<PAGE>
SCHEDULE 14A
(RULE 14-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
CONCENTRIC NETWORK CORPORATION
------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(I)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: N/A
---
(2) Aggregate number of securities to which transaction applies: N/A
---
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): N/A
---
(4) Proposed maximum aggregate value of transaction: N/A
---
(5) Total fee paid: N/A
---
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: N/A
---
(2) Form, Schedule or Registration Statement No.: N/A
---
(3) Filing Party: N/A
---
(4) Date Filed: N/A
---
<PAGE>
CONCENTRIC NETWORK CORPORATION
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 20, 1998
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Concentric
Network Corporation, a Delaware corporation (the "Company"), will be held on
May 20, 1998 at 10:00 a.m., local time, at the offices of the Company located
at 10590 North Tantau Avenue, Cupertino, CA 95014, for the following purposes:
1. To elect one Class I director to serve for a term of three years and
until his successor is duly elected and qualified.
2. To amend the Company's 1997 Stock Plan to increase the number of
shares available for issuance thereunder by 750,000 shares to an aggregate
of 2,250,000 shares.
3. To amend the Company's 1997 Employee Stock Purchase Plan to provide
for an annual increase in the number of shares reserved for issuance
thereunder equal to the lesser of: (i) 400,000 shares, (ii) 2% of the
outstanding shares of Common Stock of the Company or (iii) a number of
shares determined by the Board of Directors.
4. To ratify the appointment of Ernst & Young LLP as independent auditors
for the Company for the fiscal year ending December 31, 1998.
5. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on March 28, 1998 are
entitled to notice of and to vote at the Annual Meeting.
All stockholders are cordially invited to attend the Annual Meeting in
person. However, to assure your representation at the Annual Meeting, you are
urged to sign and return the enclosed proxy as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any stockholder attending
the Annual Meeting may vote in person even if he or she has returned a proxy.
Peter J. Bergeron
Secretary
Cupertino, California
April 23, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO COMPLETE
AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED.
<PAGE>
CONCENTRIC NETWORK CORPORATION
----------------
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
----------------
PROCEDURAL MATTERS
GENERAL
This Proxy Statement is being furnished in connection with the solicitation
of proxies by the Board of Directors of Concentric Network Corporation (the
"Company") for use at the Annual Meeting of Stockholders (the "Annual
Meeting") to be held on May 20, 1998 at 10:00 a.m., local time, and at any
adjournment thereof, for the purposes set forth herein and in the accompanying
Notice of Annual Meeting of Stockholders.
The Annual Meeting will be held at the offices of the Company located at
10590 North Tantau Avenue, Cupertino, California 95014. The Company's
telephone number is (408) 342-2800.
These proxy solicitation materials were mailed on or about April 23, 1998,
together with the Company's 1998 Annual Report to Stockholders, to all
stockholders entitled to vote at the Annual Meeting.
VOTING AT THE ANNUAL MEETING; RECORD DATE
Only stockholders of record of the Company's Common Stock at the close of
business on March 28, 1998 (the "Record Date") are entitled to notice of and
to vote at the Annual Meeting. Such stockholders are entitled to cast one vote
for each share of Common Stock held as of the Record Date and to vote on all
matters properly submitted for the vote of stockholders at the Annual Meeting.
As of the Record Date, 14,176,633 shares of the Company's common stock, $.001
par value (the "Common Stock"), were issued and outstanding. No shares of
Preferred Stock were outstanding. For information regarding security ownership
by management and by the beneficial owners of more than 5% of the Company's
Common Stock, see "Beneficial Security Ownership of Management and Certain
Beneficial Owners."
QUORUM; ABSTENTIONS; BROKER NON-VOTES; REQUIRED VOTE
The presence, in person or by proxy, of the holders of a majority of the
shares entitled to be voted generally at the Annual Meeting is necessary to
constitute a quorum at the Annual Meeting. The affirmative vote of a plurality
of shares present in person or represented by proxy at the Annual Meeting is
required for the election of the director in Proposal One described below. The
affirmative vote of a majority of shares present in person or represented by
proxy at the Annual Meeting is required for approval of the proposed amendment
of the Company's 1997 Stock Plan and Employee Stock Purchase Plan in Proposal
Two and Proposal Three, respectively, and to ratify the appointment of
auditors in Proposal Four described below.
Under the General Corporation Law of the State of Delaware, an abstaining
vote and a broker "non-vote" are counted as present and entitled to vote and
are, therefore, included for purposes of determining whether a quorum of
shares is present at a meeting; however, such votes are not deemed to be
"votes cast." As a result, abstentions and broker "non-votes" are not included
in the tabulation of the voting results on the election of directors or issues
requiring approval of a majority of the votes cast and, therefore, do not have
the effect of votes in opposition in such tabulations. A broker "non-vote"
occurs when a nominee holding shares for a beneficial owner does not vote on a
particular proposal because the nominee does not have discretionary voting
power with respect to that item and has not received instructions from the
beneficial owner.
REVOCABILITY OF PROXIES
All shares entitled to vote and represented by properly executed proxies
received prior to the Annual Meeting, and not revoked, will be voted at the
Annual Meeting in accordance with the instructions indicated on those proxies.
If no instructions are indicated on a properly executed proxy, the shares
represented by that proxy will be voted as recommended by the Board of
Directors. If any other matters are properly presented for consideration at
the Annual Meeting, including, among other things, consideration of a motion
to adjourn the
<PAGE>
Annual Meeting to another time or place (including, without limitation, for
the purpose of soliciting additional proxies), the persons named in the
enclosed proxy and acting thereunder will have discretion to vote on those
matters in accordance with their best judgment. The Company does not currently
anticipate that any other matters will be raised at the Annual Meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. A proxy may be revoked (i) by filing
with the Secretary of the Company, at or before the taking of the vote at the
Annual Meeting, a written notice of revocation or a duly executed proxy, in
either case later dated than the prior proxy relating to the same shares or
(ii) by attending the Annual Meeting and voting in person (although attendance
at the Annual Meeting will not of itself revoke a proxy). Any written notice
of revocation or subsequent proxy must be received by the Secretary of the
Company prior to the taking of the vote at the Annual Meeting. Such written
notice of revocation or subsequent proxy should be hand delivered to the
Secretary of the Company or should be sent so as to be delivered to Concentric
Network Corporation, 10590 North Tantau Avenue, Cupertino, California, 95014,
Attention: Secretary.
EXPENSES OF SOLICITATION
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement, will be borne by the Company. The Company may
reimburse brokerage firms, custodians, nominees, fiduciaries and other persons
representing beneficial owners of Common Stock for their reasonable expenses
in forwarding solicitation material to such beneficial owners. Directors,
officers and employees of the Company may also solicit proxies in person or by
telephone, telegram, letter, facsimile or other means of communication. Such
directors, officers and employees will not be additionally compensated, but
they may be reimbursed for reasonable out-of-pocket expenses in connection
with such solicitation.
PROCEDURE FOR SUBMITTING STOCKHOLDER PROPOSALS
Stockholders may present proper proposals for inclusion in the Company's
proxy statement and for consideration at the next annual meeting of its
stockholders by submitting their proposals in writing to the Secretary of the
Company in a timely manner. In order to be included in the Company's proxy
materials for the 1999 annual meeting of stockholders, stockholder proposals
must be received by the Secretary of the Company no later than December 11,
1998, and must otherwise comply with the requirements of Rule 14a-8 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and the
procedures set forth in the Company's Bylaws.
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<PAGE>
PROPOSAL ONE
ELECTION OF DIRECTOR
GENERAL
The Company's Board of Directors is currently comprised of six members who
are divided into three classes with overlapping three-year terms. A director
serves in office until his or her respective successor is duly elected and
qualified or until his or her earlier death or resignation. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of an equal number of directors. Louis P. Bender, III, a current
Class I director, will not stand for re-election at the Annual Meeting. At a
meeting of the Board of Directors in April 1998, the Board approved a decrease
in the size of the Board of Directors from six to five, effective as of the
Annual Meeting. Accordingly, one Class I director is to be elected at the
Annual Meeting for a three-year term ending on the date of the annual
stockholder's meeting in 2001.
NOMINEE FOR CLASS I DIRECTOR
The Board of Directors has nominated GORDON C. MARTIN for election as the
Class I director. Unless otherwise instructed, the persons named in the
enclosed proxy intend to vote proxies received by them for the election of Mr.
Martin. The Company expects that Mr. Martin will accept such nomination;
however, in the event that Mr. Martin is unable or declines to serve as a
director at the time of the Annual Meeting, proxies will be voted for a
substitute nominee designated by the present Board of Directors to fill the
vacancy. The term of office of the person elected as a director will continue
until such directors' term expires in 2001 or until such director's successor
has been elected and qualified.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEE LISTED ABOVE.
INFORMATION REGARDING NOMINEE AND OTHER DIRECTORS
Set forth below is certain information regarding the nominee for Class I
director and each other director of the Company whose term of office continues
after the Annual Meeting.
NOMINEE FOR CLASS I DIRECTOR FOR A TERM EXPIRING IN 2001
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
---- --- --------------------------------------------
<C> <C> <S>
Gordon C. Martin.. 37 Mr. Martin has been a director of the Company since October 1997.
