<PAGE>
SCHEDULE 14A
(RULE 14a-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
[ X ] Definitive proxy statement
[] Definitive additional materials
[] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
DIGITAL ISLAND, INC.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in 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 the 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 Rule 0-11 (Set forth the amount on which the
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>
DIGITAL ISLAND, INC.
45 Fremont Street, 12th Floor
San Francisco, CA 94105
(415) 738-4100
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 20, 2000
TO THE STOCKHOLDERS OF DIGITAL ISLAND, INC.:
The annual meeting of stockholders of DIGITAL ISLAND, INC., a Delaware
corporation (the "Company"), will be held on Thursday, April 20, 2000 at 10:00
a.m., local time, at the Park Hyatt Hotel, 333 Battery Street, San Francisco,
California, 94111 for the following purposes:
1. To elect two directors to serve for a three-year term ending in the
year 2003 or until their successors are duly elected and qualified;
2. To approve a series of amendments to the Digital Island 1999 Stock
Incentive Plan which will (i) increase the number of shares of Digital
Island common stock available for issuance under the 1999 plan by an
additional 3,000,000 shares, (ii) effect the following changes to the
automatic share increase provisions of the 1999 plan: (a) increase the
number of shares of common stock by which the share reserve will
automatically increase on the first trading day of each calendar year,
beginning with calendar year 2001, from 4% to 4.75% of the total number
of shares of Digital Island common stock outstanding on the last
trading day of the immediately preceding calendar year and (b) increase
the limit on such annual increase from 2,000,000 shares to 5,000,000
shares, subject to adjustment for subsequent stock splits, stock
dividends and similar transactions and (iii) effect the following
changes to the automatic option grant program in effect for the non-
employee board members under the 1999 plan: (x) increase the number of
shares of common stock for which each new non-employee board member is
to be granted a stock option at the time of his or her initial election
or appointment to the board from 15,000 shares to 30,000 shares and (y)
increase the number of shares of common stock for which each continuing
non-employee board member is to be granted stock options at each annual
stockholders meeting from 5,000 shares to 10,000 shares, beginning with
the 2000 Annual Stockholders Meeting;
3. To ratify the appointment of PricewaterhouseCoopers LLP as our
independent auditors for the year ending September 30, 2000; and
4. To transact such other business as may properly come before the annual
meeting and any adjournment or postponement thereof.
The foregoing matters are described in more detail in the enclosed proxy
statement. The board of directors has fixed the close of business on March 16,
2000, as the record date for the determination of the stockholders entitled to
notice of, and to vote at, the annual meeting and any postponement or
adjournment thereof. Only those stockholders of record of the Company as of
the close of business on that date will be entitled to vote at the annual
meeting or any postponement or adjournment thereof. A list of stockholders
entitled to vote at the annual meeting will be available for inspection at the
executive offices of the Company.
All stockholders are cordially invited to attend the meeting in person.
Whether or not you plan to attend, please sign and return the enclosed proxy
as promptly as possible in the envelope enclosed for your convenience. Should
you receive more than one proxy because your shares are registered in
different names and addresses, each proxy should be signed and returned to
assure that all of your shares will be voted. You may revoke your proxy at any
time prior to the annual meeting. If you attend the annual meeting and vote by
ballot, your proxy will be revoked automatically and only your vote at the
annual meeting will be counted.
<PAGE>
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
PLEASE READ THE ATTACHED PROXY STATEMENT CAREFULLY, COMPLETE, SIGN AND DATE
THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE AND RETURN IT IN THE ENCLOSED
ENVELOPE.
By Order of the Board of Directors,
/s/ T.L. Thompson
-------------------------------------
T.L. Thompson
Secretary
San Francisco, California
March 23, 2000
<PAGE>
DIGITAL ISLAND, INC.
45 Fremont Street, 12th Floor
San Francisco, CA 94105
(415) 738-4100
PROXY STATEMENT
Your vote at the annual meeting is important to us. Please vote your shares
of common stock by completing the enclosed proxy card and returning it to us
in the enclosed envelope. This proxy statement has information about the
annual meeting and was prepared by our management for the board of directors.
