND TO THE EXTENT, OTHERWISE
EXPRESSLY PROVIDED HEREIN; (III) FAILURE OF THE PRODUCT TO PROVIDE SECURITY;
(IV) ANY USE OF THE PRODUCT OR THE DOCUMENTATION; (V) THE RESULTS OR INFORMATION
OBTAINED OR DECISIONS MADE BY USERS OF THE PRODUCT OR THE DOCUMENTATION; OR (VI)
ANY CONTENT PROVIDED BY LICENSEE AND/OR ANY MATERIAL TO WHICH USERS CAN LINK
THROUGH SUCH CONTENT. THE REMEDIES PROVIDED IN THIS AGREEMENT ARE LICENSEE'S
SOLE AND EXCLUSIVE REMEDIES. (d) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO
THE CONTRARY AND EXCEPT FOR DEATH OR PERSONAL INJURY CAUSED BY NEGLIGENCE OF
NETSCAPE, NETSCAPE'S ENTIRE LIABILITY TO LICENSEE FOR DAMAGES CONCERNING
PERFORMANCE OR NONPERFORMANCE BY NETSCAPE OR IN ANY WAY RELATED TO THE SUBJECT
MATTER OF THIS AGREEMENT, AND REGARDLESS OF WHETHER THE CLAIM FOR SUCH DAMAGES
IS BASED IN CONTRACT OR IN TORT, SHALL NOT EXCEED THE AMOUNT RECEIVED BY
NETSCAPE FROM LICENSEE DURING THE 12 MONTHS PRIOR TO SUCH CLAIM FOR THE PRODUCT
GIVING RISE TO SUCH CLAIM.
11. TERM AND TERMINATION. The term of this Agreement shall be coterminous with
the Co-marketing Agreement. Subject to the Co-Marketing Agreement, either party
may terminate this Agreement if the other defaults in a material obligation
hereunder and does not cure such default within 30 days after receiving notice
of such default from the nonbreaching party. In addition, this Agreement (a)
shall expire automatically if Licensee: (i) ceases to do business in the normal
course, (ii) becomes or is declared insolvent or bankrupt, (iii) is the subject
of any proceeding relating to liquidation or insolvency which is not dismissed
within 90 calendar days, or (iv) makes an assignment for the benefit of its
creditors or (b) may be terminated immediately by Netscape if Licensee attempts
to derive any source code or breaches any confidentiality provisions hereunder.
Upon termination, all rights and obligations hereunder (except for any Licensee
outstanding payment obligations) shall terminate.
12. CONFIDENTIALITY. This provision shall be governed by the confidentiality
provision in the Co-Marketing Agreement.
13. NOTICE. Any notice required or permitted hereunder shall be in English, in
writing and shall be deemed to be properly given upon the earlier of (a) actual
receipt by the addressee (including facsimile or e-mail) or (b) 5 business days
after deposit in the mail, postage prepaid, when mailed by registered or
certified airmail, return receipt requested, or (c) 2 business days after being
sent via private industry courier to the respective parties at the addresses set
forth in the Agreement or to such other person or address as the parties may
from time to time designate in a writing. Notices to Netscape shall be to the
attention of the Legal Department, Netscape Communications Corporation, 501 East
Middlefield Road, Mountain View, California 94043.
14. MISCELLANEOUS. (a) This Agreement shall be governed by the laws of the
State of California, U.S.A., without reference to its conflicts of law
provisions. (b) Any dispute regarding this Agreement shall be subject to the
exclusive jurisdiction of the applicable court in Santa Clara County in the
State of California, and each party irrevocably submits to the jurisdiction and
venue of any such proceeding and agree that service of process may be effected
in the same manner notice is given hereunder. Notwithstanding the foregoing,
Netscape reserves the right to invoke the jurisdiction of any competent court to
remedy or prevent violation of any provision in the Agreement relating to
payment, Netscape Confidential Information or Netscape intellectual property.
(c) This Agreement will not be governed by the United Nations Convention of
Contracts for the International Sale of Goods. (d) A waiver by either party of
any term or
6
<PAGE>
condition of this Agreement or any breach thereof, in any one instance, shall
not waive such term or condition or any subsequent breach thereof. (e) Neither
party shall be in default or be liable for any delay, failure in performance
(excepting the obligation to pay) or interruption of service resulting directly
or indirectly from any cause beyond its reasonable control. (f) The relationship
between Netscape and Licensee is that of independent contractors and neither
Licensee nor its agents shall have any authority to bind Netscape in any way.
(g) If any dispute arises under this Agreement, the prevailing party shall be
reimbursed by the other party for any and all legal fees and costs associated
therewith. (h) The headings to the sections of this Agreement are used for
convenience only and shall have no substantive meaning. (i) This Agreement may
be amended only by a writing signed by both parties. (j) The provisions of this
Agreement which require or contemplate performance after the expiration or
termination of this Agreement shall be enforceable notwithstanding said
expiration or termination. (k) Licensee may not assign or otherwise transfer
this Agreement or any rights or obligations herein without the prior express
written consent of Netscape, except that Licensee can assign all of its rights
and obligations under this Agreement to an entity purchasing all or
substantially all of its stock or assets so long as the acquiring party agrees
in writing to comply with all of the terms and conditions of this Agreement. (l)
This Agreement shall be binding upon and shall inure to the benefit of the
parties, their successors and permitted assigns. (m) This Agreement may be
executed in counterparts or by facsimile, each of which shall be an original,
and all of which together shall constitute one and the same agreement. (n) This
Agreement constitutes the entire agreement between the parties concerning the
subject matter hereof and supersedes all prior and contemporaneous agreements
(including the Enterprise License Agreement provided with the Products) and
communications, whether oral or written, between the parties relating to the
subject matter hereof, and all past courses of dealing or industry custom. The
terms and conditions hereof shall prevail over any conflicting purchase order or
other written instrument submitted by Licensee. (o) If any provision in this
Agreement should be held illegal or unenforceable by a court having
jurisdiction, such provision shall be modified to the extent necessary to render
it enforceable without losing its intent, or severed from this Agreement if no
such modification is possible, and other provisions of this Agreement shall
remain in full force and effect. (p) Netscape may use Licensee's name in any
customer reference list or in any press release issued by Netscape regarding the
licensing of the Product and/or provide Licensee's name and the names of the
Products licensed by Licensee to third parties. (q) If Netscape is required by a
third party software supplier to cease and to cause its licensees to cease use
or distribution of a particular revision of the Products, Licensee agrees to
comply herewith if Netscape (i) provides Licensee with 30 days prior written
notice and (ii) replaces such affected Product with a functionally equivalent
Product as soon as commercially practicable. (r) This Agreement is in the
English language only, which language shall be controlling in all respects. (s)
Licensee agrees to comply and shall ensure compliance with all then-current
applicable laws, rules and regulations governing this Agreement, including all
applicable export laws, rules and regulations of the U.S. Government or other
applicable agencies. (t) The Products are not fault-tolerant and is not
designed, manufactured or intended for use or resale as on-line control
equipment in hazardous environments requiring fail-safe performance, such as in
the operation of nuclear facilities, aircraft navigation or communication
systems, air traffic control, direct life support machines, or weapons systems,
in which the failure of the Products could lead directly to death, personal
injury, or severe physical or environmental damage ("High Risk Activities").
Netscape and its suppliers specifically disclaim any express or implied warranty
of fitness for High Risk Activities.
7
<PAGE>
ATTACHMENT C
EXPERT ALLIANCE SUPPORT PROGRAM
DEFINITIONS, PRICING AND LICENSEE CONTACTS
1. DEFINITIONS. As used in this Attachment C, "END USER" means any user of the
Netscape software ("PRODUCT") authorized by Licensee pursuant to Agreement.
"PROGRAM ERRORS" means 1 or more reproducible deviations in the standard,
unmodified Product from the applicable specifications shown in the
documentation. "Major Updates" are designated by a change in the number to the
left of the decimal point of the number appearing after the product name.
2. PRICING. [*]
A. Expert Alliance: (12 hours/day; 5 days/week; after-hours pager service for
---------------
priority 1 issues only)
i) Annual flat fee: [*] for an assigned Netscape support engineer, 4
authorized technical contacts (list technical contacts below),
unlimited number of support requests from Licensee, problem diagnosis
for selected Netscape beta products, technical bulletins from Netscape,
1 introductory site visit by Netscape, technical support usage reports,
regularly scheduled conference calls with Netscape, quarterly support
review by Netscape and access to a private web site for Netscape's
Expert Alliance customers.
ii) Optional Add-On Support (available only in conjunction with the
purchase of Services under Section A (i)):
(a) Dedicated Netscape support engineer: [*] per year (replaces
assigned Netscape support engineer described under Section A(i))
(b) Additional assigned Netscape support engineer: [*] per year
(c) Additional Licensee Contact: [*] per contact per year
3. LICENSEE'S TECHNICAL CONTACTS:
Technical Contact #1: David Schairer
Phone: Fax: E-mail:
Technical Contact #2: Warren Smith
Phone: Fax: E-mail:
Technical Contact #3: _________________________________________________________
Phone: __________________ Fax: ______________ E-mail: _________________________
Technical Contact #4: # ______________________________________________________
Phone: __________________ Fax: ______________ E-mail: _________________________
-----------------------------------------------------------
Visit http://help.netscape.com/mktg for general information
about Netscape's support services and operating hours.
-----------------------------------------------------------
1. FRONT-LINE SUPPORT. Licensee, and not Netscape, will provide front-line
technical support to its End Users. Such support includes but is not limited
to, call receipt, entitlement verification, call screening, installation
assistance, problem identification and diagnosis, product defect determination,
efforts to create a repeatable demonstration of the Program Error and, if
applicable, the distribution of any defective media. Licensee agrees that any
documentation distributed by Licensee to its End Users will clearly and
conspicuously state that End Users should call Licensee for technical support
for the Product. Netscape will have no obligation to furnish any assistance,
information or documentation with respect to the Product, directly to End Users.
If Netscape is being contacted by a significant number of End Users, Netscape
will use reasonable efforts to (i) verify support eligibility for such End
Users, and (ii) refer such End Users to Licensee for support. If Netscape
continues to be contacted by a significant number of End Users, then, upon
Netscape's request, Licensee and Netscape will cooperate to minimize such
contact. Thereafter, if Netscape continues to be contacted by a significant
number of End Users for front-line support, then Licensee shall pay to Netscape
Netscape's then current charges for any End User identified by Netscape as
obtaining such support.