Mr. Martin is vice president of strategic marketing for Williams
Communications Group, Inc., a subsidiary of the Williams
Companies, Inc. Mr. Martin joined Williams Communications Group,
Inc. in October 1987 as manager of interexchange carrier sales
for the network division. He was promoted to director of product
marketing in January 1993. From February 1995 to May 1995, he
served as General Manager of Digital Frontiers LLC, a division of
Williams. In June 1995, he returned to Williams as Vice
President, Marketing until he was promoted to his current
position in January 1997. Mr. Martin has a bachelor's degree in
accounting and an M.B.A. from Oral Roberts University.
</TABLE>
3
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<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
---- --- --------------------------------------------
<C> <C> <S>
INCUMBENT CLASS II DIRECTORS WHOSE TERMS EXPIRE IN 1999
Gary E. Rieschel... 41 Mr. 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.
Vinod Khosla....... 43 Mr. 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., 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.
INCUMBENT CLASS I DIRECTORS WHOSE TERMS EXPIRE IN 2000
Franco Regis....... 42 Mr. 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.
Henry R. Nothhaft.. 53 Mr. Nothhaft joined the Company as President and Chief Executive
Officer in May 1995 and became a Director of the Company in
August 1995 and was appointed chairman of the Board in January
1998. 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.
</TABLE>
BOARD MEETINGS AND COMMITTEES
The Board of Directors held a total of twenty meetings (including regularly
scheduled and special meetings) during fiscal 1997. No incumbent director
during the last fiscal year, while a member of the Board of Directors, attended
fewer than 75% of the aggregate of (i) the total number of meetings of the
Board of Directors and (ii) the total number of meetings held by all committees
on which such director served.
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<PAGE>
The Board of Directors of the Company has two standing committees: an Audit
Committee and a Compensation Committee. It does not have a nominating
committee or a committee performing the functions of a nominating committee.
The Audit Committee, which currently consists of Messrs. Bender and Regis,
is responsible for monitoring the corporate financial reporting and the
external audits of the Company, reviewing and approving material accounting
policy changes, monitoring internal accounting controls, recommending
engagement of independent auditors, reviewing related-party transactions and
performing other duties as prescribed by the Board of Directors. The Audit
Committee did not meet during fiscal 1997.
The Compensation Committee, which currently consists of Messrs. Khosla and
Rieschel is responsible for reviewing and approving the compensation and
benefits for the Company's officers, directors, consultants, and other
employees, administering the Company's stock purchase and stock option plans,
and making recommendations to the Board of Directors regarding such matters.
The Compensation Committee held nine meetings during fiscal 1997.
COMPENSATION OF DIRECTORS
Directors received no cash remuneration for serving on the Board. All
directors are reimbursed for expenses incurred in attending any Board of
Director and committee meetings.
REQUIRED VOTE
The nominee receiving the highest number of affirmative votes of the shares
present or represented and entitled to be voted for them shall be elected as
directors. Votes withheld from any director are counted for purposes of
determining the presence or absence of a quorum for the transaction of
business, but they have no legal effect under Delaware law.
PROPOSAL TWO
APPROVAL OF AMENDMENT TO 1997 STOCK PLAN
The Company's Board of Directors and stockholders have previously adopted
and approved the Company's 1997 Stock Plan (the "Stock Plan"). A total of
1,500,000 shares of Common Stock are presently reserved for issuance under the
Stock Plan. In April 1998, the Board of Directors approved an amendment to the
Stock Plan, subject to stockholder approval, to increase the shares reserved
for issuance thereunder by 750,000 shares, bringing the total number of shares
issuable under the Stock Plan to 2,250,000.
As of April 10, 1998, 671,046 shares were available for future grants under
the Stock Plan.
At the Annual Meeting, the stockholders are being asked to approve an
amendment to the Stock Plan to increase the number of shares of Common Stock
reserved for issuance thereunder by 750,000 shares, bringing the total number
of shares issuable under the Stock Plan to 2,250,000. The Board believes that
the amendment will enable the Company to continue its policy of widespread
employee stock ownership as a means to motivate high levels of performance and
to recognize key employee accomplishments.
VOTE REQUIRED; RECOMMENDATION OF BOARD OF DIRECTORS
The approval of the amendment to the Stock Plan requires the affirmative
vote of a majority of shares present in person or represented by Proxy and
entitled to vote on the proposal at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE AMENDMENT
OF THE STOCK PLAN TO INCREASE THE NUMBER OF SHARES RESERVED FOR ISSUANCE
THEREUNDER.
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DESCRIPTION OF STOCK PLAN
The essential terms of the Stock Plan, as proposed to be amended, are as
follows:
Purpose
The purpose of the Stock Plan is 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. The Stock Plan will continue in effect for a term
of ten years beginning in August 1997 unless terminated earlier pursuant to
the terms of the Stock Plan.
Stock Subject to the Stock Plan
The maximum aggregate number of shares that may be optioned and sold under
the Stock Plan is 2,250,000 Shares. The shares may be authorized, but
unissued, or reacquired Common Stock. If an option or stock purchase right
expires or becomes unexercisable without having been exercised in full, or is
surrendered pursuant to an option exchange program, the unpurchased shares
that were subject thereto will become available for future grant or sale under
the Stock Plan.
Administration
The Stock Plan is administered by the Board of Directors and/or different
committees of the Board of Directors (referred to as the "Administrator").
Subject to the provisions of the Stock Plan, the Administrator has the
authority, in its discretion: (i) to determine the fair market value of the
Company's Common Stock; (ii) to select the employees, directors or consultants
to whom options and stock purchase rights may be granted under the Stock Plan;
(iii) to determine the number of shares of Common Stock to be covered by each
option and stock purchase right granted under the Stock Plan; (iv) to approve
forms of agreement for use under the Stock Plan; (v) to determine the terms
and conditions of any option or stock purchase right granted under the Stock
Plan such as 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; (vi) to reduce
the exercise price of any option or stock purchase right to the then current
fair market value; (vii) to institute an option exchange program; (viii) to
construe and interpret the terms of the Stock Plan and awards granted pursuant
to the Stock Plan; (ix) to prescribe, amend and rescind rules and regulations
relating to the Stock Plan; (x) to modify or amend each option or stock
purchase right; (xi) to allow optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the shares to be issued upon
exercise of an option or stock purchase right that number of shares having a
fair market value equal to the amount required to be withheld; (xii) to
authorize any person to execute on behalf of the Company any instrument
required to effect the grant of an option or stock purchase right previously
granted by the Administrator; and (xiii) to make all other determinations
deemed necessary or advisable for administering the Plan.
Eligibility
All employees, directors and consultants are eligible to participate in the
Stock Plan. Stock options intended to qualify as an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code (an "Incentive
Stock Option") may be granted only to employees. Options not intended to
qualify as Incentive Stock Options ("Nonstatutory Stock Options") and Stock
Purchase Rights may be granted to employees, directors and consultants of the
Company. No optionee may be granted, in any fiscal year of the Company,
options to purchase more than 500,000 shares; provided that, in connection
with his or her initial service, an optionee may be granted options to
purchase up to an additional 500,000 shares that shall not count against such
limit.
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Terms and Conditions of Options
Each option granted pursuant to the Stock Plan is evidenced by a written
stock option agreement (an "Option Agreement") between the optionee and the
Company and is subject to the following terms and conditions:
Term of Option. The term of each option is stated in each Option Agreement.
In the case of an Incentive Stock Option, the term is ten years from the date
of grant or such shorter terms as may be provided in the Option Agreement. In
the case of an Incentive Stock Option granted to an optionee who, at the time
the Incentive Stock Option is granted, owns stock representing more than ten
percent of the total combined voting power of all classes of stock of the
Company or any parent or subsidiary, the term of the Incentive Stock Option is
five years from he date of grant or such shorter term as may be provided in
the Option Agreement.
Exercise Price. The per share exercise price for the Shares to be issued
pursuant to the exercise of an option is determined by the Administrator,
subject to the following: (i) in the case of an Incentive Stock Option (A)
granted to an employee who, at the time the Incentive Stock Option is granted,
owns stock representing more than ten percent of the voting power of all
classes of stock of the Company or any parent or subsidiary, the per share
exercise price may be no less than 110% of the fair market value per share on
the date of grant and (B) granted to any employee other than an employee
described in (A) immediately preceding, the per share exercise price may be no
less than 100% of the fair market value per share on the date of grant; (ii)
in the case of a Nonstatutory Stock Option, the per share exercise price may
be determined by the Administrator; and (iii) in the case of a Nonstatutory
Stock Option intended to qualify as "performance-based compensation" within
the meaning of Section 162(m) of the Code, the per share exercise price may be
no less than 100% of the fair market value per share on the date of grant.
Notwithstanding the foregoing, options may be granted with a per share
exercise price of less than 100% of the fair market value per share on the
date of grant pursuant to a merger or other corporate transaction.
Waiting Period and Exercise Dates. At the time an option is granted, the
Administrator fixes the period within which the option may be exercised and
determines any conditions that must be satisfied before the option may be
exercised.
