<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 16, 1997
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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
ADELE C. FREEDMAN BROBECK, PHLEGER & HARRISON LLP
VALERIE SCHULTHIES TWO EMBARCADERO PLACE
PAUL B. SHINN 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. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value
$0.001 per share...... 3,450,000 $12.00 $41,400,000 $12,546
</TABLE>
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(1) Includes 450,000 shares which the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee. The estimate is made pursuant to Rule 457 of the
Securities Act of 1933, as amended.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 16, 1997
3,000,000 SHARES
CONCENTRIC NETWORK CORPORATION
COMMON STOCK
-----------
All of the 3,000,000 shares of Common Stock offered hereby are being sold
by Concentric Network Corporation ("Concentric" or the "Company"). Prior to
this offering, there has been no public market for the Common Stock of the
Company. It is currently estimated that the initial public offering price will
be between $10.00 and $12.00 per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
The Company has filed an application to have its Common Stock approved for
quotation on the Nasdaq National Market under the symbol "CNCX."
Concurrently with the closing of this offering, certain strategic investors
have agreed to purchase directly from the Company shares of Common Stock having
an aggregate purchase price of approximately $15.0 million. All of such shares
will be unregistered shares purchased at the Price to Public set forth below.
See "Direct Placements."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
</TABLE>
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(1) For information regarding indemnification of Underwriters, see
"Underwriting."
(2) Before deducting expenses of the offering payable by the Company, estimated
at $750,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days from the date hereof, to purchase up to 450,000 additional shares of
Common Stock on the same terms set forth above, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public will be $ , the Underwriting Discounts and Commissions will be
$ , and Proceeds to Company will be $ . Including the Direct
Placements, the total Proceeds to Company will be $ , or $ if the
over-allotment is exercised in full. See "Underwriting."
-----------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole and in part and to certain other
conditions. It is expected that delivery of such shares will be made through
the offices of , New York, New York on or about , 1997.
-----------
, 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 the conversion of all shares of
Class B Common Stock into shares of Common Stock, which will occur prior to the
closing of the offering, and (iv) assumes no exercise of the Underwriters'
over-allotment option. See "Description of Capital Stock" and "Underwriting."
In addition, all share numbers herein assume that no stockholder receiving the
Rescission Offer, which Rescission Offer will be made as promptly as
practicable following the closing of the offering, exercises its right to
rescind its purchase of shares of the Company's Common Stock. See "Rescission
Offers." Certain terms used in this Prospectus are defined in the Glossary of
Terms beginning on page G-1.
THE COMPANY
Concentric provides tailored, value-added Internet Protocol ("IP") based
network services for businesses and consumers. To provide these services, the
Company utilizes its low/fixed latency, high-throughput network, employing its
advanced network architecture and the Internet. Concentric's service offerings
for enterprises include virtual private networks ("VPNs"), dedicated access
facilities ("DAFs") and Web hosting services. These services enable enterprises
to take advantage of standard Internet tools such as browsers and high-
performance servers for customized data communications within an enterprise and
between an enterprise and its suppliers, partners and customers. These services
combine the cost advantages, nationwide access and standard protocols of public
networks with the customization, high performance, reliability and security of
private networks. Among the current enterprise customers are Acer America
Corporation, Inc., Intuit, Inc., Total Entertainment Network, WebTV Networks,
Inc. and Ziff-Davis Publishing Co. Concentric's revenue from enterprise
customers accounted for 53.9% and 35.0% of the Company's revenue for the three
months ended March 31, 1997 and the year ended December 31, 1996, respectively.
Concentric's service offerings for consumers and small office/home office
customers include local Internet dial-up access, Web hosting services and
online multiplayer gaming.
Industry analysts expect the market size for both value-added IP data
networking services and Internet access to grow rapidly as businesses and
consumers increase their use of the Internet, intranets and privately managed
IP networks. The total market for these services is projected to grow from $1.2
billion in 1996 to approximately $22.7 billion in the year 2000, with
approximately $10.4 billion in the enterprise market segment and $12.3 billion
in the consumer market segment.
The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, SuperPOPs in 19 major metropolitan areas and 150
secondary and tertiary POPs in other cities, allowing dial-up network access in
the U.S. and Canada. In addition, the Company can provide analog dial-up, frame
relay, fractional T-1, T-1 and DS3 access to the network. The Concentric
network is engineered and managed to provide superior quality of service,
balancing several key performance criteria. The Company provides guaranteed
levels of service for DAFs to enterprise customers, and targets performance
benchmarks for connection success rates, latency levels and throughput for all
of its service offerings. Concentric also believes that a major advantage of
its network architecture is its ability to perform adaptive call processing
("ACP"), which is designed to enable the tuning of network parameters and
traffic routing to meet the latency, throughput, security, and reliability
requirements of a specific customer or application on a call-by-call basis.
Concentric is currently deploying the ACP technology in its network and is
planning to commercially introduce these capabilities during the second half of
1997.
In addition to strong network performance capabilities, the Company believes
that several factors distinguish its ability to provide value-added network
services. These factors include: (i) excellent service quality; (ii) rapid
development time and flexibility in meeting custom applications requirements;
(iii) responsive customer support and
3
<PAGE>
effective account management, available 24 hours per day, seven days per week
through the Company's 142 customer service personnel; and (iv) the Company's
technical expertise in devising cost-effective network solutions for customers.
The Company's objective is to become the leading provider of value-added IP-
based network services worldwide. In order to achieve its goal, the Company is
implementing business strategies which capitalize on a number of opportunities
in the marketplace and a large and growing IP network access market. Key
strategies include: (i) rapidly providing cost-effective, tailored network
solutions; (ii) optimizing network utilization; (iii) employing leveraged
marketing through strategic partners; (iv) offering next generation network
services; and (v) deploying network services internationally.
The Company aggressively pursues strategic alliances with a variety of
companies. Key partners currently include Bay Networks, Inc., Microsoft
Corporation, Netscape Communications, Inc., PictureTel Corporation, Racal-
Datacom, Inc. and TMI Telemedia International, Ltd., a subsidiary of Telecom
Italia, SpA ("TMI"). The Company is continuing to expand its value-added
services, and plans to introduce RemoteLink, a remote access service designed
to help businesses reduce the high costs of telecommunications charges and user
support associated with building, deploying and maintaining their own remote
access WAN, in mid-1997. In addition, Concentric is in early stage trials for
videoconferencing services and IP-based telephony services. The Company is also
working with TMI to establish an international network based on the Company's
network technology and expertise and TMI's global telecommunications
infrastructure.
The Company was incorporated in Florida in 1991 under the name Engineered
Video Concepts, Inc., changed its name to Concentric Research Corporation in
1992 and commenced network operations in 1994. In 1995, the Company changed its
name to Concentric Network Corporation. Unless the context otherwise requires,
"Concentric" and the "Company" refer to Concentric Network Corporation. The
address of the Company's principal executive offices is 10590 N. Tantau Avenue,
Cupertino, CA 95014, and its telephone number at that address is (408) 342-
2800.
Concentric Network Corporation, The Concentric Network, Concentric
RemoteLink, ConcentricView, FlexChannel, FullChannel, Powered by Concentric
Network, and PremierConnect are among the trademarks of the Company. This
Prospectus contains other product names, trade names and trademarks of the
Company and of other organizations.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company................ 3,000,000 shares(1)
Common Stock to be outstanding after the offering.. 11,700,769 shares(2)
Use of Proceeds.................................... For expansion of network
and data center
operations, to fund
operating losses and for
working capital and other
general corporate
purposes. In addition, the
Company expects to use a
portion of the proceeds to
fund the repurchase of
shares tendered in
connection with rescission
offers.
Proposed Nasdaq National Market Symbol............. CNCX
</TABLE>
- --------
(1) Excludes shares to be sold by the Company to certain strategic investors
concurrent with the closing of this offering. See "Direct Placements."
(2) Includes an assumed 1,363,636 shares to be issued to certain strategic
investors concurrent with the closing of this offering (assuming an initial
public offering price of $11.00 per share). See "Direct Placements."
Excludes 2,915,621 shares issuable upon exercise of options and warrants
outstanding at May 15, 1997 at a weighted average exercise price of $12.00
per share. See "Description of Capital Stock--Warrants."
DIRECT PLACEMENTS
Certain strategic investors have agreed to purchase from the Company, in a
private placement that will occur concurrently with the closing of this
offering, shares of Common Stock with an aggregate purchase price of
approximately $15.0 million. Such purchasers will pay to the Company a per
share amount equal to the Price to Public set forth on the cover page of this
Prospectus. See "Direct Placements."
4
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1991 THREE MONTHS ENDED
(INCEPTION) YEAR ENDED DECEMBER 31, MARCH 31,
THROUGH DEC. 31, ------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
---------------- ------- ------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. -- $ 23 $ 442 $ 2,483 $ 15,648 $ 1,533 $ 9,154
Cost of revenue......... -- 130 2,891 16,168 47,945 7,256 15,744
Network equipment write-
off(1) ................ -- -- -- -- 8,321 -- --
Total operating
expenses............... 28 1,114 1,784 7,602 22,503 4,196 7,021
---- ------- ------- -------- -------- --------- ---------
Loss from operations.... (28) (1,221) (4,233) (21,287) (63,121) (9,919) (13,611)
Net loss................ $(28) $(1,245) $(4,290) $(22,008) $(66,381) $ (10,380) $ (14,681)
==== ======= ======= ======== ======== ========= =========
Pro forma net loss per
share(2)............... $ (13.84) $ (2.24)
======== =========
Weighted average shares
used in computing pro
forma net loss per
share(2)............... 4,797 6,540
======== =========
OTHER OPERATING DATA:
EBITDA(3)............... $(28) $(1,103) $(4,064) $(19,091) $(53,650) $ (8,593) $ (9,755)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------
PRO PRO FORMA
ACTUAL FORMA(4) AS ADJUSTED(5)
-------- -------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................. $(24,705) $(24,705) $ 20,235
Property and equipment, net................ 53,227 53,227 53,227
Total assets............................... 61,438 61,438 106,378
Long-term debt and capital lease
obligations, less current portion......... 35,349 35,349 35,349
Stockholders' equity (deficit)............. (10,619) (10,619) 34,321
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1996 1996 1996 1997
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
QUARTERLY STATEMENT OF
OPERATIONS DATA:
Revenue................... $ 1,533 $ 2,489 $ 4,193 $ 7,433 $ 9,154
Cost of revenue........... 7,256 11,782 11,913 16,994 15,744
Network equipment write-
off(1)................... -- -- -- 8,321 --
Total operating expenses.. 4,196 5,475 5,464 7,368 7,021
-------- -------- -------- -------- --------
Loss from operations...... (9,919) (14,768) (13,184) (25,250) (13,611)
Net loss.................. $(10,380) $(15,420) $(14,473) $(26,108) $(14,681)
======== ======== ======== ======== ========
OTHER OPERATING DATA:
EBITDA(3)................. $ (8,593) $(12,971) $(10,579) $(21,507) $ (9,755)
</TABLE>
- --------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Financial Statements.
(2) The pro forma net loss per share computation gives retroactive effect to
the conversion of the outstanding Preferred Stock into Common Stock upon
the closing of the offering. See Note 1 of Notes to Financial Statements
for an explanation of the calculation of pro forma net loss per share.
(3) Represents earnings (loss) before depreciation and amortization, interest
expense and income tax expense (benefit). The Company has included
information concerning EBITDA herein because it understands that such
information is used by certain investors as one measure of an issuer's
historical ability to service debt. EBITDA should not be considered an
alternative to, or more meaningful than, income from operations, net income
or cash flow as an indication of the Company's operating performance.
(4) Pro forma to reflect the conversion of Class B Common Stock and Preferred
Stock into Common Stock.
(5) Adjusted to reflect the receipt by the Company of the estimated net
proceeds of $44,940,000 from the sale of 3,000,000 shares of Common Stock
offered hereby and an assumed 1,363,636 shares offered in the Direct
Placement at an assumed initial public offering price of $11.00 per share.
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information set forth in this
Prospectus, in connection with an investment in the Common Stock offered
hereby. The Prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Those statements appear in a number of places in this
Prospectus and include statements regarding the intent, belief or current
expectations of the Company or its directors or officers with respect to,
among other things: (i) trends affecting the Company's financial condition or
results of operation; and (ii) the Company's business and growth strategies.
Prospective investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those projected, expressed
or implied, in the forward-looking statements as a result of various factors.
The accompanying information contained in this Prospectus, including without
limitation the information set forth under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," identifies important factors that could cause such
differences. Such forward-looking statements speak only as of the date of this
Prospectus, and the Company cautions potential investors not to place undue
reliance on such statements.
LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES
The Company was incorporated in 1991, commenced network operations in 1994
and completed initial deployment of its current network architecture and use
of an advanced ATM backbone network in late 1996. Accordingly, the Company has
a limited operating history upon which an evaluation of the Company and its
prospects can be based. In addition, a majority of the Company's senior
management team have been working together at the Company for less than two
years. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets. To address these risks, the Company must, among other things, respond
to competitive developments, continue to attract, retain and motivate
qualified persons, and continue to upgrade its technologies and commercialize
its network services incorporating such technologies. There can be no
assurance that the Company will be successful in addressing such risks and the
failure to do so could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has
incurred net losses and experienced negative cash flow from operations since
inception and expects to continue to operate at a net loss and experience
negative cash flow for the foreseeable future. The Company experienced net
losses of approximately $4.3 million, $22.0 million and $66.4 million for the
years ended December 31, 1994, 1995 and 1996, respectively, and a net loss of
$14.7 million for the three months ended March 31, 1997. At March 31, 1997,
the Company had an accumulated deficit of approximately $108.6 million. There
can be no assurance that the Company will be able to achieve or sustain
revenue growth or profitability or positive cash flow on either a quarterly or
an annual basis. While the Company has incurred substantial operating losses
since inception, the Company's ability to utilize net operating loss
carryforwards for income tax purposes to offset taxable income, if any,
realized in future periods is severely limited. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 8 of
Notes to Financial Statements.
UNCERTAINTY AS TO ABILITY TO CONTINUE AS A GOING CONCERN
The Company has received a report from its independent auditors containing
an explanatory paragraph that describes the uncertainty as to the ability of
the Company to continue as a going concern due to the Company's recurring
losses from operations. There can be no assurance that the Company will
achieve profitable operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Financial Statements--
Report of Independent Auditors.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have fluctuated in the past and may in the
future fluctuate significantly depending upon a variety of factors, including
the timely deployment and implementation of expansion of the Concentric
network and new network architectures, the incurrence of related capital
costs, the receipt of new value-added network services and consumer services
subscriptions and the introduction of new services by the Company and
6
<PAGE>
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. While the Company expects revenue from WNI to decrease in both
absolute amount and as a percentage of revenue in future periods, the Company
believes that revenue derived from current and future large customers will
continue to represent a significant portion of its revenue. As a result, the
loss of one or more of the Company's major customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that revenue from customers
that have accounted for significant revenue in past periods, individually or
as a group, will continue, or if continued, will reach or exceed historical
levels in any future period. See Note 1 of Notes to Financial Statements.
MANAGEMENT OF POTENTIAL GROWTH AND EXPANSION
As of December 31, 1995, the Company had 96 employees and 60 independent
contractors, and as of December 31, 1996, the Company had 245 employees and 46
independent contractors. As of March 31, 1997, the Company had 280 employees
and 48 independent contractors. The growth and expansion of the Company's
business and its service offerings have placed, and are expected to continue
to place, a significant strain on the Company's management, operational and
financial resources. The Company has recently expanded and upgraded its
network to use an ATM backbone. The Company plans to continue to substantially
expand its network in the future. There can be no assurance that the Company
will be able to add services at the rate or according to the schedule
presently planned by the Company. To manage its growth, the Company must,
among other things, (i) continue to implement and improve its operational,
financial and management information systems, including its billing, accounts
receivable and payable tracking, fixed assets and other financial management
systems; (ii) hire and train additional qualified personnel; and (iii)
continue to expand and upgrade its network infrastructure. Demands on the
Company's network infrastructure and technical support resources have grown
rapidly with the Company's expanding customer base, and the Company may in the
future experience difficulties meeting the demand for its access services and
technical support. There can be no assurance that the Company's technical
support or other resources will be sufficient to facilitate the Company's
growth. As the Company strives to increase total network utilization and to
optimize this utilization by targeting both business and consumer users to
balance the network's usage throughout a 24-hour period, there will be
additional demands on the Company's customer support, sales and marketing
resources. Any failure of the Company to manage its growth effectively could
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEPENDENCE UPON NEW AND UNCERTAIN MARKETS
The markets for tailored, value-added network services for businesses and
consumers offered by the Company, including Internet access, are in the early
stages of development. Since these markets are relatively new and because
current and future competitors are likely to introduce competing services or
products, it is difficult to predict the rate
7
<PAGE>
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" and
"-- Dependence upon New and Enhanced Services," "-- Risks of Technological
Change and Evolving Industry Standards."
DEPENDENCE UPON NEW AND ENHANCED SERVICES
The Company has recently introduced new enterprise service offerings,
including the introduction of value-added, IP-based communication services to
enterprises. The failure of these services to gain market acceptance in a
timely manner or at all could have a material adverse effect on the business,
financial condition and results of operations of the Company.
Introduction by the Company of new or enhanced services with reliability,
quality or compatibility problems could significantly delay or hinder market
acceptance of such services, which could adversely affect the Company's
ability to attract new customers and subscribers. The Company's services may
contain undetected errors or defects when first introduced or as enhancements
are introduced. There can be no assurance that, despite testing by the Company
or its customers, errors will not be found in new services after commencement
of commercial deployment, resulting in additional development costs, loss of,
or delays in, market acceptance, diversion of technical and other resources
from the Company's other development efforts and the loss of credibility with
the Company's customers and subscribers. Any such event could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Services."
Additionally, if the Company is unable to achieve balanced network
utilization over a 24-hour period, the Concentric network could become
overburdened at certain periods during the day, which could adversely affect
the quality of service provided by the Company. Conversely, due to the high
fixed cost nature of Concentric's infrastructure, under-utilization of the
Concentric network during certain periods of the day could adversely affect
the Company's ability to provide cost-efficient services at other times. The
failure of the Company to achieve balanced network utilization, because of
either over- or under-utilization could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
The Company relies on other companies to supply certain key components of
its network infrastructure, including telecommunications services and
networking equipment, which, in the quantities and quality demanded by the
Company, are available only from sole or limited sources. AT&T Corp. ("AT&T"),
MCI Telecommunications, Inc. ("MCI"), WorldCom, Inc. ("WorldCom") and PacWest
Telecomm, Inc. are the primary providers to the Company of data communications
facilities and capacity. AT&T is the sole provider of the frame relay backbone
of the Concentric network, and MCI is the sole provider of the ATM backbone of
the Concentric network. The Company is also dependent upon local exchange
carriers ("LECs") to provide telecommunications services to the Company and
its customers. The Company from time to time has experienced delays in
receiving telecommunications services, and there can be no assurance that the
Company will be able to obtain such services on the scale and within the time
frames required by the Company at an affordable cost, or at all. Any failure
to obtain such services on a timely basis at an affordable cost would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The routers, switches and modems the Company uses are supplied by Bay
Networks, Inc. through Racal-Datacom, Inc. ("Racal"). In addition, Racal acts
as a systems integrator. The servers primarily used in the Company's network
infrastructure are supplied solely by Sun Microsystems, Inc. The Company
purchases these components pursuant to purchase orders placed from time to
time, does not carry significant inventories of these components and has no
guaranteed supply arrangements for such components. The Company's suppliers
also sell products to the Company's competitors and may in the future
themselves become competitors of the Company. There can be no assurance that
the Company's suppliers will not enter into exclusive arrangements with the
Company's competitors or stop selling their products or components to the
Company at commercially reasonable prices or at all.
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Expansion of network infrastructures by the Company and others is placing,
and will continue to place, a significant demand on the Company's suppliers,
some of which have limited resources and production capacity. In addition,
certain of the Company's suppliers, in turn, rely on sole or limited sources
of supply of components included in their products. Failure of the Company's
suppliers to adjust to meet such increasing demand may prevent them from
continuing to supply components and products in the quantities and quality and
at the times required by the Company, or at all. The Company's inability to
obtain sufficient quantities of sole- or limited-source components or to
develop alternative sources if required could result in delays and increased
costs in expanding, and overburdening of, the Company's network
infrastructure, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also is dependent on its suppliers' ability to provide necessary
products and components that comply with various Internet and
telecommunications standards and that interoperate with products and
components from other vendors. Any failure of the Company's sole- or limited-
source suppliers to provide products or components that comply with Internet
standards or that interoperate with other products or components used by the
Company in its network infrastructure could have a material adverse effect on
the Company's business, financial condition and results of operations.
Certain of the Company's suppliers, including the regional Bell operating
companies ("RBOCs") and other LECs, currently are subject to tariff controls
and other price constraints that in the future may be changed. In addition,
regulatory proposals are pending that may affect the prices charged by the
RBOCs and other LECs to the Company. Any such regulatory changes could result
in increased prices of products and services, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "-- Dependence upon New and Enhanced Services" and "-- Risks
of Technological Change and Evolving Industry Standards."
DEPENDENCE UPON NETWORK INFRASTRUCTURE
The Company's success will depend upon the capacity, reliability and
security of its network infrastructure. The Company currently derives a
significant portion of its revenue from customer subscriptions. The Company
expects that a substantial portion of its future revenues will be derived from
the provision of tailored value-added network services to its customers. The
Company must continue to expand and adapt its network infrastructure as the
number of users and the amount of information they wish to transfer increase,
and as customer requirements change. The Company's current projections of
utilization of the Concentric network require rapid expansion of the capacity
of the network to avoid capacity constraints that would adversely affect the
performance of the system. The expansion and adaptation of the Company's
network infrastructure will require substantial financial, operational and
management resources. There can be no assurance that the Company will be able
to expand or adapt its network infrastructure to meet additional demand or its
customers' changing requirements on a timely basis, at a commercially
reasonable cost, or at all. In addition, if demand for usage of the Concentric
network were to increase faster than projected or were to exceed the Company's
current forecasts, the network could experience capacity constraints, which
would adversely affect the performance of the system. Any failure of the
Company to expand its network infrastructure on a timely basis or adapt it to
either changing customer requirements or evolving industry standards, or
capacity constraints experienced by the Concentric network for any reason,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- The Concentric Network."
Currently, the Company has a transit agreement with networkMCI, Inc. to
support the exchange of traffic between the Concentric network and the
Internet. The Company connects to the MCI Internet via a DS3 (45 Mbps) link
from its Bay City Data Center and another DS3 link from its Cupertino Data
Center. The failure of the MCI Internet backbone, or either or both data
centers, or any other link in the delivery chain, and resulting interruption
in the Company's operations would have a material adverse effect on the
Company's business, financial condition and results of operations.
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COMPETITION
The market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company believes
that its ability to compete successfully depends upon a number of factors,
including market presence; the capacity, reliability, low latency and security
of its network infrastructure; technical expertise and functionality,
performance and quality of services; customization; ease of access to and
navigation of the Internet; the pricing policies of its competitors and
suppliers; the variety of services; the timing of introductions of new
services by the Company and its competitors; customer support; the Company's
ability to support industry standards; and industry and general economic
trends.
The Company's current and prospective competitors generally may be divided
into the following five groups: (i) telecommunications companies, such as
AT&T, MCI, Sprint, Inc., WorldCom, the RBOCs and various cable companies; (ii)
online services providers, such as America Online, Inc. ("America Online"),
CompuServe Incorporated ("CompuServe"), the Microsoft Network ("MSN") of
Microsoft Corporation ("Microsoft"), and Prodigy Services Company ("Prodigy");
(iii) Internet service providers ("ISPs"), such as BBN Corporation ("BBN"),
NETCOM On-Line Communications Services, Inc. ("NETCOM"), PSINet, Inc. ("PSI"),
and other national and regional providers; (iv) nonprofit or educational
Internet connectivity providers; and (v) Web server farms such as Internet
Direct and Exodus. Many of these competitors have greater market presence,
engineering and marketing capabilities, and financial, technological and
personnel resources than those available to the Company. As a result, they may
be able to develop and expand their communications and network infrastructures
more quickly, adapt more swiftly to new or emerging technologies and changes
in customer requirements, take advantage of acquisition and other
opportunities more readily, and devote greater resources to the marketing and
sale of their products and services than can the Company. In addition to the
companies named above, various organizations have entered into or are forming
joint ventures or consortiums to provide services similar to those of the
Company.
The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies, will enter the tailored value-added network services market,
resulting in even greater competition for the Company. Certain of such
telecommunications companies and online services providers are currently
offering or have announced plans to offer Internet or online services or to
expand their network services. Certain companies, including America Online,
BBN and PSI, have also obtained or expanded their Internet access products and
services as a result of acquisitions. Such acquisitions may permit the
Company's competitors to devote greater resources to the development and
marketing of new competitive products and services and the marketing of
existing competitive products and services. In addition, the ability of some
of the Company's competitors to bundle other services and products with
virtual private network services or Internet access services could place the
Company at a competitive disadvantage. Certain companies are also exploring
the possibility of providing or are currently providing high-speed data
services using alternative delivery methods such as over the cable television
infrastructure, through direct broadcast satellites and over wireless cable.
The Company is applying for certificates of authority to become a CLEC in
selected states. To the extent the Company obtains such authorizations and
commences CLEC operations, it will compete with the incumbent LEC and
additional CLECS providing telecommunications services in these markets. For
all new entrants, including the Company, the market for local exchange
services is extremely competitive. Local telecommunications services offered
by the Company will compete principally with services offered by the incumbent
LEC serving that area. Incumbent LECs, such as the RBOCs, currently dominate
their local telephone markets. Such companies have financial, managerial and
technical resources that substantially exceed those of the Company and have
long-standing relationships with their customers. While the 1996 Telecom Act
provides increased business opportunities to CLECs, it also allows incumbent
LECs increased pricing flexibility for their services. Increased price
competition from incumbent LECs could have a material adverse effect on the
Company's CLEC operations and, in turn, on the Company's results of operations
and financial condition to the extent its CLEC operations are a material
portion of its business. Furthermore, upon the satisfaction of certain
regulatory conditions, the RBOCs currently are expected to be able to offer
long distance services in their home markets in addition to local service,
which would afford their local customers "one-stop shopping" for
telecommunications services. The Company also expects to face increased
competition in the provision of local exchange services from other CLECs,
cable television companies, electric utilities,
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microwave carriers, wireless telephone system operators, AT&T, MCI, Sprint,
WorldCom and other long distance carriers who may choose to enter the local
exchange market by resale of incumbent LEC facilities.
As a result of increased competition and vertical and horizontal integration
in the industry, the Company could encounter significant pricing pressure,
which in turn could result in significant reductions in the average selling
price of the Company's services. For example, certain of the Company's
competitors that are telecommunications companies may be able to provide
customers with reduced communications costs in connection with their Internet
access services or private network services, reducing the overall cost of
their solutions and significantly increasing price pressures on the Company.
There can be no assurance that the Company will be able to offset the effects
of any such price reductions with an increase in the number of its customers,
higher revenue from enhanced services, cost reductions or otherwise. In
addition, the Company believes that the Internet access and online services
businesses are likely to encounter consolidation in the near future, which
could result in increased price and other competition in these industries and,
potentially, the virtual private networks industry. Increased price or other
competition could result in erosion of the Company's market share and could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Company will
have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully. See "-- Management of
Potential Growth and Expansion" and "Business -- Competition."
DEPENDENCE UPON THIRD-PARTY MARKETING, DISTRIBUTION AND ENGINEERING
RELATIONSHIPS
An important element of the Company's strategy is to develop relationships
with leading companies to enhance Concentric's engineering, marketing and
distribution efforts. The Company has OEM agreements with Netscape Corporation
("Netscape") and Microsoft pursuant to which the Company is entitled to
distribute and modify these companies' browsers. The customization of browsers
by the Company is an integral part of its current tailored VPN offerings. The
Netscape agreement expires in 1998 and the Microsoft agreement expires in
1999. The Company has an agreement with Intuit, Inc. ("Intuit") for the
development, operation and maintenance of a VPN that is the integrated access,
dial-up network and infrastructure used by purchasers of Quicken, Turbo Tax
and other Intuit software products to access the Quicken Financial Network
Website and upgrade to full Internet access. The Intuit contract expires in
1998. The Company relies on these relationships for acquisition of consumer
customers. The termination of or failure to renew any of these agreements or
the inability of the Company to enter into similar relationships with others
could have a material adverse effect on the Company's business, financial
condition and results of operation. The Company has an outsourcing agreement
with Critical Technologies Incorporated ("CTI"), a subsidiary of Williams
Telecommunications, Inc. that enables the Company to use CTI employees for the
operational support of the Concentric network. The Company's use of CTI
employees and CTI engineering expertise were integral to its development of
the Concentric network and continue to be integral to ongoing operation of the
Company's network operations center. Pursuant to the agreement with CTI, all
of the CTI employees currently working for Concentric will become employees of
Concentric at the termination of the agreement in October 1999. Termination of
any of these agreements or the failure of the Company to renew any of the
agreements upon termination on terms acceptable to the Company could result in
a material adverse affect on the Company's business, financial condition and
results of operations. See "Business -- Key Customer Applications."
RISKS OF TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS
The markets for the Company's services are characterized by rapidly changing
technology, evolving industry standards, changes in customer needs, emerging
competition and frequent new product and service introductions. The Company's
future success will depend, in part, on its ability to effectively use leading
technologies; to continue to develop its technical expertise; to enhance its
current networking services; to develop new services that meet changing
customer needs; to advertise and market its services; and to influence and
respond to emerging industry standards and other technological changes in a
timely and cost-effective basis. There can be no assurance that the Company
will be successful in effectively using new technologies, developing new
services or enhancing its existing services on a timely basis, or that such
new technologies or enhancements will achieve market acceptance. The Company's
pursuit of necessary technological advances may require substantial time and
expense, and there can be no assurance that the Company will succeed in
adapting its network service business to alternate access devices and
conduits. An integral
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part of the Company's strategy is to design its network in order to meet the
requirements of emerging standards such as 56.6 Kbps modems and applications
such as IP-based interactive video and voice conferencing communications.
Failure of the Company, for technological or other reasons, to develop and
introduce new or enhanced services that are compatible with industry standards
and that satisfy customer requirements would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- The Concentric Network."
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its
services with products and architectures offered by various vendors. Although
the Company intends to support emerging standards in the market for Internet
access, there can be no assurance that industry standards will be established
or, if they become established, that the Company will be able to conform to
these new standards in a timely fashion and maintain a competitive position in
the market. Specifically, the Company's services rely on the continued
widespread commercial use of TCP/IP. Alternative open protocol and proprietary
protocol standards have been or are being developed. If any of these
alternative protocols become widely adopted, there may be a reduction in the
use of TCP/IP, which could render the Company's services obsolete and
unmarketable. Additionally, two of the leading modem manufacturers, Rockwell
and US Robotics, have proposed different, incompatible standards for 56.6 Kbps
modems. The Company currently plans to accommodate both standards to the
extent it can do so cost effectively. The failure of the Company to anticipate
the prevailing standard, or the failure of a common standard to emerge could
have a material adverse effect on the Company's business and results of
operations. In addition, there can be no assurance that services or
technologies developed by others will not render the Company's services or
technology uncompetitive or obsolete.
The Company faces the risk of fundamental changes in the way Internet access
is delivered. Currently, Internet services are accessed primarily by computers
connected by telephone lines. Recently, several companies announced the
development and planned sale of cable television modems, wireless modems and
satellite modems to provide access to the Internet. Cable television,
satellite and wireless modems have the ability to transmit data at
substantially faster speeds than the modems the Company and its subscribers
currently use. In addition, wireless modems have the potential to reduce the
cost of network services. As the Internet becomes accessible through these
cable television, wireless and satellite modems and by screen-based
telephones, television or other consumer electronic devices, or subscriber
requirements change the way Internet access is provided, the Company will have
to develop new technology or modify its existing technology to accommodate
these developments. The Company's pursuit of these technological advances may
require substantial time and expense, and there can be no assurance that the
Company will succeed in adapting its Internet access business to alternate
access devices and conduits.
LEGAL PROCEEDINGS
On April 22, 1997, a complaint was filed in the Los Angeles County,
California Superior Court against the Company and other unnamed defendants by
Sattel Communications LLC ("Sattel"). The complaint alleges claims for breach
of contract, breach of the covenant of good faith and fair dealing, unfair
business practices, fraud and negligent misrepresentation. Sattel claims that
the Company is in breach of an agreement to pay for up to $4.2 million of DSS
Switches from Sattel for use in the Company's network. The Complaint also
seeks unspecified consequential and punitive damages. On April 29, 1997,
Sattel served the Company with an Application for Writ of Attachment, seeking
to secure a lien on the Company's assets up to an amount of $3.6 million.
Prior to the offering and the Direct Placements, Sattel holds approximately
1.7% of the Company's Common Stock.
On April 30, 1997, a putative securities class action complaint was 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 also 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 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
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adverse effect on the Company's financial condition. In addition, even if the
ultimate outcomes are resolved in favor of the Company, the defense of such
litigation could entail considerable cost and the diversion of efforts of
management, either of which could have a material adverse effect on the
Company's results of operations. See "Business -- Legal Proceedings" and Note
10 of Notes to Financial Statements.
RISK OF SYSTEM FAILURE
As the Company expands its network and usage grows, increased stress will be
placed upon network hardware and traffic management systems. While the
Company's network has been designed with redundant backbone circuits to allow
traffic re-routing, there can be no assurance that the Company will not
experience failures relating to individual network points of presence ("POPs")
or even catastrophic failure of the entire network. Moreover, the Company's
operations are dependent upon its ability to protect its network
infrastructure against damage from fire, earthquakes, floods, mudslides, power
loss, telecommunications failures and similar events. A significant portion of
the Company's computer equipment, including critical equipment dedicated to
its Internet access services, is located at its facilities in Bay City,
Michigan, and Cupertino, California. In addition, the Company's modems and
routers that serve large areas of the United States are located in such
cities. The Company's network operations center, which manages the entire
network, is in St. Louis, Missouri. Despite precautions taken by the Company,
the occurrence of a natural disaster or other unanticipated problems at the
Company's network operations center, at its hubs (sites at which the Company
has located routers, switches and other computer equipment that make up the
backbone of the Company's network infrastructure) or at a number of the
Company's POPs has from time to time in the past caused, and in the future
could cause, interruptions in the services provided by the Company. In
addition, failure of the Company's telecommunications providers to provide the
data communications capacity in the time frame required by the Company as a
result of a natural disaster or operational disruption or for any other reason
could cause interruptions in the services provided by the Company. Any damage
or failure that causes interruptions in the Company's operations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
SYSTEM SECURITY RISKS
Despite the implementation of network security measures, the core of the
Company's network infrastructure is vulnerable to computer viruses, break-ins
and similar disruptive problems caused by its customers or Internet users.
Computer viruses, break-ins or other problems caused by third parties could
lead to interruptions, delays or cessation in service to the Company's
customers and subscribers. Furthermore, such inappropriate use of the network
by third parties could also potentially jeopardize the security of
confidential information stored in the computer systems of the Company and its
customers, which may result in liability to the Company and also may deter
potential subscribers. Although the Company intends to continue to implement
industry-standard security measures, such measures occasionally have been
circumvented in the past, and there can be no assurance that measures
implemented by the Company will not be circumvented in the future. The costs
and resources required to eliminate computer viruses and alleviate other
security problems may result in interruptions, delays or cessation of service
to the Company's customers that could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Management of Potential Growth and Expansion," "-- Dependence upon New and
Enhanced Services,"""-- Risks of Technological Change and Evolving Industry
Standards," "Use of Proceeds" and "Business -- Services."
DEPENDENCE UPON KEY PERSONNEL; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its executive management team, including Henry R. Nothhaft,
the Company's President and Chief Executive Officer, and John K. Peters, the
Company's Executive Vice President and General Manager, Network Services
Division. The loss of the services of Messrs. Nothhaft or Peters could have a
material adverse effect on the Company. The Company does not have employment
agreements with any of its senior officers, including Messrs. Nothhaft or
Peters. Nor does the Company carry key man life insurance on the life of any
such persons. The Company's success will also depend upon the continued
service of the other members of its senior management team and technical,
marketing and sales personnel. The Company's employees may voluntarily
terminate their employment with the Company at any time, and competition for
qualified employees is intense. The Company's success also depends upon its
ability to attract
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and retain additional highly qualified management, technical, sales and
marketing and customer support personnel. The process of locating such
personnel with the combination of skills and attributes required to carry out
the Company's strategy is often lengthy. The loss of the services of key
personnel, or the inability to attract additional qualified personnel, could
have a material adverse effect upon the Company's results of operations,
development efforts and ability to complete the expansion of its network
infrastructure. Any such event could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Management of Potential Growth and Expansion," "-- Dependence upon New and
Enhanced Services," "-- Risks of Technological Change and Evolving Industry
Standards" and "Business --Services."
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
A key component of the Company's strategy is its planned expansion into
international markets. In particular, the Company has entered into an
agreement with TMI Telemedia International Ltd., a subsidiary of Telecom
Italia SpA ("TMI"), to establish an international network based on
Concentric's network technology and expertise and TMI's existing
telecommunications infrastructure to deliver a range of compatible network
services worldwide. If the companies are not able to successfully deploy
Concentric's technology over TMI's infrastructure, or if Concentric is
unsuccessful in transferring its knowledge to TMI employees, the Company's
international strategy may be delayed and the Company's business, results of
operation or financial condition could be materially adversely affected. To
date, the Company has only limited experience in working with TMI to develop
versions of its products and marketing and distributing its products
internationally. There can be no assurance that the Company will be able to
successfully market, sell and deliver its products in these markets. In
addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent in doing business on
an international level, such as unexpected changes in regulatory requirements,
export restrictions, export controls relating to encryption technology,
tariffs and other trade barriers, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting accounts
receivable, political instability, fluctuations in currency exchange rates,
seasonal reductions in business activity during the summer months in Europe
and certain other parts of the world and potentially adverse tax consequences
that could adversely impact the success of the Company's international
operations. There can be no assurance that one or more of such factors will
not have a material adverse effect on the Company's future international
operations and, consequently, on the Company's business, financial condition
and results of operations. See "Business -- Sales and Marketing."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that its available cash resources combined
with the net proceeds of the offering, the Direct Placements and existing
lease and credit facilities, and funds from operations will be sufficient to
meet its anticipated working capital and capital expenditure requirements for
the next 12 months. However, there can be no assurance that such resources
will be sufficient for its anticipated working capital and capital expenditure
requirements. The Company may need to raise additional funds through public or
private debt or equity financings in order to take advantage of unanticipated
opportunities, including more rapid international expansion or acquisitions of
complementary businesses or technologies, or to develop new products or
otherwise respond to unanticipated competitive pressures. The Company may also
raise additional funds through public or private debt or equity financings if
such financings become available on favorable terms. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
then current stockholders of the Company may be reduced and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. If additional funds are raised through
the issuance of debt securities, such securities would have certain rights,
preferences and privileges senior to holders of Common Stock and the terms of
such debt could impose restrictions on the operations of the Company. There
can be no assurance that additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or
are not available on acceptable terms, the Company may not be able to take
advantage of unanticipated opportunities, develop new products or 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."
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RISKS ASSOCIATED WITH ACQUISITIONS
The Company may seek to acquire assets or businesses complementary to its
operations, although no specific acquisitions are currently in negotiation.
Any such future acquisitions would be accompanied by the risks commonly
encountered in acquisitions of companies. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's business, the
inability of the Company's management to maximize the financial and strategic
position of the Company by the incorporation of acquired technology or
business into the Company's service offerings, the difficulty of maintaining
uniform standards, controls, procedures and policies, the potential loss of
key employees of acquired companies, and the impairment of relationships with
employees and customers as a result of changes in management. No assurance can
be given that any acquisition by the Company will or will not occur, that if
an acquisition does occur it will not materially and adversely affect the
Company or that any such acquisition will be successful in enhancing the
Company's business.
If the Company proceeds with one or more significant acquisitions in which
the consideration consists of cash, a substantial portion of the Company's
available cash, including proceeds of this offering, could be used to
consummate the acquisitions. If the Company were to consummate one or more
acquisitions in which the consideration consisted of stock, stockholders of
the Company could suffer significant dilution of their interests in the
Company. Many business acquisitions must be accounted for as a purchase for
financial reporting purposes. Most of the businesses that might become
attractive acquisition candidates for the Company are likely to have
significant goodwill and intangible assets, and acquisition of these
businesses, if accounted for as a purchase, would typically result in
substantial amortization of goodwill charges to the Company.
GOVERNMENT REGULATION
Value-Added Network and Internet Service Providers. The Federal
Communications Commission (the "FCC") currently does not regulate value-added
network software or computer equipment related services that transport data or
voice messages over telecommunication facilities. The Company provides value-
added IP-based network services, in part, through data transmissions over
public telephone lines. These transmissions are governed by regulatory
policies establishing charges and terms for wireline communications. Operators
of these types of value-added networks that provide access to regulated
transmission facilities only as part of a data services package currently are
excluded from regulations that applies to "telecommunications carrier" and as
such the Company is not currently subject to direct regulation by the FCC or
any other governmental agency, other than regulations applicable to businesses
generally. However, in the future the Company could become subject to
regulation by the FCC or another regulatory agency as a provider of basic
telecommunications services.
Currently, the FCC is reviewing its regulatory positions and could seek to
impose common carrier regulation on the network transport and communications
facilities aspects of an enhanced or information service package. Further, the
FCC could conclude that the Company's protocol conversions, computer
processing, and interaction with customer-supplied information are
insufficient to afford the Company the benefits of the enhanced or information
service classification, and thereby may seek to regulate some segments of the
Company's activities as basic telecommunications services. While state public
utility commissions generally have declined to regulate enhanced or
information services, some states have continued to regulate particular
aspects of enhanced services in limited circumstances, such as where they are
provided by local exchange carriers ("LECs"). Moreover, the public service
commissions of certain states continue to review potential regulation of such
services. There can be no assurance that regulatory authorities of states
within which Concentric makes its Internet access, Intranet and VPN services
available will not seek to regulate aspects of these activities as
telecommunications services. Changes in the regulatory environment relating to
the Internet connectivity market, including regulatory changes that directly
or indirectly affect telecommunications costs or increase the likelihood or
scope of competition from the RBOCs or other telecommunications companies,
could affect the prices at which the Company may sell its services. The
Company 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 is applying for
certificates of authority to become a CLEC in selected states. To the extent
the Company obtains such authorizations and commences CLEC operations, the
telecommunications services provided by such operations will be subject to
regulation by federal, state and local governmental agencies. At the federal
level, the FCC has jurisdiction over interstate telecommunications services.
State regulatory commissions exercise jurisdiction over intrastate services.
Additionally, municipalities and other local government agencies may regulate
limited aspects of the Company's business, such as use of rights-of-way.
Typically start-up telecommunications carriers are not as heavily regulated as
incumbent LECs. For example, under current regulations, the Company would not
be subject to price cap or rate of return regulation by the FCC. However, the
Telecommunications Act of 1996 (the "1996 Telecom Act") requires the FCC to
establish a subsidy mechanism for universal telephone service to which the
Company will be required to contribute based on its telecommunications
revenues and requires all LECs, including CLECs, to make services available
for resale by other carriers, provide nondiscriminatory access to rights-of-
way, offer reciprocal compensation for termination of local telecommunication
traffic and provide dialing parity and telephone number portability, and
ensure that their services are accessible to and usable by persons with
disabilities. The 1996 Telecom Act retains for individual states the authority
to impose their own regulations of local exchange services, including state
universal service subsidy programs, so long as this regulation is not
inconsistent with the requirements of the 1996 Telecom Act. The Company is
unable to predict the final form of such regulation and its potential impact
on the Company. In its provision of interstate, international and intrastate
services as a CLEC, the Company generally will be subject to tariff filing
requirements setting forth the terms, conditions and prices for services,
prior to offering telecommunications services. At the state level, the Company
will also be subject to state certification proceedings as a CLEC. These
certifications generally require a showing that the carrier has adequate
financial, managerial and technical resources to offer the proposed services
consistent with the public interest. Under some state statutes changes in the
ownership of the Company's outstanding voting securities also may trigger
additional state public utility commission approval. For example, in certain
jurisdictions an investor who acquires as little as ten percent or more of the
Company's voting securities may have to obtain prior approval of the
acquisition of such securities because such ownership might be deemed to
constitute an indirect controlling interest in the CLEC. While uncommon,
challenges to these tariffs and certificates by third parties could cause the
Company to incur substantial legal and administrative expenses. Many states
also have additional regulatory requirements such as minimum service quality
reporting and customer service requirements and uniform LEC accounting
requirements.
Although the 1996 Telecom Act eliminates legal barriers to entry into the
CLEC market, no assurance can be given that changes in current or future
regulations adopted by the FCC or state regulators or other legislative or
judicial initiatives relating to the telecommunications industry would not
have a material adverse effect on the Company's ability to offer such
services. With the passage of the 1996 Telecom Act and the anticipated
increase in the level of competition faced by incumbent LECs, the FCC could
grant incumbent LECs substantial pricing flexibility with regard to interstate
access services. It is also anticipated that the prices incumbent LECs charge
for access services will be substantially reduced as a result of the FCC's
reform of the current access charge regime and the adoption of universal
service rules. Similarly, a number of states have allowed incumbent LECs rate
and tariff flexibility, particularly for services deemed subject to
competition. Such price competition could significantly and adversely affect
the Company's CLEC operations which could, in turn, adversely affect the
Company's results of operations and financial condition to the extent its CLEC
operations are a material portion of its business.
DEPENDENCE ON TECHNOLOGY; PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
technology, although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights. The Company
principally relies upon a combination of copyright, trademark and trade secret
laws and contractual restrictions to protect its proprietary technology. It
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization or to develop similar
technology independently, and there 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
36.5% of the outstanding shares of Common Stock (35.3% if the over-allotment
option is exercised in full). As a result, the Company's officers, directors
and their affiliates will have the
17
<PAGE>
ability to significantly influence the election of the Company's Board of
Directors and the outcome of corporate actions requiring stockholder approval.
See "Principal Stockholders."
RESCISSION OFFERS
From August 1993 through March 1995, the prior management of the Company
sold convertible debentures and Common Stock for aggregate consideration of
approximately $5.1 million. Through December 1996, all of the convertible
debentures were subsequently converted into shares of Common Stock. The offer
and sale of these securities were not made pursuant to a registration
statement under the Securities Act, nor were the offer and sale registered or
qualified under any state securities laws. Although the prior management of
the Company believed at the time that such offers, sales and conversion were
exempt from such registration or qualification, they may not have been exempt.
As a result, purchasers of such securities may have the right under the
Securities Act or such state securities laws to rescind their purchases, and
thereby be entitled to return such securities to the Company and receive back
from the Company the full consideration paid by such purchasers with interest
thereon. Additionally, options issued pursuant to the Company's 1995 Stock
Incentive Plan to Employees and Consultants (the "1995 Plan") and non-plan
options were issued to approximately 200 people in California for which the
Company was unable to rely on an exemption. Additionally, smaller numbers of
options were issued in other states, including Michigan, Virginia and Florida,
for which the Company may not have had an available exemption under state
laws. Such options are potentially subject to rescission and the Company
intends to include them in any rescission offer. No claims for any such
rescission have been asserted against the Company. However, the Company
believes that once the Rescission Offer is made, a substantial number of
offerees may accept the Rescission Offer. The effective price per share of
Common Stock and Common Stock equivalents of such purchases ranged from $3.75
to $30.00, and the exercise price of the options was $3.75. The Company is
filing a registration statement relating to a rescission offer with respect to
such shares (the "Rescission Offer") and expects to conclude the Rescission
Offer to all such holders approximately 30 days following the closing of this
offering in an amount equal to approximately $5.1 million plus statutory
interest of approximately $1.0 million (which would be an expense during the
period in which the rescission was effected) with respect to the shares of
Common Stock issued upon conversion of the convertible debentures and an
amount equal to $556,000 with respect to the options issued under the 1995
Plan. If all such holders accept the Rescission Offer, the Company will be
required to apply a portion of the proceeds of this placement towards such
rescission. See "Use of Proceeds," "Shares Eligible for Future Sale;
Registration Rights" and "Rescission Offers."
ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law and the Company's Amended and Restated
Certificate of Incorporation and Bylaws could make it more difficult for a
third party to acquire, and could discourage a third party from attempting to
acquire, control of the Company. Certain of these provisions allow the Company
to issue Preferred Stock with rights senior to those of the Common Stock
without any further vote or action by the Stockholders, eliminate cumulative
voting and impose various procedural and other requirements that could make it
more difficult for Stockholders to effect certain corporate actions.
Additionally, the Company's Certificate of Incorporation provides for these
classes of directors, to be elected in a staggered basis. One class is elected
each year with each class serving a three year term, enabling management to
exercise significant control over the Company's affairs. Such charter
provisions could limit the price that certain investors might be willing to
pay in the future for shares of the Company's Common Stock or Preferred Stock
and may have the effect of delaying or preventing a change in control of the
Company. The issuance of Preferred Stock also could decrease the amount of
earnings and assets available for distribution to the holders of Common Stock
or could adversely affect the rights and powers, including voting rights, of
the holders of the Common Stock. See "Certain Transactions" and "Description
of Capital Stock --Common Stock" and "-- Preferred Stock."
NO PRIOR PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE
There has been no public market for the Company's Common Stock prior to the
offering. Although application has been made to the Nasdaq National Market for
listing of the Common Stock, there can be no assurance that an active trading
market will develop or be sustained or that the market price of the Common
Stock will not decline below the initial public offering price. The initial
public offering price will be determined through negotiations between the
Company and the Underwriters and may not be indicative of the market price for
the Common Stock
18
<PAGE>
following the offering. See "Underwriting" for a discussion of the factors to
be considered in determining the initial public offering price. Even if an
active trading market does develop, the market price of the Common Stock
following this offering may be highly volatile. Factors such as variations in
the Company's revenue, earnings and cash flow and announcements of new service
offerings, technological innovations or price reductions by the Company, its
competitors or providers of alternative services could cause the market price
of the Common Stock to fluctuate substantially. In addition, from time to time
the stock markets have experienced significant price and volume fluctuations
that particularly have affected companies in the technology and
telecommunications sectors and resulted in changes in the market price of the
stocks of many companies that have been unrelated or disproportionate to the
operating performance of those companies. Such broad market fluctuations, as
well as a shortfall in revenue earnings compared to securities analysts'
expectations, changes in analysts' recommendations or projections, and general
economic and market conditions may adversely affect the market price of the
Common Stock following this offering.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial numbers of shares of Common Stock in the public market
could adversely affect the market price of the Common Stock and make it more
difficult for the Company to raise funds through equity offerings in the
future. A substantial number of outstanding shares of Common Stock and other
shares of Common Stock issuable upon exercise of outstanding stock options and
warrants will become available for resale in the public market at prescribed
times. Upon completion of the offering, in addition to the shares sold in the
offering, approximately 137,673 shares, which are not subject to lock-up
agreements, will be immediately eligible for resale in the public market
without restriction under the Act. Approximately 7,199,460 shares of Common
Stock held by existing stockholders are subject to one year lock-up
agreements. Upon the expiration of the lock-up agreements, such shares of
Common Stock will become eligible for sale in the public market, subject to
the provisions of Rules 144(k), 144 and 701 under the Securities Act. The lead
managing underwriter of this offering may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. The holders of approximately 5,954,254 shares of Common
Stock are entitled to certain registration rights with respect to such shares.
In addition, the Company intends to register the shares of Common Stock
reserved for issuance under the Company's 1995 Stock Incentive Option Plan,
1996 Stock Plan, 1997 Stock Plan and 1997 Employee Stock Purchase Plan
following the date of this Prospectus. See "Shares Eligible for Future Sale"
and "Description of Capital Stock --Registration Rights."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution, in the amount of $7.97 per share, in the net tangible
book value per share of the Common Stock from the initial public offering
price. See "Dilution."
19
<PAGE>
USE OF PROCEEDS
Assuming an initial public offering price of $11.00 per share, the net
proceeds from the sale of the shares of Common Stock offered hereby, after
deducting the underwriting discount and estimated offering expenses are
estimated to be approximately $29,940,000 (approximately $34,543,500 if the
Underwriters' over-allotment is exercised in full) and the proceeds from the
sale of Common Stock in the Direct Placements concurrently with the closing of
this offering are estimated to be approximately $15,000,000.
The Company currently plans to use $3.0 million of the net proceeds from
this offering and the Direct Placements for capital expenditures associated
with expanding the Company's network and data center operations. The balance
of the proceeds will be used to fund operating losses and for working capital
requirements or for other general corporate purposes. Additionally, the
Company currently expects that a portion of the proceeds may also be used to
fund the repurchase of shares of the Company tendered in connection with the
Company's rescission offer in an amount up to $5.1 million plus approximately
$1.0 million of statutory interest with respect to shares of Common Stock
issued upon conversion of the convertible debentures and an amount up to
$556,000 with respect to the options issued under the 1995 Plan. See
"Rescission Offer." Proceeds from the offering also may be used for possible
acquisitions of businesses or technology that expand, complement or are
otherwise related to the Company's current services, although no specific
acquisitions are currently in negotiation. Pending such uses, the proceeds
will be invested in short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain all of its earnings, if any, for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future.
DIRECT PLACEMENTS
Certain strategic investors (collectively, the "Strategic Investors") have
agreed to purchase from the Company, in a private placement that will occur
concurrently with the closing of this offering (the "Direct Placements"),
shares of Common Stock with an aggregate purchase price of approximately $15.0
million. Such purchasers will pay to the Company the per share amount equal to
the Price to Public set forth on the cover page of this Prospectus. At an
assumed offering price of $11.00, such purchasers would purchase an aggregate
of 1,363,636 shares of Common Stock. The Strategic Investors have agreed with
the Company and with the Underwriters that they will not sell or otherwise
dispose of any Common Stock acquired in the Direct Placements until at least
one year after the closing of this offering.
20
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
derived from its financial statements as of March 31, 1997, (ii) such
capitalization presented to reflect on a pro forma basis the conversion of
Class B Common Stock and Preferred Stock into Common Stock, and (iii) such pro
forma capitalization as adjusted to reflect the sale by the Company of (a)
3,000,000 shares of Common Stock pursuant to this offering at an assumed
public offering price of $11.00 per share and the receipt by the Company of
the estimated net proceeds therefrom, after deducting underwriting discounts
and estimated offering expenses and (b) an assumed 1,363,636 shares of Common
Stock in the Direct Placements at an assumed price of $11.00 per share. The
capitalization information set forth in the table below is qualified by the
more detailed Financial Statements and Notes thereto included elsewhere in
this Prospectus and should be read in conjunction with such Financial
Statements and Notes.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------------
PRO FORMA
ACTUAL(1) PRO FORMA(1) AS ADJUSTED(2)
--------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligations, excluding
current portion(3)..................... $ 35,349 $ 35,349 $ 35,349
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value
(7,333,333 shares authorized;
5,007,018 shares issued and
outstanding actual; 10,000,000 shares
authorized, none outstanding pro
forma and pro forma as adjusted)..... 96,323 -- --
Common Stock, $0.001 par value
(13,343,333 shares authorized;
1,395,788 shares issued and
outstanding actual; 100,000,000
shares authorized pro forma and pro
forma as adjusted; 6,403,059 shares
outstanding pro forma; 10,766,695
shares outstanding pro forma as
adjusted)............................ 1,958 98,281 143,221
Deferred compensation................. (267) (267) (267)
Accumulated deficit................... (108,633) (108,633) (108,633)
--------- --------- ---------
Total stockholders' equity (deficit).. (10,619) (10,619) 34,321
--------- --------- ---------
Total capitalization.................... $ 24,730 $ 24,730 $ 69,670
========= ========= =========
</TABLE>
- --------
(1) Excludes 482,229 shares of Common Stock issued after March 31, 1997 and
2,915,621 shares issuable upon exercise of options and warrants
outstanding at May 15, 1997 at a weighted average exercise price of $12.00
per share. In addition, the foregoing tables exclude the Common Stock
subject to rescission. Therefore such shares are excluded from the number
of shares outstanding and the purchase price thereof is excluded from
total consideration paid for shares. See "Description of Capital Stock--
Warrants."
(2) Includes an assumed 1,363,636 shares to be issued to certain strategic
investors concurrent with the closing of this offering (assuming a public
offering price of $11.00 per share). See "Direct Placements."
(3) See Note 3 of Notes to Financial Statements.
21
<PAGE>
DILUTION
The net tangible book value of the Company as of March 31, 1997 was
$(12,322,000), or $(1.92) per share of Common Stock. Net tangible book value
per share is equal to the Company's total tangible assets less its total
liabilities, divided by the number of shares of Common Stock outstanding after
giving pro forma effect to the conversion into Common Stock of all Class B
Common Stock and all outstanding Preferred Stock. After giving effect to the
sale of 3,000,000 shares of Common Stock offered hereby and an assumed
1,363,636 shares offered in the Direct Placements at an assumed public
offering price of $11.00 per share and the receipt by the Company of the
estimated net proceeds therefrom, after deducting underwriting discounts and
estimated offering expenses, the net tangible book value of the Company as of
March 31, 1997 would have been $32,618,000, or $3.03 per share. This
represents an immediate increase in net tangible book value of $4.95 per share
to existing stockholders and an immediate dilution of $7.97 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share...................... $11.00
------
Net tangible book value per share before the offering and
Direct Placements(1)...................................... $(1.92)
------
Increase per share attributable to new investors in the
offering.................................................. 4.95
------
Net tangible book value per share after the offering and
Direct Placements........................................... 3.03
------
Dilution per share to new investors.......................... $ 7.97
======
</TABLE>
The following table summarizes as of March 31, 1997, the number of shares of
Common Stock purchased from the Company, the total consideration paid to the
Company and the average price per share paid by existing stockholders, by
investors participating in the Direct Placements and by the investors
purchasing shares of Common Stock in this offering (before deducting
underwriting discounts and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)..... 6,403,059 59.5% $ 98,281,000 67.2% $15.35
Direct placements............ 1,363,636 12.7 15,000,000 10.2 11.00
Investors in the offering.... 3,000,000 27.8 33,000,000 22.6 11.00
---------- ----- ------------ -----
Total...................... 10,766,695 100.0% $146,281,000 100.0%
========== ===== ============ =====
</TABLE>
- --------
(1) Adjusted to give effect to the conversion of all outstanding shares of
Class B Common Stock and Preferred Stock into Common Stock.
The foregoing tables (i) do not give effect to the issuance of 482,229
shares of Common Stock after March 31, 1997, (ii) assume no exercise of the
Underwriters' over-allotment option and (iii) exclude 2,915,621 shares that
were issuable upon exercise of options and warrants outstanding at May 15,
1997 at a weighted average exercise price of $12.00 per share. See
"Description of Capital Stock--Warrants." To the extent of such new issuances
and to the extent that outstanding options and warrants are exercised in the
future, there will be further dilution to new investors. In addition, the
foregoing tables exclude the Common Stock subject to rescission. Therefore
such shares are excluded from the number of shares outstanding, the purchase
price thereof is treated as a liability in calculating net tangible value and
such amount is deducted from total consideration paid for shares.
22
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Financial Statements and related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere herein. The selected financial data for the three years ended
December 31, 1996 are derived from financial statements of the Company which
have been audited by Ernst & Young LLP, independent auditors and included
elsewhere herein. The selected financial data for the period from May 1, 1991
(inception) through December 31, 1992 and for the year ended December 31, 1993
and for the three-month periods ended March 31, 1996 and March 31, 1997 are
derived from unaudited financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which the Company considers necessary for a fair presentation of the financial
position and results of operations for these periods. The operating results
for the three months ended March 31, 1997 are not necessarily indicative of
the results to be expected for any future period. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1991
(INCEPTION) THREE MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, --- ------------------------------------ ------------------
1992 1993 1994 1995 1996 1996 1997
------------ ------- ------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ -- $ 23 $ 442 $ 2,483 $ 15,648 $ 1,533 $ 9,154
Costs and operating
expenses
Cost of revenue........ -- 130 2,891 16,168 47,945 7,256 15,744
Network equipment
write-off(1).......... -- -- -- -- 8,321 -- --
Development............ -- 349 534 837 2,449 340 1,025
Marketing and sales.... -- 131 639 3,899 16,609 3,120 4,936
General and
administrative........ 28 634 611 2,866 3,445 736 1,060
----- --- ------- ------- -------- -------- -------- --------
Total costs and
operating expenses.... 28 1,244 4,675 23,770 78,769 11,452 22,765
----- --- ------- ------- -------- -------- -------- --------
Loss from operations.... (28) (1,221) (4,233) (21,287) (63,121) (9,919) (13,611)
Net interest expense.... -- 24 57 721 3,260 461 1,070
----- --- ------- ------- -------- -------- -------- --------
Net loss................ $ (28) $(1,245) $(4,290) $(22,008) $(66,381) $(10,380) $(14,681)
===== === ======= ======= ======== ======== ======== ========
Pro forma net loss per
share(2)............... $ (13.84) $ (2.24)
======== ========
Weighted average shares
used in computing pro
forma net loss per
share(2)............... 4,797 6,540
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
----- ------- ------- ------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit)............... $ -- $ (603) $(1,046) $ 8,992 $(10,868) $(24,705)
Property and equipment,
net..................... -- 675 1,303 16,289 47,927 53,227
Total assets............. -- 783 1,798 37,235 70,722 61,438
Long-term debt and
capital lease
obligations, less
current portion......... -- 491 -- 10,977 30,551 35,349
Convertible debentures... 760 1,648 70 -- --
Common stock subject to
rescission.............. -- -- 2,812 5,080 5,150 5,150
Common and preferred
stock................... 28 101 1,360 37,334 97,065 98,281
Deferred compensation.... -- -- -- -- (188) (267)
Stockholders' equity
(deficit)............... (28) (1,172) (4,203) 9,763 2,925 (10,619)
</TABLE>
- --------
(1) See Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 2 of Notes to Financial Statements.
(2) The pro forma net loss per share computation gives retroactive effect to
the conversion of outstanding Preferred Stock into Common Stock upon
closing of the offering. See Note 1 of Notes to the Financial Statements
for an explanation of the calculation of pro forma net loss per share.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with financial
statements and related notes included elsewhere in this Prospectus. The
results shown herein are not necessarily indicative of the results to be
expected in any future periods. This discussion contains forward-looking
statements based on current expectations which involve risks and
uncertainties. Actual results and the timing of certain events may differ
significantly from those projected in such forward-looking statements due to a
number of factors, including those set forth in the section entitled "Risk
Factors" and elsewhere in this Prospectus.
OVERVIEW
Concentric was founded in 1991. From 1991 to mid-1993, the Company conducted
development and network services planning activities and realized no revenues.
Initially, the Company was focused on providing consumers with direct dial-up
connectivity to bulletin board services. On-line gaming and entertainment
services for consumers were commenced in July 1993 through the utilization of
a third party network infrastructure. The Company commenced operation of its
own network in late 1994.
In May 1995, new management led by Henry R. Nothhaft redefined and broadened
the Company's strategy to provide a range of Internet and tailored, value-
added IP-based network services to consumers and businesses.
The Company's revenue prior to 1996 has been primarily generated from
providing Internet access to consumers. The Company's current focus is on
developing and deploying VPNs and providing network access and Web hosting
services for enterprise customers. Contracts with enterprise customers
typically have a term ranging from one to three years. Enterprise-related
revenue accounted for 53.9% and 35.0% of the Company's total revenue for the
three months ended March 31, 1997 and the year ended December 31, 1996,
respectively. The Company expects enterprise-related revenue to represent an
increasing portion of total revenue in future periods. The foregoing
expectation is a forward-looking statement that involves risks and
uncertainties, and actual results could vary as a result of a number of
factors including the Company's operating results, the results and timing of
the Company's launch of new products and services, governmental or regulatory
changes, the ability of the Company to meet product and project demands, the
success of the Company's marketing efforts, competition and acquisitions of
complementary businesses, technologies or products.
The Company has incurred net losses and experienced negative cash flow from
operations since inception and expects to continue to operate at a net loss
and experience negative cash flow for the foreseeable future. The Company
experienced net losses of approximately $4.3 million, $22.0 million and $66.4
million for the years ended December 31, 1994, 1995 and 1996, respectively and
$14.7 million for the quarter ended March 31, 1997. At March 31, 1997, the
Company had an accumulated deficit of approximately $108.6 million. There can
be no assurance that the Company will be able to sustain revenue growth or to
achieve profitability or positive cash flow on either a quarterly or an annual
basis. While the Company has incurred substantial operating losses since
inception, the Company's ability to utilize net operating loss carryforwards
for income tax purposes to offset taxable income, if any, realized in future
periods is severely limited. See Note 8 of Notes to Financial Statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
Revenue. Revenue totaled approximately $9.2 million for the three months
ended March 31, 1997, a $7.7 million increase over revenue of approximately
$1.5 million for the three months ended March 31, 1996. Revenue derived from
network services to enterprise customers totaled $4.9 million for the period,
an increase of $4.7 million over the same period in 1996. Revenue derived from
consumer services totaled $4.3 million, an increase of $3.0 million over first
quarter 1996 revenue of $1.3 million derived from such services. The increased
proportion of revenue derived from enterprise customers reflects the Company's
current focus on developing and deploying products for this market as well as
the lower average selling prices of the Company's offerings for consumer
Internet access due to industry-wide adoption of flat monthly rates for
unlimited Internet access in April 1996.
24
<PAGE>
For the three months ended March 31, 1997, revenue from WebTV Networks, Inc.
("WNI") accounted for 32.7% of the Company's revenue. No other customer
accounted for more than 10% of the Company's revenue during the period. The
Company expects revenue from WNI to decrease both in absolute amounts and as a
percentage of revenue.
Cost of Revenue. Cost of revenue consists primarily of personnel costs to
maintain and operate the Company's network, access charges from local exchange
carriers, backbone and Internet access costs, depreciation of network equipment
and amortization of related assets. Cost of revenue for the three month period
ended March 31, 1997 was approximately $15.7 million, an increase of $8.4
million from cost of revenue of $7.3 million in the first quarter of 1996. This
increase is attributable to the overall growth in the size of the network. As a
percentage of revenue, such costs declined to 172.0% of revenue in the three
months ended March 31, 1997 from 473.3% of revenue in the year earlier period,
due to increased network utilization associated with the Company's revenue
growth and lower per port costs of the Company's SuperPOP network architecture
deployed in the second half of 1996. The Company expects its cost of revenue to
continue to increase in dollar amount, while declining as a percentage of
revenue as the Company expands its customer base.
Development. Development expense consists primarily of personnel and
equipment related expenses associated with the development of products and
services of the Company. Development expense was approximately $1.0 million and
$300,000 for the three months ended March 31, 1997 and 1996, respectively. This
higher level of development expense reflects an overall increase in personnel
to develop new product offerings and to manage the overall growth in the
network. Development expense as a percentage of revenue declined to 11.2% for
the three months ended March 31, 1997 from 22.2% in the year earlier period as
a result of the Company's increased revenue. The Company expects its
development spending to continue to increase in dollar amount, but to decline
as a percentage of revenue.
Marketing and Sales. Marketing and sales expense consists primarily of
personnel expenses, including salary and commissions, costs of marketing
programs and the cost of 800 number circuits utilized by the Company for
customer support functions. Marketing and sales expense was approximately $4.9
million and $3.1 million for the three months ended March 31, 1997 and 1996,
respectively. The $1.8 million increase in 1997 reflects a substantial
investment in the customer support, marketing and sales organizations necessary
to support the Company's expanded customer base. This increase also reflects a
growth in subscriber acquisition costs, related to both increased direct
marketing efforts as well as commissions paid to distribution partners.
Additionally, the increase reflects the ramp-up of marketing efforts related to
the introduction of enterprise products and services. Marketing and sales
expense as a percentage of revenue declined to 53.9% for the three months ended
March 31, 1997 from 203.5% in the year earlier period as a result of the
Company's increased revenue. The Company expects marketing and sales
expenditures to continue to increase in dollar amount, but to decline as a
percentage of revenue.
General and Administrative. General and administrative expense consists
primarily of personnel expense and professional fees. General and
administrative expense was approximately $1.1 million and $700,000 for the
three months ended March 31, 1997 and 1996, respectively. This higher level of
expense reflects an increase in personnel and professional fees necessary to
manage the financial, legal and administrative aspects of the business. General
and administrative expense as a percentage of revenue declined to 11.6% for the
three months ended March 31, 1997 from 48.0% in the year earlier period as a
result of the Company's increased revenue. The Company expects general and
administrative expense to increase in dollar amount, reflecting its growth in
operations and costs associated with being a publicly held entity, but to
decline as a percentage of revenue.
Net Interest Expense. Net interest expense was approximately $1.1 million and
$500,000 for the first quarter of 1997 and 1996, respectively. The increase is
primarily due to an increase of $31.6 million in principal amount of
capitalized lease obligations from March 31, 1996 to March 31, 1997.
Net Loss. The Company's net loss increased to approximately $14.7 million for
the quarter ended March 31, 1997 as compared to approximately $10.4 million for
the same quarter of 1996.
25
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue. Revenue totaled approximately $15.6 million for the year ended
December 31, 1996, an increase of $13.1 million over 1995 revenue of
approximately $2.5 million. Revenue derived from consumer services totaled
$10.2 million in 1996, an increase of $7.7 million over 1995 revenue derived
from such services. Revenue derived from the sale of network services for
enterprise customers totaled $5.4 million in 1996 and were immaterial in
amount in 1995. The average selling prices of the Company's offerings for
consumer Internet access services decreased by approximately 33% beginning in
April 1996 due to industry-wide adoption of flat monthly rates for unlimited
Internet access.
Cost of Revenue. Cost of revenue for the year ended December 31, 1996 was
approximately $47.9 million, an increase of $31.7 million from 1995 cost of
revenue of approximately $16.2 million. The largest component of this
increase, approximately $15.0 million, was the cost of providing virtual local
access ("VLA") service over 800 circuits. VLA service was an interim solution
for providing nationwide coverage, while the Company's SuperPOP network
architecture was being deployed. This deployment was substantially completed
in December 1996. Costs associated with VLA service are expected to be
immaterial in amount in 1997. The remainder of the increase in 1996 cost of
revenue is primarily attributable to the overall growth in the size of the
network.
Network Equipment Write-off. In 1996, the Company took a charge of
approximately $8.3 million related to the cost of certain network equipment.
The Company decided not to deploy the equipment in the network because of
concerns that the equipment would not provide the functionality and
reliability required by the Company and concerns that the equipment provider
would be unable to provide timely maintenance and support. See Note 2 of Notes
to Financial Statements.
Development. Development expense for the year ended December 31, 1996 was
approximately $2.4 million, an increase of $1.6 million over 1995 expenditures
of approximately $837,000. This higher level of development expense in 1996
primarily reflects an overall increase in personnel to develop new product
offerings and to manage the overall growth in the network.
Marketing and Sales. Marketing and sales expense for 1996 was approximately
$16.6 million, an increase of $12.7 million over 1995 expenditures of
approximately $3.9 million. This increase in marketing and sales expense
reflects a substantial investment in the customer support, marketing and sales
organizations required to support the Company's expanded customer base. This
increase also reflects a growth in subscriber acquisition costs, related to
both increased direct marketing efforts as well as commissions paid to
distribution partners. Additionally, the increase reflects the ramp-up of
marketing efforts related to the introduction of enterprise products and
services.
General and Administrative. General and administrative expense for 1996 was
approximately $3.4 million, an increase of $500,000 over 1995 expenditures of
approximately $2.9 million. This increase reflects an increase in personnel
and professional fees necessary to manage the financial, legal and
administrative aspects of the business.
Net Interest Expense. Net interest expense for 1996 was approximately $3.3
million as compared to approximately $721,000 for 1995. The increase of $2.6
million is primarily due to an increase of $27.6 million in principal amount
of the capitalized lease obligations from December 31, 1995 to December 31,
1996. This increase in interest expense was partially offset by greater
interest income from higher average cash balances resulting from equity
financings completed in late 1995 and in August 1996. See Notes 3 and 6 of
Notes to Financial Statements.
Net Loss. The Company's net loss increased to approximately $66.4 million in
1996 from approximately $22.0 million in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue. Revenue totaled approximately $2.5 million for 1995, an increase of
$2.1 million, over 1994 revenue of approximately $400,000. The Company's
revenue in both of these years was derived entirely from the sale of Internet
access services to consumers.
26
<PAGE>
Cost of Revenue. Cost of revenue for 1995 was approximately $16.2 million,
an increase of $13.3 million over 1994 cost of revenue of approximately $2.9
million. The increase in cost of revenue from 1994 to 1995 reflected overall
higher costs associated with deploying and managing the Company's own network
infrastructure. Prior to late 1994, the Company had leased third party network
facilities and thus had not incurred significant network deployment and
maintenance expenses.
Development. Development expense for 1995 was approximately $837,000, an
increase of $303,000 over 1994 expenditures of approximately $534,000. This
higher level of development expense primarily reflected an overall increase in
personnel required to develop new products and support network growth.
Marketing and Sales. Marketing and sales expense for 1995 was approximately
$3.9 million, an increase of $3.3 million over 1994 expenditures of
approximately $639,000. This higher level of spending in 1995 reflected the
Company's new market focus on providing IP-based network services. In
connection with this new focus, the Company incurred increased expenses
related to direct subscriber acquisition, formation of a telesales group,
development of strategic relationships and marketing communications. With the
growth in subscribers, the Company added personnel to its customer support
organization.
General and Administrative. General and administrative expense for 1995 was
$2.9 million, an increase of $2.3 million over 1994 expenditures of
approximately $600,000. This increase generally reflects an increase in
personnel and professional fees necessary to manage the financial, legal and
administrative aspects of the business.
Net Interest Expense. Net interest expense for 1995 was approximately
$721,000 as compared with approximately $57,000 for 1994. This increase in net
interest expense resulted from the Company's deployment of network equipment
for its own network infrastructure beginning in late 1994 which equipment
purchases were primarily financed under capital leases. Capital lease
obligations at December 31, 1995 were $14.2 million, compared with no such
obligations at December 31, 1994.
Net Loss. The Company's net loss increased to approximately $22.0 million in
1995 from a net loss of $4.3 million in 1994.
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<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
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<PAGE>
acceptance of new and enhanced versions of the Company's services; changes in
pricing policies by the Company's competitors; the Company's ability to obtain
sufficient supplies of sole- or limited-source components; user demand for
network and Internet access services; balancing of network usage over a 24-
hour period; and general access services.
In view of the significant growth of the Company's operations, the Company
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance and that the Company may
experience in the future significant period-to-period fluctuations in
operating results. The Company expects to focus in the near term on building
and increasing its revenue base, which will require it to significantly
increase its expenses for personnel, marketing, network infrastructure and the
development of new services, and may adversely impact short term operating
results. As a result, there can be no assurance that the Company will be
profitable on a quarterly basis in the future and the Company believes that it
will incur losses in the near term.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has satisfied its cash requirements primarily through
capitalized lease financings and the sale of capital stock. The Company's
principal uses of cash are to fund working capital requirements and capital
expenditures and to service its capital lease financing obligations. Net cash
used in operating activities for the three months ended March 31, 1997 and
1996 was approximately $11.1 million and $8.4 million, respectively. Net cash
used in investing activities for the three months ended March 31, 1997 and
1996 was approximately $2.5 million and $500,000, respectively. For the three
months ended March 31, 1997 and 1996, cash of approximately $1.2 million and
$800,000, respectively, was used in financing activities. Cash used in the
first quarter of 1997 is net of $1.1 million cash received from a current
investor for rights to purchase warrants, which warrants were subsequently
issued.
Net cash used in operating activities for the years ended December 31, 1996,
1995 and 1994 was approximately $42.1 million, $15.8 million and $2.6 million,
respectively. Net cash used in investing activities was approximately $7.3
million, $1.2 million and $1.0 million for 1996, 1995 and 1994, respectively.
Net cash flow provided by financing activities was approximately $48.1
million, $36.0 million and $3.7 million for 1996, 1995 and 1994, respectively.
Cash provided by financing activities in 1996 includes approximately $53.5
million net proceeds from the issuance of Series D Preferred Stock, while 1995
reflects net proceeds from the issuance of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, totaling approximately $34.8
million.
The Company used approximately $6.9 million, $1.4 million and $791,000 of
cash to purchase capital equipment and leasehold improvements in 1996, 1995
and 1994, respectively, and approximately $2.6 million in the three months
ended March 31, 1997. To date, the Company primarily has used capital lease
arrangements to finance capital equipment purchases and the principal amount
of such lease financing obligations totaled $47.6 million at March 31, 1997.
The Company currently has financing availability under the following equipment
lease facilities: (i) a master lease agreement with no minimum or maximum for
the lease financing of equipment sold and/or manufactured by Racal; (ii) a
master lease agreement of up to a maximum of $3.3 million in the aggregate for
lease financing of telecommunications and computer equipment which was fully
utilized at March 31, 1997; and (iii) a master lease agreement of up to a
maximum of $2.0 million in the aggregate for lease financing of
telecommunications and computer equipment, of which approximately $1.7 million
had been utilized at March 31, 1997. In addition, the Company is contemplating
entering into negotiations for a lease financing facility to finance its
telecommunications and computer equipment requirements for the remainder of
1997. See Note 3 of Notes to Financial Statements.
The Company has already made significant capital investments in its network,
data centers, development equipment and other capital assets totaling
approximately $39.1 million, $17.2 million and $800,000 in 1996, 1995 and
1994, respectively. The Company expects to make additional investments in
capital equipment to expand and enhance its network, with approximately $8.0
million of anticipated purchases of capital equipment throughout the remainder
of 1997, of which the Company plans to finance approximately $5.0 million
through capital lease arrangements. The foregoing expectation with respect to
additional capital investments is a forward-looking statement that involves
risks and uncertainties and the actual amount of capital investment could vary
materially as a result of a number of factors, including those described in
"Risk Factors--Future Capital Needs; Uncertainty of Additional
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<PAGE>
Financing." In addition, the Company may be obligated to repurchase shares
tendered in connection with the Company's rescission offer for a maximum
liability of approximately $5.1 million plus statutory interest of
approximately $1.0 million with respect to shares issued on conversion of the
convertible debentures and an amount of $556,000 with respect to options
issued under the 1995 Plan. See Note 5 of Notes to Financial Statements and
"Risk Factors--Rescission Offers."
Since the Company expects to incur operating losses in the foreseeable
future, the Company will rely on the following to meet its near term capital
requirements: (i) the contemplated lease financing discussed above; and (ii)
the net proceeds from this offering and the Direct Placements. The Company
believes that such financing will be sufficient to meet its anticipated cash
needs for working capital and for the acquisition of capital equipment at
least for the next 12 months. However, there can be no assurance that the
Company will not require additional financing within this time frame. The
Company's forecast of the period of time through which its financial resources
will be adequate to support its operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary. The Company
may be required to raise additional funds through public or private financing,
strategic relationships or other arrangements. There can be no assurance that
such additional funding, if needed, will be available on terms attractive to
the Company, or at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Strategic arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain
of its technologies. See "Risk Factors--Future Capital Needs; Uncertainty of
Additional Financing."
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123"), which established a fair-value based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies that elect not to adopt the new method of
accounting. In January 1996, the Company adopted the disclosure requirements
of FAS 123. The Company accounts for stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees." The adoption of the disclosure requirements of FAS 123 did not
have a material impact on the Company's financial condition or results of
operations.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"),
which adjusts the calculation of earnings per share under generally accepted
accounting principles. FAS 128 is effective for the Company's fiscal year
ending December 31, 1997. See Note 1 of Notes to Financial Statements for the
effect of FAS 128 on the Company's pro forma net loss per share presentation.
30
<PAGE>
BUSINESS
Concentric provides tailored, value-added Internet Protocol ("IP") based
network services for businesses and consumers. To provide these services, the
Company utilizes its low/fixed latency, high-throughput network, employing its
advanced network architecture and the Internet. Concentric's service offerings
for enterprises include virtual private networks ("VPN's"), dedicated access
facilities and Web hosting services. These services enable enterprises to take
advantage of standard Internet tools such as browsers and high-performance
servers for customized data communications within an enterprise and between an
enterprise and its suppliers, partners and customers. These services combine
the cost advantages, nationwide access and standard protocols of public
networks with the customization, high performance, reliability and security of
private networks. Among the current enterprise customers are Acer America
Corporation, Inc., Intuit, Inc., Total Entertainment Network, WebTV Networks,
Inc. and Ziff-Davis Publishing Co. Concentric's revenue from enterprise
customers accounted for 53.9% and 35.0% of the Company's revenue for the three
months ended March 31, 1997 and the year ended December 31, 1996, respectively.
Concentric's service offerings for consumers and small office/home office
customers include local Internet dial-up access, Web hosting services and
online multiplayer gaming.
INDUSTRY BACKGROUND
Development of Private Networks
Historically, the data communications services offered by public carriers had
limited security features, were expensive and did not adequately ensure
accurate and reliable transmission. As a result, many corporations established
and maintained their own private wide-area networks ("WANs") to provide
network-based services, such as transaction processing, to their customers and
to coordinate operations between employees, suppliers and business partners.
Such private WANs were frequently customized to specific applications, business
practices and user communities. As a result, these private WANs had the
capability of providing organizations and users with tailored performance and
features, security, reliability and private-label branding.
The demand for WANs has grown as a result of today's competitive business
environment. Factors stimulating the higher demand include the need to provide
broader and more responsive customer service, to operate faster and more
effectively between operating units, suppliers and other business partners, and
the need to take advantage of new business opportunities for network-based
offerings in a timely fashion. In addition, as businesses become more global in
nature, the ability to access business information across the enterprise has
become a competitive necessity.
Despite the attractive capabilities of private networks, limitations of many
private WANs have impeded or reduced the effectiveness of their use. These
networks, which traditionally have required the use of leased telephone lines
with bandwidth dedicated solely to this purpose and the purchase of vendor-
specific networking equipment, are inherently expensive to set up, operate and
maintain. Private WANs often require the development and maintenance of
proprietary software and lack cost-effective access. These aspects of
developing, deploying and maintaining such private WANs have conflicted with
the increased focus of many businesses on their core competencies, which has
prompted the outsourcing of many noncore functions. The Company believes that
many businesses have viewed as unacceptable the costs of maintaining a private
WAN infrastructure and the risks of investing in new technologies in the
absence of a single technological standard.
Emergence of the Internet
The emergence of the Internet and the widespread adoption of IP as a data
transmission standard in the 1990s, combined with deregulation of the
telecommunications industry and advances in telecommunications technology have
significantly increased the attractiveness of providing data communication
applications and services over public networks. At the same time, growth in
client/server computing, multimedia personal computers and online computing
services and the proliferation of networking technologies have resulted in a
large and growing group of people who are accustomed to using networked
computers for a variety of purposes, including e-mail, electronic file
transfers, online computing and electronic financial transactions. These trends
have led businesses increasingly to
31
<PAGE>
explore opportunities to provide IP-based applications and services within
their organization, and to customers and business partners outside the
enterprise.
Need for IP-Based Private Networks
The ubiquitous nature and relatively low cost of the Internet have resulted
in its widespread usage for certain applications, most notably Web access and
e-mail. However, usage of the Internet for mission-critical business
applications has been impeded by the limited security and unreliable
performance inherent in the structure and management of the Internet.
Additionally, emerging applications such as IP-based voice and video
applications, multiplayer gaming and certain multimedia applications require a
network that has high performance characteristics, including low and/or fixed
latency (response time) and high throughput, as well as the ability to
customize features for specific user requirements. On the Internet, latency is
frequently relatively high and variable, making it suboptimal for these
emerging applications. Although private networks are capable of offering lower
and more stable latency levels, providers of these emerging applications also
desire a network that will offer their customers full access to the Internet.
As a result, these businesses and applications providers require a network that
combines the best features of the Internet, such as openness, ease of access
and low cost made possible by the IP standard, with the advantages of a private
network, such as high security, low/fixed latency and customized features.
Industry analysts expect the market size for both value-added IP data
networking services and Internet access to grow rapidly as businesses and
consumers increase their use of the Internet, intranets and privately managed
IP networks. The total market for these services is projected to grow from $1.2
billion in 1996 to approximately $22.7 billion in the year 2000, with
approximately $10.4 billion in the enterprise market segment and $12.3 billion
in the consumer market segment.
THE CONCENTRIC SOLUTION
Concentric provides tailored, value-added IP-based network services for
businesses and consumers. To provide these services, the Company employs a
low/fixed latency, high-throughput network based on its advanced,
geographically dispersed ATM and frame relay backbone and the Internet.
Concentric allows enterprises to create virtual private networks providing
tailored network access, content and services to enterprise-defined end users
with higher reliability and more security than is available over the Internet.
Concentric's VPN solutions also provide the ease of access and flexibility of
public networks at a lower cost than private WANs without sacrificing
reliability or security.
The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, SuperPOPs in 19 major metropolitan areas and 150
secondary and tertiary POPs in other cities, allowing dial-up network access in
the U.S. and Canada. In addition, the Company can provide analog dial-up, frame
relay, fractional T-1, T-1 and DS3 access to the network. The Concentric
network is engineered and managed to provide superior quality of service,
balancing several key performance criteria. The Company provides guaranteed
levels of service for dedicated access facilities to enterprise customers, and
targets performance benchmarks for connection success rates, latency levels and
throughput for all of its service offerings. Concentric also believes that a
major advantage of its network architecture is its ability to perform adaptive
call processing ("ACP"), which is designed to enable the tuning of network
parameters and traffic routing to meeting the latency, throughput, security,
and reliability requirements of a specific customer or application on a call-
by-call basis. Concentric is currently deploying the ACP technology in its
network and is planning to commercially introduce ACP capabilities during the
second half of 1997.