[*] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
8
<PAGE>
2. SERVICES. Netscape will provide back-end support to Licensee for Program
Errors not resolved by Licensee pursuant to Licensee's support policies and in
accordance herewith. This support includes efforts to identify defective source
code and to provide corrections, workarounds and/or patches to correct Program
Errors. Netscape will provide Licensee with a telephone number and an e-mail
address which Licensee may use to report Program Errors during Netscape's local
business hours. For priority 1, Licensee agrees to notify Netscape via both
telephone and e-mail. On Attachment C, Licensee has identified 4 members of its
customer support staff to act as technical liaisons responsible for all
communications with Netscape's technical support representatives. Such liaisons
will have sufficient technical expertise, training and/or experience, for
Licensee to perform its obligations hereunder. Licensee may substitute its
contacts at any time by providing 1 week's prior written and/or electronic
notice thereof to Netscape.
For the introductory site visit by Netscape, travel costs and related expenses
are paid by Netscape for up to 2 days. Upon Licensee's request, Netscape
engineers can extend the site visit for 3 additional days, provided that
Licensee shall pay for all costs and expenses related to such extended stay.
Netscape will use reasonable commercial efforts to resolve each significant
Program Error by providing either a reasonable workaround, an object code patch
or a specific action plan for how Netscape will address the problem and an
estimate of how long it will take to rectify the defect. Netscape reserves the
right to charge Licensee additional fees at its then-standard rates for services
performed in connection with reported Program Errors which are later determined
to have been due to hardware or software not supplied by Netscape.
Notwithstanding the foregoing, Netscape has no obligation to perform services in
connection with Program Errors resulting from hardware or software not supplied
by Netscape. Netscape agrees to support a given revision of the Product for the
shorter of (i) 12 months from the date such revision is superseded by the next
sequential Product revision; or (ii) until such revision is superseded by 2
sequential Product revisions. (For example, Netscape will support version 2.1
for the shorter of 12 months from the date version 2.2 or 3.0 (if 3.0 is the
next sequential release), is released by Netscape, or until version 2.1 is
superseded by 2 sequential releases (2.2 and 2.3 or 2.2 and 3.0, as the case may
be.)
Netscape will make reasonable efforts to correct significant Program Errors that
Licensee identifies, classifies and reports to Netscape and that Netscape
substantiates. Netscape may reclassify Program Errors if it reasonably believes
that Licensee's classification is incorrect. Licensee will provide sufficient
information for Netscape to enable Netscape to duplicate the Program Error
before Netscape's response obligations will commence. Unless otherwise
authorized in writing by Netscape, Netscape will not be required to correct any
Program Error caused by (a) incorporation, attachment of a feature, program, or
device to the Product, or any part thereof; (b) any nonconformance caused by
accident, transportation, neglect, misuse, alteration, modification, or
enhancement of the Product; (c) the failure to provide an installation
environment recommended for the Product; (d) use of the Product for other than
the specific purpose for which the Product is intended; (e) use of the Product
on any systems other than the specified hardware platform for such Product; (f)
if applicable, use of defective media or defective duplication of the Product;
or (g) failure to incorporate any Product revision or patch previously released
by Netscape which corrects such Program Error. For Program Error reports
received by Netscape during Netscape's local business hours, Netscape will use
reasonable commercial efforts to communicate with Licensee about the Program
Error via telephone or e-mail within the targeted response times set forth at
the end of these terms and conditions.
3. PURCHASE ORDERS. Licensee must place a written purchase order to initiate
Services under this Agreement and to renew or change the selection of Services
thereafter. Each purchase order must contain the following (i) reference to the
Agreement number; (ii) the level of Service, fees and charges therefor, and bill
to address (if different). No terms and conditions set forth in any purchase
order or instrument issued by Licensee in connection with the Services shall be
binding upon Netscape.
TARGETED RESPONSE TIMES:
- --------------------------------------------------------------------------------
STATUS UPDATES
INITIAL (PROVIDED UPON
PRIORITY FAILURE DESCRIPTION RESPONSE LICENSEE'S REQUEST
TIME AFTER NETSCAPE'S
INITIAL RESPONSE)
- --------------------------------------------------------------------------------
1 Enterprise-critical 1 hour By customer
(Product is not agreement
functioning)
- --------------------------------------------------------------------------------
2 Severe Impact - Product 2 working Once per
inconsistency which hours working day
significantly decreases Licensee
productivity (periodic work
stoppages, feature crashes)
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
3 Degraded Operations: Product 4 working Once every 3
inconsistency which slightly hours working days
impairs customer productivity
(Licensee can work around problem)
- --------------------------------------------------------------------------------
4 Minimal Impact: desired change next work Release notes or
in Product (documentation day plan for next
update, cosmetic defects, release
enhancement requests)
- --------------------------------------------------------------------------------
10
<PAGE>
EXHIBIT 10.41
CONCENTRIC NETWORK CORPORATION
NOTE AND WARRANT PURCHASE AGREEMENT
-----------------------------------
THIS NOTE AND WARRANT PURCHASE AGREEMENT (this "Agreement") is made and
entered into as of the 27th day of June, 1997, by and among Concentric Network
Corporation, a Florida corporation (the "Company"), Kleiner Perkins Caufield &
Byers VII and KPCB Information Sciences Zaibatsu Fund VII (the "Purchasers").
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereto mutually agree as follows:
1. The Loan and the Note. The Purchasers hereby agree to lend to the
---------------------
Company, on the date hereof, and on the terms of and conditions hereof, up to an
aggregate principal amount of $2,000,000 (the "Loan"). The Loan made to the
Company by the Purchasers shall be evidenced by unsecured promissory notes in
substantially the form attached hereto as Exhibit A (the "Note").
2. The Warrant. As an inducement to the Purchasers to make the Loan, the
-----------
Company shall issue to the Purchasers warrants to purchase up to the number of
shares of the Common Stock of the Company set forth in each such Purchaser's
Common Stock Purchase Warrant in substantially the form attached hereto as
Exhibit B (the "Warrant").
3. Representations and Warranties of the Company. Except as set forth in
---------------------------------------------
the Schedule of Exceptions attached hereto as Annex I and as otherwise
-------
disclosed in the Registration Statement on Form S-1 (File No. 333-27241) filed
with the Securities and Exchange Commission (the "Registration Statement"),
the Company hereby represents and warrants to the Purchasers as follows:
3.1 Organization and Standing. The Company is a corporation duly
-------------------------
incorporated and validly existing under, and by virtue of, the laws of its
jurisdiction of incorporation and is in good standing under the laws of such
jurisdiction. The Company has requisite corporate power and authority to own
and operate its properties and assets and to carry on its business as
currently conducted.
3.2 Corporate Power; Authorization. The Company has all requisite
------------------------------
legal and corporate power to execute and deliver the Transaction Documents (as
defined in Section 5.4) and to carry out and perform all of its obligations
under the Transaction Documents. The execution, delivery and performance of
the Transaction Documents by the Company have been duly authorized by all
requisite corporate action. The Transaction Documents constitute the legal,
valid and binding obligations of the Company, enforceable in accordance with
their respective terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization or similar laws relating to or affecting the
enforcement of creditors' rights, and (ii) as limited by equitable principles
generally.
<PAGE>
3.3 Non-Contravention. The execution, delivery and performance of the
-----------------
Transaction Documents, the compliance with the provisions thereof, do not
materially conflict with, or result in a material breach or violation of, or
constitute a material default under, or result in the creation or imposition of
any material lien pursuant to the terms of, the Second Amended and Restated
Articles of Incorporation or Bylaws of the Company, or the charter or other
organizational documents of CNC.
4. Representation and Warranties of the Purchasers. The Purchasers
-----------------------------------------------
represent and warrant to the Company as follows:
4.1 Binding Obligation. The Purchasers have full legal capacity,
------------------
power and authority to execute and deliver this Agreement and to perform their
obligations hereunder. Each of the Transaction Documents issued to the
Purchasers is a valid and binding obligation of the Purchasers, enforceable in
accordance with its terms, except as limited by bankruptcy, insolvency or
other laws of general application relating to or affecting the enforcement of
creditors' rights generally and general principles of equity.
4.2 Securities Law Compliance. The Purchasers have been advised that
-------------------------
neither of the Notes or the Warrants have been registered under the Securities
Act, or any state securities laws and, therefore, cannot be resold unless they
are registered under the Securities Act and applicable state securities laws
or unless an exemption from such registration requirements is available. The
Purchasers are aware that the Company is under no obligation to effect any
such registration with respect to the Notes or to file for or comply with any
exemption from registration. The Purchasers have not been formed solely for
the purpose of making this investment and are purchasing the Notes to be
acquired by the Purchasers hereunder for their own account for investment, not
as a nominee or agent, and not with a view to, or for resale in connection
with, the distribution thereof. The Purchasers have such knowledge and
experience in financial and business matters that the Purchasers are capable
of evaluating the merits and risks of such investment, are able to incur a
complete loss of such investment and are able to bear the economic risk of
such investment for an indefinite period of time. The Purchasers are
accredited investors as such term is defined in Rule 501 of Regulation D under
the Securities Act.
4.3 Access to Information. Purchasers acknowledge that the Company
---------------------
has given the Purchasers access to the corporate records and accounts of the
Company and to all information in its possession relating to the Company, has
made its officers and representatives available for interview by Purchasers,
and has furnished such Purchasers with all documents and other information
required for Purchasers to make an informed decision with respect to the
purchase of the Notes and Warrants.
5. Conditions to Transaction. The obligation of the Purchasers to make the
-------------------------
Loan, and the obligations of the Company to issue the Notes and Warrants, shall
be subject to each of the following conditions having been fulfilled on or
before such date:
-2-
<PAGE>
5.1 Blue Sky. The Company shall have obtained all necessary Blue Sky
--------
law permits and qualifications, or have the availability of exceptions
therefrom, required by any state for the offer and sale of the Notes and
Warrants and the issuance of the Shares upon exercise of the Warrants.
5.2 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated hereby shall have been completed.
5.3 Consents and Waivers. The Company shall have obtained any and all
--------------------
consents and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement.
5.4 Transaction Documents. The Company shall have duly executed and
---------------------
delivered to the Purchasers the following documents (the "Transaction
Documents"):
(a) This Agreement;
(b) The Notes issued hereunder; and
(c) The Warrants issued hereunder.
6. Covenants of the Partners.
-------------------------
6.1 Use of Proceeds. The Company covenants and agrees that the
---------------
proceeds from the Notes will be used solely for the purpose of paying a $2
million pre-paid license fee to Netscape Communications, Inc. ("Netscape") for
the use of Netscape's Virtual Office product ("Virtual Office").