This proxy statement and the accompanying proxy card are first being mailed to
you on or about March 23, 2000.
GENERAL INFORMATION ABOUT VOTING
Who can vote?
You can vote your shares of common stock if our records show that you owned
the shares on March 16, 2000. A total of 66,824,637 shares of common stock can
vote at the annual meeting. You get one vote for each share of common stock.
The enclosed proxy card shows the number of shares you can vote.
How do I vote by proxy?
Follow the instructions on the enclosed proxy card to vote on each proposal
to be considered at the annual meeting. Sign and date the proxy card and mail
it back to us in the enclosed envelope. If the proxy card is properly signed
and returned, the proxyholders named on the proxy card will vote your shares
as you instruct. If you sign and return the proxy card but do not vote on a
proposal, the proxyholders will vote for you on that proposal. Unless you
instruct otherwise, the proxyholders will vote FOR each of the two director
nominees and FOR each of the other proposals to be considered at the meeting.
What if other matters come up at the annual meeting?
The matters described in this proxy statement are the only matters we know
will be voted on at the annual meeting. If other matters are properly
presented at the meeting, the proxyholders will vote your shares as they see
fit.
Can I change my vote after I return my proxy card?
Yes. At any time before the vote on a proposal, you can change your vote
either by filing with our Secretary at our principal executive offices at 45
Fremont Street, 12th Floor, San Francisco, CA 94105, a written notice revoking
your proxy card or by signing, dating and returning to us a new proxy card. We
will honor the proxy card with the latest date. You may also revoke your proxy
by attending the annual meeting and voting in person.
Can I vote in person at the annual meeting rather than by completing the proxy
card?
Although we encourage you to complete and return the proxy card to ensure
that your vote is counted, you can attend the annual meeting and vote your
shares in person.
What do I do if my shares are held in "street name"?
If your shares are held in the name of your broker, a bank, or other
nominee, that party should give you instructions for voting your shares.
1
<PAGE>
How are votes counted?
We will hold the annual meeting if holders of a majority of the shares of
common stock entitled to vote either sign and return their proxy cards or
attend the meeting. If you sign and return your proxy card, your shares will
be counted to determine whether we have a quorum even if you abstain or fail
to vote on any of the proposals listed on the proxy card.
If your shares are held in the name of a nominee, and you do not tell the
nominee how to vote your shares (so-called "broker nonvotes"), the nominee can
vote them as it sees fit only on matters that are determined to be routine,
and not on any other proposal. Broker nonvotes will be counted as present to
determine if a quorum exists but will not be counted as present and entitled
to vote on any nonroutine proposal.
Who pays for this proxy solicitation?
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional solicitation materials furnished to the stockholders.
Copies of solicitation materials will be furnished to brokerage houses,
fiduciaries and custodians holding shares in their names that are beneficially
owned by others so that they may forward this solicitation material to such
beneficial owners. In addition, the Company may reimburse such persons for
their costs in forwarding the solicitation materials to such beneficial
owners. The original solicitation of proxies by mail may be supplemented by a
solicitation by telephone, telegram or other means by directors, officers or
employees of the Company. No additional compensation will be paid to these
individuals for any such services. Except as described above, the Company does
not presently intend to solicit proxies other than by mail.
STOCKHOLDER PROPOSALS
To be included in the proxy statement and form of proxy relating to the
annual meeting to be held in 2001, a stockholder proposal must be received by
T.L Thompson, Chief Financial Officer and Secretary, Digital Island, Inc., 45
Fremont Street, 12th Floor, San Francisco, CA 94105 no later than December 21,
2000. If the Company is not notified of a stockholder proposal by February 6,
2001, then the proxy solicited by the board of directors for the 2001 annual
meeting will confer discretionary authority to vote against such stockholder
proposal.
PROPOSAL NO. 1:
ELECTION OF DIRECTORS
Our board of directors is divided into three classes with staggered three-
year terms with each class consisting as nearly as possible, of one-third of
the total number of directors. The number of directors is determined from time
to time by the board of directors and is currently fixed at nine members.
Effective at the time of the Annual Meeting, the size of the board of
directors will be reduced from nine members to seven members.