In addition to strong network performance capabilities, the Company believes
that several factors distinguish its ability to provide value-added network
services. These factors include: (i) excellent service quality; (ii) rapid
development time and flexibility in meeting custom applications requirements;
(iii) responsive customer support and effective account management, available
24 hours per day, seven days per week through the Company's 142 customer
service personnel; and (iv) the Company's technical expertise in devising cost-
effective network solutions for customers.
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BUSINESS STRATEGY
The Company's objective is to become the leading supplier of value-added, IP-
based network services worldwide. In order to achieve this goal, the Company is
implementing a business strategy focused on the following key principles:
Rapidly Provide Cost-Effective, Tailored Network Solutions. The Company
intends to capitalize on its expertise in developing tailored VPNs to establish
a leadership position in rapidly developing, deploying and maintaining a range
of value-added network services to meet the specific needs of its customers.
The Company utilizes a set of software and hardware technology modules as
"building blocks" to offer a variety of tailored network services on an IP-
based network architecture with minimal additional investment in engineering
and rapid time to market for businesses and consumers. These building blocks
include modules for client and system software, dedicated and remote network
connectivity, tracking and billing, Web hosting, customer support and security.
Optimize Network Utilization. Given the fixed cost nature of Concentric's
network infrastructure, the Company strives to increase total network
utilization and to optimize this utilization by targeting both daytime business
and evening-intensive consumer users to balance the network's usage throughout
a 24-hour period. Accordingly, while the Company's current strategic focus is
on providing value-added IP-based communications services to enterprises, the
Company intends to continue partnering with multichannel distributors to
acquire and maintain a base of consumer subscribers who access the Concentric
network predominantly during non-business hours.
Employ Leveraged Marketing Through Strategic Partners. The Company actively
seeks to form alliances with certain software developers, gaming companies, and
telecommunications service and equipment suppliers that have substantially
greater marketing, distribution and sales resources than does the Company and
that have a large installed customer base. These alliances facilitate the cost-
effective acquisition of consumer and business customers and increase
Concentric's network utilization. These marketing relationships are developed
and enhanced through the bundling of Concentric's IP-based network services
with the products and services offered by the strategic partners. These
relationships may involve customized browsers, registration services and
specialized pricing, revenue sharing and billing programs. To date, Concentric
has established such strategic relationships with a number of companies,
including Acer America Corporation, Bay Networks, Inc., Intuit, Inc., Microsoft
Corporation, Netscape, OzEmail, PictureTel Corporation ("PictureTel"), Racal-
Datacom, Inc., Total Entertainment Network, Inc. ("TEN"), Telecom Italia and
WebTV Networks, Inc. ("WNI"). See "--Key Customer Applications" and "Sales and
Marketing."
Offer Next Generation Network Services. The Company is continuing to expand
the value-added network services that it makes available to its customers.
Towards this end, the Company is in early stage trials with providers of video
conferencing and IP-based telephony services that require the low/fixed latency
characteristics afforded by the Concentric network. Additionally, the Company
is applying for licenses to become a Competitive Local Exchange Carrier
("CLEC") in selected states. The Company believes that successful
implementation of its CLEC strategy will enable the Company to reduce its local
access charges, as well as to expand its range of services.
Deploy Network Services Internationally. The Company believes that its
enterprise customers increasingly will require their network solutions
providers to offer network services on a global basis. Pursuant to an agreement
with TMI Telemedia International, Ltd., a subsidiary of Telecom Italia SpA
("TMI"), entered into in August 1996, the Company is working to establish an
international network based on Concentric's network technology and expertise
and TMI's existing telecommunications infrastructure to deliver a range of
compatible network services worldwide. TMI currently has a telecommunications
network deployed in over 40 countries worldwide. While the Company does not
expect to generate significant revenue from deployment of an international
network until at least 1998, the Company believes that the ability to deliver
network solutions globally will be a key competitive factor in its industry.
SERVICES
Concentric provides tailored, value-added IP-based network services for
businesses and consumers. To provide these services, the Company employs a
low/fixed latency high-throughput network based on an advanced, geographically
dispersed ATM and frame relay backbone and the Internet.
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Enterprise Solutions
For businesses, the Company has developed a set of enterprise services
including VPNs, dedicated and remote access services and Web hosting services.
VPNs. Concentric's VPN solutions enable its customers to deploy tailored, IP-
based mission-critical business applications for internal enterprise, business-
to-business and business-to-customer data communications on the Concentric
network while also affording high-speed access to the Internet. Concentric
offers its customers a secure network on which to communicate and access
information between an organization's geographically dispersed locations;
collaborate with external groups or individuals, including customers,
suppliers, and other business partners and use the Web to access information on
the Internet and communicate with other Web users. The Company's VPN solutions
allow the enterprise customer to tailor the type of access, services and
information that various users of the VPN are afforded according to the
specific needs of the enterprise.
The Company's VPN building blocks include modules for client and system
software, network connectivity (high-speed dedicated access lines, remote
access services and dial-up accounts), tracking and billing, Web hosting
(intranet, Web, e-mail, news or other servers), customer support and security.
VPN customers may choose to use one or more of the elements individually or in
tandem with existing or third-party components to create a customized
networking solution that is generally superior in terms of price, performance
and time to market to the option of building and maintaining a private network.
Key benefits include rapid implementation time, lower operating and maintenance
costs, minimal capital investment, higher quality of service overall and 24-
hour network and customer support.
For example, starting in October 1995 the Company created and now maintains
the VPN used by Intuit customers using a customized version of the Netscape
Navigator browser bundled with Quicken for Windows, Quickbooks, ProTax and
TurboTax. The bundled software allows a Quicken customer to click on an icon
that launches Netscape, and takes the user directly to Quicken Financial
Network Website. On the Web page Quicken customers will find useful financial
advice, information from Intuit's bank and financial institution partners,
answers to commonly asked technical questions and tips on how to tap the full
potential of Intuit's financial products. See "--Key Customer Applications."
Pricing options for enterprise solutions are a combination of standard prices
and standard charges for integration of the Company's VPN building blocks into
a comprehensive package. VPN services are priced by combining elements such as
dedicated access facilities and Web hosting with customer support, software and
other Concentric building blocks. The pricing is standard for each service, but
may be combined as a package with quantity discounts.
Dedicated Access Facilities. In April 1997, the Company began offering
dedicated access facilities ("DAFs") as a stand-alone product targeted at
businesses that desire single or multipoint high-speed, dial-up and/or
dedicated connections to distributed locations such as regional offices,
warehouses, manufacturing facilities and/or to the Internet. DAF products are
primarily targeted at providing intranet connectivity amongst distributed
enterprise locations with the additional benefit of Internet access if desired
by the customer. The Company provides a full range of connectivity options,
allowing the customer to order the appropriate amount of bandwidth to meet its
networking requirements. In addition, Concentric offers its DAF customers a
guarantee on the quality of service and performance of these facilities.
Furthermore, Concentric believes it is the only network service provider to
bill customers based on average usage levels rather than peak usage levels.
Concentric also performs around-the-clock monitoring of network performance
and enables its customers to monitor their network as well through the
Company's proprietary ConcentricView software. ConcentricView is a distributed
Web-based network management tool that enables a customer to monitor usage on a
call-by-call basis and performance of that portion of the Concentric network
bandwidth supporting the customer's applications. The Company believes it is
the only network services provider to offer this service.
Concentric has four offerings in its dedicated access product line:
FullChannel T-1, FullChannel T-1 Protected, FlexChannel and LECFrame Relay.
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
FULLCHANNEL T-1 PRICING
ONE-TIME FEE AVERAGE USAGE LEVEL MONTHLY FEE(1)
------------ ------------------- --------------
<S> <C> <C>
$3,000.00 0-64Kbps $1,095.00
$3,000.00 64-128Kbps $1,595.00
$3,000.00 128-256Kbps $2,095.00
$3,000.00 256-384Kbps $2,395.00
$3,000.00 384Kbps + $2,695.00
- ------------------------------------------------------------------------------------------
</TABLE>
FULLCHANNEL T-1 PROTECTED PRICING
<TABLE>
<CAPTION>
ONE-TIME FEE AVERAGE USAGE LEVEL MONTHLY FEE(1)
------------ ------------------- --------------
<S> <C> <C>
$3,000.00 384Kbps + $2,095.00
- ------------------------------------------------------------------------------------------
</TABLE>
FLEXCHANNEL PRICING
<TABLE>
<CAPTION>
ONE-TIME FEE FRACTIONAL T-1 BANDWIDTH MONTHLY FEE(1)
------------ ------------------------ --------------
<S> <C> <C>
$3,000.00 128Kbps $ 895.00
$3,000.00 256Kbps $1,295.00
$3,000.00 384Kbps $1,595.00
$3,000.00 512Kbps $1,895.00
- ------------------------------------------------------------------------------------------
</TABLE>
LECFRAME RELAY PRICING(2)
<TABLE>
<CAPTION>
ONE-TIME FEE FRAME RELAY CIR(3) MONTHLY FEE(1)
------------ ----------- ------- --------------
<S> <C> <C> <C>
$2,000.00 56Kbps 32Kbps $ 395.00
$2,000.00 128Kbps 64Kbps $ 795.00
$2,000.00 256Kbps 128Kbps $ 995.00
$2,000.00 512Kbps 256Kbps $1,095.00
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Monthly billing based on average usage.
(2) Offer varies by region.
(3) Committed Information Rate.
FullChannel T-1 pricing is based on average utilization pricing. The
customer's usage is measured at five-minute intervals throughout the month,
and the average of all of those measurements is used to determine the
customer's bill at the end of the month. This is the appropriate choice for
those customers who have fluctuating and/or uncertain bandwidth consumption
patterns.
FullChannel T-1 Protected gives a customer a fixed price for a full 1.5
megabits of bandwidth. This is an economical choice for those customers who
recognize in advance that their bandwidth throughput requirements will equal
T-1 levels.
FlexChannel gives a customer the opportunity to purchase a fractional
portion of a T-1 for a fixed monthly fee. This is the appropriate choice for
the customers who know that their bandwidth requirements are going to be
consistently less than a full T-1.
LECFrame Relay is based on various LECs' Frame Relay facilities. Although
Concentric does not offer service level guarantees over LECFrame Relay,
Concentric does guarantee the committed information rate ("CIR"). This
offering gives a lower cost, lower performance network service for those
customers for whom performance is less imperative.
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Web Hosting Services. The Company's Web hosting services were introduced in
March 1997, and are targeted at businesses that are implementing high-
performance intranet, Web, e-mail, gaming, chat or other types of servers.
Concentric offers a wide range of hosting solutions structured to meet the
needs of small businesses to very large enterprises. By outsourcing its Web
hosting requirements to Concentric, an enterprise can reduce costs while
increasing reliability and performance of its servers.
Web hosting consists of providing and/or managing the necessary equipment to
allow companies to operate Web sites. The components of Web hosting are the
server; a workstation or PC that runs the Website; the facility to host the
server; high speed Internet access for hosted servers; server and power backup
to ensure 24 hour functionality; and maintenance to ensure ongoing operation
of the server. Concentric also bundles Web hosting software and network
services to provide businesses with complete Internet presence solutions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
WEB HOSTING PRICING
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>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DEDICATED CO-LOCATED SERVER PRICING
INTERNET CONNECTION MONTHLY PRICE
------------------- -------------
<S> <C>
1 Mbps Priority Bandwidth $1,500.00
2 Mbps Priority Bandwidth $2,500.00
4 Mbps Priority Bandwidth $4,500.00
Dedicated 10 Mbps Ethernet $5,000.00
Setup Fee $1,000.00
- --------------------------------------------------------------------------------
</TABLE>
Remote Access Service. The Company's remote access services ("RAS"), will be
marketed as Concentric RemoteLink, and are scheduled for commercial release in
mid-1997. RemoteLink services are targeted at businesses that have employees
in remote locations. RemoteLink will enable an enterprise's salespeople and
other mobile employees, telecommuters and business partners to dial into an
enterprise's corporate network resources and use them just as if they were
connected locally, thus increasing their potential productivity and allowing
for information to be available on a real-time basis across the enterprise.
Concentric's RemoteLink is designed to be highly customizable and will have
the ability to interface with existing Company network infrastructure.
Currently RemoteLink is in beta testing with Bay Networks, Inc. Additionally,
RemoteLink is being designed to support multiple layers of security including
privacy encryption, local and remote firewalls and network access security.
The Company believes that RemoteLink will help businesses significantly
reduce the high costs of telecommunications charges and user support
associated with building, deploying and maintaining their own remote access
WAN, typically based on remote access servers or modem pools, 800 circuits and
router links to the Internet. In addition, the enterprise will see utilization
of Concentric's high-performance network, combined with T1 or fractional T1
links to the enterprise LAN, offering more reliable and faster access.
Concentric RemoteLink will offer support for remote users 24 hours a day,
seven days a week. See "Risk Factors--Dependence on New and Enhanced
Services."
Consumer Services
Concentric provides its individual and small office/home office ("SOHO")
customers with a broad range of Internet access options and Web hosting e-
mail, chat, File Transfer Protocol ("FTP"), Gopher and online shareware
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<PAGE>
services. Users can choose from 800-number, telnet and direct dial services.
Concentric offers the Netscape Navigator or Microsoft Internet Explorer
browser to its users when they sign up for dial-up or 800-number service.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INTERNET ACCESS PRICING
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>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
WEB HOSTING PRICING
CONCENTRIC NETWORK
SHARED HOSTING SERVICES HOME OFFICE HOSTING
----------------------- -------------------
<S> <C>
Internet Access Yes
Address Subdomain
Email Accounts 5
Web site storage 5 MB
Monthly Throughput 300 MB
Set-up Fee $50.00
Monthly Price $29.95
- --------------------------------------------------------------------------------
</TABLE>
Concentric also offers a variety of shell accounts, including PPP, SLIP and
UNIX, as access solutions to users who do not require a graphical user
interface. Shell accounts also enable users who already have Internet access
to set up extra mailboxes or post their own Website. Shell account services
currently are priced at $10.00 per month.
The Company also offers DAFs to its SOHO and individual customers. These
customers use these facilities to connect their Web servers to the Concentric
network (and hence to the Internet) or to offer dedicated connection to an
internal SOHO local area network.
The Company also offers consumers value-added services, including a
collection of online multiplayer games and premium products targeted to
vertical segments such as the SOHO and family market. This includes the
upselling of discounted products and services in such areas as education,
retail products, telephony, and travel services with such partners as
Infonautics, Amazon.com, Inc., QuadraCom, LLC and PrimePower, Inc. Such
arrangements not only provide a profitable monthly revenue stream but also
increase customer retention. Additional value-added products/services being
reviewed by the Company for potential introduction include premium service
levels, critical file disk back-up/recovery, hard drive maintenance software,
virus protection, and long distance and faxing services.
Gaming Gateway. Concentric is developing its Gaming Gateway as a broad
offering of online multiplayer games, affording consumers access to a number
of the major online gaming networks with the convenience of a single billing
account, login identification and password. The Gaming Gateway will be offered
to the public via the Internet and will be made available at an attractive
price to Concentric dial-up access customers in mid-1997.
The Gaming Gateway offers a unified packaged solution not available in the
marketplace. With a focus on ease of use and advanced functionality tying in
all the major online gaming networks in one package, consumers will be
presented with the best combined value on one service. Gaming Gateway
customers will also be offered a free CD-ROM with additional value added
offerings including free content, gaming software and free time online. A
strategic partnership with Unified Gamers Online, LLC provides the Gaming
Gateway with gaming oriented
37
<PAGE>
editorial, game experts which will manage tournaments and other gamer-oriented
activities like chats and message boards all of which will be free to gamers.
CUSTOMERS
The following is a representative list of the Company's customers during the
last 12 months.
Acer America Corporation Netscape Communications Corporation
Ameritech Services, Inc. SCP Communications
Bay Networks, Inc. SMC Communications LLC
Books That Work Surfers Unlimited LLC
Electronic Data Systems Corporation Toshiba America Information Systems
ENGAGE Games Online, Inc. Total Entertainment Network
Hewlett-Packard Company WebTV Networks, Inc.
Infonautics Corporation You Bet! On-Line Entertainment
Intuit, Inc. Ziff-Davis Publishing Co.
Netlink, LTD
During the year ended December 31, 1996 and the three months ended March 31,
1997, revenue from WebTV accounted for 10.1% and 32.7%, respectively, of the
Company's revenue. See "Risk Factors--Customer Concentration."
KEY CUSTOMER APPLICATIONS
The Company aggressively pursues business alliances with a variety of
companies. Through these partners, the Company seeks to expand its enterprise
and consumer customer base and increase the 24 hour utilization of the
Concentric network. The following is a summary of selected strategic
relationships:
Intuit. Intuit Inc. ("Intuit"), a financial software and Web-based
services company, is a market leader in personal and small business
financial software. Intuit's mission is to change for the better how people
and small businesses manage their financial lives, and to change for the
better how financial providers reach, sell, and serve their customers and
prospects. Intuit views its Websites as a key channel for communicating
with its customers, and as a vehicle to provide personal finance,
investment and tax related financial information. Concentric and Intuit
partnered in October 1995 to launch the integrated Internet access to the
Quicken Financial Network and the Internet. The Internet access capability
included both a virtual private network service designed to provide Intuit
customers subsidized access to select Intuit Web sites and the ability to
upgrade to full access to the Internet. Intuit has bundled tailored
versions of the Netscape Navigator browser in its fiscal year 1996 and 1997
releases of Quicken, TurboTax, ProTax and Quickbooks. Concentric designed
and implemented tailored registration and network access software to
provide Intuit customers with seamless, subsidized access to select Intuit
Web sites. Concentric provides an easy, Web-based upgrade process for
customers desiring full Internet access and e-mail services. Customers are
billed for network time through Concentric's billing systems. In addition,
Concentric provides private-labeled customer service to Intuit customers
with full network access on a twenty-four hour a day, seven day a week
basis.
WebTV Networks Inc. WebTV Networks Inc. ("WNI") provides the world's
first high-quality Internet solution for television. In the fall of 1996,
WNI's licensees, Sony Electronics, Inc. and Philips Electronics introduced
a plug-and-play set-top box that enables Internet browsing from a
television. As part of the WNI service, Concentric and WNI jointly designed
and implemented a national virtual private dial-up network solution to
connect WebTV Network(TM) users to the Internet, utilizing Concentric's
network. The WebTV(TM) Internet terminal, combined with the virtual private
network, allows anyone to browse the Internet from the comfort of their
living room.
You Bet! On-Line Entertainment. You Bet! On-Line Entertainment ("You
Bet!") is a technology company that facilitates live events and is focused
on content development, network deployment, and event management via a
cross-platform environment. You Bet! is a service organization providing
horse players instant access to live racing, information, and wagering
worldwide via a private, secure online environment. The Company's initial
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<PAGE>
service, the You Bet! Racing Network is focused on the emerging market for
home wagering on domestic horse racing. The application, which runs on the
Concentric network, involves the synchronization of audio, video and data
feeds that are accumulated at a single point. The multicast application is
supported by a secure front-end processor and maintained at the Concentric
data centers. A closed community group has access to the multicast
information, which consists of live races, track calls, live odds, past
performance, secured wagering from a pari-mutuel escrow account and
handicap information. Concentric believes it was chosen as the network
provider by You Bet! because of its expertise in developing back-end
systems and its ability to deploy and manage a virtual private network.
Concentric will collect hourly usage fees from You Bet!
Total Entertainment Network. Total Entertainment Network ("TEN") operates
a popular Internet-based game network that enables consumers to play PC
multi-player titles from packaged software marketed in major computer
retail outlets. In addition to the games, TEN offers a number of community
arenas that include chat areas, player profiles, rankings, contest,
tournaments and editorial content. Concentric believes it was chosen as the
preferred provider for network services because of its ability to deliver a
reliable, high performance, low/fixed latency network that is essential for
the advanced features of top-performing action multi-player games. TEN
utilizes Concentric's advanced ATM backbone and distributed data centers to
connect game players dialing into the Concentric Network with a series of
TEN game servers co-located at Concentric's data centers. Concentric
collects an hourly fee from TEN for network usage.
PictureTel Corporation. PictureTel Corporation ("PictureTel"), a leading
provider of video conferencing products, and Concentric have signed a
Letter of Agreement which specifies both parties' intent to negotiate final
agreements concerning a business relationship regarding plans to enable
PictureTel desktop and room video conferencing systems to communicate over
the Concentric network. Both Concentric and PictureTel currently have trial
systems installed and operating over the Concentric network. Preliminary
results demonstrate that the low/fixed latency and high throughput of the
Concentric network delivers superior quality for both desktop and room
video conferencing over IP-routed networks.
THE CONCENTRIC NETWORK
The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, 19 SuperPOPs in many major metropolitan areas plus a
total of 150 secondary and tertiary POPs in other cities, allowing local dial-
up access to the network to users in the U.S. and Canada. In addition, the
Company can provide analog dial-up, frame relay, fractional T-1, T-1 and DS3
access to the network. The Concentric network currently supports 28.8 Kbps
(V.34) modems and is evaluating plans to upgrade to 56.6 Kbps modem access.
The Concentric network is managed via a centralized network control center in
St. Louis, Missouri. Two data centers (located in Bay City, Michigan and
Cupertino, California) house the servers that support logon/authentication,
billing, e-mail, Internet access, Web services and other network services.
The Concentric SuperPOPs are designed to support both dial-up and dedicated
access services within a broad geographic region. Typically, a SuperPOP will
utilize one or more CLECs and LECs to aggregate dial traffic within a 50-200
mile radius of the SuperPOP and terminate it at the SuperPOP. This strategy
allows Concentric to offer users local call coverage within the SuperPOP
region without having to deploy individual POPs in each local calling area.
All the calls are terminated at the modem equipment at the regional SuperPOP.
This results in broader call coverage, lower costs due to the typically lower
rates from CLECs and economies of scale from larger modem installations, lower
maintenance costs, and easier capacity upgrades since equipment is located in
a single location within a region.
DAFs from customer locations in a region are terminated in the SuperPOP as
well. Typically, Fractional T-1, T-1, and T-3 circuits are terminated directly
into SuperPOP router equipment (via CSU/DSUs). Frame access is terminated via
aggregated LEC Frame Access circuit(s). Both dial and dedicated traffic is
then aggregated by the routers/switches in the SuperPOP and directed to the
Concentric ATM backbone via one or more T-3 ATM links.
Traditional network designs allocate dedicated network resources to specific
classes of applications. For example, separate network resources (or networks)
might be dedicated to transaction processing applications versus Internet
applications. Concentric believes that a major advantage of its network
architecture is the ability of the network to
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<PAGE>
support adaptive call processing ("ACP"). ACP is designed to allow a common set
of network resources to be used for different applications on a call-by-call
basis. Performance and functionality for the user is improved, because each
end-user receives the needed services on a customized basis instead of relying
on a "one-size-fits-all" network approach. Furthermore, the Company believes
that ACP will reduce costs by making it possible to optimize network usage on a
call-by-call basis to provide only the services actually needed. Using software
implemented by Bay Networks, Inc. in accordance with Concentric specifications,
ACP is designed to enable the tuning of network parameters and traffic routing
to meet the level of latency, throughput, security/privacy, and reliability
requirements of a specific customer or application on a call-by-call basis. The
initial release of ACP will utilize the phone number dialed by the subscriber
to determine the configuration parameters and protocol support required by the
access modems and communications servers. Concentric is currently deploying the
software technology in its network and is planning to commercially introduce
the initial ACP capabilities during the second half of 1997.
Some applications, such as Web browsing and file transfer require high
throughput, but can tolerate moderate and variable latency, while others, such
as mission-critical business applications, multiplayer gaming and voice and
video conferencing, require low/fixed latency. Still others, such as
transaction processing, require fast connect/disconnect times, may require high
levels of security and are indifferent to latency levels. Traditional static
network access technologies and backbone architectures cannot cost-effectively
manage these varied requirements in a single network. The Concentric network
has been designed to be able to solve this problem by incorporating software
intelligence in both its access and backbone technologies to adapt the
network's connection setup and data transfer properties to the nature of the
user's application requirements on a call-by-call or service-by-service basis.
The Concentric network also offers its customers the security, reliability
and management features that companies require in their own private networks.
Varying layers of security and encryption are supported and tailored to
specific customer requirements. The network design includes a standard security
layer and is compatible with most types of custom security applications.
Further, security is provided at both the edge of the network and internally
based on embedded firewall and encryption techniques. The Concentric network
features co-location of network access and switching equipment in "hardened"
facilities, direct connections to carrier facilities, a resilient ATM/frame
relay backbone, dual data processing centers, and redundancy within data
centers to substantially enhance its uptime performance.
Network managers, customer service, and technical support staff require near
real-time access to information about the performance and quality of their
networks. In traditional private networks, this information is provided by
network management, trouble reporting/tracking, and management information
systems. Customers usually sacrifice a great deal of control and have access to
less information when using a public network instead of a private network. It
has been difficult for public network providers to provide their major
customers with information regarding network performance that relates to that
customer's usage without either compromising other customers' proprietary
information or compromising the integrity of the network itself. Concentric has
developed a set of non-intrusive software tools and reporting mechanisms,
distributed to DAF enterprise customers as ConcentricView. ConcentricView
allows a customer's network manager to monitor network performance and quality
and to adequately support inquiries for help from their users. Web browsers and
file transfer tools are used to provide access to much of this information. In
some cases, custom integration of Concentric's network management and trouble
tracking/reporting systems will be provided to customers.
SALES AND MARKETING
The Company focuses on marketing its services to two distinct market
segments: enterprise and consumer. By attracting enterprise customers who use
the network primarily during the daytime, and consumer customers who use the
network primarily at night, the Company is able to more fully utilize its
network infrastructure by having some customers online during the day and the
others, using the same modem pools, online during the evening. The
Company has developed a multi-tiered sales strategy consisting of leveraged
third party distribution channels, inbound and outbound telesales, value-added
resellers and direct sales.
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Leveraged Third Party Distribution. The Company has positioned itself as a
key network services provider for companies that bundle network access in their
products or services. For example, the Company's network service is bundled
with Intuit's Quicken, TurboTax and Quickbooks products, Microsoft Office 97
and with WebTV and Sega Saturn Internet access devices. Additionally, the
Company is one of the Internet services providers listed on the Netscape
Navigator and Microsoft Internet Explorer browser registration servers.
Telesales. The Company uses an inbound telesales group to answer calls from
potential consumers/subscribers and to sign up customers. Inbound telesales
representatives also proactively upsell premium products and services. The
Company also uses an outbound telesales group to sell DAFs and high-end hosting
products to small and medium-sized businesses. Both the inbound and outbound
telesales groups forward leads to the direct sales force when appropriate.
Value-Added Resellers. The Company has also begun to establish sales channels
through value-added resellers. These resellers are companies that sell
equipment or other components for full-service network solutions to medium and
large businesses. Value-added resellers such as Racal-Datacom, Inc., which
employs more than 500 field sales, sales-support and field engineering people,
are compensated for selling Concentric's enterprise service offerings in
conjunction with their other products. These relationships enable the VARs to
provide more comprehensive solutions to their customers while affording the
Company the benefit of the VAR's large sales force without incurring the costs
of maintaining a large sales force of its own.
Direct Sales Force. For large and complex enterprise solutions and to
acquire, support and retain distribution channel partners, the Company employs
11 direct sales people located in Cupertino and Orange County, California,
Dallas, Texas, and the New York metropolitan area to provide national direct
sales coverage. The Company's direct sales force is supported by inside
sales/account managers and systems engineers.
Concentric markets its enterprise services to information service ("IS")
professionals. In addition, the Company uses print advertising in targeted
industry publications to build awareness and acquire leads for its VARs and its
direct sales team. The Company is also planning to launch in the second half of
1997 a large direct response effort (direct mail/outbound telemarketing)
targeting enterprise IS managers and senior management of multilocation
companies, and companies with large numbers of mobile and telecommuting
employees.
In the consumer market, the Company focuses on direct mail to targeted
audiences; establishment of customer referral programs; and co-marketing such
as packaging literature with MasterCard mailers and Intuit software. In
addition, the Company has implemented on-line programs, such as a Website
"home" where they can learn how to use the service, how to use the Internet,
and how to find information quickly, designed to increase customer retention.
The Company is also implementing programs to sell additional products and
services to its consumer customers. Additionally, the Company is generating
advertising revenue on its growing Website traffic in direct ad banner
placements as well as in shared revenue relationships with content partners
such as Excite, Inc., Lycos, Inc., and Classifieds2000, Inc.
The Company employs public relations personnel in-house and works with an
outside public relations agency to provide broad coverage in network computer
and vertical industry publications. The Company participates in industry trade
shows based on the size and vertical makeup of the trade show audience. Planned
shows in 1997 include E3, NetWorld + InterOp and Fall Internet World. The
Company also participates in trade shows with its strategic marketing partners
such as Racal-Datacom to promote the sale of Concentric products and services.
As of March 31, 1997, the Company employed 63 persons in sales and marketing.
The Company is in the process of expanding its sales and marketing staff. The
Company's sales operations are conducted from its principal office in
Cupertino, California and by its field sales personnel in Orange County,
California, Dallas, Texas and the New York metropolitan area.
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CUSTOMER SUPPORT
Concentric believes that a high level of customer support is critical to
attracting and retaining its enterprise and consumer customers. The Company
maintains a customer support call center at its Saginaw, Michigan, facility.
Concentric offers several levels of customer support all of which are
available 24 hours per day, seven days per week. The basic level of customer
support includes support for customers on installing and using their software,
customer communications and customer training. Premier level service programs
guarantee an exceptional performance standard, offer supplemental support
training, and provide monthly reports on operations. Private label support
gives businesses a premier level of support provided by their own customer
service team who answer calls with that customer's company name. Customer
support is provided by e-mail, telephone, Website and online chat.
As of March 31, 1997, the Company employed 142 persons in customer support.
In addition, the Company outsources supplemental customer support to
Concentric customers and their end-users.
COMPETITION
The market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company believes
that its ability to compete successfully depends upon a number of factors,
including market presence; the capacity, reliability, low latency and security
of network infrastructure; technical expertise and functionality, performance
and quality of services; customization; ease of access to and navigation of
the Internet; the pricing policies of its competitors; the variety of
services; the timing of introductions of new services by the Company and its
competitors; customer support; the Company's ability to support industry
standards; and industry and general economic trends.
The Company's current and prospective competitors generally may be divided
into the following five groups: (i) telecommunications companies, such as
AT&T, MCI, Sprint, Inc., WorldCom, RBOCs and various cable companies; (ii)
online services providers, such as America Online, CompuServe, Microsoft's
MSN, and Prodigy; (iii) ISPs, such as BBN, NETCOM, PSI, and other national and
regional providers; (iv) nonprofit or education Internet connectivity
providers; and (v) Web server farms such as Internet Direct and Exodus. Many
of these competitors have greater market presence, engineering and marketing
capabilities, and financial, technological and personnel resources than those
available to the Company. As a result, they may be able to develop and expand
their communications and network infrastructures more quickly, adapt more
swiftly to new or emerging technologies and changes in customer requirements,
take advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products than can the
Company. In addition, various organizations, including certain of those
identified above, have entered into or are forming joint ventures or
consortiums to provide services similar to those of the Company.
The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies will enter the value added network services markets, resulting in
even greater competition for the Company. Certain of such telecommunications
companies and online services providers are currently offering or have
announced plans to offer Internet or online services or to expand their
Internet access services. Certain companies, including America Online, BBN and
PSI, have also obtained or expanded their Internet access products and
services as a result of acquisitions. Such acquisitions may permit the
Company's competitors to devote greater resources to the development and
marketing of new competitive products and services and the marketing of
existing competitive products and services. In addition, the ability of some
of the Company's competitors to bundle other services and products with VPN
and consumer network services could place the Company at a competitive
disadvantage. Certain companies are also exploring the possibility of
providing high-speed data services using alternative delivery methods such as
over the cable television infrastructure, through direct broadcast satellite
technology and by wireless cable.
The Company is applying for licenses to become a CLEC in selected states. To
the extent the Company obtains such licenses and commences CLEC operations, it
will compete with the incumbent LEC and additional CLECS providing
telecommunications services in these markets. For all new entrants, including
the Company, the market for
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local exchange services is extremely competitive. Local telecommunications
services offered by the Company will compete principally with services offered
by the incumbent LEC serving that area. Incumbent LECs, such as the RBOCs,
currently dominate their local telephone markets. Such companies have
financial, managerial and technical resources that substantially exceed those
of the Company and have long-standing relationships with their customers.
While the 1996 Telecom Act provides increased business opportunities to CLECs,
it also allows incumbent LECs increased pricing flexibility for their
services. Increased price competition from incumbent LECs could have a
material adverse effect on the Company's CLEC operations and, in turn, on the
Company's results of operations and financial condition to the extent its CLEC
operations are a material portion of its business. Furthermore, upon the
satisfaction of certain regulatory conditions, the RBOCs currently are
expected to be able to offer long distance services in their home markets in
addition to local service, which would afford their local customers "one-stop
shopping" for telecommunications services. The Company also expects to face
increased competition in the provision of local exchange services from other
CLECs, cable television companies, electric utilities, microwave carriers,
wireless telephone system operators, AT&T, MCI, Sprint, WorldCom and other
long distance carriers who may choose to enter the local exchange market by
resale of incumbent LEC facilities.
As a result of increased competition in the industry and vertical and
horizontal integration in the industry, the Company could encounter
significant pricing pressure, which in turn could result in significant
reductions in the average selling price of the Company's services. For
example, certain of the Company's competitors that are telecommunications
companies may be able to provide customers with reduced communications costs
in connection with their Internet access services or private network services,
reducing the overall cost of their solutions and significantly increasing
price pressures on the Company. There can be no assurance that the Company
will be able to offset the effects of any such price reductions with an
increase in the number of its customers, higher revenue from enhanced
services, cost reductions or otherwise. In addition, the Company believes that
the Internet access and online services businesses are likely to encounter
consolidation in the near future, which could result in increased price and
other competition in these industries and, potentially, the virtual private
networks industry. Increased price or other competition could result in
erosion of the Company's market share and could have a material adverse effect
on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will have the financial resources,
technical expertise or marketing and support capabilities to continue to
compete successfully. See "Risk Factors--Competition," "--Risks of Growth and
Expansion" and "--Future Capital Needs; Uncertainty of Additional Financing"
and "Business--Competition."
GOVERNMENT REGULATION
Value-Added Network and Internet Service Providers. The FCC currently does
not regulate value-added network software or computer equipment related
services that transport data or voice messages over telecommunication
facilities. The Company provides value-added IP-based network services, in
part, through data transmissions over public telephone lines. These
transmissions are governed by regulatory policies establishing charges and
terms for wireline communications. Operators of these types of value-added
networks that provide access to regulated transmission facilities only as part
of a data services package are currently excluded from regulations that
applies to "telecommunications carrier" and as such the Company is not
currently subject to direct regulation by the FCC or any other governmental
agency, other than regulations applicable to businesses generally. However, in
the future the Company could become subject to regulation by the FCC or
another regulatory agency as a provider of basic telecommunications services.
Currently, the FCC is reviewing its regulatory positions and could seek to
impose common carrier regulation on the network transport and communications
facilities aspects of an enhanced or information service package. Further, the
FCC could conclude that the Company's protocol conversions, computer
processing, and interaction with customer-supplied information are
insufficient to afford the Company the benefits of the enhanced or information
service classification, and thereby may seek to regulate some segments of the
Company's activities as basic telecommunications services. While state public
utility commissions generally have declined to regulate enhanced or
information services, some states have continued to regulate particular
aspects of enhanced services in limited circumstances, such as where they are
provided by LECs. Moreover, the public service commissions of certain states
43
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continue to review potential regulation of such services. There can be no
assurance that regulatory authorities of states within which Concentric makes
its Internet access, Intranet and VPN services available will not seek to
regulate aspects of these activities as telecommunications services. Changes
in the regulatory environment relating to the Internet connectivity market,
including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition
from the RBOCs or other telecommunications companies, could affect the prices
at which the Company may sell its services. The Company cannot predict the
impact, if any, that future regulation or regulatory changes may have on its
business and there can be no assurance that such future regulation or
regulatory changes will not have a material adverse effect on the Company's
business, results of operations and financial condition.
Competitive Local Exchange Carriers. The Company is applying for
certificates of authority to become a CLEC in selected states. To the extent
the Company obtains such authorizations and commences CLEC operations, the
telecommunications services provided by such operations will be subject to
regulation by federal, state and local governmental agencies. At the federal
level, the FCC has jurisdiction over interstate telecommunications services.
State regulatory commissions exercise jurisdiction over intrastate services.
Additionally, municipalities and other local government agencies may regulate
limited aspects of the Company's business, such as use of rights-of-way.
Typically start-up telecommunications carriers are not as heavily regulated as
incumbent LECs. For example, under current regulations, the Company would not
be subject to price cap or rate of return regulation by the FCC. However, the
Telecommunications Act of 1996 (the "1996 Telecom Act") requires the FCC to
establish a subsidy mechanism for universal telephone service to which the
Company will be required to contribute based on its telecommunications
revenues and requires all LECs, including CLECs, to make services available
for resale by other carriers, provide nondiscriminatory access to rights-of-
way, offer reciprocal compensation for termination of local telecommunication
traffic and provide dialing parity and telephone number portability, and
ensure that their services are accessible to and usable by persons with
disabilities. The 1996 Telecom Act retains for individual states the authority
to impose their own regulations of local exchange services, including state
universal service subsidy programs, so long as this regulation is not
inconsistent with the requirements of the 1996 Telecom Act. The Company is
unable to predict the final form of such regulation and its potential impact
on the Company. In its provision of interstate, international and intrastate
services as a CLEC, the Company generally will be subject to tariff filing
requirements setting forth the terms, conditions and prices for services,
prior to offering telecommunications services. At the state level, the Company
will also be subject to state certification proceedings as a CLEC. These
certifications generally require a showing that the carrier has adequate
financial, managerial and technical resources to offer the proposed services
consistent with the public interest. Under some state statutes changes in the
ownership of the Company's outstanding voting securities also may trigger
additional state public utility commission approval. For example, in certain
jurisdictions an investor who acquires as little as ten percent or more of the
Company's voting securities may have to obtain prior approval of the
acquisition of such securities because such ownership might be deemed to
constitute an indirect controlling interest in the CLEC. While uncommon,
challenges to these tariffs and certificates by third parties could cause the
Company to incur substantial legal and administrative expenses. Many states
also have additional regulatory requirements such as minimum service quality
reporting and customer service requirements and uniform LEC accounting
requirements.
Although the 1996 Telecom Act eliminates legal barriers to entry into the
CLEC market, no assurance can be given that changes in current or future
regulations adopted by the FCC or state regulators or other legislative or
judicial initiatives relating to the telecommunications industry would not
have a material adverse effect on the Company's ability to offer such
services. With the passage of the 1996 Telecom Act and the anticipated
increase in the level of competition faced by incumbent LECs, the FCC could
grant incumbent LECs substantial pricing flexibility with regard to interstate
access services. It is also anticipated that the prices incumbent LECs charge
for access services will be substantially reduced as a result of the FCC's
reform of the current access charge regime and the adoption of universal
service rules. Similarly, a number of states have allowed incumbent LECs rate
and tariff flexibility, particularly for services deemed subject to
competition. Such price competition could significantly and adversely affect
the Company's CLEC operations which could, in turn, adversely affect the
Company's results of operations and financial condition to the extent its CLEC
operations are a material portion of its business.
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PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
technology, although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights. The Company
principally relies upon a combination of copyright, trademark and trade secret
laws and contractual restrictions to protect its proprietary technology. It
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization or to develop similar
technology independently, and there can be no assurance that such measures
have been, or will be, adequate to protect the Company's proprietary
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology.
Although the Company does not believe that it infringes the proprietary
rights of any third parties, there can be no assurance that third parties will
not assert such claims against the Company in the future or that such claims
will not be successful. In addition, participants in the Company's industry
also rely upon trade secret law. The Company could incur substantial costs and
diversion of management resources with respect to the defense of any claims
relating to proprietary rights which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief which
could effectively block the Company's ability to license its products in the
United States or abroad. Such a judgment would have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company is obligated under certain agreements to indemnify the
other party in connection with infringement by the Company of the proprietary
rights of third parties. In the event a claim relating to proprietary
technology or information is asserted against the Company, the Company may
seek licenses to such intellectual property. There can be no assurance,
however, that licenses could be obtained on commercially reasonable terms, if
at all, or that the terms of any offered licenses will be acceptable to the
Company. The failure to obtain the necessary licenses or other rights could
have a material adverse effect on the Company's business, financial condition
and results of operations.
EMPLOYEES
As of March 31, 1997, Concentric had 280 employees and 48 independent
contractors, including 63 persons in sales and marketing, 91 persons in
network operations and development, 142 in customer support and 32 in finance
and administrative functions. The Company believes that its future success
will depend in part on its continued ability to attract, hire and retain
qualified personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to identify, attract, and retain
such personnel in the future. None of the Company's employees is represented
by a labor union, and management believes its employee relations are good.
PROPERTIES
The Company's executive offices are located in Cupertino, California, under
a lease that expires in April 1998. The Company also leases network operations
and customer support facilities in Bay City, Michigan, and Saginaw, Michigan,
respectively, under leases expiring in December 1997 and December 2001,
respectively. The Saginaw lease obligates the Company to pay up to $1.25
million to restore the building in the event of any damage or destruction to
it during the lease term, without any rent abatement for loss of use. The
Company believes that its existing facilities are adequate for its current
needs.
LEGAL PROCEEDINGS
On April 22, 1997, a complaint was filed in the Los Angeles County,
California Superior Court against the Company and other unnamed defendants by
Sattel Communications LLC ("Sattel"). The complaint alleges claims for breach
of contract, breach of the covenant of good faith and fair dealing, unfair
business practices, fraud and negligent misrepresentation. Sattel claims that
the Company is in breach of an agreement to pay for up to $4.2 million of DSS
Switches from Sattel for use in the Company's network. The Complaint also
seeks unspecified consequential and punitive damages. On April 29, 1997,
Sattel served the Company with an Application for Writ of Attachment, seeking
to secure a lien on the Company's assets up to an amount of $3.6 million.
Prior to this offering and the Direct Placements, Sattel holds approximately
1.7% of the Company's Common Stock.
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On April 30, 1997, a putative securities class action complaint was 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 also 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 plaintiffs seek unspecified compensatory damages.
While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct
vigorous defenses. An unfavorable outcome in these matters could have a
material adverse effect on the Company's financial condition. In addition,
even if the ultimate outcomes are resolved in favor of the Company, the
defense of such litigation could entail considerable cost and the diversion of
efforts of management, either or which could have a material adverse effect on
the Company's results of operations. See "Risk Factors--Legal Proceedings."
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth certain information as of March 31, 1997, with
respect to the executive officers and directors of the Company, as well as
certain members of its senior management.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------------------------------------------------
<S> <C> <C>
Henry R. Nothhaft.............. 52 President, Chief Executive Officer and
Director
John K. Peters................. 49 Executive Vice President and General
Manager, Network Services Division
Michael F. Anthofer............ 45 Senior Vice President and Chief Financial
Officer
William Etheredge.............. 50 Senior Vice President of Sales
George D. Carr................. 52 Vice President of Field Sales
Eileen A. Curtis............... 48 Vice President of Customer Relations
Scott G. Eagle................. 38 Vice President of Marketing
Donald C. Schutt............... 51 Vice President of Michigan Operations
Warren A. Smith................ 46 Vice President of Software Engineering
James L. Isaacs................ 37 Vice President of Product Management
Vinod Khosla................... 42 Director
Terence M. O'Toole............. 38 Director
Randy A. Maslow................ 42 Director
Franco Regis................... 41 Director
L. Rod Manning................. 48 Director
Gary E. Rieschel............... 41 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Henry R. Nothhaft joined the Company as President and Chief Executive Officer
in May 1995 and became a Director of the Company in August 1995. From 1989 to
August 1994, Mr. Nothhaft was President, Chief Executive Officer and a Director
of David Systems, Inc. ("David Systems"), a networking company. From 1983 to
1989, Mr. Nothhaft held various positions with DSC Communications Corporation
("DSC"), including Senior Vice President of Marketing, President of the Digital
Switch Corporation subsidiary, President of the Business Network Systems Group
and a Corporate Director of DSC. From 1979 to 1983, Mr. Nothhaft was Vice
President of Domestic Marketing and Vice President of Sales for GTE Telenet
Communications Corporation (now Sprint). Mr. Nothhaft has an M.B.A. in
Information Systems Technology from George Washington University and a B.S.
degree from the U.S. Naval Academy.
John K. Peters joined the Company in May 1995 as an independent consultant.
Mr. Peters was named Executive Vice President and General Manager, Network
Services Division of the Company in June 1995. From 1993 to August 1995, Mr.
Peters served as President of Venture Development Consulting, a consulting firm
specializing in new communications, information services and software
businesses. From 1988 to 1993, Mr. Peters was Vice President and Chief
Operating Officer of Pacific Bell Information Services, Inc. Prior to that, Mr.
Peters spent three years as Vice President of Application Services for
Telestream Corporation. In 1981, Mr. Peters co-founded Integrated Office
Systems, Inc., a communications and information systems company. From 1976 to
1980, Mr. Peters was Vice President of Advanced Network Services for GTE
Telenet Communications Corporation. Mr. Peters has an M.B.A. from Stanford
Graduate School of Business and a B.S. degree in Statistics from Stanford
University.
Michael F. Anthofer joined the Company in January 1996 as Vice President and
Chief Financial Officer and became a Senior Vice President in November 1996.
From January 1991 to December 1995, Mr. Anthofer served as an Executive Vice
President and Chief Financial Officer of Shared Resource Exchange, Inc., a
privately held digital switching platform and PBX supplier. Prior to 1991, Mr.
Anthofer held various executive positions, including Vice President, Corporate
Business Planning, Vice President, Business Network Group and Vice President,
Network Products Group, at DSC. Mr. Anthofer has an M.B.A. and a B.S. degree
from the University of California, Berkeley.
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William C. Etheredge joined the Company in March 1997 as the Senior Vice
President of Sales. From May 1991 to March 1997, Mr. Etheredge served first as
Vice President of Sales and Marketing and then as Vice President of Sales for
Meridian Data, Inc., a provider of networked CD-ROM database creation and
retrieval software and network servers. From July 1990 to May 1991, he served
as Vice President of Strategic Accounts for Maxtor Corporation. From June 1985
to June 1990, he served first as Vice President US Sales and Marketing and then
Vice President Western Region for Memorex-Telex Corporation. Mr. Etheredge has
an M.B.A. degree from Bowling Green University and a B.A. degree from
Westminster College.
George D. Carr joined the Company in June 1995 as an independent consultant.
In September 1995 Mr. Carr became Vice President of Sales. From June 1993 to
June 1995, Mr. Carr was Vice President of Sales and Marketing of David
Systems/ChipCom. From June 1989 to June 1993, Mr. Carr was VP of Operations and
International Sales of David Systems. From December 1983 to June 1989, Mr. Carr
was VP of Operations and Service of David Systems. Mr. Carr has a B.A. degree
from Loyola Marymount.
Eileen A. Curtis joined the Company in November 1994 as an independent
consultant. She became Customer Relations Manager in January 1995, Director of
Customer Relations in September 1995 and Vice President, Customer Relations in
November 1996. From August 1987 to July 1993, Ms. Curtis was employed by Cox
Communications Saginaw, Inc. and served in various positions including
Marketing and Public Relations Manager, Administrative Manager and Customer
Service Manager. Ms. Curtis has a B.S. degree from Central Michigan University.
Scott G. Eagle joined the Company in March 1996 as Vice President of
Marketing. From November 1993 to February 1996, Mr. Eagle was the Vice
President, Strategic Marketing Development for MFS Intelenet, Inc., a start-up
division of MFS Communications Company, Inc. From February 1989 to November
1993, Mr. Eagle was the Vice President of Marketing for the Woodbridge Group, a
marketer of consumer package goods. Prior to February 1989, Mr. Eagle served in
various marketing management positions with The Procter & Gamble Company. Mr.
Eagle has a B.S. degree from the University of Pennsylvania, Wharton School of
Business.
Donald C. Schutt joined the Company in February 1994 as Vice President of
Sales and Marketing and was appointed Chief Operations Officer later that year.
Mr. Schutt was named Vice President and General Manager, Bay City Operations in
August 1995. His title was changed to Vice President of Michigan Operations in
March 1996. From 1964 to 1985, Mr. Schutt held various management positions
with General Motors, after which Mr. Schutt served until 1989 as Vice President
for Sales and Marketing for Gentex Corporation. From 1989 to 1993, Mr. Schutt
was President and Chief Executive Officer of AMPM, Inc., a full-service
advertising agency, and retains a 54 percent interest in such entity. Mr.
Schutt has a B.S. degree in Marketing from Ferris University.
Warren A. Smith joined the Company in April 1996 as Vice President, Software
Engineering. From October 1992 to April 1996, Mr. Smith was the Director of
Engineering at NetManage, Inc., a software company. From July 1987 to July
1992, Mr. Smith was the Director of Distributed Computing Technology for Sun
Microsystems, Inc. From March 1983 to July 1987, Mr. Smith was the Western
Regional Manager of SEI Information Technology an engineering consulting firm.
Mr. Smith has a B.S. degree from California State University, Sacramento.
James L. Isaacs joined the Company in October 1995 as the Director of Product
Management. In March 1997, he became Vice President of Product Management. From
July 1988 to October 1995, Mr. Isaacs held various positions at Apple Computer,
including Group Manager Product Marketing, Apple On Line Services Division and
Business Development Manager of Apple On Line Services Division. Mr. Isaacs has
an M.B.A. degree from the University of California, Berkeley and an A.B. degree
from Stanford University.
Vinod Khosla has been a Director of the Company since April 1995. Mr. Khosla
has been a General Partner with the venture capital firm of Kleiner Perkins
Caufield & Byers from February 1986 to the present. Mr. Khosla was a co-founder
of Daisy Systems and the founding Chief Executive Officer of Sun Microsystems,
Inc. Mr. Khosla also serves on the boards of Excite, Inc., PictureTel, The 3DO
Company, and Spectrum Holobyte. He has a B.S.E. from the Indian Institute of
Technology in New Delhi, an M.S.E. from Carnegie Mellon University, and an
M.B.A. from the Stanford Graduate School of Business.
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Terence M. O'Toole has been a Director of the Company since April 1995. Mr.
O'Toole is a Managing Director at Goldman, Sachs & Co. Mr. O'Toole joined
Goldman, Sachs & Co. in 1983, became a general partner in 1992 and a Managing
Director in 1996. Mr. O'Toole serves on the boards of directors of AMF Group,
Inc., Insilco Corporation, and Western Wireless Corporation. He has a B.S.
degree from Villanova University and an M.B.A. from the Stanford University
Graduate School of Business.
Randy A. Maslow joined the Company in March 1994 as an independent consultant
and subsequently served as Vice President for Business Development from
September 1994 through February 1996. He has been a director of the Company
since January 1995. Since February 1996, Mr. Maslow has been Managing Director
of Electric Ventures, Inc., a venture finance firm in the interactive services
industry. Prior to joining Concentric, Mr. Maslow was a co-founder and managing
partner of the RAM Group, a venture finance and business development consulting
firm in the online services and electronic publishing industries. From 1982
through 1989, Mr. Maslow was a corporate attorney in private practice. Mr.
Maslow has a B.A. degree from Cornell University and a J.D. from Rutgers Law
School.
Franco Regis has been a Director of the Company since October 1996. Since
1994, Mr. Regis has been a Director of Business Development and Strategic
Planning at Telecom Italia, SpA, the telephone operating company of Italy. From
1992 to 1994, Mr. Regis was a Director of Budget and Control for the business
division of Telecom Italia. Mr. Regis has an engineering degree from the Rome
State University.
L. Rod Manning has been a Director of the Company since May 1997. Since March
1997, he has been President and General Counsel of the Racal Corporation, which
holds 100% of the stock of Racal-DataCom, Inc, a telecommunications equipment
provider and systems integrator. Prior to such time, Mr. Manning acted as
Deputy General Counsel of the Racal Corporation.
Gary E. Rieschel has been a Director of the Company since October 1996. Mr.
Rieschel is a Senior Vice President at SOFTBANK Holdings, having joined that
company in January 1996. Mr. Rieschel was Vice President for N-Cube Corporation
from August 1994 through December 1995. He was Sales Director at Cisco Systems,
Inc. from July 1993 through October 1994. Prior to this, Mr. Rieschel was a
General Manager and Sales Director at Sequent Computer for over nine years. Mr.
Rieschel has an M.B.A. from Harvard Graduate School of Business and a B.A. in
biology from Reed College.
Members of the Board of Directors are elected each year at the Company's
annual meeting of stockholders, and serve until the following annual meeting of
stockholders and until their respective successors have been elected and
qualified.
Voting Agreements
Pursuant to a Stockholder Agreement entered into in connection with the
Company's sale of Series A Preferred Stock, as amended and restated in
connection with the issuance of Series B Preferred Stock and Series B warrants,
each of Kleiner Perkins Caufield & Byers VII, KPCB VII Founders Fund and KPCB
Information Sciences Zaibatsu Fund II (collectively, the "Kleiner Entities"),
Mr. Collins-Rector, Mr. Chad Shackley, Intuit and GS Capital Partners, L.P.
("GSCP") has agreed to vote all its capital stock, except for any Series B
Preferred Stock, to elect as directors the Chief Executive Officer of the
Company and two other individuals designated by GSCP and the Kleiner Entities.
This voting obligation terminates as to each such stockholder upon the earlier
of (i) such stockholder no longer beneficially owning any shares of Stock, as
defined in such Stockholder Agreement, and (ii) the closing of a public
offering resulting in at least $15 million in gross proceeds to the Company and
reflecting a corporation valuation of at least $50 million. In addition, GSCP
and the Kleiner Entities have delivered irrevocable proxies to Intuit to vote
their Series B Preferred shares for an Intuit director designee in the event
that Intuit fully exercises its warrants to purchase Series B shares. The
latter proxies terminate upon the earliest of (a) Intuit's ceasing to hold at
least half of its Series B shares, (b) the conversion of all Series B Preferred
Stock into Common Stock, and (c) the closing of a public offering resulting in
at least $15 million in gross proceeds to the Company and reflecting a
corporation valuation of at least $50 million.
Pursuant to a Shareholder Agreement entered into in connection with the
Company's sale of Series D Preferred Stock, each of Racal, TMI and SOFTBANK has
agreed, until the earlier of (i) the date on which the number of
49
<PAGE>
outstanding Series D Preferred shares falls below certain specified minimums
and (ii) the occurrence of a qualified public offering of the Company's Common
Stock, to vote the shares of Common Stock and Preferred Stock controlled by
them to elect as Directors that number of Series D Directors provided for in
the Amended and Restated Articles of Incorporation, to be designated in
accordance with the respective holdings of the three parties. Currently, each
of Racal, TMI and SOFTBANK is entitled to designate one director, and each of
the three agrees to vote all shares of Common Stock and Preferred Stock
controlled by it to elect the designees of the other two parties.
Each of the foregoing voting arrangements will terminate upon completion of
the offering.
Pursuant to a Governance Agreement entered into among GSCP, the Kleiner
Entities, Intuit, Mr. Collins-Rector, Mr. Shackley and the Company (the
"Government Agreement"), Mr. Collins-Rector and Mr. Shackley are jointly
enabled to designate one member of the Company's Board of Directors. The
Governance Agreement also obligates the Company to use reasonable efforts to
maintain such designee on the Board of Directors until the earlier to occur of
(i) one year after the closing of the Company's initial public offering, (ii)
the expiration or full release of Mr. Collins-Rector and Mr. Shackley from any
lock-up restrictions granted to the underwriters in connection with such
initial public offering, or (iii) the sale of all or substantially all of the
assets of the Company or the merger, acquisition or other reorganization of the
Company in which more than 50% of the voting power of the Company is disposed
of. Initially, such designee is Robert W. Doede.
Director Compensation
Directors are reimbursed for certain reasonable expenses incurred in
attending Board or committee meetings. Officers of the Company are elected
annually by the Board of Directors and serve at its discretion. The Company has
entered into indemnification agreements with each member of the Board of
Directors and certain of its officers providing for the indemnification of such
person to the fullest extent authorized, permitted or allowed by law.
Compensation Committee
The Company's Board of Directors currently has a Compensation Committee that
reviews and approves the compensation and benefits to be provided to the
officers, directors, employees, and consultants of the Company, administers the
Company's 1993 Incentive Stock Option Plan, 1995 Stock Incentive Plan for
Employees and Consultants, and Amended and Restated 1996 Stock Plan, and will
administer the 1997 Stock Plan and 1997 Employee Stock Purchase Plan, which are
to take effect upon closing of the Company's initial public offering.
Audit Committee
The Company's Board of Directors currently has an Audit Committee that
monitors the corporate financial reporting and the internal and external audits
of the Company, reviews and approves material accounting policy changes,
monitors internal accounting controls, to recommend engagement of independent
auditors, reviews related-party transactions and performs other duties as
prescribed by the Board of Directors.
50
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth in summary form the
compensation earned by the Company's Chief Executive Officer, and the four most
highly compensated executive officers (the "Named Officers") during 1996.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ------------
SECURITIES ALL OTHER
OTHER ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) ($)(3)
- --------------------------- ---------- --------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Henry R. Nothhaft....... 184,808 -- -- -- 3,105
President and Chief
Executive Officer
John K. Peters.......... 184,273 -- -- -- 3,076
Executive Vice
President and General
Manager, Network
Services Division
Michael F. Anthofer..... 136,336 20,000 155,212(2) 43,333 1,545
Senior Vice President
and Chief Financial
Officer
George D. Carr.......... 105,000 25,897(1) -- 6,667 1,761
Vice President of Field
Sales
Scott G. Eagle.......... 114,337 -- 82,396(2) 30,000 1,347
Vice President of
Marketing
</TABLE>
- --------
(1) Reflects sales commissions.
(2) Reflects relocation expense payments.
(3) Reflects Company contributions to an employee 401(k) plan and term life
insurance premiums paid by the Company.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE
APPRECIATION
FOR OPTIONS
INDIVIDUAL GRANTS TERM(2)
--------------------------------------------------------- --------------
PERCENT OF MARKET
NUMBER OF TOTAL PRICE OF
SECURITIES OPTIONS SECURITIES
UNDERLYING GRANTED TO EXERCISE UNDERLYING
OPTIONS EMPLOYEES PRICE OPTIONS ON EXPIRATION
NAME GRANTED(1) IN 1996 PER SHARE DATE OF GRANT DATE 5%($) 10%($)
---- ---------- ---------- --------- ------------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry R. Nothhaft....... -- -- -- -- -- -- --
John K. Peters.......... -- -- -- -- -- -- --
Michael F. Anthofer..... 33,333(1) 5.9% $3.75 1/11/2006 78,611 199,216
10,000(2) 1.8 $3.75 $4.80 12/31/2006 40,687 87,000
George D. Carr.......... 3,333(1) 0.6 $3.75 2/21/2006 7,861 19,922
3,333(2) 0.6 $3.75 $4.80 12/31/2006 13,561 28,997
Scott G. Eagle.......... 30,000(1) 5.3 $3.75 2/21/2006 70,750 179,296
</TABLE>
Option Grants During 1996. The following table sets forth for each of the
Named Officers certain information concerning stock options granted during
1996.
- --------
(1) Options vest with respect to 25% of the shares on the first anniversary
date of grant and the remaining 75% vests monthly over the succeeding three
years.
(2) Potential Realizable Value is based on the assumption that the Common Stock
of the Company appreciates at the annual rate shown (compounded annually)
from the date of grant until the expiration of the option term. These
numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.
Aggregate Option Exercises in 1996 and Year-End Option Values. The following
table sets forth for each of the Named Officers certain information concerning
the number of shares subject to both exercisable and unexercisable
51
<PAGE>
stock options as of December 31, 1996. Also reported are values for "in-the-
money" options that represent the positive spread between the respective
exercise prices of outstanding options and the fair market value of the
Company's Common Stock as of December 31, 1996. No Named Officer exercised
options during 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT 12/31/96(#) 12/31/96($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Henry R. Nothhaft........... 73,210 76,124 76,871 79,930
John K. Peters.............. 59,832 67,101 62,824 70,456
Michael F. Anthofer......... -- 43,333 -- 45,500
George D. Carr.............. 2,917 13,750 3,063 14,438
Scott G. Eagle.............. -- 30,000 -- 31,500
</TABLE>
- --------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1996 ($4.80 per share)
and the exercise price of the Named Officer's option.
EMPLOYEE STOCK PLANS
1995 Stock Incentive Plan for Employees and Consultants. The Company's 1995
Stock Incentive Plan for Employees and Consultants (the "1995 Plan") provides
for the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
for the granting to employees and consultants of nonstatutory stock options,
stock appreciation rights ("SARs") and restricted stock awards ("RSAs"). No
SARs or RSAs have been granted under the 1995 Plan. The 1995 Plan was approved
by the Board of Directors in September 1995 and Stockholders in September 1995,
and an amendment decreasing the number of shares thereunder from 840,000 to
762,600 was approved by the Board of Directors in February 1996. The 1995 Plan
was terminated effective October 4, 1996, and no further grants are being made
thereunder except to the extent that an exchange of options under the Company's
1993 Incentive Stock Option Plan for options under the 1995 Plan, which
exchange was begun in October 1995, is continuing and has not yet been
completed. A total of 762,600 shares of Common Stock are reserved for issuance
pursuant to the 1995 Plan. As of May 15, 1997, options to purchase 344,952
shares of Common Stock at a weighted exercise price of $5.55 per share were
outstanding.
The 1995 Plan is administered by a committee of the Board of Directors, which
committee is required, once the Company's Common Stock becomes publicly traded,
to be constituted to comply with Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended, and applicable laws. The administrator has
the power to determine the terms of the options granted, including the exercise
price, the number of shares subject to the option and the exercisability
thereof, and the form of consideration payable upon exercise. Options granted
under the 1995 Plan are not generally transferable by the optionee, and each
option is exercisable during the lifetime of the optionee only by such
optionee. Incentive stock options granted under the 1995 Plan must generally be
exercised within three months of the end of an optionee's status as an employee
or consultant of the Company, or within 12 months after such optionee's
termination by death or disability, but in no event later than the expiration
of the option's term, which may not exceed ten years. The exercise price of all
options granted under the 1995 Plan must be at least equal to the fair market
value of the Common Stock on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all classes of
the Company's outstanding capital stock, the exercise price of any option must
equal at least 110% of the fair market value on the grant date and the term of
the option must not exceed five years. The term of all other options granted
under the 1995 Plan may not exceed 10 years.
The 1995 Plan provides that in the event of a recapitalization, stock split,
stock dividend, combination or reclassification or other increase or decrease
in the number of issued shares of Common Stock without consideration, the
number of shares subject to each outstanding stock option, as well as the
exercise price are appropriately adjusted as determined by the Committee.
Amended and Restated 1996 Stock Plan. The Company's Amended and Restated 1996
Stock Plan (the "Restated 1996 Plan") provides for the granting to employees of
incentive stock options within the meaning of Section 422 of
52
<PAGE>
the Code, and for the granting to employees, directors and consultants of
nonstatutory stock options and stock purchase rights ("Rights"). The 1996 Plan
was initially approved by the Board of Directors effective as of December 1996.
It was amended and restated in May 1997 and will be presented to the
Stockholders for their approval at the 1997 annual meeting. Unless terminated
sooner, the Restated 1996 Plan will terminate automatically in December 2006. A
total of 793,333 shares of Common Stock are currently reserved for issuance
pursuant to the Restated 1996 Plan. As of May 15, 1997, options to purchase
595,580 shares of Common Stock at a weighted average exercise price of $6.75
per share were outstanding, and 2,966,295 shares of Common Stock remained
available for future grant under the Restated 1996 Stock Plan.
The Restated 1996 Plan may be administered by a committee of the Board of
Directors constituted to comply with applicable laws (the "Committee") or by
the Board itself. The Board or Committee (the "Administrator") has the power to
determine the terms of the options or Rights granted, including the exercise
price, the number of shares subject to each option or Right, the exercisability
thereof, or any vesting acceleration or waiver of forfeiture conditions. The
Administrator may determine the form of payment upon exercise, including cash,
check, promissory note, other shares, cashless exercise or a combination of the
foregoing. The Board has the authority to amend, suspend or terminate the
Restated 1996 Plan, provided that no such action may impair the rights of any
optionee or Right holder without that person's consent.
Options and Rights granted under the Restated 1996 Plan are not generally
transferable by the optionee or Right holder other than by will or the laws of
descent and distribution, and each option and Right is exercisable during the
lifetime of the optionee or Right holder only by such optionee or Right holder.
The form of option agreement currently in use provides that options generally
must be exercised within 90 days of the end of optionee's status as an
employee, director or consultant of the Company. Under the Plan, options must
be exercised within twelve months after such optionee's termination by death or
disability, but in no event later than the expiration of the option's term. In
the case of Rights, unless the Administrator determines otherwise, the
Restricted Stock Purchase Agreement shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
service with the Company for any reason (including death or disability). The
purchase price for shares repurchased pursuant to the Restricted Stock Purchase
Agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The
repurchase option shall lapse at a rate determined by the Administrator but in
no case more slowly than 20% per year over five years. Generally, options vest
25% after one year and 1/36 per month thereafter. The exercise price of all
incentive stock options granted under the Restated 1996 Plan must be at least
equal to the fair market value of the Common Stock on the date of grant. The
exercise price of nonstatutory stock options and Rights must at least be equal
to 85% of the fair market value of the Common Stock on the date of grant. With
respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of the Company's outstanding capital stock, the
exercise price of any incentive or nonstatutory stock option granted must equal
at least 110% of the fair market value on the grant date. The term of an
incentive stock option granted to such a 10% Stockholder must not exceed five
years. The term of other options granted under the Restated 1996 Plan may not
exceed ten years.
The Restated 1996 Plan provides that in the event of a merger of the Company
with or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option shall be
assumed or an equivalent option substituted by the successor corporation. If
the outstanding options are not assumed or substituted as described in the
preceding sentence, the Administrator shall provide for the optionee or Right
holder to have the right to exercise the option or Right as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. If the Administrator makes an option or Right exercisable in full
in the event of a merger or sale of assets, the Administrator shall notify the
optionee or Right holder that the option or Right shall be fully exercisable
for a period of fifteen days from the date of such notice, and the option or
Right will terminate upon the expiration of such period. The forms of option
agreement and restricted stock purchase agreement currently in use provide for
a 180-day lockup of the optionee's or Right holder's shares in the event of the
Company's initial public offering. The option exercise notice and the
restricted stock purchase agreement also grant the Company a right of first
refusal (prior to the initial public offering) on the sale or transfer of any
shares purchased pursuant to an option or Right, other than transfers by gift,
operation of law or certain family transfers.
53
<PAGE>
1997 Stock Plan. The Company's 1997 Stock Plan (the "1997 Plan") provides for
the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), and for the granting to employees, directors and consultants of
nonstatutory stock options and stock purchase rights ("Rights"). The 1997 Plan
will be presented to the Board of Directors and to the stockholders in June
1997. Unless terminated sooner, the 1997 Plan will terminate automatically in
2007. A total of 1,500,000 shares of Common Stock are currently reserved for
issuance pursuant to the 1997 Plan.
The 1997 Plan may be administered by a committee of the Board of Directors
(the "Committee") or by the Board itself. In the case of options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code, the Committee shall consist of two or more "outside
directors" within the meaning of Section 162(m) of the Code. The Board or
Committee (the "Administrator") has the power to determine the terms of the
options or Rights granted, including the exercise price, the number of shares
subject to each option or Right, the exercisability thereof, and the form of
consideration payable upon such exercise. In addition, the Administrator has
the authority to amend, suspend or terminate the 1997 Plan, provided that no
such action may affect any share of Common Stock previously issued and sold or
any option previously granted under the 1997 Plan.
Options and Rights granted under the 1997 Plan are not generally transferable
by the optionee or Right holder, and each option and Right is exercisable
during the lifetime of the optionee or Right holder only by such optionee or
Right holder. Options granted under the 1997 Plan must generally be exercised
within three months of the end of optionee's status as an employee, director or
consultant of the Company, or within twelve months after such optionee's
termination by death or disability, but in no event later than the expiration
of the option's ten-year term. In the case of Rights, unless the Administrator
determines otherwise, the restricted stock purchase agreement shall grant the
Company a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment with the Company for any reason
(including death or disability). The purchase price for shares repurchased
pursuant to the restricted stock purchase agreement shall be the original price
paid by the purchaser and may be paid by cancellation of any indebtedness of
the purchaser to the Company. The repurchase option shall lapse at a rate
determined by the Administrator. The exercise price of all incentive stock
options granted under the 1997 Plan must be at least equal to the fair market
value of the Common Stock on the date of grant. The exercise price of
nonstatutory stock options and Rights granted under the 1997 Plan is determined
by the Administrator, but with respect to nonstatutory stock options intended
to qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code, the exercise price must at least be equal to the fair
market value of the Common Stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of the Company's outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date and the term of such incentive stock option must not
exceed five years. The term of other incentive stock options granted under the
1997 Plan may not exceed ten years.
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets
or a like transaction involving the Company, each option shall be assumed or an
equivalent option substituted by the successor corporation. If the outstanding
options are not assumed or substituted as described in the preceding sentence,
the Administrator shall provide for the optionee or Right holder to have the
right to exercise the option or Right as to all of the optioned stock,
including shares as to which it would not otherwise be exercisable. If the
Administrator makes an option or Right exercisable in full in the event of a
merger or sale of assets, the Administrator shall notify the optionee or Right
holder that the option or Right shall be fully exercisable for a period of
fifteen days from the date of such notice, and the option or Right will
terminate upon the expiration of such period.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock Purchase
Plan (the "1997 Purchase Plan") will be presented to the Board of Directors and
to the stockholders in June 1997. A total of 500,000 shares of Common Stock has
been reserved for issuance under the 1997 Purchase Plan. The 1997 Purchase
Plan, which is intended to qualify under Section 423 of the Internal Revenue
Code, consists of 24-month offering periods beginning on the first trading day,
respectively, except for the first such offering period, which commences on the
first trading day on or after the closing of the Company's initial public
offering and ends on the last trading day. Each offering
54
<PAGE>
period contains four six-month purchase periods. To the extent permitted by
applicable laws, regulations and stock exchange rules, if the fair market value
of the Common Stock on any exercise date in an offering period is lower than it
was on the enrollment date of such offering period, then all participants in
that offering period will be automatically withdrawn from such offering period
after exercise and re-enrolled in the immediately following offering period.
The 1997 Purchase Plan is administered by the Board of Directors or by a
committee appointed by the Board. Employees are eligible to participate if they
are customarily employed by the Company or any designated subsidiary for at
least 20 hours per week and more than five months in any calendar year. The
1997 Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions of up to 10% of an employee's compensation (excluding
overtime, shift premium, and other bonuses and incentive compensation), up to a
maximum of $25,000 for all offering periods ending within the same calendar
year. The price of stock purchased under the 1997 Purchase Plan is 85% of the
lower of the fair market value of the Common Stock at the beginning of the
offering period or at the end of the current purchase period. Employees may end
their participation at any time during an offering period, and they will be
paid their payroll deductions to date. Participation ends automatically upon
termination of employment with the Company.
Rights granted under the 1997 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1997 Purchase Plan. The 1997 Purchase Plan
provides that, in the event of a merger of the Company with or into another
corporation or a sale of substantially all of the Company's assets, each
outstanding option shall be assumed or an equivalent option shall be
substituted for it, or the Board of Directors or its committee shall shorten
the purchase and offering periods then in progress (so that employees' rights
to purchase stock under the Plan are exercised prior to the merger or sale of
assets). The 1997 Purchase Plan will terminate in 2007. The Board of Directors
has the authority to amend or terminate the 1997 Purchase Plan, except that no
such action may adversely affect any outstanding rights to purchase stock under
the 1997 Purchase Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the current members of the Compensation Committee is an executive
officer of the Company.
55
<PAGE>
CERTAIN TRANSACTIONS
PREFERRED STOCK ISSUANCES
The Company has sold shares of its Preferred Stock in private financings
from April 1995 through April 1997 as follows (all shares of Preferred Stock
are set forth herein on an as-converted-to-Common Stock basis and reflect the
one-for-15 reverse stock split of the Common Stock effective in May 1997):
909,364 shares of Series A Preferred Stock at an effective price of $11.00 per
share; 433,638 shares of Series B Preferred Stock at an effective price of
$11.00 per share; 1,031,146 shares of Series C Preferred Stock at an effective
price of $27.30 per share; and 2,933,252 shares of Series D Preferred Stock at
an effective price of $20.40 per share.
<TABLE>
<CAPTION>
DIRECTORS, EXECUTIVE SHARES OF SHARES OF SHARES OF SHARES OF
OFFICERS AND COMMON SERIES A SERIES B SHARES OF SERIES SERIES D
5% STOCKHOLDERS STOCK PREFERRED PREFERRED C PREFERRED PREFERRED WARRANTS
-------------------- --------- --------- --------- ---------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
The Goldman Sachs Group,
L.P.(1)................ 167,249 454,682 216,819 136,964 14,706 57,595
Kleiner Perkins Caufield
& Byers entities(2).... 167,249 454,682 216,819 -- 14,706 57,595
TMI Telemedia
International,
Ltd.(3)................ -- -- -- -- 1,184,642 325,786
SOFTBANK Holdings(4).... -- -- -- -- 980,393 --
Racal Data Group(5)..... -- -- -- -- 490,197 491,631
Henry R. Nothhaft(6).... -- -- -- -- -- 4,902
John Peters(7).......... -- -- -- -- -- 2,451
</TABLE>
- --------
(1) Consists of securities held of record by GS Capital Partners, L.P. See
"Principal Stockholders." Includes 90,938 shares of Common Stock issued
upon exercise of warrants in April 1997 at an exercise price of $6.60 per
share, 33,344 shares of Series B Preferred Stock issued upon exercise of
warrants in April 1997 at an exercise price of $6.60 per share, and 14,706
shares of Series D Preferred Stock issued upon exercise of warrants in
April 1997 at an exercise price of $12.24 per share. GS Capital Partners
L.P. exercised such warrants at a discounted exercise price in
consideration of its early exercise. Terence M. O'Toole, a Director of the
Company, is a Managing Director of Goldman, Sachs & Co., the investment
manager for GS Capital Partners, L.P. See "Principal Stockholders."
(2) Vinod Khosla, a director of the Company, is a general partner of KPCB VII
Associates, the general partner of Kleiner Perkins Caufield & Byers VII
and KPCB VII Information Sciences Zaibatsu Fund II. Includes 90,938 shares
of Common Stock issued upon exercise of warrants in April 1997 at an
exercise price of $6.60 per share 33,344 shares of Series B Preferred
Stock issued upon exercise of warrants in April 1997 at an exercise price
of $6.60 per share, and 14,706 shares of Series D Preferred Stock issued
upon exercise of warrants in April 1997 at an exercise price of $12.24 per
share. The Kleiner Entities exercised such warrants at a discounted
exercise price in consideration of their early exercise.
(3) Franco Regis, a director of the Company, is Director of Business
Development and Strategic Planning of Telecom Italia, SpA, the parent of
TMI Telemedia International, Ltd. Includes 204,248 shares of Series D
Preferred issued upon exercise of a warrant in April 1997 at an exercise
price of $12.24 per share. TMI exercised such warrants at a discounted
exercise price in consideration of its early exercise.
(4) Gary Reischel, a director of the Company, is Senior Vice President of
SOFTBANK Holdings, Inc.
(5) L. Rod Manning, a director of the Company, is the President and General
Counsel of The Racal Corporation, the parent of Racal Datacom, Inc.
(6) Henry R. Nothhaft is the President of the Company. Represents 4,902 shares
of Series D Preferred Stock issuable upon exercise of a warrant at an
exercise price of $20.40 per share. The warrant was granted to Mr.
Nothhaft in July 1996 in consideration of a bridge loan in the amount of
$100,000. The principal and interest on such bridge loan was repaid in
full.
(7) John Peters is the Executive Vice President and General Manager Network
Operations of the Company. Represents 2,451 shares of Series D Preferred
Stock issuable upon exercise of a warrant at an exercise price of $20.40
per share. The warrant was granted to Mr. Peters in July 1996 in
consideration of a bridge loan in the amount of $50,000. The principal and
interest on such bridge loan was repaid in full.
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The Preferred Stock described above will convert into Common Stock upon the
closing of this Offering. Holders of the Preferred Stock are entitled to
certain registration rights with respect to the Common Stock issued or
issuable upon conversion thereof. In addition, GSCP, the Kleiner Entities and
Marc Collins-Rector are entitled to certain registration rights with respect
to shares of Common Stock held by them, and employees of Critical
Technologies, Inc. have certain piggyback registration rights with respect to
shares issuable upon exercise of certain options issued to them. See
"Description of Capital Stock--Registration Rights."
SERIES A AGREEMENT
The Preferred Stock and Warrant Purchase Agreement, dated April 20, 1995, as
amended (the "Series A Agreement") by which the Registrant sold Series A
Preferred Stock and warrants to purchase Common Stock to GSCP, Kleiner Perkins
Caufield & Byers VII and KPCB VII Founders Fund for an aggregate consideration
of approximately $10.0 million, provides that as long as GSCP and its
affiliates beneficially own five percent or more of the outstanding Common
Stock of the Registrant, Goldman, Sachs & Co. or any of its affiliates have
the right to perform all investment banking services for the Registrant on
customary terms consistent with an arms'-length transaction. The Series A
Agreement, further obligates the Registrant to complete by June 30, 1997, a
rescission offer with respect to all Common Stock and Common Stock equivalents
issued prior to April 20, 1995, and to indemnify the GSCP and the Kleiner
Entities against "rescission losses," in excess of the estimated amount of
rescission losses described in the Series A Agreement.
BRIDGE LOANS
In connection with the alliance between Intuit and the Company, GSCP and the
Kleiner Entities made bridge loans totaling $2 million to the Company on
October 16, 1995, which were rolled over into bridge loans totaling $4 million
on November 6, 1995. On November 29, 1995, GSCP made a further bridge loan of
$3 million. In consideration of these loans, GSCP and the Kleiner Entities
received warrants to purchase 181,876 shares of Series B Preferred Stock at an
exercise price of $11.00 per share. Effective as of December 20, 1995, GSCP
and the Kleiner Entities converted the principal and interest due under their
$2 million promissory notes into a total of 366,947 shares of Series B
Preferred Stock at a price of $11.00 per share. In addition, effective as of
January 1996, GSCP converted the entire amount of principal and interest on
its $3 million bridge note into 123,297 Series C Shares as an exercise price
of $6.60 per share.
On July 31, 1996, the Company closed bridge loans from GSCP and KPCB for
$300,000 each, evidenced by convertible promissory notes dated July 29, 1996.
The Company issued GSCP and KPCB each a warrant dated July 31, 1996, to
purchase 14,706 shares of Series D Preferred Stock at an exercise price of
$20.40 per share. The loans were repaid on August 21, 1996. On April 4, 1997,
the Company and GSCP and KPCB entered warrant amendment agreements reducing
the exercise price of the warrants to $12.24 per share, and the warrants were
exercised.
On July 31, 1996, the Company closed bridge loans from Henry Nothhaft, the
Company's President, Chief Executive Officer and a director, and John Peters,
the Company's Executive Vice President and President, Network Services
Division, for $100,000 and $50,000, respectively. The loans were evidenced by
promissory notes dated July 29, 1996. The Company issued Mr. Nothhaft and Mr.
Peters warrants dated July 31, 1996, to purchase 4,902 shares and 2,451
shares, respectively, of Series D Preferred Stock at an exercise price of
$20.40 per share. The loans were repaid on August 21, 1996.
COMMISSIONS
The Company paid commissions totaling $350,000 to Goldman, Sachs & Co. in
August 1996 in connection with the sale of shares of Series D Preferred Stock.
Terence M. O'Toole, a Director of the Company, is a Managing Director of
Goldman, Sachs & Co.
WARRANT EXERCISES
Effective as of April 4, 1997, the Company entered into warrant amendment
agreements with TMI, GSCP, and the Kleiner Entities to reduce the exercise
price of certain of their warrants in return for the immediate exercise of
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such warrants. The exercise price of warrants for 124,282 shares of Class A
Common Stock and 66,688 shares of Series B Preferred Stock held by GSCP and the
Kleiner Entities was reduced from $11.00 to $6.60 per share. The exercise price
of warrants for 233,660 shares of Series D Preferred Stock held by GSCP, KPCB
and TMI was reduced from $20.40 per share to $12.24 per share. Also, in
connection with the reduction of the exercise price of the GSCP and Kleiner
Entities' Common Stock warrants, the exercise price of Intuit's $1.5 million
warrant was similarly reduced to $6.60 per share, and the expiration date was
extended to December 31, 2000.
RACAL AND TRANSACTION
Pursuant to a master lease agreement between the Company and Racal-Datacom,
Inc. ("Racal"), effective March 31, 1995, the Company has installed networking
equipment under lease financing. The terms of the leases under the master
agreement are 48 months or 60 months, depending on the equipment. In 1996, the
Company paid Racal approximately $8.3 million in lease payments and related
charges. As of December 31, 1996, the current portion of the Company's capital
lease obligations to Racal totaled $10.2 million, and the noncurrent portion
totaled $29.2 million. As security for the lease financing, Racal has a
security interest in all leased equipment.
AMPM, INC. TRANSACTIONS
Donald C. Schutt, Vice President of Michigan Operations, for the Company, is
a majority stockholder of AMPM, Inc., an advertising agency. The Company
incurred marketing fees to AMPM, Inc. totaling $2.5 million in 1996.
EMPLOYMENT AND TERMINATION AGREEMENTS
In February 1996, the Company entered into a termination of services and
indemnification agreement with Marc Collins-Rector and Chad Shackley (the
"Founders"). Pursuant to such agreement Mr. Collins-Rector agreed to resign
from the Board of Directors of the Company and the Founders agreed to resign as
Company employees and to enter into lock-up agreements in the event of the
Company's initial public offering. If asked to do so by the Founders, the
Company agreed it will file a registration statement on Form S-8 or Form S-3 by
certain deadlines after it becomes eligible to do so, with respect to certain
shares issuable upon exercise of the Founders' options.
Also in February 1996, the Company entered into an agreement with Randy
Maslow wherein Mr. Maslow agreed to serve as an advisor to the Board of
Directors through October 31, 1996. Pursuant to such agreement, Mr. Maslow
agreed to resign from the Board upon the effectiveness of an initial public
offering. If asked to do so by Mr. Maslow, the Company agreed it will file a
registration statement on Form S-8 or Form S-3 as soon as practicable after it
becomes eligible to do so, with respect to certain shares issuable upon
exercise of Mr. Maslow's options.
OPTIONS OF MANAGEMENT AND DIRECTORS
In August 1996, the Board of Directors amended the vesting provisions of
options to purchase 14,000 shares issued to Henry Nothhaft, President, Chief
Executive Officer and a director of the Company, on October 31, 1995, and an
option to purchase 11,900 shares issued to John Peters, Executive Vice
President and General Manager, Network Services Division, on October 31, 1995,
so the options would fully vest as of the closing date of the sale of at least
$29 million of Series D Preferred Stock of the Company, which occurred on
August 21, 1996.
In August 1996, the Company exchanged four options previously issued to Randy
Maslow, a director of the Company, for new options exercisable for an aggregate
of 46,673 shares of Class A Common Stock at $3.75 per share. The four-year
vesting schedule accelerates so that all shares vest immediately in the event
of an initial public offering or a change of control. The options may be
exercised through their expiration date regardless of when Mr. Maslow ceases
being an employee or consultant. Mr. Maslow's employment with the Company ended
on October 31, 1996.
In May 1997, the Company amended the terms of options to purchase 53,341
shares of Common Stock previously issued to Donald C. Schutt, an executive
officer of the Company, at an average exercise price of $20.34. The exercise
price was decreased to $3.75 per share and conditions precedent to vesting of
such options was removed.
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In May 1997, the Company amended options to purchase 26,666 shares of Common
Stock previously issued to Marc Collins-Rector, a founder and 5% shareholder of
the Company's Common Stock, to remove vesting conditions.