6.2 Conversion of Note. In the event that a Financing Event does not
------------------
occur within forty-five (45) days of the date hereof, the parties agree to
establish a joint venture (the "Joint Venture") with the right to use and
exploit the Virtual Office license purchased by the Company. In such event,
Purchasers agree to convert the outstanding principal amount of the Notes and
all interest due thereunder into a 50% equity position in the Joint Venture
and the Company agrees to contribute a license to use the Virtual Office,
together with cash, in exchange for a 50% equity position in the Joint
Venture. If the Company is unable to contribute sufficient cash to the Joint
Venture, the Company shall assign to the Purchasers all its rights under that
certain Virtual Office Co-Marketing Agreement with Netscape, to the extent
permitted by Netscape.
7. Investment Representations; Legends.
-----------------------------------
7.1 Investment Representations of the Purchasers. The Purchasers hereby
--------------------------------------------
represent and warrant to the Company that the Purchasers are acquiring the Notes
and the Warrants for their own account for investment and not with a view toward
the distribution thereof. The Purchasers understand that neither of the Notes,
the Warrants or the Shares have been registered
-3-
<PAGE>
under the Securities Act of 1933, as amended (the "Act"), and that they are
being offered and sold pursuant to an exemption from registration contained in
the Act based in part upon the representations of the Purchasers contained
herein.
7.2 Legends.
-------
(a) The Notes, the Warrants and the certificates representing any
Shares will each be stamped or otherwise imprinted with legends as set forth
in the form of Note and Warrant attached as Exhibits A and B, respectively.
Such legends shall be removed by the Company from the Notes, the Warrants, or
the certificates representing the Shares upon delivery to it of an opinion of
counsel that a registration statement under the Act is at the time in effect
with respect to the legended security or that such security can be freely
transferred without such registration statement being in effect and that such
transfer will not jeopardize the exemption or exemptions from registration
pursuant to which the Notes and Warrants were issued.
(b) The Notes, the Warrants, and the certificates representing the
Shares shall also bear any legends required under applicable state securities
laws.
8. Modification; Waiver. No modification or waiver of any provision of
--------------------
this Agreement or consent to departure therefrom shall be effective unless in
writing and signed by the Company and the Purchasers. Any action to be taken
by the holders of the Notes with regard thereto or the rights granted
thereunder shall be taken only with the consent of holders of at least a
majority (50%) of the then-outstanding aggregate principal amount thereof.
9. Notices. Any notice or report herein required or permitted to be given
-------
shall be given by depositing the same in the United States mail, postage prepaid
and addressed or confirmed facsimile transmission to the parties as follow:
(a) To the Company:
Concentric Network Corporation
10590 N. Tantau Avenue
Cupertino, CA 95014
Attn: Michael F. Anthofer
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Attn: David J. Segre
-4-
<PAGE>
(b) To the Purchasers:
Kleiner Perkins Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Vinod Khosla
or to such other place or places as any of the parties shall designate by
written notice to the others.
10. Successors and Assigns. All covenants and agreements of the parties
----------------------
contained in this Agreement shall be binding and inure to the benefit of their
respective successors and assigns.
11. Governing Law. This Agreement shall in all respects be governed by the
-------------
laws of the State of California.
12. Section Headings. The section and paragraph headings contained
----------------
herein are for reference purposes only and shall not in any way affect the
meaning and interpretation of this Agreement.
13. Execution in Counterparts. This Agreement may be executed in any
-------------------------
number of counterparts, each of which when so executed and delivered shall be
deemed an original, and such counterparts together shall constitute only one
instrument.
14. Expenses of Agreement. The parties to this Agreement shall each bear
---------------------
their own expenses incurred in connection with the preparation, execution and
delivery of this Agreement, the Note, the Warrant, the Security Agreement and
any other instruments and documents.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
themselves or by their respective representatives thereunto duly authorized the
day and year first above written.
CONCENTRIC NETWORK CORPORATION
By: /s/ Henry R. Nothhaft
-------------------------------------------
Henry R. Nothhaft
President and Chief Executive Officer
"PURCHASERS"
KLEINER PERKINS CAUFIELD & BYERS VII
By: KPCB VII Associates, its general partner
By: /s/Vinod Khosla
-------------------------------------------
Vinod Khosla
KPCB INFORMATION SCIENCES ZAIBATSU FUND VII
By: KPCB VII Associates, its general partner
By: /s/Vinod Khosla
-------------------------------------------
Vinod Khosla
-6-
<PAGE>
EXHIBIT A
THIS NOTE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF
COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.
CONCENTRIC NETWORK CORPORATION
UNSECURED PROMISSORY NOTE
("NOTE")
$1,950,000 June 27, 1997
Cupertino, California
FOR VALUE RECEIVED Concentric Network Corporation, a Florida corporation
(the "Company"), promises to pay to Kleiner Perkins Caufield & Byers VII
("Holder"), or its registered assigns, the principal sum of One Million Nine
Hundred Fifty Thousand Dollars ($1,950,000), or such lesser amount as shall
equal the outstanding principal amount hereof, together with interest from the
date of this Note on the unpaid principal balance at a rate equal to 10% per
annum, computed on the basis of the actual number of days elapsed and a year of
365 days. All unpaid principal, together with any then unpaid and accrued
interest and other amounts payable hereunder, shall be due and payable on the
earlier to occur of (i) five (5) days after the closing of the Financing Event
(as defined below) or (ii) forty-five (45) days from the date first set forth
above. This Note is the only Note issued pursuant to the Note and Warrant
Purchase Agreement of even date herewith (as amended, modified or supplemented,
the "Note Purchase Agreement") between Company and the Holder. As used in this
Note, "Financing Event" shall mean the closing of a combination public offering
of the Company's Common Stock registered under the Securities Act of 1933, as
amended, and private placement resulting in aggregate gross proceeds to the
Company of at least $40,000,000 (the "IPO").
The following is a statement of the rights of Holder and the conditions to
which this Note is subject, and to which Holder, by the acceptance of this Note,
agrees:
1. INTEREST. Accrued interest on this Note shall be payable on the
--------
maturity date of this Note.
2. PREPAYMENT. Upon written notice to the Holder, Company may prepay
----------
all or any portion of this Note without penalty.
3. EVENTS OF DEFAULT. The occurrence of any of the following shall
-----------------
constitute an "Event of Default" under this Note and the other Transaction
Documents:
<PAGE>
(a) Failure to Pay. Company shall fail to pay (i) when due any
principal payment on the due date hereunder or (ii) any interest or other
payment required under the terms of this Note or any other Transaction
Document on the date due and such payment shall not have been made within
fifteen (15) days of Company's receipt of Holder's written notice to Company
of such failure to pay; or
(b) Breaches of Material Covenants. Company shall fail to observe or
perform any material covenant, obligation, condition or agreement contained in
this Note or the other Transaction Documents (other than those specified in
Sections 6(a) and 6(b)) and (i) such failure shall continue for fifteen (15)
days, or (ii) if such failure is not curable within such fifteen (15) day
period, but is reasonably capable of cure within forty-five (45) days, either
(A) such failure shall continue for forty-five (45) days or (B) Company shall
not have commenced a cure in a manner reasonably satisfactory to Holder within
the initial fifteen (15) day period; or
(c) Representations and Warranties. Any representation, warranty, or
certificate made or furnished by or on behalf of Company to Holder in writing in
connection with this Note or any of the other Transaction Documents, or as an
inducement to Holder to enter into this Note and the other Transaction
Documents, shall be false, incorrect, incomplete or misleading in any material
respect when made or furnished; or
(d) Voluntary Bankruptcy or Insolvency Proceedings. Company shall (i)
apply for or consent to the appointment of a receiver, trustee, liquidator or
custodian of itself or of all or a substantial part of its property, (ii) make a
general assignment for the benefit of its or any of its creditors, (iii) be
dissolved or liquidated, (iv) become insolvent (as such term may be defined or
interpreted under any applicable statute), (v) commence a voluntary case or
other proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or consent to any such relief or to the
appointment of or taking possession of its property by any official in an
involuntary case or other proceeding commenced against it, or (vi) take any
action for the purpose of effecting any of the foregoing; or
(e) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings
for the appointment of a receiver, trustee, liquidator or custodian of Company
or of all or a substantial part of the property thereof, or an involuntary
case or other proceedings seeking liquidation, reorganization or other relief
with respect to Company or the debts thereof under any bankruptcy, insolvency
or other similar law now or hereafter in effect shall be commenced and an
order for relief entered or such proceeding shall not be dismissed or
discharged within thirty (30) days of commencement; or
4. RIGHTS OF HOLDER UPON DEFAULT. Upon the occurrence or existence of
-----------------------------
any Event of Default (other than an Event of Default, referred to in Sections
6(d) and 6(e) and at any time thereafter during the continuance of such Event of
Default, Holder may, by written notice to Company, declare all outstanding
Obligations payable by Company hereunder to be immediately due and payable
without presentment, demand, protest or any other notice of any kind, all of
which are hereby expressly waived, anything contained herein or in the other
Transaction Documents to the contrary notwithstanding. Upon the occurrence or
existence of any Event of Default described in Sections 6(d) and 6(e),
immediately and without notice, all outstanding Obligations payable by Company
hereunder shall automatically become
-2-
<PAGE>
immediately due and payable, without presentment, demand, protest or any other
notice of any kind, all of which are hereby expressly waived, anything contained
herein or in the other Transaction Documents to the contrary notwithstanding.
In addition to the foregoing remedies, upon the occurrence or existence of any
Event of Default, Holder may exercise any other right power or remedy granted to
it by the Transaction Documents or otherwise permitted to it by law, either by
suit in equity or by action at law, or both.
5. SUCCESSORS AND ASSIGNS. Subject to the restrictions on transfer
----------------------
described in Sections 8 and 9 below, the rights and obligations of Company and
Holder of this Note shall be binding upon and benefit the successors, assigns,
heirs, administrators and transferees of the parties.
6. WAIVER AND AMENDMENT. Any provision of this Note may be amended,
--------------------
waived or modified only upon the written consent of Company and the Holder.
7. TRANSFER OF THIS NOTE. With respect to any offer, sale or other
---------------------
disposition of this Note, Holder will give written notice to Company prior
thereto, describing briefly the manner thereof, together with a written opinion
of Holder's counsel, to the effect that such offer, sale or other distribution
may be effected without registration or qualification (under any federal or
state law then in effect). Upon receiving such written notice and reasonably
satisfactory opinion, Company, within seven (7) business days, shall notify
Holder that Holder may sell or otherwise dispose of this Note or such
securities, all in accordance with the terms of the notice delivered to Company.