Form of Consideration. The Administrator determines the acceptable form of
consideration for exercising an option, including the method of payment. In
the case of an Incentive Stock Option, the Administrator determines the
acceptable form of consideration at the time of grant. Such consideration may
consist entirely of cash, check, promissory note, other shares that (a) in the
case of shares acquired upon exercise of an option, have been owned by the
optionee for more than six months on the date of surrender, and (b) have a
fair market value on the date of surrender equal to the aggregate exercise
price of the shares as to which such option is exercised, consideration
received by the Company under a cashless exercise program implemented by the
Company in connection with the Stock Plan, a reduction in the amount of any
Company liability to the optionee, including any liability attributable to the
optionee's participation in any Company-sponsored deferred compensation
program or arrangement, any combination of the foregoing methods of payment,
or any other consideration and method of payment for the issuance of shares to
the extent permitted by applicable laws.
Exercise of Option. Any option granted under the Stock Plan is exercisable
according to the terms of the Stock Plan and at such times and under such
conditions as determined by the Administrator and set forth in the Option
Agreement. Unless the Administrator provides otherwise, vesting of options
granted under the Stock Plan are tolled during any paid leave of absence.
Termination of Relationship as a Service Provider. If an optionee ceases to
be an employee, director or consultant, other than upon the optionee's death
or disability, the optionee may exercise his or her option within such period
of time as is specified in the Option Agreement to the extent that the option
is vested on the date of termination (but in no event later than the
expiration of the term of such option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the option remains
exercisable for three months following the optionee's termination. If, on the
date of termination, the optionee is not vested as to his or
7
<PAGE>
her entire option, the shares covered by the unvested portion of the option
revert to the Stock Plan. If, after termination, the optionee does not
exercise his or her option within the time specified by the Administrator, the
option terminates, and the shares covered by such option revert to the Stock
Plan.
Disability of Optionee. If an optionee ceases to be an employee, director or
consultant as a result of the optionee's disability, the optionee may exercise
his or her option within such period of time as is specified in the Option
Agreement to the extent the option is vested on the date of termination (but
in no event later than the expiration of the term of such option as set forth
in the Option Agreement). In the absence of a specified time in the Option
Agreement, the option will remain exercisable for twelve months following the
optionee's termination. If, on the date of termination, the optionee is not
vested as to his or her entire option, the shares covered by the unvested
portion of the option revert to the Stock Plan. If, after termination, the
optionee does not exercise his or her option within the time specified herein,
the option will terminate, and the shares covered by such Option revert to the
Stock Plan.
Death of Optionee. If an Optionee dies while an employee, director or
consultant, the option may be exercised within such period of time as is
specified in the Option Agreement (but in no event later than the expiration
of the term of such option as set forth in the Option Agreement), by the
optionee's estate or by a person who acquires the right to exercise the option
by bequest or inheritance, but only to the extent that the option is vested on
the date of death. In the absence of a specified time in the Option Agreement,
the option will remain exercisable for twelve months following the optionee's
termination. If, at the time of death, the optionee is not vested as to his or
her entire option, the shares covered by the unvested portion of the option
will revert to the Stock 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, the
option terminates, and the shares covered by such option revert to the Stock
Plan.
Buyout Provisions. The Administrator may at any time offer to buy out for a
payment in cash, shares or otherwise an option previously granted based on
such terms and conditions as the Administrator establishes and communicates to
the optionee at the time that such offer is made.
Stock Purchase Rights
Rights to Purchase. Stock purchase rights may be issued either alone, in
addition to, or in tandem with other awards granted under the Stock Plan
and/or cash awards made outside of the Stock Plan. After the Administrator
determines that it will offer stock purchase rights under the Stock Plan, it
will advise the offeree in writing or electronically, by means of a Notice of
Grant, of the terms, conditions and restrictions related at the offer,
including the number of shares that the offeree will be entitled to purchase,
the price to be paid, and the time within which the offeree must accept such
offer. The offer will be accepted by execution of a restricted stock purchase
agreement in the form determined by the Administrator.
Repurchase Option. Unless the Administrator determines otherwise, the
restricted stock purchase agreement will 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 will 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 will lapse at a rate determined by the Administrator.
Buyout Provisions. The Administrator may at any time offer to buy out for a
payment in cash, shares or otherwise an option previously granted based on
such terms and conditions as the Administrator will establish and communicate
to the optionee at the time that such offer is made.
Other Provisions. The restricted stock purchase agreement will contain such
other terms, provisions and conditions not inconsistent with the Stock Plan as
may be determined by the Administrator in its sole discretion.
8
<PAGE>
Rights as a Shareholder. Once the stock purchase right is exercised, the
purchaser will have the rights equivalent to those of a stockholder, and will
be a stockholder when his or her purchase is entered upon the records of the
duly authorized transfer agent of the Company.
Non-Transferability of Options and Stock Purchase Rights
An option or stock purchase right may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or
by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale
Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding option and stock purchase right, and the number of shares of
Common Stock that have been authorized for issuance under the plan but as to
which no options or stock purchase rights have yet been granted or that have
been returned to the Stock 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, will 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.
Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, the Administrator will notify each optionee as
soon as practicable prior to the effective date of such proposed transaction.
The Administrator in its discretion may provide for an optionee to have the
right to exercise his or her option until ten days prior to such transaction
as to all of the optioned stock covered thereby, including shares as to which
the option would not otherwise be exercisable. In addition, the Administrator
may provide that any Company repurchase option applicable to any shares
purchased upon exercise of an option or stock purchase right will lapse as to
all such shares, provided the proposed dissolution or liquidation take place
at the time and in the manner contemplated. To the extent it has not been
previously exercised, an option or stock purchase right will terminate
immediately prior to the consummation of such proposed action.
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 will 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 will 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 repurchase right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator will notify the Optionee in writing or electronically that the
option or stock purchase right shall be fully vested and exercisable for a
period of fifteen days from the date of such notice, and the option or stock
purchase right shall terminate upon the expiration of such period.
Amendment and Termination of the Plan
The Board may at any time amend, alter, suspend or terminate the Stock Plan;
provided that the Company is required to obtain stockholder approval of any
Stock Plan amendment to the extent necessary and desirable to comply with
applicable laws.
Federal Income Tax Consequences
Incentive Stock Options. An optionee who is granted an incentive stock
option does not recognize taxable income at the time the option is granted or
upon its exercise, although the exercise may subject the optionee to the
alternative minimum tax. Upon a disposition of the shares more than two years
after grant of the option and
9
<PAGE>
one year after exercise of the option, any gain or loss is treated as long-
term capital gain or loss. If these holding periods are not satisfied, the
optionee recognizes ordinary income at the time of disposition equal to the
difference between the exercise price and the lower of (i) the fair market
value of the shares at the date of the option exercise or (ii) the sale price
of the shares. Any gain or loss recognized on such a premature disposition of
the shares in excess of the amount treated as ordinary income is treated as
long-term or short-term capital gain or loss, depending on the holding period.
A different rule for measuring ordinary income upon such a premature
disposition may apply if the optionee is also an officer, director, or 10%
stockholder of the Company. The Company is entitled to a deduction in the same
amount as the ordinary income recognized by the optionee.
Nonstatutory Stock Options. An optionee does not recognize any taxable
income at the time he or she is granted a nonstatutory stock option. Upon
exercise, the optionee recognizes taxable income generally measured by the
excess of the then fair market value of the shares over the exercise price.
Any taxable income recognized in connection with an option exercise by an
employee of the Company is subject to tax withholding by the Company. The
Company is entitled to a deduction in the same amount as the ordinary income
recognized by the optionee. Upon a disposition of such shares by the optionee,
any difference between the sale price and the optionee's exercise price, to
the extent not recognized as taxable income as provided above, is treated as
long-term or short-term capital gain or loss, depending on the holding period.
Stock Purchase Rights. Stock purchase rights will generally be taxed in the
same manner as nonstatutory stock options. However, restricted stock is
generally purchased upon the exercise of a stock purchase right. At the time
of purchase, restricted stock is subject to a "substantial risk of forfeiture"
within the meaning of Section 83 of the Code. As a result, the purchaser will
not recognize ordinary income at the time of purchase. Instead, the purchaser
will recognize ordinary income on the dates when a stock ceases to be subject
to a substantial risk of forfeiture. The stock will generally cease to be
subject to a substantial risk of forfeiture when it is no longer subject to
the Company's right to repurchase the stock upon the purchaser's termination
of employment with the Company. At such times, the purchaser will recognize
ordinary income measured as the difference between the purchase price and the
fair market value of the stock on the date the stock is no longer subject to a
substantial risk of forfeiture.