All future transactions among the Company and its officers, directors,
principal stockholders and their affiliates will be approved by a majority of
the Board of Directors, including a majority of the independent and
disinterested directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock on a fully diluted basis as of March
31, 1997, and as adjusted to reflect the sale of the 3,000,000 shares of Common
Stock offered hereby and an assumed 1,363,636 shares to be sold in the Direct
Placements, by: (i) each person who is known by the Company to own beneficially
more than 5% of the Common Stock; (ii) each director and Named Officer of the
Company; and (iii) all directors and executive officers of the Company as a
group. For purposes of the following table, Common Stock issuable upon exercise
of all outstanding options and warrants (including unvested option and
warrants) are considered outstanding. In addition, Common Stock issuable upon
conversion of all outstanding Preferred Stock and upon conversion of all
Preferred Stock issuable upon exercise of outstanding warrants are considered
outstanding. Except as otherwise noted, the persons named in the table have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
SHARES PERCENT BENEFICIALLY OWNED(1)
BENEFICIALLY ------------------------------
NAMES AND ADDRESSES OWNED BEFORE OFFERING AFTER OFFERING
------------------- ------------ --------------- --------------
<S> <C> <C> <C>
TMI Telemedia International,
Ltd.(2).......................... 1,510,428 19.7% 12.6%
Viale del Campo Boario, 56D
00153 Rome, Italy
The Goldman Sachs Group, L.P.(3).. 1,048,011 14.2 8.9
85 Broad Street
New York, NY 10004
Racal-Datacom, Inc.(4)............ 981,828 12.5 8.1
1601 North Harrison Parkway
Sunrise, FL 333233-2899
Yoshitaka Kitao SOFTBANK Holdings,
Inc. ............................ 980,393 13.4 8.4
10 Langley Road, Suite 403
Newton Center, MA 02159
Kleiner Perkins Caufield & Byers
Entities(5)...................... 911,051 12.3 7.7
2750 Sand Hill Road
Menlo Park, CA 94025
Marc Collins-Rector(6)............ 649,507 8.8 5.5
2000 Benedict Canyon
Beverly Hills, CA 90210
Henry R. Nothhaft(7).............. 100,667 1.4 *
John K. Peters(8)................. 81,455 1.1 *
Michael F. Anthofer(9)............ 13,195 * *
Scott G. Eagle(10)................ 11,250 * *
George D. Carr(11)................ 5,834 * *
Franco Regis(12).................. 1,510,428 19.7 12.6
Terence M. O'Toole(13)............ -- -- --
L. Rod Manning(14)................ 981,828 12.5 8.1
Gary E. Rieschel(15).............. 980,393 13.4 8.4
Vinod Khosla(16).................. 911,051 12.3 7.3
Randy Maslow(17).................. 46,674 * *
All current executive officers and
directors as a group
(16 persons)(18)................. 4,712,065 55.2% 36.5%
</TABLE>
- --------
*Less than 1%.
(1) Applicable percentage ownership after this offering reflects the issuance
of 3,000,000 shares in the offering and an assumed 1,363,636 shares in the
Direct Placements. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission, based on factors
including voting and investment power with respect to shares, subject to
the applicable community property laws. Shares of Common Stock subject to
options or warrants currently exercisable, or exercisable by August 31,
1997, are deemed outstanding for the purpose of computing the percentage
ownership of the person holding such options or warrants, but are not
deemed outstanding for computing the percentage ownership of any other
person.
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(2) Includes warrants to purchase 325,786 shares of stock.
(3) Consists of securities held of record by GS Capital Partners, L.P., an
investment partnership, of which affiliates of The Goldman Sachs Group,
L.P. ("GS Group") are the general partner or investment manager. GS Group
disclaims beneficial ownership of the shares owned by GS Capital Partners,
L.P. to the extent attributable to partnership interests therein held by
persons other than GS Group and its affiliates. GS Capital Partners, L.P.
shares voting and investment power with certain of its affiliates.
Includes warrants to purchase 57,595 shares of stock.
(4) Includes warrants to purchase 491,631 shares of stock.
(5) Includes shares held by Kleiner Perkins Caufield & Byers VII, KPCB
Information Sciences Zaibatsu Fund, KCPB Information Sciences Zaibatsu
Fund II and KCPB VII Founders Fund (collectively, the "KCPB Entities").
Also includes warrants to purchase 57,595 shares held by the KCPB
Entities.
(6) Includes 80,007 shares of Common Stock issuable upon exercise of
outstanding stock options.
(7) Includes 100,667 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants.
(8) Includes 81,455 shares of Common Stock issuable upon exercise of
outstanding stock options and (ii) warrants.
(9) Includes 13,195 shares of Common Stock issuable upon exercise of
outstanding stock options.
(10) Includes 11,250 shares of Common Stock issuable upon exercise of
outstanding stock options.
(11) Includes 5,834 shares of Common Stock issuable upon exercise of
outstanding stock options.
(12) Includes 1,510,428 shares held by TMI Telemedia International, Ltd. Mr.
Regis is the Director of Business Development and Strategic Planning of
Telecom Italia, S.p.A., the parent of TMI Telemedia International, Ltd.
See note (2). Mr. Regis disclaims beneficial ownership of such shares.
(13) Excludes 1,048,011 shares which may be deemed to be beneficially owned by
the Goldman Sachs Group, L.P. See note (3). Mr. Terence M. O'Toole, a
director of the Company, serves on the Board of Directors as a
representative of GS Capital Partners, L.P., pursuant to a contractual
arrangement. Mr. O'Toole is a Managing Director of Goldman, Sachs & Co.,
the investment manager for GS Capital Partners, L.P. Mr. O'Toole disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
(14) Includes 981,828 shares held by Racal Datacom, Inc. See note (4). Mr.
Manning is the President and General Counsel of The Racal Corporation, the
parent of Racal-Datacom, Inc. Mr. Manning disclaims beneficial ownership
of such shares.
(15) Represents 980,393 shares held by Yoshitaka Kitao SOFTBANK Ventures, Inc.
See note (5). Mr. Rieschel is a Senior Vice President at SOFTBANK
Holdings, Inc. Mr. Rieschel disclaims beneficial ownership of such shares.
(16) Represents shares beneficially owned by the KCPB Entities. Mr. Khosla is
an affiliate of such entities. Mr. Khosla disclaims beneficial ownership
of such shares, except to the extent of his pecuniary interest therein.
(17) Includes 46,674 shares of Common Stock issuable upon exercise of
outstanding stock options.
(18) Includes shares of Common Stock issuable upon exercise of outstanding
options and warrants, and shares beneficially owned by entities associated
with Messrs. Regis, Manning, Rieschel and Khosla, as to which they
disclaim beneficial ownership. See Notes (7)-(17).
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<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 11,700,769 shares,
$0.001 par value. At March 31, 1997, there were 6,854,904 shares of Common
Stock outstanding held of record by approximately 340 stockholders.
The following description of the Company's capital stock does not purport to
be complete and is subject to and qualified in its entirety by the Company's
Amended and Restated Certificate of Incorporation and Bylaws and by the
provisions of applicable Delaware law.
The Amended and Restate Certificate of Incorporation and Bylaws contain
certain provisions that are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and which may have
the effect delaying, deferring, or preventing a future takeover or change in
control of the Company unless such takeover or change in control is approved by
the Board of Directors.
COMMON STOCK
A total of 100,000,000 shares of Common Stock of the Company will be
authorized upon the closing of the offering. Holders of Common Stock do not
have cumulative voting rights, and, therefore, holders of a majority of the
shares voting for the election of directors can elect all of the directors. In
such event, the holders of the remaining shares will not be able to elect any
directors.
Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between the Company and its debtholders. See "Dividend Policies." The Company
has never declared or paid cash dividends on its capital stock, expects to
retain future earnings, if any, for use in the operation and expansion of its
business, and does not anticipate paying any cash dividends in the foreseeable
future. In the event of the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets legally available for distribution after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding.
The Common Stock has no preemptive, redemption or subscription rights. The
outstanding shares of Common Stock are, and the shares offered by the Company
will be, when issued and paid for, fully paid and nonassessable.
PREFERRED STOCK
Effective upon the closing of the offering, the Board of Directors has the
authority, without further action by the Stockholders, to issue up to
10,000,000 shares of Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any
series or the designation of such series, without any further vote or action by
the Stockholders. The issuance of Preferred Stock could adversely affect the
voting power of holders of Common Stock and the likelihood that such holders
will receive dividend payments and payments upon liquidation and could have the
effect of delaying, deferring or preventing a change in control of the Company.
The Company has no present plan to issue any shares of Preferred Stock.
WARRANTS
As of April 30, 1997, the following warrants were outstanding:
(i) Warrants to purchase 44,935 shares of Common Stock at an exercise
price of $3.75 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on September 1, 1998.
(ii) Warrants to purchase 5,000 shares of Common Stock exercisable
through February 15, 2000, at an exercise price equal to the lowest of (a)
$30 per share, (b) the lowest price per share of which the Company may sell
shares of its Common Stock (or securities convertible into or exchangeable
for shares of its Common Stock)
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on or after February 15, 1995, and (c) the lowest price at which the holder
of a warrant, option or other Company security entitling the holder to
purchase shares of the Company's Common Stock may purchase such shares on
or after February 15, 1995 (currently $3.75).
(iii) Warrants to purchase 17,453 shares of Common Stock at an exercise
price of $10.82 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on July 20, 1998.
(iv) Warrants to purchase 115,188 shares of Series B Preferred Stock at
an exercise price of $11.00 per share (subject to adjustment for stock
splits, stock dividends and the like), which expire on December 11, 1998.
(v) Warrants to purchase 227,273 shares of Series B Preferred Stock at an
exercise price of Series B Preferred Stock at an exercise price of $6.60
per share (subject to adjustment for stock splits, stock dividends and the
like), which expire on December 31, 2000.
(vi) Warrants to purchase 128,205 shares of Series B Preferred Stock at
an exercise price of $27.30 per share (subject to adjustment for stock
splits, stock dividends and the like), which expire on December 31, 2000.
(vii) Warrants to purchase 36,765 shares of Series D Preferred Stock at
an exercise price of $20.40 per share (subject to adjustment for stock
splits, stock dividends and the like), which expires on June 6, 1999.
Warrants to purchase 34,314 shares of Series D Preferred Stock at an
exercise price of $20.40 per share (subject to adjustment for stock splits,
stock dividends and the like), which expire on July 31, 1999. Warrant to
purchase 149,108 shares of Series D Preferred Stock at an exercise price of
$20.40 per share (subject to adjustment for stock splits, stock dividends
and the like), which expires on August 21, 1999. Warrants to purchase
441,695 shares of Series D at an exercise price of $20.40 per share
(subject to adjustment for stock splits, stock dividends and the like),
which expire on October 31, 1999. Warrant to purchase 176,678 shares of
Series D Preferred Stock at an exercise price of $20.40 per share (subject
to adjustment for stock splits, stock dividends and the like), which
expires on March 5, 2000.
REGISTRATION RIGHTS
Pursuant to the agreement between the Company and holders of approximately
5,954,254 shares of Common Stock the "Holders"), the Holders are entitled to
certain rights with respect to the registration of such shares under the
Securities Act. If the Company proposes to register any of its securities under
the Securities Act, either for its own account or for the account of other
security Holders exercising registration rights, such Holders are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein. Additionally, Holders of the Registrable Securities are also
entitled to certain demand registration rights pursuant to which they may
require the Company to file a registration statement under the Securities Act
at the Company's expense with respect to their shares of Common Stock, and the
Company is required to use its best efforts to effect such registration. All of
these registration rights are subject to certain conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in such registration and the right of the Company not to effect
a requested registration within six months following an offering of the
Company's securities, including the offering made hereby.
Additionally, pursuant to an agreement with Critical Technologies Inc.
("CTI"), certain employees of CTI who have been granted options to purchase an
aggregate of up to 900,000 shares of the Company's Common Stock are entitled to
certain piggyback registration rights with respect to such shares. Such rights
are subject to the right of the underwriters of an offering to limit the number
of shares included in such registration.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Limitation of Director and Officer Liability
The Company's Certificate of Incorporation and Bylaws contain certain
provisions relating to the limitation of liability and indemnification of
directors and officers. The Company's Certificate of Incorporation provides
that directors of the Company may not be held personally liable to the Company
or its stockholders for monetary damages for a breach of fiduciary duty, except
for liability (i) for any breach of the director's duty of loyalty to the
Company or
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<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
has been appointed as the transfer agent and registrar for the
Company's Common Stock. Its telephone number for such purposes is .
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RESCISSION OFFERS
The Company intends to commence approximately 30 days after the effectiveness
of the Offering made hereby, a rescission offer (the "Rescission Offer")
pursuant to a registration statement filed under the Securities Act of 1933, as
amended (the "Act") and pursuant to the state securities laws of the States of
California, Florida, Georgia, Illinois, Kentucky, Michigan, Missouri, New
Jersey, New York, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, Washington,
Wisconsin and West Virginia, 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 451,845 shares through December 31, 1996 (the "Rescission Stock").
Because of the frequency and number of sales, including the number of persons
who received offers and who purchased shares, the private placement exemption
under the Act may not have been available for the Company's prior sales of the
Rescission Stock. The Company will offer to rescind such prior sales by
repurchasing the Rescission Stock at the price per share paid therefor (a range
of $3.75 per share to $30.00 per share) plus interest thereon at the statutory
rate from the date of purchase by the purchaser to the expiration of the
Rescission Offer. The Rescission Offer will expire approximately 30 days after
the effectiveness of the registration statement with respect to the Rescission
Stock. Under such Rescission Offer, the Company would be required to make an
aggregate payment of approximately $5.1 million plus the aggregate amount of
interest thereon as described above, if all offerees accept the offer. Offerees
who do not accept the Rescission Offer will, for purposes of applicable federal
and state securities laws, be deemed to hold registered shares under the Act
which will be freely tradeable in the public market as of the effective date of
the registration statement with respect to the Rescission Stock. The Act does
not expressly provide that a Rescission Offer will terminate a purchaser's
right to rescind a sale of stock which was not registered under the Act as
required. Accordingly, should the Rescission Offer be rejected by any of all
offerees, the Company may continue to be contingently liable under the Act for
the purchase price of Rescission Stock up to an aggregate amount of
approximately $5.1 million plus statutory interest of approximately $1.0
million.
In addition, options issued pursuant to the Company's 1995 Stock Incentive
Plan for Employees and Consultants (the "1995 Plan") and nonplan options for
the purchase of Common Stock were issued to approximately 150 to 200 people in
California in 1995 and 1996 for which the Company was unable to rely on the
exemption provided by Section 25102(f) of the California Corporations Code. In
March 1996, the Company was denied a permit for these issuances by the
California Commissioner of Corporations as a result of the Company's having had
two classes of Common Stock with differing voting rights. In addition, a
smaller number of options were issued to optionees in other states, including
Michigan, Virginia and Florida, for which the Company may not have had
available an exemption from qualification. Also, the November 17, 1995, grant
of options for the purchase of 900,000 shares of Common Stock to employees of
Critical Technologies Incorporated was not qualified and may not have had an
exemption available under the blue sky laws of California. The aforementioned
options are potentially subject to rescission, and the Company intends to
include them in its planned Rescission Offer discussed above. Under such
Rescission Offer, the Company will be required to make an aggregate payment of
approximately $556,000.
As of the date hereof, management is not aware of any claims for rescission
against the Company. While the Company will offer to rescind the securities
sales, there are no assurances that the Company will not otherwise be subject
to possible penalties or fines relating to these issuances. The Company
believes the Rescission Offers will provide it with additional meritorious
defenses to any such future claims. See "Risk Factors--Rescission Offers,"
"Shares Eligible for Future Sale" and Note 5 of Notes to the Financial
Statements.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have approximately
11,700,769 shares of Common Stock outstanding, after giving effect to the
automatic conversion of all outstanding shares of Preferred Stock into Common
Stock immediately prior to the closing of this offering and assuming (i) no
exercise of the Underwriters' over-allotment option, and (ii) no exercise of
outstanding options or warrants. Effective upon the consummation of this
offering, assuming no exercise of outstanding options or warrants, the Company
will have outstanding options and warrants to purchase an aggregate of
approximately 2,915,621 shares of Common Stock.
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Of the Common Stock outstanding upon completion of this offering, the
3,000,000 shares of Common Stock sold in this offering will be freely tradeable
without restriction or further registration under the Securities Act, except
for any shares purchased by "affiliates" of the Company, as that term is
defined under the Securities Act and the Regulations promulgated thereunder (an
"Affiliate"). The remaining 8,700,769 shares of Common Stock held by officers,
directors, employees, consultants and other stockholders of the Company were
sold by the Company in reliance on exemptions from the registration
requirements of the Securities Act and are "restricted securities" within the
meaning of Rule 144 under the Securities Act. Any shares of Common Stock issued
upon the exercise of options or warrants held by any of such persons will
constitute restricted securities. Approximately 137,673 of the outstanding
shares of Common Stock which are restricted securities will be eligible for
sale in the public market as of the date of this Prospectus (the "Effective
Date") in reliance on Rule 144(k) under the Securities Act. The remaining
8,563,096 shares of Common Stock held by existing stockholders are subject to
lock-up agreements with the Representatives and may not be sold or otherwise
transferred until 360 days after the Effective Date without the consent of such
underwriter except for transfers pursuant to gifts or certain partnership
distributions and similar transfers in which the transferee enters into a
substantially similar lock-up agreement. Upon the expiration of the lock-up
agreements, all of such locked-up shares will become eligible for sale 360 days
after the Effective Date subject to the provisions of Rules 144(k), 144 or 701.
The lead managing underwriter may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to these
lock-up agreements.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated), including an Affiliate, who has beneficially owned
restricted securities for a period of at least one year from the later of the
date such restricted securities were acquired from the Company or the date they
were acquired from an Affiliate, is entitled to sell, within any three-month
period commencing 90 days after the Effective Date, a number of shares that
does not exceed the greater of 1% of the then outstanding shares of Common
Stock (approximately 117,000 shares immediately after this offering) or the
average weekly trading volume in the Common Stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
provisions relating to the number and notice of sale and the availability of
current public information about the Company.
Further, under Rule 144(k), if a period of at least two years has elapsed
between the later of the date restricted securities were acquired from the
Company and the date they were acquired from an Affiliate of the Company, a
holder of such restricted securities who is not an Affiliate at the time of the
sale and has not been an Affiliate for at least three months prior to the sale
would be entitled to sell the shares immediately after the Effective Date
without regard to the volume and manner of sale limitations described above.
Any employee, director or consultant to the Company who purchased his or her
shares pursuant to a written compensation plan or contract is entitled to rely
on the resale provisions of Rule 701, which permits non-Affiliates to sell
their Rule 701 shares beginning 90 days after the Effective Date without having
to comply with the volume limitations and other restrictions of Rule 144 and
permits Affiliates to sell their Rule 701 shares without having to comply with
the Rule 144 holding period restrictions. As of May 15, 1997, there were
outstanding options to purchase approximately 1,539,007 shares which under
certain circumstances would be available for sale pursuant to Rule 701, subject
to the lock-up agreements.
In addition, the Company intends to register shares of Common Stock reserved
for issuance pursuant to its 1993 Incentive Stock Option Plan, 1995 Stock
Incentive Plan for Employees and Consultants, Amended and Restated 1996 Stock
Plan, 1997 Stock Plan and 1997 Employee Stock Purchase Plan following the
closing of this offering. Shares issued under the Executive Stock Option Plan,
Director Stock Plan and Employee Stock Purchase Plan (other than shares issued
to the Affiliates) after the effective date of a registration statement
covering such shares generally may be sold immediately in the public market,
subject to vesting requirements and the lock-up agreements described above. See
"Management--Employee Stock Plans."
Prior to this offering, there has been no public market for the Common Stock
of the Company, and any sale of substantial amounts of Common Stock in the open
market, or the availability of shares for sale, may adversely affect the market
price of the Common Stock and the ability of the Company to raise funds through
equity offerings in the future.
The holders of approximately 5.3 million shares are entitled to certain
registration rights with respect to their shares. See "Description of Capital
Stock--Registration Rights."
66
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom ,
and 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>
---------
Total......................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The nature
of the Underwriters' obligations is such that they are committed to purchase
all shares of Common Stock offered hereby if any of such shares are purchased.
The Representatives have advised the Company that the Underwriters propose to
offer the shares of Common Stock directly to the public at the offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a commission not in excess of $ per share. The Underwriters may
allow and such dealers may reallow a concession not in excess of $ per share
to certain other dealers. After the public offering of the shares of Common
Stock, the offering price and other selling terms may be changed by the
Underwriters.
The Representatives have further advised the Company that, pursuant to
Regulation M under the Securities Act, certain persons participating in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of
the Underwriters for the purpose of fixing or maintaining the price of the
Common Stock. A "syndicate covering transaction" is the bid for or the purchase
of the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with the offering. A "penalty bid"
is an arrangement permitting the Representatives to reclaim the selling
concession otherwise accruing to an Underwriter or syndicate member in
connection with the offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
Certain of the Company's current investors have agreed to grant the
Representatives an option to sell up to [ ] shares of Common Stock to such
current investors at a purchase price equal to the initial public offering
price set forth on the cover of this Prospectus (the "Put"). Upon exercise of
the Put, the current investors have agreed to purchase from the Representatives
all of the shares put back to them up to [ ] shares of Common Stock. The
Representatives may exercise the Put, in whole or in part, for a period of 30
days following the offering.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock to cover over-allotments, if any, at the
public offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions.
67
<PAGE>
To the extent that the Underwriters exercise this option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased
by it shown in the above table bears to the total number of shares of Common
Stock offered hereby. The Company will be obligated, pursuant to the option, to
sell such shares to the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
All officers, directors and significant stockholders of the Company who
beneficially own or have dispositive power over substantially all of the shares
of Common Stock outstanding prior to this offering, have agreed that they will
not, without the prior written consent of the Representatives, offer, sell,
contract to sell, pledge, grant any option to sell or otherwise dispose of
shares of Common Stock or securities convertible, or exchangeable for, Common
Stock, or warrants or other rights to purchase shares of Common Stock, whether
now owned or hereafter acquired, for a period of 360 days after the date of
this Prospectus. The Company has agreed that it will not, without the prior
written consent of lead managing underwriter, offer, sell or otherwise dispose
of any shares of Common Stock, for a period of 360 days after the date of this
Prospectus, except that the Company may grant additional options and issue
stock under its stock option plans and stock purchase plans or issue shares of
Common Stock upon the exercise of outstanding stock options.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereof.
Concurrently with the closing of the offering, certain strategic investors
have agreed to purchase directly from the Company shares of Common Stock having
an aggregate purchase price of approximately $15.0 million. All of such shares
will be purchased at the Price to Public set forth on the cover page of this
Prospectus. See "Direct Placements."
Prior to this offering, there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined through
negotiations among the Company and the Representatives. Among the factors to be
considered in determining the initial public offering price, in addition to
prevailing market and economic conditions, are certain financial information of
the Company, the history of, and the prospects for, the Company and the
industry in which it competes, an assessment of the Company's management, its
past and present operations, the prospects for, and timing of, future revenues
of the Company, the present stage of the Company's development and the above
factors in relation to market values and various valuation measures of other
companies engaged in activities similar to those of the Company. The initial
public offering price set forth on the cover page of this Prospectus should
not, however, be considered an indication of the actual value of the Common
Stock. Such price is subject to change as a result of market conditions and
other factors. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to this offering at or above the initial offering price.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed upon
for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California. Certain legal matters in connection with the Common
Stock offered hereby will be passed upon for the Underwriters by Brobeck,
Phleger & Harrison LLP, Palo Alto, California.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996 and
for each of the three years in the period ended December 31, 1996, appearing in
this Prospectus and Registration Statement have been audited by
68
<PAGE>
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission, Washington, D.C. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to such Registration Statement, exhibits and schedules. A
copy of the Registration Statement may be inspected by anyone without charge at
the Commission's principal office, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of all or any part thereof, including any exhibit thereto,
may be obtained from the Commission upon the payment of certain fees prescribed
by the Commission. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements certified by its independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
69
<PAGE>
GLOSSARY OF TERMS
56 Kbps.................... Equivalent to a single high-speed telephone
service line; capable of transmitting one voice
call or 56 Kbps of data. Currently in widespread
use by medium and large businesses primarily for
entry level high-speed data and very low-speed
video applications.
ATM........................ Asynchronous Transfer Mode. A low latency, fixed
delay information transfer standard for routing
traffic. The ATM format can be used by many
different information systems, including LANs, to
deliver traffic at varying rates, permitting a
mix of data, voice and video.
Backbone................... A centralized high-speed network that
interconnects smaller, independent networks.
Bandwidth.................. The number of bits of information that can move
through a communications medium in given amount
of time; the capacity of a telecommunications
circuit/network to carry voice, data and video
information. Typically measured in Kbps and Mbps.
Bandwidth from public networks is typically
available to business and residential end-users
in increments from 56 Kbps to T-3.
CIR........................ Committed Information Rate.--The rate, usually
expressed as a particular quantitative amount of
Kbps of Mbps of bandwidth, at which data is
guaranteed to be transmitted through a dedicated
lease line network connection.
CLEC....................... Competitive local exchange carrier. A
telecommunications company that provides an
alternative to a LEC for local transport of
private line and special access
telecommunications services.
E-mail..................... An application that allows a user to send or
receive text messages to or from any other user
with an Internet address, commonly termed an E-
mail address.
Firewall................... A system placed between networks that filters
data passing through it and removes unauthorized
traffic, thereby enhancing the security of the
network.
Frame relay................ A variable delay information transfer standard
for relaying traffic. Frame relay can be an
economical means to backhaul traffic to an ATM
network.
FTP........................ File Transfer Protocol. A protocol that allows
file transfer between a host and a remote
computer.
Internet................... A global collection of interconnected computer
networks which use TCP/IP, a common
communications protocol.
ISDN....................... Integrated Services Digital Network. An
information transfer standard for transmitting
digital voice and data over telephone lines at
speeds up to 128 Kbps.
Kbps....................... Kilobits per second. A transmission rate. One
kilobit equals 1,024 bits of information.
LAN........................
Local Area Network. A data communications network
designed to interconnect personal computers,
workstations, minicomputers, file servers and
other communications and computing devices within
a localized environment.
G-1
<PAGE>
Leased line................ Telecommunications line dedicated to a particular
customer along a predetermined route.
LEC........................ Local Exchange Carrier. A telecommunications
company that provides telecommunications services
in a geographic area in which calls generally are
transmitted without toll charges.
Mbps....................... Megabits per second. A transmitting digital
information over an analog telephone line.
Modem...................... A device for transmitting digital information
over an analog telephone line.
NAP........................ Network Access Point. A location at which ISPs
exchange each other's traffic.
Online services............ Commercial information services that offer a
computer user access to a specified slate of
information, entertainment and communications
menus on what appears to be a single system.
Peering.................... The commercial practice under which nationwide
ISPs exchange each other's traffic without the
payment of settlement charges.
POPs....................... Points-of-presence. Geographic areas within which
the Company provides local access. For purposes
of this Memorandum, POPs include both physical
points of presence as well as VLA.
Router..................... A system placed between networks that relays data
to those networks based upon a destination
address contained in the data packets being
routed.
Server..................... Software that allows a computer to offer a
service to another computer. Other computers
contact the server program by means of matching
client software. In addition, such term means the
computer on which server software runs.
SuperPOP................... A SuperPOP is a Concentric POP that is directly
connected to the Concentric ATM backbone.
SuperPOPs typically support dial access from the
region surrounding the SuperPOP (typically within
200 miles of the SuperPOP) using the services of
a CLEC. SuperPOPs also support dedicated access
connections to customer locations using Local
Exchange Carrier and/or Competitive Access
Provider facilities to connect the customer to
the Concentric SuperPOP.
TCP/IP..................... Transmission Control Protocol/Internet Protocol.
A suite of network protocols that allow computers
with different architectures and operating system
software to communicate with other computers on
the Internet.
T-1........................ A data communications circuit capable of
transmitting data at 1.5 Mbps.
T-3........................ A data communications circuit capable of
transmitting data at 45 Mbps.
UNIX.......................
A computer operating system frequently found on
workstations and PCs and noted for its
portability and communications functionality.
G-2
<PAGE>
VLA........................ Virtual local access call numbers which allow a
subscriber in a location outside the calling area
of a physical POP to place a local call to a
phone number without incurring long distance or
message unit charges.
VPN........................ Virtual Private Network. A network capable of
providing the tailored services of a private
network (i.e., low latency, high throughput,
security and customization) while maintaining the
benefits of a public network (i.e., ubiquity and
economies of scale).
World Wide Web or Web...... A system that supports easy access to documents
that have been linked across the Internet. The
documents contain links to each other, hence the
term "Web." Users do not have to know the
locations of particular documents and work
through a user friendly interface.
Website.................... A server connected to the Internet from which
Internet users can obtain information.
G-3
<PAGE>
CONCENTRIC NETWORK CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Common Stock Subject to Rescission and Stockholders' Equity
(Deficit)............................................................... F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors Concentric Network Corporation
We have audited the accompanying balance sheets of Concentric Network
Corporation as of December 31, 1995 and 1996, and the related statements of
operations, common stock subject to rescission and stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
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.
As discussed in Note 1 to the financial statements, Concentric Network
Corporation's recurring losses from operations and working capital deficiency
raise substantial doubt about its ability to continue as a going concern.
Management's plans as to these matters are also described in Note 1. The 1996
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
San Jose, California
March 14, 1997, except for Note 10,
as to which the date is
May , 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
May 14, 1997
F-2
<PAGE>
CONCENTRIC NETWORK CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY (DEFICIT)
------------------ MARCH 31, AT MARCH 31,
1995 1996 1997 1997
-------- -------- ----------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $ 19,054 $ 17,657 $ 2,841
Accounts receivable, net of
allowances including $80 in
1996 and $303 in 1997 to a
related party.............. 116 1,849 2,323
Prepaid expenses and other
current assets............. 1,167 1,722 1,689
-------- -------- ---------
Total current assets......... 20,337 21,228 6,853
Property and equipment:
Computer and telecommunica-
tions equipment............ 17,622 55,091 60,927
Software.................... 256 583 789
Furniture and fixtures and
leasehold improvements..... 833 2,130 2,612
-------- -------- ---------
18,711 57,804 64,328
Accumulated depreciation and
amortization............... 2,422 9,877 11,101
-------- -------- ---------
16,289 47,927 53,227
Other assets................. 609 1,567 1,358
-------- -------- ---------
Total assets................. $ 37,235 $ 70,722 $ 61,438
======== ======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable............ $ 4,159 $ 16,723 $ 15,619
Accrued compensation and
other employee benefits.... 230 714 571
Other current liabilities... 617 2,163 1,882
Current portion of capital
lease obligations, includ-
ing $2,758 in 1995,$10,180
in 1996, and $10,772 in
1997 to a related party.... 3,198 11,258 12,304
Note payable to related par-
ty......................... 3,000 -- --
Deferred revenue............ 141 1,238 1,182
-------- -------- ---------
Total current liabilities.... 11,345 32,096 31,558
Capital lease obligations,
including $10,210 in 1995,
$29,167 in 1996, and $33,034
in 1997 to a related party,
net of current portion...... 10,977 30,551 35,349
Convertible debentures....... 70 -- --
Commitments and contingencies
Class A common stock subject
to rescission, $0.001 par
value:
Issued and outstanding
shares--445 in 1995, 455 in
1996 and 1997.............. 5,080 5,150 5,150
Stockholders' equity (defi-
cit):
Preferred stock, $0.001 par
value; issuable in series:
Authorized shares--4,667 in
1995 and 7,333 in 1996 and
1997
Issued and outstanding
shares--2,170 in 1995,
5,007 in 1996 and 1997;
none outstanding pro
forma--unaudited (liquida-
tion preference of $89,798
at March 31, 1997)......... 35,695 95,215 96,323 $ --
Common stock, $0.001 par
value; issuable in clas-
ses:
Authorized shares--6,677 in
1995, 13,343 in 1996 and
1997
Issued and outstanding
shares--1,388 in 1995,
1,393 in 1996 and 1,396 in
1997; 6,403 shares issued
and outstanding
pro forma--unaudited....... 1,639 1,850 1,958 98,281
Accumulated deficit.......... (27,571) (93,952) (108,633) (108,633)
Deferred compensation........ -- (188) (267) (267)
-------- -------- --------- ---------
Total stockholders' equity
(deficit)................... 9,763 2,925 (10,619) $ (10,619)
-------- -------- --------- =========
Total liabilities and stock-
holders' equity (deficit)... $ 37,235 $ 70,722 $ 61,438
======== ======== =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CONCENTRIC NETWORK CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED DECEMBER 31, PERIODS ENDED
--------------------------- --------------------
MARCH 31, MARCH 31,
1994 1995 1996 1996 1997
------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue..................... $ 442 $ 2,483 $ 15,648 $ 1,533 $ 9,154
Costs and expenses:
Cost of revenue........... 2,891 16,168 47,945 7,256 15,744
Network equipment write-
off...................... -- -- 8,321 -- --
Development............... 534 837 2,449 340 1,025
Marketing and sales,
including $95, $920,
$2,448, $792, and $494 to
a related party for the
years ended December 31,
1994, 1995, and 1996, and
the three-month periods
ended March 31, 1996 and
1997, respectively....... 639 3,899 16,609 3,120 4,936
General and
administrative........... 611 2,866 3,445 736 1,060
------- -------- -------- -------- --------
Total costs and expenses.... 4,675 23,770 78,769 11,452 22,765
------- -------- -------- -------- --------
Loss from operations........ (4,233) (21,287) (63,121) (9,919) (13,611)
Interest income............. (19) (137) (614) (192) (129)
Interest expense, including
$0, $797, $3,065, $506, and
$1,061 to a related party
for the years ended
December 31, 1994, 1995,
and 1996, and the three-
month periods ended March
31, 1996 and 1997,
respectively............... 76 858 3,874 653 1,199
------- -------- -------- -------- --------
Net loss.................... $(4,290) $(22,008) $(66,381) $(10,380) $(14,681)
======= ======== ======== ======== ========
Pro forma net loss per
share...................... $ (13.84) $ (2.24)
======== ========
Shares used in computing pro
forma net loss per share... 4,797 6,540
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONCENTRIC NETWORK CORPORATION
STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND STOCKHOLDERS' EQUITY
(DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK STOCKHOLDERS' EQUITY (DEFICIT) TOTAL
SUBJECT TO --------------------------------------------------- STOCK-
RESCISSION PREFERRED STOCK COMMON STOCK ACCUMU- DEFERRED HOLDERS'
------------- ---------------- -------------- LATED COMPEN- EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT SATION (DEFICIT)
------ ------ ------- -------- ------ ------ --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993................. -- $ -- -- $ -- 1,339 $ 101 $ (1,273) $ -- $ (1,172)
Issuance of Class A common stock............ 7 200 -- -- 5 19 -- -- 19
Issuance of stock for services.............. -- -- -- -- 8 93 -- -- 93
Stock exchanged for long-term debt.......... -- -- -- -- 31 348 -- -- 348
Contribution of shares in connection with
note settlement............................ -- -- -- -- (66) -- -- -- --
Stock options granted for debt and
services................................... -- -- -- -- -- 800 -- -- 800
Conversion of debentures to common stock.... 241 2,612 -- -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- -- (4,290) -- (4,290)
--- ------ ------ -------- ----- ------ --------- ----- --------
Balance at December 31, 1994................. 248 2,812 -- -- 1,317 1,361 (5,563) -- (4,202)
Issuance of Series A preferred stock and
common stock (net of issuance costs)....... -- -- 909 10,147 62 117 -- -- 10,264
Issuance of Series C preferred stock (net of
issuance costs)............................ -- -- 894 20,691 -- -- -- -- 20,691
Conversion of note to Series B preferred
stock...................................... -- -- 367 4,035 -- -- -- -- 4,035
Warrants issued to purchase Series B
preferred stock............................ -- -- -- 822 -- -- -- -- 822
Issuance of Class A common stock............ 23 690 -- -- -- 1 -- -- 1
Issuance of Class A common stock for
services................................... -- -- -- -- 2 19 -- -- 19
Conversion of officer's note payable for
Class B common stock....................... -- -- -- -- 7 80 -- -- 80
Warrants issued to purchase Class A common
stock...................................... -- -- -- -- -- 61 -- -- 61
Conversion of debentures to Class A common
stock...................................... 174 1,578 -- -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- -- (22,008) -- (22,008)
--- ------ ------ -------- ----- ------ --------- ----- --------
Balance at December 31, 1995................. 445 5,080 2,170 35,695 1,388 1,639 (27,571) -- 9,763
Issuance of Class A common stock............ -- -- -- -- -- 1 -- -- 1
Conversion of debentures to Class A common
stock...................................... 10 70 -- -- -- -- -- -- --
Exercise of options......................... -- -- -- -- 5 22 -- -- 22
Conversion of note to Series C preferred
stock (net of issuance costs).............. -- -- 137 2,960 -- -- -- -- 2,960
Issuance of Series D preferred stock (net of
issuance costs)............................ -- -- 2,451 48,533 -- -- -- -- 48,533
Conversion of note to Series D preferred
stock...................................... -- -- 249 5,072 -- -- -- -- 5,072
Warrants issued to purchase Series D
preferred stock............................ -- -- -- 2,955 -- -- -- -- 2,955
Deferred compensation resulting from grant
of options................................. -- -- -- -- -- 188 -- (188) --
Net loss.................................... -- -- -- -- -- -- (66,381) -- (66,381)
--- ------ ------ -------- ----- ------ --------- ----- --------
Balance at December 31, 1996................. 455 5,150 5,007 95,215 1,393 1,850 (93,952) (188) 2,925
Issuance of Class A common stock
(unaudited)................................ -- -- -- -- 3 11 -- -- 11
Warrants issued to purchase Series D
preferred stock (net of issuance costs)
(unaudited)................................ -- -- -- 1,108 -- -- -- -- 1,108
Deferred compensation resulting from grant
of options (unaudited)..................... -- -- -- -- -- 97 -- (97) --
Amortization of deferred compensation
(unaudited)................................ -- -- -- -- -- -- -- 18 18
Net loss (unaudited)........................ -- -- -- -- -- -- (14,681) -- (14,681)
--- ------ ------ -------- ----- ------ --------- ----- --------
Balance at March 31, 1997 (unaudited)........ 455 $5,150 5,007 $ 96,323 1,396 $1,958 $(108,633) $(267) $(10,619)
=== ====== ====== ======== ===== ====== ========= ===== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONCENTRIC NETWORK CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED DECEMBER 31, PERIODS ENDED
--------------------------- --------------------
MARCH 31, MARCH 31,
1994 1995 1996 1996 1997
------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................... $(4,290) $(22,008) $(66,381) $(10,380) $(14,681)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 169 2,196 7,528 1,261 3,629
Amortization of deferred
interest and marketing and
sales related to issuance
of warrants................ -- -- 1,942 65 209
Amortization of deferred
compensation............... -- -- -- -- 18
Loss on disposal of
equipment.................. -- 29 -- -- --
Network equipment write-
off........................ -- -- 8,321 -- --
Compensation related to
stock sales and option
grants..................... 400 864 -- -- --
Stock issued for services... 93 19 -- -- --
Changes in current assets
and liabilities:
Prepaid expenses and other
current assets............ (48) (818) (57) (114) 33
Accounts receivable........ (81) (14) (1,734) (301) (474)
Accounts payable........... 1,081 3,051 5,129 (75) 624
Accrued compensation and
other employee benefits... 57 173 484 32 (143)
Deferred revenue........... -- 141 1,097 715 (57)
Other current liabilities.. (20) 539 1,546 373 (282)
------- -------- -------- -------- --------
Net cash used in operating
activities................... (2,639) (15,828) (42,125) (8,424) (11,124)
INVESTING ACTIVITIES
Additions of property and
equipment.................... (791) (1,427) (6,889) (514) (2,495)
Increase in refundable
deposits..................... -- -- (442) -- --
(Increase) decrease in note
receivable................... (255) 255 -- -- --
------- -------- -------- -------- --------
Net cash used in investing
activities................... (1,046) (1,172) (7,331) (514) (2,495)
FINANCING ACTIVITIES
Proceeds from notes payable... 298 7,000 6,300 -- --
Repayment of lease obligations
to a related party........... -- (1,609) (4,561) (492) (1,972)
Repayment of lease
obligations.................. -- -- (886) (88) (344)
Repayment of notes payable.... (324) (218) (1,300) -- --
Proceeds from sales of
convertible debentures....... 3,500 -- -- -- --
Proceeds from issuances of
stock and warrants........... 219 30,818 48,506 (211) 1,119
------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities......... 3,693 35,991 48,059 (791) (1,197)
------- -------- -------- -------- --------
Increase (decrease) in cash
and cash equivalents......... 8 18,991 (1,397) (9,729) (14,816)
Cash and cash equivalents at
beginning of period.......... 55 63 19,054 19,054 17,657
------- -------- -------- -------- --------
Cash and cash equivalents at
end of period................ $ 63 $ 19,054 $ 17,657 $ 9,325 $ 2,841
======= ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
CONCENTRIC NETWORK CORPORATION
STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE-MONTH
31, PERIODS ENDED
---------------------- -------------------
MARCH 31, MARCH 31,
1994 1995 1996 1996 1997
------ ------- ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Stock options issued to settle note
payable........................... $ 400 $ -- $ -- $ -- $ --
Stock exchanged for notes payable,
including accrued interest........ $ 348 $ 4,115 $ 8,082 $3,010 $ --
Capital lease obligations incurred
with a related party.............. $ -- $14,578 $30,945 $2,485 $6,435
Capital lease obligations
incurred.......................... $ -- $ 1,207 $ 2,136 $ -- $ --
Reduction of accounts payable
through capital lease obligations
incurred.......................... $ -- $ -- $ -- $ -- $1,726
Convertible debentures exchanged
for stock......................... $2,612 $ 1,578 $ 70 $ -- $ --
Issuance of warrants............... $ -- $ 883 $ 2,955 $ -- $ --
Purchase of property and equipment
through accounts payable.......... $ -- $ -- $ 6,344 $ -- $ --
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Interest paid...................... $ 9 $ 850 $ 2,807 $ 401 $1,156
</TABLE>
See accompanying notes.
F-7
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Concentric Network Corporation (the Company or Concentric) was incorporated
in the state of Florida in April 1991. Concentric provides tailored, value-
added Internet Protocol (IP) based network services for businesses and
consumers. To provide these services, the Company utilizes its low/fixed
latency, high-throughput network, employing its advanced network architecture
and the Internet. Concentric's service offerings for enterprises include
virtual private networks (VPNs), dedicated access facilities (DAFs) and Web
hosting services. These services enable enterprises to take advantage of
standard Internet tools such as browsers and high-performance servers for
customized data communications within an enterprise and between an enterprise
and its suppliers, partners and customers. These services combine the cost
advantages, nationwide access and standard protocols of public networks with
the customization, high performance, reliability and security of private
networks. Concentric's service offerings for consumers and small office/home
office customers include local Internet dial-up access, Web hosting services
and online multiplayer gaming.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since inception, the Company has
incurred cumulative net losses of approximately $108,633,000 and has negative
working capital as of March 31, 1997. Management expects the Company to incur
additional losses and recognizes the need for an infusion of cash during the
fiscal year 1997. The Company is actively pursuing various alternatives to
secure additional financing and believes that sufficient funding will be
available to achieve its planned business objectives (see Note 10).
Interim Results
The accompanying balance sheet as of March 31, 1997 and the statements of
operations and cash flows for the three months ended March 31, 1996 and 1997
and the statement of common stock subject to rescission and stockholders'
equity (deficit) for the three months ended March 31, 1997 are unaudited. In
the opinion of management, the statements have been prepared on the same basis
as the audited financial statements and include all adjustments, consisting of
normal recurring adjustments, necessary for the fair statement of interim
periods. The data disclosed in these notes to the financial statements for
these periods is also unaudited.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity (at date of purchase) of three months or less to be the equivalent of
cash for the purpose of balance sheet and statement of cash flows
presentation. Cash and cash equivalents are carried at cost which approximates
market value. There were no short-term investments at December 31, 1995 and
1996 or March 31, 1997.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets as follows: computer and telecommunications equipment: three to
five years; purchased software: three to five years; furniture and fixtures:
eight to ten years; and leasehold improvements: the shorter of the remaining
term of the related leases or the estimated economic useful lives of the
improvements. Equipment under capital leases is amortized over the related
lease term (see Note 3).
Revenue and Customer Receivables
Revenue is recognized over the period in which services are provided,
generally monthly. Payments received in advance of services being provided are
included in deferred revenues. Substantially all end-user subscribers pay for
services with major credit cards for which the Company receives daily
remittances from the credit card carriers.
F-8
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
Concentration of Credit Risk
The Company typically offers its enterprise customers credit terms. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have
historically been insignificant.
Cost of Revenue
Cost of revenue includes the cost of operating the Company's network,
including telecommunications charges, personnel costs, equipment depreciation
and amortization, and related overhead.
Development
Development expenditures primarily include personnel and related overhead
expenses incurred to design, create, and test product offerings and associated
client and server tools. These expenditures are charged to operations as
incurred. The Company does not currently develop software that is sold,
licensed, or otherwise marketed. Substantially all software development
efforts by the Company are in connection with the development of its network.
Marketing and Sales
Marketing and sales expense consists primarily of personnel expenses,
including salary and commissions, costs of marketing programs and the cost of
800 number circuits utilized by the Company for customer support functions.
Advertising Costs
The Company expenses the costs of advertising as incurred except for direct-
response advertising costs meeting certain specific criteria. To date, no
direct-response advertising costs have been capitalized.
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes".
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Net Loss Per Share (Historical)
Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding excluding common stock
subject to rescission. Common stock equivalent shares from convertible
preferred stock and from stock options and warrants are not included as the
effect is antidilutive. Pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins, common and common equivalent shares issued by the
Company at prices below the initial public offering price during the twelve-
month period prior to the offering have been included in the calculation as if
they were outstanding for all periods presented (using the treasury stock
method and the estimated public offering price in calculating equivalent
shares).
F-9
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
Per share information calculated on the above noted basis is as follows (in
thousands, except for per share amounts):
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED PERIODS ENDED
DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net loss per share...... $ (2.94) $ (14.99) $ (43.41) $ (6.80) $ (9.58)
========= ========= ========= ========= =========
Shares used in computing
net loss per share..... 1,460,261 1,467,656 1,529,300 1,527,280 1,533,147
========= ========= ========= ========= =========
</TABLE>
Pro Forma Net Loss Per Share and Unaudited Pro Forma Stockholders' Equity
(Deficit)
Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from
convertible preferred shares that will automatically convert to common shares
upon the closing of the Company's initial public offering (using the as-if-
converted method). If the offering contemplated by the prospectus is
consummated, all of the convertible preferred stock outstanding as of the
effective date of the offering will automatically be converted into an
aggregate of 6,885,288 shares of common stock based on the number of shares of
convertible preferred stock outstanding at May 15, 1997. Unaudited pro forma
stockholders' equity (deficit) at March 31, 1997, as adjusted for the
conversion of preferred stock is disclosed on the balance sheet.
Stock-Based Compensation
The Company accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25), and has adopted the "disclosure only"
alternative described in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123).
Effect of New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" (FAS 128), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact of
FAS 128 on the calculation of primary and fully diluted earnings per share is
not expected to be material.
Customer Concentrations
The Company currently derives a substantial portion of its total revenue
from a single customer. For the year ended December 31, 1996 and the three
months ended March 31, 1997, revenue from WebTV Networks, Inc. represented
approximately 10.1% and 32.7%, respectively, of the Company's total revenue.
2. NETWORK EQUIPMENT WRITE-OFF
In December 1996, the Company wrote off approximately $8,321,000
representing the net book value and future commitments for certain network
equipment purchased from Sattel Communications LLC (Sattel), an approximately
1.7% stockholder of the Company prior the offering and the Direct Placements.
The Company decided not to deploy the equipment in the network because of
concerns that the equipment would not provide the functionality and
F-10
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
reliability required by the Company and concerns that the equipment provider
would be unable to provide timely maintenance and support. Included in accounts
payable in the accompanying balance sheet at December 31, 1996 and March 31,
1997 was $7,517,000 and $5,791,000, respectively, related to this equipment.
3. COMMITMENTS
Operating Leases
The Company has an agreement with a third party through which such third
party makes available the premises at which the Company's POP sites throughout
the United States are located. POP sites are locations where certain
telecommunications switching and related equipment are installed. This
agreement expires in October 1999, and the amount of the payments is based,
among other things, on the number of POP sites maintained by the Company,
subject to certain minimums. Expenses of approximately $232,000, $1,155,000,
$1,622,000, $356,000, and $372,000 were incurred during the years ended
December 31, 1994, 1995, and 1996, and the three-month periods ended March 31,
1996 and 1997, respectively, for these facilities. Additionally, the Company
has agreements with three telecommunications companies to locate POP sites and
certain of such equipment at their facilities. The expiration dates associated
with these agreements range from December 1998 to January 2000. Expenses
incurred on these leases was $0 during 1996 and $162,000 for the three-month
period ended March 31, 1997.
The Company leases space for offices and a data center in Bay City, Michigan.
The lease expires in December 1997. Rent expense associated with the facility
was approximately $36,000, $36,000, $42,000, $9,000, and $11,000 in the years
ended December 31, 1994, 1995, and 1996, and the three-month periods ended
March 31, 1996 and 1997, respectively. In March 1996, the Company entered into
a lease agreement for office space in Saginaw, Michigan, primarily for its
customer support organization. This lease expires in December 2001. Rent
expense associated with the Saginaw facility was approximately $129,000 in 1996
and $54,000 for the three-month period ended March 31, 1997. The Company
maintains its corporate headquarters in Cupertino, California where it leases
its facility under an operating lease that expires in April 1998. Lease expense
associated with this facility was approximately $100,000, $267,000, $61,000,
and $200,000 in the years ended December 31, 1995 and 1996, and the three-month
periods ended March 31, 1996 and 1997, respectively.
Rent expense under all operating leases of the Company totaled approximately
$268,000, $1,291,000, $2,060,000, $426,000, and $799,000 in the years ended
December 31, 1994, 1995 and 1996 and the three-month periods ended March 31,
1996 and 1997, respectively.
F-11
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
Future minimum lease commitments for all noncancelable operating leases at
December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997.............................................................. $2,283
1998.............................................................. 985
1999.............................................................. 779
2000.............................................................. 217
2001.............................................................. 217
------
Total............................................................. $4,481
======
</TABLE>
Capital Leases
In August 1994, the Company entered into a master lease agreement under
which a related party began installing networking equipment at the Company's
POP sites and data center. This agreement became effective upon installation
and acceptance by the Company on March 31, 1995. The lease provides for
monthly payments for terms of 48 or 60 months, depending upon the type of
equipment. The Company has continued to install equipment under the terms of
this agreement, resulting in a monthly payment of approximately $896,000 and
$1,228,000 at December 31, 1996 and March 31, 1997, respectively.
In September 1995, the Company entered into a master lease agreement with a
third party for an equipment lease line against which the Company has leased
approximately $3,342,000 as of March 31, 1997. The term of the lease is 36
months and provides for monthly payments of approximately $114,000 as of March
31, 1997. The Company has granted to the third party a security interest in
all equipment leased under this agreement.
Assets capitalized under capital leases totaled approximately $15,785,000,
$48,856,000, and $52,885,000 at December 31, 1995 and 1996, and March 31,
1997, respectively, and are included in computer and telecommunications
equipment. Accumulated amortization for assets capitalized under capital
leases totaled approximately $1,787,000, $8,306,000, and $9,055,000 at
December 31, 1995 and 1996, and March 31, 1997 respectively. Amortization of
leased assets is included in depreciation and amortization expense. Future
minimum lease payments under capital lease obligations at December 31, 1996
are as follows (in thousands):
<TABLE>
<S> <C>
1997............................................................ $15,732
1998............................................................ 15,105
1999............................................................ 11,321
2000............................................................ 6,069
Thereafter...................................................... 3,393
-------
Total minimum lease payments.................................... 51,620
Less amount representing interest............................... 9,811
-------
Present value of net minimum lease payments..................... 41,809
Less current portion of capital leases.......................... 11,258
-------
Long-term portion of capital leases............................. $30,551
=======
</TABLE>
F-12
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
Other
The Company has a noncancelable service agreement with AT&T for the
utilization of its frame relay telecommunications network. The agreement
provides for minimum payments to AT&T of approximately $300,000 per month over
its three-year term, expiring in June 1999.
The Company has a noncancelable service agreement with MCI for the
utilization of its ATM telecommunications network. The agreement provides for
minimum payments to MCI of approximately $1,200,000 per year over its term,
expiring three years after the end of an initial ramp up period but no later
than June 2000. The Company also has a noncancelable telecommunications
service agreement with MCI for other services, including dedicated access and
800 service, that provides for minimum payments of approximately $8,500,000
over the term of the agreement, expiring in June, 1998. The Company had
incurred expenses of approximately $3,700,000, $0, and $3,994,000 for the year
ended December 31, 1996 and the three-month periods ended March 31, 1996 and
1997, respectively, related to these other services.
The Company has remaining minimum prepaid royalty commitments to a vendor
for distribution of licenses of the vendor's software totaling approximately
$1,016,000 due in installments through 1997. Prepaid royalties related to this
agreement were $300,000 at December 31, 1996 and $225,000 at March 31, 1997.
In November 1995, the Company entered into a two-year service agreement
under which a third party provides substantially all of the network analysis
and deployment and maintenance of POP sites. This agreement has subsequently
been extended to October 31, 1999. The Company will reimburse the third party
for its employee compensation and direct costs for services provided. At the
end of the agreement, the third party is obligated to transfer to the Company
those personnel, resources, and facilities used to support the Company's
network analysis, POP site deployment, and maintenance. The Company, in turn,
will pay the third party $675,000 to relocate the remainder of the third
party's business to new facilities. Additionally, as part of the agreement,
the Company granted 60,000 options for its Class A common stock to employees
of such third party at an exercise price of $3.75. At March 31, 1997, all of
these options were vested.
4. CONVERTIBLE DEBENTURES AND NOTES
At December 31, 1995, convertible debentures in the amount of $70,000,
representing 9,802 shares of common stock, were outstanding. The conversion of
these debentures into shares of Class A common stock subject to rescission was
completed in March 1996.
In 1995, the Company issued convertible notes totaling $7,000,000 to
shareholders of which $4,000,000, plus accrued interest, was converted into
Series B convertible preferred stock in December 1995. The remaining
$3,000,000 outstanding at December 31, 1995 was converted into Series C
convertible preferred stock in February 1996.
5. COMMON STOCK SUBJECT TO RESCISSION
In August 1993, the Company commenced sales of convertible debentures and
certain additional shares of its common stock. Through March 31, 1995, sales
of convertible debentures aggregated $4,260,000, and issuance of common stock
aggregated $890,200. The sale of common stock and sale of and/or conversion of
debentures into common stock was not made pursuant to a registration statement
filed under the Securities Act of 1933 (the Act) or any filings pursuant to
the laws of any of the states in which such sales occurred (State Blue Sky
Laws). Although at the time the Company believed the sale and conversion, if
applicable, of these securities was exempt from the provisions of the Act and
applicable State Blue Sky Laws, it appears that the appropriate exemptions may
not
F-13
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
have been. As a result,the Company is conducting a Recission Offer and
purchasers of these securities will be entitled to a return of the
consideration paid for their stock or debentures. As such, these shares have
been classified as common stock subject to rescission in the accompanying
financial statements. Additionally, options issued pursuant to the Company's
1995 Stock Incentive Plan to Employees and Consultants (the 1995 Plan) and
non-plan options were issued in various states for which the Company may not
have had an available exemption under state laws. Such options are potentially
subject to rescission and the Company intends to include them in the
rescission offer. As of March 31, 1997, there have been no claims asserted
against the Company. While the Company will offer to rescind the shares and
options, there can be no assurances that the Company will not otherwise be
subject to possible statutory interest totaling approximately $1,000,000
related to the issuance of this stock and an amount equal to $556,000 with
respect to options issued under the 1995 Plan.
6. STOCKHOLDERS' EQUITY
On August 5, 1996, the Company amended its Articles of Incorporation to
increase the number of authorized shares of Class A common stock and preferred
stock to 13,333,333 and 7,333,333, respectively. Of the 7,333,333 authorized
shares of preferred stock, 1,000,000, 866,667, 933,333, and 4,533,333 are
designated as Series A, B, C, and D, respectively.
Preferred Stock
Preferred stock at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED AND PAR LIQUIDATION
AUTHORIZED OUTSTANDING VALUE AMOUNT PREFERENCE
---------- ----------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Series A convertible...... 1,000,000 909,359 $0.001 $10,146,987 $10,000,000
Series B convertible...... 866,667 366,947 $0.001 4,857,130 4,035,130
Series C convertible...... 933,333 1,031,124 $0.001 23,651,008 20,690,804
Series D convertible...... 4,533,333 2,699,588 $0.001 56,559,871 55,071,586
--------- ----------- -----------
5,007,018 $95,214,996 $89,797,520
========= =========== ===========
</TABLE>
In April 1995, the Company agreed to sell 909,359 shares of Series A
convertible preferred stock and, as discussed below, warrants to purchase
Class A common stock for an aggregate of $10,000,000. In December 1995,
convertible notes totaling $4,000,000 and accrued interest were converted into
366,947 shares of Series B convertible preferred stock (see Note 4). In
October 1995, the Company agreed to sell 1,031,124 shares of Series C
convertible preferred stock. In August 1996, the Company agreed to sell
2,699,588 shares of Series D convertible preferred stock and, as discussed
below, warrants to purchase 795,051 shares of Series D convertible preferred
stock in connection with other agreements established with certain Series D
investors. Included in the sale of Series D shares was the conversion of a
June 1996 $5,000,000 bridge loan and accrued interest thereon.
The Preferred Stock and Warrant Purchase Agreement pursuant to which the
Series A convertible preferred stock was issued, as amended through August 21,
1996 (the Series A Agreement), contains certain provisions relating to
corporate governance prior to completion of a Qualified Public Offering, as
defined and as amended (see Note 10). These provisions include limiting the
size of the Company's Board of Directors to five, giving investors the right
to designate certain directors for election by the Company, and the automatic
designation for election of the Chief Executive Officer of the Company.
F-14
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
The Series D Preferred Stock Purchase Agreement (the Series D Agreement)
also contains certain provisions relating to corporate governance, which are
effective as long as 20% of the shares of Series D preferred stock issued at
the initial closing remain outstanding. These provisions include a requirement
that the Board of Directors be large enough to enable the Series D holders to
designate three, four, or five board members, depending on the number of
Series D shares outstanding.
In addition, the Series A Agreement and the Series D Agreement provide that
without approval of the Series A and Series D investors, the Company may not
declare or pay dividends on common stock other than in common stock, make
loans or advances to any person except in the ordinary course of business or
under terms of a board-approved employee stock or option plan, or engage in a
transaction with an officer or director on terms better than could be obtained
from arms' length negotiations with an unrelated third party.
Each share of Series A, B, C, and D convertible preferred stock is
convertible into shares of Class A common stock initially on a one-for-one
basis, subject to adjustment for, among other things, stock splits, stock
dividends, and the issuance of additional shares of common stock and
securities convertible into common stock. Additionally, each share of Series A
convertible preferred stock is convertible into .003207 shares of Class B
common stock. The conversion price of Series A, B, C, and D convertible
preferred stock is subject to adjustment for any future issuance of common
stock at a per share price less than the exercise or conversion price. Holders
of each share of Series A, B, C, and D convertible preferred stock are
entitled to the number of votes equal to the number of shares of Class A and
Class B common stock into which the preferred stock is convertible. Holders of
Series A, B, C, and D convertible preferred stock will be entitled to receive
dividends on a pari passu basis.
Each share of Series A, B, C, and D convertible preferred stock will be
converted automatically into the number of shares of Class A common stock into
which such shares are convertible, immediately prior to the closing of a sale
of the Company's common stock to the public in a Qualified Public Offering, as
defined and as amended.
In the event of liquidation, dissolution, or winding up of the Company, each
holder of Series A, B, C, and D convertible preferred stock will be entitled
to be paid, with respect to each share of Series A, B, C, and D convertible
preferred stock held, a liquidation preference out of the assets available for
distribution to shareholders in an amount equal to $11.03, $11.00, $27.30, and
$20.40, respectively. Thereafter, holders of common stock will get pro rata
shares of an amount equal to the aggregate liquid amounts paid to Series A, B,
C, and D. Any residual assets will be distributed among the holders of common
and preferred stock as if each share of convertible preferred stock had been
converted into the number of shares of common stock issuable upon conversion
of the convertible preferred stock immediately prior to such liquidation,
dissolution, or winding up of the Company.
Warrants to Purchase Preferred Stock
In connection with a customer network services arrangement, the Company
issued warrants to purchase 136,407 shares of Series B convertible preferred
stock at an exercise price of $11.00 beginning December 11, 1995 and warrants
to purchase 128,205 shares of Series B convertible preferred stock at an
exercise price of $27.30 beginning February 27, 1996. The warrants expire at
the earlier of October 1998 or ten days from the closing of a Qualified Public
Offering of the Company's common stock meeting certain criteria. In 1995, the
Company recorded deferred sales and marketing expense of $822,000 to reflect
the value of these warrants as determined by using the Black-Scholes option
pricing method. Amortization of deferred sales and marketing expense totaled
$249,000 for the year ended December 31, 1996, and $43,000 and $69,000 for the
three-month periods ended March 31, 1996 and 1997, respectively.
F-15
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
In December 1995, the Company issued warrants to purchase 181,876 shares of
Series B convertible preferred stock to certain preferred shareholders in
connection with the Series B convertible preferred stock financing. The
warrants expire three years from issuance and are exercisable at $11.00 per
share.
On June 6, 1996 and July 29, 1996, the Company received bridge loans from
various investors of $5,000,000 and $1,300,000, respectively. Included in
these transactions were the issuance of warrants to purchase 36,765 shares and
63,725 shares of Series D convertible preferred stock. These warrants expire
three years from issuance and are exercisable at $20.40 per share. The value
of these warrants, approximately $330,000, was expensed as a cost of
financing.
As part of the sale of Series D convertible preferred stock in August 1996,
the Company issued warrants to purchase 795,051 shares of Series D convertible
preferred stock to certain Series D investors. These warrants were issued in
connection with distribution, lease financing, and joint sales and marketing
agreements. These warrants will expire in three years and are exercisable at
$20.40 per share. The value of these warrants was determined by using the
Black-Scholes option pricing method. Approximately $1,369,000 and $121,000 of
this value was expensed in the year ended December 31, 1996 and the three-
month period ended March 31, 1997, respectively, with the remaining balance
being amortized over the three-year life of the warrants.
Also, in connection with the sale of Series D convertible preferred stock,
an additional 176,678 warrants to purchase Series D convertible preferred
stock were issued for net consideration of approximately $1,108,000 in March
1997. These warrants will expire in three years and are exercisable at $20.40
per share.
Common Stock
Common stock at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES ISSUED
AND
AUTHORIZED OUTSTANDING PAR VALUE AMOUNT
---------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Class A........................ 13,333,333 1,385,790 $0.001 $1,769,819
Class B........................ 10,024 7,117 $0.001 80,065
---------- --------- ----------
13,343,357 1,392,907 $1,849,884
========== ========= ==========
</TABLE>
The holders of Class A common stock are entitled to one vote per share on
all matters submitted to the shareholders. The holders of Class B common stock
are entitled to 500 votes per share on all matters submitted to the
shareholders. Each share of Class B common stock will automatically be
converted into one share of Class A common stock immediately prior to the
closing of common stock in a Qualified Public Offering, as defined and as
amended. The holders of common stock do not have preemptive rights under the
Company's Articles of Incorporation to subscribe for additional shares of
common stock. See Note 10 for the conversion of Class B common stock.
Subject to the preferences of the preferred stock, the holders of common
stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available for payment. In the event of the liquidation, dissolution, or
winding up of the Company, holders of common stock are entitled to receive
ratably an amount equal to the aggregate liquidation amount paid to all
holders of preferred stock. Thereafter, any remaining assets of the Company
are shared ratably by holders of common stock, calculated assuming the
conversion of all outstanding preferred stock.
F-16
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
Warrants to Purchase Common Stock
From April 20 through July 5, 1995, the Company issued warrants to purchase
181,876 shares of Class A common stock to certain preferred shareholders in
connection with the Series A convertible preferred stock financing. The
warrants expire three years from issuance and are exercisable at $11.00 per
share.
In connection with the capital lease agreements discussed in Note 3, the
Company issued warrants to purchase 67,388 shares of Class A common stock at
an exercise price of $3.75. The warrants expire over a term from July 20, 1998
to February 15, 2000. In 1995, the Company recorded deferred interest of
$61,000 to reflect the value of these warrants using the Black-Scholes option
pricing method. Amortization of deferred interest totaled $25,000 for the year
ending December 31, 1996 and $16,000 and $3,000 for the three-month periods
ended March 31, 1996 and 1997, respectively.
Stock Option Plans
The Company maintains the 1993 Incentive Stock Option Plan (the 1993 Plan),
the 1995 Plan and the 1996 Stock Plan (the 1996 Plan), collectively referred
to as the Plans. The 1996 Plan was approved by the Board of Directors on
December 30, 1996 and calls for shareholder approval within one year. The 1995
Plan was approved by the Board of Directors and shareholders in September
1995. In October 1995, the Company offered to exchange options issued under
the 1993 Plan for options under the 1995 Plan. With the inception of the 1996
Plan, no further options will be granted under the 1993 and 1995 Plans.
Among other things, the 1996 Plan provides for granting of incentive stock
options, nonstatutory stock options, and stock appreciation rights to
employees and consultants. Unless terminated sooner, the 1996 Plan will
terminate automatically in December 2006. A total of 700,000 shares of common
stock may be issued under the 1996 Plan of which 520,700 shares are available
for grant at December 31, 1996. See Note 10 for amendment and restatement of
the 1996 Plan. Options under all plans generally vest over a four-year period,
25% after one year and the remaining portion in equal monthly increments over
the remaining three years. Options generally expire within ninety days of
termination of employment or five years after full vesting has occurred.
In August 1994, the Company granted nonqualified options under individual
option agreements to purchase 106,667 shares of common stock at a per share
price of $3.75 to two of the Company's executives and majority shareholders
(53,333 options each) to settle a note payable of $400,000. This transaction
also resulted in compensation expense of $400,000 at the grant date. These
options were fully vested at the time of issuance; however, they may not be
exercised if the holder has any other unexercised options that were previously
granted to that individual. In addition, during 1994, the Company granted
other nonqualified stock options to various individuals under separate option
agreements. These options vest over periods of up to one year and expire over
periods of up to five years.
In April 1995, an additional 53,333 options to purchase Class A common stock
for $30.00 per share were issued to two of the Company's executives in
connection with their employment by the Company. These options were fully
vested upon issuance and are exercisable over five years.
In October 1995 and August 1996, the exercise price of options to purchase
182,375 shares and 46,673 shares of Class A common stock, respectively, were
repriced to $3.75 per share, the then fair value of the common stock, as
determined by the Company's Board of Directors.
The Company issued options to purchase 179,300 shares of Class A common
stock in December 1996 and 40,267 shares of common stock in January 1997. The
Company recorded deferred compensation, for financial
F-17
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
reporting purposes, of approximately $188,000 in 1996 and $97,000 for the
three-month period ended March 31, 1997, with respect to such option grants to
reflect the difference between the exercise price and the deemed fair value
for financial reporting purposes of these shares. Amortization of this
deferred compensation was $0 in 1996 and $18,000 in the three-month period
ended March 31, 1997. The amortization of this deferred compensation will
continue over the four year vesting period of the associated stock options.
The following table summarizes stock option activity under all of the Plans:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
--------- ---------------
<S> <C> <C>
Balance at January 1, 1994...................... 38,333 $3.75--$30.00
Granted....................................... 319,722 $3.75--$33.00
Exercised..................................... (4,933) $3.75
Canceled...................................... (666) $3.75
---------
Balance at December 31, 1994.................... 352,456 $3.75--$33.00
Granted....................................... 642,075 $3.75--$33.00
Exercised..................................... (133) $9.00
Canceled...................................... (187,315) $11 .25--$12.45
---------
Balance at December 31, 1995.................... 807,083 $3.75--$33.00
Granted....................................... 421,620 $3.75
Exercised..................................... (4,483) $3.75--$9.00
Canceled...................................... (95,218) $3.75--$30.00
---------
Balance at December 31, 1996.................... 1,129,002 $3.75--$33.00
Granted....................................... 392,014 $3.75--$15.00
Exercised..................................... (2,880) $3.75
Canceled...................................... (4,860) $3.75--$15.00
---------
Balance at March 31, 1997....................... 1,513,276 $3.75--$33.00
=========
</TABLE>
At March 31, 1997, vested options totaled 613,130.
Stock-Based Compensation
Pro forma information regarding results of operations and loss per share is
required by FAS 123 for awards granted after December 31, 1994 as if the
Company had accounted for its stock-based awards to employees under a
valuation method permitted by FAS 123. The value of the Company's stock-based
awards to employees in 1995 and 1996 was estimated using the minimum value
method. Should the Company complete an initial public offering (IPO) of its
stock, options granted after the IPO will be valued using the Black-Scholes
option pricing model. Among other things, the Black-Scholes model considers
the expected volatility of the Company's stock price, determined in accordance
with FAS 123, in arriving at an option valuation. The minimum value method
does not consider stock price volatility. Further, certain other assumptions
necessary to apply the Black-Scholes model may differ significantly from
assumptions used in calculating the value of options granted in 1995 and 1996
under the minimum value method.
F-18
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
The minimum value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following weighted average
assumptions:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Expected life.......................................... 8.5 years 8.5 years
Risk-free interest rate................................ 6.2% 6.3%
</TABLE>
The weighted average minimum value of stock options granted during 1995 and
1996 was $0.10. Exercise prices for options outstanding as of December 31,
1996 ranged from $3.75 to $30.00. The weighted average remaining contractual
life of those options is 9.1 years. In 1996, certain options were issued at an
exercise price less than the stock price for which the weighted average
minimum value was $4.65. For pro forma purposes, the estimated minimum value
of the Company's stock-based awards to employees is amortized over the
options' vesting period. The results of applying FAS 123 to the Company's
option grants in 1995 and 1996 was not material to the results of operations
or loss per share for those years reported in the accompanying statements of
operations. Because FAS 123 is applicable only to awards granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
approximately 1998.
7. EMPLOYEE BENEFIT PLANS
Retirement Savings Plan
The Company maintains a contributory 401(k) plan that covers substantially
all employees. The Company contributes $0.30 for every $1.00 contributed by
the participant up to a maximum of 1.5% of the participants' compensation. The
Company contributed $5,000, $6,000, $45,000, $7,000, and $26,000 to the plan
during the years ended December 31, 1994, 1995, and 1996, and the three-month
periods ended March 31, 1996 and 1997, respectively.
8. INCOME TAXES
Due to the Company's loss position, the Company has not recorded a provision
for income taxes for the years ended December 31, 1994, 1995, and 1996.
As of December 31, 1996, the Company had federal and state net operating
loss carryforwards of approximately $86,000,000 and $59,000,000, respectively.
The net operating loss carryforwards will expire at various dates beginning in
the years 2003 through 2011, if not utilized.
Utilization of the net operating losses are subject to a substantial annual
limitation due to the "change in ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions. The annual limitation may result in
the expiration of the net operating losses before utilization.
F-19
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes of December 31, 1995 and 1996 are as
follows:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $8,500,000 $32,000,000
Write-off of network equipment.................. -- 5,000,000
Other, net...................................... 500,000 1,000,000
---------- -----------
Total deferred tax assets......................... 9,000,000 38,000,000
---------- -----------
Deferred tax liabilities:
Other, net...................................... -- 1,000,000
---------- -----------
Net deferred tax assets........................... 9,000,000 37,000,000
Valuation allowance............................... (9,000,000) (37,000,000)
---------- -----------
$ -- $ --
========== ===========
</TABLE>
The Company has provided a full valuation allowance against its deferred tax
assets due to uncertainties regarding the timing and amount of future taxable
income to be generated by the Company.
The net valuation allowance increased by approximately $7,000,000 in 1995
and $28,000,000 in 1996.
9. OTHER MATTERS
An officer of the Company is a majority shareholder of a vendor of the
Company. The Company incurred marketing fees to the vendor totaling $95,000,
$920,000, $2,450,000, $792,000, and $494,000 in the years ended December 31,
1994, 1995, 1996, and the three-month periods ended March 31, 1996 and 1997,
respectively.
10. SUBSEQUENT EVENTS
Initial Public Offering and Direct Placements
In May 1997, the Company's Board of Directors approved the filing of a Form
S-1 Registration Statement with the Securities and Exchange Commission
covering the proposed sale by the Company of up to 3,000,000 shares of its
common stock to the public plus an overallotment option for the underwriters.
Concurrently with the closing of this offering, certain strategic investors
have agreed to purchase directly from the Company shares of Common Stock
having an aggregate purchase price of approximately $15,000,000. All of such
shares will be unregistered shares purchased at the initial public offering
price.
On May 1, 1997, and May , 1997 the Company's Board of Directors took the
following actions which were approved by the Company's shareholders on June ,
1997:
(i) Approved the reincorporation of the Company under the laws of the
state of Delaware (effective May 1, 1997)
(ii) Subject to the filing of the Amended and Restated Certificate of
Incorporation with the Secretary of the State of Delaware (which took place
on May , 1997) authorized a reverse stock split of one for 15 of the
Company's common stock and the conversion of all previously issued and
outstanding shares of Class B common stock into voting shares of common
stock, amended the definition of a Qualified Public Offering that would
F-20
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)
trigger the automatic conversion of the shares of Series A, B, C, and D
convertible preferred shares and authorized the issuance additional shares
of Series B convertible preferred shares. (All capital accounts, share and
per share data in these financial statements have been retroactively
restated to reflect the stock split.)
(iii) Amended and restated the 1996 Stock Plan to increase the shares
reserved for grant thereunder to 793,333.
(iv) Adopted and approved the 1997 Stock Plan (the 1997 Plan) which
provides for the granting of incentive stock options to employees and the
granting of nonstatutory stock options and stock purchase rights to
employees, directors, and consultants of the Company. A total of 1,500,000
shares of the Company's common stock has been reserved for issuance
pursuant to the 1997 Plan. Unless terminated sooner, the 1997 Plan will
terminate automatically in 2007.
(v) Adopted and approved the 1997 Employee Stock Purchase Plan (the 1997
Purchase Plan) under which 500,000 shares of common stock have been
reserved for issuance. The 1997 Purchase Plan allows for eligible employees
to purchase stock at 85% of the lower of the fair market value of the
Company's common stock as of the first day of each six-month offering
period or at the end of the current purchase period. The Plan has 24-month
offering periods, with each offering period divided into four consecutive
six-month purchase periods. The initial offering period will commence on
the first trading day on or after the closing of the initial public
offering.
Exercise of Warrants
On April 18, 1997, certain preferred stockholders holding warrants to
purchase an aggregate number of 181,876 shares of Class A common stock and
66,688 shares of Series B convertible preferred stock at $11.00 per share,
exercised such warrants at a discounted price of $6.60 per share in
consideration of their early exercise. Additionally, certain preferred
stockholders exercised warrants to purchase an aggregate number of 233,660
shares of Series D convertible preferred stock at a price of $12.24,
discounted from the original price of $20.40. The Company received total
consideration of $4.5 million related to the exercise of these warrants.
Litigation
On April 22, 1997, a complaint was filed in the Los Angeles County,
California Superior Court against the Company and other unnamed defendants by
Sattel Communications LLC. The complaint alleges claims for breach of
contract, breach of the covenant of good faith and fair dealing, unfair
business practices, fraud and negligent misrepresentation. Sattel claims that
the Company is in breach of an agreement to pay for up to $4.2 million of DSS
Switches from Sattel for use in the Company's network. The Complaint also
seeks unspecified consequential and punitive damages. On April 29, 1997,
Sattel served the Company with an Application for Writ of Attachment, seeking
to secure a lien on the Company's assets up to an amount of $3.6 million.
Prior to the offering and the Direct Placements, Sattel holds approximately
1.7% of the Company's Common Stock.
On April 30, 1997, a putative securities class action complaint was 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. The Company was also named as a defendant in the complaint in
connection with certain statements made by Diana and officers of Diana related
to the Company's purchase of network switching equipment from Diana's Sattel
subsidiary. 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.
F-21
<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 and Operating 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 Offer......................................................... 65
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 67
Legal Matters............................................................ 68
Experts.................................................................. 68
Additional Information................................................... 69
Glossary................................................................. G-1
Index to Financial Statements............................................ F-1
</TABLE>
----------------
Until 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 SHARES
[LOGO]
CONCENTRIC NETWORK CORPORATION
COMMON STOCK
----------------
PROSPECTUS
, 1997
----------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale
of the Common Shares being registered. All of the amounts shown are estimates
except for the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 12,545
NASD Filing Fee.................................................... 4,640
Nasdaq National Market Listing Fee................................. 40,000
Blue Sky Qualification Fees and Expenses........................... 5,000
Printing and Engraving Expenses.................................... 100,000
Legal Fees and Expenses............................................ 350,000
Accounting Fees and Expenses....................................... 175,000
Transfer Agent and Registrar Fees.................................. 10,000
Miscellaneous...................................................... 52,815
--------
Total............................................................ $750,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In May 1997, the Registrant entered into indemnification agreements with its
directors and officers providing for limitations on a director's and officer's
liability for judgments, settlements, penalties, fines and expenses of defense
(including attorneys' fees, bonds and costs of investigation) arising out of
or in any way related to acts or omissions as a director or an officer, or in
any other capacity in which services are rendered to the Registrant. The
Registrant believes its indemnification agreements will assist it in
attracting and retaining qualified individuals to serve as directors and
officers. The agreements provide that a director or officer is not entitled to
indemnification under such agreements (i) if the director or officer is not
relieved of liability under applicable law, (ii) for violations of certain
securities laws, or (iii) for certain claims initiated by the officer or
director. Due to the lack of applicable case law, it is not clear whether
indemnification is available in case of a breach of securities laws of the
U.S.
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Amended and Restated Certificate of Incorporation to be effective
upon completion of the offering include a provision that eliminates the
personal liability of its directors for monetary damages for breach or alleged
breach of their duty of care. In addition, as permitted by Section 145 of the
Delaware General Corporation Law, the Bylaws, as amended, of the Registrant to
be effective upon completion of the offering provide that: (i) the Registrant
is required to indemnify its directors and officers and persons serving in
such capacities in other business enterprises (including, for example,
subsidiaries of the Registrant) at the Registrant's request, to the fullest
extent permitted by Delaware law, including in those circumstances in which
indemnification would otherwise be discretionary; (ii) the Registrant may, in
its discretion, indemnify employees and agents in those circumstances where
indemnification is not required by law; (iii) the Registrant is required to
advance expenses, as incurred, to its directors and officers in connection
with defending a proceeding (except that it is not required to advance
expenses to a person against whom the Registrant brings a claim for breach of
the duty of loyalty, failure to act in good faith, intentional misconduct,
knowing violation of law or deriving an improper personal benefit); (iv) the
rights conferred in the Bylaws, as amended, are not exclusive, and the
Registrant is authorized to enter into indemnification agreements with its
directors, officers and employees; and (v) the Registrant may not
retroactively amend the Bylaw provisions in a way that is adverse to such
directors, officers and employees.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and officers that provide the maximum indemnity allowed
to directors and officers by Section 45 of the Delaware General Corporation
Law and the Bylaws, as amended, as well as certain additional procedural
protections.
II-1
<PAGE>
The indemnification provisions in the Bylaws, as amended, and the
indemnification agreements entered into between the Registrant and its
directors and officers may be sufficiently broad to permit indemnification of
the Registrant's directors and officers for liabilities arising under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the three years preceding the date hereof, the Company has made the
following sales of securities that were not registered under the Securities
Act (share numbers are approximate and actual numbers of shares may differ as
a result of rounding calculations related to the one-for-15 reverse split):
1. From June 1993 to March 1995, the Company sold to various investors
convertible debentures and convertible subordinated debentures
(collectively, the "Convertible Debentures") in the aggregate principal
amount of $4,260,000. As of March 31, 1997, all of the Convertible
Debentures had been converted into shares of Class A Common Stock at prices
ranging from $3.75 per share to $11.25 per share.
2. From June 1993 to March 1995, the Company sold to various investors
29,673 shares of Class A Common Stock at $30.00 per share, for an aggregate
consideration of $890,200.
3. Since June 1993 the Company has issued 24,611 shares of Class A Common
Stock, at prices from $11.25 to $30.00, to individuals or other entities on
account of services rendered by them to the Company.
4. In October 1994, the Company issued 30,917 shares of Class A Common
Stock to Linkon Corporation ("Linkon") in exchange for 66,170 shares of the
Company's Common Stock held by Linkon and Linkon's forgiveness of the
Company's debt to Linkon.
5. In connection with the 1994 master lease agreement with Racal, the
Company granted to Racal warrants to purchase 44,935 shares of the
Company's Class A Common Stock exercisable through September 1, 1998 at
$15.00 per share subject to adjustment. As a result of the options granted
to certain members of management in October 1995, the exercise price of the
warrants was decreased to $3.75 per share.
6. In February 1995, the Company granted to Racal warrants to purchase
5,000 shares of the Company's Class A Common Stock in consideration for
securing the Company's loan from Sun Bank South Florida, National
Association (the "Sun Bank Loan"). The Company has since repaid the Sun
Bank Loan. Racal may exercise the warrants through February 15, 2000, at a
price equal to the lowest of (i) $30.00 per share, (ii) the lowest price
per share at which the Company may sell shares of Common Stock (or
securities convertible into or exchangeable for shares of its Common
Stock), and (iii) the lowest price at which the holder of the warrant,
option or other Company security entitling the holder to purchase shares of
the Company's Common Stock may purchase such shares on or after February
15, 1995.
7. In connection with the 1995 master lease agreement between the Company
and Comdisco, Inc., the Company has issued to Comdisco a warrant to
purchase up to 17,453 shares of Class A Common Stock for a purchase price
of $10.82 subject to adjustment.
8. On April 20, 1995, the Company sold to GS Capital Partners L.P.
("GSCP"), Kleiner Perkins Caufield & Byers VII ("KPCB"), and KPCB VII
Founders Fund (together with KPCB, "KP") an aggregate of 906,453 shares of
the Company's Series A Preferred Stock ("Series A Preferred Shares") and
warrants to purchase an aggregate of 181,876 Class A Common Stock for an
aggregate consideration of approximately $10,000,000 pursuant to a
preferred stock and warrant purchase agreement (the "Series A Agreement").
The warrants issued pursuant to the Series A Agreement had an initial
exercise price of $11.00 for each share of Class A Common Stock. On April
18, 1997, the Investors exercised the warrants at a discounted price of
$6.60 per share. See "Certain Transactions" and "Description of Capital
Stock."
9. The Series A Agreement provided that in the event that the book value
of the shares of the Company decreased an amount in excess of $100,000 as a
result of certain events, including the breach of any representation or
warranty in the Series A Agreement, GSCP and KP would be entitled to
receive indemnification, in the form of additional shares of Class A Common
Stock. In consideration of GSCP's and KP's waiver of their right to be
indemnified in the future the Company agreed, in October 1995, to issue to
GSCP and KP an aggregate of 61,678 shares of Class A Common Stock.
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10. In connection with the alliance between Intuit and the Company, on
December 11, 1995, Intuit received warrants to purchase $1.5 million worth
of Series B Preferred Stock at an initial exercise price of $11.00 per
share and warrants to purchase $3.5 million worth of Series B Preferred
Stock at the closing sale price of the Company's next preferred stock sale,
which was $27.30 per share. Also in connection with the arrangements with
Intuit, GSCP and the Kleiner Entities made bridge loans totaling $2 million
to the Company on October 16, 1995, which were rolled over into bridge
loans totaling $4 million on November 6, 1995. On November 29, 1995, GSCP
made a further bridge loan of $3 million. In consideration of these loans,
GSCP and the Kleiner Entities received warrants to purchase shares of
Series B Preferred Stock at an exercise price of $11.00 per share.
Effective as of December 20, 1995, GSCP and the Kleiner Entities converted
the principal and interest due under their $2 million promissory notes into
a total of 366,947 shares of Series B Preferred Stock at a price of $11.00
per share. Also effective as of December 20, 1995, GSCP converted the
entire amount of principal and interest on its $3 million bridge note into
123,297 Series C Shares at an exercise price of $24.57 per share.
11. On December 20, 1995, the Company issued a total of 804,945 shares of
Series C Preferred Stock ("Series C Shares") at a price of $27.30 per
share. An additional 123,297 Series C Shares were issued to GSCP at $24.57
per share when it converted its $3 million bridge loan in January 1996.
12. On June 6, 1996, the Company closed a Bridge Loan from Sattel
Communications, LLC ("Sattel") for $5,000,000 evidenced by a convertible
Promissory Note dated June 6, 1996. The Company issued Sattel a warrant
dated June 6, 1996, to purchase 36,765 shares of the Company's Series D
Preferred Stock at an exercise price of $20.40 per share. On August 21,
1996, Sattel converted the bridge loan into shares of Series D Preferred
Stock at $20.40 per share.
13. On July 31, 1996, the Company closed a Bridge Loan from Matthew Bross
for $50,000 evidenced by a convertible Promissory Note dated July 29, 1996.
The Company issued Matthew Bross a warrant dated July 31, 1996, to purchase
2,451 shares of Series D Preferred Stock at an exercise price of $20.40 per
share. On August 21, 1996, the Company repaid the loan.
14. On July 31, 1996, the Company closed a Bridge Loan from Maritime
Capital Partners, L.P. for $500,000, evidenced by a convertible Promissory
Note dated July 29, 1996. The Company issued Maritime a warrant dated July
31, 1996, to purchase 14,706 shares of Series D Preferred Stock at an
exercise price of $1.36 per share. On August 21, 1996, the Company repaid
the loan.
15. On July 31, 1996, the Company closed a Bridge Loan from GSCP for
$300,000, evidenced by a convertible Promissory Note dated July 29, 1996.
The Company issued GSCP a warrant dated July 31, 1996, to purchase 24,510
shares of Series D Preferred Stock at an exercise price of $20.40 per
share. The Company repaid the loan on August 21, 1996.
16. On July 31, 1996, the Company closed a Bridge Loan from KPCB for
$300,000 evidenced by a convertible Promissory Note dated July 29, 1996.
The Company issued to KPCB a warrant dated July 31, 1996, to purchase
14,706 shares of Series D Preferred Stock at an exercise price of $20.40
per share. The Company repaid the loan on August 21, 1996.
17. On July 31, 1996, the Company closed a Bridge Loan from Henry
Nothhaft for $100,000 evidenced by a Promissory Note dated July 29, 1996.