If a determination has been made pursuant to this Section 8 that the opinion of
counsel for Holder is not reasonably satisfactory to Company, Company shall so
notify Holder promptly after such determination has been made. Each Note thus
transferred shall bear a legend as to the applicable restrictions on
transferability in order to ensure compliance with the Act, unless in the
opinion of counsel for Company such legend is not required in order to ensure
compliance with the Act. Company may issue stop transfer instructions to its
transfer agent in connection with such restrictions. Subject to the foregoing,
transfers of this Note shall be registered upon registration books maintained
for such purpose by or on behalf of Company as provided in the Note Purchase
Agreement. Prior to presentation of this Note for registration of transfer,
Company shall treat the registered holder hereof as the owner and holder of this
Note for the purpose of receiving all payments of principal and interest hereon
and for all other purposes whatsoever, whether or not this Note shall be overdue
and Company shall not be affected by notice to the contrary.
8. ASSIGNMENT BY COMPANY. Neither this Note nor any of the rights,
---------------------
interests or obligations hereunder may be assigned, in whole or in part, by
Company without the prior written consent of Holder except in connection with an
assignment in whole to a successor corporation to Company, provided that such
successor corporation acquires all or substantially all of Company's property
and assets and Holder's rights hereunder are not impaired.
9. NOTICES. Any notice, request or other communication required or
-------
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or mailed by registered or certified mail, postage
prepaid, or by recognized overnight courier or personal delivery at the
respective addresses of the parties as set forth in the Note Purchase Agreement
or on the register maintained by Company or by confirmed facsimile receipt. Any
party hereto may by notice so given
-3-
<PAGE>
change its address for future notice hereunder. Notice shall conclusively be
deemed to have been given when received.
10. PAYMENT. Payment shall be made in lawful tender of the United States.
-------
11. USURY. In the event any interest is paid on this Note which is deemed
-----
to be in excess of the then legal maximum rate, then that portion of the
interest payment representing an amount in excess of the then legal maximum rate
shall be deemed a payment of principal and applied against the principal of this
Note.
12. GOVERNING LAW. This Note and all actions arising out of or in
-------------
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
provisions of the State of California, or of any other state.
-4-
<PAGE>
IN WITNESS WHEREOF, Company has caused this Note to be issued as of
the date first written above.
CONCENTRIC NETWORK CORPORATION
a Florida corporation
By: /s/Henry R. Nothhaft
-------------------------------------
Henry R. Nothhaft
President and Chief Executive Officer
-5-
<PAGE>
EXHIBIT A
THIS NOTE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF
COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.
CONCENTRIC NETWORK CORPORATION
UNSECURED PROMISSORY NOTE
("NOTE")
$50,000 June 27, 1997
Cupertino, California
FOR VALUE RECEIVED Concentric Network Corporation, a Florida corporation
(the "Company"), promises to pay to KPCB Information Sciences Zaibatsu Fund VII
("Holder"), or its registered assigns, the principal sum of Fifty Thousand
Dollars ($50,000), or such lesser amount as shall equal the outstanding
principal amount hereof, together with interest from the date of this Note on
the unpaid principal balance at a rate equal to 10% per annum, computed on the
basis of the actual number of days elapsed and a year of 365 days. All unpaid
principal, together with any then unpaid and accrued interest and other amounts
payable hereunder, shall be due and payable on the earlier to occur of (i) five
(5) days after the closing of the Financing Event (as defined below) or (ii)
forty-five (45) days from the date first set forth above. This Note is the only
Note issued pursuant to the Note and Warrant Purchase Agreement of even date
herewith (as amended, modified or supplemented, the "Note Purchase Agreement")
between Company and the Holder. As used in this Note, "Financing Event" shall
mean the closing of a combination public offering of the Company's Common Stock
registered under the Securities Act of 1933, as amended, and private placement
resulting in aggregate gross proceeds to the Company of at least $40,000,000
(the "IPO").
The following is a statement of the rights of Holder and the conditions to
which this Note is subject, and to which Holder, by the acceptance of this Note,
agrees:
1. INTEREST. Accrued interest on this Note shall be payable on the
--------
maturity date of this Note.
2. PREPAYMENT. Upon written notice to the Holder, Company may prepay
----------
all or any portion of this Note without penalty.
3. EVENTS OF DEFAULT. The occurrence of any of the following shall
-----------------
constitute an "Event of Default" under this Note and the other Transaction
Documents:
<PAGE>
(a) Failure to Pay. Company shall fail to pay (i) when due any
--------------
principal payment on the due date hereunder or (ii) any interest or other
payment required under the terms of this Note or any other Transaction Document
on the date due and such payment shall not have been made within fifteen (15)
days of Company's receipt of Holder's written notice to Company of such failure
to pay; or
(b) Breaches of Material Covenants. Company shall fail to observe or
perform any material covenant, obligation, condition or agreement contained in
this Note or the other Transaction Documents (other than those specified in
Sections 6(a) and 6(b)) and (i) such failure shall continue for fifteen (15)
days, or (ii) if such failure is not curable within such fifteen (15) day
period, but is reasonably capable of cure within forty-five (45) days, either
(A) such failure shall continue for forty-five (45) days or (B) Company shall
not have commenced a cure in a manner reasonably satisfactory to Holder within
the initial fifteen (15) day period; or
(c) Representations and Warranties. Any representation, warranty, or
certificate made or furnished by or on behalf of Company to Holder in writing in
connection with this Note or any of the other Transaction Documents, or as an
inducement to Holder to enter into this Note and the other Transaction
Documents, shall be false, incorrect, incomplete or misleading in any material
respect when made or furnished; or
(d) Voluntary Bankruptcy or Insolvency Proceedings. Company shall
(i) apply for or consent to the appointment of a receiver, trustee, liquidator
or custodian of itself or of all or a substantial part of its property, (ii)
make a general assignment for the benefit of its or any of its creditors, (iii)
be dissolved or liquidated, (iv) become insolvent (as such term may be defined
or interpreted under any applicable statute), (v) commence a voluntary case or
other proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or consent to any such relief or to the
appointment of or taking possession of its property by any official in an
involuntary case or other proceeding commenced against it, or (vi) take any
action for the purpose of effecting any of the foregoing; or
(e) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings
for the appointment of a receiver, trustee, liquidator or custodian of Company
or of all or a substantial part of the property thereof, or an involuntary case
or other proceedings seeking liquidation, reorganization or other relief with
respect to Company or the debts thereof under any bankruptcy, insolvency or
other similar law now or hereafter in effect shall be commenced and an order for
relief entered or such proceeding shall not be dismissed or discharged within
thirty (30) days of commencement; or
4. RIGHTS OF HOLDER UPON DEFAULT. Upon the occurrence or existence of
-----------------------------
any Event of Default (other than an Event of Default, referred to in Sections
6(d) and 6(e) and at any time thereafter during the continuance of such Event of
Default, Holder may, by written notice to Company, declare all outstanding
Obligations payable by Company hereunder to be immediately due and payable
without presentment, demand, protest or any other notice of any kind, all of
which are hereby expressly waived, anything contained herein or in the other
Transaction Documents to the contrary notwithstanding. Upon the occurrence or
existence of any Event of Default described in Sections 6(d) and 6(e),
immediately and without notice, all outstanding Obligations payable by Company
hereunder shall automatically become
-2-
<PAGE>
immediately due and payable, without presentment, demand, protest or any other
notice of any kind, all of which are hereby expressly waived, anything contained
herein or in the other Transaction Documents to the contrary notwithstanding.
In addition to the foregoing remedies, upon the occurrence or existence of any
Event of Default, Holder may exercise any other right power or remedy granted to
it by the Transaction Documents or otherwise permitted to it by law, either by
suit in equity or by action at law, or both.
5. SUCCESSORS AND ASSIGNS. Subject to the restrictions on transfer
----------------------
described in Sections 8 and 9 below, the rights and obligations of Company and
Holder of this Note shall be binding upon and benefit the successors, assigns,
heirs, administrators and transferees of the parties.
6. WAIVER AND AMENDMENT. Any provision of this Note may be amended,
--------------------
waived or modified only upon the written consent of Company and the Holder.
7. TRANSFER OF THIS NOTE. With respect to any offer, sale or other
---------------------
disposition of this Note, Holder will give written notice to Company prior
thereto, describing briefly the manner thereof, together with a written opinion
of Holder's counsel, to the effect that such offer, sale or other distribution
may be effected without registration or qualification (under any federal or
state law then in effect). Upon receiving such written notice and reasonably
satisfactory opinion, Company, within seven (7) business days, shall notify
Holder that Holder may sell or otherwise dispose of this Note or such
securities, all in accordance with the terms of the notice delivered to Company.
If a determination has been made pursuant to this Section 8 that the opinion of
counsel for Holder is not reasonably satisfactory to Company, Company shall so
notify Holder promptly after such determination has been made. Each Note thus
transferred shall bear a legend as to the applicable restrictions on
transferability in order to ensure compliance with the Act, unless in the
opinion of counsel for Company such legend is not required in order to ensure
compliance with the Act. Company may issue stop transfer instructions to its
transfer agent in connection with such restrictions. Subject to the foregoing,
transfers of this Note shall be registered upon registration books maintained
for such purpose by or on behalf of Company as provided in the Note Purchase
Agreement. Prior to presentation of this Note for registration of transfer,
Company shall treat the registered holder hereof as the owner and holder of this
Note for the purpose of receiving all payments of principal and interest hereon
and for all other purposes whatsoever, whether or not this Note shall be overdue
and Company shall not be affected by notice to the contrary.
8 ASSIGNMENT BY COMPANY. Neither this Note nor any of the rights,
---------------------
interests or obligations hereunder may be assigned, in whole or in part, by
Company without the prior written consent of Holder except in connection with an
assignment in whole to a successor corporation to Company, provided that such
successor corporation acquires all or substantially all of Company's property
and assets and Holder's rights hereunder are not impaired.
9. NOTICES. Any notice, request or other communication required or
-------
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or mailed by registered or certified mail, postage
prepaid, or by recognized overnight courier or personal delivery at the
respective addresses of the parties as set forth in the Note Purchase Agreement
or on the register maintained by Company or by confirmed facsimile receipt. Any
party hereto may by notice so given
-3-
<PAGE>
change its address for future notice hereunder. Notice shall conclusively be
deemed to have been given when received.