The purchaser may accelerate to the date of purchase his or her recognition
of ordinary income, if any, and the beginning of any capital gain holding
period by timely filing an election pursuant to Section 83(b) of the Code. In
such event, the ordinary income recognized, if any, is measured as the
difference between the purchase price and the fair market value of the stock
on the date of purchase, and the capital gain holding period commences on such
date. The ordinary income recognized by a purchaser who is an employee will be
subject to tax withholding by the Company. Different rules may apply if the
purchaser is also an officer, director, or 10% stockholder of the Company.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON OPTIONEES, HOLDERS OF STOCK PURCHASE RIGHTS, AND THE COMPANY WITH RESPECT
TO THE GRANT AND EXERCISE OF OPTIONS AND STOCK PURCHASE RIGHTS UNDER THE 1997
STOCK PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX
CONSEQUENCES OF THE EMPLOYEE'S OR CONSULTANT'S DEATH OR THE PROVISIONS OF THE
INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE
EMPLOYEE OR CONSULTANT MAY RESIDE.
10
<PAGE>
Participation in the Stock Plan
The following table sets forth certain information regarding options to
purchase Common Stock issued during the fiscal year ended December 31, 1997 to
each of the executive officers named in the Summary Compensation Table below
who participated in the Stock Plan, all current executive officers as a group,
all current non-executive officer directors as a group and all other employees
who participated in the Stock Plan as a group:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING DOLLAR VALUE ($)
NAME OF INDIVIDUAL AND POSITION OPTION(#) (1)
------------------------------- ---------- ----------------
<S> <C> <C>
Henry R. Nothhaft, President, Chief Executive Offi-
cer, Chairman of the Board and Director........... 124,666 2,261,987
John K. Peters, Executive Vice President and
General Manager, Network Service Division......... 103,466 1,885,187
Michael F. Anthofer, Senior Vice President and
Chief Financial Officer........................... 73,333 1,327,493
George D. Carr, Vice President of Field Sales...... 26,666 487,487
Warren A. Smith, Vice President of Software Engi-
neering........................................... 23,333 419,993
All current Executive Officers as a group (11 per-
sons)............................................. 544,955 9,797,463
Non-Executive Officer Directors as a group (5 per-
sons)............................................. 0 0
All Other Employees as a group..................... 584,575 9,797,231
</TABLE>
- --------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at April 10, 1998 ($26.25 per share)
and the exercise price of the option.
PROPOSAL THREE
AMENDMENT TO 1997 EMPLOYEE STOCK PURCHASE PLAN
At the Annual Meeting, the stockholders are being asked to approve an
amendment to the Company's 1997 Employee Stock Purchase Plan (the "Purchase
Plan") to provide for an annual increase in the shares reserved for sale under
the Purchase Plan equal to the lesser of: (i) 400,000 shares, (ii) 2% of the
outstanding shares of Common Stock of the Company or (iii) a number of shares
determined by the Board of Directors per year thereafter. A total of 500,000
shares are reserved for issuance pursuant to the Purchase Plan. As of April
10, 1998, 466,963 shares were available for future issuance under the Purchase
Plan. The proposed amendment to the Purchase Plan was approved by the Board of
Directors in April 1998.
Recent accounting pronouncements have altered the accounting treatment in
the case of a shortfall of shares reserved for issuance under an employee
stock purchase plan. As a result, if a shortfall occurs during a purchase
period, the Company is unable to seek stockholder approval for an increase
without incurring significant compensation charges. Therefore, the Board of
Directors has approved the amendment to the Purchase Plan which would
automatically increase the shares reserved for issuance under the Purchase
Plan according to a pre-set formula and proposed that it be approved by the
stockholders at this Annual Meeting. While such an amendment minimizes the
likelihood of a shortfall and resulting compensation charge, the Purchase Plan
will require periodic monitoring to ensure that no shortfall occurs. As
amended, the number of shares reserved for issuance under the Purchase Plan
would be increased automatically at the beginning of each fiscal year
commencing on January 1, 1999 by an amount equal to the lesser of (i) 400,000
shares, (ii) 2% of the outstanding shares of Common Stock of the Company on
such date or (iii) a number of shares determined by the Board of Directors. If
a shortfall occurs, the Company will make a pro rata allocation of the shares
remaining available for purchase in as uniform a manner as shall be
practicable and as it shall determine to be equitable.
In connection with its initial public offering in August 1997, the Company
implemented the Purchase Plan as an incentive to its employees and executives
as a means to promote increased stockholder value. The purpose
11
<PAGE>
of the Purchase Plan is to provide employees of the Company with an
opportunity to purchase Common Stock of the Company through accumulated
payroll deductions. Management believes that stock ownership is one of the
prime methods of attracting and retaining key personnel responsible for the
continued development and growth of the Company's business. In addition, an
employee stock purchase plan is considered a competitive necessity in the high
technology industry.
VOTE REQUIRED; RECOMMENDATION OF BOARD OF DIRECTORS
The approval of the amendments to the Purchase Plan requires the affirmative
vote of a majority of shares present in person or represented by Proxy and
entitled to vote on the proposal at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE AMENDMENT
TO THE PURCHASE PLAN.
DESCRIPTION OF PURCHASE PLAN
The essential terms of the Purchase Plan, as proposed to be amended, are
summarized as follows:
Purpose
The purpose of the Purchase Plan is to provide employees of the Company and
of any subsidiary which is designated by the Board of Directors to participate
in the Purchase Plan with an opportunity to purchase Common Stock of the
Company through accumulated payroll deductions. The Purchase Plan is intended
to qualify under Section 423 of the Internal Revenue Code of 1986, as amended
(the "Code").
Administration
The Purchase Plan provides for administration by the Board of Directors of
the Company or a committee appointed by the Board. All questions of
interpretation or application of the Purchase Plan are determined by the Board
of Directors or its appointed committee, and its decisions are final and
binding upon all participants.
Offering Periods
The Purchase Plan has offering periods of approximately 24 months, each
divided into four six-month purchase periods. The offering periods commence on
the first trading day on which national stock exchanges and the Nasdaq System
are open for trading on or after February 15 and August 15 of each year. The
Board of Directors or its committee has the power to alter the duration of the
offering periods without stockholder approval.
Eligibility
Any person who (i) is a regular employee scheduled to work at least twenty
hours per week and at least five months per year and (ii) was employed by the
Company on the first day of a given offering period (or by any subsidiary
designated from time to time by the Board of Directors) is eligible to
participate in the Purchase Plan. Eligible employees become participants in
the Purchase Plan by delivering to the Company's payroll office a subscription
agreement authorizing payroll deductions. An employee who becomes eligible to
participate in the Purchase Plan after the commencement of an offering period
may not participate in the Purchase Plan until the commencement of the next
offering period.
Purchase Price
The price at which shares are sold to participating employees is eighty-five
percent (85%) of the lower of the fair market value per share of the Common
Stock on (i) the first day of the offering period or (ii) the last day of the
purchase period. The fair market value of the Common Stock on a given date is
determined by reference to the closing sales price of the Nasdaq National
Market.
12
<PAGE>
Payment of Purchase Price; Payroll Deductions
The purchase price of the shares is accumulated by payroll deductions over
the offering period. The deductions may not exceed 10% of a participant's
compensation. A participant may discontinue his or her participation in the
Purchase Plan and may decrease the rate of payroll deductions at any time
during the offering period. A participant may increase the rate of payroll
deductions at the beginning of each purchase period. Payroll deductions shall
commence on the first payday following the offering date and shall continue at
the same rate until the end of the offering period unless sooner terminated as
provided in the Purchase Plan.
Grant and Exercise of Option to Purchase Stock
On the enrollment date of each offering period, each eligible employee
participating in such offering period is granted an option to purchase on each
exercise date during such offering period (at the applicable purchase price)
up to a number of shares of the Company's Common Stock determined by dividing
such employee's payroll deductions accumulated prior to such exercise date and
retained in the employee's account by the applicable purchase price; provided
that in no event will an employee be permitted to purchase during each
purchase period more than 25,000 shares of the Company's Common Stock on the
enrollment date. The option will expire on the last day of the offering
period.
Unless a participant withdraws from the Purchase Plan, his or her option for
the purchase of shares is exercised automatically on the exercise date, and
the maximum number of full shares subject to option are purchased for such
participant at the applicable purchase price with the accumulated payroll
deductions in his or her account. Any monies left over in a participant's
account after the exercise date are returned to the participant. During a
participant's lifetime, a participants option to purchase shares under the
Purchase Plan is exercisable only by him or her.
Notwithstanding the forgoing, no employee shall be permitted to subscribe
for shares under the Purchase Plan (a) if, immediately after the grant of the
option, the employee would own, and/or hold outstanding options to purchase,
5% or more of the voting stock or value of all classes of stock of the Company
or (b) which permits his or her rights to purchase stock under all employees
stock purchase plans of the Company and its subsidiaries to accrue at a rate
which exceeds twenty-five thousand dollars ($25,000) worth of stock
(determined at the fair market value of the shares at the time such option is
granted) for each calendar year in which such option is outstanding at any
time. Furthermore, if the number of shares which would otherwise be placed
under option at the beginning of an offering period exceeds the number of
shares then available under the Purchase Plan, a pro rata allocation of the
shares remaining shall be made in as equitable a manner as is practicable.
Withdrawal
While each participant in the Purchase Plan is required to sign a
subscription agreement authorizing payroll deductions, the participant's
interest in a given offering may be terminated in whole, but not in part, by
signing and delivering to the Company a notice of withdrawal from the Purchase
Plan. Such withdrawal may be elected at any time prior to the end of the
applicable offering period. Any withdrawal by the employee during a given
offering automatically terminates the employee's interest in that offering.