The Company issued Henry Nothhaft a warrant dated July 31, 1996, to
purchase 4,902 shares of Series D Preferred Stock at an exercise price of
$20.40 per share. The Company repaid the loan on August 21, 1996.
18. On July 31, 1996, the Company closed a Bridge Loan from John Peters
for $50,000 evidenced by a Promissory Note dated July 29, 1996. The Company
issued John Peters a warrant dated July 31, 1996, to purchase 2,451 shares
of Series D Preferred Stock at an exercise price of $20.40 per share. The
Company repaid the loan on August 21, 1996.
19. On August 16, 1996, the Board of Directors amended the vesting
provisions of options to purchase 14,000 shares issued to Henry Nothhaft,
President, Chief Executive Officer and a director of the Company, on
October 31, 1995, and an option to purchase 11,900 shares issued to John
Peters, Executive Vice President
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and General Manager, Network Services Division, on October 31, 1995, so the
options would fully vest as of the closing date of the sale of at least
$29,000,000 of Series D Preferred Stock of the Company, which occurred on
August 21, 1996.
20. On August 21, 1996, the Company exchanged four options previously
issued to Randy Maslow, a director of the Company, for new options
exercisable for an aggregate of 46,673 shares of Class A Common Stock at
$3.75 per share. The four-year vesting schedule accelerates so that all
shares vest immediately in the event of an initial public offering or a
change of control. The options may be exercised through their expiration
date regardless of when Mr. Maslow ceases being an employee or consultant.
Mr. Maslow's employment with the Company ended on October 31, 1996.
21. On August 21, 1996, the Company sold 1,670,176 shares of Series D
Preferred Stock at $20.40 per share for an aggregate price of $34,000,000.
22. Between October 25, 1996 and November 5, 1996, the Company sold an
additional 1,029,412 shares of Series D Preferred Stock at $20.40 per share
for an aggregate price of $21,000,000.
23. In December 1996, the Company issued options for the purchase of
60,000 shares of Class A Common Stock to employees of Critical Technologies
Incorporated ("CTI"), a company that provides network operations services
to the Company. The options were issued pursuant to the Company's Employee
Staffing and Services Agreement with CTI, dated November 1, 1995. In
October 1996, the Board ratified an amendment to the Company's agreement
with CTI to provides that performance conditions applicable to 13,334 of
the 60,000 optioned shares will be deemed satisfied.
24. On March 5, 1997, in consideration of distribution agreements with
the Company, TMI Telemedia International, Ltd. was issued a warrant for
176,678 shares of Series D Preferred Stock at an exercise price of $20.40
per share.
25. On April , 1997, the Company entered into warrant amendment
agreements with TMI, GSCP, and the Kleiner Entities to reduce the exercise
price of certain of their warrants in return for the immediate exercise of
such warrants. The exercise price of warrants for 181,876 shares of Class A
Common Stock and 66,888 shares of Series B Preferred Stock held by GSCP and
the Kleiner Entities was reduced from $11.00 to $6.60 per share. The
exercise price of warrants for 233,660 shares of Series D Preferred Stock
held by GSCP, KPCB and TMI was reduced from $20.40 per share to $12.24 per
share. Also, in connection with the reduction of the exercise price of the
GSCP and Kleiner Entities' Common Stock warrants, the exercise price of
Intuit's $1.5 million warrant was similarly reduced to $0.44 per share, and
the expiration date was extended to December 31, 2000.
26. In May 1997, in consideration for Marc Collins-Rector agreeing to
convert his Class B Common Stock into Series A Preferred Stock and to vote
his shares to approve the reincorporation of the Company into Delaware and
certain other matters, GSCP, the Kleiner entities and Intuit agreed to vote
in favor of granting Mr. Collins-Rector certain registration rights with
respect to the shares of Common Stock held by Mr. Collins-Rector or
issuable upon conversion of the Series A Preferred. Additionally, the
Company granted Mr. Collins-Rector the right to designate a member of the
Board of Directors of the Company. Currently, Mr. Collins-Rector's designee
is Mr. Robert Doede.
27. Between May 31, 1996, and March 18, 1997, nonplan options to purchase
a total of 3,418 shares of Common Stock were exercised by three optionees
at prices ranging from $3.75 to $9.00 per share.
28. 1993 Incentive Stock Option Plan. The Company's 1993 Incentive Stock
Option Plan (the "1993 Plan") provides for the grant to employees of the
Company of incentive stock options. As of May 15, 1997, options to purchase
5,067 shares of Common Stock had been exercised at an exercise price of
$3.75 per share under the 1993 Plan by three optionees, and options to
purchase 54,007 shares of Class A Common Stock at a weighted average
exercise price of $12.45 per share were outstanding. No future grants will
be made under the 1993 Plan. The exercise price of all stock options
granted under the 1993 Plan must be at least equal to the fair market value
of the Common Stock on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all classes
of stock of the Company, the exercise price of any stock option granted to
such person must be at least 110% of the fair market value on the grant
date, and the maximum term of such option is five years. The term of all
other options granted under the 1993 Plan may be up to 10 years. Options
granted under the 1993 Option Plan must be exercised before the optionee
terminates his or her
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status as an employee of the Company, or within three months after such
optionee's termination by disability, or within 12 months after termination
by death. In October 1995, the Board approved an exchange offer pursuant to
which all employees would exchange their options for options granted under
the 1995 Stock Incentive Plan for Employees and Consultants (the "1995
Plan").
29. 1995 Stock Incentive Plan for Employees and Consultants. The
Company's 1995 Plan provides for the granting to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and for the granting to employees
and consultants of nonstatutory stock options, stock appreciation rights
("SARs") and restricted stock awards ("RSAs"). No SARs or RSAs have been
granted under the 1995 Plan. The 1995 Plan was approved by the Board of
Directors and Stockholders in September 1995, and an amendment decreasing
the number of shares thereunder from 840,000 to 762,600 was approved by the
Board of Directors in February 1996. The 1995 Plan was terminated effective
October 4, 1996, and no further grants are being made thereunder except to
the extent that an exchange of options under the Company's 1993 Plan for
options under the 1995 Plan, which exchange was begun in October 1995, is
continuing and has not yet been completed. A total of 762,600 shares of
Common Stock are reserved for issuance pursuant to the 1995 Plan. As of May
15, 1997, options to purchase 344,951 shares of Common Stock at a weighted
exercise price of $3.75 per share were outstanding. Nine optionees have
exercised 3,612 shares of Common Stock under the 1995 Plan at an exercise
price of $3.75 per share.
The 1995 Plan may be administered by the Board of Directors or a
committee of the Board of Directors, which committee is required, once the
Company's Common Stock becomes publicly traded, to be constituted to comply
with Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as
amended, and applicable laws. The administrator has the power to determine
the terms of the options granted, including the exercise price, the number
of shares subject to the option and the exercisability thereof, and the
form of consideration payable upon exercise. Options granted under the 1995
Plan are not generally transferable by the optionee, and each option is
exercisable during the lifetime of the optionee only by such optionee.
Options granted under the 1995 Plan must be exercised within three months
of the end of such optionee's status as an employee or consultant of the
Company, or within 12 months after such optionee's termination by death or
disability, but in no event later than the expiration of the option's term,
which may not exceed ten years. The exercise price of all options granted
under the 1995 Plan must be at least equal to the fair market value of the
Common Stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any option must
equal at least 110% of the fair market value on the grant date and the term
of the option must not exceed five years. The term of all other options
granted under the 1995 Plan may not exceed 10 years.
The 1995 Plan provides that in the event of a recapitalization, stock
split, stock dividend, combination or reclassification or other increase or
decrease in the number of issued shares of Common Stock without
consideration, the Committee shall adjust the number of shares subject to
each outstanding stock option, as well as the exercise price. In the event
of dissolution or liquidation of the Company, unexercised stock options
will terminate immediately prior to such event, after advance notice to
participants. In the event of a merger or the sale of substantially all
assets of the Company, each option shall be assumed or substituted. Options
not assumed or substituted shall terminate on the date of closing of the
merger.
30. Amended and Restated 1996 Stock Plan. The Company's Amended and
Restated 1996 Stock Plan (the "Restated 1996 Plan") provides for the
granting to employees of incentive stock options within the meaning of
Section 422 of the Code, and for the granting to employees, directors and
consultants of nonstatutory stock options and stock purchase rights
("Rights"). The 1996 Plan was initially approved by the Board of Directors
effective as of December 1996. It was amended and restated in May 1997 and
will be presented to the Stockholders for their approval at the 1997 annual
meeting. Unless terminated sooner, the Restated 1996 Plan will terminate
automatically in December 2006. A total of 793,333 shares of Common Stock
are currently reserved for issuance pursuant to the Restated 1996 Plan. As
of May 15, 1997, options to purchase 595,580 shares of Class A Common Stock
at a weighted average exercise price of $10.35 per share were outstanding,
and shares of Class A Common Stock remained available for future grant
under the Restated 1996 Stock Plan.
The Restated 1996 Plan may be administered by a committee of the Board of
Directors constituted to comply with applicable laws (the "Committee") or
by the Board itself. The Board or Committee (the "Administrator") has the
power to determine the terms of the options or Rights granted, including
the exercise price, the number of shares subject to each option or Right,
the exercisability thereof, or any vesting acceleration
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or waiver of forfeiture conditions. The Administrator may determine the
form of payment upon exercise, including cash, check, promissory note,
other shares, cashless exercise or a combination of the foregoing. The
Board has the authority to amend, suspend or terminate the Restated 1996
Plan, provided that no such action may impair the rights of any optionee or
Right holder without that person's consent.
Options and Rights granted under the Restated 1996 Plan are not generally
transferable by the optionee or Right holder other than by will or the laws
of descent and distribution, and each option and Right is exercisable
during the lifetime of the optionee or Right holder only by such optionee
or Right holder. The form of option agreement currently in use provides
that options generally must be exercised within 90 days of the end of
optionee's status as an employee, director or consultant of the Company.
Under the Plan, options must be exercised within twelve months after such
optionee's termination by death or disability, but in no event later than
the expiration of the option's term. In the case of Rights, unless the
Administrator determines otherwise, the Restricted Stock Purchase Agreement
shall grant the Company a repurchase option exercisable upon the voluntary
or involuntary termination of the purchaser's service with the Company for
any reason (including death or disability). The purchase price for shares
repurchased pursuant to the Restricted Stock Purchase Agreement shall be
the original price paid by the purchaser and may be paid by cancellation of
any indebtedness of the purchaser to the Company. The repurchase option
shall lapse at a rate determined by the Administrator but in no case more
slowly than 20% per year over five years. Generally, options vest 25% after
one year and 1/36 per month thereafter. The exercise price of all incentive
stock options granted under the Restated 1996 Plan must be at least equal
to the fair market value of the Common Stock on the date of grant. The
exercise price of nonstatutory stock options and Rights must at least be
equal to 85% of the fair market value of the Common Stock on the date of
grant. With respect to any participant who owns stock possessing more than
10% of the voting power of all classes of the Company's outstanding capital
stock, the exercise price of any incentive or nonstatutory stock option
granted must equal at least 110% of the fair market value on the grant
date. The term of an incentive stock option granted to such a 10%
Stockholder must not exceed five years. The term of other options granted
under the Restated 1996 Plan may not exceed ten years.
The Restated 1996 Plan provides that in the event of a merger of the
Company with or into another corporation, a sale of substantially all of
the Company's assets or a like transaction involving the Company, each
option shall be assumed or an equivalent option substituted by the
successor corporation. If the outstanding options are not assumed or
substituted as described in the preceding sentence, the Administrator shall
provide for the optionee or Right holder to have the right to exercise the
option or Right as to all of the optioned stock, including shares as to
which it would not otherwise be exercisable. If the Administrator makes an
option or Right exercisable in full in the event of a merger or sale of
assets, the Administrator shall notify the optionee or Right holder that
the option or Right shall be fully exercisable for a period of fifteen days
from the date of such notice, and the option or Right will terminate upon
the expiration of such period. The forms of option agreement and restricted
stock purchase agreement currently in use provide for a 180-day lockup of
the optionee's or Right holder's shares in the event of the Company's
initial public offering. The option exercise notice and the restricted
stock purchase agreement also grant the Company a right of first refusal
(prior to the initial public offering) on the sale or transfer of any
shares purchased pursuant to an option or Right, other than transfers by
gift, operation of law or certain family transfers.
The sales and issuances of securities in the transactions described in
paragraphs 4-27 above were deemed to be exempt from registration under the Act
in reliance upon (i) Section 4(2) of the Securities Act and Regulation D
promulgated thereunder as transactions by an issuer not involving any public
offering, or (ii) Rule 701 promulgated thereunder as transactions pursuant to
a compensatory benefit plan or a written contract relating to compensation.
The issuances described in paragraphs 1, 2 and 3 were not made pursuant to a
registration statement under the Act, nor were the offer and sale registered
or qualified under any state securities laws. Although the Company believed at
the time that such offers, sales and conversion were exempt from such
registration or qualification, they may not have been exempt. As a result,
purchasers of such securities may have the right under the Act or such state
securities laws, to rescind their purchases, and thereby be entitled to return
such securities to the Company and receive back from the Company the full
consideration paid by such purchasers. No claims for any such rescission have
been asserted against the Company. The effective price per share of Class A
Common Stock and Class A Common Stock equivalents
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of such purchases ranged from $3.75 to $30.00. The Company expects to initiate
a rescission offer to all such holders simultaneous with this offering. If all
such holders accept such rescission offer, the Company would be required to
apply up to $5,150,000 of the proceeds of this placement towards such
rescission. The repurchase of shares pursuant to the rescission offer may give
rise to an obligation of the Company to issue additional shares of Class A
Common Stock to the holders of Series A Preferred Stock.
In addition, options issued pursuant to the Company's 1995 Stock Incentive
Plan for Employees and Consultants (the "1995 Plan") and nonplan options for
the purchase of Class A Common Stock were issued to approximately 150 to 200
people in California in 1995 and 1996 for which the Company was unable to rely
on the exemption provided by Section 25102(f) of the California Corporations
Code. In March 1996, the Company was denied a permit for these issuances by
the California Commissioner of Corporations as a result of the Company's two
classes of Common Stock with differing voting rights. In addition, a smaller
number of options were issued to optionees in other states, including Michigan
and Florida, for which the Company may not have had available an exemption
from qualification. Also, the November 17, 1995, grant of options for the
purchase of 60,000 shares of Class A Common Stock to employees of Critical
Technologies Incorporated was not qualified and may not have had an exemption
available under the blue sky laws of California. The aforementioned options
are potentially subject to rescission, and the Company intends to include them
in its planned rescission offer previously discussed. As of the date hereof,
management is not aware of any claims for rescission against the Company.
While the Company will offer to rescind the securities sales, there are no
assurances that the Company will not otherwise be subject to possible
penalties or fines relating to these issuances. The Company believes the
Rescission Offers will provide it with additional meritorious defenses to any
such future claims. See "Shares Eligible for Future Sale."
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
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1.1* Form of Underwriting Agreement.
2.1* Merger Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation of Registrant
prior to completion of this offering.
3.2* Form of Amended and Restated Certificate of Incorporation of Registrant
to be effective upon completion of this offering.
3.3* Amended and Restated Bylaws of Registrant prior to completion of this
offering.
3.4* Amended and Restated Bylaws of Registrant to be effective upon completion
of this offering.
4.1* Form of Registrant's Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
regarding legality of the securities being issued.
10.1 Amended and Restated Registration Rights Agreement, as amended and
restated as of August 21, 1996, by and among the Registrant, GS Capital
Partners, L.P., Kleiner Perkins Caufield & Byers VII, Comdisco, Inc.,
Intuit, Inc., certain listed holders of Series C Convertible Preferred
Stock, certain listed holders of Common Stock, certain listed holders of
Series D Convertible Preferred Stock, and Racal-Datacom, Inc.
10.2* Preferred Stock and Warrant Purchase Agreement, dated as of April 20,
1995, by and among the Registrant, GS Capital Partners, L.P., and
Kleiner Perkins Caufield & Byers VII and KPCB Information Sciences
Zaibatsu Fund II, as amended.
10.3 Form of Director and Officer Indemnification Agreement.
10.4 1995 Stock Incentive Plan for Employees and Consultants, as amended
February 21, 1996.
10.5 Amended and Restated 1996 Stock Plan.
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10.6* 1997 Stock Plan.
10.7* 1997 Employee Stock Purchase Plan.
10.8 Termination of Services and Indemnification Agreement, dated as of
February 15, 1996, by and between the Registrant and Marc Collins-
Rector and Chad Shackley.
10.9 Agreement, dated as of February 15, 1996, by and between the
Registrant and Randy Maslow.
10.10 Governance Agreement, dated May 15, 1997, by and among the Registrant,
Marc Collins-Rector, Chad Shackley, GS Capital Partners, L.P.,
Kleiner Perkins Caufield & Byers VII, KPCB VII Founders Fund, KPCB
Information Sciences Zaibatsu Fund II, and Intuit, Inc.
10.11+* Employee Services and Staffing Agreement, dated November 1, 1995,
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+* Internet Access Agreement for Resellers, dated June 26, 1996, between
the Registrant and network MCI, Inc.
10.19+* Internet Server Access Services Agreement, dated August 5, 1996,
between the Registrant and Pac-West Telecomm.
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.
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10.28* Sublease, dated June 22, 1995, between the Registrant and Tandem
Computers Incorporated.
10.29 Sublease, dated April 25, 1995, between Tandem Computers Incorporated
and Passage Systems, Inc.
10.30 Assignment Agreement, dated December 6, 1996, by and between the
Registrant and Passage Systems, Inc.
10.31+* Internet Access Service Agreement, dated December 11, 1995, effective
as of August 1, 1995, between the Registrant and Intuit, Inc.
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.
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.
+ 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.
(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-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, 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 REGISTRATION
STATEMENT ON FORM S-1 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF PALO ALTO, STATE OF CALIFORNIA, ON THE 16TH
DAY OF MAY, 1997.
Concentric Network Corporation
By: /s/ Henry R. Nothhaft
---------------------------------
HENRY R. NOTHHAFT
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Henry R. Nothhaft and Michael Anthofer,
and each of them acting individually, as his attorney-in-fact, each with full
power of substitution, for him in any and all capacities, to sign and all
amendments to this Registration Statement (including post-effective
amendments), and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all
post-effective amendments thereto, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be
signed by our said attorney to any and all amendments to said Registration
Statement.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON MAY 16, 1997, BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED
SIGNATURE TITLE DATE
/s/ Henry R. Nothhaft President and Chief May 16, 1997
- ------------------------------------- Executive Officer
HENRY R. NOTHHAFT (Principal
Executive Officer),
Director
/s/ Michael F. Anthofer Chief Financial May 16, 1997
- ------------------------------------- Officer (Principal
MICHAEL F. ANTHOFER Financial and
Accounting Officer)
/s/ Terence M. O'Toole Director May 16, 1997
- -------------------------------------
TERENCE M. O'TOOLE
/s/ Vinod Khosla Director May 16, 1997
- -------------------------------------
VINOD KHOSLA
II-10
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
Director , 1997
- ------------------------------------
RANDY MASLOW
/s/ Franco Regis Director May 16, 1997
- ------------------------------------
FRANCO REGIS
Director , 1997
- ------------------------------------
L. ROD MANNING
/s/ Gary E. Rieschel Director May 16, 1997
- ------------------------------------
GARY E. RIESCHEL
II-11
<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+* Employee Services and Staffing Agreement, dated November 1, 1995,
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+* Internet Access Agreement for Resellers, dated June 26, 1996, between
the Registrant and network MCI, Inc.
10.19+* Internet Server Access Services Agreement, dated August 5, 1996,
between the Registrant and Pac-West Telecomm.
10.20+* Contract for Services, dated June 17, 1996, by and between the
Registrant and MFS Telephone, Inc.
10.21+* AT&T Contract Tariff Order, dated June 17, 1996, and Addendum of even
date therewith.
10.22+* Master Lease Agreement Number CONO1C Between Concentric Research
Corporation and Racal-Datacom, Inc. ("Racal"), dated August 4, 1994,
as Supplemented by Letter Agreement, dated March 30, 1995, Between
the Corporation and Racal.
10.23+* Lease Agreement Number CON04C between Concentric Network Corporation
and Racal-Datacom, Inc., dated June 26, 1996.
10.24+* Master On-site Maintenance Plan Agreement Number CONO2C Between
Concentric Research Corporation and Racal-Datacom, Inc., dated August
24, 1994.
10.25 Lease Agreement, dated November 1, 1996, effective March 11, 1996, by
and between the Registrant and Saginaw Video Associates, d.b.a.
Saginaw Conference Center.
10.26 Amended and Restated Lease Agreement, dated as of October 7, 1996,
between the Registrant and Larry Shackley.
10.27 (Master) Lease, dated January 26, 1988, between Tandem Computers
Incorporated and Spieker-French #130, Limited Partnership, as amended
by Lease Amendment No. 1, effective February 5, 1990, and Extension
Agreement, dated March 23, 1993.
10.28* Sublease, dated June 22, 1995, between the Registrant and Tandem
Computers Incorporated.
10.29 Sublease, dated April 25, 1995, between Tandem Computers Incorporated
and Passage Systems, Inc.
10.30 Assignment Agreement, dated December 6, 1996, by and between the
Registrant and Passage Systems, Inc.
10.31+* Internet Access Service Agreement, dated December 11, 1995, effective
as of August 1, 1995, between the Registrant and Intuit, Inc.
10.32+* Virtual Private Network Services, dated August 16, 1996, between the
Registrant and WebTV Networks, Inc.
10.33+* Support Services Agreement, dated March 31, 1997, by and between the
Registrant and MCI Telecommunications Corporation.
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.
+ 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.
<PAGE>
EXHIBIT 3.1
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CONCENTRIC NETWORK CORPORATION
Concentric Network Corporation, a corporation organized and existing under
the laws of the State of Delaware, does hereby certify:
1. The name of the corporation is Concentric Network Corporation.
Concentric Network Corporation was originally incorporated under the same name,
and the original Certificate of Incorporation was filed with the Secretary of
State of the State of Delaware on February 9, 1996.
2. Pursuant to Sections 242 and 228 of the General Corporation law of the
state of Delaware, the amendments and restatement herein set forth have been
duly approved by the Board of Directors and the sole stockholder of Concentric
Network Corporation
3. Pursuant to section 245 of the General Corporation Law of the state of
Delaware, this Restated Certificate of Incorporation restates and integrates and
further amends the provisions of the Certificate of Incorporation of this
corporation.
4. The text of the Restated Certificate of Incorporation is hereby
restated and further amended to read in its entirety as follows:
FIRST: The name of the Corporation is Concentric Network Corporation (the
"Corporation").
SECOND: The address of the Corporation's registered office in the State of
Delaware is 15 East North Street, Dover, Delaware 19901, County of Kent.
The name of its registered agent at such address is Incorporating Services,
L.P.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH:
1. Authorized Capital. The total number of shares of all classes of capital
------------------
stock which the Corporation has authority to issue is 117,000,000 shares, par
value $.001 per share, consisting of (i) 100,000,000 shares of Common Stock, par
value $.001 per share (the "Common Stock") and (ii) 17,000,000 shares of
Preferred Stock, par value $.001 per share (the "Preferred Stock"). The Board
of Directors of the Corporation by vote of a majority of its members, is
authorized in accordance with and subject to limitations prescribed by law to
<PAGE>
provide by resolution for the issuance of additional shares of Preferred Stock
in series, to establish from time to time the number of shares to be included in
each such series and to fix the designations, powers, preferences and rights of
the shares of each such series and the qualifications, limitation or
restrictions thereof.
Effective upon the conversion of all shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
upon the closing of the Company's initial public offering of Common Stock, the
authorized shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock shall be converted into
undesignated Preferred Stock on a one-for-one basis up to an aggregate of
10,000,000 shares. Such undesignated shares of Preferred Stock authorized by
this Amended and Restated Certificate of Incorporation may be issued from time
to time in one or more series. For any wholly unissued series of Preferred
Stock, the Board of Directors is hereby authorized to fix and alter the dividend
rights, dividend rates, conversion rights, voting rights, rights and terms of
redemption (including sinking fund provisions), redemption prices, liquidation
preferences, the number of shares constituting any such series and the
designation thereof, or any of them.
For any series of Preferred Stock having issued and outstanding shares, the
Board of Directors is further authorized to increase or decrease (but not below
the number of shares of such series then outstanding) the number of shares of
such series that were originally fixed by the Board of Directors, but such
increase or decrease shall be subject to the limitations and restrictions stated
in the resolution of the Board of Directors originally fixing the number of
shares of such series, if any. If the number of shares of any series is so
decreased, then the shares constituting such decrease shall resume the status
that they had prior to the adoption of the resolution originally fixing the
number of shares such series.
2. Terms of the Common Stock.
-------------------------
2.1 Dividends. Subject to the rights of the Preferred Stock described in
---------
Section 3.2 of this Article Fourth, dividends may be paid on the Common Stock as
and when declared by the Board of Directors of the Corporation out of the assets
or funds of the Corporation legally available therefor.
2.2 Ratable Treatment. The Corporation shall not pay a dividend, make a
-----------------
distribution (as defined in Section 3.10), or effect a stock split-up,
combination, reclassification or recapitalization, in each case, with respect to
its outstanding shares of Common Stock, unless all of its outstanding shares of
Common Stock participate on the same basis (except in the case of a
reclassification or recapitalization, with respect to voting rights) in such
dividend, distribution, split-up, combination, reorganization, reclassification
or recapitalization.
2.3 Voting Rights. Each holder of Common Stock shall be entitled to one
-------------
vote for each share of Common Stock held. Except as required by law, or as
otherwise set forth in this Article Five or as provided by the Board of
Directors in its designation of any series of Preferred Stock pursuant to
Section 3.1 of this Article Five, the holders of shares of Preferred Stock and
Common Stock shall vote together as a single class and not as separate classes.
The holders of the Common Stock and Series C Preferred Stock shall vote as a
class to elect the members of the Board of Directors (the "Common
<PAGE>
Directors"), other than (x) the Series A Directors (as defined below), (y) the
Series B Director (as defined below) and (z) the Series D Directors (as defined
below).
2.4 Liquidation Rights. Subject to the rights of the holders of the
------------------
Preferred Stock described in Section 3.5 of this Article Fourth and any other
prior and/or superior rights of such holders as provided by law, upon any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation, the holders of Common Stock shall be entitled to receive an
amount equal to the Aggregate Preference Amount (as defined in Section 3.5)
payable out of any remaining funds and other assets of the Corporation to be
distributed. Such funds and other assets shall be distributed to holders of the
Common Stock on a ratable basis. After the payment to the holders of Common
Stock of an amount equal to the Aggregate Preference Amount, the remaining
assets of the Corporation available for distribution to stockholders shall be
distributed ratably to the holders of Common Stock (treating for purposes of
this calculation all shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock as having been
converted into Common Stock).
2.5 Fractional Shares. A fractional share of Common Stock shall be
-----------------
entitled to an equivalent fractional percentage of all of the rights and
privileges associated with a whole share of such Common Stock. Any reference to
a share of Common Stock in the Amended and Restated Certificate of Incorporation
shall be a reference to a whole or fractional share, as applicable, of Common
Stock.
3. Terms of the Series A Preferred Stock, Series B Preferred Stock, Series C
-------------------------------------------------------------------------
Preferred Stock and Series D Preferred Stock.
--------------------------------------------
3.1 Designation and Number. There are hereby designated four series of
----------------------
Preferred Stock to be known as "Series A Preferred Stock," "Series B Preferred
Stock," "Series C Preferred Stock" and "Series D Preferred Stock." The number
of shares constituting the Series A Preferred Stock shall be 1,000,000. The
number of shares constituting the Series B Preferred Stock shall be 905,000.
The number of shares constituting the Series C Preferred Stock shall be
940,000. The number of shares constituting the Series D Preferred Stock shall
be 4,540,000.
3.2 Dividends.
---------
(a) The Corporation shall not declare or pay any dividend or make any
other distribution to the holders of the Common Stock unless the holders of the
Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred
Stock and the Series D Preferred Stock participate with the holders of the
Common Stock in any such dividend or distribution, and a dividend or
distribution is prior thereto or simultaneously therewith declared or paid, as
the case may be, to the holders of the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock
as set forth in the immediately succeeding sentence. In the case of a dividend
or distribution to the holders of the Common Stock, the holder of each share of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock shall receive the same dividend or distribution that
such holder would be entitled to receive if all of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
held by such holder were exchanged for Common Stock at the applicable Conversion
Ratio (as defined below).
<PAGE>
(b) The Corporation shall not declare or pay any dividend or make any
other distribution to the holders of the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock or the Series D Preferred Stock,
respectively, unless the holders of each of the other Series A Preferred Stock,
the Series B Preferred Stock, the Series C Preferred Stock and the Series D
Preferred Stock, as the case may be, participate with the holders of such Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series
D Preferred Stock, as the case may be, in any such dividend or distribution,
and a dividend or distribution is prior thereto or simultaneously therewith
declared or paid, as the case may be, to the holders of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred
Stock, as the case may be, as set forth in the immediately succeeding sentence.
In the case of a dividend or distribution to the holders of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or
the Series D Preferred Stock, as the case may be (the "Dividend"), the holder of
each share of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock shall receive the same dividend or
distribution that such holder would be entitled to receive if (i) the Dividend
were deemed to have been made to holders of Common Stock, and (ii) all of the
outstanding Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock were converted into Common Stock at
the applicable Conversion Ratio.
3.3 Voting Rights.
-------------
(a) In addition to any voting rights provided by law, the holder of
each share of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock shall be entitled to vote on all
matters and shall be entitled to the number of votes equal to the number of
votes a holder of the shares of Common Stock, whole or fractional, into which
such share of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock is convertible pursuant to Section
3.6 of this Article Fourth is entitled to, at the record date for the
determination of the shareholders entitled to vote on such matters or, if no
such record date is established, at the date such vote is taken or any written
consent of shareholder is solicited, provided that the holders of Series A
Preferred Stock shall not be entitled to vote on any matters relating to the
election of the Common Directors, the Series B Director or the Series D
Directors, the holders of Series B Preferred Stock shall not be entitled to vote
on any matters relating to the election of the Common Directors, the Series A
Directors or the Series D Directors, the Series C Preferred Stock shall not be
entitled to vote on any matters relating to the election of the Series A
Directors, Series B Director or the Series D Directors, and the Series D
Preferred Stock shall not be entitled to vote on any matters relating to the
election of the Series A Directors, Series B Director or Common Directors. The
holders of Series A Preferred Stock shall be entitled to vote as a class to
elect the Series A Directors (as defined below) in accordance with Section
3.3(b) hereof, the holders of Series B Preferred Stock shall be entitled to vote
as a class to elect the Series B Director (as defined below) in accordance with
Section 3.3(b) hereof and the holders of the Series D Preferred Stock shall be
entitled to vote as a class to elect the Series D Directors (as defined below)
in accordance with Section 3.3(b) hereof.
<PAGE>
(b) Series A Directors, Series B Director and Series D Directors.
(i) The holders of Series A Preferred Stock shall be entitled to
vote as a class to elect two persons to the Corporation's Board of Directors.
Each person elected to be a director by the holders of Series A Preferred Stock
pursuant to this Section 3.3(b)(i) shall be referred to as a "Series A
Director."
(ii) The holders of Series B Preferred Stock shall be entitled to
vote as a class to elect one person to the Corporation's Board of Directors. The
person elected to be a director by the holders of Series B Preferred Stock
pursuant to this Section 3.3(b)(ii) shall be referred to as the "Series B
Director."
(iii) So long as at least 2,127,000 shares of Series D Preferred
Stock are outstanding, the holders of Series D Preferred Stock shall be entitled
to vote as a class to elect four persons to the Corporation's Board of
Directors. In the event that less than 2,127,000, shares of Series D Preferred
Stock are outstanding, the holders of the Series D Preferred Stock shall be
entitled to vote as a class to elect three persons to the Corporation's Board of
Directors. In the event the Corporation's Board of Directors is increased to 15
or more persons and at least 2,127,000 shares of Series D Preferred Stock are
outstanding, the holders of Series D Preferred Stock shall be entitled to vote
as a class to elect five persons to the Corporation's Board of Directors. Each
person elected to be a director by the holders of Series D Preferred Stock
pursuant to this Section 3.3(b)(iii) shall be referred to as a "Series D
Director."
(iv) At any meeting (or in a written consent in lieu thereof) held for
the purpose of electing directors, the presence in person or by proxy (or the
written consent) of the holders of a majority of the shares of Series A
Preferred Stock, Series B Preferred Stock or Series D Preferred Stock then
outstanding shall constitute a quorum for the election of the Series A
Directors, the Series B Director or the Series D Directors, respectively.
Series A Directors may be removed only by vote or written consent of the holders
of the Series A Preferred Stock. The Series B Director may be removed only by
the vote or written consent of the holders of the Series B Preferred Stock. The
Series D Directors may only be removed by the vote or written consent of the
holders of the Series D Preferred Stock.
3.4 Reacquired Shares. Any shares of Series A Preferred Stock, Series B
-----------------
Preferred Stock, Series C Preferred Stock or Series D Preferred Stock converted,
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. None of
such shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock shall be reissued by the
Corporation.
3.5 Liquidation, Dissolution or Winding Up.
--------------------------------------
(a) Upon the voluntary or involuntary dissolution, liquidation or
winding up (each, a "Liquidation") of the Corporation, the holders of the shares
of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock shall be entitled to receive and
-5-
<PAGE>
to be paid out of the assets of the Corporation available for distribution to
its shareholders, before any payment or distribution shall be made on any Junior
Stock (as defined in Section 3.10), the applicable Preferred Distribution
Preference Per Share (as defined below) with respect to each outstanding share
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
or Series D Preferred Stock.
(b) If upon any such Liquidation, whether voluntary or involuntary,
the assets to be distributed to the holders of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
shall be insufficient to permit payment of the full amount of the Preferred
Distribution Preference Per Share with respect to each share of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock, then the entire assets of the Corporation to be distributed
among the holders of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock shall be distributed among
such holders pro rata in proportion to the full amounts to which they would
respectively be entitled.
(c) After the payment to the holders of shares of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock of the full amount of the liquidating distribution to which they
are entitled under this Section 3.5 and to any other holders of shares of
Preferred Stock in accordance with the terms provided by the resolution pursuant
to which such Preferred Stock is issued (collectively, the "Aggregate Preference
Amount"), an amount equal to the Aggregate Preference Amount shall be
distributed ratably to the holders of the Common Stock out of the assets of the
Corporation. After the payment to the holders of Common Stock of an amount
equal to the Aggregate Preference Amount, the remaining assets of the
Corporation available for distribution to shareholders shall be distributed
ratably to the holders of Common Stock (treating for purposes of this
calculation all shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock as having been converted
into Common Stock) and to any other holders of shares of Preferred Stock in
accordance with the terms provided by the resolution pursuant to which such
Preferred Stock is issued.
(d) Neither the consolidation, merger or other business combination
of the Corporation with or into any other Person or Persons nor the sale of all
or substantially all the assets of the Corporation shall be deemed to be a
Liquidation for purposes of this Section 3.5 of this Article Fourth.
(e) "Preferred Distribution Preference Per Share" shall mean, (i)
with respect to each share of Series A Preferred Stock, the quotient obtained by
dividing $10,000,000 by the number of shares of Series A Preferred Stock issued
by the Corporation (the "Issued Series A Preferred Stock") regardless of whether
then outstanding (subject to adjustment for any stock splits or recombinations
of the Series A Preferred Stock), (ii) with respect to each share of Series B
Preferred Stock, $11.00 per share (subject to adjustment for any stock splits or
recombinations of the Series B Preferred Stock), (iii) with respect to each
share of Series C Preferred Stock, $27.30 per share (subject to adjustment for
any stock splits or recombinations of the Series C Preferred Stock) and (iv)
with respect to each share of Series D Preferred Stock, $20.40 per share
(subject to adjustment for any stock splits or recombinations of the Series D
Preferred Stock).
-6-
<PAGE>
3.6 Conversion.
----------
(a) Each share of Series A Preferred Stock, each share of Series B
Preferred Stock, each share of Series C Preferred Stock and each share of Series
D Preferred Stock issued or issuable with respect to the exercise or conversion
of any Series A Equivalents, Series B Equivalents, Series C Equivalents or
Series D Equivalents (as defined in Section 3.9) shall automatically be
converted into the applicable number of Common Stock Units (as defined in
Section 3.10) at the then effective applicable Conversion Ratio (as defined in
Section 3.10) immediately prior to a Qualified Public Offering. In addition, at
the option of the holder of any Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock or Series D Preferred Stock, such holder shall
have the right, at any time and from time to time prior to a Qualified Public
Offering, by written notice to the Corporation, to convert any share of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
Preferred Stock owned by such holder into the number of applicable Common Stock
Units at the then effective applicable Conversion Ratio. A "Qualified Public
Offering" shall mean the sale of shares of the Company's Common Stock in a bona
fide, firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, resulting
in at least $15,000,000 of gross proceeds to the Corporation before deducting
underwriting discounts and commissions and offering expenses, and reflecting a
Corporation Valuation (as defined below) of at least $50,000,000 (or such lesser
amount as the holders of a majority of the outstanding Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock,
each voting as separate classes, otherwise agree). The term "Corporation
Valuation" means, with respect to any public offering of Common Stock, the
amount obtained by multiplying the total number of shares of common Stock
outstanding immediately prior to such public offering (treating for purposes of
this calculation all securities convertible into, or exchangeable or exercisable
for, any shares of Common Stock (collectively, "Common Stock Equivalents") as
having been converted, exchanged or exercised) multiplied by the per share
offering price for such public offering.
(b) The Corporation shall at all times reserve and keep available for
issuance upon the conversion of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock, free from any
preemptive rights, such number of its authorized but unissued shares of Common
Stock as will from time to time be necessary to permit the conversion of all
outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock into shares of Common Stock, and
shall take all action required to increase the authorized number of shares of
Common Stock if necessary to permit the conversion of all outstanding shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock. For purposes of this paragraph (b) of this Section
3.6 of this Article Five, all Series A Equivalents, Series B Equivalents, Series
C Equivalents and Series D Equivalents (as defined in Section 3.9) shall be
deemed, at any given time, to be fully exercised, converted or exchanged for
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock or Series D Preferred Stock, respectively.
(c) The Conversion Ratio (as defined in Section 3.10) applicable to
the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock, respectively, will be subject to adjustment from
time to time as follows:
(i) In case the Corporation shall at any time or from time to
time after April 20, 1995 in the case of the Series A Preferred Stock and Series
B Preferred Stock, December 15, 1995 in the case of the Series C Preferred
Stock, or August 1, 1996 in the case of the Series D Preferred Stock (A) pay any
dividend, or make any distribution on the outstanding shares of Common Stock in
shares of Common Stock, (B) subdivide the outstanding shares of Common Stock,
(C) combine the outstanding shares of Common Stock into a smaller number of
shares or (D) issue by reclassification of the shares of Common Stock any shares
of capital stock of the Corporation, then, and in each such case, the applicable
Conversion Ratio in effect immediately prior to such event or the record date
therefor, whichever is earlier, shall be adjusted so that the holder of any
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock or Series D Preferred Stock thereafter convertible into Common Stock
pursuant to this Section 3.6 of this Article Fourth shall be entitled to receive
the
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<PAGE>
number and type of shares of Common Stock or other securities of the Corporation
which such holder would have owned or have been entitled to receive after the
happening of any of the events described above, had such shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
Preferred Stock been converted into Common Stock immediately prior to the
happening of such event or the record date therefor, whichever is earlier. An
adjustment made pursuant to this clause (i) shall become effective (x) in the
case of any such dividend or distribution, immediately after the close of
business on the record date for the determination of holders of shares of Common
Stock entitled to receive such dividend or distribution, or (y) in the case of
such subdivision, reclassification or combination, at the close of business on
the day upon which such corporate action becomes effective.
(ii) Except with respect to the Excluded Securities (as
defined below) applicable in the case of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock or Series D Preferred Stock,
respectively, in case the Corporation shall issue any shares of Common Stock (or
Common Stock Equivalents (as defined in Section 3.10) after the respective date
when the first share of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock is issued (or their
respective Series A Equivalents, Series B Equivalents, Series C Equivalents or
Series D Equivalents as defined in Section 3.9 of this Article Five), at a price
per share (or having a conversion or exercise price per share) less than the
then applicable Preferred Distribution Preference Per Share, then in each such
case, the applicable Conversion Ratio shall be adjusted by multiplying (A) the
applicable Conversion Ratio in effect on the day immediately prior to the date
of issuance of such shares (or Common Stock Equivalents) by (B) a fraction, the
numerator of which shall be the sum of (1) the number of shares of Common Stock
outstanding on such date prior to such issuance and (2) the number of additional
shares of Common Stock issued (or issuable upon conversion, exchange or exercise
of such Common Stock Equivalents), and the denominator of which shall be the sum
of (x) the number of shares of Common Stock outstanding on such date prior to
such issuance and (y) the number of shares of Common Stock purchasable at the
then applicable Preferred Distribution Preference Per Share upon payment of the
aggregate consideration receivable by the Corporation for the total number of
shares of Common Stock (or such Common Stock Equivalents) so issued. An
adjustment made pursuant to this clause (ii) shall be made on the next Business
Day following the date on which any such issuance is made and shall be effective
retroactively to the close of business on the date of such issuance. For
purposes of this clause (ii), the aggregate consideration receivable by the
Corporation in connection with the issuance of shares of Common Stock or of
Common Stock Equivalents shall be deemed to be equal to the sum of the aggregate
offering price (before deduction of underwriting discounts or commissions and
expenses payable to third parties, if any) of all such Common Stock and/or
Common Stock Equivalents plus the minimum aggregate amount, if any, payable upon
conversion, exchange or exercise of any such Common Stock Equivalents. The
issuance or reissuance of any shares of Common Stock (whether treasury shares or
newly issued shares) pursuant to a dividend or distribution on, or subdivision,
combination or reclassification of, the outstanding shares of Common Stock
requiring an adjustment in the Conversion Ratio pursuant to clause (i) of this
paragraph (c) of this Section 3.6 of this Article Fourth shall not be deemed to
constitute an issuance of Common Stock or Common Stock Equivalents by the
Corporation to which this clause (ii) applies. Upon the expiration of any
unconverted, unexchanged or unexercised Common Stock Equivalents for which an
adjustment has been made pursuant to this clause (ii), the adjustments shall
forthwith be reversed to effect such Conversion Ratio as would have been in
effect at the time of such expiration or such termination had
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<PAGE>
such Common Stock Equivalents, to the extent outstanding immediately prior to
such expiration or termination, never been issued. Excluded Securities shall
mean all shares of (w) Common Stock or Common Stock Equivalents issued and
outstanding on December 18, 1995, (x) Common Stock issued upon the conversion or
exercise of any such Common Stock Equivalent, (y) Common Stock or Common Stock
Equivalents issued pursuant to the Corporation's Incentive Stock Option Plan as
in effect on December 18, 1995, (z) up to 1,286,667 shares of Common Stock to be
issued pursuant to the Corporation's stock option plan to be adopted by the
Corporation's Board of Directors, and (aa) Common Stock or Common Stock
Equivalents issued in connection with any bona fide loans or lease financings
approved unanimously by the Corporation's Board of Directors.
(iii) For purposes of this paragraph (c) of this Section 3.6 of
this Article Fourth, the number of shares of Common Stock at any time
outstanding shall mean the aggregate of all shares of Common Stock then
outstanding (other than any shares of Common Stock then owned or held by or for
the account of the Corporation) treating for purposes of this calculation all
Common Stock Equivalents as having been converted, exchanged or exercised.
(iv) If the Corporation shall take a record of the holders of
its Common Stock for the purpose of entitling them to receive a dividend or
other distribution and shall thereafter, and before such dividend or
distribution is paid or delivered to shareholders entitled thereto, legally
abandon its plan to pay or deliver such dividend or distribution, then no
adjustment in the Conversion Ratio then in effect shall be made by reason of the
taking of such record, and any such adjustment previously made as a result of
the taking of such record shall be reversed.
(d) The issuance of certificates for shares of Common Stock upon
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock shall be made without charge to the
holders thereof for any issuance tax in respect thereof, provided that the
Corporation shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any certificate in a
name other than that of the holder of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock or Series D Preferred Stock which is
being converted.
(e) The Corporation will at no time close its transfer books against
the transfer of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock or of any shares of Common Stock
issued or issuable upon the conversion of any shares of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred
Stock, in any manner which interferes with the timely conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
Preferred Stock, except as may otherwise be required to comply with applicable
securities laws.
(f) As used in this Section 3.6, the term "Common Stock" shall mean
and include the Corporation's authorized Common Stock, par value $.001 per
share, as constituted on the Filing Date (as defined below), and shall also
include any capital stock of any class of the Corporation thereafter authorized
which shall neither be limited to a fixed sum or percentage in respect of the
rights of the holders thereof to participate in dividends nor be entitled to a
preference in the distribution of assets
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<PAGE>
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, provided that the shares of Common Stock receivable upon conversion
of shares of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock shall include only shares
designated as Common Stock of the Corporation on the Filing Date, or in case of
any reorganization or reclassification of the outstanding shares thereof, the
stock, securities or assets to be issued in exchange for such Common Stock
pursuant thereto.
(g) In the case of a Sale of the Corporation (as defined in Section
3.10 below) or a proposed reorganization of the Corporation or a proposed
reclassification or recapitalization of the capital stock of the Corporation
(except as a transaction for which provision for adjustment is otherwise made in
this Section 3.6), each share of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock of the Corporation
deliverable upon conversion of such Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock or Series D Preferred Stock would have been
entitled upon such Sale of the Corporation, reorganization, reclassification or
recapitalization; and, in any such case, appropriate adjustment (as determined
by the Board of Directors) shall be made in the application of the provisions
herein set forth with respect to the rights and interest thereafter of the
holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock, to the end that the provisions set
forth herein (including provisions with respect to changes in and other
adjustments of the applicable Conversion Ratio) shall thereafter be applicable,
as nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the conversion of the Series A Preferred
Stock, Series B Preferred Stock, the Series C Preferred Stock or Series D
Preferred Stock. The Corporation shall not effect any such Sale of the
Corporation unless prior to or simultaneously with the consummation thereof the
successor corporation or purchaser, as the case may be, shall assume by written
instrument the obligation to deliver to the holders of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock such shares of stock, securities or assets as, in accordance with the
foregoing provisions, each such holder is entitled to receive.
(h) The Corporation will not, by amendment of its Amended and
Restated Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 3.6 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock against
impairment.
(i) Upon any conversion of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock pursuant
to this Article, the shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock which are converted
shall not be reissued. Upon conversion of all of the then outstanding Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock pursuant to this
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<PAGE>
Article, all of this Article shall be void and each share of authorized Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock shall be converted into one share of authorized undesignated
Preferred Stock, up to a maximum of 10,000,000 shares, and all shares of
Preferred Stock in excess of 10,000,000 shall be canceled and shall not be
deemed outstanding for any purpose whatsoever.
3.7 Reports as to Adjustment. Upon any adjustment of the Conversion Ratio
------------------------
then in effect pursuant to the provisions of Section 3.6 of this Article
Fourth, then, and in each such case, the Corporation shall promptly deliver to
the Transfer Agent(s) of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Common Stock and to each
of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock, a certificate signed by the
President or a Vice President and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary of the Corporation setting forth in
reasonable detail the event requiring the adjustment, the method by which such
adjustment was calculated and the Conversion Ratio then in effect following such
adjustment. Where appropriate, such notice to holders of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock may be given in advance.
3.8 Certain Covenants. Any registered holder of Series A Preferred Stock,
-----------------
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock
may proceed to protect and enforce its rights and the rights of any other
holders of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock, as the case may be, with any and
all remedies available at law or in equity.
3.9 Protective Provisions. So long as shares of Series A Preferred Stock,
---------------------
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock
(or securities convertible into, or exchangeable or exercisable for, shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or
Series D Preferred Stock, as the case may be, which are called "Series A
Equivalents," "Series B Equivalents" and "Series C Equivalents" and "Series D
Equivalents," respectively) are outstanding, the Corporation shall not without
first obtaining the approval (by vote or written consent, as provided by law) of
the holders of at least a majority of the then outstanding shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
Preferred Stock, as the case may be (treating for purposes of these calculation
of all Series A Equivalents, Series B Equivalents, Series C Equivalents and
Series D Equivalents as having been converted, exchanged or exercised), voting
as a single class:
(a) alter or change the rights, preferences or privileges of the
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock or Series D Preferred Stock, as the case may be, or except as provided in
subsection (c) of this Section 3.9, otherwise amend these Amended and Restated
Certificate of Incorporation (in any case whether by merger, consolidation or
otherwise) so as to affect adversely the shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock,
respectively; or
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<PAGE>
(b) increase the authorized number of shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred
Stock as the case may be; or
(c) create or designate, or authorize the issuance of any new class
or series of stock (including, without limitation, the issuance of any
additional shares of Preferred Stock by the Board of Directors pursuant to
Section 1 of this Article Fourth) (i) ranking senior to or having a preference
over, or being on a parity with, Series A Preferred Stock with respect to
dividends or upon liquidation, (ii) ranking senior or having a preference over
the Series C Preferred Stock, (iii) ranking senior to or having a preference
over, or being on a parity with, the Series D Preferred Stock or (iv)
convertible into any such class or series of stock, provided that the
Corporation may create or designate or authorize the issuance of a new class or
series of stock (a) ranking senior to or having preference over, or being on a
parity with, the Series B Preferred Stock or (b) being on a parity with the
Series C Preferred Stock in each case with respect solely to dividends or upon
liquidation, without obtaining the approval of the holders of any of the Series
B Preferred Stock or the Series C Preferred Stock, as the case may be.
3.1 Definitions. In addition to any other terms defined herein, for
-----------
purposes of this Article Fourth, the following terms shall have the meanings
indicated:
"Business Day" shall mean any day other than a Saturday, Sunday, or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Commission" shall mean the Securities and Exchange Commission, and
any successor agency.
"Common Stock Equivalent" shall mean securities convertible into, or
exchangeable or exercisable for, shares of Common Stock.
"Conversion Ratio," determined as of any date, shall equal the number
of Common Stock Units into which one share of Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, as the
case may be, is convertible pursuant to Section 3.6 of this Article Fourth. The
Conversion Ratio shall initially equal one and shall be subject to adjustment as
provided in paragraph (c) of Section 3.6 of this Article Fourth.
The term "distribution" shall include the transfer of cash or property
to the holders of a class of capital stock of the Corporation, without
consideration, whether by way of dividend or otherwise, or the purchase or
redemption of shares of the Corporation, for cash or property, including such
transfer, purchase or redemption by a subsidiary of the Corporation. The time
of any distribution by way of dividends shall be the date of declaration
thereof, and the time of any distribution by purchase or redemption of shares
shall be the date on which cash or property is transferred by the Corporation,
whether or not pursuant to a contract of an earlier date; provided that, where a
debt security is issued in exchange for shares, the time of the distribution is
the date when the Corporation acquires the shares for such exchange.
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<PAGE>
"Filing Date" shall mean the date of filing of this Second Amended and
Restated Certificate of Incorporation.
"Junior Stock" shall mean any capital stock of the Corporation ranking
junior (either as to dividends or upon liquidation, dissolution or winding up)
to the Preferred Stock.
"Person" shall mean any individual, firm, corporation, partnership or
other entity, and shall include any successor (by merger or otherwise) of such
entity.
"Sale of the Corporation" shall mean consolidation or merger of the
Corporation with or into any other corporation or corporations (other than a
consolidation or merger in which the Corporation is the continuing corporation),
or a sale, conveyance or disposition of all or substantially all of the assets
of the Corporation or the effectuation by the Corporation of a transaction or
series of related transactions in which more than fifty (50%) percent of the
voting power of the Corporation is disposed of.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and
before voting begins.
SEVENTH: The number of directors which constitute the whole Board of Directors
of the Corporation shall be designated in the Bylaws of the
Corporation. Effective at such time as the Corporation becomes
subject to the periodic reporting requirements of the Securities
Exchange Act of 1934, as amended, the directors shall be divided into
three classes, as nearly equal in number as possible, with the term of
office of the first class to expire at the 1998 annual meeting of
stockholders, the term of office of the second class to expire at the
1999 annual meeting of stockholders and the term of office of the
third class to expire at the 2000 annual meeting of stockholders. At
each annual meeting of stockholders following such initial
classification and election, directors elected to succeed those
directors whose terms expire shall be elected to serve three-year
terms and until their successors are elected and qualified, so that
the term of one class of directors will expire each year. When the
number of directors is changed, any newly created directorships, or
any decrease in directorships, shall be so apportioned among the
classes so as to make all classes as nearly equal as possible,
provided that no decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of
Directors, although less than a quorum, at any meeting of the Board of
Directors. A person so elected by the Board of Directors to fill a
vacancy shall hold office until the next succeeding annual meeting of
stockholders of the Corporation and until his or her successor shall
have been duly elected and qualified.
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<PAGE>
EIGHTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make,
alter, amend or repeal the Bylaws of the Corporation.
NINTH: To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or as it may hereafter be amended, no director
of the Corporation shall be personally liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as
a director.
Neither any amendment nor repeal of this Article, nor the adoption of
any provision of this Restated Certificate of Incorporation
inconsistent with this Article, shall eliminate or reduce the effect
of this Article in respect of any matter occurring, or any cause of
action, suit or claim that, but for this Article, would accrue or
arise, prior to such amendment, repeal or adoption of an inconsistent
provision.
TENTH: Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may
be kept (subject to any provision contained in the statutes) outside
of the State of Delaware at such place or places as may be designated
from time to time by the Board of Directors or in the Bylaws of the
Corporation.
ELEVENTH: Effective upon the closing of the Corporation's initial public
offering of securities pursuant to a registration statement filed
under the Securities Act of 1933, as amended, stockholders of the
Corporation may not take action by written consent in lieu of a
meeting but must take any such action at a duly called annual or
special meeting.
TWELFTH: Pursuant to Section 203(b) of the Delaware Corporation laws, the
stockholders of this Corporation expressly elect not to be governed by
Section 203(a) of the Delaware Corporation laws. Effective at such
time as the Corporation becomes subject to the periodic reporting
requirements of the Securities Exchange Act of 1934, as amended, any
merger or combination between an entity or person owning, directly or
indirectly, 10% of the Corporation's shares and the Corporation, will
require the affirmative vote of at least two-thirds (2/3) of the
combined voting power of all of the then-outstanding shares of the
Corporation entitled to vote, unless: (i) the merger is approved by a
two-thirds (2/3) of the members of the Board of Directors; or (ii) the
entity or person owning, directly or indirectly, 10% of the
Corporation's shares pays a price for the remaining shares at least
equal to the greatest of (a) the highest price paid by the offeror for
any shares of the Corporation during the offer; or (b) an amount
reflecting the same or a greater percentage relationship to the then
market price of the Corporation's stock as the highest price per share
paid by the offeror during the tender offer bears to the market price
of the stock immediately prior to the commencement of the tender
offer; or (c) an amount equal to the earnings per share of the
Corporation for the four full consecutive fiscal quarters immediately
preceding the proposed merger or business combination multiplied by
the then current price/earnings ratio of the offeror.
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<PAGE>
THIRTEENTH: Notwithstanding any other provision of this Amended and Restated
Certificate of Incorporation or any provision of law which might
otherwise permit a lessor vote or no vote, but in addition to any
affirmative vote of the holders of the capital stock required by
law or this Amended and Restated Certificate of Incorporation, the
affirmative vote of the holders of at least two-thirds (2/3) of
the combined voting power of all of the then-outstanding shares of
the Corporation entitled to vote shall be entitled to alter, amend
or repeal Articles VII, XI, XII or XIII or any provision thereof.
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<PAGE>
IN WITNESS WHEREOF, Concentric Network Corporation, has caused this Amended
and Restated Certificate of Incorporation to be executed by Henry R. Nothhaft,
its President and Chief Executive Officer attested by Peter J. Bergeron, its
Secretary, this ____ day of ____, 1997.
CONCENTRIC NETWORK CORPORATION
Henry R. Nothhaft,
President and Chief Executive Officer
Attest:
________________________________
Peter Bergeron, Secretary
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<PAGE>
EXHIBIT 10.1
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
by and among
CONCENTRIC NETWORK CORPORATION
formerly known as
Concentric Research Corporation
GS CAPITAL PARTNERS, L.P.
KLEINER PERKINS CAUFIELD & BYERS VII
COMDISCO, INC.
INTUIT, INC.
THE HOLDERS OF SERIES C CONVERTIBLE PREFERRED STOCK
APPEARING ON SCHEDULE I TO THIS AGREEMENT
THE HOLDERS OF COMMON STOCK APPEARING ON
SCHEDULE II TO THIS AGREEMENT
THE HOLDERS OF SERIES D CONVERTIBLE PREFERRED STOCK
APPEARING ON SCHEDULE III TO THIS AGREEMENT
and
RACAL-DATACOM, INC.
Dated as of April 20, 1995
and amended as of September 19, 1995,
December 11, 1995,
amended and restated as of
December 20, 1995,
amended and restated as of
February 20, 1996 and
amended and restated as of
August 21, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Certain Definitions..................................................... 3
1.1 "Commission........................................................ 3
1.2 "Holder" or "Holders".............................................. 3
1.3 "IPO .............................................................. 3
1.4 "Person ........................................................... 3
1.5 "Registrable Securities ........................................... 3
1.6 "Securities Act ................................................... 4
1.7 "Series C Parties ................................................. 4
1.8 "Series D Parties" ................................................ 4
2. Registration Rights..................................................... 4
2.1 Demand Registrations.................................................... 4
2.2 Piggyback Registrations ................................................ 7
2.3 Allocation of Securities Included in Registration Statement ............ 8
2.4 Registration Procedures ................................................ 9
2.5 Registration Expenses .................................................. 14
2.6 Certain Limitations on Registration Rights ............................. 15
2.7 Limitations on Sale or Distribution of Other Securities................. 15
2.8 No Required Sale........................................................ 16
2.9 Indemnification......................................................... 16
3. Underwritten Offerings.................................................. 19
3.1 Requested Underwritten Offerings........................................ 19
3.2 Piggyback Underwritten Offerings........................................ 20
4. General................................................................. 20
4.1 Adjustments Affecting Registrable Securities............................ 20
4.2 Rule 144/Form S-3....................................................... 20
4.3 Nominees for Beneficial Owners.......................................... 21
4.4 Amendments and Waivers.................................................. 21
4.5 Notices................................................................. 21
4.6 Miscellaneous........................................................... 24
4.7 No Inconsistent Agreements.............................................. 25
</TABLE>
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EXHIBIT 10.1
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
--------------------------------------------------
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT, dated as of April 20, 1995,
as amended as of September 19, 1995 and as of December 11, 1995 as amended and
restated as of December 20, 1995, as amended and restated as of February 20,
1996 and as amended and restated by this Agreement (this "Agreement"), as of
August 21, 1996, by and among Concentric Network Corporation (formerly known as
Concentric Research Corporation), a Florida corporation (the "Company"), GS
Capital Partners, L.P., a Delaware limited partnership ("GSCP"), Kleiner Perkins
Caufield & Byers VII, a California limited partnership ("KP"), Comdisco, Inc., a
Delaware corporation ("Comdisco"), Intuit, Inc., a Delaware corporation
("Intuit"), the holders of Series C Convertible Preferred Stock of the Company
appearing on Schedule I to this Agreement (the "Series C Holders"), the holders
of Class A Common Stock of the Company appearing on Schedule II hereto (the
"Common Holders")and the holders of Series D Convertible Preferred Stock of the
Company appearing on Schedule III to this Agreement (the "Series D Holders") and
Racal-Datacom, Inc. ("Racal").
Preliminary Statement
The Company, GSCP and KP have entered into a Preferred Stock and Warrant
Purchase Agreement (the "Purchase Agreement"), dated as of April 20, 1995, in
connection with a private placement of the Company's Series A Convertible
Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), and
warrants (the "Warrants") to purchase shares of Class A Common Stock of the
Company, par value $.01 per share.
Marc Collins-Rector, Chad Shackley, GSCP and KP have entered into a Common Stock
and Option Purchase Agreement (the "Stock Purchase Agreement"), dated as of
April 20, 1995, pursuant to which GSCP and KP have purchased shares of Class A
Common Stock of the Company and options (the "Options") to purchase shares of
Class A Common Stock from Marc Collins-Rector and Chad Shackley.
The parties hereto (other than Comdisco, Intuit, the Series C Holders, the
Series D Holders, the Common Holders and Racal ) have entered into the original
Registration Rights Agreement dated as of April 20, 1995 (the "Original
Registration Rights Agreement") to provide certain registration rights with
respect to the shares of Class A Common Stock or Class B Common Stock, par value
$.01 per share (collectively, the "Common Stock") of the Company (i) issued upon
conversion of Series A Preferred Stock or exercise of Warrants held by any party
hereto or (ii) purchased pursuant to the Stock Purchase Agreement or upon
exercise of any Option held by any party hereto.
The Company subsequently entered into certain financing transactions with
Comdisco, and in that connection entered into a Warrant Agreement dated as of
July 20, 1995 (the "Comdisco Warrant Agreement"), providing for the purchase by
Comdisco of up to 257,671 shares of the Company's Class A Common Stock, and
Amendment Number One dated as of September 19, 1995, to add
<PAGE>
Comdisco as a party to the Original Registration Rights Agreement.
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<PAGE>
The Company also entered additional financing transactions providing for (i) the
issuance to Intuit of warrants dated December 11, 1995 (the "Intuit Warrants")
with an initial aggregate exercise price of $5,000,000 entitling Intuit to
purchase shares of the Company's Series B Convertible Preferred Stock (the
"Series B Preferred Stock"), (ii) the issuance to GSCP and KP of (a) warrants to
purchase shares of Series B Preferred Stock (the "Stand-By Financing Warrants")
and (b) notes that are convertible into shares of Series B Preferred Stock
pursuant to a Stand-By Financing Agreement dated December 11, 1995, among GSCP,
KP, Intuit and the Company (the "Stand-By Financing Agreement"), and (iii) the
issuance to GSCP and KP of additional shares of Series B Preferred Stock (the
"Additional Stand-By Financing Series B Preferred Stock") pursuant to the Stand-
By Financing Agreement upon the occurrence of certain events. In connection
with such financing transactions, the Company entered into Amendment Number Two
dated as of December 11, 1995, to provide for the participation of Intuit as a
party to the amended Original Registration Rights Agreement.
Thereafter the Company concluded a financing transaction providing for the
issuance to the Series C Holders of shares of the Company's Series C Convertible
Preferred Stock (the "Series C Preferred Stock"). In connection with such
transaction, the Company entered into the Amended and Restated Registration
Rights Agreement dated as of December 20, 1995 (the "Amended and Restated
Agreement"), to provide for the participation of the Series C Holders as parties
to the Amended and Restated Agreement.
Thereafter the Company agreed to grant registration rights to certain purchasers
of shares of the Company's Class A Common Stock sold by Marc Collins-Rector (the
"Common Shares"). The Company also entered additional financing transactions
providing for the issuance to Sattel Communications Company ("Sattel") of (a)
warrants to purchase shares of Series D Preferred Stock (the "Series D
Preferred Stock") (the "Sattel Standby Warrant") and (b) a note that is
convertible into Series D Preferred Stock pursuant to a Bridge Loan Financing
Agreement dated June 6, 1996, between the Company and Sattel (the "Sattel
Note").
Concurrently with the execution of this Agreement the Company is entering into a
Network Provision and Distribution Agreement with TMI Telemedia International,
Ltd. ("TMI") pursuant to which the Company has issued or agreed to issue
Warrants to purchase 7,950,514 shares of Series D Preferred Stock to TMI (the
"TMI Warrants"). In July 1996, the Company issued warrants to purchase 955,882
shares of Series D Preferred Stock to a group of individuals and entities in
consideration of a bridge loan of $1,300,000 (the "Bridge Warrants"). The
undersigned now desire to amend and restate the Amended and Restated Agreement
to provide for the participation as parties to this Agreement of (i) Racal with
respect to shares of Common Stock issuable to Racal (the "Racal Stock") upon
exercise of warrants dated September 1, 1994, and February 19, 1995 (the "Racal
Common Warrants"), (ii) Racal with respect to shares of Common Stock issuable to
Racal upon conversion of the Series D Preferred Stock issuable upon exercise of
warrants to purchase Series D Preferred dated August 1, 1996 (the "Racal Series
D
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<PAGE>
Warrants," and, collectively with the Racal Common Warrant, the "Racal
Warrants"), (iii) Sattel with respect to the shares of Common Stock issuable
upon conversion of the Series D Preferred Stock issuable upon exercise of the
Sattel Standby Warrants, (iv) TMI with respect to shares of Common Stock
issuable to TMI upon conversion of the Series D Preferred Stock issuable upon
exercise of the TMI Warrants, (v) the holders of the Bridge Warrants with
respect to shares of Common Stock issuable to such holders upon conversion of
the Series D Preferred Stock issuable upon exercise of the Bridge Warrants, and
(vi) the holders of the Company's Series D Preferred Stock with respect to the
shares of Common Stock issuable to the Series D Holders upon the conversion of
the Company's Series D Preferred Stock.
Accordingly, the parties hereto agree as follows:
1. Certain Definitions.
-------------------
As used in this Agreement, the following terms shall have the meanings ascribed
to them below:
1.1 "Commission": the Securities and Exchange Commission.
----------
1.2 "Holder" or "Holders": GSCP, KP, Comdisco, Intuit, the Series C
------ -------
Holders, the Common Holders, Racal, Sattel, the Series D Holders and any party
who shall hereafter acquire and hold Registrable Securities or securities
exercisable for or convertible into Registrable Securities, provided such party
becomes a party to, and agrees to be bound by, this Agreement.
1.3 "IPO": the initial underwritten offering pursuant to which the Common
---
Stock becomes registered under Section 12 of the Securities Exchange Act of
1934, as amended (the "Exchange Act").
1.4 "Person" any natural person, corporation, partnership, firm,
------
association, trust, government, governmental agency or other entity, whether
acting in an individual, fiduciary or other capacity.
1.5 "Registrable Securities": any shares of Common Stock (i) issued upon
----------------------
conversion of any share of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock, or upon exercise of any
Warrant, the Intuit Warrants or the Stand-By Financing Warrants or upon the
conversion of the Notes (including the Prior Notes, as such terms are defined in
the Stand-By Financing Agreement), (ii) issued pursuant to Section 12 of the
Purchase Agreement, (iii) purchased pursuant to the Comdisco Warrant Agreement,
(iv) purchased pursuant to the Stock Purchase Agreement or the Stand-By
Financing Agreement or upon exercise of any Option, (v) purchased by a Common
Holder from Marc Collins-Rector or Chad Shackley pursuant to that certain Common
Stock Purchase Agreement dated as of February 15, 1996, (vi) issued upon
conversion of the Sattel Notes, (vii) issued upon exercise of the Racal Warrants
or the Sattel Standby Warrant (viii) issued upon exercise of the TMI Warrants or
(ix) issued upon exercise of the Bridge Warrants (and any shares issued upon any
subdivision,
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<PAGE>
combination or reclassification of such shares or any stock dividend in respect
of any of the foregoing shares). As to any particular Registrable Securities,
such securities shall cease to be Registrable Securities when (i) a registration
statement with respect to the sale of such securities shall have been declared
effective under the Securities Act and such securities shall have been disposed
of in accordance with such registration statement, or (ii) such securities shall
have been sold (other than in a privately negotiated sale) pursuant to Rule 144
(or any successor provision) under the Securities Act.
1.6 "Securities Act": the Securities Act of 1933, as amended.
--------------
1.7 "Series C Parties": the Holders of at least a majority of all
----------------
outstanding shares of Series C Preferred Stock and of Common Stock issued upon
conversion of any shares of Series C Preferred Stock, in each case which are, or
are convertible into, Registrable Securities, who jointly deliver a written
request to the Company in accordance with Section 2.1(a)(i) below, treating, for
purposes of this calculation, all shares of Series C Preferred Stock as having
been converted into shares of Common Stock.
1.8 "Series D Parties": the Holders of at least a majority of all
------------------
outstanding shares of Series D Preferred Stock and of Common Stock issued upon
conversion of any shares of Series D Preferred Stock, in each case which are, or
are convertible into, Registrable Securities, who jointly deliver a written
request to the Company in accordance with Section 2.1(a)(i) below, treating, for
purposes of this calculation, all shares of Series D Preferred Stock as having
been converted into shares of Common Stock.
2. Registration Rights.
-------------------
2.1 Demand Registrations.
--------------------
(a) (i) Subject to Section 2.1(b) below, (x) at any time and from
time to time after the earlier of the closing of an IPO or June 30, 1997, any of
the GSCP Parties (as defined in the Purchase Agreement), the KP Parties (as
defined in the Purchase Agreement), the Series C Parties, or, the Series D
Parties shall have the right to require the Company to file a registration
statement under the Securities Act covering all or part of their respective
Registrable Securities, and (y) at any time and from time to time after the
fifteenth month anniversary of the closing of the IPO, Intuit, on the one hand,
and the Common Holders, on the other hand shall have the right to require the
Company to file a registration statement under the Securities Act covering all
or part of its or their Registrable Securities, in each case by delivering a
written request therefor to the Company specifying the number of Registrable
Securities to be included in such registration by the parties making the request
and the intended method of distribution thereof. All requests pursuant to this
Section 2.1(a)(i) are referred to herein as "Demand Registration Requests," and
the registrations requested are referred to herein as "Demand Registrations." As
promptly as practicable, but no later than ten days after receipt of a Demand
Registration Request, the Company shall give written notice of such Demand
Registration
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<PAGE>
Request to all Holders of record.
(ii) The Company, subject to Sections 2.3 and 2.6, shall
include in a Demand Registration (x) the Registrable Securities of the party
making the demand under subsection (a) (i) above and (y) the Registrable
Securities of any Holder which shall have made a written request to the Company
for registration thereof (which request shall specify the maximum number of
Registrable Securities intended to be disposed of by such Holder) within 30 days
after the receipt of written notice from the Company (or, 15 days if, at the
request of the Holder(s) which requested such registration, the Company states
in such written notice or gives telephonic notice to all Holders, with written
confirmation to follow promptly thereafter, that such registration will be on
Form S-3).
(iii) The Company shall, as expeditiously as possible following
a Demand Registration Request, use its best efforts to (x) effect such
registration under the Securities Act (including, without limitation, by means
of a shelf registration pursuant to Rule 415 under the Securities Act if so
requested and if the Company is then eligible to use such a registration) of the
Registrable Securities which the Company has been so requested to register, for
distribution in accordance with such intended method of distribution, and (y) if
requested by the Holder(s) which requested such registration, obtain
acceleration of the effective date of the registration statement relating to
such registration.
(b) The Demand Registration rights granted to the GSCP Parties, the
KP Parties, Intuit, the Series C Parties, the Series D Parties and the Common
Holders in Section 2.1(a) are subject to the following limitations: (i) each
registration in respect of a Demand Registration Request, must include (A)
500,000 Registrable Securities or (B) Registrable Securities having an aggregate
market value of at least $10,000,000 which market value shall be determined by
multiplying the number of Registrable Securities to be included in the Demand
Registration by the proposed per share offering price (provided that the
limitations set forth in this clause (i) shall not be in effect at any time the
Holders' Registrable Securities would otherwise be able to be sold under Rule
144 under the Securities Act but for the Company's failure to comply with the
information requirements thereunder, unless at such time, the Company's outside
counsel (which shall be reasonably acceptable to the Holders requesting such
registration) delivers a written opinion of counsel to such Holders to the
effect that such Holders' Registrable Securities may be publicly offered and
sold without registration under the Securities Act); (ii) the Company shall not
be required to cause a registration pursuant to Section 2.1(a)(i) to be declared
effective within a period of 180 days after the effective date of any
registration statement of the Company effected in connection with a Demand
Registration Request; (iii) if the Board of Directors of the Company, in its
good faith judgment, determines that any registration of Registrable Securities
should not be made or continued because it would materially interfere with any
material financing, acquisition, corporate reorganization or merger or other
transaction involving the Company or any of its subsidiaries (a "Valid Business
Reason"), the Company may postpone filing a registration statement relating to a
Demand Registration Request until such Valid Business Reason no longer exists,
but in no event for more than six months, and, in case a
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<PAGE>
registration statement has been filed relating to a Demand Registration Request,
if the Valid Business Reason has not resulted from actions taken by the Company,
the Company may cause such registration statement to be withdrawn and its
effectiveness terminated or may postpone amending or supplementing such
registration statement; and the Company shall give written notice of its
determination to postpone or withdraw a registration statement and of the fact
that the Valid Business Reason for such postponement or withdrawal no longer
exists, in each case, promptly after the occurrence thereof; (iv) the offering
of Registrable Securities requested to be registered pursuant to Section
2.1(a)(i) shall be pursuant to a firm commitment underwritten offering unless
the Company has previously sold Common Stock pursuant to a registration
statement under the Securities Act; (v) Intuit shall have only one right to
initiate a Demand Registration (for which Intuit shall have the sole right to
select the managing underwriter to be reasonably satisfactory to the Company),
and it shall only be effective in the event the Company is able to register the
securities subject to such right on Form S-3 or a substantially equivalent form
promulgated by the Commission, provided, that if the number of Registrable
Securities Intuit seeks to register upon exercise of its Demand Registration
initiation right is reduced pursuant to Section 2.3(a)(i), then Intuit shall be
deemed not to have exercised a Demand Registration with respect to such
Registrable Securities; (vi) the GSCP Parties, the KP Parties, the Series C
Parties and the Series D Parties shall each have only two rights to initiate a
Demand Registration (for which the GSCP Parties, the KP Parties, the Series C
Parties or the Series D Parties, as the case may be, shall have the sole right
to select the managing underwriter to be reasonably satisfactory to the
Company), provided, that if the number of Registrable Securities the GSCP
Parties, the KP Parties, the Series C Parties or Series D Parties seek to
register upon exercise of their Demand Registration initiation rights, is
reduced pursuant to section 2.3(a)(i), then the GSCP Parties, the KP Parties,
the Series C Parties or the Series D Parties, as the case may be, shall be
deemed not to have exercised a Demand Registration with respect to such
Registrable Securities and (vii) the Common Holders shall have only one right to
initiate a Demand Registration (for which a majority of the Common Holders shall
have the sole right to select a managing underwriter to be reasonably
satisfactory to the Company) and it shall only be effective in the event the
Company is able to register the securities subject to such right on Form S-3 or
a substantially equivalent form promulgated by the Commission.
If the Company shall give any notice of postponement or withdrawal of any
registration statement, the Company shall not, during the period of postponement
or withdrawal, register any Common Stock, other than pursuant to a registration
statement on Form S-4 or S-8 (or an equivalent registration form then in
effect). Each Holder of Registrable Securities agrees that, upon receipt of any
notice from the Company that the Company has determined to withdraw any
registration statement pursuant to clause (iii) above, such Holder will
discontinue its disposition of Registrable Securities pursuant to such
registration statement and, if so directed by the Company, will deliver to the
Company (at the Company's expense) all copies, other than permanent file copies,
then in such Holder's possession of the prospectus covering such Registrable
Securities that was in effect at the time of receipt of such notice. If the
Company shall have withdrawn or prematurely terminated a registration statement
filed under Section 2.1(a)(i) (whether pursuant to clause (iii) above or as a
result of any stop order, injunction or
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<PAGE>
other order or requirement of the Commission or any other governmental agency or
court), the Company shall not be considered to have effected an effective
registration for the purposes of this Agreement until the Company shall have
filed a new registration statement covering the Registrable Securities covered
by the withdrawn registration statement and such registration statement shall
have been declared effective and shall not have been withdrawn. If the Company
shall give any notice of withdrawal or postponement of a registration statement,
the Company shall, at such time as the Valid Business Reason that caused such
withdrawal or postponement no longer exists (but in no event later than six
months after the date of the postponement), use its best efforts to effect the
registration under the Securities Act of the Registrable Securities covered by
the withdrawn or postponed registration statement in accordance with this
Section 2.1 (unless the Holder(s) delivering the Demand Registration Request
shall have withdrawn such request, in which case the Company shall not be
considered to have effected an effective registration for the purposes of this
Agreement), and such registration shall not be withdrawn or postponed pursuant
to clause (iii) above.
(c) The Company, subject to Sections 2.3 and 2.6, may elect to
include in any registration statement and offering made pursuant to Section
2.1(a)(i), authorized but unissued shares of Common Stock or shares of Common
Stock held by the Company as treasury shares; provided, that such inclusion
shall be permitted only to the extent that it is pursuant to and subject to the
terms of the underwriting agreement or arrangements, if any, entered into by the
Holders exercising the Demand Registration rights granted to the Holders under
Section 2.1(a)(i). With respect to any Demand Registration, except as set forth
in the preceding sentence, no securities other than the Registrable Securities
of the Holders permitted to be included in such registration pursuant to Section
2.1(a)(ii) shall be included among the securities covered by such registration.
(d) The managing underwriter for any Demand Registration shall be
selected by the party or parties making the demand for such registration,
provided that such underwriter shall be reasonably satisfactory to the Company.
It is the current intention of the parties that Goldman, Sachs & Co. ("GS&Co.")
will act as managing underwriter in any registration of the Registrable
Securities. If GS&Co. acts as managing underwriter in any such registered
offering, to the extent required by applicable law, a Qualified Independent
Underwriter (as defined in Schedule E to the National Association of Securities
Dealers, Inc. By-Laws) shall be retained, and the Company shall pay all fees and
expenses (other than underwriting discounts and commissions) of such Qualified
Independent Underwriter.
2.2 Piggyback Registrations.
-----------------------
(a) If, at any time, the Company proposes or is required to register
any of its equity securities under the Securities Act (other than pursuant to
(i) registrations on such form or similar form(s) solely for registration of
securities in connection with an employee benefit plan or dividend reinvestment
plan or a merger or consolidation or (ii) a Demand Registration under Section
2.1) on a registration statement on Form S-1, Form S-2 or Form S-3 (or an
equivalent
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<PAGE>
general registration form then in effect), whether or not for its own account,
the Company shall give prompt written notice of its intention to do so to each
of the Holders of record. Upon the written request of any Holder, made within 15
days following the receipt of any such written notice (which request shall
specify the maximum number of Registrable Securities intended to be disposed of
by such Holder and the intended method of distribution thereof), the Company
shall, subject to Sections 2.2(b), 2.3 and 2.6 hereof, use its best efforts to
cause all such Registrable Securities, the Holders of which have so requested
the registration thereof, to be registered under the Securities Act (with the
securities which the Company at the time proposes to register) to permit the
sale or other disposition by the Holders (in accordance with the intended method
of distribution thereof) of the Registrable Securities to be so registered. No
registration effected under this Section 2.2(a) shall relieve the Company of its
obligations to effect Demand Registrations.
(b) If, at any time after giving written notice of its intention to
register any equity securities and prior to the effective date of the
registration statement filed in connection with such registration, the Company
shall determine for any reason not to register or to delay registration of such
equity securities, the Company may, at its election, give written notice of such
determination to all Holders of record and (i) in the case of a determination
not to register, shall be relieved of its obligation to register any Registrable
Securities in connection with such abandoned registration, without prejudice,
however, to the rights of Holders under Section 2.1, and (ii) in the case of a
determination to delay such registration of its equity securities, shall be
permitted to delay the registration of such Registrable Securities for the same
period as the delay in registering such other equity securities.
(c) Any Holder shall have the right to withdraw its request for
inclusion of its Registrable Securities in any registration statement pursuant
to this Section 2.2 by giving written notice to the Company of its request to
withdraw; provided, that (i) such request must be made in writing prior to the
earlier of the execution of the underwriting agreement or the execution of the
custody agreement with respect to such registration and (ii) such withdrawal
shall be irrevocable and, alter making such withdrawal, a Holder shall no longer
have any right to include Registrable Securities in the registration as to which
such withdrawal was made.
2.3 Allocation of Securities Included in Registration Statement.
-----------------------------------------------------------
(a) If any requested registration pursuant to Section 2.1 involves an
underwritten offering and a co-manager of such offering, which shall be a
prominent investment banking firm which is unaffiliated with the Holders (the
"Co-Manager"), shall advise the Company that, in its view, the number of
securities requested to be included in such registration (including those
securities requested by the Company to be included in such registration) exceeds
the largest number (the "Section 2.1 Sale Number") that can be sold in an
orderly manner in such offering within a price range acceptable to the Holders
of a majority of the Registrable Securities proposed to be registered, the
Company shall include in such registration:
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<PAGE>
(i) all Registrable Securities requested to be included in such
registration by Holders, provided, that if the number of such Registrable
Securities exceeds the Section 2.1 Sale Number, the number of such Registrable
Securities (not to exceed the Section 2.1 Sale Number) to be included in such
registration shall be allocated on a pro rata basis among all Holders requesting
that Registrable Securities be included in such registration, based on the
aggregate number of Registrable Securities then owned by, and issuable upon
exercise or conversion of other securities to, each Holder requesting inclusion
in relation to the aggregate number of Registrable Securities owned by, and
issuable upon exercise or conversion of other securities to, all Holders
requesting inclusion; and
(ii) to the extent that the number of Registrable Securities to
be included by all Holders is less than the Section 2.1 Sale Number, securities
that the Company proposes to register.
If, as a result of the proration provisions of this Section 2.3(a), any
Holder shall not be entitled to include all Registrable Securities in a
registration that such Holder has requested to be included, such Holder may
elect to withdraw his request to include Registrable Securities in such
registration or may reduce the number requested to be included; provided, that
(x) such request must be made in writing prior to the earlier of the execution
of the underwriting agreement or the execution of the custody agreement with
respect to such registration and (y) such withdrawal shall be irrevocable and,
after making such withdrawal, a Holder shall no longer have any right to include
Registrable Securities in the registration as to which such withdrawal was made.
(b) If any registration pursuant to Section 2.2 involves an
underwritten offering and the Co-Manager shall advise the Company that, in its
view, the number of securities requested to be included in such registration
exceeds the number (the "Section 2.2 Sale Number") that can be sold in an
orderly manner in such registration within a price range acceptable to the
Company, the Company shall include in such registration:
(i) all Common Stock or securities convertible into, or
exchangeable or exercisable for, Common Stock that the Company proposes to
register for its own account (the "Company Securities"), and
(ii) to the extent that the number of Company Securities is less
than the Section 2.2 Sale Number, all Registrable Securities requested to be
included by all Holders; provided, that, if the number of such Registrable
Securities exceeds the Section 2.2 Sale Number less the number of Company
Securities, then the number of such Registrable Securities included in such
registration shall be allocated on a pro rata basis, based on the aggregate
number of Registrable Securities owned by, and issuable upon exercise or
conversion of other securities to, each Holder requesting inclusion in relation
to the aggregate number of Registrable Securities owned by, and issuable upon
exercise or conversion of other securities to, all Holders requesting inclusion.