On December 28, 1999, we completed our acquisition of Sandpiper Networks,
Inc. The merger agreement provided that, upon completion of the merger, the
board of directors of Digital Island would be set to nine members--four
designees of Digital Island, three designees of Sandpiper Networks and two
mutually acceptable outside directors. The current board of directors
facilitated the integration of Digital Island and Sandpiper after the merger.
However, pursuant to the merger agreement and as part of the merger
transition, two directors--one Digital Island designee and one Sandpiper
designee--are required to come off the board within six months of the merger.
Consequently, at the annual meeting, Cliff Higgerson (as the Digital Island
designee) and Robert Kibble (as the Sandpiper designee), who are both
currently Class I directors, will not stand for re-election as Class I
directors.
The new seven member board of directors, effective as of the annual meeting,
will consist of two Class I directors, two Class II directors, and three Class
III directors. In connection with the restructuring of the board
2
<PAGE>
of directors, Charlie Bass, who is currently a Class II director, will resign
as a Class II director effective as of the annual meeting and will stand for
election as a Class I director at the annual meeting.
Pursuant to our certificate of incorporation and bylaws, the board of
directors expects to review the size of the board of directors from time to
time, and if suitable outside candidates are available, the board may increase
the size of the board of directors.
A single class of directors is elected each year at the annual meeting.
Subject to transition provisions, each director elected at each such meeting
will serve for a term ending on the date of the third annual meeting of
stockholders after his election or until his successor has been elected and
duly qualified.
Two directors are to be elected at this annual meeting to serve until the
2003 annual meeting, or until the successors are duly elected and qualified.
If the nominee is unable or unwilling to serve as a director, the proxies may
be voted for any substitute nominee designated by the present board of
directors or the proxy holders to fill such vacancy, or the board of directors
may be reduced in accordance with our bylaws. The board of directors has no
reason to believe that the persons named will be unable or unwilling to serve
as nominees or as directors if elected.
Unless otherwise instructed, the proxy holders will vote the proxies
received by them FOR the nominees named below.
Set forth below is certain information concerning the nominees and the other
incumbent directors:
DIRECTOR TO BE ELECTED AT THE 2000 ANNUAL MEETING
Ruann F. Ernst. Ms. Ernst has served as Chairman of the Board since December
1999 and as Chief Executive Officer and as a director since June 1998. She was
President from June 1998 until the closing of the Sandpiper merger in December
1999. Prior to joining Digital Island, Ms. Ernst served with Hewlett Packard,
a computer equipment and services company, for approximately ten years, most
recently as general manager of the Financial Services Business Unit. Ms. Ernst
has also served as Director, Medical Computing Services Division and Assistant
Professor, Medicine and Computer Science at The Ohio State University and as a
Congressional Fellow in the Office of Technology Assessment. Ms. Ernst serves
on the Board of Directors of The Institute for the Future, Phoenix
International and Advanced Fibre Communications, Inc. Ms. Ernst holds a B.S.
in Mathematics, a Masters Degree in Computer Science and a Ph.D. in Technology
and Organizational Change from The Ohio State University.
Charlie Bass. Dr. Bass has served as a director since March 1997. Dr. Bass
is Trustee of The Bass Trust and General Partner of Bass Associates. He also
serves on the board of directors of Socket Communications, Inc. and on the
board of directors of several private communications companies. Prior to co-
founding Ungermann-Bass in 1979, Dr. Bass was at Zilog, Inc., and prior to the
formation of Zilog, Inc. in 1975, he was on the Electrical Engineering and
Computer Sciences faculty at the University of California at Berkeley from
1972 to 1975. Dr. Bass holds a Ph.D. in Electrical Engineering from the
University of Hawaii where he participated in the Aloha System research in
radio frequency-based computer networks.
DIRECTORS WHOSE TERMS EXPIRE IN 2001
Shahan Soghikian. Mr. Soghikian has served as a director since February
1999. He has over fourteen years of private equity and investment banking
experience, and is a General Partner and head of the West Coast office of
Chase Capital Partners. Since joining Chase Capital in 1990, Mr. Soghikian has
been involved with numerous venture investments and was responsible for
developing and managing the firm's European activities from 1994 to 1998. He
currently serves as a director of Ninth House Network, Complient, Halo Data
Devices, MetroOptix,
3
<PAGE>
Coactive Networks, Nextec Applications and DJ Orthopedics. He received his
B.A. from Pitzer College and an M.B.A. from the Anderson School of Business at
the University of California at Los Angeles.