Termination of Employment
Termination of a participant's employment for any reason, including
retirement or death, cancels his or her participation in the Purchase Plan
immediately. In such event, the payroll deductions credited to the
participant's account will be returned without interest to such participant,
or, in the case of death, to the person or persons entitled thereto as
specified by the employee in the subscription agreement.
Capital Changes
In the event of any changes in the capitalization of the Company, such as
stock splits or stock dividends, resulting in an increase or decrease in the
number of shares of Common Stock, effected without receipt of consideration by
the Company, appropriate adjustments will be made by the Company in the shares
subject to purchase and in the purchase price per share.
13
<PAGE>
Nonassignability
No rights or accumulated payroll deductions of an employee under the
Purchase Plan may be pledged, assigned, or transferred for any reason and any
such attempt may be treated by the Company as an election to withdraw from the
Purchase Plan.
Shares Reserved for Issuance under the Purchase Plan
A total of 500,000 shares of Common Stock has been reserved for issuance
under the Purchase Plan. On the first day of each fiscal year (commencing on
January 1, 1999), the number of shares reserved thereunder will be increased
automatically by the lesser of: (i) 400,000 shares, (ii) 2% of the outstanding
shares of Common Stock of the Company on such date or (iii) a number of shares
determined by the Board of Directors.
Amendment and Termination of the Purchase Plan
The Board of Directors may at any time amend or terminate the Purchase Plan,
except that such termination will not affect options previously granted nor
may any amendment make any changes in an option granted prior thereto which
adversely affects the rights of any participant. No amendment may be made to
the Purchase Plan without prior approval of the stockholders of the Company if
such amendment would increase the number of shares reserved under the Purchase
Plan, materially modify the eligibility requirements, or materially increase
the benefits which may accrue to participants under the Purchase Plan.
Certain United States Federal Income Tax Information
The Purchase Plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Section 423 of the
Code. Under these provisions, no income will be taxable to a participant until
the shares purchased under the Purchase Plan are sold or otherwise disposed
of. Upon sale or other disposition of the shares, the participant will
generally be subject to tax and the amount of the tax will depend upon the
holding period. If the shares are sold or otherwise disposed of more than two
years from the first day of the offering period and more than one year from
the date of the shares are purchased, the participant will recognize ordinary
income measured as the lesser of (a) the excess of the fair market value of
the shares at the time of such sale or disposition over the purchase price, or
(b) an amount equal to 15% of the fair market value of the shares as of the
first day of the offering period. Any additional gain will be treated as long-
term capital gain. If the shares are sold or otherwise disposed of before the
expiration of these holding periods, the participant will recognize ordinary
income generally measured as the excess of the fair market value of the shares
on the date the shares are purchased over the purchase price. Any additional
gain or loss of such sale or disposition will be long-term or short-term
capital gain or loss, depending on the holding period. Generally, the Company
is entitled to a deduction for ordinary income recognized by participants upon
a sale or disposition of shares prior to the expiration of the holding
period(s) described above.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE PARTICIPANT AND THE COMPANY WITH RESPECT TO THE SHARES PURCHASED
UNDER THE PURCHASE PLAN. REFERENCE SHOULD BE MADE TO THE APPLICABLE PROVISIONS
OF THE CODE. IN ADDITION, THE SUMMARY DOES NOT DISCUSS THE TAX CONSEQUENCES OF
A PARTICIPANT'S DEATH OR THE INCOME TAX LAWS OF ANY STATE OR FOREIGN COUNTRY
IN WHICH THE PARTICIPANT MAY RESIDE.
Participation in the Purchase Plan
Participation in the Purchase Plan is voluntary and is dependent on each
eligible employee's election to participate and his or her determination as to
the level of payroll deductions. Accordingly, future purchases under the
Purchase Plan are not determinable. Non-employee directors are not eligible to
participate in the Purchase Plan.
There were no shares purchased during the fiscal year ended December 31,
1997 under the Purchase Plan by any of the executive officers named in the
Summary Compensation Table below, any current executive officers, or any other
employees.
14
<PAGE>
PROPOSAL FOUR
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP, independent auditors,
to audit the financial statements of the Company for the fiscal year ending
December 31, 1998. Ernst & Young LLP has audited the Company's financial
statements since 1993. A representative of Ernst & Young LLP is expected to be
present at the meeting, will have the opportunity to make a statement, and is
expected to be available to respond to appropriate questions.
REQUIRED VOTE; RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has conditioned its appointment of the Company's
independent auditors upon the receipt of the affirmative vote of a majority of
the shares represented, in person or by proxy, and voting at the Annual
Meeting, which shares voting affirmatively also constitute at least a majority
of the required quorum. In the event that the stockholders do not approve the
selection of Ernst & Young LLP, the appointment of the independent auditors
will be reconsidered by the Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP, AS INDEPENDENT AUDITORS FOR FISCAL YEAR
ENDING DECEMBER 31, 1998. THE EFFECT OF AN ABSTENTION IS THE SAME AS A VOTE
AGAINST THE RATIFICATION OF THE APPOINTMENT OF THE INDEPENDENT AUDITORS.
15
<PAGE>
BENEFICIAL SECURITY OWNERSHIP OF
MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of Common Stock of
the Company as of March 28, 1998 for the following: (i) each person or entity
who is known by the Company to own beneficially more than 5% of the
outstanding shares of the Company's Common Stock; (ii) each of the Company's
directors; (iii) the Company's Chief Executive Officer and each of the
officers named in the Summary Compensation Table on page [21] hereof; and (iv)
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY BENEFICIALLY
NAMES AND ADDRESSES OWNED OWNED(1)
- ------------------- ------------ ------------
<S> <C> <C>
Williams Communications, Inc.(2)................... 1,604,254 11.1%
One Williams Center
Tulsa, OK 74172
TMI Telemedia International, Ltd.(3)............... 1,580,966 10.9
Viale del Campo, Boario, 56D
00153 Rome, Italy
The Goldman Sachs Group, L.P.(4)................... 1,089,642 7.7
85 Broad Street
New York, NY 10004
Racal-Datacom, Inc.(5)............................. 1,025,347 7.0
1601 North Harrison Parkway
Sunrise, FL 333233-2899
SOFTBANK Ventures, Inc............................. 1,026,179 7.3
c/o SOFTBANK Holdings Inc.
10 Langley Road, Suite 403
Newton Center, MA 02159
Kleiner Perkins Caufield & Byers Entities(6)....... 1,006,873 7.1
2750 Sand Hill Road
Menlo Park, CA 94025
Denver Investment Advisors LLC..................... 909,500 6.4
1225 17th Street, 26th Floor
Denver, CO 80202
Henry R. Nothhaft (7).............................. 141,653 1.0
John K. Peters(8).................................. 118,009 *
Michael F. Anthofer(9)............................. 35,625 *
Warren A. Smith(10)................................ 24,167 *
George D. Carr(11)................................. 14,375 *
Louis P. Bender III(12)............................ -- --
Vinod Khosla(13)................................... 1,006,873 7.1
Gordon Martin(14).................................. -- --
Franco Regis(15)................................... 1,580,966 10.9
Gary E. Rieschel(16)............................... -- --
All current executive officers and directors as a
group (17 persons)(17)............................ 6,636,573 47.0
</TABLE>
- --------
* Less than 1%.
(1) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Exchange Act, and the information is
not necessarily indicative of beneficial ownership for any other purpose.
Under such rule, beneficial ownership includes any shares as to which the
individual or entity has voting power or investment power and any shares
which the individual has the right to acquire within 60 days of March
28,1998 through the exercise of any stock option or other right. Unless
otherwise indicated in the footnotes, each person or entity has sole
voting and investment power (or shares such powers with his or her
spouse) with respect to the shares shown as beneficially owned.
16
<PAGE>
(2) Includes warrants to purchase 355,018 shares of Common Stock.
(3) Includes warrants to purchase 341,001 shares of Common Stock.
(4) Consists of securities held of record by GS Capital Partners, L.P., an
investment partnership, of which affiliates of The Goldman Sachs Group,
L.P. ("GS Group") are the general partner or investment manager. GS Group
disclaims beneficial ownership of the shares owned by GS Capital
Partners, L.P. to the extent attributable to partnership interests
therein held by persons other than GS Group and its affiliates. GS
Capital Partners, L.P. shares voting and investment power with certain of
its affiliates. Includes warrants to purchase 58,523 shares of Common
Stock.
(5) Includes warrants to purchase 512,259 shares of Common Stock.
(6) Includes shares held by Kleiner Perkins Caufield & Byers VII and KPCB
Information Sciences Zaibatsu Fund II (collectively, the "KPCB
Entities"). Also includes warrants to purchase 141,854 shares of Common
Stock held by the KPCB Entities.
(7) Includes 141,653 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants.
(8) Includes 118,009 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants.
(9) Includes 35,625 shares of Common Stock issuable upon exercise of
outstanding stock options.
(10) Includes 24,167 shares of Common Stock issuable upon exercise of
outstanding stock options.
(11) Includes 14,375 shares of Common Stock issuable upon exercise of
outstanding stock options.