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<PAGE>
2.4 Registration Procedures. If and whenever the Company is required by
-----------------------
the provisions of this Agreement to use its best efforts to effect or cause the
registration of any Registrable Securities under the Securities Act as provided
in this Agreement, the Company shall, as expeditiously as possible:
(a) prepare and file with the Commission a registration statement on
an appropriate registration form of the Commission for the disposition of such
Registrable Securities in accordance with the intended method of disposition
thereof, which form (i) shall be selected by the Company and (ii) shall, in the
case of a shelf registration, be available for the sale of the Registrable
Securities by the selling Holders thereof and such registration statement shall
comply as to form in all material respects with the requirements of the
applicable form and include all financial statements required by the Commission
to be filed therewith, and the Company shall use its best efforts to cause such
registration statement to become and remain effective (provided, that before
filing a registration statement or prospectus or any amendments or supplements
thereto, or comparable statements under securities or blue sky laws of any
jurisdiction, the Company will furnish to one counsel for the Holders
participating in the planned offering (selected by the Holders making the Demand
Registration Request, in the case of a registration pursuant to Section 2.1, and
selected by the Holders of a majority of the Registrable Securities included in
such registration, in the case of a registration pursuant to Section 2.2) and
the underwriters, if any, copies of all such documents proposed to be filed
(including all exhibits thereto), which documents will be subject to the
reasonable review and reasonable comment of such counsel, and the Company shall
not file any registration statement or amendment thereto or any prospectus or
supplement thereto to which the Holders of a majority of the Registrable
Securities covered by such registration statement or the underwriters, if any,
shall reasonably object in writing);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
such period (which shall not be required to exceed 150 days in the case of a
registration pursuant to Section 2.1 or 120 days in the case of a registration
pursuant to Section 2.2) as any seller of Registrable Securities pursuant to
such registration statement shall request and to comply with the provisions of
the Securities Act with respect to the sale or other disposition of all
Registrable Securities covered by such registration statement in accordance with
the intended methods of disposition by the seller or sellers thereof set forth
in such registration statement;
(c) furnish, without charge, to each seller of such Registrable
Securities and each underwriter, if any, of the securities covered by such
registration statement such number of copies of such registration statement,
each amendment and supplement thereto (in each case including all exhibits), and
the prospectus included in such registration statement (including each
preliminary prospectus) in conformity with the requirements of the Securities
Act, and other documents, as such seller and underwriter may reasonably request
in order to facilitate the public sale or other disposition of the Registrable
Securities owned by such seller (the Company hereby
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<PAGE>
consenting to the use in accordance with all applicable law of each such
registration statement (or amendment or post-effective amendment thereto) and
each such prospectus (or preliminary prospectus or supplement thereto) by each
such seller of Registrable Securities and the underwriters, if any, in
connection with the offering and sale of the Registrable Securities covered by
such registration statement or prospectus);
(d) use its best efforts to register or qualify the Registrable
Securities covered by such registration statement under such other securities or
"blue sky" laws of such jurisdictions as any sellers of Registrable Securities
or any managing underwriter, if any, shall reasonably request, and do any and
all other acts and things which may be reasonably necessary or advisable to
enable such sellers or underwriter, if any, to consummate the disposition of the
Registrable Securities in such jurisdictions, except that in no event shall the
Company be required to qualify to do business as a foreign corporation in any
jurisdiction where it would not, but for the requirements of this paragraph (d),
be required to be so qualified, to subject itself to taxation in any such
jurisdiction or to consent to general service of process in any such
jurisdiction;
(e) promptly notify each Holder selling Registrable Securities
covered by such registration statement and each managing underwriter, if any:
(i) when the registration statement, any pre-effective amendment, the prospectus
or any prospectus supplement related thereto or post-effective amendment to the
registration statement has been filed and, with respect to the registration
statement or any posteffective amendment, when the same has become effective;
(ii) of any request by the Commission or state securities authority for
amendments or supplements to the registration statement or the prospectus
related thereto or for additional information; (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of the registration
statement or the initiation of any proceedings for that purpose; (iv) of the
receipt by the Company of any notification with respect to the suspension of the
qualification of any Registrable Securities for sale under the securities or
blue sky laws of any jurisdiction or the initiation of any proceeding for such
purpose; (v) of the existence of any fact of which the Company becomes aware
which results in the registration statement, the prospectus related thereto or
any document incorporated therein by reference containing an untrue statement of
a material fact or omitting to state a material fact required to be stated
therein or necessary to make any statement therein not misleading; and (vi) if
at any time the representations and warranties contemplated by Section 3 below
cease to be true and correct in all material respects; and, if the notification
relates to an event described in clause (v), the Company shall promptly prepare
and furnish to each such seller and each underwriter, if any, a reasonable
number of copies of a prospectus supplemented or amended so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein in the light of the circumstances under which they were made not
misleading;
(f) comply with all applicable rules and regulations of the
Commission, and make generally available to its security holders, as soon as
reasonably practicable after the effective date of the registration statement
(and in any event within 16 months thereafter), an earnings statement (which
need not be audited) covering the period of at least twelve consecutive months
beginning with the first day of the Company's first calendar quarter after the
effective date of the registration statement, which earnings statement shall
satisfy the provisions of
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Section 11(a) of the Securities Act and Rule 158 thereunder;
(g) (i) cause all such Registrable Securities covered by such
registration statement to be listed on the principal securities exchange on
which similar securities issued by the Company are then listed (if any), if the
listing of such Registrable Securities is then permitted under the rules of such
exchange, or (ii) if no similar securities are then so listed, cause all such
Registrable Securities to be listed on a national securities exchange or,
failing that, secure designation of all such Registrable Securities as a
National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ") "national market security" within the meaning of Rule 11 Aa2-1 of the
Commission or, failing that, secure NASDAQ authorization for such shares and,
without limiting the generality of the foregoing, take all actions that may be
required by the Company as the issuer of such Registrable Securities in order to
facilitate the managing underwriter's arranging for the registration of at least
two market makers as such with respect to such shares with the National
Association of Securities Dealers, Inc. (the "NASD");
(h) provide and cause to be maintained a transfer agent and registrar
for all such Registrable Securities covered by such registration statement not
later than the effective date of such registration statement;
(i) enter into such customary agreements (including, if applicable,
an underwriting agreement) and take such other actions as the Holders of a
majority of the Registrable Securities participating in such offering shall
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities, provided that the underwriting agreement, if any, shall
be reasonably satisfactory in form and substance to the Company. The Holders of
the Registrable Securities which are to be distributed by such underwriters
shall be parties to such underwriting agreement and may, at their option,
require that the Company make to and for the benefit of such Holders the
representations, warranties and covenants of the Company which are being made to
and for the benefit of such underwriters and which are of the type customarily
provided to institutional investors in secondary offerings;
(j) obtain an opinion from the Company's counsel and a "cold comfort"
letter from the Company's independent public accountants in customary form and
covering such matters as are customarily covered by such opinions and "cold
comfort" letters delivered to underwriters in underwritten public offerings,
which opinion and letter shall be reasonably satisfactory to the underwriter, if
any, and to the Holders of a majority of the Registrable Securities
participating in such offering, and furnish to each Holder participating in the
offering and to each underwriter, if any, a copy of such opinion and letter
addressed to such Holder or underwriter;
(k) deliver promptly to each Holder participating in the offering and
each underwriter, if any, copies of all correspondence between the Commission
and the Company, its counsel or auditors and all memoranda relating to
discussions with the Commission or its staff with respect to the registration
statement, other than those portions of any such correspondence and memoranda
which contain information subject to attorney-client privilege with respect to
the Company, and, upon receipt of such confidentiality agreements as the Company
may reasonably request, make reasonably available for inspection by any seller
of such Registrable Securities
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<PAGE>
covered by such registration statement, by any underwriter, if any,
participating in any disposition to be effected pursuant to such registration
statement and by any attorney, accountant or other agent retained by any such
seller or any such underwriter, all pertinent financial and other records,
pertinent corporate documents and properties of the Company, and cause all of
the Company's officers, directors and employees to supply all information
reasonably requested by any such seller, underwriter, attorney, accountant or
agent in connection with such registration statement;
(l) use its best efforts to obtain the withdrawal of any order
suspending the effectiveness of the registration statement;
(m) provide a CUSIP number for all Registrable Securities, not later
than the effective date of the registration statement;
(n) make reasonably available its employees and personnel and
otherwise provide reasonable assistance to the underwriters (taking into account
the needs of the Company's businesses and the requirements of the marketing
process) in the marketing of Registrable Securities in any underwritten
offering;
(o) promptly prior to the filing of any document which is to be
incorporated by reference into the registration statement or the prospectus
(after the initial filing of such registration statement) provide copies of such
document to counsel to the selling Holders of Registrable Securities and to the
managing underwriter, if any, and make the Company's representatives reasonably
available for discussion of such document and make such changes in such document
concerning the selling Holders prior to the filing thereof as counsel for such
selling Holders or underwriters may reasonably request;
(p) furnish to each Holder participating in the offering and the
managing underwriter, without charge, at least one signed copy of the
registration statement and any post effective amendments thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
(q) cooperate with the selling Holders of Registrable Securities and
the managing underwriter, if any, to facilitate the timely preparation and
delivery of certificates not bearing any restrictive legends representing the
Registrable Securities to be sold, and cause such Registrable Securities to be
issued in such denominations and registered in such names in accordance with the
underwriting agreement prior to any sale of Registrable Securities to the
underwriters or, if not an underwritten offering, in accordance with the
instructions of the selling Holders of Registrable Securities at least three
business days prior to any sale of Registrable Securities; and
(r) take all such other commercially reasonable actions as are
necessary or advisable in order to expedite or facilitate the disposition of
such Registrable Securities.
The Company may require as a condition precedent to the Company's
obligations under this Section 2.4 that each seller of Registrable Securities as
to which any registration is
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<PAGE>
being effected furnish the Company such information regarding such seller and
the distribution of such securities as the Company may from time to time
reasonably request provided that such information shall be used only in
connection with such registration.
Each Holder of Registrable Securities agrees that upon receipt of any
notice from the Company of the happening of any event of the kind described in
clause (v) of paragraph (e) of this Section 2.4, such Holder will discontinue
such Holder's disposition of Registrable Securities pursuant to the registration
statement covering such Registrable Securities until such Holder's receipt of
the copies of the supplemented or amended prospectus contemplated by paragraph
(e) of this Section 2.4 and, if so directed by the Company, will deliver to the
Company (at the Company's expense) all copies, other than permanent file copies,
then in such Holder's possession of the prospectus covering such Registrable
Securities that was in effect at the time of receipt of such notice. In the
event the Company shall give any such notice, the applicable period mentioned in
paragraph (b) of this Section 2.4 shall be extended by the number of days during
such period from and including the date of the giving of such notice to and
including the date when each seller of any Registrable Securities covered by
such registration statement shall have received the copies of the supplemented
or amended prospectus contemplated by paragraph (e) of this Section 2.4.
If any such registration statement or comparable statement under "blue
sky" laws refers to any Holder by name or otherwise as the Holder of any
securities of the Company, then such Holder shall have the right to require (i)
the insertion therein of language, in form and substance satisfactory to such
Holder and the Company, to the effect that the holding by such Holder of such
securities is not to be construed as a recommendation by such Holder of the
investment quality of the Company's securities covered thereby and that such
holding does not imply that such Holder will assist in meeting any future
financial requirements of the Company, or (ii) in the event that such reference
to such Holder by name or otherwise is not in the judgment of the Company, as
advised by counsel, required by the Securities Act or any similar federal
statute or any state "blue sky" or securities law then in force, the deletion of
the reference to such Holder.
2.5 Registration Expenses.
---------------------
(a) "Expenses" shall mean any and all fees and expenses incident to
the Company's performance of or compliance with this Article 2, including,
without limitation: (i) Commission, stock exchange or NASD registration and
filing fees and all listing fees and fees with respect to the inclusion of
securities in NASDAQ, (ii) fees and expenses of compliance with state securities
or "blue sky" laws and in connection with the preparation of a "blue sky"
survey, including without limitation, reasonable fees and expenses of blue sky
counsel, (iii) printing expenses, (iv) messenger and delivery expenses, (v) fees
and disbursements of counsel for the Company, (vi) with respect to each
registration, the fees and disbursements of one counsel for the selling Holders
(selected by the Holders making the Demand Registration Request, in the case of
a registration pursuant to Section 2.1, and selected by the Holders of a
majority of the Registrable Securities included in such registration, in the
case of a registration pursuant to Section 2.2) as well as of one local counsel,
(vii) fees and disbursements of all independent public accountants (including
the expenses of any audit and/or "cold comfort" letter) and fees and expenses of
other
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<PAGE>
persons, including special experts, retained by the Company, (viii) fees and
expenses payable to a Qualified Independent Underwriter and (ix) any other fees
and disbursements of underwriters, if any, customarily paid by issuers or
sellers of securities (collectively, "Expenses").
(b) The Company shall pay all Expenses with respect to any Demand
Registration that shall not be deemed to have been effected as contemplated by
Section 2.1(b) and any registration effected under Section 2.2. With respect to
any Demand Registration effected pursuant to Section 2.1, (i) the Company shall
pay all Expenses related to (A) two Demand Registrations which GSCP elects to
have the Company pay the Expenses related thereto, (B) two Demand Registrations
which KP elects to have the Company pay the Expenses related thereto, (C) one
Demand Registration which Intuit elects to have the Company pay the Expenses
related thereto, (D) two Demand Registrations which the Series C Parties elect
to have the Company pay the Expenses related thereto, (E) two Demand
Registrations which the Series D Parties elect to have the Company pay the
Expenses related thereto and (F) one Demand Registration which the Common
Holders elect to have the Company pay the Expenses related thereto, and (ii) the
Holders of Registrable Securities shall pay all Expenses related to any other
Demand Registration effected pursuant to Section 2.1, (such Expenses shall be
allocated among the Holders of Registrable Securities participating in a Demand
Registration on a pro rata basis based on the number of Registrable Securities
included in such offering by a Holder relative to the number of Registrable
Securities included in such offering by all Holders, except to the extent
Expenses are attributable to a Holder or to securities included in an offering
by a Holder).
(c) Notwithstanding the foregoing, (x) the provisions of this Section
2.5 shall be deemed amended to the extent necessary to cause these expense
provisions to comply with "blue sky" laws of each state in which the offering is
made and (y) in connection with any registration hereunder, each Holder of
Registrable Securities being registered shall pay all underwriting discounts and
commissions and transfer taxes, if any, attributable to the Registrable
Securities included in the offering by such Holder and (z) the Company shall, in
the case of all registrations under this Article 2, be responsible for all its
internal expenses (including, without limitation, all salaries and expenses of
its officers and employees performing legal or accounting duties).
2.6 Certain Limitations on Registration Rights. In the case of any
------------------------------------------
registration under Section 2.1 pursuant to an underwritten offering, or in the
case of a registration under Section 2.2 if the Company has determined to enter
into an underwriting agreement in connection therewith, all Registrable
Securities to be included in such registration shall be subject to an
underwriting agreement and no person may participate in such registration unless
such person agrees to sell such person's securities on the basis provided
therein and completes and/or executes all questionnaires and other documents
(other than powers of attorney) which must be executed in connection therewith,
and provides such other information to the Company or the underwriter as may be
necessary to register such Holder's Registrable Securities.
2.7 Limitations on Sale or Distribution of Other Securities.
-------------------------------------------------------
(a) If requested in writing by the Company or the managing
underwriter, if any, of any registration effected pursuant to Section 2.1 or
2.2, each Holder agrees not to effect
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<PAGE>
any public sale or distribution, including any sale pursuant to Rule 144 under
the Securities Act, of any Registrable Securities, or of any other equity
security of the Company or of any security convertible into or exchangeable or
exercisable for any equity security of the Company (other than as part of such
underwritten public offering) during the time period reasonably requested by the
managing underwriter, not to exceed 90 days (and the Company hereby also so
agrees (except that the Company may effect any sale or distribution of any such
securities pursuant to a registration on Form S-4 (if reasonably acceptable to
the managing underwriter) or Form S-8, or any successor or similar form which is
then in effect) and agrees to use its best efforts to cause each holder of any
equity security or of any security convertible into or exchangeable or
exercisable for any equity security of the Company purchased from the Company at
any time other than in a public offering so to agree).
(b) The Company hereby agrees that if it shall previously have
received a request for registration pursuant to Section 2.1 or 2.2, and if such
previous registration shall not have been withdrawn or abandoned, the Company
shall not effect any registration of any of its securities under the Securities
Act (other than a registration on Form S-4 or Form S-8 or any successor or
similar form which is then in effect), whether or not for sale for its own
account, until a period of 90 days shall have elapsed from the effective date of
such previous registration; and the Company shall so provide in any registration
rights agreements hereafter entered into with respect to any of its securities.
2.8 No Required Sale. Nothing in this Agreement shall be deemed to create
----------------
an independent obligation on the part of any Holder to sell any Registrable
Securities pursuant to any effective registration statement.
2.9 Indemnification.
---------------
(a) In the event of any registration of any securities of the Company
under the Securities Act pursuant to this Article 2, the Company will, and
hereby does, indemnify and hold harmless, to the fullest extent permitted by
law, the seller of any Registrable Securities covered by such registration
statement, its directors, officers, fiduciaries, employees and stockholders or
general and limited partners (and the directors, officers, employees and
stockholders thereof, each other individual, partnership, joint venture,
corporation, trust, unincorporated organization or government or any department
or agency thereof (each, a "Person")) any underwriter or Qualified Independent
Underwriter, if any, who participates in the offering or sale of such
securities, each officer, director, employee, stockholder or partner of such
underwriter or Qualified Independent Underwriter, and each other Person, if any,
who controls such seller or any such underwriter within the meaning of the
Securities Act, against any and all losses, claims, damages or liabilities,
joint or several, actions or proceedings (whether commenced or threatened) in
respect thereof ("Claims") and expenses (including reasonable fees of counsel
and any amounts paid in any settlement effected with the Company's consent,
which consent shall not be unreasonably withheld or delayed) to which each such
indemnified party may become subject under the Securities Act or otherwise,
insofar as such Claims or expenses arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement under which such securities were registered under the
Securities Act or the omission or alleged omission to state therein a material
fact required to be stated therein or
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<PAGE>
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary, final or summary prospectus or any amendment or supplement thereto,
together with the documents incorporated by reference therein, or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, or (iii) any
violation by the Company of any federal, state or common law rule or regulation
applicable to the Company and relating to action required of or inaction by the
Company in connection with any such registration, and the Company will reimburse
any such indemnified party for any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
Claim as such expenses are incurred; provided, that the Company shall not be
liable to any such indemnified party in any such case to the extent such Claim
or expense arises out of or is based upon any untrue statement or alleged untrue
statement of a material fact or omission or alleged omission of a material fact
made in such registration statement or amendment thereof or supplement thereto
or in any such prospectus or any preliminary, final or summary prospectus in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of such indemnified party specifically for use therein.
Such indemnity and reimbursement of expenses shall remain in full force and
effect regardless of any investigation made by or on behalf of such indemnified
party and shall survive the transfer of such securities by such seller.
(b) Each Holder of Registrable Securities that are included in the
securities as to which any registration under Section 2.1 or 2.2 is being
effected (and, if the Company requires as a condition to including any
Registrable Securities in any registration statement filed in accordance with
Section 2.1 or 2.2, any underwriter and Qualified Independent Underwriter, if
any) shall, severally and not jointly, indemnify and hold harmless (in the same
manner and to the same extent as set forth in paragraph (a) of this Section 2.9)
to the extent permitted by law the Company, its officers and directors, each
Person controlling the Company within the meaning of the Securities Act. and all
other prospective sellers and their directors, officers, general and limited
partners and respective controlling Persons with respect to any untrue statement
or alleged untrue statement of any material fact in, or omission or alleged
omission of any material fact from, such registration statement, any
preliminary, final or summary prospectus contained therein, or any amendment or
supplement thereto, if such statement or alleged statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company or its representatives by or on behalf of
such Holder or underwriter or Qualified Independent Underwriter, if any,
specifically for use therein and reimburse such indemnified party for any legal
or other expenses reasonably incurred in connection with investigating or
defending any such Claim as such expenses are incurred, provided, however, that
the aggregate amount which any such Holder shall be required to pay pursuant to
this Section 2.9(b) and Sections 2.9(c) and (e) shall in no case be greater than
the amount of the net proceeds received by such person upon the sale of the
Registrable Securities pursuant to the registration statement giving rise to
such claim. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such indemnified party and shall
survive the transfer of such securities by such Holder.
(c) Indemnification similar to that specified in the preceding
paragraphs (a) and (b) of this Section 2.9 (with appropriate modifications)
shall be given by the Company and
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<PAGE>
each seller of Registrable Securities with respect to any required registration
or other qualification of securities under any state securities and "blue sky"
laws.
(d) Any person entitled to indemnification under this Agreement shall
notify promptly the indemnifying party in writing of the commencement of any
action or proceeding with respect to which a claim for indemnification may be
made pursuant to this Section 2.9, but the failure of any indemnified party to
provide such notice shall not relieve the indemnifying party of its obligations
under the preceding paragraphs of this Section 2.9, except to the extent the
indemnifying party is materially prejudiced thereby and shall not relieve the
indemnifying party from any liability which it may have to any indemnified party
otherwise than under this Article 2. In case any action or proceeding is brought
against an indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, unless in the reasonable opinion of outside counsel to the
indemnified party a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, to assume the defense
thereof jointly with any other indemnifying party similarly notified, to the
extent that it chooses, with counsel reasonably satisfactory to such indemnified
party (who shall not, except with the consent of the indemnified party, be
counsel to the indemnifying party), and after notice from the indemnifying party
to such indemnified party that it so chooses, the indemnifying party shall not
be liable to such indemnified party for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation; provided, that (i) if the indemnifying
party fails to take reasonable steps necessary to defend diligently the action
or proceeding within 20 days after receiving notice from such indemnified party
that the indemnified party believes it has failed to do so; or (ii) if such
indemnified party who is a defendant in any action or proceeding which is also
brought against the indemnifying party reasonably shall have concluded that
there may be one or more legal defenses available to such indemnified party
which are not available to the indemnifying party; or (iii) if representation of
both parties by the same counsel is otherwise inappropriate under applicable
standards of professional conduct, then, in any such case, the indemnified party
shall have the right to assume or continue its own defense as set forth above
(but with no more than one firm of counsel for all indemnified parties in each
jurisdiction, except to the extent any indemnified party or parties reasonably
shall have concluded that there may be legal defenses available to such party or
parties which are not available to the other indemnified parties or to the
extent representation of all indemnified parties by the same counsel is
otherwise inappropriate under applicable standards of professional conduct) and
the indemnifying party shall be liable for any expenses therefor. No
indemnifying party shall, without the written consent of the indemnified party,
effect the settlement or compromise of, or consent to the entry of any judgment
with respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (A) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim and (B) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any indemnified party.
(e) If for any reason the foregoing indemnity is unavailable or is
insufficient to hold harmless an indemnified party under Sections 2.9(a), (b) or
(c), then each indemnifying party shall contribute to the amount paid or payable
by such indemnified party as a result of any
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<PAGE>
Claim in such proportion as is appropriate to reflect the relative fault of the
indemnifying party, on the one hand, and the indemnified party, on the other
hand, with respect to such offering of securities. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnifying party or the
indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. If, however, the allocation provided in the second preceding sentence
is not permitted by applicable law, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative faults but also
the relative benefits of the indemnifying party and the indemnified party as
well as any other relevant equitable considerations. The parties hereto agree
that it would not be just and equitable if contributions pursuant to this
Section 2.9(e) were to be determined by pro rata allocation or by any other
method of allocation which does not take account of the equitable considerations
referred to in the preceding sentences of this Section 2.9(e). The amount paid
or payable in respect of any Claim shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such Claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Notwithstanding anything in this Section 2.9(e) to
the contrary, no indemnifying party (other than the Company) shall be required
pursuant to this Section 2.9(e) to contribute any amount in excess of the net
proceeds received by such indemnifying party from the sale of Registrable
Securities in the offering to which the losses, claims, damages or liabilities
of the indemnified parties relate, less the amount of any indemnification
payment made pursuant to Sections 2.9(b) and (c).
(f) The indemnity agreements contained herein shall be in addition to
any other rights to indemnification or contribution which any indemnified party
may have pursuant to law or contract and shall remain operative and in full
force and effect regardless of any investigation made or omitted by or on behalf
of any indemnified party and shall survive the transfer of the Registrable
Securities by any such party.
(g) The indemnification and contribution required by this Section 2.9
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred.
3. Underwritten Offerings.
----------------------
3.1 Requested Underwritten Offerings. If requested by the underwriters
--------------------------------
for any underwritten offering by the Holders pursuant to a registration
requested under Section 2.1, the Company shall enter into a customary
underwriting agreement with the underwriters. Such underwriting agreement shall
be satisfactory in form and substance to the Holders which requested such
registration and shall contain such representations and warranties by, and such
other agreements on the part of, the Company and such other terms as are
generally prevailing in agreements of that type, including, without limitation,
indemnities and contribution agreements. Any Holder participating in the
offering shall be a party to such underwriting agreement and
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<PAGE>
may, at its option, require that any or all of the representations and
warranties by, and the other agreements on the part of, the Company to and for
the benefit of such underwriters shall also be made to and for the benefit of
such Holder and that any or all of the conditions precedent to the obligations
of such underwriters under such underwriting agreement be conditions precedent
to the obligations of such Holder; provided, the Company shall not be required
to make any representations or warranties with respect to information
specifically provided by a selling holder for inclusion in the registration
statement. Such underwriting agreement shall also contain such representations
and warranties by the participating Holders as are customary in agreements of
that type.
3.2 Piggyback Underwritten Offerings. In the case of a registration
--------------------------------
pursuant to Section 2.2 hereof, if the Company shall have determined to enter
into any underwriting agreements in connection therewith, all of the Holders'
Registrable Securities to be included in such registration shall be subject to
such underwriting agreements. Any Holder participating in such registration
may, at its option, require that any or all of the representations and
warranties by, and the other agreements on the part of, the Company to and for
the benefit of such underwriters shall also be made to and for the benefit of
such Holder and that any or all of the conditions precedent to the obligations
of such underwriters under such underwriting agreement be conditions precedent
to the obligations of such Holder. Such underwriting agreement shall also
contain such representations and warranties by the participating Holders as are
customary in agreements of that type.
4. General.
-------
4.1 Adjustments Affecting Registrable Securities. The Company agrees that
--------------------------------------------
it shall not effect or permit to occur any combination or subdivision of shares
which would adversely affect the ability of the Holder of any Registrable
Securities to include such Registrable Securities in any registration
contemplated by this Agreement or the marketability of such Registrable
Securities in any such registration. The Company agrees that it will take all
reasonable steps necessary to effect a subdivision of shares if in the
reasonable judgment of (a) the Holder of Registrable Securities that makes a
Demand Registration Request and (b) the managing underwriter for the offering in
respect of such Demand Registration Request, such subdivision would enhance the
marketability of the Registrable Securities. Reference in this Agreement to any
specific number of securities required to be held, registered or transferred
with respect to the exercise or transfer of rights hereunder (including, without
limitation, Sections 2.1(b)(i)(A) and 4.6(a)), shall be deemed adjusted, as
appropriate, to reflect any subdivision, combination or reclassification of such
securities (including, without limitation, a stock split) or any stock dividend
in respect of any such securities which occurs on or after April 20, 1995.
4.2 Rule 144/Form S-3. If the Company shall have filed a registration
-----------------
statement pursuant to the requirements of Section 12 of the Exchange Act or a
registration statement pursuant to the requirements of the Securities Act in
respect of the Common Stock or securities of the Company convertible into or
exchangeable or exercisable for Common Stock, the Company covenants that it will
timely file the reports required to be filed by it under the Securities Act or
the Exchange Act (including, but not limited to, the reports under Sections 13
and 15(d) of the Exchange Act referred to in subparagraph (c)(1) of Rule 144
under the Securities
-21-
<PAGE>
Act), and will take such further action as any Holder of
Registrable Securities may reasonably request, all to the extent required from
time to time to enable such Holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by (i) Rule 144 under the Securities Act, as such Rule may be amended
from time to time, or (ii) any similar rule or regulation hereafter adopted by
the Commission. Upon the request of any Holder of Registrable Securities, the
Company will deliver to such Holder a written statement as to whether it has
complied with such requirements. If the Company shall have filed a registration
statement pursuant to the requirements of Section 12 of the Exchange Act or a
registration statement pursuant to the requirements of the Securities Act in
respect of the Common Stock or securities of the Company convertible into or
exchangeable or exercisable for Common Stock, the Company covenants that it will
take all actions as are necessary for the Company to meet the registrant
requirements for the use of Form S-3 (or a substantially equivalent form
promulgated by the Commission). The Company acknowledges that the covenant of
the foregoing sentence is for the benefit of Intuit (with reference to the
provisions of Section 2.1(b)(v) of this Agreement), and upon the request of
Intuit the Company will deliver to Intuit a written statement as to whether the
Company meets and expects to continue to meet the registrant requirements for
the use of Form S-3 (or a substantially equivalent form promulgated by the
Commission).
4.3 Nominees for Beneficial Owners. If Registrable Securities, or
------------------------------
securities which are convertible or exercisable into Registrable Securities, are
held by a nominee for the beneficial owner thereof, the beneficial owner thereof
may, at its option, be treated as the Holder of such securities for purposes of
any request or other action by any Holder or Holders pursuant to this Agreement
(or any determination of any number or percentage of shares constituting
Registrable Securities held by, and issuable upon exercise or conversion of
other securities to, any Holder or Holders contemplated by this Agreement);
provided that the Company shall have received assurances reasonably satisfactory
to it of such beneficial ownership.
4.4 Amendments and Waivers. This Agreement may be amended, modified,
----------------------
supplemented or waived only upon the written agreement of the party against whom
enforcement of such amendment, modification, supplement or waiver is sought;
provided, that in any instance where such enforcement is sought against the
Holders of the Series C Preferred Stock, the Series D Preferred Stock or the
Registrable Securities issuable with respect thereto, this Agreement may be
amended, modified, supplemented or waived upon the written agreement of the
Holders of at least a majority of all outstanding shares of Series C Preferred
Stock or Series D Preferred Stock, as the case may be, and of Common Stock
which are then Registrable Securities issued upon conversion of any shares of
Series C Preferred Stock or Series D Preferred Stock, as the case may be,
treating, for purposes of this calculation, all shares of Series C Preferred
Stock or Series D Preferred Stock as having been converted into shares of Common
Stock; and provided further, that this Agreement may be amended to grant only
---------------------
additional piggyback registration rights to additional parties upon the written
agreement of the Holders of a majority of the Registrable Securities, GSCP, KP
and Intuit.
4.5 Notices. Except as otherwise provided in this Agreement, notices and
-------
other communications under this Agreement shall be in writing and delivered
personally, by telecopy (with confirmation sent within three business days by
overnight courier) or by overnight courier,
-22-
<PAGE>
addressed to such party at the address set forth below:
(i) if to the Company, to:
Concentric Network Corporation
10590 N. Tantau Avenue
Cupertino, CA 95014
Attention: Henry R. Nothhaft and Peter Bergeron
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attention: Robert T. Clarkson, Esq.
(ii) if to GSCP, to:
GS Capital Partners, L.P.
85 Broad Street
New York, New York 10004
Telecopy: (212) 902-3000
Attention: Terence M. O'Toole
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Telecopy: (212) 859-8586
Attention: Paul M. Reinstein, Esq.
(iii) if to KP, to:
Kleiner Perkins Caufield & Byers VII
2750 Sand Hill Road
Menlo Park, California 94025
Telecopy: (415)233-0300
Attention: Vinod Khosla
(iv) if to Intuit, to:
Intuit, Inc.
6220 Greenwich Drive
San Diego, CA 92122-5988
Attn: William H. Harris, Jr.
-23-
<PAGE>
and Phillip L. Poirier, Jr., Esq
(v) if to any other Holder, to the address set forth on Schedule
I, Schedule II or Schedule III.
Each Holder, by written notice given to the Company in accordance with this
Section 4.5 may change the address to which such notice or other communications
are to be sent to such Holder. All such notices and communications shall be
deemed to have been received on the date of delivery thereof if delivered by
hand, on the filth day after the mailing thereof, if mailed, on the next day
after the sending thereof if by overnight courier, when answered back if telexed
and when receipt is acknowledged, if telecopied.
4.6 Miscellaneous.
-------------
(a) This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and the respective successors and
assigns of the parties hereto, whether so expressed or not. No Person other
than a Holder shall be entitled to any benefits under this Agreement, except as
otherwise expressly provided herein. This Agreement and the rights of the
parties hereunder may be assigned by any of the parties hereto to any transferee
of Registrable Securities or securities exercisable for or convertible into
Registrable Securities, provided such transferee becomes a party to this
Agreement and agrees to be bound by its terms, provided further, in the case of
the Series C Preferred Stock, or Common Stock issued upon its conversion, such
transfer is (i) from the original Series C Holder, and (ii) the transferee
acquires at least 50,000 of such shares in a transaction involving at least 80%
of the aggregate of shares of Series C Preferred Stock originally acquired by
the Series C Holder and Common Stock issued upon their conversion; provided
further, in the case of transfers of Common Stock by a Common Holder, such
transfer is (i) from the original Common Holder, and (ii) the transferee
acquires at least 50,000 of such shares in a transaction involving at least 80%
of the aggregate of Common Stock originally acquired by the Common Holder;
provided further, in the case of transfers of Racal Warrants or Racal Stock,
such transfer is (i) from Racal and (ii) the transferee acquires at least 50,000
of such shares in a transaction involving at least 80% of the aggregate of the
Racal Warrants or Racal Stock; and provided further, in the case of Series D
Preferred Stock, such transfer is (i) from the original Series D Holder and (ii)
the transferee acquires at least 50,000 of such shares in a transaction
involving at least 80% of the aggregate of the Series D Preferred Stock
originally acquired by the Series D Holder and Common Stock issuable upon its
conversion, except that the preceding condition shall not apply to the transfer
of Series D Preferred Stock by SOFTBANK Holdings Inc. to one or more affiliated
partnerships managed by it nor to the transfer of Series D Preferred Stock by
Telemedia International Ltd., Sattel Communications LLC or Racal-Datacom, Inc.
to one or more affiliates; (who shall be treated as an original Series D Holder)
the parties hereto acknowledge and agree that with respect to the transfer of
1,838,235 shares of Series D Preferred Stock from Sattel Communications LLC to
StreamLogic Corporation, such transfer shall be treated as if it were a transfer
to an affiliate.
(b) This Agreement (with the documents referred to herein or
delivered pursuant hereto) embodies the entire agreement and understanding
between the parties hereto relating to the subject matter hereof and supersedes
all prior agreements and understandings
-24-
<PAGE>
relating to the subject matter hereof, specifically including, but not limited
to, the Registration Rights Agreements dated September 1, 1994 and February 15,
1995 between Racal and the Company, and each such agreement (and any rights such
Holder has pursuant to such agreement) shall be terminated, null and void and no
longer in effect.
(c) This Agreement shall be construed and enforced in accordance with
and governed by the laws of the State of New York without giving effect to the
conflicts of law principles thereof.
(d) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof. All section
references are to this Agreement unless otherwise expressly provided.
(e) This Agreement may be executed in any number of counterparts,
each of which shall be an original, but all of which together shall constitute
one instrument.
(f) Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction.
(g) It is hereby agreed and acknowledged that it will be impossible
to measure in money the damages that would be suffered if the parties fail to
comply with any of the obligations herein imposed on them and that in the event
of any such failure, an aggrieved person will be irreparably damaged and will
not have an adequate remedy at law. Any such person shall, therefore, be
entitled to injunctive relief including specific performance, to enforce such
obligations, without the posting of any bond and if any action should be brought
in equity to enforce any of the provisions of this Agreement, none of the
parties hereto shall raise the defense that there is an adequate remedy at law.
(h) Each party hereto shall do and perform or cause to be done and
performed all such further acts and things and shall execute and deliver all
such other agreements, certificates, instruments, and documents as any other
party hereto reasonably may request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
4.7 No Inconsistent Agreements. Without the prior written consent of
--------------------------
GSCP, the Company will not, on or after the date of this Agreement, enter into
any agreement with respect to its securities which is inconsistent with the
rights granted in this Agreement or otherwise conflicts with the provisions
hereof other than any lock-up agreement with the underwriters in connection with
any registered offering effected hereunder, pursuant to which the Company shall
agree not to register for sale, and the Company shall agree not to sell or
otherwise dispose of, Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, for a specified period following
the registered offering.
-25-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated
Registration Rights Agreement as of the date set forth above.
CONCENTRIC NETWORK CORPORATION
By: /s/ Henry R. Nothhaft
----------------------------------------------
Name: Henry R. Nothhaft
-----------------------------------------
Title: President
----------------------------------------
GS CAPITAL PARTNERS, L.P.
By: GS Advisors, L.P., its general partner
By: GS Advisors, Inc., its general partner
By: /s/ C. H. Scodinski
----------------------------------------------
Name: C. H. Scodinski
-----------------------------------------
Title: Vice President
---------------------------------------
KLEINER PERKINS CAUFIELD & BYERS VII
By: KPCB VII ASSOCIATES, its general partner
By: /s/ Vinod Khosla
----------------------------------------------
Name: Vinod Khosla
---------------------------------------
Title:________________________________________
COMDISCO, INC.
By: /s/ Jill O. Hanses
---------------------------------------------
Name: Jill O. Hanses
---------------------------------------
Title: Assistant Vice President
---------------------------------------
INTUIT, INC.
By: /s/ William H. Harris
---------------------------------------------
Name: William H. Harris
---------------------------------------
Title: Executive Vice President
-------------------------------------
<PAGE>
SERIES C HOLDER
By: /s/
---------------------------------------------
Name:________________________________________
Title:_______________________________________
COMMON HOLDER
By: /s/
---------------------------------------------
Name:________________________________________
Title:_______________________________________
SERIES D HOLDER
By: /s/ Gary E. Rieschel
---------------------------------------------
Name: Gary E. Rieschel
--------------------------------------------
Title: Sr. Vice President
--------------------------------------------
SERIES D HOLDER
By: /s/ Fernando Borgani
---------------------------------------------
Name: Fernando Borgani
--------------------------------------
Title: ______________________________________
SERIES D HOLDER
By: /s/ Daniel W. Latham
---------------------------------------------
Name: Daniel W. Latham
--------------------------------------
Title: President
--------------------------------------
SERIES D HOLDER
By: /s/ Charles F. Kuehne
---------------------------------------------
Name: Charles F. Kuehne
---------------------------------------
Title: Vice President, Finance & Treasurer
--------------------------------------
RACAL-DATACOM, INC.
By: /s/ Charles F. Kuehne
---------------------------------------------
Name: Charles F. Kuehne
---------------------------------------
Title: Vice President, Finance & Treasurer
---------------------------------------
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
<PAGE>
KPCB VII FOUNDERS FUND
By: KPCB VII ASSOCIATES, its general partner
By: /s/ Vinod Khosla
--------------------------------------------
Name: Vinod Khosla
--------------------------------------------
Title:______________________________________
KPCB INFORMATION SCIENCES ZAIBATSU FUND II
By: KPCB VII ASSOCIATES, its general partner
By: Vinod Khosla
--------------------------------------------
Name: Vinod Khosla
--------------------------------------
Title:______________________________________
<PAGE>
SCHEDULE I
----------
AMERINDO TECHNOLOGY CAPITAL TRUST MANAGEMENT
One Embarcadero Center One Sansome Street
Suite 2300 Suite 1800
San Francisco, CA 94111 San Francisco, CA 94104
Attention: Alberto W. Vilar Attention: Chris Lenzo
APPLEWOOD ASSOCIATES, L.P. JOHN CHAMBERS
68 Wheatley Road 12123 Foothill Lane
Brookville, NY 11545 Los Altos, CA 94022
Attention: Barry Rubenstein
BT HOLDINGS ROBERT CONWAY
130 Liberty Street 173 Jefferson
Mail Stop 2377 Menlo Park, CA 94025
New York, NY 10006
Attention: Lisa Chen
JACK BERMAN CORE TECHNOLOGY FUND INC.
32107 West Lindero S Squared Affiliate
No. 219 515 Madison Avenue
Westlake Village, CA 91361 New York, NY 10022
Attention: Sy Goldblatt
GUS BLASS, II
212 Center Street
Center Place CVMG GENERAL
Suite 800
PARTNERSHIP
Little Rock, AR 72201 414 North Camden Drive
Suite 1100
GUS BLASS, III Beverly Hills, CA 90210
212 Center Street Attention: Dr. Ron
Center Place Karlsberg
Suite 800 ESSEX HIGH TECHNOLOGY
Little Rock, AR 72201 (Bermuda) L.P.
128 High Street
Boston, MA 02110
JEAN PIERRE BOESPFLUG Attention: Susan
Stickells
912 Chemin de la Grande
Bastide
06250 Mougin-France
FRANCE
<PAGE>
ESSEX PERFORMANCE FUND, L.P. MANCHESTER RESORTS, L.P.
128 High Street 1 Market Place
Boston, MA 02110 33rd Floor
Attention: Susan Stickells San Diego, CA 92101
Attention: Doug Manchester
EXECUTIVE TECHNOLOGY L.P.
c/o S Squared Technology Corp MARITIME CAPITAL PARTNERS
515 Madison Avenue c/o Dominion
New York, NY 10022 15302 25th Drive SE
Attention: Sy Goldblatt Mill Creek, WA 98012
RAINBOW TRADING CORP. MATRIX TECHNOLOGY GROUP
8201 Preston Road c/o S Squared Technology
Group
Suite 400 515 Madison Avenue
Dallas, TX 75225 New York, NY 10022
Attention: Stanford C. Finney Attention: Sy Goldblatt
DON FOSS MELLC-CNC, L.P.
25505 West 12 Mile Road c/o Menlo Equities
Suite 300 2180 Sand Hill Road
Southfield, MI 48304 Suite 100
Menlo Park, CA 94025
G.S. CAPITAL PARTNERS, L.P. Attention: Henry Bullock
Carla Skodinski
85 Broad Street MONTSOL INVESTMENTS
New York, NY 10004 c/o S Squared TechnologyCorp
515 Madison Avenue
ALLEN GUNN Suite 4200
725 Key Royale Drive New York, NY 10022
Holmes Beach, FL 34217 Attention: Sy Goldblatt
BRUCE R. KATZ WESLEY ASSOCIATES
8230 Walnut Hill Lane 45 East Wesley Street
Dallas, TX 75231 South Hackensack, NJ
07606
Attention: David Goldner
BILL LIEBACK
c/o Montegomery Securities JIM WHITE/MIDWEST -
600 Montegomery Avenue A PARTNERSHIP
San Francisco, CA 94111 5225 Hampton Place
P.O. Box 5949
Saginaw, MI 48603-0949
<PAGE>
LITTON INDUSTRIES, INC. MASTER TRUST JOHN PRITZKER
c/o Amerindo 909 Montgomery Street
One Embarcadero Center Suite 601
Suite 2300 San Francisco, CA 94133
San Francisco, CA 94111
ESSEX SPECIAL GROWTH OPPORTUNITIES FUND, L.P. RAINBOW TRADING CORP.
128 High Street 8201 Preston Road
Boston, MA 02110 Suite 400
Attention: Susan Stickells Dallas, TX 75225
Attention: Howard E.
Rachofsky
NAVIGATOR GLOBAL FUND LIMITED
909 3rd Street RAINBOW TRADING PARTNERS,
9th Floor LTD. & RAINBOW TRADING
New York, NY 10022 VENTURE PARTNERS, L.P.
Attention: Cory M. Horowitz 8201 Preston Road
Suite 400
THE NEW DISCOVERY FUND LIMITED Dallas, TX 75225
c/o Essex Attention: William Ward
125 High Street
Boston, MA 02110 SCI-TECH INVESTMENT
Attention: Susan Stickells PARTNERS, L.P. & S SQUARED
AFFILIATE
PERMAL MEDIA & COMMUNICATION LTD. 515 Madison Avenue
c/o Essex New York, NY 10022
125 High Street Attention: Sy Goldblatt
Boston, MA 02110
ROBERT W. PETERS & CAROLYN H. PETERS SG PARTNERS
Trustees of the Robet W. Peters and the c/o S Squared Affiliate
Caroly H. Peters 1992 Trust UTA 1/10/92 515 Madison Avenue
1282 St. Mark Court Suite 4200
Los Altos, CA 94024 New York, NY 10022
Attention: Robert Peters Attention: Sy Goldblatt
PORRIDGE PARTNERS II PKD TRUST DTD 1/8/92
354 Pequot Avenue c/o Montegomery Securities
Southport, CT 06490 600 Montegomery Avenue
Attention: Art Samberg San Francisco, CA 94111
<PAGE>
VPN INVESTORS, L.P.
c/o CMH Capital
909 3rd Avenue
New York, NY 10022
Attention: Cory Horowitz
RAINBOW TRADING CORPORATION
8201 Preston Road
Suite 400
Dallas, TX 75225
Attention: William C. Ward
YALE UNIVERSITY RETIREMENT FUND FOR STAFF EMPLOYEES &
YALE UNIVERSITY
c/o S Squared Affiliates
515 Madison Avenue
New York, NY 10022
Attention: Sy Golblatt
<PAGE>
SCHEDULE II
-----------
APPLEWOOD ASSOCIATES L.P. VPN INVESTORS II
68 Wheatley Road c/o CMH Capital
Brookville, NY 11545 909 3rd Avenue
Attention: Barry Rubenstein New York, NY 10022
Attention: Cory Horowitz
CAPOR EMPLOYEE PENSION PLAN
c/o CMH Capital
909 3rd Floor
New York, NY 10022
Attention: Cory Horowitz
CRITICAL TECHNOLOGIES
3324 Hollenberg Drive
Bridgeton, MO 63044
Attention: David L. Bross
Matthew W. Bross
James E. Cravens
Tony O. Zeis
EARLY BIRD INVESTMENT CLUB
1325 4th Avenue, Suite 1900
Seattle, WA 98115
Attention: Greta Thompson
ALFRED J. MELILLO
c/o Harold Schnair Sales Co.
1007 Oakmead Drive
Arlington, TX 76011
MINGLEWOOD MANAGEMENT, LTD.
c/o Montegomery Securities
600 Montegomery Avenue
San Francisco, CA 94111
LEE POSEY
c/o Palm Harbor Homes
15301 Dallas Parkway, #800
Dallas, TX 75268
<PAGE>
SCHEDULE III
------------
RACAL-DATACOM, INC. TMI TELEMEDIA INTERNATIONAL, LTD.
1601 North Harrison Parkway Viale del Campo Boario, 56/D
Sunrise, FL 33323-2899 00153 Roma, Italy
Telecopy: 954/846-5026 Telecopy: 39 (06) 5734 3379
Attention: Legal Department Attention: Dr. Fernando Borgani
with a copy to: with a copy to:
Dechert Price & Rhoads Jones, Day, Reavis & Pogue
4000 Bell Atlantic Tower 599 Lexington Avenue
1717 Arch Street New York, New York 10022
Philadelphia, PA 19103-2793 Telecopy: 212/755-7306
Attention: Christopher Karras Attention: Steven D. Guynn, Esq.
SATTEL COMMUNICATIONS LLC
26025 Mureau Road
Calabasas, CA 91301
Telecopy: 818/878-7633
Attention: Mark Perkell
SOFTBANK HOLDINGS, INC.
10 Langley Road
Suite 403
Newton Center, MA 02159
Telecopy: 617/928-9301
Attention: Ronald D. Fisher
with a copy to:
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
Telecopy: 212/558-3588
Attention: Stephen A. Grant, Esq.
<PAGE>
EXHIBIT 10.3
FORM OF INDEMNIFICATION AGREEMENT
---------------------------------
Indemnification Agreement ("Agreement") is made on ______________, 1997,
between CONCENTRIC NETWORK CORPORATION, a Delaware corporation ("Corporation"),
and _________________ ("Director").
RECITALS
--------
A. Director is a member of Corporation's Board of Directors, and
Corporation desires Director to continue in such capacity. Director is willing
to continue to serve on Corporation's Board of Directors if Director receives
the protections provided by this Agreement.
B. Corporation's Bylaws obligate it to indemnify its directors and
officers to the maximum extent authorized by the Delaware General Corporations
Law, as amended.
C. Corporation intends to secure, at its expense, directors' and
officers' liability insurance ("D&O Insurance") protecting its directors in
connection with their performance of services for Corporation.
D. Corporation believes that (1) litigation against corporate directors,
regardless of whether meritorious, is expensive and time-consuming for the
director to defend; (2) there is a substantial risk of a large judgment or
settlement in litigation in which a corporate director was neither culpable nor
profited personally to the detriment of the corporation; (3) it is increasingly
difficult to attract and keep qualified directors because of such potential
liabilities; and (4) it is important for a director to have assurance that
indemnification will be available if the director acts in accordance with
reasonable business standards to the fullest extent permitted by applicable law,
it is in the best interests of Corporation and its Stockholders for Corporation
to contractually obligate itself to indemnify its directors and to set forth the
details of the indemnification process.
E. Based upon the conclusions stated in Recital D above, to induce
Director to continue to serve on Corporation's Board of Directors and in
consideration of Director's continued service as a director, Corporation wishes
to enter into this Agreement with Director.
Therefore, Corporation and Director agree as follows:
1. AGREEMENT TO SERVE. Director will serve as a member of the Board of
------------------
Directors of Corporation so long as Director is duly elected and qualified to so
serve or until Director resigns or is removed from Corporation's Board of
Directors.
2. INDEMNIFICATION.
---------------
<PAGE>
(a) Corporation will indemnify Director to the fullest extent
permitted under the governing law in effect on the date hereof or as such laws
may from time to time hereafter be amended to increase the scope of such
permitted indemnification if Director was or is a party or threatened to be made
a party to any threatened, pending or completed action, arbitration, alternative
dispute resolution mechanism, investigation, administrative hearing, or any
other suit or proceeding of any kind, whether civil, criminal, administrative or
investigative and whether formal or informal (including actions by or in the
right of Corporation and any preliminary inquiry or claim by any person or
authority) (collectively, a "Proceeding"), by reason of the fact that Director
is or was a director, officer, employee or agent of Corporation or is or was
serving at Corporation's request as a director, officer, employee or agent of
another corporation (including a Subsidiary), partnership, joint venture, trust
or other enterprise against liability incurred in connection with such
proceeding, including any appeal thereof (collectively, "Covered Matters").
Such indemnification will cover all Expenses (as defined in paragraph 5(a)
below), liabilities, judgments (including punitive and exemplary damages),
penalties, fines (including excise taxes relating to employee benefit plans and
civil penalties) and amounts paid in settlement which are incurred or imposed
upon Director in connection with a Covered Matter (collectively, "Indemnified
Amounts").
(b) Notwithstanding the foregoing provisions of paragraph 2(a) above,
no such indemnification shall be made in respect of any claim, issue, or matter
as to which the governing law expressly prohibits such indemnification by reason
of an adjudication of liability of Director to the Corporation; provided,
--------
however, that in such event such indemnification shall nevertheless be made by
- -------
the Corporation to the extent that the court in which such action or suit was
brought shall determine equitable under the circumstances.
(c) Notwithstanding any provision of this Agreement, to the extent
that Director has been wholly successful on the merits or otherwise absolved in
any proceeding on any claim, issue or matter, Director shall be indemnified
against all Expenses incurred by Director or on Director's behalf in connection
therewith. If Director is not wholly successful in such Proceeding but is
successful, on the merits or otherwise, as to one or more but less than all
claims, issues or matters in such Proceeding, the Corporation shall indemnify
Director to the maximum extent permitted by law, against all Expenses,
judgments, penalties, fines and amounts paid in settlement, incurred by Director
in connection with each successfully resolved claim, issue, or matter. For
purposes of this paragraph 2, and without limitation, the termination of any
such claim, issue or matter by dismissal with or without prejudice shall be
deemed to be a successful resolution as to such claim, issue or matter.
3. CLAIMS FOR INDEMNIFICATION. Director will give Corporation written
--------------------------
notice of any claim for indemnification under this Agreement. Payment requests
will include a schedule setting forth in reasonable detail the amount requested
and will be accompanied (or, if necessary, followed) by copies of the relevant
invoices or other documentation. Upon Corporation's request, Director will
provide Corporation with a copy of the document or pleading, if any, notifying
Director of the Covered Matter. To the extent practicable, Corporation will pay
Indemnified Amounts directly without requiring Director to make any prior
payment.
-2-
<PAGE>
4. DETERMINATION OF RIGHT TO INDEMNIFICATION.
-----------------------------------------
(a) Director will be presumed to be entitled to indemnification under
this Agreement and will receive such indemnification, subject to paragraph 4(b)
below, irrespective of whether the Covered Matter involves allegations of
intentional misconduct, alleged violations of Section 16(b) of the Securities
Exchange Act of 1934, alleged violations of Section 10(b) of the Securities
Exchange Act of 1934 (including Rule 10b-5 thereunder), breach of Director's
fiduciary duties (including duties of loyalty or care) or any other claim.
(b) If, in the opinion of counsel to Corporation, applicable law
permits indemnification in a Covered Matter only as authorized in the specific
case upon a determination that indemnification is proper in the circumstances
because Director has met a standard of conduct established by applicable law,
and upon an evaluation of Indemnified Amounts to be paid in connection with such
Covered Matter, the following will apply:
(1) Corporation will give Director notice that a determination
and evaluation will be made under this paragraph 4(b); such notice will be
given immediately after receipt of counsel's opinion that such a
determination and evaluation is necessary and will include a copy of such
opinion.
(2) Such determination and evaluation will be made in good
faith, as follows:
(A) by a majority vote of a quorum of Corporation's Board
of Directors who are not parties or threatened to be made parties to the
Covered Matter in question ("Disinterested Directors") or, if such a quorum
is not obtainable or, even if obtainable, by a majority vote of a committee
of two or more Disinterested Directors who are selected by the entire
Board; or
(B) by an attorney or firm of attorneys, having no previous
relationship with Corporation or Director, which is selected by the Board
of Directors or Committee as prescribed in clause (A) above; or
(C) by the Stockholders by a majority vote of a quorum
consisting of Stockholders who were not parties to such proceeding, or, if
no such quorum is obtainable, by a majority vote of Stockholders who were
not parties to such proceeding.
(3) Director will be entitled to a hearing before the entire
Board of Directors of Corporation and any other person or persons making
the determination and evaluation under clause (2) above. Director will be
entitled to be represented by counsel at such hearing.
(4) The cost of a determination and evaluation under this
paragraph 4(b) (including attorneys' fees and other expenses incurred by
Director in preparing for and attending the hearing contemplated by clause
(3) above and otherwise in connection with the determination and evaluation
under this paragraph 4(b)) will be borne by Corporation.
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(5) The determination will be made as promptly as reasonably
possible after notice from counsel to Corporation of the need therefor and,
in any case, promptly as possible after final adjudication of the Covered
Matter.
(6) Evaluation of the reasonableness of expenses and
authorization of indemnification shall be made in the same manner as the
determination that indemnification is permissible. If the determination of
permissibility is made under clause 2(B) above, the same persons shall
evaluate the reasonableness of expenses and may authorize indemnification.
(7) Director will be presumed to have met the required standard
of conduct under this paragraph 4(b) unless it is clearly demonstrated to
the determining body that Director has not met the required standard of
conduct.
(c) Notwithstanding the failure of Corporation to provide
indemnification, and despite any contrary determination of the Board of
Directors or of the Stockholders in the specific case, Director may apply for
indemnification or advancement of expenses, or both, to the court conducting the
proceeding, to the circuit court, or to another court of competent jurisdiction.
5. INDEMNIFICATION FOR EXPENSES OF A WITNESS.
-----------------------------------------
Notwithstanding any other provision of this Agreement, to the extent
that Director, by reason of the fact that Director is or was a director,
officer, employee or agent of Corporation or any other entity which Director is
or was serving at the request of Corporation, a witness in any Proceeding,
Director shall be indemnified by the Corporation against all Expenses actually
incurred by Director or on Director's behalf in connection therewith.
6. ADVANCE OF EXPENSES.
-------------------
(a) Before final adjudication of a Covered Matter, upon Director's
request pursuant to paragraph 3 above, Corporation will promptly either advance
Expenses directly or reimburse Director for all Expenses. As used in this
Agreement, "Expenses" means all costs and expenses (including attorneys' fees,
expert fees, other professional fees and court costs) incurred by Director in
connection with a Covered Matter other than judgments, penalties, fines and
settlement amounts.
(b) Expenses incurred by Director in defending a civil or criminal
proceeding may be paid by Corporation in advance of the final disposition of
such proceeding, only upon receipt of an undertaking by or on behalf of Director
to repay such amount if Director is ultimately found by the court not to be
entitled to indemnification by Corporation.
7. DEFENSE OF CLAIM.
----------------
(a) Except as provided in paragraph 7(c) below, Corporation, jointly
with any other indemnifying party, will be entitled to assume the defense of any
Covered Matter as to which Director requests indemnification.
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<PAGE>
(b) Counsel selected by Corporation to defend any Covered Matter will
be subject to Director's advance written approval, which will not be
unreasonably withheld.
(c) Director may employ Director's own counsel in a Covered Matter
and be fully reimbursed therefor if (1) Corporation approves, in writing, the
employment of such counsel or (2) either (A) Director has reasonably concluded
that there may be a conflict of interest between Corporation and Director or
between Director and other parties represented by counsel employed by
Corporation to represent Director in such action or (B) Corporation has not
employed counsel reasonably satisfactory to Director to assume the defense of
such Covered Matter promptly after Director's request.
(d) Neither Corporation nor Director will settle any Covered Matter
without the other's written consent, which will not be unreasonably withheld.
(e) If Director is required to testify (in court proceedings,
depositions, informal interviews or otherwise), consult with counsel, furnish
documents or take any other reasonable action in connection with a Covered
Matter, Corporation will pay Director a fee for Director's efforts at a rate
equal to the amount payable to Director for attending Board and Board committee
meetings, plus reimbursement for all reasonable expenses incurred by Director in
connection therewith.
8. DISPUTES; ENFORCEMENT.
---------------------
(a) If there is a dispute relating to the validity or enforceability
of this Agreement or a denial of indemnification, Advance of Expenses or payment
of any other amounts due under this Agreement or Corporation's Amended and
Restated Certificate of Incorporation or Bylaws, Corporation will provide such
indemnification, Advance of Expenses or other payment until a final, non-
appealable judgment that Director is not entitled to such indemnification,
Advance of Expenses or other payment has been rendered by the court of last
resort (or by a lower court if not timely appealed). Director will repay such
amounts if such final, non-appealable judgment so requires.
(b) Corporation will reimburse all of Director's reasonable expenses
(including attorneys' fees) in pursuing an action to enforce Director's rights
under this Agreement unless a final, non-appealable judgment against Director
has been rendered in such action by the court of last resort (or by a lower
court if not timely appealed). At Director's request, such expenses will be
advanced by Corporation to Director as incurred before final resolution of such
action by the court of last resort; such expenses will be repaid by Director if
a final, non-appealable judgment in Corporation's favor is rendered in such
action by the court of last resort (or by a lower court if not timely appealed).
9. D&O INSURANCE.
-------------
(a) Corporation currently has no D&O Insurance in effect.
(b) Subject to the provisions of paragraph 9(c) below, as soon as is
reasonably practical in the sole judgment of the Board of Directors, the
Corporation will purchase and maintain D&O Insurance in such amount as its Board
of Directors determines appropriate, insuring Director
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<PAGE>
against any liability arising out of Director's status as a director of
Corporation, regardless of whether Corporation has the power to indemnify
Director against such liability under applicable law.
(c) Corporation will not be required to purchase and maintain D&O
Insurance if the Board of Directors of Corporation determines, after diligent
inquiry, that (1) such insurance is not available; or (2) the premiums for
available insurance are disproportionate to the amount of coverage and to the
premiums paid by other corporations similarly situated. The Board of Directors
of Corporation will, at least annually, in good faith review its decision not to
maintain D&O Insurance and will purchase such insurance at any time that the
conditions of this paragraph 9(c) cease to apply.
(d) The parties will cooperate to obtain advances of Expenses,
indemnification payments and consents from D&O Insurance carriers in any Covered
Matter to the full extent of applicable D&O Insurance. The existence of D&O
insurance coverage will not diminish or limit Corporation's obligation to make
indemnification payments to Director. Amounts paid directly to Director with
respect to a Covered Matter by Corporation's D&O Insurance carriers will be
credited to the amounts payable by Corporation to Director under this Agreement.
10. LIMITATIONS OF ACTIONS: LIMITATION OF LIABILITY. No action will be
------------------------------------------------
brought by or on behalf of Corporation against Director or Director's heirs or
personal representatives relating to Director's service as a director, after the
expiration of one year from the date Director ceases (for any reason) to serve
as a Director of Corporation, and any claim or cause of action of Corporation
will be extinguished and deemed released unless asserted by the filing of a
legal action before the expiration of such period.
11. RIGHTS NOT EXCLUSIVE. The indemnification provided to Director under
--------------------
this Agreement will be in addition to any indemnification provided to Director
by any law, agreement, Board resolution, provision of the Amended and Restated
Certificate of Incorporation or Bylaws of Corporation or otherwise.
12. SUBROGATION. Upon payment of any Indemnified Amount under this
-----------
Agreement, Corporation will be subrogated to the extent of such payment to all
of Director's rights of recovery therefor and Director will take all reasonable
actions requested by Corporation (at no cost or penalty to Director) to secure
Corporation's rights under this paragraph 12 including executing documents.
13. CONTINUATION OF INDEMNITY. All of Corporation's obligations under
-------------------------
this Agreement will continue as long as Director is subject to any actual or
possible Covered Matter, notwithstanding Director's termination of service as a
director.
14. AMENDMENTS. Neither Corporation's Amended and Restated Certificate of
----------
Incorporation nor its Bylaws will be changed to increase liability of directors
or to limit Director's indemnification. Any repeal or modification of
Corporation's Amended and Restated Certificate of Incorporation or Bylaws or any
repeal or modification of the relevant provisions of any applicable law will not
in any way diminish any of Director's rights or Corporation's obligations under
this Agreement. This Agreement cannot be amended except with the written
consent of Corporation and Director.
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15. GOVERNING LAW. This Agreement will be governed by Delaware law.
-------------
16. DURATION; SUCCESSORS.
--------------------
(a) This Agreement shall apply to any claim asserted and any Expenses
incurred in connection with any claim asserted on or after the effective date of
this Agreement and shall continue until and terminate upon the later of: (a) 10
years after Director has ceased to occupy any of the positions or have any of
the relationships described in Section 2(a) of this Agreement, or (b) one year
after the final termination of all Proceedings of the kind described herein with
respect to Director which are pending or threatened as of the date this
Agreement would otherwise terminate. This Agreement will be binding upon and
inure to the benefit of the parties and their respective heirs, legal
representatives and assigns.
(b) Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Corporation to assume all of
Corporation's obligations under this Agreement. Such assumption will not
release Corporation from its obligations under this Agreement.
17. SEVERABILITY. The provisions of Agreement will be deemed severable,
------------
and if any part of any provision is held illegal, void or invalid under
applicable law, such provision may be changed to the extent reasonably necessary
to make the provision, as so changed, legal, valid and binding. If any
provision of this Agreement is held illegal, void or invalid in its entirety,
the remaining provisions of this Agreement will not in any way be affected or
impaired but will remain binding in accordance with their terms.
18. NOTICES. All notices given under this Agreement will be in writing
-------
and delivered either personally, by registered or certified mail (return receipt
requested, postage prepaid), by recognized overnight courier or by telecopy (if
promptly followed by a copy delivered personally, by registered or certified
mail or overnight courier), as follows:
If to Director: ________________________
If to Corporation: Concentric Network Corporation
10590 N. Tantau Avenue
Cupertino, California 95014
or to such other address as either party furnishes to the other in writing.
19. COUNTERPARTS. This Agreement may be signed in counterpart.
------------
20. SUBSIDIARIES. As used in this Agreement, the term "Subsidiary" means
------------
any corporation in which Corporation owns a majority interest.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
written above.
CONCENTRIC NETWORK CORPORATION,
a Delaware corporation
By:__________________________________________
Signature
__________________________________________
Print Name
__________________________________________
Title
_____________________________________________
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<PAGE>
EXHIBIT 10.4
CONCENTRIC NETWORK CORPORATION
1995 STOCK INCENTIVE PLAN FOR EMPLOYEES AND CONSULTANTS
(as amended February 21, 1996)
1. DEFINITIONS: As used herein, the following definitions shall apply:
(a) "Board of Directors" shall mean the Board of Directors of the
Corporation.
(b) "Committee" shall mean the Compensation Committee designated by
the Board of Directors of the Corporation, or such other committee as shall be
specified by the Board of Directors to perform the functions and duties of the
Committee under the Plan; provided, however, that, if and when the Class A
Common Stock of the Corporation becomes publicly traded, the Committee shall
comply with the requirements of (i) Rule 16b-3 of the Rules and Regulations
under the Securities Exchange Act of 1934, as amended ("Rule 16b-3" and the
"Exchange Act", respectively), and (ii) Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"), and the regulations thereunder.
(c) "Corporation" shall mean Concentric Network Corporation, a
Florida corporation, or any successor thereof.
(d) "Discretion" shall mean in the sole discretion of the Committee,
with no requirement whatsoever that the Committee follow past practices, act in
a manner consistent with past practices, or treat an employee or consultant in a
manner consistent with the treatment afforded other employees or consultants
with respect to the Plan.
(e) "Incentive Option" shall mean an option to purchase Class A
Common Stock of the Corporation which meets the requirements set forth in the
Plan and also meets the definition of an incentive stock option within the
meaning of Section 422 of the Code. The stock option agreement for an Incentive
Option shall state that the option is intended to be an Incentive Option.
(f) "Nonqualified Option" shall mean an option to purchase Class A
Common Stock of the Corporation which meets the requirements set forth in the
Plan but does not meet the definition of an incentive stock option within the
meaning of Section 422
<PAGE>
of the Code. The stock option agreement for a Nonqualified Option shall state
that the option is intended to be a Nonqualified Option.
(g) "Participant" shall mean any individual designated by the
Committee under Paragraph 6 for participation in the Plan.
(h) "Plan" shall mean this Concentric Network Corporation 1995 Stock
Incentive Plan For Employees And Consultants.
(i) "Restricted stock award"shall mean a grant of Class A Common
Stock of the Corporation which is subject to forfeiture, restrictions against
transfer, and such other terms and conditions determined by the Committee, as
provided in Paragraph 18.
(j) "Stock appreciation right"shall mean a right to receive the
appreciation in value, or a portion of the appreciation in value, of a specified
number of shares of the Class A Common Stock of the Corporation, as provided in
Paragraph 12.
(k) "Subsidiary" shall mean a " subsidiary corporation", whether now
or hereafter existing, as defined in Section 424(f) of the Code.
2. PURPOSE OF PLAN: The purpose of the Plan is to provide employees and
consultants of the Corporation and its Subsidiaries with an incentive to make
significant and extraordinary contributions to the long-term performance and
growth of the Corporation and its Subsidiaries, to join the interests of
employees and consultants with the interests of the shareholders of the
Corporation, and to facilitate attracting and retaining employees and
consultants of exceptional ability.
3. ADMINISTRATION: The Plan shall be administered by the Committee.
Subject to the provisions of the Plan, the Committee shall determine, from those
eligible to be Participants under the Plan, the persons to be granted stock
options, stock appreciation rights and restricted stock, the amount of stock or
rights to be optioned or granted to each such person, and the terms and
conditions of any stock options, stock appreciation rights and restricted stock.
Subject to the provisions of the Plan, the Committee is authorized to interpret
the Plan, to make, amend and rescind rules and regulations relating to the Plan
and to make all other determinations necessary or advisable for the Plan's
administration. Interpretation and construction of any provision of the Plan by
the Committee shall, unless otherwise determined by the Board of Directors of
the Corporation, be final and conclusive. A majority of the Committee shall
constitute a quorum, and the acts approved by a majority of the members present
at any meeting at which a quorum is present, or acts approved in writing by a
majority of the Committee, shall be the acts of the Committee.
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<PAGE>
4. INDEMNIFICATION OF COMMITTEE MEMBERS: In addition to such other
rights of indemnification as they may have, the members of the Committee shall
be indemnified by the Corporation in connection with any claim, action, suit or
proceeding relating to any action taken or failure to act under or in connection
with the Plan or any option, stock appreciation right or restricted stock
granted hereunder to the full extent permitted by applicable law or provided for
under the Corporation's Articles of Incorporation or Bylaws with respect to
indemnification of directors of the Corporation.
5. MAXIMUM NUMBER OF SHARES SUBJECT TO PLAN: Subject to the provisions
of Paragraph 19, the maximum number of shares with respect to which stock
options or stock appreciation rights may be granted or which may be awarded as
restricted stock under the Plan shall be 11,439,002 shares in the aggregate of
Class A Common Stock of the Corporation. The number of shares with respect to
which a stock appreciation right is granted, but not the number of shares which
the Corporation delivers or could deliver to a Participant upon exercise of a
stock appreciation right, shall be charged against the aggregate number of
shares remaining available under the Plan; provided, however, that in the case
of a stock appreciation right granted in conjunction with a stock option under
circumstances in which the exercise of the stock appreciation right results in
termination of the stock option and vice versa, only the number of shares
subject to the stock option shall be charged against the aggregate number of
shares remaining available under the Plan. If a stock option or stock
appreciation right expires or terminates for any reason (other than termination
as a result of the exercise of a related right) without having been fully
exercised, or if shares of restricted stock are forfeited, the number of shares
with respect to which the stock option or stock appreciation right was not
exercised at the time of its expiration or termination, and the number of
forfeited shares of restricted stock, shall again become available for the grant
of stock options or stock appreciation rights, or the award of restricted stock,
under the Plan, unless the Plan shall have been terminated.
Subject to the provisions of Paragraph 19, no employee of the Corporation
or a Subsidiary may receive options, stock appreciation rights, restricted stock
or any combination thereof for more than 2,000,000 shares of Class A Common
Stock of the Corporation over the term of the Plan, as provided in Paragraph 23.
For purposes of this 2,000,000 share per-employee limitation, there shall be
taken into account all shares covered by stock options and stock appreciation
rights granted, and all restricted shares awarded, to an employee regardless
of whether such stock options or stock appreciation rights expire or terminate
without being fully exercised or whether such restricted shares are forfeited
back to the Corporation.
6. PARTICIPANTS: The Committee shall determine and designate from time
to time, in its Discretion, those employees and consultants of the Corporation
or any Subsidiary to receive stock options, stock appreciation rights, or
restricted stock who, in the judgment of
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the Committee, are or will become responsible for the direction and financial
success of the Corporation or any Subsidiary; provided, however, that Incentive
Options may be granted only to employees of the Corporation or of a Subsidiary.
For the purposes of the Plan, employees shall include officers and directors who
are also employees of the Corporation or any Subsidiary.
7. WRITTEN AGREEMENT: Each stock option, stock appreciation right and
restricted stock award shall be evidenced by a written agreement (each a
"Corporation-Participant Agreement") containing such provisions as may be
approved by the Committee. Each such Corporation-Participant Agreement shall
constitute a binding contract between the Corporation and the Participant and
every Participant, upon acceptance of such Agreement, shall be bound by the term
and restrictions of the Plan and of such Agreement. The terms of each such
Corporation-Participant Agreement shall be in accordance with the Plan, but each
Corporation-Participant Agreement may include such additional provisions and
restrictions determined by the Committee, in its Discretion, provided that such
additional provisions and restrictions are not inconsistent with the terms of
the Plan.
8. ALLOTMENT OF SHARES: The Committee shall determine and fix, in its
Discretion, the number of shares of Class A Common Stock with respect to which a
Participant may be granted stock options and stock appreciation rights and the
number of shares of restricted stock which a Participant may be awarded;
provided, however, that no Incentive Option may be granted under the Plan to any
one Participant which would result in the aggregate fair market value,
determined as of the date the option is granted, of underlying stock with
respect to which incentive stock options are exercisable for the first time by
such Participant during any calendar year under any plan maintained by the
Corporation (or any parent or subsidiary corporation of the Corporation)
exceeding $100,000.
9. STOCK OPTIONS: Subject to the terms of the Plan, the Committee, in
its Discretion, may grant to Participants either Incentive Options or
Nonqualified Options or any combination thereof. Each option granted under the
Plan shall designate the number of shares covered thereby, if any, with respect
to which the option is an Incentive Option, and the number of shares covered
thereby, if any, with respect to which the option is a Nonqualified Option.
10. STOCK OPTION PRICE: Subject to the rules set forth in this Paragraph
10, at the time any stock option is granted, the Committee, in its Discretion,
shall establish the price per share for which the shares covered by the option
may be purchased. With respect to any option granted under this Plan, the
option price shall not be less than 100% of the fair market value of the stock
on the date on which such option is granted; provided, however, that with
respect to an option granted to a Participant who at the time of the grant owns
(after applying
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<PAGE>
the attribution rules of Section 424(d) of the Code) more than 10% of the total
combined voting stock of the Corporation or of any parent or Subsidiary, the
option price shall not be less than 110% of the fair market value of the stock
on the date such option is granted. Fair market value of a share shall be
determined by the Committee and, if and when the Class A Common Stock of the
Corporation becomes publicly traded, may be determined by taking the mean
between the highest and lowest quoted selling prices of the Corporation's Class
A Common Stock on any exchange or other market on which the shares of Class A
Common Stock of the Corporation shall be traded on such date, or if there are no
sales on such date then the selling prices shall be from the last prior trading
date. The option price shall be subject to adjustment in accordance with the
provisions of paragraph 19 of the Plan.
11. PAYMENT OF STOCK OPTION PRICE: To exercise in whole or in part any
stock option granted hereunder, payment of the option price in full in cash or,
with the consent of the Committee, in Class A Common Stock of the Corporation,
or by a promissory note payable to the order of the Corporation in a form
acceptable to the Committee, shall be made by the Participant for all shares so
purchased. Class A Common Stock of the Corporation used to pay the option price
shall have a fair market value on the date of surrender equal to the aggregate
exercise price of the shares as to which said option shall be exercised and in
the case of shares acquired upon exercise of an option, have been owned by the
Participant for more then six (6) months on the date of surrender. Such payment
may, with the consent of the Committee, also consist of a cash down payment and
delivery of such promissory note in the amount of the unpaid exercise price. In
the Discretion of and subject to such conditions as may be established by the
Committee, payment of the option price may also be made by the Corporation
remaining from the shares to be delivered upon exercise of the stock option that
number of shares having a fair market value on the date of exercise equal to the
option price of the number of shares with respect to which the Participant
exercises the stock option. Such payment may also be made in such other manner
as the Committee determines is appropriate, in its Discretion. No Participant
shall have any of the rights of a shareholder of the Corporation under any stock
option until the actual issuance of shares to said Participant, and prior to
such issuance no adjustment shall be made for dividends, distributions or other
rights in respect of such shares, except as provided in Paragraph 19.
12. STOCK APPRECIATION RIGHTS: Subject to the terms of the Plan, the
Committee may grant stock appreciation rights to Participants either in
conjunction with, or independently of, any stock options granted under the
Plan. A stock appreciation right granted in conjunction with a stock option may
be an alternative right wherein the exercise of the stock option terminates the
stock appreciation right to the extent of the number of shares purchased upon
exercise of the stock option and, correspondingly, the exercise of the stock
appreciation right terminates the stock option to the extent of the number of
shares with respect to which the stock appreciation right is exercised.
Alternatively, a stock appreciation right granted in
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<PAGE>
conjunction with a stock option may be an additional right wherein both the
stock appreciation right and the stock option may be exercised. A stock
appreciation right may not be granted in conjunction with an Incentive Option
under circumstances in which the exercise of the stock appreciation right
affects the right to exercise the Incentive Option or vice versa, unless the
stock appreciation right, by its terms, meets all of the following requirements:
(a) the stock appreciation right will expire no later than the
Incentive Option;
(b) the stock appreciation right may be for no more than the
difference between the option price of the Incentive Option and the fair market
value of the shares subject to the Incentive Option at the time the stock
appreciation right is exercised;
(c) the stock appreciation right is transferable only when the
Incentive Option is transferable, and under the same conditions;
(d) the stock appreciation right may be exercised only when the
Incentive Option is eligible to be-exercised; and
(e) the stock appreciation right may be exercised only when the fair
market value of the shares subject to the Incentive Option exceeds the option
price of the Incentive Option.
Upon exercise of a stock appreciation right, a Participant shall be
entitled to receive, without payment to the Corporation (except for applicable
withholding taxes), an amount equal to the excess of or, in the Discretion of
the Committee if provided in the Corporation-Participant Agreement, a portion of
the excess of (i) the then aggregate fair market value of the number of shares
with respect to which the Participant exercises the stock appreciation right,
over (ii) the aggregate fair market value of such number of shares at the time
the stock appreciation right was granted. This amount shall be payable by the
Corporation, in the Discretion of the Committee, in cash or in shares of Class A
Common Stock of the Corporation or any combination thereof.
13. GRANTING AND EXERCISING OF STOCK OPTIONS AND STOCK APPRECIATION
RIGHTS: Subject to the provisions of this Paragraph 13, each stock option and
stock appreciation right granted hereunder shall be exercisable at any such time
or times or in any such installments as may be determined by the Committee at
the time of the grant; provided, however, no stock option or stock appreciation
right may be exercisable prior to the expiration of six months from the date of
grant unless the Participant dies or becomes disabled prior thereto and all
stock options and stock appreciation rights must vest at a rate not less than
twenty percent
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<PAGE>
(20%) per year over five years from the date of grant. Moreover, if and when the
Class A Common Stock of the Corporation becomes publicly traded and if a
Participant who is granted a stock appreciation right is a person who is
regularly required to report his or her ownership and changes in ownership of
Class A Common Stock of the Corporation to the Securities and Exchange
Commission and is subject to short-swing profit liability under the provisions
of Section 16(b) of the Exchange Act (an "Insider"), then any election to
exercise as well as any actual exercise of such Participant's stock appreciation
right shall be made only during the period beginning on the third business day
and ending on the twelfth business day following the release for publication by
the Corporation of quarterly or annual summary statements of sales and earnings.
Notwithstanding anything contained in the Plan to the contrary, if and when the
Class A Common Stock of the Corporation becomes publicly traded, stock
appreciation rights shall always be granted and exercised in such a manner as to
conform to the provisions of Rule 16b-3(e), or any replacement rule, adopted
pursuant to the provisions of the Exchange Act.
No fractional shares shall be issued pursuant to the Plan; no stock
appreciation rights may be granted under the Plan with respect to fractional
shares; and any fractional shares resulting from adjustments shall be eliminated
from any outstanding stock option, stock appreciation right or restricted stock
award.
A Participant may exercise a stock option or stock appreciation right, if
then exercisable, in whole or in part by delivery to the Corporation of written
notice of the exercise, in such form as the Committee may prescribe,
accompanied, in the case of a stock option, by (i) payment for the shares with
respect to which the stock option is exercised in accordance with Paragraph 11,
or (ii) in the Discretion of the Committee, irrevocable instructions to a stock
broker to promptly deliver to the Corporation full payment for the shares with
respect to which the stock option is exercised from the proceeds of the stock
broker's sale of or loan against the shares. Except as provided in Paragraph
17, stock options and stock appreciation rights granted to a Participant may be
exercised only while the Participant is an employee or consultant of the
Corporation or a Subsidiary.
Successive stock options and stock appreciation rights may be granted to
the same Participant, whether or not the stock option(s) and stock appreciation
right(s) previously granted to such Participant remain unexercised. A
Participant may exercise a stock option or a stock appreciation right, if then
exercisable, notwithstanding that stock options and stock appreciation rights
previously granted to such Participant remain unexercised.
14. NON-TRANSFERABILITY OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS:
No stock option or stock appreciation right granted under the Plan to a
Participant shall be transferable by such Participant otherwise than by will or
by the laws of descent and dis-
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<PAGE>
tribution, and stock options and stock appreciation rights shall be exercisable,
during the lifetime of the Participant, only by the Participant.
15. TERM OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS: If not sooner
terminated, each stock option and stock appreciation right granted hereunder
shall expire not more than 10 years from the date of the granting thereof;
provided, however, that with respect to an Incentive Option or a related stock
appreciation right granted to a Participant who, at the time of the grant, owns
(after applying the attribution rules of Section 424(d) of the Code) more than
10 % of the total combined voting stock of all classes of stock of the
Corporation or of any parent or subsidiary, such option and stock appreciation
right shall expire not more than five (5) years after the date of granting
thereof.
16. CONTINUATION OF EMPLOYMENT: The Committee may require, in its
Discretion, that any Participant under the Plan to whom a stock option or stock
appreciation right shall be granted shall agree in writing as a condition of the
granting of such stock option or stock appreciation right to remain in the
employ or to remain as a consultant of the Corporation or a Subsidiary for a
designed minimum period from the date of the granting of such stock option or
stock appreciation right as shall be fixed by the Committee.
17. TERMINATION OF EMPLOYMENT: If the employment or consultancy of a
Participant by the Corporation or a Subsidiary shall terminate, the Committee
may, in its Discretion, permit the exercise of stock options and stock
appreciation rights granted to such Participant:
(i) for a period of not less than thirty (30) days nor more than three
months following termination of employment with respect to Incentive
Options or related stock appreciation rights if termination of
employment is not due to death or disability of the Participant;
(ii) for a period of not less than six (6) months nor more than one year
following termination of employment with respect to Incentive Options
or related stock appreciation rights if termination of employment is
due to the death or disability of the Participant; provided, however,
that if such disability is not a "disability" as such term is defined
in Section 22(e)(3) of the Code, the Incentive Stock Option shall
automatically cease to be treated as an Incentive Stock Option and
shall be treated as a Nonstatutory Stock Option on the day three (3)
months and one day following such termination; and;
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<PAGE>
(iii) for a period of not less than six (6) months and not longer than the
expiration date with respect to Nonqualified Options or related or
independently granted stock appreciation rights.
In no event, however, shall a stock option or stock appreciation right be
exercisable subsequent to its expiration date and, furthermore, a stock option
or stock appreciation right may only be exercised after termination of a
Participant's employment or consultancy to the extent exercisable on the date of
termination of employment or consultancy. The period of time a Participant
shall have to exercise stock options or stock appreciation rights upon
termination of employment shall be set forth in the Corporation-Participant
Agreement.
18. RESTRICTED STOCK AWARDS: Subject to the terms of the Plan, the
Committee may award shares of restricted stock to Participants. All shares of
restricted stock granted to Participants under the Plan shall be subject to the
following terms and conditions (and to such other terms and conditions
prescribed by the Committee):
(a) At the time of each award of restricted shares, there shall be
established for the shares a restricted period, which shall be no less than
six months and no greater than five years and will lapse at a rate of not
less than twenty percent (20%) per year over five (5) years from the date
the award is made. Such restricted period may differ among Participants
and may have different expiration dates with respect to portions of shares
covered by the same award.
(b) Shares of restricted stock awarded to Participants may not be
sold, assigned, transferred, pledged, hypothecated or otherwise encumbered
during the restricted period applicable to such shares. Except for such
restrictions on transfer, a Participant shall have all of the rights of a
shareholder in respect of restricted shares awarded to him or her
including, but not limited to, the right to receive any dividends on, and
the right to vote, the shares.
(c) Unless the Committee determines otherwise, the Corporation shall
have a repurchase option exercisable upon the voluntary or involuntary
termination of the Participant's employment with the Corporation for any
reason (including death or disability). The purchase price for shares
purchased shall be the original price paid by the Participant and may be
paid by cancellation of any indebtedness of the Participant to the
Corporation.
(d) Stock certificates shall be issued in respect of shares of
restricted stock awarded hereunder and shall be registered in the name of
the Participant. Such certificates shall be deposited with the Corporation
or its designee, together with a stock
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<PAGE>
power endorsed in blank and a legend shall be placed upon such certificates
reflecting that the shares represented thereby are subject to restrictions
against transfer and forfeiture.
(e) At the expiration of the restricted period applicable to the
shares, the Corporation shall deliver to the Participant or the legal
representative of the Participant's estate the stock certificates deposited
with it or its designee and as to which the restricted period has expired.
(f) Restricted stock awards granted to Insiders and shares purchased
by Insiders in connection with restricted stock awards, shall be subject to
any restrictions applicable thereto in compliance with Rule 16b-3. An
Insider may purchase shares pursuant to the grant of a restricted stock
award, and may sell shares purchased pursuant to the grant of a restricted
stock award, only during such time or times as are permitted by Rule 16b-3.
19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE:
(A) CHANGES IN CAPITALIZATION: Subject to any required action by the
shareholders of the Corporation, the number of shares of Class A Common Stock
covered by each outstanding stock option, restricted stock award, and stock
appreciation right, and the number of shares of Class A Common Stock which have
been authorized for issuance under the Plan but as to which no stock option,
restricted stock award, or stock appreciation right has yet been granted or
which has been returned to the Plan upon cancellation or expiration of a stock
option, restricted stock award, or stock appreciation right, as well as the
price per share of Class A Common Stock covered by each such outstanding stock
option, restricted stock award, or stock appreciation right, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Class A Common Stock resulting from a stock split, reverse stock
split, stock dividend, combination or reclassification of the Class A Common
Stock, or any other increase or decrease in the number of issued shares of Class
A Common Stock effected without receipt of consideration by the Corporation;
provided, however, that conversion of any convertible securities of the
Corporation shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Corporation of shares of stock of any class,
or securities convertible into shares of stock of any class, shall affect, and
no adjustment by reason thereof shall be made with respect to the number or
price of shares of Class A Common Stock subject to a stock option, restricted
stock award, or stock appreciation right.
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<PAGE>
(B) DISSOLUTION OR LIQUIDATION: In the event of the proposed
dissolution or liquidation of the Corporation, the Committee shall notify each
participant as soon as practicable prior to the effective date of such proposed
transaction. To the extent it has not been previously exercised, an stock
option, restricted stock award, or stock appreciation right will terminate
immediately prior to the consummation of such proposed action.
(C) MERGER OR ASSET SALE: In the event of a merger of the Corporation
with or into another corporation, or the sale of substantially all of the assets
of the Corporation, each outstanding stock option, restricted stock award, and
stock appreciation right shall be assumed or an equivalent stock option,
restricted stock award, or stock appreciation right substituted by the successor
corporation or a parent or Subsidiary of the successor corporation. In the
event that the successor corporation refuses to assume or substitute for the
stock option, restricted stock award, or stock appreciation right, then such
stock option, restricted stock award, or stock appreciation right shall
terminate as of the date of the closing of the merger. For the purposes of this
paragraph, the stock option, restricted stock award, or stock appreciation right
shall be considered assumed if, following the merger or sale of assets, the
stock option, restricted stock award, or right confers the right to purchase or
receive, for each share of stock subject to the stock option, restricted stock
award, or stock appreciation right immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Class A Common Stock for
each share held on the effective date of the transaction (and if holders were
offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding shares); provided, however, that if
such consideration received in the merger or sale of assets was not solely
common stock of the successor corporation or its parent, the Committee may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the stock option, restricted stock award, or stock
appreciation right, for each share of stock subject to the stock option,
restricted stock award, or stock appreciation right, to be solely common stock
of the successor corporation or its parent equal in fair market value to the per
share consideration received by holders of Class A Common Stock in the merger or
sale of assets.
20. INVESTMENT PURPOSE: If the Committee in its Discretion determines
that as a matter of law such procedure is or may be desirable, it may require a
Participant, upon any acquisition of Class A Common Stock hereunder (whether by
reason of the exercise of stock options or stock appreciation rights or the
award of restricted stock) and as a condition to the Corporation's obligation to
issue or deliver certificates representing such shares, to execute and deliver
to the Corporation a written statement, in form satisfactory to the Committee,
representing and warranting that the Participant's acquisition of shares of
stock shall be for such person's own account, for investment and not with a view
to the resale or distribution thereof and that any subsequent offer for sale or
sale of any such shares shall be made either
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<PAGE>
pursuant to (a) a registration statement on an appropriate form under the
Securities Act of 1933, as amended (the "Securities Act"), which registration
statement has become effective and is current with respect to the shares being
offered and sold, or (b) a specific exemption from the registration requirements
of the Securities Act, but in claiming such exemption the Participant shall,
prior to any offer for sale or sale of such shares, obtain a favorable written
opinion from counsel for or approved by the Corporation as to the availability
of such exemption. The Corporation may endorse an appropriate legend referring
to the foregoing restriction upon the certificate or certificates representing
any shares issued or transferred to a Participant under the Plan.