Leo Spiegel. Mr. Spiegel has served as President since December 1999 and
previously served as Sandpiper's President and Chief Executive Officer and as
a director of Sandpiper since January 1998. From February 1996 to January
1998, Mr. Spiegel served as Senior Vice President and Chief Technology Officer
of Donnelley Enterprise Solutions, Inc., an information management firm. From
June 1995 to February 1996, Mr. Spiegel serves as a Senior Vice President of
Donnelley Business Services, a subsidiary of R.R. Donnelley and Sons Company.
From May 1991 to June 1995, Mr. Spiegel was the Executive Vice President and
Chief Technology Officer of LANSystems, a network utilities software developer
and international systems integration firm which he co-founded. Mr. Spiegel
holds a B.A. from the University of California, San Diego.
DIRECTORS WHOSE TERMS EXPIRE IN 2002
Christos Cotsakos. Mr. Cotsakos has served as a director of Digital Island
since July 1998. Mr. Cotsakos joined E*TRADE, an online financial services
company, in March 1996 as the President and Chief Executive Officer and as a
director. Before joining E*TRADE, he served as President, Chief Operating
Officer, Co-Chief Executive Officer and a director of AC Nielsen Inc., a
marketing research company. Prior to joining AC Nielsen, Mr. Cotsakos spent 19
years with Federal Express Corporation, where he held a number of senior
executive positions. In addition to E*TRADE, Mr. Cotsakos serves on the boards
of directors of Critical Path, Inc., Fox Entertainment Group, Inc., National
Processing, Inc., Official Payments Corp., PlanetRx.com, Inc. and Tickets.com,
Inc., as well as several private companies. A decorated Vietnam veteran, he
received a B.A. from William Paterson College and an M.B.A. from Pepperdine
University. Mr. Cotsakos is currently pursuing a Ph.D. degree in economics at
the University of London.
Marcelo Gumucio. Mr. Gumucio has served as a director since January 1998,
and served as Chairman of the board of directors from January 1998 until May
1998. He is the managing partner of Gumucio Burke & Associates, a private
investment firm. In April 1996, Mr. Gumucio joined Micro Focus PLC, an
enterprise software provider, as its Chief Executive Officer. He had served as
a non-executive director of Micro Focus' board of directors since January
1996. Prior to joining Micro Focus, from 1992 to 1996, Mr. Gumucio was
President, Chief Executive Officer and Chairman of the board of directors of
Memorex Telex NV. Mr. Gumucio's professional experience in the computer and
communications industry spans almost 30 years and includes senior management
positions at Cray Research, Inc., Northern Telecom Limited, Memorex
Corporation and Hewlett-Packard Company. Mr. Gumucio serves on the board of
directors of BidCom Inc., Burr Brown Corporation and E-Stamp Corporation. Mr.
Gumucio graduated cum laude with a B.S. in mathematics from the University of
San Francisco in 1960. He received an M.S. in applied mathematics and
operations research in 1963 from the University of Idaho, where he was named a
National Science Fellow and graduated with honors. In 1982, he graduated from
the Harvard Business School Advanced Management Program.
G. Bradford Jones. Mr. Jones has served as a director since December 1999.
Mr. Jones is a founding General Partner at Redpoint Ventures, a venture
capital fund which invests in Internet communications, media and commerce
companies. Prior to founding Redpoint Ventures in 1999, Mr. Jones was a
General Partner with Brentwood Venture Capital, which he joined in 1981. Mr.
Jones also currently serves on the board of directors of Onyx Acceptance
Corporation, a specialized consumer finance company, Interpore International,
a medical device company, Trading Edge, an Internet-based fixed income
securities broker, Stamps.com, an Internet postage company, and several
privately-held companies. Mr. Jones received a B.S. in Chemistry from Harvard
University, a M.S. degree in Physics from Harvard University and a J.D./M.B.A.
from Stanford University.