(12) Excludes 1,025,347 shares and exercisable warrants held by Racal-Datacom,
Inc. See note (5). Mr. Bender is the President of Racal-Datacom, Inc. Mr.
Bender disclaims beneficial ownership of such shares. Mr. Bender will
cease to serve on the Board of Directors of the Company effective as of
the Annual Meeting.
(13) Represents shares beneficially owned by the KPCB Entities. Mr. Khosla is
an affiliate of such entities. See note (6). Mr. Khosla disclaims
beneficial ownership of such shares, except to the extent of his
pecuniary interest therein.
(14) Excludes 1,604,254 shares held by Williams Communications, Inc. Mr.
Martin, a Director of the Company, is a vice president of Williams
Communications Group, Inc., an affiliate of Williams Communications, Inc.
Mr. Martin disclaims beneficial ownership of such shares.
(15) Includes 1,580,966 shares and exercisable warrants held by TMI Telemedia
International, Ltd. Mr. Regis is the Director of Business Development and
Strategic Planning of Telecom Italia, S.p.A., the parent of TMI Telemedia
International, Ltd. See note (3). Mr. Regis disclaims beneficial
ownership of such shares.
(16) Excludes 1,026,179 shares held by SOFTBANK Ventures Inc. Mr. Rieschel, a
director of the Company, is a Senior Vice President at SOFTBANK Holdings
Inc., an affiliate of SOFTBANK Ventures Inc. Mr. Rieschel disclaims
beneficial ownership of such shares.
(17) Includes shares of Common Stock issuable upon exercise of outstanding
options and warrants, and shares beneficially owned by entities
associated with Messrs. Regis and Khosla, as to which they disclaim
beneficial ownership. See Notes (7)-(16).
17
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the
Securities and Exchange Commission (the "SEC") and the National Association of
Securities Dealers, Inc. Such officers, directors and ten-percent stockholders
are also required by SEC rules to furnish the Company with copies of all such
forms that they file.
Based solely on its review of the copies of such forms received by the
Company, or written representations from certain reporting persons that no
Forms 5 were required for such persons, the Company believes that during
fiscal 1997 all Section 16(a) filing requirements applicable to its officers,
directors and ten-percent stockholders were complied with, except for the
following: Messrs. Nothhaft, Peters, Schutt, Anthofer, Fisher and Etheredge
and Ms. Curtis, each filed their reports on Form 5 with the SEC one day late.
There were no changes in ownership by such individuals in the one day period
that the Forms 5 were filed late.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee currently consists of Messrs. Khosla
and Rieschel. No interlocking relationship exists between any member of the
Company's Board of Directors or Compensation Committee and any member of the
Board of Directors or compensation committee of any other Company, nor has any
such interlocking relationship existed in the past. No member of the
Compensation Committee is or was formerly an officer or an employee of the
Company or its subsidiaries.
There has not been any fees for compensation and reimbursement of expenses
for attendance at Board of Director meetings of the Company.
The Company has entered into indemnification agreements with each member of
its board of directors and certain of its officers. Such agreements provide
for the indemnification of such person to the fullest extent authorized,
permitted, or allowed by law.
18
<PAGE>
EXECUTIVE OFFICER COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning total
compensation received by the Chief Executive Officer and each of the four most
highly compensated executive officers whose salary plus bonus exceeded
$100,000 during the last fiscal year for services rendered to the Company in
all capacities during the last two fiscal years.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- ------------
FISCAL OTHER ANNUAL STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANT(#) COMPENSATION(3)
- --------------------------- ------ -------- ------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Henry R. Nothhaft 1997 $214,231 -- -- 124,666(4) $2,162
President and Chief 1996 184,808 -- -- -- 3,105
Executive Officer
John K. Peters 1997 201,346 -- -- 103,466(4)
Executive Vice President 1996 184,273 -- -- -- 3,076
and General Manager,
Network Services
Division
Michael F. Anthofer 1997 185,500 -- -- 73,333 1,027
Senior Vice President 1996 136,336 20,000 155,212(2) 43,333(5) 1,545
and Chief Financial
Officer
George D. Carr 1997 117,115 41,904(1) -- 26,666 3,041
Vice President of Field 1996 105,000 25,897(1) -- 6,666(5) 1,761
Sales
Warren A. Smith 1997 158,308 -- -- 23,333 2,559
Vice President of 1996 101,242 -- -- 40,000 280
Software Engineering
</TABLE>
- --------
(1) Reflects sales commissions.
(2) Reflects relocation expense payments.
(3) Reflects Company contributions to an employee 401(k) plan and term life
insurance premiums paid by the Company.
(4) Includes certain options that were granted at higher fair market values
earlier in February 1997 and repriced by amendment in July 1997 to reflect
fair market values at that time.
(5) Includes certain options that were granted at higher fair market values
earlier in 1996 and repriced by amendment in April 1996 to reflect lower
fair market values at that time.
19
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows, as to each of the officers named in the Summary
Compensation Table, information concerning stock options granted during the
fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------
POTENTIAL
REALIZABLE
MARKET VALUE OF ASSUMED
PERCENT OF PRICE OF ANNUAL RATES OF
NUMBER OF TOTAL SECURITIES STOCK PRICE
SECURITIES OPTIONS EXERCISE UNDERLYING APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTIONS ON OPTIONS TERM(2)
OPTIONS EMPLOYEES PER DATE OF EXPIRATION -----------------
NAME GRANTED(1)(#) IN 1997 SHARE GRANT DATE 5% 10%
---- ------------- ---------- -------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry R. Nothhaft....... 74,666 5.07% $ 6.00(3) $6.00 07/07/07 $282,238 $712,314
50,000 3.40% 11.25 11.25 10/29/07 354,375 894,375
John K. Peters.......... 63,466 4.31% 6.00(3) 6.00 07/07/07 239,902 605,466
40,000 2.72% 11.25 11.25 10/29/07 283,500 715,500
Michael F. Anthofer..... 43,333 2.94% 6.00 6.00 03/15/07 163,799 413,397
30,000 2.04% 11.25 11.25 10/29/07 212,625 536,625
George D. Carr.......... 16,666 1.13% 6.00 6.00 03/15/07 62,998 158,994
10,000 0.68% 11.25 11.25 10/29/07 70,875 178,875
Warren A. Smith......... 13,333 0.9% 6.00 6.00 03/15/07 50,399 127,197
10,000 0.68% 11.25 11.25 10/29/07 70,875 178,875
</TABLE>
- --------
(1) Options vest with respect to 25% of the shares on the first anniversary
date of grant and the remaining 75% vests monthly over the succeeding
three years.
(2) Potential Realizable Value is based on the assumption that the Common
Stock of the Company appreciates at the annual rate shown (compounded
annually) from the date of grant until the expiration of the option term.
These numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.
(3) These options were granted at an exercise price determined by the Board of
Directors to be equal to the fair market value of the Company's shares on
the date of grant. The Company's Common Stock was not traded publicly at
the time of the option grants to the Named Officers. The options were
granted at higher fair market values earlier in February 1997 and repriced
by amendment in July 1997 to reflect fair market values at that time.
OPTION EXERCISES AND HOLDINGS
The following table sets forth, for each of the officers in the Summary
Compensation Table, certain information concerning stock options exercised
during fiscal 1997, and the number of shares subject to both exercisable stock
options as of December 31, 1997. Also reported are values for "in-the-money"
options that represent the positive spread between the respective exercise
prices of outstanding stock options and the fair market value of the Company's
Common Stock as of December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT 12/31/97 (#) 12/31/97(1)
------------------------- -------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Henry R. Nothhaft....... -- -- 107,042 166,957 $2,408,453 $3,213,527
John K. Peters.......... -- -- 88,590 141,809 1,993,272 2,747,907
Michael F. Anthofer..... -- -- 18,472 98,194 415,621 1,886,864
George D. Carr.......... -- -- 7,778 35,554 174,995 687,477
Warren A. Smith......... -- -- 16,667 46,666 375,000 944,993
</TABLE>
- --------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at April 10, 1998 ($26.25 per share)
and the exercise price of the Named Officer's option.
20
<PAGE>
TRANSACTIONS WITH MANAGEMENT
Donald C. Schutt, Vice President of International Services for the Company,
is a majority stockholder of AMPM, Inc., an advertising agency. The Company
incurred marketing fees payable to AMPM, Inc. totaling $2.5 million in 1996.
The Company believes that the fees charged by AMPM for such services are
competitive with those of similar advertising agencies.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee (the "Committee") is comprised of Messrs. Khosla
and Rieschel, each of whom is a non-employee director. The Committee sets,
reviews and administers the Company's executive compensation program. The role
of the Committee is to establish and recommend salaries and other compensation
paid to executive officers of the Company and to administer the Company's
stock option plan and employee stock purchase plan. The Committee approves all
stock option grants to executive officers, all executive officer base salaries
and any cash bonus payments to executive officers and reviews all stock option
grants to employees.
The Company's executive pay programs are designed to attract and retain
executives who will contribute to the Company's long-term success, to mesh
executive and stockholder interests through stock option based plans and to
provide a compensation package that recognizes individual contributions and
Company performance.