21. RIGHTS TO CONTINUED EMPLOYMENT: Nothing contained in the Plan or in
any stock option, stock appreciation right or restricted stock granted or
awarded pursuant to the Plan, nor any action taken by the Committee hereunder,
shall confer upon any Participant any right with respect to continuation of
employment or consultancy by the Corporation or a Subsidiary nor interfere in
any way with the right of the Corporation or a Subsidiary to terminate such
person's employment or consultancy at any time.
22. WITHHOLDING PAYMENTS: If upon the exercise of a Nonqualified Option
or stock appreciation right, or upon the award of restricted stock or the
expiration of restrictions applicable to restricted stock, or upon a
disqualifying disposition (within the meaning of Section 422 of the Code) of
shares acquired upon exercise of an Incentive Option, there shall be payable by
the Corporation or a Subsidiary any amount for income tax withholding, in the
Committee's Discretion, either the Corporation shall appropriately reduce the
amount of Class A Common Stock or cash to be delivered or paid to the
Participant or the Participant shall pay such amount to the Corporation or
Subsidiary to reimburse it for such income tax withholding. The Committee may,
in its Discretion, permit Participants to satisfy such with holding
obligations, in whole or in part, by electing to have the amount of Class A
Common Stock delivered or deliverable by the Corporation upon exercise of a
stock option or stock appreciation right or upon award of restricted stock
appropriately reduced, or by electing to tender Class A Common Stock back to the
Corporation subsequent to exercise of a stock option or stock appreciation right
or award of restricted stock, to reimburse the Corporation or a Subsidiary for
such income tax withholding, subject to such rules and regulations as the
Committee may adopt. The Committee may make such other arrangements with
respect to income tax withholding as it shall determine. Any withholding
payments made pursuant to this Paragraph with respect to Insiders shall comply
with Rule 16b-3.
23. EFFECTIVENESS OF PLAN: The Plan shall be effective on the date the
Board of Directors of the Corporation adopts the Plan, provided that the
shareholders of the Corporation approve the Plan within 12 months of its
adoption by the Board of Directors. Stock options, stock appreciation rights and
restricted stock may be granted or awarded prior to
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<PAGE>
shareholder approval of the Plan, but each such stock option, stock appreciation
right or restricted stock grant or award shall be subject to shareholder
approval of the Plan. No stock option or stock appreciation right may be
exercised prior to shareholder approval, and any restricted stock awarded is
subject to forfeiture if such shareholder approval is not obtained.
24. TERMINATION, DURATION AND AMENDMENTS OF PLAN: The Plan may be
abandoned or terminated at any time by the Board of Directors of the
Corporation. Unless sooner terminated, the Plan shall terminate on the date ten
years after its adoption by the Board of Directors, and no stock options, stock
appreciation rights or restricted stock may be granted or awarded thereafter.
The termination of the Plan shall not affect the validity of any stock option,
stock appreciation right or restricted stock outstanding on the date of
termination.
For the purpose of conforming to any changes in applicable law or
governmental regulations, or for any other lawful purpose, the Board of
Directors shall have the right, with or without approval of the shareholders of
the Corporation, to amend or revise the terms of the Plan at any time; provided,
however, that no such amendment or revision shall (i) without approval or
ratification of the shareholders of the Corporation (A) increase the maximum
number of shares in the aggregate which are subject to the Plan (subject,
however, to the provisions of Paragraph 19), (B) increase the maximum number of
shares for which any Participant may be granted stock options, stock
appreciation rights or awarded restricted stock under the Plan (except as
contemplated by Paragraph 19), (C) change the class of persons eligible to be
Participants under the Plan, or (D) materially increase the benefits accruing to
Participants under the Plan, or (ii) without the consent of the holder thereof,
change the stock option price (except as contemplated by Paragraph 19) or alter
or impair any stock option, stock appreciation right or restricted stock which
shall have been previously granted or awarded under the Plan.
25. INFORMATION TO PARTICIPANTS: The Corporation shall provide to each
Participant and to each individual who acquires shares pursuant to the Plan, not
less frequently than annually during the period such Participant or purchaser
has one or more options, restricted stock awards or stock appreciation rights
outstanding, and, in the case of an individual who acquires Class A Common Stock
pursuant to the Plan, during the period such individual owns shares of Class A
Common Stock, copies of annual financial statements. The Corporation shall
not be required to provide such statements to key employees whose duties in
connection with the Corporation assure their access to equivalent information.
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<PAGE>
EXHIBIT 10.5
CONCENTRIC NETWORK CORPORATION
AMENDED AND RESTATED
1996 STOCK PLAN
(Amended and Restated as of May 1, 1997)
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock
Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
-----------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 hereof.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means Concentric Network Corporation, a Florida
-------
corporation.
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<PAGE>
(h) "Consultant" means any person who is engaged by the Company or
----------
any Parent or Subsidiary to render consulting or advisory services and is
compensated for such services.
(i) "Director" means a member of the Board of Directors of the
--------
Company.
(j) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(l) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or the Nasdaq SmallCap Market of the Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(m) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code.
(n) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
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<PAGE>
(o) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Option" means a stock option granted pursuant to the Plan.
------
(q) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(r) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are exchanged for Options with a lower exercise price.
(s) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(t) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(u) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(v) "Plan" means this 1996 Stock Plan.
----
(w) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(x) "Section 16(b)" means Section 16(b) of the Securities Exchange
-------------
Act of 1934, as amended.
(y) "Service Provider" means an Employee, Director or Consultant.
----------------
(z) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 below.
(aa) "Stock Purchase Right" means a right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(bb) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 11,900,000 Shares. The Shares may be authorized but
unissued, or reacquired Common Stock.
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<PAGE>
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued under the Plan,
upon exercise of either an Option or Stock Purchase Right, shall not be returned
to the Plan and shall not become available for future distribution under the
Plan, except that if Shares of Restricted Stock are repurchased by the Company
at their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) The Plan shall be administered by the Board or a Committee
appointed by the Board, which Committee shall be constituted to comply with
Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, of any Option or
Stock Purchase Right granted hereunder. Such terms and conditions include, but
are not limited to, the exercise price, the time or times when Options or Stock
Purchase Rights may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or Stock Purchase Right or the
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(f) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
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<PAGE>
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by Optionees to
have Shares withheld for this purpose shall be made in such form and under such
conditions as the Administrator may deem necessary or advisable; and
(xi to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
(b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by
------------
the Board. It shall continue in effect for a term of 10 years unless sooner
terminated under Section 14 of the Plan.
5
<PAGE>
7. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement; provided, however, that the term shall be no more than 10 years from
the date of grant thereof. In the case of an Incentive Stock Option granted to
an Optionee who, at the time the Option is granted, owns stock representing more
than 10% of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the term of the Option shall be five years from the date
of grant or such shorter term as may be provided in the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of
such Option, owns stock representing more than 10% of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the exercise price
shall be no less than 110% of the Fair Market Value per Share on the date of
grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a Service Provider who, at the time of
grant of such Option, owns stock representing more than 10% of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the exercise
price shall be no less than 110% of the Fair Market Value per Share on the date
of the grant.
(B) granted to any other Service Provider, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal
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<PAGE>
to the aggregate exercise price of the Shares as to which such Option shall be
exercised, (5) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan, or (6) any
combination of the foregoing methods of payment. In making its determination as
to the type of consideration to accept, the Administrator shall consider if
acceptance of such consideration may be reasonably expected to benefit the
Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement, but in no case at a rate of less than 20% per year over
five years from the date the Option is granted. Unless the Administrator
provides otherwise, vesting of Options granted hereunder shall be tolled during
any unpaid leave of absence. An Option may not be exercised for a fraction of a
Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, such Optionee may exercise his or her Option
within such period of time as is specified in the Option Agreement (of at least
30 days) to the extent that the Option is vested on the date of termination (but
in no event later than the expiration of the term of the Option as set forth in
the Option Agreement). To the extent that the Optionee is not entitled to
exercise the Option on the date of such termination, or if the Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
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<PAGE>
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of Optionee's disability, the Optionee may within 12 months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
an Option to the extent otherwise entitled to exercise it at the date of such
termination. If such disability is not a "disability" as such term is defined
in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such
Incentive Stock Option shall automatically cease to be treated as an Incentive
Stock Option and shall be treated for tax purposes as a Nonstatutory Stock
Option on the day three months and one day following such termination. To the
extent that the Optionee is not entitled to exercise the Option on the date of
termination, or if the Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised at any time within 12 months following the date of
death (but in no event later than the expiration of the term of such Option as
set forth in the Notice of Grant) to the extent vested on the date of death.
If, at the time of death, the Optionee is not vested as to the entire Option,
the Shares covered by the unvested portion of the Option shall revert to the
Plan. The Option may be exercised by the executor or administrator of the
Optionee's estate or, if none, by the person(s) entitled to exercise the Option
under the Optionee's will or the laws of descent or distribution. If the Option
is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically of the terms, conditions and restrictions
related to the offer, including the number of Shares that such person shall be
entitled to purchase, the price to be paid, and the time within which such
person must accept such offer. The terms of the offer shall comply in all
respects with Section 260.140.42 of Title 10 of the California Code of
Regulations. The offer shall be accepted by execution of a Restricted Stock
purchase agreement in the form determined by the Administrator.
8
<PAGE>
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine, but in no case at a rate of less than 20% per year
over five years from the date of purchase.
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have rights equivalent to those of a shareholder
and shall be a shareholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.
12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
----------------------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify the
Optionee at least 15 days prior to such proposed action. To the extent it has
not been previously exercised, the Option or Stock Purchase Right shall
terminate immediately prior to the consummation of such proposed action.
9
<PAGE>
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully exercisable for a period of 15
days from the date of such notice, and the Option or Stock Purchase Right shall
terminate upon the expiration of such period. For the purposes of this
paragraph, the Option or Stock Purchase Right shall be considered assumed if,
following the merger or sale of assets, the option or right confers the right to
purchase or receive, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger or sale of assets is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon the
exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
13. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option or Stock Purchase Right is so granted within a reasonable time
after the date of such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Board shall obtain shareholder approval
--------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed
10
<PAGE>
otherwise between the Optionee and the Administrator, which agreement must be in
writing and signed by the Optionee and the Company. Termination of the Plan
shall not affect the Administrator's ability to exercise the powers granted to
it hereunder with respect to Options granted under the Plan prior to the date of
such termination.
15. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
16. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within 12 months after the date the Plan is adopted.
Such shareholder approval shall be obtained in the degree and manner required
under Applicable Laws.
19. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options or Stock Purchase Rights outstanding, and, in the case
of an individual who acquires Shares pursuant to the Plan, during the period
such individual owns such Shares, copies of annual financial statements. The
Company shall not be required to provide such statements to key employees whose
duties in connection with the Company assure their access to equivalent
information.
11
<PAGE>
CONCENTRIC NETWORK CORPORATION
1996 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
The undersigned Optionee has been granted an Option to purchase Common
Stock of the Company, subject to the terms and conditions of the Plan and this
Option Agreement, as follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $_________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
----------------
This Option shall be exercisable, in whole or in part, according to the
following vesting schedule:
1
<PAGE>
TWENTY-FIVE PERCENT OF THE SHARES SUBJECT TO THE OPTION SHALL VEST TWELVE
MONTHS AFTER THE VESTING COMMENCEMENT DATE, AND 1/36 OF THE SHARES SUBJECT TO
THE OPTION SHALL VEST ON THE LAST CALENDAR DAY OF EACH MONTH THEREAFTER, SUBJECT
TO OPTIONEE'S CONTINUING TO BE A SERVICE PROVIDER ON SUCH DATES.
Termination Period:
------------------
This Option shall be exercisable for 90 days after Optionee ceases to be a
Service Provider. Upon Optionee's death or disability, this Option may be
exercised for such longer period as provided in the Plan. In no event may
Optionee exercise this Option after the Term/Expiration Date as provided above.
II. AGREEMENT
---------
1. Grant of Option. The Plan Administrator of the Company hereby grants
---------------
to the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 14(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option as defined in
Section 422 of the Code. Nevertheless, to the extent that it exceeds the
$100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option shall be exercisable during its
-----------------
term in accordance with the Vesting Schedule set out in the Notice of Grant and
with the applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option shall be exercisable by delivery
------------------
of an exercise notice in the form attached as Exhibit A (the AExercise Notice@)
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by the aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with Applicable laws. Assuming such
compliance, for income tax
2
<PAGE>
purposes the Shares shall be considered transferred to the Optionee on the date
on which the Option is exercised with respect to such Shares.
3. Optionee's Representations. In the event the Shares have not been
--------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
B.
4. Lock-Up Period. Optionee hereby agrees that, if so requested by the
--------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
5. Method of Payment. Payment of the aggregate Exercise Price shall be
-----------------
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash or check;
(b) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or
(c) surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
6. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.
7. Non-Transferability of Option. This Option may not be transferred
-----------------------------
in any manner otherwise than by will or by the laws of descent or distribution
and may be exercised during the lifetime of Optionee only by Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
3
<PAGE>
8. Term of Option. This Option may be exercised only within the term
--------------
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
9. Tax Consequences. Set forth below is a brief summary as of the date
----------------
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of ISO. If this Option qualifies as an ISO, there will
---------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
(b) Exercise of ISO Following Disability. If the Optionee ceases to
------------------------------------
be an Employee as a result of a disability that is not a total and permanent
disability as defined in Section 22(e)(3) of the Code, to the extent permitted
on the date of termination, the Optionee must exercise an ISO within three
months of such termination for the ISO to be qualified as an ISO.
(c) Exercise of Nonstatutory Stock Option. There may be a regular
-------------------------------------
federal income tax liability upon the exercise of a Nonstatutory Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is an
Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(d) Disposition of Shares. In the case of an NSO, if Shares are
---------------------
held for at least one year, any gain realized on disposition of the Shares will
be treated as long-term capital gain for federal income tax purposes. In the
case of an ISO, if Shares transferred pursuant to the Option are held for at
least one year after exercise and of at least two years after the Date of Grant,
any gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within one year after exercise or two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price and the lesser of (1) the Fair Market Value of the
Shares on the date of exercise, or (2) the sale price of the Shares. Any
additional gain will be taxed as capital gain, short-term or long-term depending
on the period that the ISO Shares were held.
4
<PAGE>
(e) Notice of Disqualifying Disposition of ISO Shares. If the Option
-------------------------------------------------
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
10. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws but not
the choice of law rules of the state of California.
11. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
5
<PAGE>
OPTIONEE: CONCENTRIC NETWORK CORPORATION
______________________________ ______________________________________
Signature By
______________________________ ______________________________________
Print Name Print Name
______________________________ ______________________________________
Residence Address Title
______________________________
OPTION AGREEMENT
6
<PAGE>
EXHIBIT A
---------
CONCENTRIC NETWORK CORPORATION
1996 STOCK PLAN
OPTION EXERCISE NOTICE
Concentric Network Corporation
10590 North Tantau Avenue
Cupertino, CA 95014
Attention: Corporate Secretary
1. Exercise of Option. Effective as of today, ___________, 19__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_________ shares of the Common Stock (the "Shares") of Concentric Network
Corporation (the "Company") under and pursuant to the 1996 Stock Plan (the
"Plan") and the Stock Option Agreement dated ________, 19____ (the "Option
Agreement").
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price of the Shares, as set forth in the Option Agreement.
3. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance of the Shares (as
---------------------
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive dividends
or any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares shall be issued to
the Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.
5. Company's Right of First Refusal. Before any Shares held by
--------------------------------
Optionee or any transferee (either being sometimes referred to herein as the
"Holder") may be sold or otherwise transferred (including transfer by gift or
operation of law), the Company or its assignee(s) shall have a right of first
refusal to purchase the Shares on the terms and conditions set forth in this
Section (the "Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee;
<PAGE>
and (iv) the bona fide cash price or other consideration for which the Holder
proposes to transfer the Shares (the "Offered Price"), and the Holder shall
offer the Shares at the Offered Price to the Company or its assignee(s).
(b) Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
--------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the
-------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Shares proposed in
--------------------------
the Notice to be transferred to a given Proposed Transferee are not purchased by
the Company and/or its assignee(s) as provided in this Section, then the Holder
may sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
(f) Exception for Certain Family Transfers. Anything to the
--------------------------------------
contrary contained in this Section notwithstanding, the transfer of any or all
of the Shares during the Optionee's lifetime or on the Optionee's death by will
or intestacy to the Optionee's immediate family or a trust for the benefit of
the Optionee's immediate family shall be exempt from the provisions of this
Section. "Immediate Family" as used herein shall mean spouse, lineal descendant
or antecedent, father, mother, brother or sister. In such case, the transferee
or other recipient shall receive and hold the Shares so transferred subject to
the provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
2
<PAGE>
(g) Termination of Right of First Refusal. The Right of First
-------------------------------------
Refusal shall terminate as to any Shares upon the first sale of Common Stock of
the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
6. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
7. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. Optionee understands and agrees that the Company shall
-------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL
SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE
ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN
THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH
MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER
RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF
THESE SHARES.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instruc tions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
3
<PAGE>
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
8. Successors and Assigns. The Company may assign any of its rights
----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.
9. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.
10. Governing Law; Severability. This Agreement is governed by the
---------------------------
internal substantive laws but not the choice of law rules, of the state of
California.
4
<PAGE>
11. Entire Agreement. The Plan and Option Agreement are incorporated
----------------
herein by reference. This Agreement, the Plan, the Option Agreement and the
Investment Representation Statement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.
Submitted by: Accepted by:
OPTIONEE: CONCENTRIC NETWORK CORPORATION
____________________________ ___________________________________
Signature By
____________________________ ___________________________________
Print Name Print Name
___________________________________
Title
Address: Address:
- ------- -------
____________________________ ___________________________________
____________________________ ___________________________________
___________________________________
Date Received
OPTION EXERCISE NOTICE
5
<PAGE>
EXHIBIT B
---------
OPTIONEE INVESTMENT REPRESENTATION STATEMENT
OPTIONEE: ______________________________
COMPANY: CONCENTRIC NETWORK CORPORATION
SECURITY: COMMON STOCK
AMOUNT: ______________________________
DATE: ______________________________
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, a legend prohibiting their
transfer without the consent of the Commissioner of Corporations of the State of
California and any other legend required under applicable state securities laws.
(c) Optionee is familiar with the provisions of Rule 701 and Rule
144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted
<PAGE>
securities" acquired, directly or indirectly from the issuer thereof, in a non-
public offering subject to the satisfaction of certain conditions. Rule 701
provides that if the issuer qualifies under Rule 701 at the time of the grant of
the Option to the Optionee, the exercise will be exempt from registration under
the Securities Act. In the event the Company becomes subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
ninety (90) days thereafter (or such longer period as any market stand-off
agreement may require) the Securities exempt under Rule 701 may be resold,
subject to the satisfaction of certain of the conditions specified by Rule 144,
including: (1) the resale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934); and, in the case of
an affiliate, (2) the availability of certain public information about the
Company, (3) the amount of Securities being sold during any three month period
not exceeding the limitations specified in Rule 144(e), and (4) the timely
filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than two years after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than three years, the satisfaction of the conditions set forth
in sections (1), (2), (3) and (4) of the paragraph immediately above.
(d) Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that any
such other registration exemption will be available in such event.
Signature of Optionee:
____________________________________
____________________________________
Print Name
Date:_______________________, 19___
OPTIONEE INVESTMENT REPRESENTATION STATEMENT
<PAGE>
CONCENTRIC NETWORK CORPORATION
1996 STOCK PLAN
NOTICE OF GRANT OF STOCK PURCHASE RIGHT
Unless otherwise defined herein, the terms defined in the 1996 Stock Plan
(the "Plan") shall have the same defined meanings in this Notice of Grant.
[Grantee's Name and Address]
You have been granted the right to purchase Common Stock of the Company,
subject to the Company's repurchase option and your ongoing status as a Service
Provider (as described in the Plan and the attached Restricted Stock Purchase
Agreement), as follows:
Grant Number _____________________________________________
Date of Grant _____________________________________________
Price Per Share $____________________________________________
Total Number of Shares Subject
to This Stock Purchase Right _____________________________________________
Expiration Date ____________________________________________
YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION DATE OR
IT WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES. By
your signature and the signature of the Company's representative below, you and
the Company agree that this Stock Purchase Right is granted under and governed
by the terms and conditions of the Plan and the Restricted Stock Purchase
Agreement attached hereto as Exhibit A-1, each of which is hereby incorporated
herein by reference. You further agree to execute the Restricted Stock Purchase
Agreement as a condition to purchasing any shares under this Stock Purchase
Right.
GRANTEE: CONCENTRIC NETWORK CORPORATION
__________________________ By:_________________________________
Signature
Print Name:______________________________
__________________________
3
<PAGE>
Print Name Title:__________________________________
4
<PAGE>
EXHIBIT A-1
-----------
CONCENTRIC NETWORK CORPORATION
1996 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Restricted Stock Purchase Agreement.
THIS AGREEMENT is made as of __________, 199__, at _____________________,
___________________, between Concentric Network Corporation, a Florida
corporation (the "Company"), and _______________ (the "Purchaser").
WHEREAS the Purchaser named in the Notice of Grant (the "Purchaser") is an
employee, director or consultant of the Company, and the Purchaser's continued
participation is considered by the Company to be important for the Company's
continued growth; and
WHEREAS in order to give the Purchaser an opportunity to acquire an equity
interest in the Company as an incentive for the Purchaser to participate in the
affairs of the Company, the Administrator has granted to the Purchaser stock
purchase rights subject to the terms and conditions of the Plan and the Notice
of Grant, which are incorporated herein by reference, and pursuant to this
Restricted Stock Purchase Agreement (the "Agreement");
NOW, THEREFORE, the parties agree as follows:
12. Sale of Stock. The Company hereby agrees to sell to the Purchaser and
-------------
the Purchaser hereby agrees to purchase shares of the Company's Common Stock
(the "Shares") at the per share purchase price and as otherwise described in the
Notice of Grant.
13. Payment of Purchase Price. The purchase price for the Shares may be
-------------------------
paid by delivery to the Company at the time of execution of this Agreement of
cash or a check.
14. Repurchase Option.
-----------------
(a) In the event Purchaser ceases to be a Service Provider for any or
no reason (including death or disability) before all of the Shares are released
from the Company's repurchase option (see Section 4), but not in the event of
Purchaser's change in status from Employee to Consultant or Non-Employee
Director or Consultant or Non-Employee Director to Employee, the Company shall,
upon the date of such termination (as reasonably fixed and determined by the
Company) have an irrevocable, exclusive option for a period of sixty (60) days
from such date to repurchase up to that number of shares which constitute the
Unreleased
<PAGE>
Shares (as defined in Section 4) at the original purchase price per share (the
"Repurchase Price"). Said option shall be exercised by the Company by delivering
written notice to the Purchaser or the Purchaser's executor (with a copy to the
Escrow Holder (as defined in Section 6)) AND, at the Company's option, (i) by
delivering to the Purchaser or the Purchaser's executor a check in the amount of
the aggregate Repurchase Price, or (ii) by the Company canceling an amount of
the Purchaser's indebtedness to the Company equal to the aggregate Repurchase
Price, or (iii) by a combination of (i) and (ii) so that the combined payment
and cancellation of indebtedness equals such aggregate Repurchase Price. Upon
delivery of such notice and the payment of the aggregate Repurchase Price in any
of the ways described above, the Company shall become the legal and beneficial
owner of the Shares being repurchased and all rights and interests therein or
relating thereto, and the Company shall have the right to retain and transfer to
its own name the number of Shares being repurchased by the Company.
(b) Whenever the Company shall have the right to repurchase Shares
hereunder, the Company may designate and assign one or more employees, officers,
directors or shareholders of the Company or other persons or organizations to
exercise all or a part of the Company's purchase rights under this Agreement and
purchase all or a part of such Shares. If the Fair Market Value of the Shares
to be repurchased on the date of such designation or assignment (the "Repurchase
FMV") exceeds the aggregate Repurchase Price of such Shares, then each such
designee or assignee shall pay the Company cash equal to the difference between
the Repurchase FMV and the aggregate Repurchase Price of such Shares.
15. Release of Shares From Repurchase Option.
----------------------------------------
(a) [__________________ (___%)] of the Shares shall be released from
the Company's repurchase option [______________________ and
______________________of the Shares shall be released each month thereafter],
provided in each case that the Purchaser's status as a Service Provicer has not
terminated prior to the date of any such release.
(b) Any of the Shares that have not yet been released from the
Company's repurchase option are referred to herein as "Unreleased Shares."
(c) The Shares that have been released from the Company's repurchase
option shall be delivered to the Purchaser at the Purchaser's request (see
Section 6).
16. Restriction on Transfer. Except for the escrow described in Section 6
-----------------------
or transfer of the Shares to the Company or its assignees contemplated by this
Agreement, none of the Shares or any beneficial interest therein shall be
transferred, encumbered or otherwise disposed of in any way until the release of
such Shares from the Company's repurchase option in accordance with the
provisions of this Agreement, other than by will or the laws of descent and
distribution.
-2-
<PAGE>
17. Escrow of Shares.
----------------
(a) To ensure the availability for delivery of the Purchaser's
Unreleased Shares upon repurchase by the Company pursuant to the Company's
repurchase option under Section 3 above, the Purchaser shall, upon execution of
this Agreement, deliver and deposit with an escrow holder designated by the
Company (the "Escrow Holder") the share certificates representing the Unreleased
Shares, together with the stock assignment duly endorsed in blank, attached
hereto as Exhibit A-2. The Unreleased Shares and stock assignment shall be held
by the Escrow Holder, pursuant to the Joint Escrow Instructions of the Company
and Purchaser attached as Exhibit A-3 hereto, until such time as the Company's
repurchase option expires. As a further condition to the Company's obligations
under this Agreement, the spouse of Purchaser, if any, shall execute and deliver
to the Company the Consent of Spouse attached hereto as Exhibit A-4.
(b) The Escrow Holder shall not be liable for any act it may do or
omit to do with respect to holding the Unreleased Shares in escrow while acting
in good faith and in the exercise of its judgment.
(c) If the Company or any assignee exercises its repurchase option
hereunder, the Escrow Holder, upon receipt of written notice of such option
exercise from the proposed transferee, shall take all steps necessary to
accomplish such transfer.
(d) When the repurchase option has been exercised or expires
unexercised or a portion of the Shares has been released from such repurchase
option, upon Purchaser's request the Escrow Holder shall promptly cause a new
certificate to be issued for such released Shares and shall deliver such
certificate to the Company or the Purchaser, as the case may be.
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a shareholder with respect to such Shares while they are held in
escrow, including without limitation, the right to vote the Shares and receive
any cash dividends declared thereon. If, from time to time during the term of
the Company's repurchase option, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of the Purchaser's ownership of the Shares shall be immediately subject
to this escrow, deposited with the Escrow Holder and included thereafter as
"Shares" for purposes of this Agreement and the Company's repurchase option.
18. Company's Right of First Refusal. Before any Shares that are
--------------------------------
permitted to be sold or otherwise transferred pursuant to this Agreement and
that are held by Purchaser or any transferee (either being sometimes referred to
herein as the "Holder") may be sold or otherwise transferred (including transfer
by gift or operation of law), the Company or its
-3-
<PAGE>
assignee(s) shall have a right of first refusal to purchase the Shares on the
terms and conditions set forth in this Section (the "Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder pro poses to
transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares
at the Offered Price to the Company or its assignee(s).
(b) Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
--------------
Shares purchased by the Company or its assignee(s) under this Section shall be
(i) the Offered Price in the case of Shares that are not Unreleased Shares, or
(ii) in the case of Shares that are Unreleased Shares, the lower of the Offered
Price or the Repurchase Price as defined in Section 3(a) hereof. If the Offered
Price includes consideration other than cash, the cash equivalent value of the
non-cash consideration shall be determined by the Board of Directors of the
Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the
-------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within thirty (30) days after receipt of the Notice or in
the manner and at the times set forth in the Notice.
(e) Holder's Right to Transfer. If the Shares proposed in the Notice
--------------------------
to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within one hundred twenty (120) days after the date of the Notice
and provided further that any such sale or other transfer is effected in
accordance with any applicable securities laws and the Proposed Transferee
agrees in writing that the provisions of this Section shall continue to apply to
the Shares in the hands of such Proposed Transferee. If the Shares described in
the Notice are not transferred to the Proposed Transferee within such period, a
new Notice shall be given to the Company, and the Company and/or its assignees
shall again be offered the Right of First Refusal before any Shares held by the
Holder may be sold or otherwise transferred.
-4-
<PAGE>
(f) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Purchaser's lifetime or on the Purchaser's death by will or
intestacy to the Purchaser's immediate family or a trust for the benefit of the
Purchaser's immediate family shall be exempt from the provisions of this
Section, provided that the Purchaser notifies the Company in writing within
thirty (30) days of said transfer. "Immediate Family" as used herein shall mean
spouse, lineal descendant or antecedent, father, mother, brother or sister. In
such case, the transferee or other recipient shall receive and hold the Shares
so transferred subject to the provisions of this Agreement, including but not
limited to this Section and Section 3, and there shall be no further transfer of
such Shares except in accordance with the terms of this Section.
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares upon the date of the first sale of Common Stock
of the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
1933 Act.
19. Legends.
-------
(a) Purchaser understands and agrees that the Company shall cause the
legends set forth below or legends substantially equivalent thereto, to be
placed upon any certificate(s) evidencing ownership of the Shares together with
any other legends that may be required by the Company or by applicable state or
federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN
THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER OF THESE
SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPO
THECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER, A RIGHT OF FIRST REFUSAL,
AND A REPURCHASE OPTION HELD BY THE ISSUER OR ITS ASSIGNEE(S)
AS SET FORTH IN THE RESTRICTED STOCK PURCHASE AGREEMENT
BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A
COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE
ISSUER. SUCH TRANSFER RESTRICTIONS, RIGHT OF FIRST REFUSAL
-5-
<PAGE>
AND REPURCHASE OPTION ARE BINDING ON
TRANSFEREES OF THESE SHARES.
(b) Stop-Transfer Notices. Purchaser agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
20. Adjustment for Stock Split. All references to the number of Shares and
--------------------------
the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares that may be made by the Company after the date of this Agreement.
21. Tax Consequences. The Purchaser has reviewed with the Purchaser's own
----------------
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. The Purchaser
is relying solely on such advisors and not on any statements or representations
of the Company or any of its agents. The Purchaser understands that the
Purchaser (and not the Company) shall be responsible for the Purchaser's own tax
liability that may arise as a result of this investment or the transactions
contemplated by this Agreement. The Purchaser understands that Section 83 of
the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary
income the difference between the purchase price for the Shares and the Fair
Market Value of the Shares as of the date any restrictions on the Shares lapse.
In this context, "restriction" includes the right of the Company to buy back the
Shares pursuant to its repurchase option. The Purchaser understands that the
Purchaser may elect to be taxed at the time the Shares are purchased rather than
when and as the Company's repurchase option expires by filing an election under
Section 83(b) of the Code with the I.R.S. within thirty (30) days from the date
of purchase. The form for making this election is attached as Exhibit A-5
hereto.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER'S BEHALF.
-6-
<PAGE>
22. Lock-Up Period. Purchaser hereby agrees that, if so requested by the
--------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Purchaser shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
23. General Provisions.
------------------
(a) This Agreement shall be governed by the laws of the State of
California. This Agreement, subject to the terms and conditions of the Plan and
the Notice of Grant, represents the entire agreement between the parties with
respect to the purchase of Common Stock by the Purchaser. Subject to Section
14(c) of the Plan, in the event of a conflict between the terms and conditions
of the Plan and the terms and conditions of this Agreement, the terms and
conditions of the Plan shall prevail. Unless otherwise defined herein, the
terms defined in the Plan shall have the same defined meanings in this
Agreement.
(b) Any notice, demand or request required or permitted to be given by
either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or
deposited in the U.S. mail, First Class with postage prepaid, and addressed to
the parties at the addresses of the parties set forth at the end of this
Agreement or such other address as a party may request by notifying the other in
writing.
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party not sending the notice.
(c) The rights and benefits of the Company under this Agreement shall
be transferable to any one or more persons or entities, and all covenants and
agreements hereunder shall inure to the benefit of, and be enforceable by the
Company's successors and assigns. The rights and obligations of the Purchaser
under this Agreement may only be assigned with the prior written consent of the
Company.
(d) Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, nor prevent that party from thereafter enforcing each
and every other provision of this Agreement. The rights granted both parties
herein are cumulative and shall not constitute a
-7-
<PAGE>
waiver of either party's right to assert all other legal remedies available to
it under the circumstances.
(e) The Purchaser agrees upon request to execute any further documents
or instruments necessary or desirable to carry out the purposes or intent of
this Agreement.
(f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE RELEASE OF SHARES FROM
THE REPURCHASE OPTION OF THE COMPANY PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY
BY CONTINUING SERVICE AS AN EMPLOYEE, DIRECTOR OR CONSULTANT AT THE WILL OF THE
COMPANY (NOT THROUGH THE ACT OF BEING HIRED OR PURCHASING SHARES HEREUNDER).
PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS
CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT
CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE,
DIRECTOR OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND
SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO TERMI NATE
PURCHASER'S EMPLOYMENT, DIRECTORSHIP OR CONSULTING RELATIONSHIP AT ANY TIME,
WITH OR WITHOUT CAUSE.
By Purchaser's signature below, Purchaser represents that he or she is
familiar with the terms and provisions of the Plan, and hereby accepts this
Agreement subject to all of the terms and provisions thereof. Purchaser has
reviewed the Plan and this Agreement in their entirety, has had an opportunity
to obtain the advice of counsel prior to executing this Agreement and fully
understands all provisions of this Agreement. Purchaser agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Agreement.
Purchaser further agrees to notify the Company upon any change in the residence
indicated in the Notice of Grant.
PURCHASER: CONCENTRIC NETWORK CORPORATION
________________________________ By:___________________________________
___
Signature
Print Name:_______________________________
________________________________
Print Name Title:___________________________________
-8-
<PAGE>
RESTRICTED STOCK PURCHASE AGREEMENT
-9-
<PAGE>
EXHIBIT A-2
-----------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto ___________________________________________________________
_____________________________________________________ (__________) shares of the
Common Stock of Concentric Network Corporation standing in my name of the books
of said corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint _____________________________________________
to transfer said stock on the books of Concentric Network Corporation with full
power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between Concentric Network Corporation and the
undersigned dated ______________, 19__.
Dated: _______________, 19__
Signature:______________________________________
Print Name:_____________________________________
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>
EXHIBIT A-3
-----------
JOINT ESCROW INSTRUCTIONS
____________________________, 19__
Corporate Secretary
Concentric Network Corporation
10590 North Tantau Avenue
Cupertino, CA 95014
Dear _________________________:
As Escrow Agent for both Concentric Network Corporation, a Florida
corporation (the "Company"), and the undersigned purchaser of stock of the
Company (the "Purchaser"), you are hereby authorized and directed to hold the
documents delivered to you pursuant to the terms of that certain Restricted
Stock Purchase Agreement ("Agreement") between the Company and the undersigned,
in accordance with the following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of stock to
be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's repurchase option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a shareholder of the Company while the
stock is held by you.
<PAGE>
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option.
Within ninety (90) days after cessation of Purchaser's continuous employment by
or services to the Company, or any parent or subsidiary of the Company, you will
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's repurchase
option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked only
by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in
good faith, and any act done or omitted by you pursuant to the advice of your
own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree, you shall
not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts as
you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
-2-
<PAGE>
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Mail, by registered or certified mail with postage and fees
prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
(10) days' advance written notice to each of the other parties hereto.
COMPANY: Concentric Network Corporation
10590 North Tantau Avenue
Cupertino, CA 95014
PURCHASER: ______________________________
______________________________
______________________________
______________________________
ESCROW AGENT: Corporate Secretary
Concentric Network Corporation
10590 North Tantau Avenue
Cupertino, CA 95014
16. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
-3-
<PAGE>
18. These Joint Escrow Instructions shall be governed by, and construed and
enforced in accordance with, the laws of the State of California.
Very truly yours,
CONCENTRIC NETWORK CORPORATION
By:_____________________________________
Print Name:_____________________________
Title:__________________________________
PURCHASER:
________________________________________
(Signature)
_______________________________________
(Typed or Printed Name)
ESCROW AGENT:
_________________________________
Corporate Secretary
JOINT ESCROW INSTRUCTIONS
-4-
<PAGE>
EXHIBIT A-4
-----------
CONSENT OF SPOUSE
I, ____________________, spouse of ___________________, have read and
approve the foregoing Agreement. In consideration of granting of the right to
my spouse to purchase shares of Concentric Network Corporation, as set forth in
the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to
the exercise of any rights under the Agreement and agree to be bound by the
provisions of the Agreement insofar as I may have any rights in said Agreement
or any shares issued pursuant thereto under the community property laws or
similar laws relating to marital property in effect in the state of our
residence as of the date of the signing of the foregoing Agreement.
Dated: _______________, 19____
______________________________
Signature
______________________________
Print or Type Name
<PAGE>
EXHIBIT A-5
-----------
ELECTION UNDER SECTION 83(b)
----------------------------
OF THE INTERNAL REVENUE CODE OF 1986
------------------------------------
The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal
Tax Code, to include in taxpayer's gross income for the current taxable year,
the amount of any compensation taxable to taxpayer in connection with taxpayer's
receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER: SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows: _____________________________________________ shares (the
"Shares") of the Common Stock of Concentric Network Corporation (the
"Company").
3. The date on which the property was transferred is: ______________, 19__.
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, on certain
events. This right lapses with regard to a portion of the Shares based on
the continued performance of services by the taxpayer over time.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction that by its terms will never lapse,
of such property is:
$_______________.
6. The amount (if any) paid for such property is:
$_______________.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------
Dated: ___________________, 19__ ____________________________, Taxpayer
The undersigned spouse of taxpayer joins in this election.
<PAGE>
Dated: ________________, 19__ _________________________, Spouse of Taxpayer
EXHIBIT B
---------
RESTRICTED STOCK PURCHASER
INVESTMENT REPRESENTATION STATEMENT
PURCHASER : ________________________________________
COMPANY : CONCENTRIC NETWORK CORPORATION
SECURITY : COMMON STOCK
AMOUNT : ________________________________________
DATE : ________________________________________
In connection with the purchase of the above-listed Securities, the undersigned
Purchaser represents to the Company the following:
(a) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledge able decision to acquire the Securities.
Purchaser is acquiring these Securities for investment for Purchaser's own
account only and not with a view to, or for resale in connection with, any
"distribution" thereof within the meaning of the Securities Act of 1933, as
amended (the "Securi ties Act").
(b) Purchaser acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Purchaser's investment intent as expressed herein. In this connec
tion, Purchaser understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Purchaser's representation was predicated solely upon a present intention to
hold these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one (1) year or any other
fixed period in the future. Purchaser further understands that the Securities
must be held indefinitely unless they are subsequently registered under the
Securities Act or an exemption from such registration is available. Purchaser
further acknowledges and understands that the Company is under no
<PAGE>
obligation to register the Securities. Purchaser understands that the
certificate evidencing the Securities will be imprinted with a legend that
prohibits the transfer of the Securities unless they are registered or such
registration is not required in the opinion of counsel satisfactory to the
Company, a legend prohibiting their transfer without the consent of the
Commissioner of Corporations of the State of California and any other legend
required under applicable state securities laws.
(c) Purchaser is familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the Securities Act, that, in substance, permit limited
public resale of "restricted securities" acquired, directly or indirectly from
the issuer thereof, in a non-public offering subject to the satisfaction of
certain conditions. Rule 701 provides that if the issuer qualifies under Rule
701 at the time of the grant of the Stock Purchase Right to the Purchaser, the
exercise will be exempt from registration under the Securities Act. In the
event the Company becomes subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or
such longer period as any market stand-off agreement may require) the Securities
exempt under Rule 701 may be resold, subject to the satisfaction of certain of
the conditions specified by Rule 144, including: (1) the resale being made
through a broker in an unsolicited "broker's transaction" or in transactions
directly with a market maker (as said term is defined under the Securities
Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of
certain public information about the Company, (3) the amount of Securities being
sold during any three (3) month period not exceeding the limitations specified
in Rule 144(e), and (4) the timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time of
grant of the Stock Purchase Right, then the Securities may be resold in certain
limited circumstances subject to the provisions of Rule 144, which requires the
resale to occur not less than two (2) years after the later of the date the
Securities were sold by the Company or the date the Securities were sold by an
affiliate of the Company, within the meaning of Rule 144; and, in the case of
acquisition of the Securities by an affiliate, or by a non-affiliate who
subsequently holds the Securities less than three years, the satisfaction of the
conditions set forth in sections (1), (2), (3) and (4) of the paragraph
immediately above.
(d) Purchaser further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commis sion
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Purchaser understands that no assurances can be given that
any such other regis tration exemption will be available in such event.
-2-
<PAGE>
-3-
<PAGE>
___________________________________
Signature of Purchaser
___________________________________
Print or Type Name
Date:________________, 19__
PURCHASER INVESTMENT REPRESENTATION STATEMENT
<PAGE>
EXHIBIT 10.8
TERMINATION OF SERVICES AND
INDEMNIFICATION AGREEMENT
This Termination of Services and Indemnification Agreement is made by and
between Concentric Network Corporation (the "Company") and Marc Collins-Rector
("Collins-Rector") and Chad Shackley (together with Collins-Rector, "Founders").
WHEREAS, Founders wish to sell certain of their shares of Class A Common
Stock of the Company to certain investors;
WHEREAS, such investors have requested that the Company make certain
representations and warranties in the stock purchase agreement relating to
Founder's sale of Class A Common Stock of the Company;
WHEREAS, the Company wishes Founders to enter into market standoff
agreements with respect to all securities of the Company held by Founders;
WHEREAS, the Company wishes Founders to assist the Company in obtaining
market standoff agreements from all other holders of the Company's securities;
NOW THEREFORE, in consideration of the mutual promises made herein, the
Company and Founders hereby agree as follows:
1. The Company agrees to make the representations and warranties set
forth in the Stock Purchase Agreements dated as of February ___, 1996 among
Founders, the Company and the purchasers of shares of Class A Common Stock of
the Company set forth on each Stock Purchase Agreement.
2. Founders will defend, indemnify and hold harmless the Company from and
against any loss, damage, settlement or expense (including attorney's fees)
incurred by the Company and arising from or related to any breach by the Company
of its representations and warranties in the Stock Purchase Agreements; provided
that Founders shall not be liable in any such case to the extent that such
breach arises out of the Company's gross negligence, recklessness or intentional
act.
3. Founders hereby resign from all their positions as employees of the
Company and Collins-Rector hereby resigns from his position as a member of the
Company's Board of Directors as of the date of this Agreement. The Company
shall have no obligation to pay any severance or other compensation to Founders.
<PAGE>
4. The Company and Collins-Rector hereby agree that the vacancy on the
Company's Board of Directors caused by Collins-Rector's resignation will be
filled by a nominee designated by GS Capital Partners L.P. and reasonably
acceptable to the other members of the Company's Board of Directors, which
appointment will be made prior to an initial public offering of the Company's
securities.
5. Immediately prior to an initial public offering of the equity
securities of the Company, Founders will enter into a market standoff agreement
substantially in the form attached hereto as Exhibit A (the "Market Standoff
Agreement") with respect to all securities of the Company owned as of the date
of the Market Standoff Agreement or acquired thereafter.
6. Founders will use their best efforts to cause all holders of
securities of the Company to enter into a market standoff agreement in form and
substance similar to the Market Standoff Agreement.
7. Founders shall diligently and in a timely fashion assist the Company
in preparing the necessary registration statement and related disclosure
documentation, in connection with an initial public offering of the Company's
shares of Common Stock (the "IPO"), and in clearing such registration statement
with the Securities and Exchange Commission and applicable state securities
commissions and shall provide such other services and assistance in connection
with the IPO as the Company shall reasonably request.
8. Founders shall refrain from taking or omitting to take any action or
making or omitting to make any statements that would prevent, delay or interfere
with the IPO.
9. Founders shall maintain the confidentiality of all confidential and
proprietary information of the Company. Founders shall return all Company
property and confidential and proprietary information in their possession within
five business days from the date hereof.
10. The Company hereby agrees that it shall have filed a registration
statement on Form S-8 covering such number of shares of Common Stock of the
Company underlying options held by Founders and Randy Maslow as are eligible for
registration on a Form S-8 and that the Company shall use its best efforts to
have such registration statement declared effective prior to the termination of
the Market Standoff Agreement.
11. The Company agrees to amend the Option Agreement granting Collins-
Rector the option to purchase 800,000 shares of Common Stock (the "Options")
dated as of August 19, 1994 between the Company and Collins-Rector to allow for
the net exercise of the Options. On the date the Company is able to register
securities on Form S-3, upon the request of Collins-Rector, the Company agrees
to promptly file a shelf registration on Form S-3 (the "Shelf Registration")
relating to the shares of Common Stock of the Company underlying the Options (i)
which cannot be sold pursuant to Rule 701 or are not the subject of an effective
Form S-8 registration statement or (ii) which cannot be sold within four months
from such date under Rule 144 (or any successor provision) under the Securities
Act of 1933, as amended. In the event the Company is required to file or files
-2-
<PAGE>
the Shelf Registration pursuant to the prior sentence, if the Board of Directors
of the Company, in its good faith judgment, determines at any time that the
filing of the Shelf Registration or the sale of securities pursuant to the Shelf
Registration should not be made or continued because it would materially
interfere with any material financing, acquisition, corporate reorganization or
merger or other transaction involving the Company or any of its subsidiaries (a
"Valid Business Reason"), the Company may postpone the filing of the Shelf
Registration or the sale of any securities pursuant to the Shelf Registration,
and Collins-Rector shall not sell any securities pursuant to the Shelf
Registration, until such Valid Business Reason no longer exists, but in no event
for more than six months; and the Company shall give written notice of its
determination to so postpone and of the fact that the Valid Business Reason for
such postponement no longer exists, in each case, promptly after the occurrence
thereof.
12. The Company agrees to amend the Option Agreement granting Chad
Shackley the option to purchase 800,000 shares of Common Stock (the "Options")
dated as of August 19, 1994 between the Company and Chad Shackley to allow for
the net exercise of the Options. On the date the Company is able to register
securities on Form S-3; upon the request of Chad Shackley, the Company agrees to
promptly file a shelf registration on Form S-3 (the "Shackley Shelf
Registration") relating to the shares of Common Stock of the Company underlying
the Options (i) which cannot be sold pursuant to Rule 701 or are not the subject
of an effective Form S-8 registration statement or (ii) which cannot be sold
within four months from such date under Rule 144 (or any successor provision)
under the Securities Act of 1933, as amended. In the event the Company is
required to file or files a Shackley Shelf Registration pursuant to the prior
sentence, if the Board of Directors of the Company, in its good faith judgment,
determines at any time that the filing of the Shackley Shelf Registration or the
sale of securities pursuant to the Shackley Shelf Registration should not be
made or continued because it would materially interfere with any Valid Business
Reason, the Company may postpone the filing of the Shackley Shelf Registration
or the sale of any securities pursuant to the Shackley Shelf Registration, and
Chad Shackley shall not sell any securities pursuant to the Shackley Shelf
Registration, until such Valid Business Reason no longer exists, but in no event
for more than six months; and the Company shall give written notice of its
determination to so postpone and of the fact that the Valid Business Reason for
such postponement no longer exists, in each case, promptly after the occurrence
thereof.
13. This Agreement shall be governed by the laws of the State of
California.
14. The parties hereto expressly agree that GS Capital Partners, L.P. and
Kleiner Perkins Caufield & Byers are third party beneficiaries to this Agreement
and shall have the right to enforce their rights hereunder.
15. This Agreement may be signed in counterparts, and each counterpart
shall have the same force and effect as an original and shall constitute an
effective, binding agreement on the part of each of the undersigned.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of this
___________ day of February 1996.
CONCENTRIC NETWORK CORPORATION
By: /s/ Michael Anthofer
------------------------------------
Michael Anthofer
Vice President and CFO
FOUNDERS
/s/ Marc Collins-Rector
----------------------------------------
Marc Collins-Rector
/s/ Chad Shakley
----------------------------------------
Chad Shackley
-4-
<PAGE>
EXHIBIT 10.9
AGREEMENT
This Agreement is made by and between Randy Maslow ("Maslow") and
Concentric Network Corporation (the "Company").
WHEREAS, Maslow is currently a member of the Company's Board of Directors
and an employee of the Company;
WHEREAS, the Company is undertaking an initial public offering of its
Common Stock;
WHEREAS, the Company wishes Maslow to enter into a market standoff
agreement with respect to all securities of the Company held by Maslow;
NOW THEREFORE, in consideration of the mutual promises made herein, the
Company and Maslow hereby agree as follows:
1. Maslow hereby agrees to resign from his position as a member of the
Company's Board of Directors, effective no later than immediately prior to the
effectiveness of the registration statement filed by the Company in connection
with the initial public offering of shares of the Company's Common Stock.
2. Maslow will remain an employee of the Company, through October 31,
1996 as an advisor to the Board of Directors. Maslow's salary will be paid bi-
monthly, in accordance with the Company's usual practice and will be set at an
annual rate of $96,000. Other than salary as set forth herein,
telecommunication expenses not in excess of $300 per month and travel expenses
incurred with the prior approval of the Company or GS Capital Partners, L.P.,
the Company shall have no obligation to pay any severance or other compensation
to Maslow.
3. Immediately prior to an initial public offering of the equity
securities of the Company, Maslow will enter into a market standoff agreement
substantially in the form attached hereto as Exhibit A (the "Market Standoff
Agreement") with respect to all securities of the Company owned as of the date
of the Market Standoff Agreement or acquired thereafter.
4. The Company agrees that it shall have filed a registration statement
on Form S-8 covering such number of shares of Common Stock of the Company
underlying options held by Maslow as are eligible for registration on a Form S-8
and that the Company shall use its best efforts to have such registration
statement declared effective prior to the termination of the Market Standoff
Agreement.
<PAGE>
5. The Company agrees to amend the Option Agreements dated March 16,
1994, December 22, 1994, September 2, 1994 and February 21, 1994 between the
Company and Maslow to allow for the net exercise of the options granted under
such agreements (the "Options"). On the date the Company is able to register
securities on Form S-3; upon the request of Maslow, the Company agrees to
promptly file a shelf registration on Form S-3 (the "Shelf Registration")
relating to the shares of Common Stock of the Company underlying the Options
(i) which cannot be sold pursuant to Rule 701 or are not the subject of an
effective Form S-8 registration statement or (ii) which cannot be sold within
four months from such date under Rule 144 (or any successor provision) under the
Securities Act of 1933, as amended. In the event the Company is required to
file or files a Shelf Registration pursuant to the prior sentence, if the Board
of Directors of the Company, in its good faith judgment, determines at any time
that the filing of the Shelf Registration or the sale of securities pursuant to
the Shelf Registration should not be made or continued because it would
materially interfere with any material financing, acquisition, corporate
reorganization or merger or other transaction involving the Company or any of
its subsidiaries (a "Valid Business Reason"), the Company may postpone the
filing of the Shelf Registration or the sale of any securities pursuant to the
Shelf Registration, and Maslow shall not sell any securities pursuant to the
Shelf Registration, until such Valid Business Reason no longer exists, but in no
event for more than six months; and the Company shall give written notice of its
determination to so postpone and of the fact that the Valid Business Reason for
such postponement no longer exists, in each case, promptly after the occurrence
thereof.
6. From the date hereof until the expiration of the Market Standoff
Agreement, the Company shall invite Maslow to attend all meetings of the
Company's Board of Directors and all meetings of any committee of the Board of
Directors, and the Company will provide Maslow copies of all notices of such
meetings when and as given to members of the Board of Directors and of such
committees and all other written communications when and as given to such
members.
7. This Agreement shall be governed by the laws of the State of
California.
8. This Agreement may be signed in counterpart, and each counterpart
shall have the same force and effect as an original and shall constitute an
effective, binding agreement on the part of each of the undersigned.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of this
15th day of February 1996.
CONCENTRIC NETWORK CORPORATION
By: /s/ Michael Anthofer
----------------------------------------
Michael Anthofer
Vice President and CFO
By: /s/ Randy Maslow
----------------------------------------
Randy Maslow
-3-
<PAGE>
EXHIBIT 10.10
GOVERNANCE AGREEMENT
This Governance Agreement (the "Agreement") is made as of May 15, 1997, by
and among CONCENTRIC NETWORK CORPORATION, a Florida corporation (the "Company"),
MARC COLLINS-RECTOR, an individual resident of California ("Collins-Rector"),
CHAD SHACKLEY, an individual resident of California ("Shackley") (together with
Collins-Rector, the "Founders"), GS CAPITAL PARTNERS, L.P., a Delaware limited
partnership ("GSCP"), KLEINER PERKINS CAUFIELD & BYERS VII, a California limited
partnership ("KPCB"), KPCB VII Founders Fund, a California limited partnership
("Founders Fund"), KPCB INFORMATION SCIENCES ZAIBATSU FUND II, a California
limited partnership ("Zaibatsu Fund" and together with KPCB and Founders Fund,
"KP"), and INTUIT, INC. ("Intuit").
In consideration of the mutual promises made herein, the Company, the
Founders, GSCP, KP and Intuit hereby agree as follows:
1. The Founders hereby convert, as of the date hereof, all 106,754 shares of
Class B Common Stock of the Company held by them into 106,754 shares of Series A
Preferred Stock of the Company and, agree to as soon as practicable, deliver to
the Company stock certificates representing all such shares of Class B Common
Stock, duly endorsed for transfer to the Company. Each of the Founders and the
Company hereby further agree to exchange each share of Series A Preferred Stock
held by the Founders upon conversion of the Class B Common Stock into one share
of a new Series E Preferred Stock, having the rights, preferences and privileges
set forth on Exhibit A attached hereto, solely in the event that the Company has
---------
not effected a Qualified Public Offering (as such term is to be defined in the
Articles of Incorporation pursuant to clause 2(a)(vii) below) by August 31,
1997, such exchange to be effective within 10 calendar days of such date.
2. Each of the Founders, GSCP, KP and Intuit (to the extent Intuit exercises
warrants to purchase Series B Preferred Stock of the Company on or prior to the
record date for such shareholder action) hereby agrees to vote all shares of
capital stock of the Company over which they have voting control in favor of the
following actions, as they shall be approved by the Board of Directors of the
Company and submitted for shareholder approval (whether by written consent, at
the annual meeting or at any special meeting of shareholders):
(a) to approve a plan of recapitalization of the Company through an
amendment and restatement of the Company's Articles of Incorporation
so as to (i) increase the number of authorized Preferred Stock and
authorized Common Stock to 255,000,000 and 360,000,000, respectively,
provided, however, that the authorized shares of capital stock will be
adjusted to give effect to the reverse stock split described in item
2(d) below; (ii) increase the number of authorized shares of Series B
Preferred Stock to 13,564,512, (iii) change the conversion rights of
the Series A Preferred Stock to eliminate any conversion of Series A
Preferred Stock into Class B Common Stock and to provide instead that
Series A Preferred Stock will convert into a number of shares of
Common Stock equal to the combined number of shares of Class A and
Class B Common Stock into which the Series A Preferred Stock otherwise
would have converted (i.e., 1.0032 shares of Common Stock), (iv)
eliminate the Class B Common Stock from the Company's capital
structure, (v) redesignate the Class A Common
<PAGE>
Stock as Common Stock, and (vi) amend the definition of "Qualified
Public Offering" to reduce to $50,000,000 the Corporation Valuation
(as defined in the Articles of Incorporation) required in a Qualified
Public Offering and to reduce to $15,000,000 the aggregate size of the
public offering required for a Qualified Public Offering (the "Amended
and Restated Articles");
(b) to approve a second amendment to the Company's Amended and Restated
Articles, solely in the event that the Company does not effect a
Qualified Public Offering by August 31, 1997, to authorize 106,754
shares of a new Series E Preferred Stock of the Company having the
rights, preferences and privileges set forth on Exhibit A and to
---------
effect the conversion of each share of Series A Preferred Stock held
by the Founders into one share of the new Series E Preferred Stock;
provided, however, that the authorized shares of Series E Preferred
Stock will be adjusted to give effect to the reverse stock split
described in item 2(d) below;
(c) to approve the reincorporation of the Company from Florida into
Delaware and the related merger agreement to effect such
reincorporation; and to approve the related agreements, amendments to
the Certificate of Incorporation, Bylaws, director and officer
indemnification agreements, other documents and contracts, and other
necessary or appropriate actions in connection therewith by the
Company and the Company's Delaware subsidiary;
(d) to approve a 15:1 reverse stock split of the outstanding shares of
Common Stock of the Company as part of the reincorporation of the
Company into Delaware;
(e) to elect Henry Nothhaft and Edward Zander as "Common Directors" of the
Company within the meaning of the Articles of Incorporation of the
Company, as amended; provided, however, that Shackley will have no
such obligation to vote for any directors under the terms of this
Agreement;
(f) approve an amendment to the Company's 1996 Stock Plan to reserve up to
11,900,000 additional shares for issuance thereunder;
(g) to approve a new 1997 Stock Option Plan and an Employee Stock Purchase
Plan designed to comply with Section 423 of the Internal Revenue Code
in such forms and with such share reserves as may be determined by the
Board of Directors of the Company in its reasonable discretion;
(h) to approve a proposal to permit the Company to exceed the 30 percent
limit for outstanding options to purchase shares of the Company as
such limit is set forth in Section 260.140.45 and related sections of
the California Code of Regulations;
(i) to approve an Amended and Restated Certificate of Incorporation of the
Company to be filed in connection with: (i) the closing of the IPO (as
defined below) and (ii) the
-2-
<PAGE>
conversion of the outstanding shares of the Company's Preferred Stock
into Common Stock, which shall establish the authorized shares of
capital stock of the Company as 100,000,000 shares of Common Stock and
10,000,000 shares of undesignated Preferred Stock; and
(j) to approve the terms of an interim financing of the Company in such
amount and on such terms as may be determined by the Board of
Directors of the Company in its reasonable discretion, subject to any
pre-existing shareholder rights granted by applicable statutes or
other written agreement.
3. GSCP, KP and Intuit hereby agree that upon filing of the Amended and
Restated Articles, the irrevocable proxies granted by each of the Founders to
GSCP pursuant to Sections 5(a) and 5(b) of the Amended and Restated Stockholders
Agreement by and among the Company, GSCP, KP, Intuit and the Founders, shall
expire and be of no further force and effect.
4. The Company agrees to place an Eligible Nominee designated by the Founders
on the Company's Board of Directors, as a representative director of the Common
shareholders. The Company will use reasonable efforts to maintain such Eligible
Nominee on the Board of Directors until the earlier to occur of (i) one year
after the closing of the IPO (as defined below), (ii) the expiration or full
release of the Founders (including a release pursuant to section 8 of this
Agreement) from any lock-up restrictions granted to the underwriters in
connection with such IPO (including, without limitation, the Lock-Up Agreement);
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 fifty percent of the voting power of the Company is disposed of; subject,
however, to the right of the Board of Directors or shareholders to remove such
Eligible Nominee from the Board as provided by applicable law. An "Eligible
Nominee" shall be a person, other than a Founder, who has industry credentials
and is reasonably acceptable to the other Board members. The Company and the
Founders acknowledge and agree that initially such Eligible Nominee shall be
Robert W. Doede. The appointment of Mr. Doede shall occur promptly following
the execution and delivery of this Agreement.
5. The Company hereby agrees to use commercially reasonable efforts to effect
the following by August 31, 1997:
(a) obtain the necessary approvals of its Board of Directors and
shareholders to effect an underwritten, firm commitment initial public
offering of the Company's Common Stock (the "IPO");
(b) engage an underwriter or underwriters to effect such an IPO; and
(c) prepare and file a registration statement in connection with such an
IPO with the Securities and Exchange Commission, and take all
reasonable actions to have such registration statement declared
effective as soon as practicable after filing.
-3-
<PAGE>
The Founders recognize that the Company cannot guarantee that a public
offering by the Company will be possible or desirable prior to or on August 31,
1997, or at any time thereafter, but if market conditions or other factors make
an IPO undesirable, in the determination of the Company and its underwriter or
underwriters, the Company will consult in good faith with the Founders about the
possible steps that may be taken under the circumstances, with a view to
enabling the Founders to sell their shares as soon as reasonably possible,
subject to compliance with applicable securities laws. Notwithstanding the
foregoing, the Company will be under no obligation to effect an IPO or to
register the shares of the Founders in the event that an IPO is not possible or
desirable and the Founders further recognize and agree that the other provisions
of this Agreement, including but not limited to each of the Founders obligations
in paragraph 2 above, will survive and remain in full force and effect if, for
any reason, the Company is not able to effect an IPO.
6. Each of GSCP, KP and Intuit hereby agree to vote for amendments to existing
registration rights agreements to give the Founders' shares piggyback
registration rights with priority over all other Registrable Securities (as
defined therein) in any follow-on offering effected by the Company prior to the
expiration or full release of lock-up agreements entered into by the Founders
with the underwriters in connection with the IPO in the event of a cutback by
the underwriter on the number of shares that may be offered or sold by selling
shareholders, it being understood that such amendments require the approval of
additional parties not signatories to this Agreement and will not be implemented
without such approval. The Company agrees to use its reasonable efforts to
obtain the signature of such additional parties to effectuate the foregoing as
soon as possible.
7. The Company and the Founders acknowledge and agree that each Founder has
options to purchase 1,200,100 shares of the Company's Common Stock (the
"Founders' Options") and that all of such options are fully vested, are in full
force and effect as of the date hereof and do not expire prior to August 19,
1999. Within 90 days of the closing of the IPO, the Company agrees to file a
Registration Statement on Form S-8 to register the shares issuable, among other
things, upon exercise of the Founders' Options. The Founder's recognize and
agree that such shares issuable on exercise of the Founders' Options will be
subject to the Lock-Up restrictions described below.
8. Collins-Rector agrees to execute and deliver to the Company the lock-up
agreement in the form attached hereto as Exhibit B (the "Lock-Up Agreement");
---------
provided, however, (i) if any officer, director or shareholder of the Company
(other than Shackley but including, without other limitation, KP or GSCP) enters
into a lock-up agreement with the underwriters of the IPO that provides for a
shorter lock-up period, the Lock-Up Agreement shall automatically be amended to
provide for a lock-up period that is the same lock-up period agreed to by such
other shareholder, (ii) if KP, GSCP, Telecom Italia, Racal Datacom or Softbank
Holdings, Inc. do not enter into a lock-up agreement prior to the closing of the
IPO, the Lock-Up Agreement shall automatically terminate and be null and void ab
initio and (iii) if any shareholder of the Company (other than Shackley) who has
previously entered into a lock-up agreement with the underwriters of the IPO is
released in any manner from the terms of their lock-up or similar agreement (or
the terms of such agreement are amended in favor of such shareholder), Collins-
Rector shall also be similarly released (or in the event of an amendment, the
same amendment shall also apply to the Lock-Up Agreement in favor of Collins-
Rector).
-4-
<PAGE>
9. The Company and each of the Founders, GSCP, KP and Intuit hereby amend the
provisions of any and all agreements each may have with the Company, including
but not limited to (i) that certain Preferred Stock and Warrant Purchase
Agreement, dated April 20, 1995, as amended, (ii) that certain Amended and
Restated Stockholder Agreement dated April 20, 1995, as amended, and (iii) each
of the Irrevocable Proxies granted by such party to vote the shares of capital
stock of the Company, to conform the definition of "Qualified Public Offering",
or similar term contained therein, to the definition of Qualified Public
Offering described in the Amended and Restated Articles (noted at paragraph 2(a)
above).
10. Concurrently with the execution of this Agreement, the Company agrees to
execute and deliver to the Founders a release of the noncompetition covenants of
the Founders in the form attached hereto as Exhibit C.
---------
11. In case any provision of this Agreement shall be declared invalid, illegal
or unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
12. The Founders and each of the other parties hereto will cooperate with the
Company to carry out the purposes and intents of this Governance Agreement.
[Remainder of page intentionally left blank]
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Governance Agreement as
of the date first above written.
CONCENTRIC NETWORK CORPORATION
By: /s/ Michael Anthofer
--------------------
Michael Anthofer
Vice President and Chief Financial
Officer
FOUNDERS INTUIT, INC.
/s/ Marc Collins-Rector By: /s/
- ----------------------- ------------------------------
Marc Collins-Rector Name:
Title:
/s/ Chad Shackley
- -----------------
Chad Shackley
GS CAPITAL PARTNERS, L.P. KPCB INFORMATION SCIENCES ZAIBATSU FUND II
By: GS Advisors, L.P., its
general partner
By: GS Advisors, Inc., its By: KPCB VII ASSOCIATES, its general partner
general partner
By: /s/ By: /s/
---------------------------- --------------------------------
Name: Name:
Title: Title:
KLEINER PERKINS CAUFIELD &
BYERS VII KPCB VII FOUNDERS FUND
By: KPCB VII ASSOCIATES, its
general partner By: KPCB VII ASSOCIATES, its general partner
By: /s/ By: /s/
------------------------- ---------------------------
Name: Name:
Title: Title:
-6-
<PAGE>
Exhibit A
---------
CONCENTRIC NETWORK CORPORATION
SERIES E PROPOSED TERM SHEET
The issuance of Series E Preferred Stock by Concentric Network Corporation
(the "Company") will be accomplished by the conversion of 106,789 shares of the
Company's authorized shares of Series A Preferred Stock, constituting all of the
outstanding shares of Series A Preferred Stock of the Company held by Marc
Collins-Rector and Chad Shackley (the "Founders"), into 106,789 shares of a new
class of Series E Preferred Stock having the rights, preferences and privileges
set forth below.
The following term sheet is subject in its entirety to the terms of the
definitive documentation to be executed and delivered in connection with the
conversion of the Series B Common Stock and the issuance of the Series E
Preferred Stock.
ISSUER: Concentric Network Corporation, a Florida corporation (the
"Company")
TYPE OF
SECURITY: Series E Preferred Stock ("Series E Shares" or "Series E
Preferred")
CONVERSION OF
FOUNDERS' SERIES A
PREFERRED STOCK: Each outstanding share of Series A Preferred Stock held by
the Founders will be automatically converted into a single
share of Series E Preferred Stock if the Company has not
effected a Qualified Public Offering by August 31, 1997.
CLASSES OF
PREFERRED STOCK: The Company has four other outstanding series of Preferred
Stock. The Series E Preferred will rank on a parity, in
terms of rights in respect of the dissolution, liquidation
or winding-up of the Company, with the Series A, B, C and D
Preferred Stock.
CONVERSION: The Series E Preferred automatically will be converted into
shares of Common Stock on a one for one basis upon the
closing of an underwritten public offering and is
convertible at the option of the holder into shares of
Common Stock. The Series E Preferred Stock is not afforded
antidilution adjustments other than with respect to splits,
combinations, recapitalizations and the like of the Common
Stock.
DIVIDENDS: Holders of Series A, B, C, D and E Preferred Stock will be
entitled to equivalent dividends and distributions (other
than those paid in additional shares of Common Stock) as
those paid on shares of Common stock (or any other class of
capital stock, but excluding senior classes). Such
equivalent dividends will be determined based upon the
dividend payable on the number of shares of Common Stock
into which such shares of Series A, B, C, D and E Preferred
could be converted on the record date for the declaration of
such dividends.
LIQUIDATION
<PAGE>
PREFERENCE: In the event of any liquidation, dissolution or winding up
of the Company, holders of Series E Preferred will be
entitled to an amount equal to $0.01 plus all accrued and
unpaid dividends per share, on a parity with the holders of
Series A, B, C and D Preferred Stock before any payments are
made to the holders of Common Stock or any other junior
securities. In the event that the Company has insufficient
funds to pay the full liquidation preference payable to the
holders of Series A, B, C, D and E Preferred Stock, and the
holders of any class or series of Preferred Stock that is on
a parity with the Series A, B, C, D and E Preferred Stock,
the existing funds will be allocated among the holders of
all such shares pro rata in proportion to the full amounts
to which they would respectively otherwise be entitled.
PREFERRED
STOCK
PROVISIONS: Series E Preferred is entitled to vote on all matters and
votes as a single class with the Common Stock and other
series of Preferred Stock of the Company except as set forth
below. Voting by the Series E Preferred as a separate voting
group is required: (a) on a proposed amendment to the
Articles of Incorporation that would (i) increase or
decrease the aggregate number of authorized shares of the
Series E Preferred, (ii) effect an exchange or
reclassification of all or part of the shares of the Series
E Preferred into shares of another class or series, (iii)
effect an exchange or reclassification, or create a right of
exchange, of all or part of the shares of another series or
class into the shares of the Series E Preferred, (iv) change
the designation, rights, preferences, or limitations of all
or part of the shares of the Series E Preferred, (v) change
the shares of all or part of the Series E Preferred into a
different number of shares of the same series, (vi) create a
new class of shares having rights or preferences with
respect to distributions or to dissolution that are prior,
superior, or substantially equal to the shares of the Series
E Preferred, (vii) increase the rights, preferences, or
number of authorized shares of any class that, after giving
effect to the amendment, have rights or preferences with
respect to distributions or to dissolution that are prior,
superior, or substantially equal to the shares of the Series
E Preferred, (viii) limit or deny an existing preemptive
right of all or part of the shares of the Series E
Preferred, (ix) cancel or otherwise affect rights to
distributions or dividends that have accumulated but not yet
been declared on all or part of the shares of the Series E
Preferred; (b) on a plan of merger if the plan contains a
provision which, if contained in a proposed amendment to the
articles of incorporation, would entitle the Series E
Preferred to vote as a separate voting group on the proposed
amendment; or (c) on a plan of share exchange if the shares
of the Series E Preferred are to be converted or exchanged
under such plan or if the plan contains any provisions
which, if contained in a proposed amendment to the articles
of incorporation, would entitle the Series E Preferred to
vote as a separate voting group. On any matter on which the
holders of the Series E Preferred are entitled to vote, each
share is entitled to the number of votes equal to the number
of shares of Common Stock into which each such share is then
convertible.
-2-
<PAGE>
Exhibit B
---------
________________, 1997
Concentric Network Corporation
10590 N. Tantau Avenue
Cupertino, CA 95104
RE: PROPOSED INITIAL PUBLIC OFFERING OF COMMON STOCK OF CONCENTRIC NETWORK
CORPORATION
Ladies and Gentlemen:
The undersigned is a shareholder and optionholder of Concentric Network
Corporation, a Florida corporation ("CNC-Florida"). The undersigned understands
that either CNC- Florida or Concentric Network Corporation, a Delaware
corporation and wholly-owned subsidiary of CNC-Florida ("CNC-Delaware, and as
the surviving corporation of a merger of CNC-Florida and CNC-Delaware, the
"Company") intends to enter into an underwriting agreement (the "Underwriting
Agreement") with one or more underwriters, as Representatives of the several
Underwriters (the "Underwriters"), providing for the purchase by the
Underwriters from the Company of shares of common stock of the Company
(collectively, the "Underwritten Stock") and for the public offering of such
Underwritten Stock by the Underwriters. The undersigned further understands that
the proposed sale of the Underwritten Stock by the Company is the subject of a
Registration Statement on Form S-1 (the "Registration Statement") proposed to be
filed with the Securities and Exchange Commission, which includes a preliminary
prospectus to be used in offering the Underwritten Stock to the public. The
undersigned also understands that the preliminary prospectus and the final
prospectus will contain a statement to the effect that the Company, its
directors and executive officers and certain of its shareholders have agreed not
to offer, sell, contract to sell, grant any option to sell or otherwise dispose
of, directly or indirectly: (1) any shares of the Company's common stock or
securities convertible into, or exchangeable for, the Company's common stock or
other rights to purchase the Company's common stock (collectively, the "Common
Stock"); or (2) any shares of the Underwritten Stock or securities convertible
into, or exchangeable for, Underwritten Stock or warrants or other rights to
purchase the Underwritten Stock, for a period commencing on the date hereof and
continuing for at least 360 days from the effective date of the Registration
Statement (the "Lock-Up Period"), without the prior written consent of the lead
underwriter selected by the Company (the "Lead Underwriter").
In light of the foregoing, the undersigned hereby represents, warrants and
agrees that, during the Lock-Up Period, the undersigned will not, without the
prior written consent of the Lead Underwriter, offer, sell, contract to sell,
grant any option to sell or otherwise dispose of, directly or indirectly, any
shares of the Common Stock or the Underwritten Stock or securities
<PAGE>
convertible into, or exchangeable for, the Common Stock or the Underwritten
Stock or warrants or other rights to purchase the Common Stock or the
Underwritten Stock of which the undersigned is now, or may in the future become,
the beneficial owner (within the meaning of Rule 13d-3 of the Securities
Exchange Act of 1934, as amended).
The foregoing restriction is expressly agreed to preclude the undersigned
from engaging in any hedging or other transaction which is designed to or
reasonably expected to lead to or result in a sale or disposition of shares of
the Common Stock or the Underwritten Stock during the Lock-Up Period even if
such shares would be disposed of by someone other than the undersigned. Such
prohibited hedging or other transactions would include without limitation any
short sale or any purchase, sale or grant of any right (including without
limitation any put or call option) with respect to any shares of Common Stock or
Underwritten Stock or with respect to any security that includes, relates to or
derives any significant part of its value from such shares.
Notwithstanding anything to the contrary contained herein or otherwise, in
the event the Registration Statement is not declared effective by the Securities
and Exchange Commission on or prior to August 31, 1997, this Agreement shall
automatically terminate and be deemed null and void ab initio.
It is understood and agreed that the foregoing representations and
agreements are provided as an inducement to, and may be relied upon by, the
Company, the Lead Underwriter and the Underwriters in connection with their
entering into the Underwriting Agreement and the preparation and distribution of
the Registration Statement and the prospectus, and that the Lead Underwriter is
intended to be a third party beneficiary of this Agreement with full right to
enforce this Agreement as though a party hereto.
This letter may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute a single
instrument.
Very truly yours,
________________________________________
(Company Name if applicable)
________________________________________
Signature
________________________________________
Print Name
________________________________________
Title (if applicable)
-2-
<PAGE>
EXHIBIT C
---------
CONCENTRIC NETWORK CORPORATION
10590 North Tantau Avenue
Cupertino, CA 95104
May __, 1997
Mr. Chad Shackley
2700 Benedict Canyon
Beverly Hills, CA 90210
Re: Waiver of Non-Competition Covenant
Dear Chad:
As you know, you have entered into a Confidentiality, Non-Competition and
Copyright Agreement (the "Agreement") with Concentric Network Corporation (the
"Company"). Section 2 of the Agreement prevents you from competing with the
Company during your employment and for the two-year period after your
termination of employment with the Company. As partial consideration for your
execution of the Governance Agreement, dated of even date herewith, of which
this letter is an exhibit, the Company hereby agrees to conditionally waive and
terminate the restrictions placed on you by Section 2 of the Agreement and any
similar noncompetition covenants (whether oral or written) that may be in effect
and to further release you from any and all claims the Company may have against
you or your affiliates for any prior breach of Section 2 of the Agreement or any
other similar noncompetition covenant (whether oral or written) that may be in
effect (the "Waiver and Release"). This Waiver and Release pertains only to
Section 2 of the Agreement and any other noncompetition provision (whether
written or oral) that may be in effect, and all other provisions of the
Agreement will remain in full force and effect unless otherwise modified by
mutual consent of the parties.
The Waiver and Release will be effective as of the date of this letter upon
the concurrent execution and delivery to the Company of the Governance Agreement
and is expressly conditioned on your full performance of each of your
obligations thereunder.
Please counter-sign and return the enclosed copy of this letter, together
with the Governance Agreement, as an acknowledgment of the terms of this letter.
<PAGE>
May __, 1997
Page 2
Please do not hesitate to contact me at (408) 342-2800 if you have any
questions regarding this letter agreement. Thank you in advance for your
cooperation.
Very truly yours,
CONCENTRIC NETWORKS CORPORATION
By: _______________________________
Michael F. Anthofer
Senior Vice President and
Chief Financial Officer
ACKNOWLEDGED AND AGREED:
CHAD SHACKLEY
By: ___________________________
Chad Shackley
<PAGE>
EXHIBIT 10.25
LEASE AGREEMENT
---------------
THIS AGREEMENT made the 1st day of November, 1996, effective the 11th day
of March, 1996, by and between SAGINAW VIDEO ASSOCIATES, a Michigan General Co-
Partnership, d/b/a Saginaw Conference Center, of 5195 Hampton Place, Saginaw,
Michigan 48604-9576 ("Landlord"), and CONCENTRIC NETWORK CORPORATION, a Florida
Corporation, authorized to do business in the State of Michigan, with offices at
400 Forty-First Street, Bay City, Michigan 48708 ("Tenant"). Landlord and
Tenant are also collectively referred to as the "parties."
1. Premises. Subject to the terms and conditions herein contained,
--------
Landlord leases to Tenant, and Tenant leases from Landlord, the following space,
including rights of ingress, egress and parking:
(a) Existing Space. An existing 11,600 square foot conference center
--------------
located at 4450 Fashion Square Boulevard, Saginaw Township, Saginaw County,
Michigan, more particularly described as follows, to-wit:
"A parcel of land being a part of the so-called North 55
acres of the Southwest 1/4 of Section 2, Town 12 North,
Range 4 East, Saginaw Township, Saginaw County, Michigan,
described as follows: To fix the Point of Beginning
commence at the South 1/4 corner of said Section 2; thence
North 00(degrees)-03'-45" East on the North and South 1/4
line of said Section, 2,621.31 feet to the center post of
said Section; thence North 89(degrees)-45'-53" West on the
East and West 1/4 line of said Section, 650.00 feet; thence
South 00(degrees)-03'-45" West, parallel with said North
and South 1/4 line, 43.00 feet to a point on the South line
of Schust Road right-of-way and the Point of Beginning of
this description; thence continuing South 00(degrees)-03'-
45" West, parallel with said North and South 1/4 line,
412.08 feet; thence North 89(degrees)-49'-39" West, on a
line which is parallel with and 454.44 feet, measured at
right angles, North of the South line of said so-called
North 55 acres, said South line being evidenced by the
remains of a fence line which if extended would intersect
the West line of said Section at a point 911.68 feet, South
00(degrees)-00'-00" West, on the West 1/4 corner of said
Section and also would intersect the North and South 1/4
line at a point 908.81 feet, South 00(degrees)-03'-45" West
of the center of said Section, 334.66 feet; thence North
03(degrees)-06'-33" West on the Easterly right-of-way line
of Schust Road, 357.52 feet to the Point of Beginning"
<PAGE>
(b) Additional Space. New space consisting of approximately 10,000
----------------
square feet, being an addition to the Existing Space located at 4450 Fashion
Boulevard, Saginaw Township, Saginaw County, Michigan.
Existing Space and Additional Space are also collectively referred to as
the "Premises."
Attached as Exhibit "A," and incorporated as part of this Lease is a site
plan which indicates driveways and parking areas.
2. Initial Lease Term.
------------------
(a) Existing Space. The Initial Lease Term for the Existing Space
--------------
shall be for a period of approximately sixty-nine (69) months, commencing the
15th day of March, 1996, or on the date possession is given to Tenant, if later,
and terminating the 31st day of December, 2001, unless otherwise terminated or
extended as provided herein.
The parties acknowledge occupancy with respect to the existing space
as of March 11, 1996.
(b) Additional Space. The Initial Lease Term for the Additional
----------------
Space, shall be for a period of approximately sixty-three (63) months,
commencing the 1st day of October, 1996, or on the date possession is given to
Tenant, if later, and terminating on the 31st day of December, 2001, unless
otherwise terminated or extended as provided herein.
Notwithstanding the foregoing, the Lease, with respect to the
additional space, shall not commence until all of the following have occurred:
(i) Landlord has substantially completed the Tenant improvements
("Tenant Improvements"), Landlord is required to construct pursuant to the
"Binding Lease Commitment" between the parties dated February 8, 1996.
(ii) There remains no incomplete or defective item of Tenant
Improvements which would materially, adversely affect Tenant's intended use of
the Premises.
(iii) Landlord has delivered possession of the Premises to
Tenant.
(iv) Landlord has obtained all approvals and permits from the
appropriate governmental authorities required for the legal occupancy of the
Premises for Tenant's intended use. Landlord shall be obligated to construct the
Tenant Improvements using new materials and equipment of good quality, in a good
and workmanlike manner and in accordance with applicable laws. Tenant may be
granted early entry rights to construct its improvement work, subject to all of
the terms and conditions of the Lease, except for the payment of rent.
-2-
<PAGE>
(c) Acknowledgment. The parties shall execute an Acknowledgment
--------------
acknowledging commencement of the Initial Lease Term. If, as a result beyond
its reasonable control, Landlord is unable to deliver possession of the Premises
by the date specified for commencement of the Initial Lease Term, Landlord shall
not be liable for any damage caused for failure to deliver possession and the
Lease shall not be void or voidable.
3. Extended Lease Term. Provided Tenant is not in default under this
-------------------
Lease, Tenant shall have the right to extend the Initial Lease Term for the
Premises for one (1) additional term of sixty (60) months commencing the 1st day
of January, 2002, and terminating the 31st day of December, 2006, unless
otherwise terminated as provided herein ("Extended Lease Term"). In the event
Tenant desires to extend the Initial Lease Term, Tenant shall give notice to
Landlord, in writing, at least one hundred eighty (180) days prior to expiration
of the Initial Lease Term in conformity with the notice provisions of this
Lease.
4. Rent.
----
(a) Initial Lease Term. During the Initial Lease Term, Tenant shall
------------------
pay to Landlord, as rent for the Premises, the sum of TEN ($10.00) DOLLARS, per
square foot.
Until commencement of the Initial Lease Term, as it relates to the
Additional Space, Tenant shall pay to Landlord, rent for the Existing Space in
the amount of NINE THOUSAND SIX HUNDRED SIXTY-SEVEN ($9,667.00) DOLLARS per
month.
Upon commencement of the Initial Lease Term, as it relates to the
Additional Space, the exact square footage of the Premises (Existing and
Additional Space), shall be calculated and Tenant shall be obligated to pay rent
to Landlord, on an exact square foot basis, at the rate of TEN ($10.00) DOLLARS,
per square foot.
At that time, the parties agree to execute and attach to this Lease, a
Certificate of Agreed Square Footage certifying the total square footage of the
Premises and total rent payable based on that square footage for the balance of
the Initial Lease Term and the first (1st) year of the Extended Lease Term.
(b) Extended Lease Term. During the Extended Lease Term, Tenant shall
-------------------
pay to Landlord, as rent for the Premises, the sum of TWELVE ($12.00) DOLLARS,
per square foot. Exact rent, based upon square footage, shall be calculated
pursuant to Subsection 4(a), entitled "Rent/Initial Lease Term."
Rent during the remainder of the Extended Lease Term shall be adjusted
as follows: commencing as of the first (1st) day of the thirteenth (13th)
calendar month following the commencement date of the Extended Lease Term, and
continuing on each annual anniversary of such day throughout the remainder of
the Extended Lease Term (each such day being referred to as a "Rent Adjustment
Date"), the monthly rent shall be adjusted to equal the product of the monthly
rent in effect for the calendar month immediately preceding the Rent Adjustment
Date multiplied by a
-3-
<PAGE>
fraction, the numerator of which shall be the Consumer Price Index published for
the month immediately preceding the Rent Adjustment Date in question and the
denominator of which is the Consumer Price Index published for the month
immediately preceding the commencement of the Extended Lease Term (with respect
to the first rent adjustment), or the immediately preceding Rent Adjustment Date
(with respect to each other rent adjustment); provided however, that unless the
Consumer Price Index increases by ten (10%) percent over that published for the
month of March, 1996, in no event shall the monthly rent on a Rent Adjustment
Date be more than four (4%) percent greater than the monthly rent due for the
immediately preceding period. The term "Consumer Price Index" shall mean the
Consumer Price Index for the Detroit Metropolitan Area, which is currently
published by the United States Department of Labor, Bureau of Labor Statistics.
if however, this Consumer Price Index is changed so that the base year is
altered from that used as of the commencement of the Extended Lease Term, then
the Consumer Price Index shall be converted in accordance with the conversion
factor published by the United States Department of Labor, Bureau of Labor
Statistics, to obtain the same results that would have been obtained had the
base year not been changed. If no conversion factor is available, or if the
Consumer Price Index is otherwise changed, revised or discounted for any reason,
there shall be substituted in lieu thereof and the term "Consumer Price Index"
shall thereafter refer to the most nearly comparable official price index of the
United States Government to obtain substantially the same result as would have
been obtained had the original Consumer Price Index not been changed, revised or
discontinued, which alternative index shall be selected by Landlord and shall be
subject to Tenant's reasonable, prior, written approval.
(i) Except as otherwise expressly set forth herein, all rent shall be
due and payable in full and without right of set-off or other deduction in
advance on the first (1st) day of each and every month during the Initial Lease
Term and any extension thereof; provided however, that Tenant shall not be
liable for rent until Landlord delivers possession to Tenant. Rent shall be
pro-rated on a per diem basis, payable in advance, for any partial months.
All rents shall be paid to Landlord by direct deposit into Landlord's
Account No. ________________ maintained at Citizens Bank, N.A., Saginaw,
Michigan, or at such other place as Landlord may reasonably designate from time
to time, in writing.
5. Deposit. Tenant shall not be required to tender a security deposit to
-------
Landlord under this Lease.