4
<PAGE>
THE BOARD OF DIRECTORS AND COMMITTEES
Our board of directors held eight meetings during the fiscal year end 1999.
All directors attended or participated in more than 75% of the aggregate of
(i) the total number of meetings of the board and (ii) the total number of
meetings of the committees of the board of directors on which they served.
The audit committee currently consists of Marcelo Gumucio, Cliff Higgerson
and G. Bradford Jones. The Audit Committee met one time during the fiscal year
end 1999. The audit committee reviews our financial statements and accounting
practices, makes recommendations to the board of directors regarding the
selection of independent auditors and reviews the results and scope of our
annual audit and other services provided by our independent auditors.
The compensation committee currently consists of Charlie Bass, Christos
Cotsakos and Robert Kibble. The Compensation Committee met five times during
the fiscal year end 1999. The compensation committee makes recommendations to
the board of directors concerning salaries and incentive compensation for our
officers and employees and administers our employee benefit plans including
the grant of options under those plans.
The finance committee currently consists of Ruann F. Ernst, G. Bradford
Jones and Shahan Soghikian. The finance committee was established on January
20, 2000 and held no meetings during the fiscal year end 1999. The finance
committee makes recommendations to the board of directors concerning financing
transactions, investments, acquisitions and partnerships. The finance
committee has the authority to approve the final terms and conditions of
acquisitions and investments of $50 million or less.
The nominating committee currently consists of Marcelo Gumucio, Shahan
Soghikian and Leo Spiegel and held no meetings during the fiscal year end
1999. The nominating committee makes recommendations to the board of directors
concerning candidates for directorships.
The special stock option committee of the board of directors currently
consists solely of Ruann Ernst and held no meetings during the fiscal year end
1999. The special stock option committee has the authority, separate from the
compensation committee, to make discretionary option grants to eligible
individuals other than officers or non-employee members of the board of
directors and the committee acted by action by written consent on six separate
occasions during the last fiscal year.
Director Compensation
Board members who are not employees do not receive cash compensation for
their services. However, under the automatic option grant program in effect
under the company's 1999 Stock Incentive Plan, an automatic option grant for
10,000 shares of common stock will be made at each annual stockholders
meeting, beginning with the 2000 annual meeting, to each individual who is to
continue to serve as a non-employee board member, whether or not his or her
class of directors is standing for re-election at that particular annual
meeting. The increase in the number of shares subject to such annual option
grant from 5,000 to 10,000 shares is subject to stockholder approval of
Proposal No. 2 at the annual meeting. Each annual option grant will have an
exercise price equal to the fair market value of the option shares on the
grant date and will be vested as to all the option shares immediately upon the
grant date. The option will have a maximum term of 10 years measured from the
grant date, subject to earlier termination upon the optionee's cessation of
service on the board.
Each new non-employee board member will, upon his or her initial election or
appointment to the board receive an automatic option grant for 30,000 shares
of common stock, if Proposal No. 2 is approved by the stockholders at the
annual meeting. In the absence of such stockholder approval, the number of
shares of common stock subject to such initial option grant will remain at the
current level of 15,000 shares. Each such initial option grant will have an
exercise price equal to the fair market value of the option shares on the
grant date and will be immediately exercisable for all the option shares.
However, any shares purchased under the option will be subject to repurchase
by us, at the option exercise paid per share, upon the optionee's cessation of
5
<PAGE>
board service prior to vesting in the shares. The shares subject to each such
initial 30,000 options will vest in a series of 6 successive equal semi-annual
installments upon the optionee's completion of each 6-month period of board
service over the 36-month period measured from the grant date. However, the
shares will immediately vest upon certain changes in control or ownership of
the company. Each option will have a maximum term of 10 years measured from
the grant date, subject to earlier termination upon the optionee's cessation
of service on the board.
The non-employee board members are also eligible to receive discretionary
option grants and stock issuances under our 1999 Stock Incentive Plan for
their service on the board of directors.
In addition to the above stock option grant, each non-employee board member
will receive certain cash compensation beginning on the date of the annual
meeting, April 20, 2000.
For further information concerning the automatic option grant, discretionary
option grant and stock issuance programs under the 1999 plan, please see
Proposal No. 2 below.