At this time in the Company's growth, the Committee has determined that the
most effective means of compensation are base salaries and long-term
incentives through the Company's stock option programs.
Base Salary. The base salaries of executive officers are initially
determined by evaluating the responsibilities of the position held and the
experience and performance of the individual, with reference to the
competitive marketplace for executive talent, including a comparison to base
salaries for comparable positions in high growth, technology-based companies
of reasonably similar size. The Committee reviews executive salaries annually
and adjusts them as appropriate to reflect changes in the market conditions
and individual performance and responsibility. During fiscal 1997, salaries
for executive officers were increased by 12% to 16% depending on the executive
officer. The Chief Executive Officer's base salary was $214,231.
Stock Options. Under the Company's Stock Plan, stock options may be granted
to executive officers and other employees of the Company. Upon joining the
Company, an individual's initial option grant is based on the individual's
responsibilities and position. The size of stock option awards are based
primarily on an individual's performance and responsibilities. Because of the
competitive nature of the technology industry in which the Company's competes,
the Committee believes stock option grants are an effective method of
incentivising executives to take a longer term view of the Company's
performance and to ensure that the executive's and the stockholder's interests
are in alignment.
Bonus. The bonuses awarded to executive officers are determined based on
achievement of individual and company performance goals.
Other. Other elements of executive compensation include Company-wide medical
and life insurance benefits and the ability to defer compensation pursuant to
a 401(k) plan. The Company currently matches contributions under the 401(k)
plan.
The Company's Chief Executive Officer does not receive any other special or
additional compensation other than as described above.
The Committee has considered the potential impact of Section 162(m) of the
Code and the regulations thereunder (the "Section"). The Section disallows a
tax deduction for any publicly-held corporation for individual compensation
exceeding $1 million in any taxable year for any of the Named Executive
Officers, unless such compensation is performance-based. Since the cash
compensation of each of the Named Executive
21
<PAGE>
Officers is below the $1 million threshold and the Committee believes that any
options granted under the Stock Plan will meet the requirements of being
performance-based, the Committee believes that the Section will not reduce the
tax deduction available to the Company. The Company's policy is to qualify, to
the extent reasonable, its executive officers' compensation for deductibility
under applicable tax laws. However, the Committee believes that its primary
responsibility is to provide a compensation program that will attract, retain
and reward the executive talent necessary to the Company's success.
Consequently, the Committee recognizes that the loss of a tax deduction could
be necessary in some circumstances.
Compensation Committee of the Board
of Directors
Vinod Khosla
Gary Rieschel
22
<PAGE>
COMPANY STOCK PRICE PERFORMANCE GRAPH
COMPARISON OF 5 MONTH CUMULATIVE TOTAL RETURN*
AMONG CONCENTRIC NETWORK CORPORATION, THE NASDAQ STOCK MARKET (U.S.) INDEX AND
THE NASDAQ TELECOMMUNICATIONS INDEX
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
Measurement Period CONCENTRIC NASDAQ STOCK NASDAQ TELE-
(Fiscal Year Covered) NETWORK CORP MARKET (U.S.) COMMUNICATIONS
- --------------------- ------------ ------------- --------------
<S> <C> <C> <C>
Measurement Pt- 8/01/97 $100.00 $100.00 $100.00
FYE 8/97 $116.67 $ 99.85 $ 96.64
FYE 9/97 $108.33 $105.76 $109.22
FYE 10/97 $ 97.40 $100.28 $122.40
FYE 11/97 $ 85.42 $100.78 $113.18
FYE 12/97 $ 73.5 $ 99.2 $119.1
</TABLE>
* $100 INVESTED ON 8/01/97 IN STOCK OR ON 7/31/97 IN INDEX--INCLUDING
REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31.
23
<PAGE>
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If any
other matters properly come before the meeting, it is the intention of the
persons named in the enclosed proxy card to vote the shares they represent as
the Company may recommend.
It is important that your shares be presented at the meeting, regardless of
the number of shares which you hold. You are, therefore, urged to execute and
return, at your earliest convenience, the accompanying proxy card in the
envelope which has been enclosed.
THE BOARD OF DIRECTORS
Cupertino, California
April 23, 1998
24
<PAGE>
ANNEX A
CONCENTRIC NETWORK CORPORATION
1997 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are:
--------------------
. to attract and retain the best available personnel for positions of
substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall be
-------------
administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means Concentric Network Corporation, a Delaware
-------
corporation.
(h) "Consultant" means any person, including an advisor, engaged by the
----------
Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
--------
<PAGE>
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between any of the Company, its Parent, any Subsidiary, or any
successor. For purposes of Incentive Stock Options, no such leave may exceed
ninety days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract. If reemployment upon expiration of a leave of absence
approved by the Company is not so guaranteed, on the 181st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option. Neither service as a Director nor payment of a director's fee by
the Company shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common Stock
-----------------
determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to qualify
-------------------------
as an Incentive Stock Option.
-2-
<PAGE>
(p) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
--------------
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this Concentric Network Corporation 1997 Stock Plan.
----
(y) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor
----------
to Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
-------------
(cc) "Service Provider" means an Employee, Director or Consultant.
----------------
-3-
<PAGE>
(dd) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 2,250,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares that were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be administered
------------------------------
by the Board and/or different Committees with respect to different groups of
Service Providers.
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
----------
hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder
shall be structured to satisfy the requirements for exemption under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan
--------------------
shall be administered by (A) the Board or (B) a Committee, which committee shall
be constituted to satisfy Applicable Laws.
-4-
<PAGE>
(b) Powers of the Administrator. Subject to the provisions of the Plan,
---------------------------
and in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any Option or Stock Purchase Right granted hereunder.
Such terms and conditions include, but are not limited to, the exercise price,
the time or times when Options or Stock Purchase Rights may be exercised (which
may be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or Stock Purchase Right of the shares of Common Stock relating thereto, based in
each case on such factors as the Administrator, in its sole discretion, shall
determine;
(vi) to reduce the exercise price of any Option or Stock Purchase
Right to the then current Fair Market Value if the Fair Market Value of the
Common Stock covered by such Option or Stock Purchase Right shall have declined
since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option or Stock Purchase Right that number of Shares having a Fair Market
Value equal to the amount required to be
-5-
<PAGE>
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 an Optionee to have Shares withheld for this purpose shall be made
in such form and under such conditions as the Administrator may deem necessary
or advisable;
(xii) to authorize any person to execute on behalf of the Company
any instrument required to effect the grant of an Option or Stock Purchase Right
previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions,
----------------------------------
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options are exercisable for the
first time by the Optionee during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For purposes of this Section 6(a),
Incentive Stock Options shall be taken into account in the order in which they
were granted. The Fair Market Value of the Shares shall be determined as of the
time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall confer
upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of
the Company, Options to purchase more than 500,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 500,000 Shares
that shall not count against the limit set forth in subsection (i) above.
-6-
<PAGE>
(iii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 13.
(iv) If an Option is canceled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the canceled Option will be counted against the limits
set forth in subsections (i) and (ii) above. For this purpose, if the exercise
price of an Option is reduced, the transaction will be treated as a cancellation
of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become
------------
effective upon its adoption by the Board. It shall continue in effect for a
term of ten years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent of the total combined voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the per Share exercise price shall be no less than 110% of the Fair Market Value
per Share on the date of grant.
(B) granted to any Employee other than an Employee described
in paragraph (A) immediately above, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
-7-
<PAGE>
(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price of less than 100% of the Fair Market Value per Share on
the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions that must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares that (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) other consideration and method of payment for the issuance
of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
-----------------------------------------------
hereunder shall be exercisable according to the terms of the Plan and at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Unless the Administrator provides otherwise, vesting
of Options granted hereunder shall be tolled during any unpaid leave of absence.
An Option may not be exercised for a fraction of a Share.
-8-
<PAGE>
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence
of a specified time in the Option Agreement, the Option shall remain exercisable
for three months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later
-9-
<PAGE>
than the expiration of the term of such Option as set forth in the Notice of
Grant), by the Optionee's estate or by a person who acquires the right to
exercise the Option by bequest or inheritance, but only to the extent that the
Option is vested on the date of death. In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for twelve months
following the Optionee's termination. If, at the time of death, the Optionee is
not vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall immediately revert to the Plan. The Option may be
exercised by the executor or administrator of the Optionee's estate or, if none,
by the person(s) entitled to exercise the Option under the Optionee's will or
the laws of descent or distribution. If the Option is not so exercised within
the time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash, Shares or otherwise an Option previously granted
based on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
(f) Other Provisions. The Option Agreement shall contain such other
----------------
terms, provisions and conditions not inconsistent with the Plan as may be
determined by the Administrator in its sole discretion.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash, Shares or otherwise an Option previously granted
based on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
-10-
<PAGE>
(d) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(e) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. An Option or
--------------------------------------------------------
Stock Purchase Right may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset
------------------------------------------------------------------------
Sale.