6. Condition of Premises/Representations. Except as Landlord and Tenant
-------------------------------------
may otherwise agree in writing, Tenant's entry into possession shall constitute
conclusive evidence against Tenant that Tenant has inspected the Existing Space
and found the same to be in good order and satisfactory condition at the time of
entry and that Tenant has accepted the Existing Space in its present "as is"
condition. Tenant agrees to keep the Existing Space in a like condition as when
possession was given to Tenant, normal wear and tear expected. Except as
expressly set forth herein, neither Landlord, nor Landlord's agents have made
any representations or promises with respect to the physical condition of the
Existing Space, or any portion thereof, or any other matter pertaining to the
Premises.
-4-
<PAGE>
Electricity, water, janitorial, heating, ventilating, air conditioning and
other services, at levels generally provided for office uses in comparable
buildings in the vicinity of the Premises, shall be available to Tenant at all
times during the Lease Term.
Tenant shall have the right to submit a written "punch list" to Landlord,
setting forth any defective item of Tenant Improvements, and Landlord shall
cause such items to be corrected promptly. Tenant's acceptance of the Premises
or submission of a "punch list" shall not be deemed a waiver of Tenant's right
to have defects in Tenant Improvements or the Premises repaired by Landlord at
no cost to Tenant.
Landlord and Tenant shall reaffirm the provisions of this Section as to the
Additional Space at such time as Tenant enters into possession of the Additional
Space; provided however, that to the best of Landlord's knowledge, Tenant's use
of the Premises will be permitted by all fire underwriter's requirements, and
all rules, regulations, statutes, ordinances, laws and building codes
(collectively "Laws").
7. Appurtenant Rights. Tenant shall have full and unimpaired access to
------------------
the Premises at all times during the Initial Lease Term and any extension
thereof.
8. Taxes and Assessments.
---------------------
(a) Real Property Taxes. Landlord shall bill Tenant for, and Tenant
-------------------
shall pay, prior to delinquency, all real property taxes, including general and
special assessments, levied or assessed against the Premises during the Initial
Lease Term and any extension thereof. Landlord's billing shall include a copy
of all underlying tax bills. Taxes shall be pro-rated on a per diem basis for
any partial years. Taxes shall be deemed paid in advance and shall be based
upon the most recent tax bill, utilizing a due date basis.
(b) Personal Property Taxes. Tenant shall pay, prior to delinquency,
-----------------------
all taxes, assessments, license fees and other charges, levied or assessed
against Tenant's personal property installed or located in, on or about the
Premises, or that become payable during the Initial Lease Term and any extension
thereof.
Tenant shall, at Tenant's sole cost, have the right to seek a reduction of
the assessed valuation of the Premises or to contest any real or personal
property taxes to be paid by Tenant.
Tenant's obligation to pay taxes shall be conditioned upon Tenant's prompt
receipt of any tax bills received by Landlord with respect to the Premises.
Additionally, Tenant's obligation to pay taxes shall not include any taxes,
assessments or other governmental levies and any increases in the foregoing
occasioned by or relating to: (i) land and improvements not reserved for
Tenant's exclusive or non-exclusive use; (ii) a voluntary or involuntary change
of ownership or other conveyance of the real property of which the Premises is a
part; or (iii) assessments and other fees for improvements and services which do
not benefit the Premises.
-5-
<PAGE>
9. Maintenance. Tenant shall, at Tenant's sole expense, maintain the
-----------
Premises in good condition.
Landlord shall not have any responsibility to maintain the Premises, except
for structural elements of the Premises, including foundation, load-bearing
walls, structural roof system, and the roof membrane (in water-tight condition).
Tenant shall not be responsible for the performance of any repair,
maintenance or improvement:
(a) Necessitated by the acts or omissions of Landlord or Landlord's
agents.
(b) Occasioned by the power of eminent domain.
(c) Required as a consequence of any violation of Laws or construction
defect in the Premises as of the commencement date of the Lease.
(d) For which Landlord has a right of reimbursement from others.
Additionally, Tenant shall have no obligation to undertake any repairs
costing in excess of $5,000.00 which could be treated as capital improvement
under generally accepted accounting principles. Instead, Landlord shall be
required to undertake such repairs, the cost of which shall be amortized over
the useful life of the improvement in question in accordance with generally
accepted accounting principles. Tenant shall be responsible for payment of the
monthly amount of the improvement as so amortized during the Lease Term.
10. Insurance.
---------
(a) Public Liability/Property Damage Insurance. Tenant shall, at
------------------------------------------
Tenant's sole expense, maintain public liability and property damage insurance,
with liability limits not less than $1,000,000.00 per person and $2,000,000.00
per occurrence, and property damage limits of not less than $500,000.00 per
occurrence with an aggregate coverage of $2,000,000.00 insuring against all
liability of Tenant and Tenant's authorized representatives, arising out of or
in connection with Tenant's use or occupancy of the Premises.
All insurance policies shall name the Landlord as an additional
insured and shall contain cross-liability endorsements.
(b) Fire Insurance. Tenant shall, at Tenant's sole expense, maintain
--------------
on the building and all other improvements which are part of the Premises, a
policy of standard fire and extended coverage insurance, with vandalism and
malicious mischief endorsements, to the extent of full replacement value. The
policy shall be issued in the name of Tenant as insured, with Landlord and
Landlord's lender as an additional insured under a standard mortgagee
endorsement.
-6-
<PAGE>
Subject to the provisions of Section 15, entitled
"Destruction/Restoration," Tenant shall indemnify and hold Landlord and any
mortgagees harmless from all claims, demands, actions, losses, damages and
liabilities, and all fees, costs and expenses, including reasonable legal fees,
relating to or in any way arising from Tenant's use of the Premises, from any
cause whatsoever; provided however, that Tenant shall have no obligation to
indemnify Landlord, or any other party, from any claims, demands, losses or
other liability with respect to the Premises to the extent that same arises from
the negligence or wilful misconduct of Landlord or Landlord's employees, agents
or contractors.
All insurance policies covering the Premises, including fire and liability,
shall provide for a thirty (30) day right of notice to Landlord prior to
cancellation for any reason.
Tenant shall not do, bring, or keep any item, article, object or thing in,
on or about the Premises which may cause a cancellation of any insurance
covering the Premises.
Landlord and Tenant hereby release each other from any and all liability or
responsibility (to the other or to anyone claiming through or under them by way
of subrogation or otherwise), or any loss or damage to Premises caused by fire
or any of the extended coverage or supplementary contract casualties, even if
such fire or other casualty shall have been caused by the fault or negligence of
the other party, or anyone for whom such party may be responsible, provided
however, that this release shall be applicable and in force and effect only with
respect to loss or damage occurring during such time as the releasor's policies
contain a clause or endorsement to the effect that any such release shall not
adversely affect or impair said policies or prejudice releasor's right to
recover thereunder. Landlord and Tenant each agree that their policies shall
include such a clause or endorsement so long as the same shall be obtainable
without extra cost, or if extra cost shall be charged, so long as the other
party pays the extra cost. If extra cost shall be chargeable, each party shall
advise the other of the amount of the extra cost, and the other party, at its
election, may pay the same, but may not be obligated to do so.
11. Utilities. Tenant shall make arrangements for and be responsible for
---------
the payment of all utilities and services furnished to the Premises or used by
Tenant, including, without limitation, gas, electricity, water, telephone
service, trash collection, and all connection charges. Landlord shall not be
liable to Tenant for damages or otherwise for any failure or interruption of any
such service furnished to the Premises, provided that such failure or
interruption was not due to the negligence or wilful misconduct of Landlord or
its agents, employees, contractors or invitees.
12. Use of Premises. Tenant shall occupy and use the Premises as general
---------------
offices for its computer networking operation, sales, research, development and
marketing, and for no other use without the prior consent of Landlord, which
consent shall not be unreasonably withheld or delayed.
13. Compliance. Tenant shall promptly observe and comply with:
----------
(a) All present and future environmental laws, ordinances,
requirements, orders, directions, rules and regulations of the federal, state,
county and township governments, and of all
-7-
<PAGE>
other governmental authorities, having or claiming jurisdiction, directly or
indirectly, over the Premises.
(b) All present and future laws concerning the Premises or Tenant's
use of the Premises, including, without limitation, the obligation of Tenant, at
Tenant's sole expense, to alter, maintain or restore the Premises in compliance
and conformity with all laws related to the condition, use or occupancy of the
Premises.
(c) Landlord warrants that, as of the commencement date of this Lease,
the Premises conforms to all underwriter's requirements and Laws applicable
thereto.
14. Alterations. Tenant shall not make any alterations to the Premises
-----------
without the prior, written consent of Landlord, which consent shall not be
unreasonably withheld.
All alterations shall be made in a workmanlike manner so as not to weaken
the building on the Premises or lessen the value of the Premises. Tenant shall
pay all bills arising out of labor and materials for work performed, and shall
cause to be removed of record, within thirty (30) days after filing, all notices
and affidavits for construction liens filed with respect to the Premises, or any
part thereof. Tenant, at Tenant's option, may bond around any construction
liens. Tenant shall indemnify, defend and hold Landlord harmless against all
liability, loss, damage, costs and all other expenses arising out of claims of
lien for work performed or materials furnished to or for the benefit of Tenant.
Landlord may impose conditions with respect to such alterations or
renovations concerning the disposal or removal of same upon termination of this
Lease.
All alterations made shall remain on, and be surrendered with the Premises
upon expiration of the Initial Lease Term or any extension thereof, or upon
termination of the Lease, unless Landlord requires removal, with restoration of
the Premises to the condition existing prior to the alterations.
15. Destruction/Restoration. If during the Initial Lease Term or any
-----------------------
extension thereof, the Premises is damaged or destroyed, in whole or in part,
rendering the Premises totally or partially inaccessible or unusable, Tenant
shall restore the Premises, or the part thereof so damaged, as nearly as
possible to the value, condition and character of the Premises immediately prior
to the occurrence of such damage or destruction. Tenant shall not be entitled
to any reduction or an abatement of rent in the event of destruction to the
extent that such destruction interferes with Tenant's use of the Premises.
Notwithstanding the foregoing, Tenant's obligations under this Section 15
shall in no event require the Tenant to expend more than $1.25 million.
16. Eminent Domain. If all or any material part of the Premises shall be
--------------
taken or condemned by any competent authority for any public use or purpose, the
current Lease Term shall, at the option of Landlord, and as of the date of the
actual taking. If the Premises may not reasonably
-8-
<PAGE>
be used for the purpose contemplated by this Lease following any taking, Tenant
may terminate this Lease. In either case, there shall be no apportionment to
Tenant of any portion of the award or damages for such taking; provided however,
that Tenant shall be entitled to any funds awarded it for moving expenses or
business interruption, loss of goodwill and the unamortized value allocable to
the remainder of the Lease Term of any trade fixtures, alterations or other
improvements installed in the Premises at Tenant's expense. This Lease shall
otherwise remain in full force and effect without apportionment to Tenant of any
portion of the award or damages.
In the event of a termination pursuant to this Section, rent shall be
apportioned to the date of such taking.
17. Assignment and Subletting. Tenant shall not have the right to: (a)
-------------------------
assign or encumber its interest in this Lease or in the Premises; (b) sublet all
or any part of the Premises; or (c) allow any other person or entity to occupy
or use all or any part of the Premises without the prior consent of Landlord,
excepting however, that Tenant shall have the right to sublet the Premises or
assign this Lease, without Landlord's consent, to: (d) a subsidiary, affiliate,
division or corporation controlling, controlled by or under common control with
Tenant; or (e) a successor corporation related to Tenant by merger,
consolidation, non-bankruptcy reorganization or government action. Landlord's
consent to any permitted assignment or subletting shall not be unreasonably
withheld or delayed.
Tenant acknowledges that Landlord is in the process of converting from a
General Co-Partnership to a Limited Liability Company under Michigan statute,
and that following conversion, all rights and responsibilities of Landlord under
this Lease shall vest in such Limited Liability Company by way of assignment.
18. Default. If Tenant shall abandon or vacate the Premises contrary to
-------
the provisions of this Lease, or if default is made by Tenant in the payment of
rent, then Landlord shall have the right to re-enter the Premises and remove
Tenant and all persons therefrom and further, to terminate this Lease, at the
option of Landlord, subject to all applicable due process requirements.
With respect to any breach by Tenant of any of its covenants under this
Lease other than the payment of rent, Tenant shall not be deemed in default
unless Tenant's failure to perform such covenant continues after Tenant's
receipt of written notice of default from Landlord for a period of seven (7)
days or such longer time as may reasonably be required to cure the default.
Landlord shall not be in default unless Landlord fails to perform its
obligations hereunder within a reasonable time, but in no event later than seven
(7) days after its receipt of written notice from Tenant specifying the nature
of any such non-performance; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for performance,
then Landlord shall not be in default if Landlord promptly commences performance
within such seven (7) day period and thereafter diligently prosecutes the same
to completion.
-9-
<PAGE>
19. Landlord's Remedies and Default Cure.
------------------------------------
(a) Following any default on the part of either party, the non-
defaulting party shall have the right to cure the default, at the defaulting
party's cost, and to have immediate recovery of said amount, with interest at
the rate of ten (10% per annum from the date the sum is paid by Landlord until
reimbursement.
(b) Landlord shall be entitled to Court costs, attorney fees and
expenses, and any other amount necessary to compensate Landlord for all
detriment proximately caused by any default of Tenant.
(c) Upon termination of Tenant's right to possession:
(i) Landlord shall have the right to recover from Tenant,
the fair market value of any unpaid rent earned at the time of termination of
the Lease.
(ii) The balance of any unpaid rent for the balance of the
Initial or Extended Term, as appropriate, following termination of Tenant's
right of possession and the computation of the amount determined under Section
19(c)(i), subject to paragraph (f) below.
(d) Landlord shall have such other further rights and remedies as
shall be available at law or in equity.
(e) All rights and remedies shall be cumulative.
(f) Landlord and Tenant shall be required to mitigate damages in all
events.
20. Signage. Tenant shall, at Tenant's sole expense, have the right to
-------
place, construct and maintain on the Premises, one or more signs advertising its
business at the Premises and no other signs. All signage shall comply with
state and local laws and ordinances.
21. Landlord's Entry on Premises. Landlord and Landlord's authorized
----------------------------
representatives shall have the right to enter the Premises at all reasonable
times for any of the following purposes:
(a) To determine whether or not the Premises are in good condition and
whether Tenant is complying with its obligations under the Lease.
(b) To perform any necessary maintenance or other restoration to the
Premises.
(c) To shore the foundations, footings or walls of the building and
other improvements which are part of the Premises.
(d) Except in the case of emergencies, Landlord and Landlord's agents
shall give Tenant at least forty-eight (48) hours oral or written notice prior
to entry of the Premises. Any such
-10-
<PAGE>
entry by Landlord or Landlord's agents shall comply with all reasonable security
measures of Tenant and shall not impair Tenant's operations more than is
reasonably necessary. During any such entry, Landlord and Landlord's agent shall
be accompanied by Tenant.
22. Subordination/Estoppel. This Lease shall not be subject to or
----------------------
subordinate to any ground or underlying lease or to any lien, mortgage, deed of
trust, or security interest now or hereafter affecting the Premises, nor shall
Tenant be required to execute any documents subordinating this Lease, unless the
ground Lessor, lender, or other holder of the interest to which this Lease shall
be subordinated contemporaneously executes a recognition and nondisturbance
agreement which (i) provides that this Lease shall not be terminated so long as
Tenant is not in default under this Lease and (ii) recognizes all of Tenant's
rights hereunder. Further, Tenant shall have no obligation to attorn to any
successor-in-interest or ground lessor, nor to execute any documents evidencing
attornment, unless the successor-in-interest or ground lessor in question
assumes, in writing, all obligations of the Landlord under this Lease. If
Landlord sells or otherwise conveys its interest in the Premises, Landlord shall
not be relieved of its obligations under the Lease accruing from and after the
effective date of such transfer, unless and until the successor assumes in
writing the obligations to be performed by Landlord on and after the effective
date of the transfer.
Each party shall, within ten (10) days after notice from the other, execute
and deliver to the other, in recordable form, a certificate stating that the
Lease is unmodified and in full force and effect, or in full force and effect as
modified and stating the modifications. The certificate shall also state the
amount of minimum monthly rent, the date to which rent has been paid in advance,
and the amount of any security deposit or prepaid rent.
23. Attorney Fees. In the event either party commences an action against
-------------
the other arising out of or in connection with this Lease, the prevailing party
shall be entitled to recover from the losing party, reasonable attorney fees and
costs of suit.
24. Surrender of Premises. Upon expiration or termination of this Lease,
---------------------
Tenant shall surrender the Premises to Landlord, together with all Tenant's
improvements and other alterations, except for such alterations which Tenant has
the right to, or is obligated to remove.
If Tenant fails to surrender the Premises to Landlord as required, Tenant
shall hold Landlord harmless from any damages resulting from Tenant's failure to
surrender the Premises, including without limitation, claims made by a
succeeding Tenant resulting from Tenant's failure to surrender the Premises.
25. Holding Over. If Tenant, with Landlord's consent, remains in
------------
possession of the Premises after expiration or termination of the Initial Lease
Term, or any extension thereof, or after the date in any notice given by
Landlord to terminate the Lease, such possession by Tenant shall be deemed to be
a month-to-month tenancy, terminable upon thirty (30) days notice given at any
time by either party. All provisions of this Lease, except those relating to
Initial and Extended Terms, shall apply to any month-to-month tenancy.
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<PAGE>
26. Consent of Parties. Whenever consent or approval of either party if
------------------
required, that party shall not reasonable withhold such consent or approval.
27. Brokerage Fees. The parties acknowledge that no broker has been
--------------
utilized as a part of this transaction and as such, no brokerage fee or other
commission shall be paid as a part of this transaction. Each party shall
indemnify and hold the other harmless from any and all liability arising out of
a breach of this Section.
28. Notices. Any notice or demand required or permitted to be given
-------
pursuant to this Lease shall be deemed effective only if in writing and
delivered either personally or by certified mail, postage fully prepaid, return
receipt requested, addressed as follows:
If To Landlord: Saginaw Video Associates
c/o James J. Shinners
5195 Hampton Place
Saginaw, Michigan 48604-9576
If To Tenant: Mr. Donald C. Schutt
Vice-President and General Manager
Concentric Network Corporation
4450 Fashion Square Boulevard
Saginaw, Michigan 48604
or to such other address as may be designated by either party, from time to
time, in writing and in conformity with the terms of this Section. Any such
notice or demand shall be deemed to have been received: (a) on the third (3rd)
business day after mailing, if notice was given by certified mail, return
receipt requested; or (b) upon delivery if notice was given by personal
delivery.
29. Binding Effect. This Lease and the covenants herein contained shall
--------------
be binding upon and inure to the benefit of the parties and their respective
successors and assigns.
30. Authorization. The Officers executing this Lease on behalf of
-------------
Landlord and Tenant represent that they are authorized to execute this Lease and
bind the respective Landlord and Tenant entities.
31. Covenant of Further Assurances. The parties covenant, each with the
------------------------------
other, and their respective heirs, administrators, representatives, successors
and assigns, that each party shall, at any time and at all times hereafter, upon
reasonable request, make, do, execute and/or deliver all such other and further
reasonable assurances, acts, deeds, documents and things as in the opinion of
competent counsel may be necessary or proper to effectuate the intentions of the
parties and complete this transaction.
32. Merger/Modification. This Lease sets forth the entire agreement of
-------------------
the parties with regard to the lease of the Premises. All prior agreements
between the parties with regard to the lease
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<PAGE>
of the Premises have been merged herein and shall be of no further force of
effect. No modification of this Lease shall be effective unless in writing and
executed by all parties.
33. General Construction. This Lease shall be governed in all respects,
--------------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of Michigan. It is deemed by the parties that each has
executed this Lease in the County of Saginaw, Michigan, each party consenting to
the jurisdiction thereof. Words of any gender in this Lease shall be held to
include the other gender and the words in the singular number shall be held to
include the plural when the context so requires. Unless the context clearly
indicates to the contrary, time shall be deemed to be of the essence in the
interpretation of this Lease. The titles or captions given to the Sections of
this Lease have been utilized solely for the purposes of convenience. In no
event shall any such title or caption be deemed to be part of this Lease or
interpretive of any of its language or intent. No provision of this Lease is to
be interpreted for or against any party because that party or that party's legal
representative drafted the Lease or its provisions.
34. Severability. In the event any provision of this Lease is deemed
------------
invalid or unenforceable, said invalidity or unenforceability shall not affect
the other provisions hereof, and this Lease shall be construed in all respect as
if such invalid or unenforceable provision were omitted.
35. Hazardous Materials. To the best knowledge of Landlord, (i) no
-------------------
Hazardous Material is present on the Premises or the soil, surface water or
groundwater thereof, (ii) no underground storage tanks are present on the
Premises; and (iii) no action, proceeding or claim is pending or threatened
regarding the Premises concerning any Hazardous Material or pursuant to any
environmental Law. Under no circumstance shall Tenant be liable for, and
Landlord shall indemnify, defend and hold harmless Tenant, its agents,
contractors, stockholders, directors, successors, representatives, and assigns
from and against, all losses, costs, claims, liabilities and damages (including
attorneys' and consultants' fees) of every type and nature, director or
indirectly arising out of or in connection with any Hazardous Material present
at any time on or about the Premises, or the soil, air, improvements,
groundwater or surface water thereof, or the violation of any Laws, relating to
any such Hazardous Material, except to the extent that any of the foregoing
actually results from the release or emission of Hazardous Material on or about
the Premises during the term of the Lease by Tenant or its agents or employees
in violation of applicable environmental Laws. As used herein, "Hazardous
Material" shall mean any material which is now or hereafter regulated by any
governmental authority or which poses a hazard to the environment or human life.
*** INTENTIONAL DRAFTING PAGE BREAK ***
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<PAGE>
*** INTENTIONAL DRAFTING PAGE BREAK ***
IN WITNESS WHEREOF, the parties have executed this Lease Agreement the day
and year first written.
WITNESSES: SIGNED AND SEALED:
SAGINAW VIDEO ASSOCIATES,
a Michigan General Co-Partnership, d/b/a
Saginaw Conference Center, Landlord
/s/ Dana M. Harris /s/ James J. Shinners
- ------------------ ---------------------
DANA M. HARRIS By: JAMES J. SHINNERS
(As To Landlord Only) Its: Authorized Partner
/s/ Genevieve J. Nowak
- ----------------------
GENEVIEVE J. NOWAK
(As To Landlord Only)
CONCENTRIC NETWORK CORPORATION,
a Delaware Corporation, Tenant
/s/ Dana M. Harris /s/ Donald C. Schutt
- ------------------ --------------------
DANA M. HARRIS By: DONALD C. SCHUTT
(As To Tenant Only) Its: Vice-President and General Manager
/s/ Patricia A. Peters
- ----------------------
PATRICIA A. PETERS
(As To Tenant Only)
Prepared By:
SHINNERS & COOK
By: James J. Shinners (P23942)
Attorneys at Law
5195 Hampton Place
Saginaw, Michigan 48604-9576
Telephone:
-14-
<PAGE>
ADDENDUM TO SAGINAW VIDEO/CONCENTRIC LEASE AGREEMENT
(MARCH, 1996 RENT PRO-RATION)
---------------------------
Monthly Rent (Existing Space): = $9,667.00
- - 11,600 square feet x $10.00 / 12
Per Diem (Existing Space): = $ 311.84
- $9,667.00 / 31
03/11/96 - 03/31/96 (21 days) = $6,548.64
$311.84 x 21
PRO-RATED RENT DUE LANDLORD FOR MARCH, 1996: $6,548.64
========
*****
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<PAGE>
EXHIBIT A
Floor Plan of the Premises
[Graphic Omitted]
-16-
<PAGE>
EXHIBIT 10.26
-------------
Amended and Restated
LEASE AGREEMENT
by and between
Mr. Larry Shackley of Bay City, Michigan (Landlord)
and
Concentric Network Corporation (Tenant)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LEASE AGREEMENT..................................................................... 1
1. DEFINITIONS.................................................................... 1
1.1 Agreed Interest Rate................................................ 1
1.2 Building............................................................ 1
1.3 Effective Date...................................................... 1
1.4 Hazardous Material.................................................. 1
1.5 Law................................................................. 1
1.6 Lease............................................................... 1
1.7 Lease Term.......................................................... 1
1.8 Leasehold Improvements.............................................. 2
1.9 Lender.............................................................. 2
1.10 Monthly Rent........................................................ 2
1.11 Outside Areas....................................................... 2
1.12 Premises............................................................ 2
1.13 Permitted Use....................................................... 2
1.14 Private Restrictions................................................ 2
1.15 Real Property Taxes................................................. 2
1.16 Tenant's Minimum Liability Insurance Coverage....................... 2
1.17 Trade Fixtures...................................................... 2
2. DEMISE, TERM AND OPTION TO EXTEND.............................................. 2
2.1 Demise of Premises.................................................. 2
2.2 Options to Extend Lease Term........................................ 2
3. RENT........................................................................... 3
3.1 Monthly Rent........................................................ 3
3.2 Payment of Rent..................................................... 3
3.3 Past Due Monthly Rent............................................... 3
4. USE OF PREMISES................................................................ 3
4.1 Compliance with Laws and Private Restrictions....................... 3
4.2 Use of Premises..................................................... 3
4.3 Parking and Reservation of Rights................................... 3
4.4 Hazardous Materials................................................. 4
5. TRADE FIXTURES AND LEASEHOLD IMPROVEMENTS...................................... 4
5.1 Leasehold Improvements.............................................. 4
5.2 Liens............................................................... 4
6. REPAIR AND MAINTENANCE......................................................... 4
6.1 Tenant's Obligation to Maintain..................................... 4
6.2 Landlord's Obligation to Maintain................................... 5
7. UTILITIES...................................................................... 5
8. REAL PROPERTY TAXES............................................................ 5
8.1 Tenant's Obligation to Reimburse..................................... 5
8.2 Taxes on Tenant's Property........................................... 5
8.3 Tax Contest.......................................................... 5
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
9. INSURANCE...................................................................... 5
9.1 Tenant's Insurance.................................................. 5
9.2 Landlord's Insurance:............................................... 6
9.3 Release and Waiver of Subrogation................................... 6
10. INDEMNITY...................................................................... 6
10.1 Indemnification of Landlord......................................... 6
10.2 Indemnification of Tenant........................................... 6
11. DAMAGE & DESTRUCTION................................................ 6
11.1 Landlord's Duty to Restore.......................................... 6
11.2 Landlord's Right to Terminate....................................... 7
11.3 Tenant's Right to Abatement and Termination......................... 7
12. CONDEMNATION................................................................... 7
12.1 Taking of Premises.................................................. 7
12.2 Restoration Following the Taking.................................... 7
12.3 Abatement of Rent................................................... 7
12.4 Temporary Taking:................................................... 7
12.5 Division of Condemnation Award...................................... 8
13. DEFAULT AND REMEDIES........................................................... 8
13.1 Events of Tenant's Default.......................................... 8
13.2 Landlord's Remedies................................................. 8
13.3 Rights Upon Termination............................................. 9
13.4 Landlord's Default and Tenant's Remedies............................ 9
13.5 Waiver.............................................................. 9
14. ASSIGNMENT AND SUBLETTING......................................................10
14.1 By Tenant...........................................................10
14.2 By Landlord.........................................................10
15. TERMINATION....................................................................10
15.1 Surrender of the Premises...........................................10
15.2 Holding Over........................................................10
16. RIGHT OF FIRST REFUSAL TO PURCHASE.............................................10
17. GENERAL PROVISIONS..................................................11
17.1 Landlord's Right to Enter...........................................11
17.2 Estoppel Certificates...............................................11
17.3 Reimbursable Expenditures...........................................11
17.4 Notices.............................................................11
17.5 Attorneys' Fees.....................................................11
17.6 Corporate Authority.................................................11
17.7 Miscellaneous.......................................................11
17.8 Brokerage Commissions...............................................12
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
PAGE
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<S> <C>
17.9 Memorandum of Lease................................................ 12
17.10 Subordination...................................................... 12
17.11 Quiet Possession................................................... 12
17.12 Entire Agreement................................................... 12
</TABLE>
Exhibit A - Legal Description
Exhibit B - Exceptions to Title
-iii-
<PAGE>
AMENDED AND RESTATED LEASE AGREEMENT
THIS AMENDED AND RESTATED LEASE AGREEMENT ("Lease"), dated October 7, 1996
for reference purposes only, is made by and between Mr. Larry Shackley of Bay
City, Michigan ("Landlord") and Concentric Network Corporation, a Delaware
corporation, formerly known as Concentric Research Corporation ("Tenant").
RECITALS
A. Pursuant to that certain lease agreement dated August 27, 1993 ("Master
Lease"), Thomas and Patricia Volk (the "Volks") leased the Premises (as defined
in Section 1) to Landlord. Pursuant to that certain lease agreement dated
August 27, 1993 ("Original Lease"), Landlord subleased the Premises to Tenant.
B. On or about _________, 1996, Landlord purchased a fee ownership interest in
the Premises from the Volks.
C. Landlord and Tenant desire to supersede and entirely replace the Original
Lease with this Lease.
NOW THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the parties hereto agree as follows:
1. DEFINITIONS: Any term that is given a special meaning by this Section 1 or
-----------
by any other provision of this Lease (including any exhibits attached hereto)
shall have such meaning when used in this Lease or any addendum or amendment
hereto.
1.1 Agreed Interest Rate: "Agreed Interest Rate" means an interest rate
--------------------
of either ten percent (10%) per annum or the maximum applicable rate permitted
by Law, whichever is less.
1.2 Building: "Building" means that certain approximately 6,000 square
--------
foot building located on the Premises.
1.3 Effective Date: "Effective Date" means the date by which the last
--------------
signatory to this Lease whose execution is required to make it binding on the
parties hereto shall have executed this Lease, provided that the executed Lease
has been mutually delivered.
1.4 Hazardous Material: "Hazardous Material" means any material or
------------------
substance that is now or hereafter prohibited or regulated by any Law or that is
now or hereafter designated by any governmental autho rity to be radioactive,
toxic, hazardous or otherwise a danger to health, reproduction or the
environment
1.5 Law: "Law" means any judicial decision, statute, constitution,
---
ordinance, resolution, order, or other requirement of any municipal, county,
state, federal, or other government agency or authority having jurisdiction over
the parties to this Lease or the Premises or both, in effect either at the
Effective Date of this Lease or any time during the Lease Term.
1.6 Lease: "Lease" means this printed lease and Exhibits "A " and "B"
----- ---------------------
attached hereto and made a part hereof, as the same may be amended in accordance
with this Lease from time to time.
1.7 Lease Term: "Lease Term" means that period of time commencing on the
----------
Effective Date and ending on December 31, 1997, unless extended or sooner
terminated as provided herein.
1
<PAGE>
1.8 Leasehold Improvements: "Leasehold Improvements" means all
----------------------
improvements, additions, alterations, and fixtures installed in or on the
Premises by Tenant at its expense which are not Trade Fixtures.
1.9 Lender: "Lender" means (i) any beneficiary, mortgagee, secured
------
party, or other holder of any deed of trust, mortgage or other written security
device or agreement affecting the Premises, and the note or other obligations
secured by it, and (ii) the lessor under any underlying ground lease under which
Landlord holds an interest in the Premises.
1.10 Monthly Rent: "Monthly Rent" means rent payable by Tenant pursuant
------------
to Paragraph 3.1.
1.11 Outside Areas: "Outside Areas" means all areas and facilities within
-------------
the Premises, other than the Building (including the parking areas, driveways,
pedestrian sidewalk, landscaped areas, trash enclosures, and the like).
1.12 Premises: "Premises" means that real property situated in the City of
--------
Bay City, County of Bay, with all improvements now or hereafter located thereon
commonly known as 400 41st Street, Bay City, Michigan 48708, as more
particularly described on Exhibit "A."
1.13 Permitted Use: "Permitted Use" means the use of the Premises for
-------------
general office, manufacturing, research and development, assembly, shipping,
storage, and all other legal uses.
1.14 Private Restrictions: "Private Restrictions" means all covenants,
--------------------
conditions and restrictions, private agreements, reciprocal easement agreements
and any other instruments (herein "encumbrances") affecting the use of the
Premises recorded as of the Effective Date and all encumbrances recorded after
the Effective Date.
1.15 Real Property Taxes: "Real Property Taxes" means all real property
-------------------
taxes, assessments, and other charges imposed by any governmental or quasi-
governmental authority, which are levied or assessed against the Premises.
Notwithstanding the foregoing, the term "Real Property Taxes" shall not include
estate, inheritance, transfer, gift or franchise taxes of Landlord or any
federal or state income tax.
1.16 Tenant's Minimum Liability Insurance Coverage: "Tenant's Minimum
---------------------------------------------
Liability Insurance Coverage" means One Million Dollars ($1,000,000).
1.17 Trade Fixtures: "Trade Fixtures" means anything affixed to the
--------------
Building or Outside Areas by Tenant at its expense for purposes of trade,
manufacture, ornament, or domestic use (except replacement of similar work or
material owned and installed by Landlord) which can be removed without injury to
the Building or Outside Areas.
2. DEMISE, TERM AND OPTION TO EXTEND:
---------------------------------
2.1 Demise of Premises: Landlord hereby leases to Tenant, and Tenant
------------------
leases from Landlord, for the Lease Term upon the terms and conditions of this
Lease, the Premises. This Lease shall supersede and entirely replace the
Original Lease. Landlord warrants that (i) the Premises are only subject to
those Private Restrictions and other exceptions to title disclosed in Exhibit
"B" hereto, (ii) the Premises are presently in compliance with all Laws and
Private Restrictions, and (iii) Tenant's conduct of its business operations as
they are presently being conducted on the Premises will not violate any Laws or
Private Restrictions.
2.2 Options to Extend Lease Term: Landlord grants to Tenant one (1)
----------------------------
option ("Option") to extend the Lease Term, for an additional term of twelve
(12) months ("Option Term"), commencing on December 31, 1997. To exercise the
Option, Tenant must give Landlord notice in writing by United States Certified
Mail, return receipt requested, of its intention to exercise the Option on or
before November 1, 1997. All terms and conditions of this Lease shall continue
to apply during the Option Term.
2
<PAGE>
3. RENT:
----
3.1 Monthly Rent: Commencing on November 1, 1996 and continuing
------------
throughout the Lease Term, Tenant shall pay to Landlord without offset or
deduction or type whatsoever except as expressly provided herein, Monthly Rent,
equal to the following:
November, 1996-December, 1996 $3,500
January, 1997-December, 1997 $3,730
If Tenant exercises the Option, then the Monthly Rent for the Option Term shall
be $4,200.
3.2 Payment of Rent: All rent required to be paid in monthly installments
---------------
shall be paid in advance on the first day of each calendar month during the
Lease Term. All rent shall be paid in lawful money of the United States, to
Landlord at its address for notices as set forth below or at such other place as
Landlord may designate from time to time by written notice to Tenant. Tenant's
obligation to pay rent shall be prorated during any partial month of the Lease
Term.
3.3 Past Due Monthly Rent: If any Monthly Rent is past due and Tenant
---------------------
fails to pay such rent within ten (10) days after Tenant has received a written
notice of delinquency from Landlord, then such past due rent shall thereafter
bear interest until paid at the rate of ten percent (10%) or the maximum
interest rate permitted by Law, whichever is lower.
4. USE OF PREMISES:
---------------
4.1 Compliance with Laws and Private Restrictions: Tenant shall not use
---------------------------------------------
or permit any person to use the Premises in any manner which violates any Laws
or Private Restrictions. At the Commencement Date, the Premises shall conform
to all requirements of covenants, conditions, restrictions and encumbrances
("CC&R's"), all underwriter's requirements, and all rules, regulations,
statutes, ordinances, laws and building codes, (collectively, "Laws") applicable
thereto. Tenant shall not be required to construct or pay the cost of complying
with any CC&R's, underwriter's requirements or Laws requiring construction of
improvements in the Premises which are properly capitalized under general
accounting principles, unless such compliance is necessitated solely because of
Tenant's particular use of the Premises.
4.2 Use of Premises: Tenant may use the Premises for any Permitted Use.
---------------
Landlord represents and warrants that Tenant's use of the Premises is and will
be permitted by all Laws, CC&R's, and fire underwriter's requirements and that
electricity, water, janitorial, heating, ventilating, air conditioning and other
services, at the levels generally provided for office uses in comparable
buildings in the vicinity of the Premises, will be available to Tenant at all
times during the Lease term. If the Premises should become unsuitable for
Tenant's use as a consequence of fire, casualty, exercise of eminent domain,
cessation of utilities or other services required to be provided to the Premises
by Landlord, or the presence of any Hazardous Material, which does not result
from Tenant's use, storage or disposal of such material in violation of
applicable law in or about the Premises, then Tenant shall be entitled to an
abatement of rent to the extent of the interference with Tenant's use of the
Premises occasioned thereby. If such interference cannot be corrected or the
damage resulting there from repaired so that the Premises will be reasonably
suitable for Tenant's intended use within one hundred twenty (120) days
following the occurrence of such event, then Tenant also shall be entitled to
terminate this Lease by delivery of written notice to Landlord at any time after
the occurrence of such event.
4.3 Parking and Reservation of Rights: Without charge, Tenant shall have
---------------------------------
the exclusive use of all parking spaces located on the Premises.
3
<PAGE>
4.4 Hazardous Materials:
-------------------
4.4.1 Tenant's Responsibility: Tenant, at its sole cost, shall
-----------------------
comply with all Laws relating to the storage, use, disposal, emission, or
release of any Hazardous Material by Tenant or its agents, employees or
contractors. If Hazardous Materials stored, used, disposed of, emitted, or
released on or about the Premises by Tenant or its agents, employees or
contractors results in contamination or deterioration of water or soil, then
Tenant shall promptly take any and all action necessary to clean up such
contamination as required by Law. At any time prior to the expiration of the
Lease Term, Tenant shall have the right to conduct appropriate tests of water
and soil and to deliver to Landlord the results of such tests to demonstrate
that no contamination has occurred as a result of Tenant's use of the Premises.
Tenant shall be solely responsible for, and shall defend, indemnify and hold
Landlord and its shareholder, officers, and directors harmless from and against,
all claims, costs and liabilities, including attorneys' fees and costs, to the
extent arising out of or the disposal or release of Hazardous Materials on or
about the Premises by Tenant or its agents, employees, or contractors or the
removal, clean-up and restoration work and materials required hereunder to
return the Property to its condition existing prior to the appearance of any
such Hazardous Materials.
4.4.2 Landlord's Obligation. Except as stated in Subparagraph 4.4.1,
---------------------
above, and notwithstanding anything to the contrary in any other section of the
Lease, Tenant shall have no responsibility for and Landlord shall be solely
responsible for, and shall defend, indemnify and hold Tenant and its
shareholders, officers, directors, successors and assigns, harmless from and
against, all claims, costs and liabili ties, including attorneys' fees and
costs, arising out of the presence at any time of any Hazardous Material on or
about the Premises during the Lease Term (including, without limitation, all
Hazardous Materials identified in that certain "Soil Feasibility Analysis and
Soil Remediation Corrective Action Plan" dated November 21, 1994, prepared by
Peerless Environmental Services, Inc.). Upon demand by Tenant, Landlord shall
promptly take any and all action necessary to investigate and remediate any such
Hazardous Material contamination as required by Law.
5. TRADE FIXTURES AND LEASEHOLD IMPROVEMENTS:
-----------------------------------------
5.1 Leasehold Improvements: Tenant may construct any Leasehold
----------------------
Improvement which does not affect the structural parts or exterior of the
Building without Landlord's prior approval. Any other Leasehold Improvements
may be made only after obtaining Landlord's consent, which consent shall not be
unreasonably withheld or delayed. Landlord shall be deemed to have consented to
any Leasehold improvement, if Landlord has not reasonably withheld its consent
to any Leasehold Improvement within fifteen (15) days of Tenant's request for
Landlord's consent to the Leasehold Improvement. All Leasehold Improvements
constructed at Tenant's cost shall remain the property of Tenant during the
Lease Term and may be removed from the Premises at any time. Landlord shall
have no lien or other interest whatsoever in any Leasehold Improvement and
within ten (10) days following Tenant's request, Landlord shall execute
documents in reasonable form to evidence Landlord's waiver of any right, title,
lien, or interest in Lessee's Leasehold Improvements located in the Premises.
Tenant shall restore all damage to the Premises caused by any removal of
Tenant's Leasehold Improvements. Within ten (10) days following a request by
Tenant, Landlord shall inform Tenant whether it reserves the right to have any
Leasehold Improvement installed by Tenant removed from the Premises by Tenant
upon termination of the Lease.
5.2 Liens: Tenant shall keep the Premises free from any liens arising out
-----
of any work performed, materials furnished, or obligations incurred by Tenant,
its agents, employees or contractors relating to the Premises. If any claim of
lien is recorded, Tenant shall bond against or discharge the same within twenty
(20) days after written notice to Tenant that the same has been recorded against
the Premises and/or the Property.
6. REPAIR AND MAINTENANCE:
----------------------
6.1 Tenant's Obligation to Maintain: Except as otherwise provided in
-------------------------------
Section 11 (restoration of damage caused by fire and other perils) and in
Paragraph 6.2 (Landlord's maintenance obligations), Tenant shall, at all times
during the Lease Term, keep and maintain the Premises in good order, condition,
and repair.
4
<PAGE>
6.2 Landlord's Obligation to Maintain: Landlord shall perform and
---------------------------------
construct, and Tenant shall have no responsibility to perform or construct, any
repair, maintenance or improvement (i) necessitated by the acts or omissions of
Landlord or its respective agents, employees or contractors, (ii) occasioned by
fire, acts of God or other casualty or by the exercise of the power of eminent
domain, (iii) required as a consequence of any violation of Law or construction
defect in the Premises as of the Effective Date, (iv) for which Landlord has a
right of reimbursement from others, (v) which could be treated as a "capital
expenditure" under generally accepted accounting principles, (vi) to the
structural parts of the Premises and the Building (including the walls, floors,
ceilings, roof, bearing walls, demising walls and foundations), necessary to
maintain a water-tight roof membrane, and to all utility systems servicing the
Premises.
7. UTILITIES: Tenant shall promptly pay, as the same become due, all charges
---------
for water, gas, electricity, telephone, sewer service, waste pick-up, and any
other utilities, materials or services furnished at the request of or used by
Tenant in the Premises.
8. REAL PROPERTY TAXES:
-------------------
8.1 Tenant's Obligation to Reimburse: Tenant shall within thirty (30)
--------------------------------
days after Landlord's written demand, shall pay the Real Property Taxes to the
extent such Real Property Taxes are directly related to periods occurring during
the Lease Term. If any assessment is levied against the Premises, Landlord may
elect to either pay the assessment in full or allow the assessment to go to
bond. If Landlord pays the assessment in full, Tenant shall pay to Landlord
each time payment of Real Property Taxes is made a sum equal to that which would
have been payable (as both principal and interest) had Landlord allowed the
assessment to go to bond. Notwithstanding anything contained herein, Tenant
shall not be obligated to pay any increase in Real Property Taxes caused by a
reassessment of the Premises following a "change in ownership" caused by a
transfer by Landlord of its interest in the Premises.
8.2 Taxes on Tenant's Property: Tenant shall pay before delinquency any
--------------------------
and all taxes, assessments, license fees, and public charges levied, assessed,
or imposed against Tenant or Tenant's estate in this Lease or the property of
Tenant situated within the Premises.
8.3 Tax Contest: If Tenant shall desire in good faith to contest or
-----------
otherwise review by appropriate legal or administrative proceeding any Real
Property Tax, Tenant may withhold payment of the Real Property Tax being
contested if, but only if, both (i) non-payment is permitted during the pendency
of such proceedings without the foreclosure of any tax lien or the imposition of
any fine or penalty and (ii) Tenant shall obtain and furnish a bond sufficient
to protect Landlord's interest in the Premises. At the request of Tenant,
Landlord shall cooperate with Tenant in any contest or other proceedings which
Tenant may desire to bring pursuant to this paragraph. Within ten (10) days
after the final determination of the amount due from Tenant with respect to the
Real Property Tax contested, Tenant shall pay the amount so determined to be
due, together with all costs, expenses and interest, whether or not this Lease
shall have then expired or terminated.
9. INSURANCE:
---------
9.1 Tenant's Insurance: At all times Tenant shall maintain in full force
------------------
and effect during the Lease Term the policies of insurance described below.
Copies of duly executed certificates for such policies shall be provided to
Landlord upon Landlord's request.
9.1.1 Liability Insurance: A policy or policies of comprehensive
-------------------
general liability insurance, including property damage, against liability for
personal injury, bodily injury, death, and damage to property occurring in or
about, or resulting from an occurrence in or about, the Premises with combined
single limit coverage of not less than $1,000,000, naming Landlord as an
additional insured, containing a cross liability endorsement.
5
<PAGE>
9.1.2 Casualty Insurance: A policy or policies of fire and property
------------------
damage insurance insuring the personal property, inventory, and trade fixtures
of Tenant within the Premises. The proceeds from any of such policies shall be
used for the repair or replacement of such items so insured if the Lease is not
terminated, or to Tenant if the Lease is terminated.
9.2 Landlord's Insurance: At all times Landlord shall maintain:
--------------------
9.2.1 A policy or policies of fire and property damage insurance in
standard "all risk" form insuring Landlord against loss from physical damage to
the Building and the Premises with coverage of not less than one hundred percent
(100%) of the full replacement cost thereof.
9.2.2 Tenant shall within thirty (30) days after its receipt of a
detailed invoice from Landlord, reimburse Landlord for the costs of the
foregoing policy, prorated as necessary to cover only the periods during the
Lease Term.
9.3 Release and Waiver of Subrogation: Notwithstanding anything to the
---------------------------------
contrary in the Lease, the parties hereto release each other, and their
respective agents, employees, subtenants, and contractors, from any liability
for injury to any person or damage to property that arises out of or incident to
any peril covered by insurance carried by the parties or out a peril of the type
to be covered by the insurance required to be carried under the terms of this
Lease, whether due to the negligence of Landlord or Tenant or their respective
agents, employees, contractors, or invitees, or any other cause. Each party
shall cause each insurance policy obtained by it to provide that the insurer
waives all right of recovery by way of subrogation against the other party and
its agents and employees in connection with any injury or damage covered by such
policy.
10. INDEMNITY:
---------
10.1 Indemnification of Landlord: Tenant shall hold harmless, indemnify
---------------------------
and defend Landlord and its employees and agents, with competent counsel
reasonably satisfactory to Landlord, from all liability, penalties, losses,
damages, costs, expenses, causes of action, claims and/or judgments arising by
reason of any death, bodily injury, personal injury or property damage to the
extent resulting from the negligent act or omission of Tenant, its agents,
contractors, or employees, a breach by Tenant of this Lease, or a violation by
Tenant of any Law or Private Restriction.
10.2 Indemnification of Tenant: Landlord shall hold harmless, indemnify
-------------------------
and defend Tenant and its employees and agents, with competent counsel
reasonably satisfactory to Tenant, from all liability, penalties, losses,
damages, costs, expenses, causes of action, claims and/or judgments arising by
reason of any death, bodily injury, personal injury or property damage to the
extent resulting from the negligent act or omission of Landlord, or its agents
contractors, or employees, a breach by Landlord of this Lease, or a violation by
Landlord of any Law or Private Restriction.
11. DAMAGE & DESTRUCTION:
--------------------
11.1 Landlord's Duty to Restore: If the Premises or the Building is
--------------------------
damaged by any peril, Landlord shall restore the same to substantially the same
condition existing immediately prior to such damage, unless the Lease is
terminated by Landlord pursuant to paragraph 11.2 or by Tenant pursuant to
paragraph 11.3. If the Lease is not terminated, all insurance proceeds
available from the fire and property damage insurance to be carried by Landlord
pursuant to paragraph 9.2 shall be paid to an independent depository and
disbursed as the restoration work progresses. If this Lease is terminated
pursuant to either paragraph 11.2 or 11.3, then all insurance proceeds available
from insurance carried by Landlord shall be paid to Landlord.
6
<PAGE>
11.2 Landlord's Right to Terminate: Landlord shall have the option to
-----------------------------
terminate this Lease in the event any of the following occurs, which option may
be exercised only by delivery to Tenant of a written notice of election to
terminate within thirty (30) days after the date of such damage:
11.2.1 The Building is damaged by any peril both (i) not covered by
the type of insurance Landlord is required to carry pursuant to paragraph 9.2
and (ii) not actually covered by valid and collectible insurance actually
carried by Landlord and in force at the time of such damage or destruction, to
such an extent that the estimated cost to restore the Building exceeds ten
percent (10%) of the then actual replacement cost thereof; or
11.2.2 The Premises are damaged by any peril during the last twelve
(12) months of the Lease Term and the restoration of the Premises cannot be
substantially completed within sixty (60) days after the date of such damage;
provided, however, that Landlord may not terminate this Lease pursuant to this
Subparagraph 11.2.2 if Tenant, at the time of such damage, has an express
written option to further extend the term of this Lease and Tenant exercises
such option to so further extend the Lease Term within thirty (30) days
following the delivery to Tenant of Landlord's written termination notice.
11.3 Tenant's Right to Abatement and Termination: If all or any portion of
-------------------------------------------
the Premises or the Building should become unsuitable for Tenant's use as a
consequence of fire, casualty, cessation of utilities not caused by Tenant for a
period exceeding ten (10) days, or the presence of any Hazardous Material not
released, emitted or discharged to the Premises by Tenant or its agents,
employees or contractors, then Tenant shall be entitled to an abatement of all
Monthly Rent payable hereunder to the extent of the interference with Tenant's
use of the Premises occasioned thereby and, if such interference cannot be
corrected or the damage resulting therefrom repaired so that the Premises will
be reasonably suitable for Tenant's intended use within ninety (90) days
following the occurrence of such event, then Tenant also shall be entitled to
terminate this Lease by delivery of written notice of termination to Landlord at
any time prior to cessation of the interfering event or restoration of the
Premises.
12. CONDEMNATION:
------------
12.1 Taking of Premises: If all or any part of the Premises or the
------------------
Building is taken by means of (i) any taking by the exercise of the power of
eminent domain, whether by legal proceedings or otherwise, (ii) a voluntary sale
or transfer by Landlord to any condemnor under threat of condemnation or while
legal proceedings for condemnation are pending, or (iii) any taking by inverse
condemnation (a "Condemnation"), and any portion of the Premises or the Building
cannot be reconstructed within a reasonable period of time and thereby made
reasonably suitable for Tenant's continued occupancy for the Permitted Use, then
Tenant shall have the option to terminate this Lease. Any such option to
terminate by Tenant must be exercised within a reasonable period of time, to be
effective as of the date that possession of the Premises is taken by the
condemnor.
12.2 Restoration Following the Taking: If any part of the Premises or the
--------------------------------
Building is taken by Condemnation and this Lease is not terminated, then
Landlord shall make all repairs and alterations that are reasonably necessary to
make that which is not taken a complete architectural unit reasonably suitable
for Tenant's occupancy for the Permitted Use.
12.3 Abatement of Rent: Except in the case of a temporary taking, if any
-----------------
portion of the Premises is taken by Condemnation and this Lease is not
terminated, then as of the date possession is taken, the Monthly Rent shall be
reduced in the same proportion that the value of the Premises so taken (less any
addition thereto by reason of any reconstruction) bears to the value of the
remainder of the Premises.
12.4 Temporary Taking: If any portion of the Premises is temporarily taken
----------------
by Condemnation and such taking affects Tenant's ability to use the Premises for
the Permitted Use, then Tenant shall have the option to terminate this Lease,
effective on the date possession is taken by the condemnor.
7
<PAGE>
12.5 Division of Condemnation Award: Tenant shall be entitled to receive
------------------------------
any damages awarded by the court in connection with a Condemnation for leasehold
improvements installed in the Premises at Tenant's expense, Tenant's moving
costs and lost goodwill. The entire balance of the award shall be the property
of Landlord.
13. DEFAULT AND REMEDIES:
---------------------
13.1 Events of Tenant's Default: Tenant shall be in default of its
--------------------------
obligations under this Lease if any of the following events occurs:
13.1.1 Tenant fails to pay any Monthly Rent when due and such
failure is not cured within five (5) days after Landlord notifies Tenant in
writing that such nonpayment was not made when due; or
13.1.2 Tenant fails to perform any term, covenant, or condition of
this Lease (except those requiring the payment of money to Landlord) and Tenant
fails to cure such default within thirty (30) days after delivery of written
notice from Landlord specifying the nature of such default where such default
could reason ably be cured within said thirty (30) day period, or fails to
commence such cure within said thirty (30) day period and thereafter
continuously with due diligence prosecute such cure to completion where such
default could not reasonably be cured within said thirty (30) day period; or
13.1.3 Tenant shall have made a general assignment of its assets
for the benefit of its creditors; or
13.1.4 Tenant shall have sublet the Premises or assigned its
interest in the Lease in violation of the provisions contained herein; or
13.1.5 Tenant shall have permitted the sequestration or attachment
of, or execution on, or the appointment of a custodian or receiver with respect
to, all or any substantial part of the property of Tenant or any property
essential to the conduct of Tenant's business, and Tenant shall have failed to
obtain a return or release of such property within thirty (30) days thereafter
or prior to sale pursuant to such sequestration, attachment or levy, whichever
is earlier; or
13.1.6 A court shall have made or entered any decree or order with
respect to Tenant, or Tenant shall have submitted to or sought a decree or order
(or a petition or pleading shall have been filed in connection therewith) which:
(i) grants or constitutes (or seeks) an order for relief, appointment of a
trustee, or confirmation of a reorganization plan under the bankruptcy laws of
the United States; (ii) approves as properly filed (or seeks such approval of) a
petition seeking liquidation or reorganization under said bankruptcy laws or any
other debtor's relief law or statute of the United States or any state thereof;
or (iii) otherwise directs (or seeks) the winding up or liquidation of Tenant;
and such petition, decree or order shall have continued in effect for a period
of thirty (30) or more days.
13.2 Landlord's Remedies: In the event of any default by Tenant, Landlord
-------------------
may, at Landlord's election, terminate this Lease by giving Tenant written
notice of termination, in which event this Lease shall terminate on the date set
forth for termination in such notice. Any termination under this subparagraph
shall not relieve Tenant from its obligation to pay sums then due Landlord or
from any claim against Tenant for damages or rent previously accrued or then
accruing. In no event shall any one or more of the following actions by
Landlord, in the absence of a written election by Landlord to terminate this
Lease, constitute a termination of this Lease:
13.2.1 Appointment of a receiver or keeper in order to protect
Landlord's interest hereunder;
8
<PAGE>
13.2.2 Consent to any subletting of the Premises or assignment of
this Lease by Tenant, whether pursuant to the provisions hereof or otherwise; or
13.2.3 Any other action by Landlord or Landlord's agents intended
to mitigate the adverse effects of any breach of this Lease by Tenant, including
without limitation any action taken to maintain and preserve the Premises or any
action taken to relet the Premises or any portions thereof, for the account of
Tenant and in the name of Tenant.
13.3. Rights Upon Termination: In the event Landlord terminates this
-----------------------
Lease, Landlord shall be entitled, at Landlord's election, to damages in an
amount as set forth below:
13.3.1 The worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided,
computed by discounting such amount at the prime rate published in the Wall
----
Street Journal at the time of award plus one percent (1%); and
- --------------
13.3.2 Any other amount necessary to compensate Landlord for all
detriment proximately caused by Tenant's failure to perform Tenant's obligations
under this Lease, or which in the ordinary course of things would be likely to
result therefrom.
13.3.3 Notwithstanding anything to the contrary set forth in
this Lease, Landlord shall use its best efforts to mitigate any damages
resulting from any default by Tenant, and Tenant shall not in any event be
liable for any damages reasonably mitigable by Landlord. Landlord waives any
right of distraint, distress for rent or landlord's lien that may arise at law.
13.4 Landlord's Default and Tenant's Remedies: In the event Landlord fails
----------------------------------------
to perform any of its obligations under this Lease and fails to cure such
default within thirty (30) days after written notice from Tenant specifying the
nature of such default where such default could reasonably be cured within said
thirty (30) day period, or fails to commence such cure within said thirty (30)
day period and thereafter continuously with due diligence prosecute such cure to
completion where such default could not reasonably be cured within said thirty
(30) day period, then Tenant shall have the following remedies:
13.4.1 Tenant may proceed in equity or at law to compel Landlord to
perform its obligations and/or to recover damages proximately caused by such
failure to perform (except to the extent Tenant has waived its right to damages
resulting from injury to person or damage to property as provided herein).
13.4.2 Tenant may cure any default of Landlord at Landlord's cost.
If Tenant at any time by reason of Landlord's default reasonably pays any sum or
does any act that requires the payment of any sum, the sum paid by Tenant shall
be immediately due from Landlord to Tenant at the time the sum is paid, and
shall bear interest at the Agreed Interest Rate from the date the sum is paid by
Tenant until Tenant is reimbursed by Landlord. Any such amount shall be payable
by Landlord to Tenant within ten (10) days following Tenant's written demand for
payment and if not so paid, may be offset against the next installments of
Monthly Rent payable by Tenant to Landlord under the Lease.
13.5 Waiver: One party's consent to or approval of any act by the other
------
party requiring the first party's consent or approval shall not be deemed to
waive or render unnecessary the first party's consent to or approval of any
subsequent similar act by the other party. The receipt by Landlord of any rent
or payment with or without knowledge of the breach of any other provision hereof
shall not be deemed a waiver of any such breach unless such waiver is in writing
and signed by Landlord. No delay or omission in the exercise of any right or
remedy accruing to either party upon any breach by the other party under this
Lease shall impair such right or remedy or be construed as a waiver of any such
breach theretofore or thereafter occurring. The waiver by either party of any
breach of any provision of this Lease shall not be deemed to be a waiver of any
subsequent breach of the same or any other provisions herein contained.
9
<PAGE>
14. ASSIGNMENT AND SUBLETTING:
-------------------------
14.1 By Tenant: The following provisions shall apply to any assignment
---------
or subletting by Tenant:
14.1.1 Tenant shall not sublet the Premises or assign or encumber
its interest in this Lease, without Landlord's prior written consent, which
consent shall not be unreasonably withheld or delayed. Landlord shall be deemed
to have consented to any proposed assignment or subletting if it has not
reasonably withheld its consent to any such proposed assignment or subletting
within fifteen (15) days of Tenant's request for consent.
14.1.2 Consent by Landlord to one or more assignments or
encumbrances of this Lease or to one or more sublettings of the Premises shall
not be deemed to be a consent to any subsequent assignment, encumbrance, or
subletting.
14.1.3 Notwithstanding the foregoing, Tenant may assign this Lease
or sublet all or a portion of the Premises without Landlord's consent (i) to a
parent, subsidiary, or an entity under common control with Tenant, (ii) in
connection with the transfer of stock of Tenant, or (iii) in connection with the
sale of substantially all of Tenant's assets located in the Premises.
14.2 By Landlord: Landlord and its successors in interest shall have the
-----------
right to transfer their interest in the Building. As used herein, the term
"Landlord" shall mean the Landlord originally named herein, but following any
transfer of its interest in the Premises and the Property, the term "Landlord"
shall thereafter mean the transferee of such interest.
15. TERMINATION:
-----------
15.1 Surrender of the Premises: Immediately prior to the expiration or
-------------------------
upon the earlier termination of this Lease, Tenant shall remove all Leasehold
Improvements installed in the Premises by Tenant (which Landlord has not agreed
may remain in the Premises), trade fixtures and other personal property, repair
all damage caused by the installation and removal of such property, and vacate
and surrender the Premises to Landlord in good condition, reasonable wear and
tear, condemnations, perils and Hazardous Materials not placed on or about the
Premises by Tenant, its agents, employees or contractors excepted.
15.2 Holding Over: Any holding over after the expiration of the Lease
------------
Term and with the written consent of Landlord shall be construed to be a tenancy
from month to month on the same terms and conditions herein specified insofar as
applicable.
16. RIGHT OF FIRST REFUSAL TO PURCHASE: If at any time during the Lease Term,
----------------------------------
Landlord elects to sell the Premises, Tenant shall have the right of first
refusal to meet any bona fide offer to purchase the Premises received by
Landlord from any party on the same terms and conditions of such offer.
Landlord shall promptly provide Tenant with a copy of any such offer and Tenant
shall have sixty (60) days after its receipt of the offer to agree in writing to
purchase the Premises on the same terms and conditions stated in the offer. If
Tenant does not indicate in writing its agreement to purchase the Premises on
the terms contained in the offer within said sixty (60) day period, then
Landlord thereafter shall have the right to sell the Premises to such party on
the same terms and conditions stated in the offer. If Landlord does not sell
the Premises within ninety (90) days after the expiration of said sixty (60) day
period, or if terms and conditions of the offer to purchase the Premises are
changed, then any further transaction shall be deemed a new offer to purchase
the Premises and the provisions of this paragraph shall again be applicable.
Notwithstanding the foregoing, Landlord may, without Tenant's right of first
refusal, sell the Premises to Amos Weiss. Should Amos Weiss become the owner of
the Premises, and should he during the Lease Term elect to sell the Premises,
then the provisions of this Section 16 shall apply to any bona fide offer to
purchase received by Mr. Weiss.
10
<PAGE>
17. GENERAL PROVISIONS:
------------------
17.1 Landlord's Right to Enter: Landlord or its agents may enter the
-------------------------
Premises at any reasonable time for the purpose of (i) inspecting the same, (ii)
posting notices of nonresponsibility, (iii) supplying any service to be provided
by Landlord to Tenant, (iv) making necessary alterations, additions or repairs,
(v) performing Tenant's obligations when Tenant has failed to do so within
thirty (30) days after written notice from Landlord, and/or (vi) in case of an
emergency. However, Landlord may not so enter the Premises until it has first
given Tenant at least forty-eight (48) hours prior written notice of its
intention to do so (except in case of an emergency) and complies with all of
Tenant's security regulations. If Tenant so elects, Landlord shall be
accompanied by a representative Tenant during any such entry. Landlord shall
not have the right to open or inspect confidential files or safes, and Landlord
shall not disclose to others any confidential information regarding Tenant's
business learned by Landlord during any such entry into the Premises.
17.2 Estoppel Certificates: Each party agrees, following any request by
---------------------
the other, promptly to execute and deliver an estoppel certificate upon which
the requesting party and any others it designates may rely (i) certifying that
this Lease is unmodified and in full force and effect, or, if modified, stating
the nature of such modification and certifying that this Lease, as so modified,
is in full force and effect, (ii) stating the date to which the rent and other
charges are paid in advance, if any, (iii) acknowledging that there are not, to
the certifying party's knowledge, any uncured defaults on the part of the other
party hereunder, or if there are stating their nature, and (iv) certifying such
other information about the Lease as may be reasonably required by the
requesting party.
17.3 Reimbursable Expenditures: Any expenditure by a party permitted or
-------------------------
required under this Lease, for which such party is entitled to demand and does
demand reimbursement from the other party, shall be limited to the actual cost
to the demanding party of the goods and/or services giving rise to such
expenditure, which cost shall not exceed the fair market value of such goods
and/or services; shall be reasonably incurred; and shall be substantiated by
documentary evidence available for inspection and review by the other party or
its representative during normal business hours.
17.4 Notices: Any notice required or desired to be given regarding this
-------
Lease shall be in writing and may be personally served, or in lieu of personal
service may be given by mail. If given by mail, such notice shall be deemed to
have been given (i) on the third business day after mailing if such notice was
deposited in the United States mail, certified and postage prepaid, addressed to
the party to be served at its address set forth below its signature, and (ii) in
all other cases when actually received. Either party may change its address by
giving notice of same in accordance with this paragraph.
17.5 Attorneys' Fees: In the event either party shall bring any action or
---------------
legal proceeding for an alleged breach of any provision of this Lease, to
recover rent, to terminate this Lease or to otherwise enforce, protect or
establish any term or covenant of this Lease or right of either party, the
prevailing party shall be entitled to recover as a part of such action or
proceedings, or in a separate action brought for that purpose, reasonable
attorneys' fees and court costs as may be fixed by the court.
17.6 Corporate Authority: Each individual executing this Lease on behalf
-------------------
of a corporation represents and warrants that he or she is duly authorized to
execute and deliver this Lease on behalf of said corporation and that this Lease
is binding upon said corporation in accordance with its terms.
17.7 Miscellaneous: Should any provision of this Lease prove to be invalid
-------------
or illegal, such invalidity or illegality shall in no way affect, impair or
invalidate any other provision hereof, and such remaining provisions shall
remain in full force and effect. This Lease shall be governed by the laws of the
State of Michigan. Time is of the essence with respect to the performance of
every provision of this Lease in which time of performance is a factor. Any
executed copy of this Lease shall be deemed an original for all purposes. This
Lease shall, subject to the provisions regarding assignment, apply to and bind
the respective heirs, successors, executors, administrators and assigns of
Landlord and Tenant. The language in all parts of this Lease shall in all cases
be construed as a
11
<PAGE>
whole according to its fair meaning, and not strictly for or against either
Landlord or Tenant. The captions used in this Lease are for convenience only and
shall not be considered in the construction or interpretation of any provision
hereof. When the context of this Lease requires, the neuter gender includes the
masculine, the feminine, a partnership or corporation or joint venture, and the
singular includes the plural. The terms "shall", "will", and "agree" are
mandatory. The term "may" is permissive. When a party is required to do
something by this Lease, it shall do so at its sole cost and expense without
right of reimbursement from the other party unless specific provision is made
therefor. Whenever one party's consent or approval is required to be given as a
condition to the other party's right to take any action pursuant to this Lease,
then such consent or approval shall not be unreasonably withheld or delayed.
Landlord shall not become or be deemed a partner or a joint venturer of Tenant
by reason of this Lease.
17.8 Brokerage Commissions: Each party warrants to the other that it has
---------------------
not had any dealings with any real estate brokers or salesmen or incurred any
obligations for the payment of real estate brokerage commissions or finder's
fees which would be earned or due and payable by reason of the execution of this
Lease.
17.9 Memorandum of Lease: At Tenant's request, Landlord shall execute in
-------------------
recordable form, a "Memorandum of Lease" referencing the Lease and setting forth
the true and legal description and assessor's parcel number of the Property in a
form reasonably acceptable to Lessee, and which Memorandum of Lease shall be
recorded in the Official Records of Bay County, Michigan.
17.10 Subordination: The following provisions shall govern the
-------------
relationship of this Lease and any underlying lease, mortgage or deed of trust
which now or hereafter affects the Premises, and any renewal, modification,
consolidation, replacement or extension thereof (collectively, "Security
Instruments"), which have been or may hereafter be executed affecting the
Premises:
17.10.1 This Lease shall not be subject or subordinate to any
existing or future Security Instruments unless the holder of the Security
Instrument in question executes a recognition and nondisturbance agreement which
(i) provides that this Lease shall not be terminated so long as Tenant is not in
default under this Lease and (ii) recognizes all of Tenant's rights hereunder;
and
17.11 Quiet Possession: Tenant shall peacefully have, hold and enjoy
----------------
the Premises, subject to the other terms of this Lease, provided that Tenant
pays the Monthly Rent and performs all of Tenant's covenants and agreements
contained in this Lease. This covenant and the other covenants of Landlord
contained in this Lease shall be binding upon Landlord and its successors only
with respect to breaches occurring during its and their respective ownerships of
Landlord's interest hereunder.
17.12 Entire Agreement: The Lease and the documents referred to herein
----------------
constitute the entire agreement between the parties, and there are no binding
agreements or representations between the parties except as expressed herein.
No subsequent change or addition to this Lease shall be binding unless in
writing and signed by the parties hereto.
12
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease with the
intent to be legally bound thereby, to be effective as of the Commencement Date
of this Lease.
AS LANDLORD: AS TENANT:
/s/ Larry Shackley Concentric Network Corporation, a
- ------------------------------- Delaware corporation
Larry Shackley
By: /s/ Donald C. Schutt
--------------------------------
Its: Vice President
-------------------------------
Address for Notices: Address for Notices:
3783 Mackinaw Road 10590 N. Tantau Ave.
- ------------------------------- -----------------------------------
Bay City, MI 48706 Cupertino, CA 95014
- ------------------------------- -----------------------------------
October 7, 1996 October 7, 1996
- ------------------------------- -----------------------------------
<PAGE>
EXHIBIT "A"
Legal Description
[to be attached]
<PAGE>
EXHIBIT "B"
Exceptions to Title
[to be attached]
<PAGE>
EXHIBIT 10.27
EXTENSION AGREEMENT
-------------------
EXTENSION AGREEMENT to be attached to and form a part of lease (which together
with any amendments, modifications and extensions there of 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 Vallco 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 lease 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.
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 ten 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.
<PAGE>
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.
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 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 be 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/ John K. French By: /s/
------------------------------------ ---------------------------
Its: general partner Its:__________________________
-----------------------------------
<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 8C. 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 the extent
the same results from 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, 19020 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
IN 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/ /s/
- ------------------------------------ ----------------------------------
By: John K. French, General Partner By: Frank Robinson, Director,
Corporate Real Estate and
Construction
<PAGE>
BASIC LEASE INFORMATION
LEASE DATE: January 26, 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 on Exhibit "A".
Building Description: That 41,151 square feet one story building known
as 10590 Tantau Avenue. The Building is shown
outlined in blue on Exhibit "A".
Premises: That entire 41,151 square foot one story building
known as 10590 Tantau Avenue. The Premises are
outlined in red on Exhibit "A".
Permitted Use: 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%
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.
-4-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Basic Lease Information............................................... 1
Table of Contents..................................................... 2
1. Premises.............................................................. 3
2. Possession and Lease Commencement..................................... 3
3. Term.................................................................. 3
4. Use................................................................... 3
5. Rules and Regulations................................................. 3
6. Rent.................................................................. 3
7. Basic Operating Cost.................................................. 4
8. Insurance and Indemnification......................................... 5
9. Waiver of Subrogation................................................. 5
10. Landlord's Repairs and Services....................................... 5
11. Tenant's Repairs...................................................... 5
12. Alterations........................................................... 5
13. Signs................................................................. 6
14. Inspection/Posting Notices............................................ 6
15. Utilities............................................................. 6
16. Subordination......................................................... 6
17. Financial Statements.................................................. 6
18. Estoppel Certificate.................................................. 6
19. Security Deposit...................................................... 6
20. Tenant's Remedies..................................................... 6
21. Assignment and Subletting............................................. 7
22. Quiet Enjoyment....................................................... 7
23. Condemnation.......................................................... 7
24. Casualty Damage....................................................... 7
25. Holding Over.......................................................... 8
26. Default............................................................... 8
27. Liens................................................................. 9
28. Substitution.......................................................... 9
29. Transfers by Landlord................................................. 9
30. Right of Landlord to Perform Tenant's Covenants....................... 9
31. Waiver................................................................ 9
32. Notices............................................................... 9
33. Attorneys' Fees....................................................... 9
34. Successors and Assigns................................................ 9
35. Force Majeure......................................................... 9
36. Miscellaneous......................................................... 9
37. Additional Provisions................................................. 10
EXHIBIT "A"........................................ Site Plan, Legal Description
EXHIBIT "B"...............................Tenant Improvements and Specifications
</TABLE>
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LEASE
THIS LEASE is made as of this 26th day of January, 1988 between
Spieker-French #130, Limited Partnership, a Texas Limited
Partnership (hereinafter called "Landlord") and Tandem Computers
Incorporated, a Delaware Corporation (hereinafter called
"Tenant").
PREMISES 1. Landlord leases to Tenant and Tenant leases from Landlord,
upon the terms and conditions hereinafter set forth, those
premises (the "Premises") outlined in red on Exhibit "A" and
described in the Basic Lease Information. The Premises may
be all or part of the building (the "Building") or of the
project (the "Project") which may consist of more than one
building. The Building and Project are outlined in blue and
green respectively on Exhibit "A".
POSSESSION AND 2.
LEASE
COMMENCEMENT
See Addendum 1
TERM 3. The Term of this Lease shall commence on the Term
Commencement date and continue in full force and effect for
the number of months specified as the Length of Term in the
Basic Lease Information or until this Lease is terminated as
otherwise provided herein. If the Term Commencement Date is
a date other than the first day of the calendar month, the
term shall be the number of months of the Length of Term in
addition to the remainder of the calendar month following
the Term Commencement Date.
USE 4. A. Tenant shall use the Premises for the Permitted Use and
for no other use or purpose without prior written consent of
Landlord. No increase in the Occupant Density of the
Premises shall be made without the prior written consent of
Landlord. Tenant and its employees, customers, visitors, and
licensees shall have the nonexclusive right to use, in
common with other parties occupying the Buildings or
Project, the parking areas and driveways of the project,
subject to such reasonable rules and regulations as Landlord
may from time to time prescribe.
B. Tenant shall not permit any odors, smoke, dust, gas,
substances, noise or vibrations to emanate from the
Premises, nor take any action which would constitute a
nuisance or would disturb, obstruct or endanger any other
tenants of the Building or Project in which the Premises are
situated or unreasonably interfere with their use of their
respective premises. Tenant shall not receive, store or
otherwise handle any product, material or merchandise which
is toxic, harmful, explosive, highly inflammable or
combustible. Storage outside the Premises of materials or
vehicles is prohibited without Landlord's prior written
consent. Tenant shall not use or allow the Premises to be
used for any improper or unlawful purpose, nor shall Tenant
cause or maintain or permit any nuisance in, on or about the
Premises. Tenant shall not commit or suffer the commission
of any waste in, on or about the Premises. Tenant shall not
allow any sale by auction upon the Premises, or place any
loads upon the floors, walls or ceilings which endanger the
structure, or place any harmful liquids in the drainage
system of the Building or Project. No waste, materials or
refuse shall be dumped upon or permitted to remain outside
the Premises except in trash containers placed inside
exterior enclosures designated for that purpose by Landlord.
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C. Tenant shall not use the Premises or permit anything to
be done in or about the Premises which will in any way
conflict with any law, statute, ordinance or governmental
rule or regulation now in force or which may hereafter be
enacted or promulgated. Tenant shall at its sole cost and
expense obtain any and all licenses or permits necessary for
Tenant's use of the Premises. Tenant shall promptly comply
with the requirements of any board of fire underwriters or
other similar body now or hereafter constituted relating to
or affecting the condition, use or occupancy of the
Premises. The judgment of any court of competent
jurisdiction or the admission of Tenant in any actions
against Tenant, whether Landlord be a party thereto or not,
that Tenant has so violated any such law, statute,
ordinance, rule, regulation or requirement, shall be
conclusive of such violation as between Landlord and Tenant.
Tenant shall not do or permit anything to be done in, on, or
about the Premises or bring or keep anything which will in
any way increase the rate of any insurance upon the
Premises, Building or Project, or upon any contents therein
or cause a cancellation of said insurance or otherwise
affect said insurance in any manner. Tenant shall indemnify
Landlord and hold Landlord harmless against any loss,
expense, damage, attorneys' fees or liability arising out of
the failure of Tenant to comply with any applicable law or
comply with the requirements as set forth herein.
RULES AND 5. Tenant and Tenant's agents, employees, and invitees shall
REGULATIONS faithfully observe and comply with any reasonable rules and
regulations Landlord may from time to time prescribe in
writing for the purpose of maintaining the proper care,
cleanliness, safety, traffic flow and general order of the
Premises or Project. Landlord shall make reasonable efforts
to enforce compliance by any other tenant or occupant of the
building or project with any of the rate and regulations.
RENT 6. Tenant shall pay to Landlord, without demand throughout the
Term, Rent as specified in the Basic Lease Information,
See Addendum 2 payable in monthly installments in advance on or before the
first day of each calendar month, in lawful money of the
United States, without deduction or offset whatsoever to
Landlord at the address specified in the Basic Lease
Information or to such other firm or to such other place as
Landlord may from time to time designate in writing. Rent
for the first full month of the Term shall be paid by Tenant
upon Tenant's execution of this Lease. If the obligation for
payment of Rent commences on other than the first day of a
month, then Rent shall be prorated and the prorated
installment shall be paid on the first day of the calendar
month next succeeding the Term Commencement Date.
BASIC 7. A. BASIC OPERATING COST. In addition to the Base Rent
OPERATING COST requirement to be paid hereunder, Tenant shall pay as
additional Rent, Tenant's Proportionate Share, as defined in
the Basic Lease Information of Basic Operating Cost in the
manner set forth below. Basic Operating Cost shall mean all
expenses and costs of every kind and nature which Landlord
shall pay or become obligated to pay, or would be required
to pay if the Project were fully occupied, because of or in
connection with the management, maintenance, preservation
and operation of the Project and its supporting facilities
servicing the Project (determined in accordance with
generally accepted accounting principles, consistently
applied) including but not limited to the following:
(1) All real estate taxes, possessory interest taxes,
business or license taxes or fees, service payment in lieu
of such taxes or fees, annual or periodic license or use
fees, excises, transit charges, housing fund assessments,
open space charge, assessments, levies, fees or charges,
general and special, ordinary and extraordinary, unforeseen
as well as foreseen, of any kind (including fees "in-lieu"
of any such tax or assessment) which are assessed, levied,
charged, confirmed, or imposed by any public authority upon
the Project its operations or the rent (or any portion or
component thereof) except (a) inheritance or estate taxes
imposed upon or assessed against the project, or any part
thereof or interest therein, and (b) taxes computed upon the
basis of the net income of Landlord or the owner of any
interest therein. See Addendum 3.
(2) All insurance premiums and costs, including but not
limited to, any deductible amounts, premiums and cost of
fire, casualty and liability coverage, rental abatement and
special hazard insurance applicable to the Project and
Landlord's personal property used in connection therewith,
provided, however, that Landlord may, but shall not be
obligated to, carry special hazard insurance covering losses
caused by casualty not insured under standard fire and
extended coverage insurance. See Addendum 4.
(3) Repairs, replacements and general maintenance for the
Premises, Building and Project (except for those repairs
expressly the responsibility of Landlord, those repairs paid
for by proceeds of insurance or by Tenant or other third
parties, and alterations attributable solely to tenants of
the Project other than Tenant).
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(4) All maintenance and service agreements and costs of
supplies and equipment used in maintaining the Premises,
Building and Project and the equipment therein and the
adjacent sidewalks, driveways, parking and service areas,
including, without limitation, alarm service, window
cleaning, elevator maintenance, Building exterior
maintenance and landscaping.
(5) Utilities which benefit all or Tenant's portion of the
Premises (utilities are metered separately).
(6) A management and accounting cost recovery equal to ten
percent (10%) of Basic Operating Costs .
* See Addendum 5 *
In the event that the building is not fully occupied during
any fiscal year of the Term as determined by Landlord, an
adjustment shall be made in computing the Basic Operating
Cost for such year so that Basic Operating Cost shall be
computed as though the building had been one hundred percent
(100%) occupied; provided, however, that in no event shall
Landlord be entitled to collect in excess of one hundred
percent (100%) of the Total Basic Operating Cost from all of
the tenants in the Building including Tenant.
All costs and expenses shall be determined in accordance
with generally accepted accounting principles which shall be
consistently applied. Basic Operating Cost shall not include
specific costs incurred for the account of, separately
billed to and paid by specific tenants. Notwithstanding
anything herein to the contrary, any instance wherein
Landlord, at Landlord's fair and reasonable discretion,
deems Tenant to be responsible for any amounts greater than
its Proportionate Share, Landlord shall have the right to
allocate costs in any manner Landlord deems appropriate.
B. PAYMENT OF ESTIMATED BASIC OPERATING COST. "Estimated
Basic Operating Cost" for any particular year shall mean
Landlord's estimate of the Basic Operating Cost for such
fiscal year made prior to commencement of such fiscal year
as hereinafter provided. Landlord shall have the right from
time to time to revise its fiscal year and interim
accounting periods so long as the periods as so revised are
reconciled with prior periods in accordance with generally
accepted accounting principles applied in a consistent
manner. During the last month of each fiscal year during the
Term, or as soon thereafter as practicable, Landlord shall
give Tenant written notice of the Estimated Basic Operating
Cost for the ensuing fiscal year. Tenant shall pay Tenant's
Proportionate Share of the Estimated Basic Operating Costs
with installments of Base Rent for the fiscal year to which
the Estimated Basic Operating Cost applies in monthly
installments on the first day of each calendar month during
such year, in advance. If at any time during the course of
the fiscal year, Landlord determines that Basic Operating
Cost will apparently vary from the then Estimated Basic
Operating Cost by more than ten percent (10%), Landlord may,
by written notice to Tenant, revise the Estimated Basic
Operating Cost for the balance of such fiscal year and
Tenant shall pay Tenant's Proportionate Share of the
Estimated Basic Operating Cost as so revised for the balance
of the then current fiscal year on the first of each
calendar month thereafter.
C. COMPUTATION OF BASIC OPERATING COST ADJUSTMENT. "Basic
Operating Cost Adjustment" shall mean the difference between
Estimated Basic Operating Cost and Basic Operating Cost for
any fiscal year determined as hereinafter provided. Within
one hundred twenty (120) days after the end of each fiscal
year, as determined by Landlord, or as soon thereafter as
practicable, Landlord shall deliver to Tenant a statement of
Basic Operating Cost for the fiscal year just ended
accompanied by a computation of Basic Operating Cost
Adjustment. If such statement shows that Tenant's payment
based upon Estimated Basic Operating Cost is less than
Tenant's proportionate Share of Basic Operating Cost, then
Tenant shall pay to Landlord the difference within twenty
(20) days after receipt of such statement. If such statement
shows that Tenant's payments of Estimated Basic Operating
Cost exceed Tenant's Proportionate Share of Basic Operating
costs, then (provided that Tenant is not in default under
this Lease), Landlord shall pay to Tenant the difference
within twenty (20) days of such statement. If this Lease has
been terminated or the Term hereof has expired prior to the
date of such statement, then the Basic Operating Cost
Adjustment shall be paid by the appropriate party within
twenty (20) days after the date of delivery of the fiscal
year. Tenant's Proportionate Share of the Basic Operating
Cost adjustment shall be prorated by reference to the exact
number of calendar days during such fiscal year for which
Tenant is obligated to pay Base Rent.
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D. NET LEASE. This shall be a net Lease and Base Rent shall
be paid to Landlord absolutely net of all costs and expenses
except as herein provided. The provisions for payment of
Basic Operating Cost and the Basic Operating Cost Adjustment
are intended to pass on to Tenant and reimburse Landlord for
all costs and expenses of the nature described in paragraph
7A incurred in connection with ownership and operating of
the Building or Project.
E. TENANT AUDIT. Tenant shall have the right, at Tenant's
expense and upon not less than five (5) days prior written
notice to Landlord, to review at reasonable times, in
Landlord's office, Landlord's books and records applicable
to Tenant's Lease for purposes of verifying Landlord's
calculation of the Basic Operating Cost and Basic Operating
Cost Adjustment.
In the event that Tenant shall dispute the amount set forth
in any statement provided by Landlord under paragraph 7B or
7C above, Tenant shall have the right, not later than twenty
(20) days following the receipt of such statement and upon
condition that Tenant shall first deposit with Landlord the
full amount in dispute, to cause Landlord's books and
records with respect to such fiscal year to be audited by
certified public accountant selected by Tenant and subject
to Landlords' reasonable right of approval. The Basic
Operating Cost Adjustment shall be appropriately adjusted on
the basis of such audit. If such audit disclosed a liability
for a refund in excess of ten percent (10%) of Tenant's
Proportionate Share of the Basic Operating Cost Adjustment
previously reported, the cost of such audit shall be borne
by Landlord; otherwise the cost of such audit shall be paid
by Tenant. If Tenant shall not request an audit in
accordance with the provisions of this paragraph 7E within
twenty (20) days of receipt of Landlord's statement provided
pursuant to paragraph 7B, 7C, such statement shall be final
and binding for all purposes hereof.
INSURANCE AND 8. A. CASUALTY INSURANCE. Landlord agrees to maintain
INDEMNIFI- insurance insuring the Buildings of the Project, of which
CATION the Premises are a part, against fire, lightning, extended
coverage, vandalism and malicious mischief in an amount not
less than eighty percent (80%) of the replacement cost
thereof. Such insurance shall be for the sole benefit of
Landlord and under its sole control, Landlord shall not be
obligated to insure any furniture, equipment, machinery,
goods or supplies not covered by this Lease which Tenant may
keep or maintain in the Premises or any leasehold
improvements, additions or alterations which Tenant may make
upon the Premises.
B. LIABILITY INSURANCE. Tenant shall purchase at its own
expense and keep in force during this Lease a policy or
policies of comprehensive liability insurance, including,
bodily injury and property damage, in the amount of not less
that Five Hundred Thousand Dollars ($500,000.00) for
property damage and Two Million Dollars ($2,000,000.00) per
occurrence for bodily injuries or deaths of persons
occurring in or about the Premises and Project. Said
policies shall (1) name landlord and, if applicable, its
agents, and any party holding an interest to which this
lease may be subordinated as additional insureds, (2) have a
Best rating of and licensed to do business in the State of
California and (3) provide that said insurance shall not be
cancelled, unless thirty (30) days prior written notice
shall have been given to landlord. Said policy or policies
or certificates thereof shall be delivered to landlord by
Tenant upon commencement of the lease and upon each renewal
of said insurance.
C. INDEMNIFICATION. Landlord shall not be liable to Tenant
for any loss or damage to person or property caused by
theft, fire, act of God, acts of a public enemy, riot,
strike, insurrection, war, court order, requisition or order
of governmental body or authority or for any damage or
inconvenience which may arise through repair or alteration
of any part of the Building or Project or failure to make
any such repair except as expressly otherwise provided in
paragraphs 10 and 12. Tenant shall indemnify Landlord and
hold Landlord harmless from any and all loss, cost, damage,
injury or expense arising out of or related to (1) claims of
injury to or death of persons or damage to property
occurring or resulting from the negligence of Tenant, its
agents, employees, invitees, or authorized representatives,
(2) claims for work or labor performed, or for materials or
supplies furnished to or at the request of Tenant or in
connection with performance of any work done for the account
of Tenant within the Premises or Project, and (3) claims
arising from any breach or default on the part of Tenant in
the performance of any covenant contained in this Lease.