RECOMMENDATION OF THE BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE NOMINEES
NAMED ABOVE.
PROPOSAL NO. 2:
APPROVAL OF AMENDMENTS TO DIGITAL ISLAND'S 1999
STOCK INCENTIVE PLAN
Digital Island stockholders are being asked to approve a series of
amendments to the Digital Island 1999 Stock Incentive Plan which will (i)
increase the number of shares of Digital Island common stock available for
issuance under the 1999 plan by an additional 3,000,000 shares, (ii) effect
the following changes to the automatic share increase provisions in effect
under the 1999 plan: (a) increase the number of shares of common stock by
which the share reserve will automatically increase on the first trading day
of each calendar year, beginning with calendar year 2001, from 4% to 4.75% of
the total number of shares of Digital Island common stock outstanding on the
last trading day of the immediately preceding calendar year and (b) increase
the limit on such annual increase from 2,000,000 shares to 5,000,000 shares,
subject to adjustment for subsequent stock splits, stock dividends and similar
transactions, and (iii) effect the following changes to the automatic option
grant program in effect for the non-employee board members under the 1999
plan: (x) increase the number of shares of common stock for which each new
non-employee board member is to be granted a stock option at the time of his
or her initial election or appointment to the board from 15,000 shares to
30,000 shares and (y) increase the number of shares of common stock for which
each continuing non-employee board member is to be granted stock options at
each annual stockholders meeting from 5,000 shares to 10,000 shares, beginning
with the 2000 Annual Stockholders Meeting. Digital Island's board of directors
adopted the amendments on January 20, 2000, subject to stockholder approval at
the annual meeting.
The increase to the share reserve and the amendments to the automatic share
increase provisions will assure that a sufficient reserve of Digital Island
common stock remains available under the 1999 plan in order to allow Digital
Island to continue to utilize equity incentives to attract and retain the
services of key individuals essential to Digital Island's long-term growth and
financial success. Equity incentives play a significant role in Digital
Island's efforts to remain competitive in the market for talented individuals,
and the company relies on such incentives as means to attract and retain
highly qualified individuals in the positions vital to the company's success.
The increase to the number of shares for which option grants are to be made to
both new and continuing non-employee board members under the automatic option
grant program will allow Digital Island to provide a more meaningful equity
incentive to attract and retain highly qualified individuals to serve as non-
employee board members.
6
<PAGE>
The following is a summary of the principal features of the 1999 plan, as
most recently amended. Any stockholder who wishes to obtain a copy of the
actual plan document may do so upon written request to Digital Island at 45
Fremont Street, 12th Floor, San Francisco, California 94105. The 1999 plan
serves as the successor to Digital Island's 1998 Stock Option/Stock Issuance
Plan which terminated in connection with the initial public offering of
Digital Island common stock All outstanding options under the 1998 plan at the
time of such termination were transferred to the 1999 plan.
Equity Incentive Programs
The 1999 plan consists of five separate equity incentive programs: (i) the
discretionary option grant program, (ii) the stock issuance program, (iii) the
salary investment option grant program, (iv) the automatic option grant
program for non-employee board members and (v) the director fee option grant
program. The principal features of each program are described below. The
compensation committee of the Digital Island board of directors will have the
exclusive authority to administer the discretionary option grant and stock
issuance programs with respect to option grants and stock issuances made to
Digital Island executive officers and non-employee board members and will also
have the authority to make option grants and stock issuances under those
programs to all other eligible individuals. However, the Digital Island board
of directors may at any time appoint a secondary committee of one or more
board members to have separate but concurrent authority with the compensation
committee to make option grants and stock issuances under those two programs
to individuals other than executive officers and non-employee board members.
The compensation committee will also have complete discretion to select the
individuals who are to participate in the salary investment option grant
program, but all grants made to the selected individuals will be governed by
the express terms of that program.
The term plan administrator, as used in this summary, will mean the Digital
Island compensation committee and any secondary committee, to the extent each
such entity is acting within the scope of its administrative authority under
the 1999 plan. However, neither the compensation committee nor any secondary
committee will exercise any administrative discretion under the automatic
option grant or director fee option grant program. All grants under those
programs will be made in strict compliance with the express provisions of such
programs.