----
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or
-11-
<PAGE>
liquidation takes place at the time and in the manner contemplated. To the
extent it has not been previously exercised, an Option or Stock Purchase Right
will terminate immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
--------------------
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option and Stock Purchase Right shall be assumed
or an equivalent option or right substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the Option or Stock
Purchase Right, the Optionee shall fully vest in and have the right to exercise
the Option or Stock Purchase Right as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an
Option or Stock Purchase Right becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen days from the date of such notice, and the Option or Stock
Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend, alter,
-------------------------
suspend or terminate the Plan.
(b) Stockholder Approval. The Company shall obtain stockholder approval
--------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
-12-
<PAGE>
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan, will
---------------------
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Stockholder Approval. The Plan shall be subject to approval by the
--------------------
stockholders of the Company within twelve months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-13-
<PAGE>
ANNEX B
CONCENTRIC NETWORK CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1997 Employee Stock Purchase
Plan of Concentric Network Corporation.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean Concentric Network Corporation and any
-------
Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings
------------
and commissions, but exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary that has been
---------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
--------
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
---------------
Period.
<PAGE>
(i) "Exercise Date" shall mean the last day of each Purchase Period.
-------------
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock exchange or
a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market
Value shall be the closing sales price for such stock (or the closing bid, if no
sales were reported) as quoted on such exchange or system for the last market
trading day prior to the date of such determination, as reported in The Wall
Street Journal or such other source as the Board or its committee administering
the Plan deems reliable, or;
(2) If the Common Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean of the closing bid and asked prices for the Common Stock for the last
market trading day prior to the date of such determination, as reported in The
Wall Street Journal or such other source as the Board or its committee deems
reliable, or;
(3) In the absence of an established market for the Common Stock, the
Fair Market Value thereof shall be determined in good faith by the Board or its
committee, or;
(4) For purposes of the Enrollment Date of the first Offering Period
under the Plan, the Fair Market Value shall be the initial price to the public
as set forth in the final prospectus included within the registration statement
in Form S-1 filed with the Securities and Exchange Commission for the initial
public offering of the Company's Common Stock (the "Registration Statement").
(k) "Offering Periods" shall mean the periods of approximately twenty-
----------------
four (24) months during which an option granted pursuant to the Plan may be
exercised, commencing on the first Trading Day on or after February 15 and
August 15 of each year and terminating on the last Trading Day in the periods
ending twenty-four months later; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and end on the last Trading Day on or before
February 14, 1999. The duration and timing of Offering Periods may be changed
pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
----
(m) "Purchase Price" shall mean an amount equal to 85% of the Fair
--------------
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(n) "Purchase Period" shall mean the approximately six-month period
---------------
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first
-2-
<PAGE>
Purchase Period of any Offering Period shall commence on the Enrollment Date and
end with the next Exercise Date.
(o) "Reserves" shall mean the number of shares of Common Stock covered
--------
by each option under the Plan that have not yet been exercised and the number of
shares of Common Stock that have been authorized for issuance under the Plan but
not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after February 15 and August 15 each year, or on such other
date as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
February 14, 1999. The Board or its committee shall have the power to change
the duration of Offering Periods (including the commencement dates thereof) with
respect to future offerings without shareholder approval if such change is
announced at least five (5) days prior to the scheduled beginning of the first
Offering Period to be affected thereafter.
5. Participation.
-------------
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<PAGE>
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten (10%) of the
Compensation that he or she receives on each pay day during the Offering Period.
(b) All payroll deductions made for a participant shall be credited to
his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the Plan
as provided in Section 10 hereof, or may increase or decrease the rate of his or
her payroll deductions during the Offering Period by completing or filing with
the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period that is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, that arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any
-4-
<PAGE>
withholding required to make available to the Company any tax deductions or
benefits attributable to sale or early disposition of Common Stock by the
Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than
25,000 shares of the Company's Common Stock (subject to any adjustment pursuant
to Section 19) on the Enrollment Date, and provided further that such purchase
shall be subject to the limitations set forth in Sections 3(b) and 12 hereof.
Exercise of the option shall occur as provided in Section 8 hereof, unless the
participant has withdrawn pursuant to Section 10 hereof. The option shall
expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account that are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
-5-
<PAGE>
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan that
may hereafter be adopted by the Company or in succeeding Offering Periods that
commence after the termination of the Offering Period from which the participant
withdraws.
11. Termination of Employment.
-------------------------
Upon a participant's ceasing to be an Employee for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 500,000 shares, plus an annual increase to be added on the first day of
the Company's fiscal year beginning in 1999 equal to the lesser of (i) 400,000
shares, (ii) 2% of the outstanding shares on such date or (iii) an amount
determined by the Board. If, on a given Exercise Date, the number of shares
with respect to which options are to be exercised exceeds the number of shares
then available under the Plan, the Company shall make a pro rata allocation of
the shares remaining available for purchase in as uniform a manner as shall be
practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in shares
covered by her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and
-6-
<PAGE>
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a beneficiary validly designated under the Plan who is living
at the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant
-------
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
--------------------
-7-
<PAGE>
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan that has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Periods then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board or its
Committee. The New Exercise Date shall be before the date of the Company's
proposed dissolution or liquidation. The Board or its committee shall notify
each participant in writing, at least ten (10) business days prior to the New
Exercise Date, that the Exercise Date for the participant's option has been
changed to the New Exercise Date and that the participant's option shall be
exercised automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the Offering Period as provided in Section 10
hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board or its committee shall notify each
participant in writing, at least ten (10) business days prior to the New
Exercise Date, that the Exercise Date for the participant's option has been
changed to the New Exercise Date and that the participant's option shall be
exercised automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the Offering Period as provided in Section 10
hereof.
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can
-8-
<PAGE>
affect options previously granted, provided that an Offering Period may be
terminated by the Board of Directors on any Exercise Date if the Board
determines that the termination of the Plan is in the best interests of the
Company and its shareholders. Except as provided in Section 19 hereof, no
amendment may make any change in any option theretofore granted that adversely
affects the rights of any participant. To the extent necessary to comply with
Section 423 of the Code (or any successor rule or provision or any other
applicable law, regulation or stock exchange rule), the Company shall obtain
shareholder approval in such a manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board or its committee shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board or its committee determines in its sole discretion advisable that
are consistent with the Plan.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
-9-
<PAGE>
Please mark [x]
your votes
as indicated
AUTHORITY
FOR THE TO VOTE
1. Election of Directors NOMINEE WITHHELD
Nominee: GORDON C. MARTIN [_] [_]
2. Proposal to amend the Company's 1997 Stock Plan to increase the number of
shares available for issuance thereunder by 750,000 shares to an aggregate of
2,250,000 shares.
FOR AGAINST ABSTAIN
[_] [_] [_]
3. Proposal to amend the Company's 1997 Employee Stock Purchase Plan to provide
for an annual increase in the number of shares reserved for issuance
thereunder equal to the lender of: (i) 400,000 shares, (ii) 29% of the
outstanding shares of Common Stock and the Company or (iii) a number of
shares determined by the Board of Directors.
FOR AGAINST ABSTAIN
[_] [_] [_]
4. Proposal to ratify the appointment of Ernst & Young LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1998.
FOR AGAINST ABSTAIN
[_] [_] [_]
I Plan to attend the meeting. [_]
In their discretion, the Proxies are entitled to vote upon such other matters as
may properly come before the meeting or any adjournments thereof.
Dated: ________________________________________, 1998
Signature: __________________________________________
Signature: __________________________________________
(This proxy should be marked, dated and signed by each stockholder exactly as
such stockholder's name appears hereon, and reprinted promptly in the enclosed
envelope. Persons signing in a fiduciary capacity should so indicate. A
corporation is requested to sign its name by its President or other authorized
officer, with the office held designated. If shares are held by joint tenants
or as community property, both holders should sign.)
TO ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, PLEASE MARK, SIGN AND DATE
THIS PROXY AND RETURN IT AS PROMPTLY AS POSSIBLE.
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FOLD AND DETACH HERE
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THE PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
CONCENTRIC NETWORK CORPORATION
PROXY FOR 1998 ANNUAL MEETING OF STOCKHOLDERS
MAY 20, 1998
The undersigned shareholder of Concentric Network Corporation (the
"Company") hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement for the 1998 Annual Meeting of Stockholders of
the Company to be held on May 20, 1998 at 10:00 a.m., local time, at the
Company's principal place of business, 10590 North Tantau Avenue, Cupertino,
California 90514 (telephone (408)342-2800), and hereby revokes all previous
proxies and appoints Henry R. Nothhaft and Michael F. Anthofer or either of
them, with full power of substitution, Proxies and Attorneys-in-Fact, on behalf
and in the name of the undersigned, to vote and otherwise represents all of the
shares registered in the name of the undersigned at said Annual Meeting, or any
adjournment thereof, with the same effect as if the undersigned were present and
voting such shares, on the matters and in the manner specified on the reverse
side:
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE. IF NO SPECIFICATION IS MADE, THE SHARES REPRESENTED BY
THIS PROXY WILL BE VOTED FOR EACH OF THE FOLLOWING PERSONS AND PROPOSALS, AND
FOR SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING AS THE
PROXYHOLDERS DEEM ADVISABLE.
(Continued and to be signed on reverse side)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