10. PAYMENT. Payment shall be made in lawful tender of the United States.
-------
11. USURY. In the event any interest is paid on this Note which is deemed
-----
to be in excess of the then legal maximum rate, then that portion of the
interest payment representing an amount in excess of the then legal maximum rate
shall be deemed a payment of principal and applied against the principal of this
Note.
12. GOVERNING LAW. This Note and all actions arising out of or in
-------------
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
provisions of the State of California, or of any other state.
-4-
<PAGE>
IN WITNESS WHEREOF, Company has caused this Note to be issued as of
the date first written above.
CONCENTRIC NETWORK CORPORATION
a Florida corporation
By: /s/Henry R. Nothhaft
-------------------------------------
Henry R. Nothhaft
President and Chief Executive Officer
<PAGE>
EXHIBIT B
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE
EFFECTED WITHOUT (I) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (II) AN
OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY,
THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (III) RECEIPT OF NO-ACTION LETTERS
FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (IV) OTHERWISE COMPLYING WITH
THE PROVISIONS OF SECTION 7 OF THIS WARRANT.
June 27, 1997
CONCENTRIC NETWORK CORPORATION
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, KPCB Information Sciences Zaibatsu
Fund VII, is entitled to subscribe for and purchase, subject to the provisions
and upon the terms and conditions hereinafter set forth, that number of shares
of the fully paid and nonassessable Common Stock of Concentric Network
Corporation, a Florida corporation (the "Company") equal to the quotient
obtained by dividing: (i) 50% of the principal amount of the Note (as defined
below) held by the holder of this Warrant, by (ii) the initial offering price
per share to the public of the Financing Event. The Shares (as defined below)
shall be purchasable at a per share purchase price equal to fifty percent of the
public offering price per share (as defined below), (such price and such other
price as shall result, from time to time, from the adjustments specified in
Section 4 hereof is herein referred to as the "Warrant Price"). As used herein,
(a) the term "Financing Event" shall mean a combination public offering of the
Company's Common Stock registered under the Securities Act of 1933, as amended,
and private placement having aggregate gross proceeds to the Company of at least
$40,000,000 (the "IPO"), (b) the term "Date of Grant" shall mean June 27, 1997,
(c) the term "Other Warrants" shall mean any other warrants issued by the
Company in connection with the transaction with respect to which this Warrant
was issued, and any warrant issued upon transfer or partial exercise of this
Warrant, (d) the term "Shares" shall mean the Common Stock to be issued by the
Company hereunder and any stock into or for which any such Common Stock may
hereafter be converted or exchanged, (e) the term "Warrant" as used herein shall
be deemed to include Other Warrants unless the context clearly requires
otherwise, and (f) the term "Note" shall mean the note issued by the Company to
the holder of this Warrant pursuant to the Note and Warrant Purchase Agreement
dated June 27, 1997.
1. Term. The purchase right represented by this Warrant is exercisable,
----
in whole or in part, at any time and from time to time after the closing of the
IPO through the earliest to occur of
<PAGE>
(i) five years after the Date of Grant, or (ii) immediately prior to any
consolidation or merger of the Company with or into any entity, or any other
corporate reorganization in which the Company shall not be the continuing or
surviving entity of such consolidation, merger or reorganization or any
transaction, any series of related transactions in which in excess of 50% of
Company's voting power is transferred, or any sale of all or substantially all
of the assets of the Company, other than the proposed reincorporation of the
Company into Delaware through the merger of the Company with and into Concentric
Network Corporation, a Delaware Corporation.
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to
----------------------------------------------------
Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part and from time to time, at
the election of the holder hereof, by (a) the surrender of this Warrant (with
the notice of exercise substantially in the form attached hereto as Exhibit A-1
-----------
duly completed and executed) at the principal office of the Company and by the
payment to the Company, by certified or bank check, or by Wire Transfer to an
account designated by the Company (a "Wire Transfer") of an amount equal to the
then applicable Warrant Price multiplied by the number of Shares then being
purchased. The person or persons in whose name(s) any certificate(s)
representing the Shares shall be issuable upon exercise of this Warrant shall be
deemed to have become the holder(s) of record of, and shall be treated for all
purposes as the record holder(s) of, the shares represented thereby (and such
shares shall be deemed to have been issued) immediately prior to the close of
business on the date or dates upon which this Warrant is exercised. In the
event of any exercise of the rights represented by this Warrant, certificates
for the shares of stock so purchased shall be delivered to the holder hereof as
soon as possible and in any event within thirty (30) days after such exercise
and, unless this Warrant has been fully exercised or expired, a new Warrant
representing the portion of the Shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be issued to the holder
hereof as soon as possible and in any event within such thirty-day period.
3. Stock Fully Paid; Reservation of Shares. All Shares that may be
---------------------------------------
issued upon the exercise of the rights represented by this Warrant will, upon
issuance pursuant to the terms and conditions herein, be fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof. During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized, and
reserved for the purpose of the issue upon exercise of the purchase rights
evidenced by this Warrant, a sufficient number of shares of its capital stock to
provide for the exercise of the rights represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and kind
------------------------------------------------
of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
(a) Reclassification. In case of any reclassification or change of
----------------
securities of the class issuable upon exercise of this Warrant (other than a
change in par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination), the Company shall
duly execute and deliver to the holder of this Warrant a new Warrant (in form
and substance reasonably satisfactory to the holder of this Warrant), so that
the holder of this Warrant shall have the right to receive, at a total purchase
price not to exceed that payable upon the exercise
-2-
<PAGE>
of the unexercised portion of this Warrant, and in lieu of the Shares
theretofore issuable upon exercise of this Warrant, the kind and amount of
shares of stock, other securities, money and property receivable upon such
reclassification or change by a holder of the number of Shares then purchasable
under this Warrant. Such new Warrant shall provide for adjustments that shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Section 4. The provisions of this subparagraph (a) shall similarly apply to
successive reclassifications or changes.
(b) Subdivision or Combination of Shares. If the Company at any
------------------------------------
time while this Warrant remains outstanding and unexpired shall subdivide or
combine its outstanding shares of capital stock into which this Warrant is
exercisable, the Warrant Price shall be proportionately decreased in the case of
a subdivision or increased in the case of a combination, effective at the close
of business on the date the subdivision or combination becomes effective.
(c) Stock Dividends and Other Distributions. If the Company at any
---------------------------------------
time while this Warrant is outstanding and unexpired shall (i) pay a dividend
with respect to its capital stock issuable hereunder payable in the same class
or series of capital stock, or (ii) make any other distribution of capital stock
with respect to its capital stock (except any distribution specifically provided
for in Sections 4(a) and 4(b)), then the Warrant Price shall be adjusted, from
and after the date of determination of shareholders entitled to receive such
dividend or distribution, to that price determined by multiplying the Warrant
Price in effect immediately prior to such date of determination by a fraction
(i) the numerator of which shall be the total number of shares of the applicable
class or series of capital stock outstanding immediately prior to such dividend
or distribution, and (ii) the denominator of which shall be the total number of
shares of such class or series of capital stock outstanding immediately after
such dividend or distribution.
(d) Adjustment of Number of Shares. Upon each adjustment in the
------------------------------
Warrant Price, the number of Shares purchasable hereunder shall be adjusted, to
the nearest whole share, to the product obtained by multiplying the number of
Shares purchasable immediately prior to such adjustment in the Warrant Price by
a fraction, the numerator of which shall be the Warrant Price immediately prior
to such adjustment and the denominator of which shall be the Warrant Price
immediately thereafter.
5. Notice of Adjustments. Whenever the Warrant Price or the number of
---------------------
Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the
Company shall make a certificate signed by its chief financial officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Warrant Price and the number of Shares purchasable hereunder after giving effect
to such adjustment, and shall cause copies of such certificate to be mailed
(without regard to Section 12 hereof, by first class mail, postage prepaid) to
the holder of this Warrant at such holder's last known address.
6. Fractional Shares. No fractional Shares will be issued in connection
-----------------
with any exercise hereunder, but in lieu of such fractional shares the Company
shall make a cash payment therefor based
-3-
<PAGE>
on the fair market value of the Shares on the date of exercise as reasonably
determined in good faith by the Company's Board of Directors.
7. Compliance with Act; Disposition of Warrant or Shares.
-----------------------------------------------------
(a) Compliance with Act. The holder of this Warrant, by acceptance
-------------------
hereof, agrees that this Warrant, and the Shares to be issued upon exercise
hereof are being acquired for investment and that such holder will not offer,
sell or otherwise dispose of this Warrant, or any Shares except under
circumstances which will not result in a violation of the Act or any applicable
state securities laws. Upon exercise of this Warrant, unless the Shares being
acquired are registered under the Act and any applicable state securities laws
or an exemption from such registration is available, the holder hereof shall
confirm in writing that the Shares so purchased are being acquired for
investment and not with a view toward distribution or resale in violation of the
Act and shall confirm such other matters related thereto as may be reasonably
requested by the Company. This Warrant and all Shares issued upon exercise of
this Warrant (unless registered under the Act and any applicable state
securities laws) shall be stamped or imprinted with a legend in substantially
the following form:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO
SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION
STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL OR OTHER
EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM
THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING
WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE
SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY."
Said legend shall be removed by the Company, upon the request of a
holder, at such time as the restrictions on the transfer of the applicable
security shall have terminated. In addition, in connection with the issuance of
this Warrant, the holder specifically represents to the Company by acceptance of
this Warrant as follows:
1) The holder is aware of the Company's business affairs
and financial condition, and has acquired information about the Company
sufficient to reach an informed and knowledgeable decision to acquire
this Warrant. The holder is acquiring this Warrant for its own account
for investment purposes only and not with a view to, or for the resale
in connection with, any "distribution" thereof in violation of the Act.
2) The holder understands that this Warrant has not been
registered under the Act in reliance upon a specific exemption
therefrom, which
-4-
<PAGE>
exemption depends upon, among other things, the bona fide nature of the
holder's investment intent as expressed herein.
3) The holder further understands that this Warrant must be
held indefinitely unless subsequently registered under the Act and
qualified under any applicable state securities laws, or unless
exemptions from registration and qualification are otherwise available.
The holder is aware of the provisions of Rule 144, promulgated under the
Act.