Share Reserve
At present, 12,544,000 shares of Digital Island common stock are reserved
for issuance over the term of the 1999 plan. Such share reserve consists of
(i) the 7,544,000 shares of Digital Island common stock initially reserved for
issuance under the 1999 plan (including the shares of Digital Island common
stock subject to the outstanding options under the predecessor 1998 plan which
have been transferred to the 1999 plan) plus (ii) the additional 2,000,000
shares added to the reserve on January 3, 2000 pursuant to the automatic share
increase provisions of the 1999 plan plus (iii) the 3,000,000-share increase
which forms part of this Proposal. In addition, upon stockholder approval of
this Proposal, the number of shares by which the share reserve under the 1999
plan will automatically increase on the first trading day of each calendar
year, beginning with calendar year 2001, will increase from 4% to 4.75% of the
total number of shares of Digital Island common stock outstanding on the last
trading day of the immediately preceding calendar year, but in no event will
any such annual increase exceed 5,000,000 shares, subject to adjustment for
subsequent stock splits, stock dividends and similar transactions. The
increase in the annual share limit from the 2,000,000-share limit currently in
effect under the 1999 plan to the new 5,000,000-share limit is subject to
stockholder approval of this Proposal.
No participant in the 1999 plan may receive option grants, separately
exercisable stock appreciation rights or direct stock issuances for more than
750,000 shares of Digital Island common stock in total per calendar year,
subject to adjustment for subsequent stock splits, stock dividends and similar
transactions. Stockholder approval of this Proposal will also constitute
approval of that 750,000-share limitation for purposes of Internal Revenue
Code Section 162(m).
7
<PAGE>
The shares of Digital Island common stock issuable under the 1999 plan may
be drawn from shares of Digital Island authorized but unissued common stock or
from shares of Digital Island common stock which Digital Island acquires,
including shares purchased on the open market.
Shares subject to any outstanding options under the 1999 plan (including
options transferred from the 1998 plan) which expire or otherwise terminate
prior to exercise will be available for subsequent issuance. Unvested shares
issued under the 1999 plan which Digital Island subsequently purchases, at the
option exercise or direct issue price paid per share, pursuant to Digital
Island's purchase rights under the 1999 plan will be added back to the number
of shares reserved for issuance under the 1999 plan and will accordingly be
available for subsequent issuance. However, any shares subject to stock
appreciation rights exercised under the 1999 plan will not be available for
reissuance.
Eligibility
Officers and employees, non-employee board members and independent
consultants in Digital Island's service or in the service of its parent and
subsidiaries (whether now existing or subsequently established) will be
eligible to participate in the discretionary option grant and stock issuance
programs. Digital Island executive officers and other highly paid employees
will also be eligible to participate in the salary investment option grant
program. Participation in the automatic option grant and director fee option
grant programs will be limited to the non-employee members of the Digital
Island board of directors.
As of February 29, 2000, approximately 491 employees, including seven
executive officers and seven non-employee board members, were eligible to
participate in the discretionary option grant and stock issuance programs. The
seven executive officers were also eligible to participate in the salary
investment option grant program, and the seven non-employee board members were
also eligible to participate in the automatic option grant and director fee
option grant programs.
Valuation
The fair market value per share of Digital Island common stock on any
relevant date under the 1999 plan will be deemed to be equal to the closing
selling price per share on that date on the Nasdaq National Market. On
February 29, 2000, the fair market value per share of Digital Island common
stock determined on such basis was $116.125.
Discretionary Option Grant Program
The plan administrator will have complete discretion under the discretionary
option grant program to determine which eligible individuals are to receive
option grants, the time or times when those grants are to be made, the number
of shares subject to each such grant, the status of any granted option as
either an incentive stock option or a non-statutory option under the federal
tax laws, the vesting schedule (if any) to be in effect for the option grant
and the maximum term for which any granted option is to remain outstanding.