Such indemnity shall include without limitation the
obligation to provide all costs of defense against any such
claims including any action or proceeding brought against
Landlord. The provisions of this paragraph shall survive the
expiration or termination of this Lease with respect to any
claims or liability occurring prior to such expiration or
termination. See Addendum 6. See Addendum 8.
WAIVER OF 9.
SUBROGATION
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LANDLORD'S
REPAIRS AND
SERVICES 10. Landlord shall at Landlord's expense maintain the structural
soundness of the roof, foundations and exterior walls of the
Building in good repair, reasonable wear and tear and acts
of God excepted. The term walls as used herein shall not
include windows, glass or plate glass, doors, special store
fronts or office entries. The term roof as used herein shall
not include skylights, smoke hatches or roof vents. Landlord
shall perform on behalf of Tenant and other tenants of the
Project the maintenance of the public and common areas of
the Project including but not limited to the landscaped
areas, parking areas, driveways, the truck staging areas,
rail spur areas, fire sprinkler systems, sanitary and storm
sewer lines, utility services, electric and telephone
equipment servicing the Building(s), exterior lighting, and
items which affect the operation and exterior maintenance of
the Project, including painting and caulking, which
determination shall be at Landlord's reasonable discretion.
Tenant shall reimburse Landlord for all such costs in
accordance with Paragraph 7. Any damage caused by or repairs
necessitated by any act of Tenant may be repaired by
Landlord at Landlord's option and at Tenant's expense.
Tenant shall immediately give Landlord written notice of any
defect or need of repairs after which Landlord shall have
reasonable opportunity to repair same. See Addendum 8.
TENANT'S 11. Tenant shall at Tenant's expense maintain all parts of the
REPAIRS Premises in a good clean and secure condition promptly
making all necessary repairs and replacements including but
not limited to all windows, glass, doors and any special
office entries, walls and wall finishes, floor covering,
hearing, ventilating and air conditioning systems, truck
doors, dock bumpers, dock plates and levelers, roofing,
plumbing work and fixtures, downspouts, skylights, smoke
hatches and roof vents. Tenant shall at Tenant's expense
also perform necessary pest extermination and regular
removal of trash and debris. If required by the railroad
company, Tenant agrees to sigh a joint maintenance agreement
governing the use of the rail spur, if any. Tenant, shall,
at its own expense, enter into a regularly scheduled
preventive maintenance/service contract with a maintenance
contractor for servicing all hot water, hearing and air
conditioning systems and equipment within or serving the
Premises. The maintenance contractor and the contract must
be approved by Landlord. The service contract must include
all services suggested by the equipment manufacturer within
the operation/maintenance manual and must become effective
and a copy thereof delivered to Landlord within sixty (60)
days of the Term Commencement Date. Tenant shall not damage
any demising wall or disturb the integrity and support
provided by any demising wall and shall, at its sole
expense, immediately repair any damage to any demising wall
caused by Tenant or its employees, agents or invitees.
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ALTERATIONS 12. Tenant shall not make, or allow to be made, any structural
or non-structural alterations which exceed Ten Thousand
Dollars ($10,000) in value per alteration, alterations or
physical additions in, about or to the premises without
obtaining the prior written consent of Landlord which
consent shall not be unreasonably withheld with respect to
proposed alterations and additions which (a) comply with all
applicable laws, ordinances, rules and regulations, (vb) are
compatible with the Project and its mechanical, plumbing,
electrical, and heating/ventilation/air conditioning
systems, and (c) will not interfere with the use and
occupancy of any other portion of the Building or Project by
any other tenant or its invitees. Specifically but without
limiting the generality of the foregoing, Landlord shall
have the right of consent for all plans and specifications
for the proposed alterations or additions, construction
means and methods, any contractor or subcontractor to be
employed on the work of alteration or additions, and the
time for performance of such work. Tenant shall also supply
See Addendum 9 to Landlord any documents and information reasonably
requested by Landlord in connection with its consideration
of a request for approval hereunder. Tenant must have
Landlord's written approval and all appropriate permits and
licenses prior to the commencement of said alterations and
additions. All alterations and additions permitted hereunder
shall be made and performed by Tenant without cost or
expense to Landlord. Landlord shall have the right to
require Tenant to remove any or all alterations, additions,
improvements and partitions made by Tenant and restore the
Premises to their original condition by the termination of
this Lease, by lapse of time or otherwise, all at Tenant's
expense. All such removals and restoration shall be
accomplished in a good workmanlike manner so as not to cause
any damage to the Premises or Project whatsoever. If
Landlord so elects, such alterations, physical additions or
improvements shall become the property of Landlord and
surrendered to Landlord upon the termination of this Lease
by lapse of time or otherwise; provided, however that this
clause shall not apply to trade fixtures or furniture owned
by Tenant. In addition to and wholly apart from its
obligation to pay Tenant's Proportionate Share of Basic
Operating Costs, Tenant shall be responsible for and shall
pay prior to delinquency any taxes or governmental service
fees, possessory interest taxes, fees or charges in lieu of
any such taxes, capital levies, or other charges imposed
upon, levied with respect to or assessed against its
personal property, on the value of its alterations,
additions or improvements and on its interest pursuant to
this Lease. To the extent that any such taxes are not
separately assessed or billed to Tenant, Tenant shall pay
the amount thereof as invoiced to Tenant by Landlord.
SIGNS 13. All signs, notices and graphics of every kind or character,
visible in or from public view or corridors, the common
areas or the exterior of the Premises, shall be subject to
Landlord's prior written approval. Tenant shall not place or
See Addendum 10 maintain any banners whatsoever or any window decor in or on
any exterior window or window fronting upon any common areas
or service area or upon any truck doors or man doors without
Landlord's prior written approval. Any installation of signs
or graphics on or about the Premises and Project shall be
subject to any applicable governmental laws, ordinances,
regulations and to pay any other requirements imposed by
Landlord. Tenant shall remove all such signs and graphics by
the termination of this Lease. Such installations and
removals shall be made in such manner as to avoid injury to
or defacement of the Premises, Building or Project and any
other improvements contained therein, and Tenant shall
repair any injury or defacement including without limitation
discoloration caused by such installation or removal.
INSPECTION/ 14. After reasonable notice, except in emergencies where no such
POSTING notice shall be required, Landlord, its agents and
NOTICES representatives, shall have the right to enter the Premises
to inspect the same, to clean, to perform such work as may
be permitted or required hereunder, to make repairs or
alterations to the Premises or Project or to other tenant
spaces therein, to deal with emergencies, to post such
notices as may be permitted or required by law to prevent
the perfection of liens against Landlord's interest in the
Project or to exhibit the Premises to prospective tenants,
purchasers, encumbrances or others, or for any other purpose
as Landlord may deem necessary or desirable; provided,
however, that Landlord shall not unreasonably interfere with
Tenant's business operations. Tenant shall not be entitled
to any abatement of Rent by reason of the exercise of any
such right of entry. Six months prior to the end of the
lease, Landlord shall have the right to erect on the
Premises and/or Project a suitable sign indicating that the
Premises are available for lease. Tenant shall give written
notice to Landlord at least thirty (30) days prior to
vacating the Premises and shall meet with Landlord for a
joint inspection of the Premises at the time of vacating. In
the event of Tenant's failure to give such notice or
participate in such joint inspection, Landlord's inspection
at or after Tenant's vacating the Premises shall
conclusively be deemed correct for purposes of determining
Tenant's responsibility for repairs and restoration. -----
ten (10) days prior written notice, except in emergencies
where no such approval shall be required. Tenant shall
accompany Landlord to any such coincidental areas.
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UTILITIES 15. Tenant shall pay for all water, gas, heat, air conditioning,
light, power, telephone, sewer, sprinkler charges and other
utilities and services used on or from the Premises,
together with any taxes, penalties, surcharges or the like
pertaining thereto, and maintenance charges for utilities
and shall furnish all electric light bulbs, ballasts and
tubes. If any such services are not separately metered to
Tenant, Tenant shall pay a reasonable proportion, as
determined by Landlord, of all charges jointly serving other
premises. Landlord shall not be liable for any damages
directly or indirectly resulting from nor shall the Rent or
any monies owed Landlord under this Lease herein reserved be
abated by reason of (a) the installation, use or
interruption of use of any equipment used in connection with
the furnishing of any of the foregoing utilities and
services, (b) failure to furnish or delay in furnishing any
such utilities or services when such failure or delay is
caused by acts of God or the elements, labor disturbances of
any character, any other accidents or other conditions
beyond the reasonable control of Landlord, or (c) the
limitation, curtailment, rationing or restriction on use of
water, electricity, gas or any other form of energy or any
other service or utility whatsoever serving the Premises or
Project. LL shall be entitled to cooperate voluntarily and
in a reasonable manner with the efforts of national, state
or local governmental agencies or utility suppliers in
reducing energy or other resource consumption. The
obligation to make services available hereunder shall be
subject to the limitations of any such voluntary, reasonable
program.
SUBORDINATION 16. Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a
subordination, this Lease shall be subject and subordinate
at all times to (a) (b) any mortgage or deed of trust which
may now exist or be placed upon said Project, or Landlord's
interest or estate in any of said items, which is specified
as security. Notwithstanding the foregoing, Landlord shall
have the right to subordinate or cause to be subordinated
any such ground leases or underlying leases or any such
liens to this Lease In the event that any mortgage or deed
of trust is foreclosed or a conveyance in lieu of
foreclosure is made of any reason, Tenant shall,
notwithstanding any subordination, attorn to and become the
Tenant of the successor in interest to Landlord at the
option of such successor in interest, so long as Tenant's
rights are recognized by such successor in interest. Tenant
shall execute and deliver, upon demand by Landlord and in
the form requested by Landlord, any additional documents
evidencing the priority of subordination of this Lease with
respect to any such ground leases or underlying leases or
any such mortgage or deed of trust.
FINANCIAL 17. At the request of Landlord, Tenant shall provide to Landlord
STATEMENTS its current financial statement or other information
discussing financial worth which Landlord shall use solely
for purposes of this Lease and in connection with the
ownership, management and disposition of the property
subject hereto. If Tenant is a corporation whose stock is
publicly-traded, current publicly.
ESTOPPEL 18. Tenant agrees from time to time with fifteen (15) days after
CERTIFICATE request of landlord, to deliver to Landlord, or Landlord's
designee, an estoppel certificate stating that this lease is
in full force and effect, the date to which Rent has been
paid, the unexpired portion of this lease and such other
matters pertaining to this Lease as may be reasonably
requested by Landlord. Failure by Tenant to execute and
deliver such certificate shall constitute an acceptance of
the Premises and acknowledgment by Tenant that the
statements included are true and correct without exception.
Landlord and Tenant intend that any statement delivered
pursuant to this paragraph may be relied upon by any
mortgagee, beneficiary, purchaser or prospective purchaser
of the Project or any interest therein. The parties agree
that Tenant's obligation to furnish such estoppel
certificates in a timely fashion is a material inducement
for Landlord's execution of the Lease.
SECURITY 19.
DEPOSIT
TENANT'S 20. Tenant shall look solely to Landlord' interest in the
REMEDIES Project or to the proceeds of Landlord's liability insurance
for recovery of any judgment from Landlord. Landlord, or if
Landlord is a partnership, its partner whether general or
limited, or if it is a corporation, its directors, officers
or shareholders, shall never be personally liable for any
such judgment. Any lien obtained to enforce any such
judgment and any levy of execution thereon shall be subject
and subordinate to any lien, mortgage or deed of trust on
the Project. Landlord shall maintain Five Million Dollars
($5,000,000) of general liability insurance with an
insurance carrier with a Best rating of 10 or better.
Landlord shall provide Tenant with proof of such insurance.
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ASSIGNMENT 21. A. Tenant shall not assign or sublet the Premises or any
AND part thereof without Landlord's prior written approval
SUBLETTING except as provided herein. If Tenant desires to assign this
Lease or sublet any or all of the Premises. Tenant shall
give Landlord written notice thirty (30) days prior to the
anticipated effective date of the assignment or sublease.
Landlord shall then have a period of fifteen (15) days
following receipt of such notice to notify Tenant in writing
that Landlord elects either (1) to terminate this Lease , or
(2) to permit Tenant to assign this Lease or sublet such
space, subject, however, to Landlord's prior written
approval of the proposed assignee of subtenant and of any
related documents or agreements associated with the
assignment of sublease, such consent not to be unreasonably
withheld so long as the use of the Premises by such proposed
assignee or subtenant would be a Permitted use and would not
increase Occupant Density of the Project, the proposed
assignee or subtenant is of sound financial condition. If
Landlord should fail to notify Tenant in writing of such
election within said period, Landlord shall be deemed to
have waived option (1) above, but written approval by
Landlord of the proposed assignee or subtenant shall be
required. Failure by Landlord to approve a proposed assignee
or subtenant shall not cause a termination of this Lease.
B. Any Rent or other consideration realized by Tenant under
any such sublease or assignment in excess of Rent payable
hereunder, after amortization (1) the reasonable cost of any
improvements which Tenant has made for the purpose of
assigning or subletting all or part of the Premises and (2)
reasonable subletting and assignment costs, shall be divided
and paid, fifty percent (50%) to Tenant and fifty percent
(50%) to Landlord.
C. In any subletting or assignment undertaken by Tenant,
Tenant shall diligently seek to obtain the maximum rental
amount available in the marketplace to such subletting or
assignment.
D.
E.
F. No assignment or subletting by Tenant shall relieve
Tenant of any obligation under this Lease. Any assignment or
subletting which conflicts with the provisions hereof shall
be void.
QUIET 22. Landlord represents that it has full right and authority to
ENJOYMENT enter into this Lease and that Tenant, upon paying the Rent
and performing its other covenants and agreements herein set
forth, shall peaceably and quietly have, hold and enjoy the
Premises for the Term hereof without hindrance or
molestation from Landlord, subject to the terms and
provisions of this Lease.
CONDEMNATION 23. A. If the whole or any substantial portion of the Project of
which the Premises are a part should be taken or condemned
for any public use or under governmental law ordinance or
regulation, or by right of eminent domain, or by private
purchase in lieu thereof, and the taking would prevent or
materially interfere with the Permitted Use of the Premises,
this lease shall terminate and the Rent shall be abated
during the unexpired portion of this Lease, effective when
the physical taking of said Premises shall have occurred.
B. If a portion of the Project of which the Premises are
part should be taken or condemned for any public use under
any governmental law, ordinance, or regulation,, or by right
of eminent domain, or by private purchase in lieu thereof,
and this Lease is not terminate as provided in the
subparagraph 23A above, this Lease shall not terminate, but
the Rent payable hereunder during the unexpired portion of
the Lease shall be reduced.
C. Landlord shall be entitled to any and all payment,
income, rent, award, or any interest therein whatsoever
which may be paid or made in connection with such taking or
conveyance and Tenant shall have no claim against Landlord
or otherwise for the value of any unexpired portion of this
Lease. Notwithstanding the foregoing paragraph, any
compensation specifically awarded Tenant for loss of
business, Tenant's personal property, moving cost or loss of
goodwill, shall be and remain the property of Tenant.
CASUALTY 24. A. If the Premises should be damaged or destroyed by fire,
DAMAGE tornado or other casualty, Tenant shall give immediate
written notice thereof to Landlord. Within thirty (30) days
of such notice, Landlord shall notify Tenant whether in
Landlord's opinion such repairs can be made either (1)
within (90) days (2) i more than ninety (90) days but in
less than one hundred fifty (150) days, or (3) in more than
one hundred fifty days (150) from the date of such notice;
Landlord's determination shall be binding on Tenant.
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B. If the Premises should be damaged by fire, tornado or
other casualty but only to such extent that rebuilding or
repairs can in Landlord's estimation be completed within
ninety (90) days after the date upon which Landlord is
notified by Tenant of such damage, this Lease shall not
terminate, and Landlord shall at its sole cost and expense
thereupon proceed with reasonable diligence to rebuild and
repair the Premises to substantially the condition in which
they existed prior to such damage, except that Landlord
shall not be required to rebuild, repair or replace any part
of the partitions, fixtures, additions and other
improvements which may have been placed in, on or about the
Premises by Tenant. If the Premises are untenantable in
whole or in part following such damage, the Rent payable
hereunder during the period in which they are untenantable
shall be reduced.
C. If the Premises should be damaged by fire, tornado or
other casualty but only to such extent that rebuilding or
repairs can in Landlord's estimation be completed in more
than ninety (90) days but in less than one hundred fifty
(150) days, then Landlord shall have the option of either
(1) terminating the Lease effective upon the date of the
occurrence of such damage, in which event the Rent shall be
abated during the unexpired portion of the Lease, or (2)
electing to rebuild or repair the Premises to substantially
the condition in which they existed prior to such damage
except that Landlord shall not b required to rebuild, repair
or replace any part of the partitions, fixtures, additions
and other improvements which may have been placed in, or
about the Premises by Tenant. If the Premises are
untenantable in whole or in part following such damage, the
Rent payable hereunder during the period in which they are
untenantable shall be reduced in direct proportion to the
area of the Premises reasonably determined to be unusable.
In the event that Landlord should fail to complete such
repairs and rebuilding within one hundred fifty (150) days
after the date upon which Landlord is notified by Tenant of
such damage, such period of time to be extended for delays
caused by the fault or neglect of Tenant or because of acts
of God, acts as of public agencies, labor disputes, strikes,
fires, freight embargoes, rainy or stormy weather, inability
to obtain materials, supplies or fuels, or delay of the
contractors or subcontractors due to such causes or other
contingencies beyond the reasonable control of Landlord,
Tenant may at its option terminate this Lease by delivering
thirty (30) days prior written notice of termination to
Landlord as Tenants exclusive remedy, whereupon all rights
and obligations hereunder shall cease and terminate.
D. If the Premises should be so damaged by fire, tornado,
or other casualty that rebuilding or repairs cannot in
Landlord's estimation be completed within one hundred fifty
(150) days after the date upon which Landlord is notified by
Tenant of such damage, this Lease shall terminate and the
Rent shall be abated during the unexpired portion of this
Lease, effective upon the date of the occurrence of such
damage.
E. Notwithstanding anything herein to the contrary, in the
event that holder of any indebtedness secured by a mortgage
or deed of trust covering the Premises requires that the
insurance proceeds be applied to such indebtedness, then
Landlord shall have the right to terminate this Lease by
delivering written notice of termination to Tenant within
fifteen (15) days after such requirement is made by any such
holder, whereupon all rights and obligations hereunder shall
cease and terminate.
HOLDING OVER 25. Tenant shall also indemnify and hold Landlord harmless from
any loss or liability resulting from delay by Tenant shall
See Addendum 12 also indemnify and hold Landlord harmless from any loss or
liability resulting from delay by Tenant in surrendering the
Premises, including, without limitation, any claims made by
any succeeding tenant founded on such delay. Alternatively,
if Landlord gives notice of Landlord's consent to Tenant's
holding over, such holding over shall constitute renewal of
the Lease on whatever terms constitute a renewal of this
Lease, and nothing contained in this paragraph shall waive
Landlord's right of Tenant at sufferance whether or not
Landlord accepts any Rent from Tenant while Tenant is
holding over without Landlord's written consent.
Additionally, in the event that upon termination of the
Lease, Tenant has not fulfilled its obligation with respect
to repairs and cleanup of the Premises or any other Tenant
obligations as set forth in this Lease, then Landlord shall
have the right to perform any such obligations as it deems
necessary at Tenant's sole cost and expense, and any time
required by Landlord to complete such obligations shall be
considered a period of holding over and the terms of this
paragraph shall apply.
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DEFAULT 26. A. EVENTS OF DEFAULT: The occurrence of any of the following
shall constitute an event of default on the part of Tenant:
(1) ABANDONMENT. Vacation or abandonment of the Premises
without prior written notice to Landlord for a continuous
period in excess of five (5) days. Tenant waives any right
to notice Tenant may have under Section 1951.3 of the Civil
Code of the State of California, the terms of this
subparagraph 26A being deemed such notice to Tenant as
required by said Section 1951.3.
(2) NONPAYMENT OF RENT. Failure to pay any installment of
Rent or any other amount due and payable hereunder upon the
date when said payment is due, such failure continuing
without cure by payment of the delinquent Rent and late
charge or other obligations for a period of ten (10) days
after written notice and demand; provided, however, that
except as expressly otherwise provided herein, Landlord
shall not be required to provide such notice more than twice
during the Term, the third such non-payment constituting
default for all purposes hereof without requirements of
notice.
(3) OTHER OBLIGATIONS. Failure to perform any obligations,
agreement or covenant under this Lease other than those
matters specified in subparagraphs (1) and (2) of this
subparagraph 26A, such failure continuing for fifteen (15)
days after written notice of such failure or such longer
period as Landlord determines to be necessary to remedy such
default, provided that Tenant shall continuously and
diligently pursue such remedy at all times until such
default is cured.
(4) GENERAL ASSIGNMENT. A general assignment by Tenant for
the Benefit of creditors.
(5) BANKRUPTCY. The filing of any voluntary petition in
bankruptcy by Tenant, or the filing of an involuntary
petition by Tenant's creditors, which involuntary petition
remains undischarged for a period of thirty (30) days. In
the event that under applicable law the trustee in
bankruptcy or Tenant has the right to affirm this Lease and
continue to perform the obligation of Tenant hereunder, such
trustee or Tenant shall, in such time period as may be
permitted by the bankruptcy court having jurisdiction, cure
all defaults of Tenant hereunder outstanding as of the date
of the affirmance of this Lease and provide to Landlord such
adequate assurances as may be necessary to ensure Landlord
of the continued performance of Tenant's obligations under
this Lease.
(6) RECEIVERSHIP. The employment of a receiver to take
possession of substantially all Tenant's assets or the
premises, if such attachment or other seizure remains
undismissed or undischarged for a period of thirty (30) days
after the levy thereof.
(7) ATTACHMENT. The attachment, execution or other
judicial seizure of all or substantially all of Tenant's
assets of the Premises, if such attachment or other seizure
remains undismissed or undischarged for a period of thirty
(30) days after the levy thereof.
B. REMEDIES UPON DEFAULT.
(1) RENT. All failures to pay any monetary obligation to be
paid by Tenant under this Lease shall be construed as
obligations for payment of Rent.
(2) TERMINATION. In the event of the occurrence of any event
of default, Landlord shall have the right, with fifteen (15)
days written notice, to immediately terminate this Lease,
and at anytime thereafter recover possession of the Premises
or any part thereof and expel and remove therefrom Tenant
and any other person occupying the same, by any lawful
means, and again repossess and enjoy the Premises without
prejudice to any of the remedies that Landlord may have
under this Lease, or at law or equity by reason of Tenant's
default or of such termination.
(3) CONTINUATION AFTER DEFAULT. Even though Tenant has
breached this Lease and/or abandoned the Premises, this
Lease shall continue in effect for so long as Landlord may
enforce all its rights and remedies under this Lease,
including but without limitation, the right to recover Rent
as it becomes due, and Landlord, without terminating this
Lease, may exercise all of the rights and remedies of a
Landlord under Section 1951.4 of the Civil Code of the State
of California or any successor code section. Acts of
maintenance preservation or efforts to lease the Premises or
the appointment of a receiver upon application of Landlord
to protect Landlord's interest under this Lease shall not
constitute an election to terminate Tenant's right to
possession.
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C. DAMAGES UPON TERMINATION. Should Landlord terminate this
Lease pursuant to the provisions of paragraph 26B(2) hereof,
Landlord shall have all the rights and remedies of a
Landlord provided by Section 1951.2 of the Civil Code of the
State of California, or successor code sections. Upon such
termination, in addition to any other rights and remedies to
which Landlord may be entitled under applicable law,
Landlord shall be entitled to recover from Tenant: (1) the
worth at the time of award of the unpaid Rent and other
amounts which had been earned at the time of termination (2)
the worth at the time of award of the amount by which the
unpaid Rent which would have been earned after termination
until the time of award exceeds the amount of such Rent loss
that the Tenant proves could have been reasonably avoided,
(3) the wroth at the time of award of the amount by which
the unpaid Rent for the balance of the Term after the time
of award exceeds the amount of such Rent loss that the
Tenant proves could be reasonably avoided, and (4) any other
amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform
its obligations under this Lease or which, in the ordinary
course of things, would be likely to result therefrom. The
"worth at the time of award" of the amounts referred to in
(1) and (2), above shall be computed with interest at the
maximum rate allowed by law. The "worth at the time of
award" of the amount referred to in (3) above shall be
computed by discounting such amount at the Federal Discount
Rate of the Federal Reserve Bank of San Francisco at the
time of the award plus one percent (1%).
D. LATE CHARGE. In addition to its other remedies, Landlord
shall have the right with three (3) business days to add to
the amount of any payment required to be made by Tenant
hereunder, and which is not paid on or before the date the
same is due, an amount equal to five percent (5%) of the
delinquency for each month or portion thereof that the
delinquency remains outstanding to compensate Landlord for
the loss of the use of the amount not paid and the
administrative costs caused by the delinquency, the parties
agreeing that Landlord's damage by virtue of such
delinquencies would be difficult to compute and the amount
stated herein represents a reasonable estimate thereof.
E. REMEDIES CUMULATIVE. All rights privileges and elections
or remedies of the parties are cumulative and not
alternative to the extent permitted by law and except as
otherwise provided herein.
LIENS 27. Tenant shall keep the Premises free from liens arising out
of or related to work performed, materials or supplies
furnished or obligations incurred by Tenant or in connection
with work made, suffered or done by Tenant in or on the
Premises or Project. In the event that Tenant shall not,
within ten (10) days following the imposition of any such
lien, cause the same to be released of record by payment or
posting of a proper bond, Landlord shall have, in addition
to all other remedies provided herein and by law, the right,
but not the obligation, to cause the same to be released by
such means as it shall deem proper, including payment of the
claim giving rise to such lien. All sums paid by Landlord on
behalf of Tenant and all expenses incurred by Landlord in
connection therefore shall be payable to Landlord on behalf
of Tenant and all expenses incurred by Landlord in
connection therefore shall be payable to Landlord by Tenant
on demand with interest at the maximum rate allowable by
law. Landlord shall have the right at all times to post and
keep posted on the Premises any notices permitted or
required by law, or which Landlord shall deem proper for the
protection of Landlord, the Premises, the Project and any
other party having an interest herein, from mechanics' and
materialmen's liens, and Tenant shall give Landlord not less
than ten (10) business days prior written notice of the
commencement of any work in the Premises or Project of a
value of Five Thousand (5,000) which could lawfully give
rise to a claim for mechanics' or materialmen's lien.
SUBSTITUTION 28.
TRANSFERS BY 29. In the event of a sale or conveyance by Landlord of the
LANDLORD Building, the same shall operate to release Landlord from
any future liability upon any of the covenants or
conditions, express or implied, herein contained in favor of
Tenant, and in such event Tenant agrees to look solely to
the responsibility of the successor in interests of Landlord
in and to this Lease. This Lease shall not be affected by
any such sale and Tenant agrees to attorn to the purchaser
or assignee, so long as Tenant's rights are recognized by
the successor interest.
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RIGHT OF 30. All covenants and agreements to be performed by Tenant under
LANDLORD TO any of the terms of this Lease shall be performed by Tenant
PERFORM at Tenant's sole cost and expense and without any abatement
TENANT'S of Rent. If Tenant shall fail to pay any sum of money, other
COVENANTS than Rent, required to be paid by it hereunder or shall fail
to perform any other act on its part to be performed
hereunder, and such failure shall continue for five (5) days
after notice thereof by Landlord, Landlord may, but shall
not be obligated to do so and without waiving or releasing
Tenant fro many obligations of the Tenant, make any such
payment or perform any such act on the Tenant's part to be
made or performed. All sums so paid by Landlord and all
necessary incidental costs together with interest thereon at
the maximum rate permitted by law from the date of such
payment by the Landlord shall be payable to Landlord on
demand, and Tenant covenants to pay such sums and Landlord
shall have, in addition to any other right or remedy of
Landlord, the same right and remedies in the event of the
nonpayment thereof by Tenant as in the case of default by
Tenant in the payment of the Rent.
WAIVER 31. If either Landlord or Tenant waives the performance of any
term, covenant or condition contained in this Lease, such
waiver shall not be deemed to be a waiver of any subsequent
breach of the same or any other waiver of any preceding
breach by Tenant of any term, covenant or condition of this
Lease, regardless of Landlord's knowledge of such preceding
breach at the time Landlord accepted such Rent. Failure by
Landlord to enforce any of the terms, covenants or
conditions of this Lease for any length of time shall not be
deemed to waive or to decrease the right of Landlord to
insist thereafter upon strict performance by Tenant. Waiver
by Landlord of any term, covenant or condition contained in
this Lease may only be made by a written document signed by
Landlord.
NOTICES 32. Each provision of this Lease or of any applicable
governmental laws, ordinances, regulations and other
requirements with reference to the sending, mailing or
delivery of any notice or the making of any payment by
Landlord or Tenant to the other shall be deemed to be
complied with when and if the following steps are taken:
A. All Rent and other payments required to be made by
Tenant to Landlord hereunder shall be payable to Landlord at
the address set forth in the Basic Lease Information, or at
such other address as Landlord may specify from time to time
by written notice delivered in accordance herewith. Tenant's
obligation to pay Rent and any other accounts to Landlord
under the terms of this Lease shall not be deemed satisfied
until such Rent and other amounts have been actually
received by Landlord.
B. All notices, demands, consents and approvals which may
or are required to be given by either party to the other
hereunder shall be in writing and shall be deemed to have
been fully given when deposited in the United States mail,
certified or registered, postage prepaid, and addressed to
the party to be notified at the address for such party
specified in the Basic Lease Information or to such other
place as the party to be notified may from time to time
designate by at least fifteen (15) days notice to the
notifying party. Tenant appoints as its agent to receive the
service of all default notices and notice of commencement of
unlawful detainer proceedings the person in charge of or
apparently n charge of or occupying the Premises at the
time, and, if there is no such person, then such service may
be made by attaching the same on the main entrance of the
Premises.
ATTORNEYS' 33. In the event either party places the environment of this
FEES Lease, or any part thereof, or the collection of any Rent
due, or to become due hereunder, or recovery of the
possession of the Premises in the hands of an attorney or
files suit upon the same, the prevailing party shall recover
its reasonable attorneys' fees and court costs.
SUCCESSORS 34. This Lease shall be binding upon and inure to the benefit of
AND ASSIGNS Landlord, its successors and assigns, and shall be binding
upon and inure to the benefit of Tenant, its successors, and
to the extent assignment may be approved by Landlord
hereunder, Tenant's assigns.
FORCE 35. Whenever a period of time is herein prescribed for action to
MAJEURE be taken by Landlord or Tenant, Landlord or Tenant shall not
be liable or responsible for, and there shall be excluded
from the computation for any such period of time, any delays
due to strikes, riots, acts of God, shortages of labor or
materials, war, governmental laws, regulations or
restrictions or any other causes of any kind whatsoever
which are beyond the control of Landlord or Tenant.
MISCELLANEOUS 36. A. The terms "Tenant" or "Landlord" or any pronoun used in
place thereof shall indicate and include the masculine or
feminine, the singular or plural number, individuals, firms
or corporations, and their and each of their respective
successors, executors, administrators and permitted assigns,
according to the context hereof.
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B. Time is of the essence regarding the Lease and all of
its provisions.
C. This Lease shall in all respects be governed by the laws
of the State of California.
D. This Lease, together with its exhibits, contains all the
agreements of the parties hereto and supersedes any previous
negotiations.
E. There have been no representations made by the Landlord
or Tenant or understandings made between the parties other
than those set forth in this Lease and it s exhibits.
F. This Lease may not be modified except by a written
instrument by the parties hereto.
G. If, for any reason whatsoever, any of the provisions
hereof shall be unenforceable or ineffective, all of the
other provisions shall be and remain in full force and
effect.
ADDITIONAL Additional Paragraphs 37 through 40 and Addenda 1 through 12.
PROVISIONS
IN WITNESS WHEREOF, the parties hereto have executed this Lease
this day and year first above written.
"LANDLORD"
Spieker-French #130, Limited Partnership, A Texas
------------------------------------------------------------
Limited Partnership
By:_________________________________________________________
Its:________________________________________________________
"TENANT"
Tandem Computers Incorporated, A Delaware Corporation
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By:_________________________________________________________
Its:________________________________________________________
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<PAGE>
ADDITIONAL PARAGRAPHS ATTACHED TO AND MADE A PART OF THAT CERTAIN LEASE DATED
JANUARY 26, 1988, BY AND BETWEEN SPIEKER-FRENCH #130, LIMITED PARTNERSHIP, A
TEXAS LIMITED PARTNERSHIP, AS LANDLORD, AND TANDEM COMPUTERS, INC., A DELAWARE
CORPORATION, AS TENANT, AND TAKES PRECEDENCE SHOULD THERE BE A CONFLICT WITH THE
LEASE.
Paragraph 37. Option to Re-Lease Premises. Provided Tenant is not, and has not
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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 ninety-five percent (95%) of the then current market rent (for
comparable one-story office space in the Vallco 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 a 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 the 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 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.
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 (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 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.
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
ental 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
one of the following: (i) 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, the option to
extend being applicable hereunder only with respect to so
ADDITIONAL PARAGRAPHS TO LEASE - Page 1
<PAGE>
much of the Premises as is actually occupied by Tenant; or (ii) if Tenant has
sublet or assigned any portion of the Premises under the provisions of Paragraph
21 above prior to Tenant's written notice of its intent to exercise its option,
Tenant may exercise the foregoing option at one hundred percent (100%) rather
than ninety-five percent (95%) of the then current market rent. In no event will
the monthly rental be less than the rental for the last month of the previous
term.
Paragraph 38. Satellite Dish. Tenant shall have the right to install, at
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Tenant's sole expense, a satellite antenna dish on the Premises, provided that
Tenant first obtains prior written approval of the satellite dish size and
location from Landlord. Tenant agrees to abide by all applicable government
rules, laws, and regulations governing the installation, use and operation of
said antenna. Tenant shall have the right to remove said satellite dish
provided that Tenant restores the Premises to their original condition prior to
the expiration or termination of this Lease.
Paragraph 39. Tenant Parking. Tenant shall have the non-exclusive use of on-
- -----------------------------
site parking at a ratio of not more than four (4) cars per 1000 square feet of
rentable area.
Paragraph 40. Contingency. This Lease Agreement is contingent upon: 1) the
- --------------------------
final execution of the Lease Termination Agreement dated March 16, 1988 between
Sysorex International, Inc., a Delaware Corporation and Spieker-French #130,
Limited Partnership, a Texas Limited Partnership for the Premises at 10590
Tantau Avenue and 2) the vacation of the Premises by Sysorex International, Inc.
provided that the aforementioned termination agreement between Spieker-French
#130 and Sysorex International, Inc. is fully executed and in full effect. This
Lease Agreement shall commence upon the day immediately following the vacation
of the Premises by Sysorex International, Inc.
ADDITIONAL PARAGRAPHS TO LEASE - Page 2
<PAGE>
ADDENDA ATTACHED TO AND MADE A PART OF THAT CERTAIN LEASE DATED JANUARY 26,
1988, BY AND BETWEEN SPIEKER-FRENCH #130, LIMITED PARTNERSHIP, A TEXAS LIMITED
PARTNERSHIP, AS LANDLORD, AND TANDEM COMPUTERS INCORPORATED, A DELAWARE
CORPORATION, AS TENANT, AND TAKES PRECEDENCE SHOULD THERE BE A CONFLICT WITH THE
LEASE.
Addendum No. 1. Paragraph 2.A. Possession and Lease Commencement
- ------------------------------------------------------------------
The scheduled term commencement date of this Lease is April 1, 1988 and the
scheduled termination date is March 31, 1993. Notwithstanding said commencement
date, if for any reason Landlord cannot deliver possession of the Premises to
Tenant on said date, Landlord shall not be subject to any liability therefore,
nor shall such failure affect the validity of this Lease or the obligations of
Tenant hereunder, but in such case Tenant shall not be obligated to pay rent
until possession of the Premises is tendered to Tenant; provided, however, that
if Landlord shall not have delivered possession of the Premises within one
hundred twenty (120) days from the said scheduled term commencement date, Tenant
may, at Tenant's option, by notice in writing to Landlord within thirty (30)
days thereafter, cancel this Lease, in which event the parties shall be
discharged from all obligations hereunder and neither party shall have any
further obligations to each other under this Lease Agreement.
If Tenant occupies the Premises prior to said scheduled term commencement
date, said occupancy shall be subject to all provisions hereof, such occupancy
shall not advance the scheduled term termination date, and Tenant shall pay rent
for such period at the initial monthly rates set forth under the Basic Lease
Information.
Possession of the Premises shall take place upon the day immediately
following the vacation of the Premises by Sysorex, Inc. The Premises shall be
delivered to Tenant in "as-is" physical condition. Tenant further acknowledges
that no representations as to the condition or repair of the Premises nor
promises to alter, remodel or improve the Premises have been made by Landlord,
unless such are expressly set forth in this Lease. Tenant shall, upon demand,
execute and deliver to Landlord a letter of acceptance of delivery of the
Premises.
Addendum No. 2. Paragraph 6. Rent.
- -----------------------------------
Rent for the Premises shall be as follows:
Months 1- 30: $52,673.00 per month plus Basic Operating Costs per
Paragraph 7 of the Lease Agreement.
Months 31-60: $55,554.00 per month plus Basic Operating Costs per
Paragraph 7 of the Lease Agreement.
Addendum No. 3. Paragraph 7.A.(1). Basic Operating Costs.
- ----------------------------------------------------------
Notwithstanding anything to the contrary contained herein, Tenant shall
not, during the first thirty (30) months of the original Lease Term only, 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 be applicable only
to this thirty (30) month period and shall not be applicable in the event of a
sale of the Project to Tandem Computers, Inc. during this period.
Addendum No. 4. Paragraph 7.A.(2). Basic Operating Costs.
- ----------------------------------------------------------
Operating Costs shall not include expenses incurred for business
interruption or rental value insurance.
Addendum No. 5. Paragraph 7.A. Basic Operating Costs.
- ------------------------------------------------------
Limitation on Basic Operating Cost. Notwithstanding anything to the
contrary contained above, Basic Operating Costs shall not include any of the
---
following:
(i) legal fees, brokerage commissions, advertising costs or
other related expenses incurred by Landlord in connection
with the leasing of other space to individual tenants in
the Project;
ADDENDA TO LEASE AGREEMENT - Page 1
<PAGE>
(ii) repairs, alterations, or replacements made to rectify or
correct any original defect in the original design,
materials or workmanship of building or common areas.
However, all other repairs, alterations and replacements,
including those necessitated by wear and tear, are
included in Basic Operating Costs;
(iii) damage and repairs attributable to insured losses due to
fire or other casualty;
(iv) damage and repairs, necessitated by the active negligence
or willful misconduct of Landlord, Landlord's employees,
contractors or agents;
(v) executive salaries or salaries or service personnel to the
extent that such personnel perform services not solely in
connection with the management, operation, repair or
maintenance of the Building;
(vi) Landlord's general overhead expenses not related to the
Building;
(vii) legal fees, accountant's fees and other expenses incurred
in connection with disputes with tenants or occupants of
the Project other than Tenant or associated with the
enforcement of the terms of any leases with tenants or the
defense of Landlord's title to or interest in the Project
or any part thereof; any legal expenses incurred with
disputes with Tenant shall be recovered under the
provisions of Paragraph 33;
(viii) costs (including permit, license and inspection fees)
incurred in renovations or otherwise improving,
decorating, painting or altering interior space for
tenants or other occupants other than Tenant or of vacant
space (excluding common areas) in the Project;
(ix) costs incurred due to a violation by Landlord or any other
tenant of the Project and not caused by Tenant, its
agents, invitees, subleasees, or assignees of the terms
and conditions of a lease;
(x) cost of any service provided to Tenant or other occupants
of the Project for which Landlord is fully reimbursed
except for reimbursement pursuant to this section;
(xi) any other expense which, under generally accepted
accounting principles applicable to real estate
operations, would not be considered a reasonable
maintenance and operating expense except as expressly
specified in this Lease;
(xii) In no event shall the Basic Operating Costs be increased
at a rate which exceeds ten percent (10%) per year over
the previous fiscal year during the first thirty (30)
months of the original Lease Term only. This cap on Basic
Operating Costs increases shall be applicable only to this
thirty (30) month period and shall not be applicable in
the event of a sale of the Project to Tandem Computers,
Inc. during this period.
Addendum No. 6. Paragraph 8.C. Indemnification.
- ------------------------------------------------
Landlord shall indemnify Tenant and hold Tenant harmless against all
liabilities, charges and expenses (including reasonable attorneys fees, 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. Landlord shall indemnify Tenant and hold harmless
Tenant, its officers, agents, employees, parent, subsidiary and affiliate
organizations against any claims, suits, loss, costs (including attorneys fees
and cleanup costs), damage or liability by reason of property damage or personal
injury (including death) to the extent the same results from pollution or toxic
contamination caused by Landlord's actions or inaction, including, but not
limited to, those related to ownership, tenancy, possession, construction,
operation, or use by Landlord or by any other party of the leased Premises other
than Tandem Computers. Tenant shall indemnify Landlord and hold harmless
Landlord, its partners, employees and affiliate organizations against any
claims, suits, loss, costs, (including attorneys fees and cleanup costs), damage
or liability by reason of property damage or personal injury (including death)
to the extent the same results from pollution or toxic contamination caused by
Tenant's actions or inaction, including, but not limited to, those related to
tenancy, possession, construction, operation, or use by Tenant, its agents,
servants, employees, invitees or authorized representatives. This provision
shall survive any termination or expiration of the Lease.
ADDENDA TO LEASE AGREEMENT - Page 2
<PAGE>
Addendum No. 7. Paragraph 9. Waiver of Subrogation.
- ----------------------------------------------------
To the extent permitted by law, and without affecting the coverage provided
by insurance required to be maintained hereunder, Landlord and Tenant mutually
waive all rights of recovery against the other for any loss from perils insured
against in any policy or policies of liability insurance and property insurance
(including that identified in 8.A. and 8.B. above), business interruption
insurance or rental value insurance obtained by either party. The provision is
intended to waive fully, and for the benefit of each party, any rights and/or
claims which might give rise to a right of subrogation on any insurance carrier.
The coverage obtained by each party pursuant to this Lease shall include,
without limitation, a waiver of subrogation by the carrier which conforms to the
provisions of this paragraph.
Addendum No. 8. Paragraph 10. Landlord's Repairs and Services.
- ---------------------------------------------------------------
Landlord shall provide Tenant with certification from a licensed mechanical
contractor (within the first thirty [30] days of Tenant's date of occupancy)
that all existing heating and air conditioning units are in good and operable
condition. Tenant shall be responsible for the regularly scheduled preventative
maintenance/service (at least one service call per quarter) by a third party
mechanical contractor as described in Paragraph 11. Tenant shall maintain
records of all service calls and any maintenance required as determined by the
maintenance contractor.
If any of the existing heating and air conditioning units require a major
replacement part(s) (a heat exchanger, motor, compressor, or entire unit) during
the Lease Term, Tenant shall notify Landlord of the possible need to replace
such parts. Landlord may, at its own expense, hire a mechanical contractor to
inspect the heating and air conditioning units to confirm the need to replace a
major replacement part(s).
If Landlord determines from the information supplied by the mechanical
contractor(s) that a major replacement part(s) is required, then Landlord shall
order any such replacement. Tenant shall be responsible for the first One
Thousand Five Hundred Dollars ($1,500) per quarter, or a maximum of Six Thousand
Dollars ($6,000) per year of expenditures for major replacement parts to the
existing heating and air conditioning units. Landlord shall be responsible for
the expenses incurred above One Thousand Five Hundred Dollars ($1,500) per
quarter or above Six Thousand Dollars ($6,000) per year for major replacement
parts.
If Tenant should fail to maintain regularly scheduled preventative
maintenance/service by a mechanical contractor at least once per quarter, then
Tenant shall be liable for all expenses incurred in replacement of major heating
and air conditioning parts.
Landlord shall provide to Tenant, within the first thirty (30) days of
Tenant's occupancy, correspondence from a licensed roofing contractor that the
roof is in good condition as of the date of occupancy. Tenant shall be
responsible for roof leaks on the Premises.
Addendum No. 9. Paragraph 12. Alterations.
- -------------------------------------------
In the event that Tenant requires Landlord's approval under the terms of
this Paragraph in order to make an alteration or physical addition and Landlord
consents to said alteration, Landlord shall notify Tenant in writing along with
the consent whether Landlord will require Tenant to remove the alteration and
return the Premises to their original condition by the termination of this
Lease.
Tenant may remove any Tenant-installed raised computer floor tiles and any
Tenant-installed computer room air conditioning units which are not roof-
mounted, provided that the Premises are restored to their original condition by
the termination of this Lease. Any additions or alterations made by Tenant
shall conform to all applicable building codes and standards.
Addendum No. 10. Paragraph 13. Signs.
- --------------------------------------
Tenant shall have the right to construct and install, at Tenant's sole
expense, a freestanding monument type identification sign in front of the
Building, provided that Tenant first obtains prior written approval of the sign
size, design, and location from Landlord. Tenant shall obtain all applicable
governmental approval for the sign at its sole expense. All of Tenant's signs
shall at all times remain the property of Tenant and Tenant must remove its
signs at the expiration or earlier termination of the Lease Agreement. Tenant
shall repair any damage caused in the removal of its sign.
ADDENDA TO LEASE AGREEMENT - Page 3
<PAGE>
Addendum No. 11. Paragraph 21. Assignment and Subletting.
- ----------------------------------------------------------
Tenant may assign or sublet the entire Premises, or any portion thereof,
without Landlord's consent, to any corporation which controls ("control" shall
mean 50% ownership or more), is controlled by or is under common control with
the Tenant, or to any corporation resulting from the merger or consolidation
with Tenant, or to any person, legal entity which acquires all the assets of
Tenant as a going concern of the business that is being conducted on the
Premises provided that the net worth of the corporation, person or entity is
greater than or equal to the net worth of Tandem Computers, Inc., at the date of
execution of this Lease, and provided that said assignee assumes, in full, the
obligations of Tenant under this Lease. Any such assignment shall not, in any
way, affect or limit the liability of Tandem Computers, Inc. under the terms of
this Lease.
Addendum No. 12. Paragraph 25. Holding Over.
- ---------------------------------------------
If Tenant shall retain of the Premises or any portion thereof without
Landlord's consent following the expiration of the Lease or sooner termination
for any reason, then Tenant shall pay to Landlord for each day of such retention
according to the following schedule:
Days 1 - 30: 110% of the daily rental for the last month
prior to the date of expiration or
termination.
Days 31 - 60: 125% of the daily rental for the last month
prior to the date of expiration or
termination.
Days 61 and thereafter: 15% of the daily rental for the last month
prior to the date of expiration or
termination.
ADDENDA TO LEASE AGREEMENT - Page 4
<PAGE>
[EXHIBIT A is a map or diagram of the property.]
<PAGE>
LEGAL DESCRIPTION:
- ------------------
All that certain real property situate in the City of Cupertino, County of Santa
Clara, State of California, described as follows:
COMMENCING at the intersection of the prolongation of the Easterly line of that
certain 19.27 acre tract conveyed by James E. Glendenning, et al to Joseph G.
Glendenning, by Deed dated November 25, 1914, and recorded November 25, 1914, in
Book 423 of Deeds, at Page 424, Santa Clara County Records, with the Southerly
line of Lot 5 as said Lot 5 is shown upon that certain Map entitled, "MAP OF
PARTITION OF THE GLENDENNING ESTATES IN THE QUITO-RANCHO", which Map was filed
for record in the office of the County Recorder of Santa Clara County on October
24, 1884 in Book "B" of Maps at Page 15; thence Easterly along the said
Southerly line of Lot 5, North 89 degrees 24' 39" East 513.56 feet; thence South
0 degrees 26' 11" West 954.95 feet; thence North 67 degrees 29' 18" East 40.72
feet to the True Point of Beginning; thence from said True Point of Beginning
along the Westerly line of said 10.00 foot wide strip of land, North 0 degrees
26' 11" East 660.07 feet; thence along the arc of a curve to the right having a
radius of 50.00 feet through a central angle of 88 degrees 581 31" at an arc
length of 77.65 feet; thence North 89 degrees 24' 42" East 250.94 feet to a
point on the Easterly line of the tract of land conveyed to Joe Marchese, et ux,
by Deed recorded October 5, 1944 in Book 1227 of Official Records, Page 30;
thence along said Easterly line South 0 degrees 48' West 580 feet to the
Southeasterly corner of said Lot 4, as said Lot 4 is shown upon that certain Map
entitled, "MAP OF THE PARTITION OF THE GLENDENNING ESTATES IN THE QUITO-RANCHO",
which Map was filed for record in the office of the County Recorder of Santa
Clara County on October 24, 1884 in Book "B" of Maps, at Page 15; thence along
the Southeasterly line of said Lot 4, South 67 degrees 29' 18" West 320 feet
more or less to the True Point of Beginning.
EXHIBIT A
<PAGE>
Tenant Improvements
-------------------
None. Tenant shall accept the premises in "as is" condition.
EXHIBIT "B"
<PAGE>
EXHIBIT 10.29
SUBLEASE
This Sublease, dated April 25, 1995, is made between Tandem Computers
Incorporated, a Delaware Corporation, having an office at 19333 Vallco Parkway,
Cupertino, California 95014 ("Sublandlord") and Passage Systems, Inc., a
California Corporation ("Subtenant").
THIS SUBLEASE IS MADE WITH REFERENCE TO THE FOLLOWING FACTS:
(A) Spieker 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 subsequently amended by,
Extension Agreement dated March 23, 1993, for the Premises located at 10590
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-I".
(B) Sublandlord desires to lease to Subtenant a portion of the Building
leased by Master Landlord to Sublandlord, and Subtenant desires to lease a
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 the 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. Subtenant
shall comply with the terms and conditions of the Master Lease and shall
promptly perform all obligations of Tenant: under the Master Lease. 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.
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 obligation 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 a) All the terms and conditions in the Exhibit "A-I" Master
Lease are incorporated herein, except for Paragraphs 1,3 6,7,37 40, Extension
-----------------------------------
Agreement, Addendum No. 1, No. 2, No. 3, No. 11, No. 12, and Exhibit "B", as
- ------------------------------------------------------------------------
terms and conditions of this Sublease and, along with all the following Sections
set out in this Sublease, shall be the complete terms and conditions of this
Sublease.
2. PREMISES: Approximately Seventeen Thousand Three Hundred Seventy Three
(17,373) square feet in the subject Building ("Premises"), further described as
10590 Tantau Avenue, Cupertino, California. The Premises are shown on attached
Exhibit "B-I", which by this reference is incorporated herein.
3. USE: Subtenant shall use the Premises for general office, administration
and creation of computer software and related products and services, and any
related lawful purpose in conformity with municipal zoning requirements.
<PAGE>
4. TERM: The term ("Term") of the Sublease shall be for a period of Thirty-
Five (35) months commencing on June 1, 1995 (or upon the substantial completion
of Tenant Improvements outlined in Exhibit "C-I" 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-I" are not completed on or before June 1, 1995 ("Commencement Date"),
then the Commencement Date shall be deemed to be the date on which the said
Tenant Improvements are substantially completed. Said Tenant Improvements shall
be deemed to be substantially completed upon the occurrence of the earlier of
the following:
a. The date on which 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; or
b. The issuance of appropriate governmental approvals. (i.e., final sign-
off of the building permit for the Tenant Improvements) for occupancy
of the Premises; or
c. The date Subtenant takes occupancy of and commences doing business in
the Premises.
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
ten (10) days thereafter, cancel this Sublease, in which event the parties shall
be discharged from all obligations thereunder.
7. EARLY OCCUPANCY If Subtenant occupies the Premises prior to said
commencement date, such occupancy shall be subject to all provisions hereof,
such occupancy shall not advance the termination date and Subtenant shall pay
rent for such period at the initial monthly rates set forth below.
8. CONDITION OF PREMISES: As of the Commencement Date Sublandlord shall
warrant to Subtenant that the Premises including sidewalks, driveways, parking
lot, truck doors and mechanical, electrical, Plumbing, roof and roofing systems
are in good operating condition.
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 said Laws 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 cause
Sublandlord to incur any liability.
9. BASE 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 32
(Notices) of The Master Lease or at such other place as Sublandlord shall
<PAGE>
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 and shall be due with the first full
month's rent. The Subtenant shall pay Base Monthly Rent as follows:
Months Base Monthly Rent
------ -----------------
Months 1 through 3 $0.00 (Zero Dollars)
Months 4 through 7 $5,211.90 (Five Thousand Two Hundred Eleven and
90/100 Dollars)
Month 8 through 36 $13,203.48 (Thirteen Thousand Two Hundred
Three and 48/100 Dollars)
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, 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
Forty-Two percent (42%). 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, 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, to
include all costs, if any, incurred by Sublessor in the exercise of its
reasonable discretion, for:
(I) The operation, repair, maintenance, and replacement, in neat,
clean, safe, good order and condition, of the building, including, but
not limited to, the following:
(aa) The Common Areas, including their surfaces, coverings,
decorative items, carpets, drapes and window coverings, and
including parking areas, loading and unloading areas, trash
areas, roadways, sidewalks, walkways, stairways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation
systems, Common Area.
<PAGE>
lighting, building exteriors and roofs, fences and gates;
(bb) All heating, air conditioning, plumbing, electrical systems,
life safety equipment, telecommunication and other equipment used
in common by, or for the benefit of, occupants of the Building,
including fire detection systems including sprinkler system
maintenance and repair.
(ii) Trash disposal and security systems
(iii) Any other service to be provided by Sublandlord that is elsewhere in
this Sublease stated to be an "Operating Expense";
(iv) The cost of the premiums for the liability and property insurance
policies to be maintained by Sublandlord under this Sublease;
(v) The amount of the real property taxes to be paid by Sublessor under
this Sublease;
(vi) The cost of water, sewer, gas, electricity and other publicly mandated
services to the Building;
(vii) Labor, salaries and applicable fringe benefits and costs, materials,
supplies and tools, used in maintaining and/or cleaning the Building and
accounting and a management fee attributable to the operation of the
Building;
(viii) Replacing and/or adding improvements mandated by any governmental
agency and any repairs or removals necessitated thereby amortized over its
useful life according to the Federal income tax regulations or guidelines
for depreciation thereof (including interest on the unamortized balance as
is then reasonable in the judgment of Sublandlord's accountants);
(ix) Replacement of equipment or improvements that have a useful life for
depreciation purposes according to Federal income guidelines of five (5)
years or less, as amortized over such life.
(e) Operating Expenses shall not include the costs of replacements equipment or
improvements that have a useful life for Federal income tax purposes in excess
of five (5) years- unless it is of the type described in paragraph 10(d) (viii),
in which case their cost shall be included as above provided. However, the
Operating Expenses will include a reasonable allowance for depreciation on such
improvements.
(f) Operating Expenses shall not include any expenses paid by any Subtenant
directly to third parties, or as to which Sublandlord is otherwise reimbursed by
any third party, other tenant, or by insurance proceeds.
(g) Subtenant's Share of Operating Expense Increase shall be payable by
Subtenant within ten (10) 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 Expense 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
<PAGE>
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 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 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 with ten (10) days after the delivery
by Sublandlord to Subtenant of said statement. Sublandlord and 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.
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).
12. TAXES: Subtenant shall pay any taxes or fees that might be 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: Subtenant shall comply with
Paragraph 12. (Alterations) of the Master Lease except that, Subtenant shall be
permitted to surrender the Premises without modification or restoration provided
that Sublandlord had approved in writing Subtenant's modification and/or
alterations to the Premises.
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 the fault of Sublandlord. Sublandlord agrees to comply
with or perform all of its obligations under the aster 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. SUBTENANT REPAIRS: Subtenant shall, at Subtenant's cost and expense,
maintain the Premises and adjacent areas in good clean and safe condition to the
reasonable satisfaction of the Sublandlord, and repair any damage caused by
Subtenant or its employees, agents, invitees, licensees, or contractors.
Subtenant shall be solely responsible for maintaining and repairing all interior
plumbing, interior electrical wiring and equipment, lighting, HVAC Systems
maintained by Sublandlord at Subtenant's expense, and any electrical equipment
or service installed by Subtenant. Except as otherwise provided in this
paragraph, the provisions of Paragraph 11. (Tenant' Repairs) of the Master Lease
shall apply to this Sublease,
16. UTILITIES/SERVICES: Except as otherwise provided herein, Subtenant shall
pay all expenses for utilities, janitorial, and trash removal services provided
to the Premises. Subtenant shall obtain and pay all expenses relating to
telephone, and security systems provided to the Premises.
17. ALTERATIONS, ADDITIONS, OF IMPROVEMENTS: Subtenant shall not make any
alterations, additions, or improvements on or to the Premises without first
obtaining the written consent of Sublandlord, which consent shall not be
unreasonably withheld. All alterations, additions and improvements that shall be
made shall be at the sole expense of Subtenant and shall become the
<PAGE>
property of Sublandlord, and shall remain on and be surrendered with the
Premises as part thereof at the termination of this Sublease. Nothing contained
in this provisions shall prevent Subtenant from removing all office machines,
equipment and trade fixtures customarily used in the business of Subtenant.
Subtenant shall keep the Premises free and clear from all liens arising out of
any work performed, materials furnished, or obligations incurred by Subtenant.
Except as otherwise provided in this section, the provisions of Paragraph 12.
(Alterations) of the Master Lease will apply to all such alterations, additions
or improvements.
17.1 This Sublease incorporates all the terms and conditions contained in
Paragraph 12. (Alterations) of the Master Lease except that Subtenant shall
not be obligated to remove any of the Tenant Improvements described in
Exhibit "C-I" herein, being installed to the Subject Premises by
Sublandlord as a condition of this Sublease.
18. ACCEPTANCE OF PREMISES: By taking possession of the Premises, Subtenant
shall be deemed to have accepted the Premises as being in good and sanitary
order, condition and repair and to have accepted the Premises in their condition
existing as of the date Subtenant takes possession of the Premises, subject to
all applicable laws, covenants, conditions, restriction, easements and other
matters of public record and the rules and regulations from time to time
promulgated by Sublandlord governing the uses of the Premises and Exterior Area,
and further, to have accepted the Tenant Improvements as being completed in
accordance with the plans and specifications for such improvements, subject only
to completion of items on Sublandlord's punch list.
19. BASE RENTAL DEPOSIT: Upon Subtenant's execution of this
Sublease, Subtenant shall deposit with Sublandlord the sum of
S5,211.90 (Five Thousand Two Hundred Eleven and 90/00 Dollars).
- --------------------------------------------------------------
Said deposit shall be used and deemed as Base Monthly Rent for
the fourth (4th) month of the Sublease term.
20. SECURITY DEPOSIT: Subtenant shall deposit with Sublandlord upon
execution hereof Fourteen Thousand and no/100 Dollars ($14,000.00) as 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 or 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.
21. CASUALTY DAMAGE: For the purpose of computation with respect to
Paragraph 24. (Casualty Damage) of the Master Lease, the "Premises" as described
herein are deemed to be approximately 17,353 square feet.
<PAGE>
22. 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", and Subtenant and its invitees, shall only be
entitled to use a maximum of seventy-two (72) parking spaces (its pro-rata
share) within said designated areas.
23. NO OPTION TO EXTEND: Subtenant shall not have any option to extend the
term of this Subtenant beyond its original Term.
24. SUBLETTING: Subject to Paragraph 21. (Assignment and Subletting) of the
Master Lease, Subtenant shall not sublet or assign all or any part of the
Premises without prior written consent of the Sublandlord and Master Landlord,
such consent shall not be unreasonably withheld. Subtenant shall not transfer
or mortgage this Sublease or any interest of law. Subtenant shall not allow the
use or occupancy of the Premises by anyone other than Subtenant, its agents and
employees.
25. INDEMNIFICATION: Unless caused by the negligence or willful misconduct by
Sublandlord or Master Landlord, Subtenant shall indemnify and hold harmless
Sublandlord and Master Landlord from all damages, including but not limited to,
reasonable attorneys' fees, arising out of injury to any person or damage to
property occurring in, on or about the Premises,
26. INSURANCE: Subtenant shall maintain, at its sole expense, for the entire
term of this Sublease, all insurance in the amounts and form required of
Sublandlord under the Master Lease and such insurance shall be primary and not
contributory to that carried by Sublandlord or Master Landlord. All such
policies shall include broad form contractual liability, cross liability and
tenant legal liability coverage, shall include the Sublandlord and Master
Landlord, their officers, directors, employees, agents and Master Landlord's
mortgagee and/or ground lessor as additional insured. All such policies shall be
issued by reputable insurance companies approved by Sublandlord and shall
endorsed to provide that they shall not be canceled or materially reduced
without thirty (30) days prior written notice to Sublandlord and Master
Landlord. Prior to the Commencement Date, Subtenant shall furnish a certificate
of insurance to Sublandlord evidencing that the required coverage is being
maintained, together with such evidence as Sublandlord shall deem satisfactory
of the payment of premiums thereon.
27. TERMINATION OF MASTER 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 shall be
refunded to the Subtenant. Upon any termination of this Sublease, by expiration
of the Term or otherwise: (a) Subtenant shall immediately vacate and surrender
the possession of the Premises; (b) Subtenant shall surrender the Premises in as
good condition as when it took possession, except for ordinary wear and tear,
free of all liens and encumbrances; and (c) Sublandlord and/or Master Landlord
shall have full authority and license to enter and take possession of the
Premises.
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.
28. 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, double the
<PAGE>
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
29. DAMAGE TO PREMISES: If the Master Premises are damaged by fire or other
casualty and the Master Landlord or Sublandlord shall, under the terms of the
Master Lease, elect to terminate the Master Lease, this Sublease shall terminate
on the date of such notice, and rent shall be apportioned from the time of the
damage. The Subtenant shall have no claim for damages from either Master
Landlord or Sublandlord in the event of such a termination.
30. DEFAULT: Any act, failure to act or omission by Subtenant which is a
breach or default under the Master Lease shall be a breach of or default under
this Sublease. If the Subtenant breaches or defaults in the performance of any
of the terms, covenants or conditions of this Sublease or in the Master Lease,
Sublandlord shall have, in addition to any rights or remedies it may have at law
or in equity, all of the rights and remedies of Master Landlord under the Master
Lease. If Subtenant fails to do any act required of it under the Sublease or
Master Lease, Sublandlord may, upon not less than five (5) days prior written
notice to Subtenant, 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.
31. 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.
32. INSPECTION OF PREMISES: Sublandlord may, at any reasonable time and from
time to time enter the Premises for the purpose of inspecting the same and for
such other purposes as may be necessary or proper for reasonable protection of
its interest.
33. SEVERABILITY: The unenforceability, invalidity, or illegality of any
provision of this Sublease shall not render the other provisions unenforceable,
invalid, or illegal.
34. NOTICES: All notices shall be in writing, mailed certified mail, postage
prepaid, addressed to the parties as follows:
Sublandlord: Subtenant:
Tandem Computers Inc. Passage Systems, Inc.
19333 Vallco Parkway 10596 No. Tantau Ave.
Cupertino, CA 95014 Cupertino, CA 95014
Attn: Corporate Real
Estate and Construction
With Copy of Master Landlord:
Default Notice To:
Speiker-French #130, Limited
Tandem Computers Inc. Partnership
19333 Vallco Parkway 2180 Sand Hill Rd., Suite 200
Cupertino, CA 95014 Menlo Park, CA 94025
Attn: General Counsel
Either party may, by notice, change the address to which notices are to be sent.
35. QUIET ENJOYMENT: As long as Subtenant performs its obligations under this
Sublease, it shall have the right of quiet and peaceable enjoyment of the
Premises.
36. APPROVAL OF MASTER LANDLORD: This Sublease is subject to the approval of
Master Landlord. This Sublease shall be of no force or effect unless consented
to by Master Landlord within fifteen days after execution hereof.
<PAGE>
37. 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 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 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 Obligations: All obligations of Sublandlord and Subtenant
under this Paragraph 37 shall survive the expiration or earlier termination of
the Sublease.
38. 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 tiles Subtenant
agrees not to remove or disturb these lines. Sublandlord, at no cost to
Sublandlord, shall be allowed to secure this room until said lines are either
relocated of disconnected (estimated date is March 1996) by Sublandlord. At that
time, Sublandlord will return the space to Subtenant for Subtenant's use for the
balance of the Sublease term. Sublandlord shall have access to room 1099 during
normal business hours in the event that maintenance of the lines is required.
39. 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.
40. 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 reasonably be expected to effect Subtenant's use of
the Premises. This consent shall apply to
<PAGE>
this Sublease only, and shall not be deemed Master Lessor's consent to any other
sublease.
41. CONFLICT OF PROVISIONS: IN the event of a conflict between the provisions
of this Sublease and those of the Master Lease that have been incorporated
herein by reference, the provisions of the Master Lease shall prevail.
SUBLANDLORD SUBTENANT
By: /s/ Frank Robinson By: /s/
--------------------------- -------------------------
Vice President, Corporate,
-----------------------------
Real Estate & Site Services President
- ------------------------------- ----------------------------
Title
5/24/95 5/14/95
----------------------------- -----------------------------
Date Date
42. First Right of Refusal: Sublandlord will grant a first right of refusal to
Subtenant to sublease room #1126 (rise computer room) if room is not subleased
by adjacent subtenant upon signing of their sublease. The sublease note )rental_
shall be the same as the current subtenant's rental rate. Subtenant shall have
72 hours to accept first right of refusal to sublease.
43. Walk-thru notes: See Exhibit "D-1"
<PAGE>
[Exhibit "B-1
Subject Premises
(Floor Map)]
<PAGE>
[Exhibit "B-2
Exterior Area
(Site Development Plan)]
<PAGE>
[Exhibit C-1
Tenant Improvements
(Floor Plan)]
<PAGE>
[Exhibit "C-1 Tenant Improvements]
Building Improvements: A. SUBLESSOR:
*Projection equipment is
available on an "AS IS" basis
with NO WARRANTIES from
Sublessor.
Sublessor at his sole expense 7. Sublessor to leave projection
shall provide the following equipment and projection screen*
improvements to the sublease in conference/training room
premises: #1015, #1014 during sublease
term (see Exhibit 1).
1. Remove interior walls 8. Sublessor to leave one (1) wall
in room #1074 and #1075 attached grease board/white
(see Exhibit 1). boards within sublessee space
during sublease term (see
2. Remove door and seal Exhibit 1).
wall in room #1075 (see
Exhibit 1). 9. Paint interior of space where
needed.
3. Remove door in room
#1037 (see Exhibit 1). 10. Clean carpet.
4. Install door between 11. Replace water stained and
room #1037 and room broken ceiling tiles and
#1026 (see Exhibit 1). repair water damage to walls
with sublease space.
5. Install wall to demise
space from adjacent 12. Deliver all plumbing,
sublease space by room electrical, mechanical, roof
#1114 (see Exhibit 1). and HVAC system within build-
ing in working order to
6. Secure or seal door in Sublessee during sublease.
room #1013 to adjacent
sublease space (see 13. Sublessee to erect monument
Exhibit 1). sign on grass area in front of
entrance to space, subject to
city approval and Master Land-
lord and Sublandlord.
<PAGE>
EXHIBIT "D-1"
Walk-thru Notes for
TANDEM COMPUTER SUBLEASE
5/16/95-1:45 TANTAU
BUILDING, CUPERTINO
Vance Nakamoto, Virginia (property manager)-Tandem;
Jackie (Tandem R.E.)
Clarke and Julian Cervantes, Gregg Hall - Cooper/Brady
Room #1011 A. Steam carpet or replace with current
carpeting in building
B. Cap off water line
C. Patch two holes in wall
Room #1074 and #1075
A. Remove walls in #1074 and #1075 and
install vinyl square flooring.
B. Finish/cap end of existing kitchen
counter.
C. Seal existing door in room #1075.
Room #1037 A. Remove door and frame.
Room #1026 A. Install door between room #1026, and
#1037. Door to swing into room #1026.
B. Install new carpet in room #1026 same
carpet in other areas of building.
Room #1013 A. Secure area from adjacent space via
deadbolt lock
B. Remove defective floor tiles and
replace with new floor tiles.
Room #1014 A. Replace water stained grey wallcovering
with like (conference room)
wallcovering.
B. Cap off water line and patch wall.
Room #1015
(conference room) A. Cap off water line and patch wall.
Room 1127
(Data Room) Determine how to secure area:
Option A:
If subtenant does not occupy computer room #1126
secure room #1127 via dead bolt.
Option B: If adjacent subtenant occupies room
#1126 Tandem to put door in room #1106 into room
#1117 and door into side of data room #1127.
<PAGE>
1. Paint and patch all wail name plate areas in premises.
2. OK to use all data wiring (except for Tandem data wiring in room #1099)
3. Tandem to determine HVAC zones for space and change ducting accordingly.
4. Change or replace any stained or missing ceiling tiles.
5. Determine status on alarm system and HVAC panel in room 1029k
6. Regarding video project - contact EISI - Tom Taylor (415) 969-5212
7. Determine percentage share of building Passage Systems indicates 42%.
8. Verified that Passage Systems does not have to restore any improvements
done by Tandem Computers.
9. Told Jackie that Passage Systems will add "First Right of Refusal" on rise
computer room #1126 to the sublease document if space is unoccupied by
adjacent subtenant.
10. Exact address for Passage Systems is said to be 10596 North Tantau,
Cupertino Subtenant to verify address.
<PAGE>
EXHIBIT 10.30
ASSIGNMENT AGREEMENT
THIS ASSIGNMENT AGREEMENT (this "Assignment") is made as of December 6,
1996, between Passage Systems, Inc., a California corporation ("Assignor") and
Concentric Network Corporation, a Florida corporation ("Assignee").
RECITALS
A. Spieker-French #130, Limited Partnership, a Texas limited partnership
("Master Landlord") and Tandem Computers, Inc., a Delaware corporation
("Sublandlord") entered into that certain written Lease and Amendment Number One
dated January 26, 1988 and Extension Agreement dated March 23, 1993
(collectively, the "Master Lease"), whereby Master Landlord leased to
Sublandlord the premises located at 10590 Tantau Avenue, Cupertino, California
(the "Master Premises").
B. Sublandlord and Assignor entered into that certain written Sublease dated
April 25, 1995 (the "Sublease"), whereby Sublandlord subleased to Assignor a
portion of the Master Premises (the "Subleased Premises"), as more particularly
described in the Sublease. A complete copy of the Sublease is attached hereto
as Exhibit A and made a part hereof.
---------
C. Subject to the limitations set forth herein, Assignor desires to assign all
of its rights, title and interest under the Sublease to Assignee, and Assignee
desires to assume all of Assignor's rights and obligations under the Sublease
which accrue or are to be performed on or after the Commencement Date (as
defined below).
In consideration of the mutual covenants contained herein and for other good and
valuable consideration, the parties hereto agree as follows:
1. Assignment: For the consideration set forth below and subject to the
----------
limitations contained herein, Assignor hereby grants to Assignee, from and after
the Commencement Date, all of Assignor's rights, title and interest under the
Sublease and the Subleased Premises for the remaining term of the Sublease,
except for any obligations of Assignor under the Sublease arising out of any
action, occurrence, inaction or condition undertaken or existing on or prior to
the Commencement Date, which obligations Assignor shall perform. For purposes
of this Assignment, "Commencement Date" shall mean the date by which all of the
following have occurred: (a) Master Landlord and Sublandlord have each delivered
to Assignor and Assignee the written consents required by Section 7 hereof, (b)
Assignor has delivered possession of the Subleased Premises to Assignee clean
and free of debris, with all sidewalks, parking lot, plumbing, electrical, HVAC,
roof and all other building systems serving the Subleased Premises, in good
working order, repair and condition. Assignor shall use diligent efforts to
deliver possession of the Subleased Premises to Assignee as soon as reasonably
possible; provided, however, that if for any reason whatsoever the Commencement
Date does not occur on or before February 15, 1997, then in addition to any
other rights or remedies that Assignee may have, Assignee may at any time until
the Commencement Date has occurred terminate this Assignment by delivery of
written notice to Assignor, whereupon any monies previously paid by Assignee to
Assignor (including, without limitation, the Assignment Fee set forth below in
Section 1.1) shall promptly be reimbursed to Assignee, together with interest
thereon from the date of the termination until paid at two percent (2%) plus the
"prime rate" (the "reference rate" or "prime rate" quoted from time to time by
the Bank) charged by Bank of America N.T. & S.A. ("Bank") or the highest rate
permitted by law, whichever is less (herein the "Interest Rate"); provided
further, however, that if the Commencement Date has not occurred on or before
February 15, 1997 through no fault of Assignor and Assignor has otherwise
satisfied its obligations under this Assignment, then Assignor may subtract from
the foregoing reimbursement to Assignee and retain the initial Twenty-Five
Thousand Dollar ($25,000) deposit it received from Assignee.
1.1 To help alleviate Assignor's moving and relocation expenses and as
consideration for this Assignment, Assignee has paid or will pay to Assignor the
following amounts (hereinafter referred to as the "Assignment Fee"), subject to
the terms and conditions set forth herein: (i) Twenty-Five Thousand Dollars
($25,000) upon the approval of the Assignment by Assignee's Board of Directors
(the payment of which Assignee has previously made to Assignor and which
Assignor acknowledges that it has received), (ii) Two Hundred Seventy-Three
Thousand Dollars ($273,000) upon the mutual execution and delivery of this
Assignment by Assignor and Assignee, (iii) upon the Commencement Date, Assignee
shall pay Fourteen Thousand Dollars ($14,000) as consideration for Assignor's
assignment hereunder to Assignee of all of Assignor's rights and interest in and
to the security deposit under the Sublease, and (iv) if and only if the
Commencement Date shall have occurred on or before January 15, 1997, then
Assignee will pay an additional One Hundred Fifty Thousand Dollars ($150,000) to
Assignor on January 15, 1997. The amount of the Assignment Fee is based in part
on the assumption that the Commencement Date will occur on or before January 15,
1997 and that the Sublease term will extend through April 30, 1998; hence, if
the Sublease is terminated for any reason (other than a default by Assignee)
prior to April 30, 1998, then Assignor shall reimburse promptly to Assignee a
portion of the Assignment Fee (excluding the security deposit reimbursement),
which portion shall be determined by multiplying fifty percent (50%) of the
total amount of the Assignment Fee (excluding the security deposit
reimbursement) by a fraction, the numerator of which shall be the number of full
calendar months which would have remained in the Sublease term had the Sublease
not been terminated and the denominator of which shall be the total number of
full calendar months remaining in the Sublease term computed as of the
Commencement Date.
2. Acceptance and Assumption: Assignee hereby accepts the foregoing
-------------------------
assignment of the Sublease and Assignor's rights thereunder; provided, however,
that Assignee shall not assume, and shall have no liability with respect to, any
obligations of Assignor under the Sublease arising out of any action,
occurrence, inaction or condition undertaken or existing on or prior to the
Commencement Date. From and after the Commencement
1
<PAGE>
Date, Assignee shall make all payments to Sublandlord of Base Monthly Rent (in
no event shall any such payment exceed the amount due pursuant to Section 9 of
the Sublease), and Operating Expense Increases (as defined in the Sublease)
required to be paid by the "Subtenant" under the Sublease accruing from and
after the Commencement Date. Operating Expense Increases and any other amounts
owed by the "Subtenant" under the Sublease shall be prorated as of the
Commencement Date. If the proration cannot be calculated accurately on the
Commencement Date, then it shall be calculated as soon thereafter as is
feasible, and any sums owed shall bear interest at the rate of ten percent (10%)
or the highest amount allowed by law, whichever is less, if payment is not made
by the responsible party within ten (10) days after the responsible party's
receipt of a written request from the other party for any amounts owed.
3. Assignor's Representations: Assignor represents and warrants to Assignee
--------------------------
(as of the date of this Assignment and again as of the Commencement Date) as
follows:
3.1 The Sublease has not been modified, amended, supplemented, terminated,
extended or renewed.
3.2 Assignor has not previously assigned the Sublease or sublet the
Subleased Premises
or any portion thereof or entered into any agreement permitting any person or
entity to use or occupy any portion of the Subleased Premises.
3.3 To the best knowledge of Assignor, Sublandlord has not assigned or
encumbered its interest in the Sublease or the Subleased Premises.
3.4 To the best knowledge of Assignor, the Subleased Premises comply with
all applicable laws, insurance underwriters' requirements, and all sidewalks,
parking lots, plumbing, electrical, HVAC, roof and all other building systems
serving the Subleased Premises, are in good working order, repair and water-
tight condition.
3.5 To the best knowledge of Assignor, neither Sublandlord nor Master
Landlord is a debtor in any bankruptcy proceeding or the subject of any state
insolvency proceeding.
3.6 The Sublease, and to the best knowledge of Assignor, the Master Lease,
are in full force and effect and there exists no default under the Sublease nor,
to the best knowledge of Assignor, the Master Lease, on the part of Assignor,
Master Landlord or Sublandlord, nor to the best knowledge of Assignor has any
event occurred which, with the giving of notice or the passage of time or both,
could constitute a breach or default by either Assignor, Sublandlord or Master
Landlord under either the Sublease or Master Lease.
3.7 Assignor has paid all Base Monthly Rent, Operating Expense Increases
and other charges due under the Sublease and has deposited Fourteen Thousand
Dollars ($14,000) with Sublandlord as a security deposit under the Sublease.
3.8 Assignor is a corporation in good standing under California law and
the person signing this Assignment on behalf of Assignor has the full power and
authority to bind Assignor to this Assignment.
3.9 Assignor has not made any alterations or improvements to the Subleased
Premises without the written approval of both Master Landlord and Sublandlord,
and Assignor will not make any alterations or improvements to the Subleased
Premises prior to the Commencement Date.
3.10 To the best knowledge of Assignor, no hazardous materials (including,
without limitation, asbestos) are located on or about the Subleased Premises in
violation of applicable environmental laws.
3.11 To the best knowledge of Assignor, no pending or threatened litigation
exists which may affect Assignee's use of or operations on the Subleased
Premises.
4. Assignee's Representations: Assignee represents that it is a corporation in
--------------------------
good standing under Florida law and is qualified to transact interstate business
in California and the person signing this Assignment on behalf of Assignee has
the full power and authority to bind Assignee to this Assignment.
5. Indemnity:
---------
5.1 Assignor shall indemnify, defend (with counsel reasonably acceptable
to Assignee), protect and hold harmless Assignee and its officers, employees,
shareholders, agents and assigns from and against all claims, demands, losses,
costs (including attorney's fees and costs) or liabilities (i) arising under the
Sublease as a consequence of Assignor's breach or default of the obligations on
its part to be performed under the Sublease prior to the Commencement Date, or
as a result of any action, occurrence, inaction or condition undertaken or
existing with respect to Assignor's or any of its agents', contractors',
employees', invitees' use or occupancy of the Subleased Premises prior to the
Commencement Date, or (ii) arising from the breach of any of Assignor's
covenants, representations or obligations under this Assignment. The foregoing
provisions shall survive the expiration or termination of the Sublease or this
Assignment.
5.2 Assignee shall indemnify, defend (with counsel reasonably acceptable
to Assignee), protect and hold harmless Assignor and its officers, employees,
shareholders, agents and assigns from and against all claims, demands, causes of
action, costs (including attorney's fees and costs) or liabilities (i) arising
under the Sublease as a consequence of Assignee's breach or default of the
obligations on its part to be performed under the Sublease on or after the
Commencement Date, or as a result of any action, occurrence, inaction or
condition undertaken or
2
<PAGE>
existing with respect to Assignee's or any of its agents', contractors',
employees', invitees' use or occupancy of the Subleased Premises on or after the
Commencement Date, or (ii) arising from the breach of any of Assignee's
covenants or representations under this Assignment. The foregoing provisions
shall survive the expiration or termination of the Sublease or this Assignment.
6. Waiver of Subrogation: The waiver of subrogation provisions set forth as
---------------------
Addendum No. 7 of (and attached to) the original form of the Master Lease shall
be deemed a four-party agreement binding among and inuring to the benefit of
Assignor, Assignee and, by their respective consent hereto, Master Landlord and
Sublandlord.
7. Conditions Precedent: Assignor shall use diligent efforts to obtain the
--------------------
written consent of both Landlord and Sublandlord to this Assignment, which
consents shall acknowledge and confirm that (i) Landlord and Sublandlord,
respectively, accept the waiver of subrogation provisions set forth in Section
6, (ii) neither Sublandlord nor Master Landlord, as applicable, have any
knowledge of any breach or default by Assignor, Sublandlord or Master Landlord
under the Sublease or Master Lease and that the Sublease and Master Lease are in
full force and effect, and (iii) the Base Monthly Rent amounts payable pursuant
to Section 9 of the Sublease shall remain unchanged after the Commencement Date.
If Assignor does not obtain both Landlord's and Sublandlord's written consent to
this Assignment with all the foregoing acknowledgments and confirmations within
twenty (20) days after the execution of this Assignment by Assignee, then at any
time thereafter until such consents are obtained, Assignee may terminate this
Assignment by written notice to Assignor, whereupon any monies previously paid
by Assignee to Assignor (including, without limitation, the Assignment Fee set
forth below in Section 1.1) shall promptly be reimbursed to Assignee, together
with interest thereon from the date of the termination until paid at the
Interest Rate; provided, however, that if Assignor has used diligent efforts to
attempt to obtain Sublandlord's and Master Landlord's consent and has otherwise
satisfied its obligations under this Assignment, then Assignor may subtract from
the foregoing reimbursement to Assignee and retain the initial Twenty-Five
Thousand Dollar ($25,000) deposit it received from Assignee.
8. Brokers: Assignor shall be solely responsible for any and all brokerage
-------
commissions or fees, if any, due to any real estate broker engaged by either
Assignor or Assignee in connection with this transaction.
9. Security Deposit: By its consent hereto, Sublandlord agrees that from and
----------------
after the Commencement Date all sums due and owing by it to the "Subtenant"
under the Sublease upon the expiration or earlier termination of the Sublease,
including, without limitation, all sums due and owing with respect to the
security deposit, shall be paid to Assignee.
10. Notices: Unless at least five (5) days' prior written notice is given in
-------
the manner set forth in this paragraph, the address of each party for all
purposes connected with this Assignment shall be that address set forth below
their signatures at the end of this Assignment. All notices, demands or
communications in connection with this Assignment shall be (i) personally
delivered; or (ii) properly addressed and (a) submitted to an overnight courier
service, charges prepaid, or (b) deposited in the mail (registered or certified,
return receipt requested, and postage prepaid). Notices shall be deemed
effective upon receipt or refusal to accept delivery.
11. Miscellaneous: This Assignment shall be governed by California law and
-------------
shall be binding upon and shall inure to the benefit of the parties hereto and
their successors and assigns. If either party shall bring any action or legal
proceeding for an alleged breach of any provision of this Assignment, to recover
rent, to terminate this Assignment or to otherwise enforce, protect or establish
any term or covenant of this Assignment or right of either party, then the
prevailing party shall be entitled to recover as a part of such action or
proceedings, or in a separate action brought for that purpose, reasonable
attorneys' fees and court costs as may be fixed by the court. Time is of the
essence with respect to the performance of every provision of this Assignment in
which time of performance is a factor. The captions used in this Assignment are
for convenience only and shall not be considered in the construction or
interpretation of any provision hereof. This Assignment may be executed in
counterparts, each of which shall constitute an original and all of which
together shall constitute one instrument. The language in all parts of this
Assignment shall in all cases be construed as a whole according to its fair
meaning, and not strictly for or against either Assignor or Assignee. When a
party is required to do something by this Assignment, it shall do so at its sole
cost and expense without right of reimbursement from the other party unless
specific provision is made therefor. Assignor shall not become or be deemed a
partner nor a joint venturer with Assignee by reason of the provisions of this
Assignment. This Assignment shall supersede any and all prior agreements
between Assignor and Assignee (including, without limitation any letters of
intent) with respect to the Subleased Premises and no subsequent change or
addition to this Assignment shall be binding unless in writing and signed by
Assignor and Assignee.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment to be
properly executed as of the day and year first above written.
ASSIGNOR: ASSIGNEE:
PASSAGE SYSTEMS, INC. CONCENTRIC NETWORK
a California corporation CORPORATION, a Florida corporation
By /s/Vance Nakamoto By Michael F. Anthofer
----------------------------- ------------------------------
Name Vance Nakamoto Name Michael F. Anthofer
--------------------------- ----------------------------
Its President Its SVP & CFO
---------------------------- -----------------------------
Address 10596 N. Tantau Ave. Address 10590 N. Tantau Ave.
------------------------ -------------------------
Cupertino, CA 95014 Cupertino, CA 95014
-------------------------- -------------------------
3
<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........ 1,321 1,329 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........... 139 139 139 139 139
------- -------- -------- --------- ---------
Shares used in computing
net loss per share........ 1,460 1,468 1,529 1,527 1,533
======= ======== ======== ========= =========
Net loss per share......... $ (2.94) $ (14.99) $ (43.41) $ (6.80) $ (9.58)
======= ======== ======== ========= =========
Convertible preferred stock
issued more than twelve
months prior to the
proposed initial public
offering.................. 3,268 5,007
======== =========
Pro forma weighted average
shares outstanding........ 4,797 6,540
======== =========
Pro forma net loss per
share..................... $ (13.84) $ (2.24)
======== =========
</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 10, as to which the date is May , 1997), in 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
May , 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
May 14, 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> (13.84) (2.24)
<EPS-DILUTED> 0 0
</TABLE>