(b) Disposition of Warrant or Shares. With respect to any offer,
--------------------------------
sale or other disposition of this Warrant or any Shares acquired pursuant to the
exercise of this Warrant prior to registration of such Warrant or Shares, the
holder hereof agrees to give written notice to the Company prior thereto,
describing briefly the manner thereof, together with a written opinion of such
holder's counsel, or other evidence, if reasonably requested by the Company, to
the effect that such offer, sale or other disposition may be effected without
registration or qualification (under the Act as then in effect or any federal or
state securities law then in effect) of this Warrant or the Shares and
indicating whether or not under the Act certificates for this Warrant or the
Shares to be sold or otherwise disposed of require any restrictive legend as to
applicable restrictions on transferability in order to ensure compliance with
such law. Promptly upon receiving such written notice and reasonably
satisfactory opinion or other evidence, if so requested, the Company, as
promptly as practicable but no later than fifteen (15) days after receipt of the
written notice, shall notify such holder that such holder may sell or otherwise
dispose of this Warrant or such Shares, all in accordance with the terms of the
notice delivered to the Company. If a determination has been made pursuant to
this Section 7(b) that the opinion of counsel for the holder or other evidence
is not reasonably satisfactory to the Company, the Company shall so notify the
holder promptly with details thereof after such determination has been made.
Notwithstanding the foregoing, this Warrant or such Shares may, as to such
federal laws, be offered, sold or otherwise disposed of in accordance with Rule
144 or 144A under the Act, provided that the Company shall have been furnished
with such information as the Company may reasonably request to provide a
reasonable assurance that the provisions of Rule 144 or 144A have been
satisfied. Each certificate representing this Warrant or the Shares thus
transferred (except a transfer pursuant to Rule 144 or 144A) shall bear a legend
as to the applicable restrictions on transferability in order to ensure
compliance with such laws, unless in the aforesaid opinion of counsel for the
holder, such legend is not required in order to ensure compliance with such
laws. The Company may issue stop transfer instructions to its transfer agent in
connection with such restrictions.
(c) Applicability of Restrictions. Neither any restrictions of any
-----------------------------
legend described in this Warrant nor the requirements of Section 7(b) above
shall apply to any transfer or grant of a security interest in, this Warrant (or
the Shares obtainable upon exercise thereof) or any part hereof (i) to a partner
of the holder if the holder is a partnership, or (ii) to a partnership of which
the holder is a partner; provided, however, in any such transfer, if applicable,
-------- -------
the transferee shall agree in writing to be bound by the terms of this Warrant
as if an original signatory hereto.
-5-
<PAGE>
8. Rights as Shareholders; Information. No holder of this Warrant, as
-----------------------------------
such, shall be entitled to vote or receive dividends or be deemed the holder of
Shares, nor shall anything contained herein be construed to confer upon the
holder of this Warrant, as such, any of the rights of a shareholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to shareholders at any meeting thereof, or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until this
Warrant shall have been exercised and the Shares purchasable upon the exercise
hereof shall have become deliverable, as provided herein. Notwithstanding the
foregoing, the Company will transmit to the holder of this Warrant such
information, documents and reports as are generally distributed to the holders
of any class or series of the securities of the Company concurrently with the
distribution thereof to the shareholders.
9. Right to Convert Warrant into Stock: Net Issuance.
--------------------------------------------------
(a) Right to Convert. In lieu of exercising this Warrant in the
----------------
manner provided above in Section 2, the Holder shall have the right to convert
this Warrant, in whole or in part, at any time and from time to time after the
closing of the IPO and prior to the expiration date of the Warrant, by the
surrender of this Warrant and the Notice of Exercise form attached hereto duly
executed to the office of the Company at the address set forth herein (or such
other office or agency of the Company as it may designate by notice in writing
to the registered holder hereof at the address of such holder appearing on the
books of the Company), into Shares as provided in this Section 9. Upon exercise
of this conversion right, the holder hereof shall be entitled to receive that
number of Shares of the Company equal to the quotient obtained by dividing [(A -
B)(X)] by (A), where:
A = the initial price per share to the public in the Financing Event.
B = the Warrant Price.
X = the number of Shares as to which this Warrant is being converted.
If the above calculation results in a negative number, then no Shares shall
be issued or issuable upon conversion of this Warrant.
Upon conversion of this Warrant in accordance with this Section 2, the
registered holder hereof shall be entitled to receive a certificate for the
number of shares of Warrant Stock determined in accordance with the foregoing,
and a new Warrant in substantially identical form and dated as of such
conversion for the purchase of that number of shares of Warrant Stock equal to
the difference, if any, between the number of shares of Warrant Stock subject
hereto and the number of shares of Warrant Stock as to which this Warrant is so
converted.
No fractional shares shall be issuable upon exercise of the Conversion
Right, and, if the number of shares to be issued determined in accordance with
the foregoing formula is other than a whole number, the Company shall pay to the
holder an amount in cash equal to the fair market value of the resulting
fractional share on the Conversion Date (as hereinafter defined). For purposes
of
-6-
<PAGE>
Section 9 of this Warrant, shares issued pursuant to the Conversion Right shall
be treated as if they were issued upon the exercise of this Warrant.
(b) Method of Exercise. The Conversion Right may be exercised by
------------------
the holder by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right and indicating the number of shares
subject to this Warrant which are being surrendered (referred to in Section 9(a)
hereof as the Converted Warrant Shares) in exercise of the Conversion Right.
Such conversion shall be effective upon receipt by the Company of this Warrant
together with the aforesaid written statement, or on such later date as is
specified therein (the "Conversion Date"), and, at the election of the holder
hereof, may be made contingent upon the closing of the sale of the Company's
Common Stock to the public in a public offering pursuant to a Registration
Statement under the Act (a "Public Offering"). Certificates for the shares
issuable upon exercise of the Conversion Right and, if applicable, a new warrant
evidencing the balance of the shares remaining subject to this Warrant, shall be
issued as of the Conversion Date and shall be delivered to the holder within
thirty (30) days following the Conversion Date.
10. Representations and Warranties. The Company represents and warrants
------------------------------
to the holder of this Warrant as follows:
(a) This Warrant has been duly authorized and executed by the
Company and is a valid and binding obligation of the Company enforceable in
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and the rules of law or
principles at equity governing specific performance, injunctive relief and other
equitable remedies;
(b) The Shares have been, or will be upon the closing of the IPO or
Private Financing, duly authorized and reserved for issuance by the Company and,
when issued in accordance with the terms hereof will be validly issued, fully
paid and non-assessable;
(c) The rights, preferences, privileges and restrictions granted to
or imposed upon the Shares and the holders thereof are as set forth in the
Amended and Restated Articles of Incorporation of the Company as they have been
and may be amended from time to time;
(d) The execution and delivery of this Warrant are not, and the
issuance of the Shares upon exercise of this Warrant in accordance with the
terms hereof will not be, inconsistent with the Company's Amended and Restated
Articles of Incorporation or Bylaws, as they have been and may be amended from
time to time, do not and will not contravene any law, governmental rule or
regulation, judgment or order applicable to the Company, and do not and will not
conflict with or contravene any provision of, or constitute a default under, any
indenture, mortgage, contract or other instrument of which the Company is a
party or by which it is bound or require the consent or approval of, the giving
of notice to, the registration or filing with or the taking of any action in
respect of or by, any Federal, state or local government authority or agency or
other person, except for the filing of notices pursuant to federal and state
securities laws, which filings will be effected by the time required thereby;
and
-7-
<PAGE>
(e) There are no actions, suits, audits, investigations or
proceedings pending or, to the knowledge of the Company, threatened against the
Company in any court or before any governmental commission, board or authority
which, if adversely determined, will have a material adverse effect on the
ability of the Company to perform its obligations under this Warrant.
11. Modification and Waiver. This Warrant and any provision hereof may be
-----------------------
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
12. Notices. Any notice, request, communication or other document
-------
required or permitted to be given or delivered to the holder hereof or the
Company shall be delivered, or shall be sent by certified or registered mail,
postage prepaid, to each such holder at its address as shown on the books of the
Company or to the Company at the address indicated therefor on the signature
page of this Warrant.
13. Lost Warrants or Stock Certificates. The Company covenants to the
-----------------------------------
holder hereof that, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to the Company, or in the case
of any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, the Company will make and deliver a new Warrant or stock
certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated
Warrant or stock certificate.
14. Descriptive Headings. The descriptive headings of the several
--------------------
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. The language in this Warrant shall be
construed as to its fair meaning without regard to which party drafted this
Warrant.
15. Governing Law. This Warrant shall be construed and enforced in
-------------
accordance with, and the rights of the parties shall be governed by, the laws of
the State of New York.
16. Severability. The invalidity or unenforceability of any provision of
------------
this Warrant in any jurisdiction shall not affect the validity or enforceability
of such provision in any other jurisdiction, or affect any other provision of
this Warrant, which shall remain in full force and effect.
-8-
<PAGE>
18. Entire Agreement; Modification. This Warrant constitutes the entire
------------------------------
agreement between the parties pertaining to the subject matter contained in it
and supersedes all prior and contemporaneous agreements, representations, and
undertakings of the parties, whether oral or written, with respect to such
subject matter.
CONCENTRIC NETWORK CORPORATION
a Florida corporation
By: /s/Henry R. Nothhaft
-------------------------------
Name:
----------------------------
Title:
----------------------------
Address:
--------------------------
-------------------------------
-9-
<PAGE>
EXHIBIT A-1
NOTICE OF EXERCISE
------------------
To: CONCENTRIC NETWORK CORPORATION (the "Company")
1. The undersigned hereby:
[_] elects to purchase __________ shares of Common Stock of the
Company pursuant to the terms of the attached Warrant, and tenders herewith
payment of the purchase price of such shares in full; or
[_] elects to exercise its net issuance rights pursuant to Section
9 of the attached Warrant with respect to __________ shares of Common
Stock.
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name or names as are specified
below:
________________________________________
(Name)
________________________________________
(Address)
________________________________________
(Address)
3. The undersigned represents that the aforesaid shares being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, all except as in
compliance with applicable securities laws.
_______________
(Date)
(Signature)
<PAGE>
EXHIBIT B
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE
EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN
OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY,
THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS
FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH
THE PROVISIONS OF SECTION 7 OF THIS WARRANT.
June 27, 1997
CONCENTRIC NETWORK CORPORATION
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, KPCB Information Sciences Zaibatsu
Fund VII, is entitled to subscribe for and purchase, subject to the provisions
and upon the terms and conditions hereinafter set forth, that number of shares
of the fully paid and nonassessable Common Stock of Concentric Network
Corporation, a Florida corporation (the "Company") equal to the quotient
obtained by dividing: (i) 50% of the principal amount of the Note (as defined
below) held by the holder of this Warrant, by (ii) the initial offering price
per share to the public of the Financing Event. The Shares (as defined below)
shall be purchasable at a per share purchase price equal to fifty percent of the
public offering price per share (as defined below), (such price and such other
price as shall result, from time to time, from the adjustments specified in
Section 4 hereof is herein referred to as the "Warrant Price"). As used herein,
(a) the term "Financing Event" shall mean a combination public offering of the
Company's Common Stock registered under the Securities Act of 1933, as amended,
and private placement having aggregate gross proceeds to the Company of at least
$40,000,000 (the "IPO"), (b) the term "Date of Grant" shall mean June 27, 1997,
(c) the term "Other Warrants" shall mean any other warrants issued by the
Company in connection with the transaction with respect to which this Warrant
was issued, and any warrant issued upon transfer or partial exercise of this
Warrant, (d) the term "Shares" shall mean the Common Stock to be issued by the
Company hereunder and any stock into or for which any such Common Stock may
hereafter be converted or exchanged, (e) the term "Warrant" as used herein shall
be deemed to include Other Warrants unless the context clearly requires
otherwise, and (f) the term "Note" shall mean the note issued by the Company to
the holder of this Warrant pursuant to the Note and Warrant Purchase Agreement
dated June 27, 1997.
1. Term. The purchase right represented by this Warrant is exercisable,
----
in whole or in part, at any time and from time to time after the closing of the
IPO through the earliest to occur of
<PAGE>
(i) five years after the Date of Grant, or (ii) immediately prior to any
consolidation or merger of the Company with or into any entity, or any other
corporate reorganization in which the Company shall not be the continuing or
surviving entity of such consolidation, merger or reorganization or any
transaction, any series of related transactions in which in excess of 50% of
Company's voting power is transferred, or any sale of all or substantially all
of the assets of the Company, other than the proposed reincorporation of the
Company into Delaware through the merger of the Company with and into Concentric
Network Corporation, a Delaware Corporation.
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to
----------------------------------------------------
Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part and from time to time, at
the election of the holder hereof, by (a) the surrender of this Warrant (with
the notice of exercise substantially in the form attached hereto as Exhibit A-1
-----------
duly completed and executed) at the principal office of the Company and by the
payment to the Company, by certified or bank check, or by Wire Transfer to an
account designated by the Company (a "Wire Transfer") of an amount equal to the
then applicable Warrant Price multiplied by the number of Shares then being
purchased. The person or persons in whose name(s) any certificate(s)
representing the Shares shall be issuable upon exercise of this Warrant shall be
deemed to have become the holder(s) of record of, and shall be treated for all
purposes as the record holder(s) of, the shares represented thereby (and such
shares shall be deemed to have been issued) immediately prior to the close of
business on the date or dates upon which this Warrant is exercised. In the
event of any exercise of the rights represented by this Warrant, certificates
for the shares of stock so purchased shall be delivered to the holder hereof as
soon as possible and in any event within thirty (30) days after such exercise
and, unless this Warrant has been fully exercised or expired, a new Warrant
representing the portion of the Shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be issued to the holder
hereof as soon as possible and in any event within such thirty-day period.
3. Stock Fully Paid; Reservation of Shares. All Shares that may be
---------------------------------------
issued upon the exercise of the rights represented by this Warrant will, upon
issuance pursuant to the terms and conditions herein, be fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof. During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized, and
reserved for the purpose of the issue upon exercise of the purchase rights
evidenced by this Warrant, a sufficient number of shares of its capital stock to
provide for the exercise of the rights represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and kind
------------------------------------------------
of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
(a) Reclassification. In case of any reclassification or change of
----------------
securities of the class issuable upon exercise of this Warrant (other than a
change in par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination), the Company shall
duly execute and deliver to the holder of this Warrant a new Warrant (in form
and substance reasonably satisfactory to the holder of this Warrant), so that
the holder of this Warrant
-2-
<PAGE>
shall have the right to receive, at a total purchase price not to exceed that
payable upon the exercise of the unexercised portion of this Warrant, and in
lieu of the Shares theretofore issuable upon exercise of this Warrant, the kind
and amount of shares of stock, other securities, money and property receivable
upon such reclassification or change by a holder of the number of Shares then
purchasable under this Warrant. Such new Warrant shall provide for adjustments
that shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 4. The provisions of this subparagraph (a) shall
similarly apply to successive reclassifications or changes.
(b) Subdivision or Combination of Shares. If the Company at any time
------------------------------------
while this Warrant remains outstanding and unexpired shall subdivide or combine
its outstanding shares of capital stock into which this Warrant is exercisable,
the Warrant Price shall be proportionately decreased in the case of a
subdivision or increased in the case of a combination, effective at the close of
business on the date the subdivision or combination becomes effective.
(c) Stock Dividends and Other Distributions. If the Company at any
---------------------------------------
time while this Warrant is outstanding and unexpired shall (i) pay a dividend
with respect to its capital stock issuable hereunder payable in the same class
or series of capital stock, or (ii) make any other distribution of capital
stock with respect to its capital stock (except any distribution specifically
provided for in Sections 4(a) and 4(b)), then the Warrant Price shall be
adjusted, from and after the date of determination of shareholders entitled to
receive such dividend or distribution, to that price determined by multiplying
the Warrant Price in effect immediately prior to such date of determination by
a fraction (i) the numerator of which shall be the total number of shares of
the applicable class or series of capital stock outstanding immediately prior
to such dividend or distribution, and (ii) the denominator of which shall be
the total number of shares of such class or series of capital stock
outstanding immediately after such dividend or distribution.
(d) Adjustment of Number of Shares. Upon each adjustment in the
------------------------------
Warrant Price, the number of Shares purchasable hereunder shall be adjusted,
to the nearest whole share, to the product obtained by multiplying the number
of Shares purchasable immediately prior to such adjustment in the Warrant
Price by a fraction, the numerator of which shall be the Warrant Price
immediately prior to such adjustment and the denominator of which shall be the
Warrant Price immediately thereafter.
5. Notice of Adjustments. Whenever the Warrant Price or the number of
---------------------
Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the
Company shall make a certificate signed by its chief financial officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Warrant Price and the number of Shares purchasable hereunder after giving effect
to such adjustment, and shall cause copies of such certificate to be mailed
(without regard to Section 12 hereof, by first class mail, postage prepaid) to
the holder of this Warrant at such holder's last known address.
6. Fractional Shares. No fractional Shares will be issued in connection
-----------------
with any exercise hereunder, but in lieu of such fractional shares the Company
shall make a cash payment
-3-
<PAGE>
therefor based on the fair market value of the Shares on the date of exercise as
reasonably determined in good faith by the Company's Board of Directors.
7. Compliance with Act; Disposition of Warrant or Shares.
-----------------------------------------------------
(a) Compliance with Act. The holder of this Warrant, by acceptance
-------------------
hereof, agrees that this Warrant, and the Shares to be issued upon exercise
hereof are being acquired for investment and that such holder will not offer,
sell or otherwise dispose of this Warrant, or any Shares except under
circumstances which will not result in a violation of the Act or any applicable
state securities laws. Upon exercise of this Warrant, unless the Shares being
acquired are registered under the Act and any applicable state securities laws
or an exemption from such registration is available, the holder hereof shall
confirm in writing that the Shares so purchased are being acquired for
investment and not with a view toward distribution or resale in violation of the
Act and shall confirm such other matters related thereto as may be reasonably
requested by the Company. This Warrant and all Shares issued upon exercise of
this Warrant (unless registered under the Act and any applicable state
securities laws) shall be stamped or imprinted with a legend in substantially
the following form:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION
MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO,
(ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE
COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION
LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE
COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE
SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY."
Said legend shall be removed by the Company, upon the request of a holder,
at such time as the restrictions on the transfer of the applicable security
shall have terminated. In addition, in connection with the issuance of this
Warrant, the holder specifically represents to the Company by acceptance of this
Warrant as follows:
1) The holder is aware of the Company's business affairs and
financial condition, and has acquired information about the Company sufficient
to reach an informed and knowledgeable decision to acquire this Warrant. The
holder is acquiring this Warrant for its own account for investment purposes
only and not with a view to, or for the resale in connection with, any
"distribution" thereof in violation of the Act.
2) The holder understands that this Warrant has not been
registered under the Act in reliance upon a specific exemption therefrom,
which
-4-
<PAGE>
exemption depends upon, among other things, the bona fide nature of the holder's
investment intent as expressed herein.
3) The holder further understands that this Warrant must be held
indefinitely unless subsequently registered under the Act and qualified under
any applicable state securities laws, or unless exemptions from registration and
qualification are otherwise available. The holder is aware of the provisions of
Rule 144, promulgated under the Act.
(b) Disposition of Warrant or Shares. With respect to any offer,
--------------------------------
sale or other disposition of this Warrant or any Shares acquired pursuant to the
exercise of this Warrant prior to registration of such Warrant or Shares, the
holder hereof agrees to give written notice to the Company prior thereto,
describing briefly the manner thereof, together with a written opinion of such
holder's counsel, or other evidence, if reasonably requested by the Company, to
the effect that such offer, sale or other disposition may be effected without
registration or qualification (under the Act as then in effect or any federal or
state securities law then in effect) of this Warrant or the Shares and
indicating whether or not under the Act certificates for this Warrant or the
Shares to be sold or otherwise disposed of require any restrictive legend as to
applicable restrictions on transferability in order to ensure compliance with
such law. Promptly upon receiving such written notice and reasonably
satisfactory opinion or other evidence, if so requested, the Company, as
promptly as practicable but no later than fifteen (15) days after receipt of the
written notice, shall notify such holder that such holder may sell or otherwise
dispose of this Warrant or such Shares, all in accordance with the terms of the
notice delivered to the Company. If a determination has been made pursuant to
this Section 7(b) that the opinion of counsel for the holder or other evidence
is not reasonably satisfactory to the Company, the Company shall so notify the
holder promptly with details thereof after such determination has been made.
Notwithstanding the foregoing, this Warrant or such Shares may, as to such
federal laws, be offered, sold or otherwise disposed of in accordance with Rule
144 or 144A under the Act, provided that the Company shall have been furnished
with such information as the Company may reasonably request to provide a
reasonable assurance that the provisions of Rule 144 or 144A have been
satisfied. Each certificate representing this Warrant or the Shares thus
transferred (except a transfer pursuant to Rule 144 or 144A) shall bear a legend
as to the applicable restrictions on transferability in order to ensure
compliance with such laws, unless in the aforesaid opinion of counsel for the
holder, such legend is not required in order to ensure compliance with such
laws. The Company may issue stop transfer instructions to its transfer agent in
connection with such restrictions.
(c) Applicability of Restrictions. Neither any restrictions of any
-----------------------------
legend described in this Warrant nor the requirements of Section 7(b) above
shall apply to any transfer or grant of a security interest in, this Warrant
(or the Shares obtainable upon exercise thereof) or any part hereof (i) to a
partner of the holder if the holder is a partnership, or (ii) to a partnership
of which the holder is a partner; provided, however, in any such transfer, if
-------- -------
applicable, the transferee shall agree in writing to be bound by the terms of
this Warrant as if an original signatory hereto.
-5-
<PAGE>
8. Rights as Shareholders; Information. No holder of this Warrant, as
-----------------------------------
such, shall be entitled to vote or receive dividends or be deemed the holder of
Shares, nor shall anything contained herein be construed to confer upon the
holder of this Warrant, as such, any of the rights of a shareholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to shareholders at any meeting thereof, or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until this
Warrant shall have been exercised and the Shares purchasable upon the exercise
hereof shall have become deliverable, as provided herein. Notwithstanding the
foregoing, the Company will transmit to the holder of this Warrant such
information, documents and reports as are generally distributed to the holders
of any class or series of the securities of the Company concurrently with the
distribution thereof to the shareholders.
9. Right to Convert Warrant into Stock: Net Issuance.
--------------------------------------------------
(a) Right to Convert. In lieu of exercising this Warrant in the
----------------
manner provided above in Section 2, the Holder shall have the right to convert
this Warrant, in whole or in part, at any time and from time to time after the
closing of the IPO and prior to the expiration date of the Warrant, by the
surrender of this Warrant and the Notice of Exercise form attached hereto duly
executed to the office of the Company at the address set forth herein (or such
other office or agency of the Company as it may designate by notice in writing
to the registered holder hereof at the address of such holder appearing on the
books of the Company), into Shares as provided in this Section 9. Upon
exercise of this conversion right, the holder hereof shall be entitled to
receive that number of Shares of the Company equal to the quotient obtained by
dividing [(A -B)(X)] by (A), where:
A = the initial price per share to the public in the Financing Event.
B = the Warrant Price.
X = the number of Shares as to which this Warrant is being converted.
If the above calculation results in a negative number, then no Shares shall
be issued or issuable upon conversion of this Warrant.
Upon conversion of this Warrant in accordance with this Section 2, the
registered holder hereof shall be entitled to receive a certificate for the
number of shares of Warrant Stock determined in accordance with the foregoing,
and a new Warrant in substantially identical form and dated as of such
conversion for the purchase of that number of shares of Warrant Stock equal to
the difference, if any, between the number of shares of Warrant Stock subject
hereto and the number of shares of Warrant Stock as to which this Warrant is so
converted.
No fractional shares shall be issuable upon exercise of the Conversion
Right, and, if the number of shares to be issued determined in accordance with
the foregoing formula is other than a whole number, the Company shall pay to the
holder an amount in cash equal to the fair market value of the resulting
fractional share on the Conversion Date (as hereinafter defined). For purposes
of
-6-
<PAGE>
Section 9 of this Warrant, shares issued pursuant to the Conversion Right shall
be treated as if they were issued upon the exercise of this Warrant.
(b) Method of Exercise. The Conversion Right may be exercised by the
------------------
holder by the surrender of this Warrant at the principal office of the Company
together with a written statement specifying that the holder thereby intends to
exercise the Conversion Right and indicating the number of shares subject to
this Warrant which are being surrendered (referred to in Section 9(a) hereof as
the Converted Warrant Shares) in exercise of the Conversion Right. Such
conversion shall be effective upon receipt by the Company of this Warrant
together with the aforesaid written statement, or on such later date as is
specified therein (the "Conversion Date"), and, at the election of the holder
hereof, may be made contingent upon the closing of the sale of the Company's
Common Stock to the public in a public offering pursuant to a Registration
Statement under the Act (a "Public Offering"). Certificates for the shares
issuable upon exercise of the Conversion Right and, if applicable, a new warrant
evidencing the balance of the shares remaining subject to this Warrant, shall be
issued as of the Conversion Date and shall be delivered to the holder within
thirty (30) days following the Conversion Date.
10. Representations and Warranties. The Company represents and warrants
------------------------------
to the holder of this Warrant as follows:
(a) This Warrant has been duly authorized and executed by the
Company and is a valid and binding obligation of the Company enforceable in
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and the rules of law or
principles at equity governing specific performance, injunctive relief and
other equitable remedies;
(b) The Shares have been, or will be upon the closing of the IPO or
Private Financing, duly authorized and reserved for issuance by the Company and,
when issued in accordance with the terms hereof will be validly issued, fully
paid and non-assessable;
(c) The rights, preferences, privileges and restrictions granted to or
imposed upon the Shares and the holders thereof are as set forth in the Amended
and Restated Articles of Incorporation of the Company as they have been and may
be amended from time to time;
(d) The execution and delivery of this Warrant are not, and the
issuance of the Shares upon exercise of this Warrant in accordance with the
terms hereof will not be, inconsistent with the Company's Amended and Restated
Articles of Incorporation or Bylaws, as they have been and may be amended from
time to time, do not and will not contravene any law, governmental rule or
regulation, judgment or order applicable to the Company, and do not and will
not conflict with or contravene any provision of, or constitute a default
under, any indenture, mortgage, contract or other instrument of which the
Company is a party or by which it is bound or require the consent or approval
of, the giving of notice to, the registration or filing with or the taking of
any action in respect of or by, any Federal, state or local government
authority or agency or other person, except
-7-
<PAGE>
for the filing of notices pursuant to federal and state securities laws, which
filings will be effected by the time required thereby; and
(e) There are no actions, suits, audits, investigations or proceedings
pending or, to the knowledge of the Company, threatened against the Company in
any court or before any governmental commission, board or authority which, if
adversely determined, will have a material adverse effect on the ability of the
Company to perform its obligations under this Warrant.
11. Modification and Waiver. This Warrant and any provision hereof may be
-----------------------
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
12. Notices. Any notice, request, communication or other document
-------
required or permitted to be given or delivered to the holder hereof or the
Company shall be delivered, or shall be sent by certified or registered mail,
postage prepaid, to each such holder at its address as shown on the books of the
Company or to the Company at the address indicated therefor on the signature
page of this Warrant.
13. Lost Warrants or Stock Certificates. The Company covenants to the
-----------------------------------
holder hereof that, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to the Company, or in the case
of any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, the Company will make and deliver a new Warrant or stock
certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated
Warrant or stock certificate.
14. Descriptive Headings. The descriptive headings of the several
--------------------
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. The language in this Warrant shall be
construed as to its fair meaning without regard to which party drafted this
Warrant.
15. Governing Law. This Warrant shall be construed and enforced in
-------------
accordance with, and the rights of the parties shall be governed by, the laws of
the State of New York.
16. Severability. The invalidity or unenforceability of any provision of
------------
this Warrant in any jurisdiction shall not affect the validity or enforceability
of such provision in any other jurisdiction, or affect any other provision of
this Warrant, which shall remain in full force and effect.
-8-
<PAGE>
18. Entire Agreement; Modification. This Warrant constitutes the entire
------------------------------
agreement between the parties pertaining to the subject matter contained in it
and supersedes all prior and contemporaneous agreements, representations, and
undertakings of the parties, whether oral or written, with respect to such
subject matter.
CONCENTRIC NETWORK CORPORATION
a Florida corporation
By: /s/Henry R. Nothhaft
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
Address:
---------------------------------
---------------------------------
-9-
<PAGE>
EXHIBIT A-1
NOTICE OF EXERCISE
------------------
To: CONCENTRIC NETWORK CORPORATION (the "Company")
1. The undersigned hereby:
[_] elects to purchase __________ shares of Common Stock of the
Company pursuant to the terms of the attached Warrant, and tenders herewith
payment of the purchase price of such shares in full; or
[_] elects to exercise its net issuance rights pursuant to Section 9
of the attached Warrant with respect to __________ shares of Common Stock.
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name or names as are specified
below:
________________________________________
(Name)
________________________________________
(Address)
________________________________________
(Address)
3. The undersigned represents that the aforesaid shares being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, all except as in
compliance with applicable securities laws.
_______________
(Date)
___________________________________________
(Signature)
<PAGE>
EXHIBIT 11.1
CONCENTRIC NETWORK CORPORATION
STATEMENT REGARDING THE COMPUTATION OF PER SHARE LOSS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTH PERIOD
DECEMBER 31, ENDED MARCH 31,
--------------------------- --------------------
1994 1995 1996 1996 1997
------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss................... $(4,290) $(22,008) $(66,381) $(10,380) $(14,681)
======= ======== ======== ========= =========
Weighted average common
shares outstanding........ 1,342 1,331 1,390 1,388 1,394
Common equivalent shares
from issuances of options,
warrants and common stock
during the twelve month
period prior to the
Company's proposed initial
public offering........... 631 631 631 631 631
------- -------- -------- --------- ---------
Shares used in computing
net loss per share........ 1,973 1,962 2,021 2,019 2,025
======= ======== ======== ========= =========
Net loss per share......... $ (2.18) $ (11.22) $ (32.85) $ (5.14) $ (7.25)
======= ======== ======== ========= =========
Convertible preferred stock
.......................... 3,546 5,373
-------- ---------
Pro forma weighted average
shares outstanding........ 5,567 7,398
======== =========
Pro forma net loss per
share..................... $ (11.92) $ (1.98)
======== =========
</TABLE>
<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 5, as to which the date is June 23,
1997, and Note 10, as to which the date is June 30, 1997), in Amendment No. 3
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
July , 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 30, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<CASH> 17,657 2,841
<SECURITIES> 0 0
<RECEIVABLES> 1,769 2,022
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 21,228 6,853
<PP&E> 57,804 64,328
<DEPRECIATION> 9,877 11,101
<TOTAL-ASSETS> 70,722 61,438
<CURRENT-LIABILITIES> 32,096 31,558
<BONDS> 0 0
5,150 5,150
95,215 96,323
<COMMON> 1,850 1,958
<OTHER-SE> (94,140) (108,900)
<TOTAL-LIABILITY-AND-EQUITY> 70,722 61,438
<SALES> 0 0
<TOTAL-REVENUES> 15,648 9,154
<CGS> 0 0
<TOTAL-COSTS> 56,266 15,744
<OTHER-EXPENSES> 22,503 7,021
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,260 1,070
<INCOME-PRETAX> (66,381) (14,681)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (66,381) (14,681)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (66,381) (14,681)
<EPS-PRIMARY> (11.92) (1.98)
<EPS-DILUTED> 0 0
</TABLE>