Each granted option will have an exercise price per share determined by the
plan administrator, but the exercise price will not be less than one hundred
percent of the fair market value of the option shares on the grant date. No
granted option will have a term in excess of ten years. The shares subject to
each option will generally vest in one or more installments over a specified
period of service measured from the grant date. However, one or more options
may be structured so that they will be immediately exercisable for any or all
of the option shares. The shares acquired under such immediately exercisable
options will be subject to repurchase by Digital Island, at the exercise price
paid per share, if the optionee ceases service prior to vesting in those
shares.
Upon cessation of service, the optionee will have a limited period of time
in which to exercise his or her outstanding options to the extent exercisable
for vested shares. The plan administrator will have complete discretion to
extend the period following the optionee's cessation of service during which
his or her outstanding
8
<PAGE>
options may be exercised and/or to accelerate the exercisability or vesting of
such options in whole or in part. Such discretion may be exercised at any time
while the options remain outstanding, whether before or after the optionee's
actual cessation of service.
The plan administrator is authorized to issue tandem stock appreciation
rights under the discretionary option grant program which will provide the
holders with the right to surrender their options to Digital Island for an
appreciation distribution. The amount of the distribution payable by Digital
Island will be equal to the excess of (a) the fair market value of the vested
shares of Digital Island common stock subject to the surrendered option over
(b) the aggregate exercise price payable for those shares. Such appreciation
distribution may, at the discretion of the plan administrator, be made in cash
or in shares of Digital Island common stock.
The plan administrator will also have the authority to effect the
cancellation of outstanding options under the discretionary option grant
program (including options transferred from the 1998 plan) in return for the
grant of new options for the same or a different number of option shares with
an exercise price per share based upon the fair market value of the common
stock on the new grant date.
Salary Investment Option Grant Program
Digital Island's compensation committee will have complete discretion in
implementing the salary investment option grant program for one or more
calendar years and in selecting the executive officers and other eligible
individuals who are to participate in the program for those years. As a
condition to such participation, each selected individual must, prior to the
start of the calendar year of participation, file with the compensation
committee an irrevocable authorization directing Digital Island to reduce his
or her base salary for the upcoming calendar year by a specified dollar amount
not less than $10,000 nor more than $50,000 and to apply that amount to the
acquisition of a special option grant under the program.
Each selected individual who files such a timely election will automatically
be granted a non-statutory option on the first trading day in January of the
calendar year for which that salary reduction is to be in effect. Stockholder
approval of this Proposal will also constitute pre-approval of each option
subsequently granted under the salary investment option grant program and the
subsequent exercise of that option in accordance with the terms of the program
summarized below.
The number of shares subject to each such option will be determined by
dividing the salary reduction amount by two-thirds of the fair market value
per share of Digital Island common stock on the grant date, and the exercise
price will be equal to one-third of the fair market value of the option shares
on the grant date. As a result, the total spread on the option shares at the
time of grant (the fair market value of the option shares on the grant date
less the aggregate exercise price payable for those shares) will be equal to
the amount by which the optionee's salary is to be reduced for the calendar
year. In effect, the salary reduction serves as a prepayment of the remaining
two thirds of the fair market value of the option shares on the grant date.
The option will become exercisable in a series of twelve equal monthly
installments upon the optionee's completion of each month of service in the
calendar year for which such salary reduction is in effect and will become
immediately exercisable for all the option shares on an accelerated basis
should Digital Island experience certain changes in ownership or control. Each
option will remain exercisable for any vested shares until the earlier of (i)
the expiration of the ten-year option term or (ii) the end of the two-year
period measured from the date of the optionee's cessation of service.
Stock Issuance Program
Shares may be issued under the stock issuance program at a price per share
not less than their fair market value, payable in cash or through a full-
recourse promissory note. Shares may also be issued as a bonus for past
services without any cash outlay required of the recipient. Shares of Digital
Island common stock may also be issued under the program pursuant to share
right awards which entitle the recipients to receive those shares upon
9
<PAGE>
the attainment of designated performance goals. The plan administrator will
have complete discretion under the program to determine which eligible
individuals are to receive such stock issuances or share right awards, the
time or times when those issuances or awards are to be made, the number of
shares subject to each such issuance or award and the vesting schedule to be
in effect for the stock issuance or share rights award.
The shares issued may be fully and immediately vested upon issuance or may
vest upon the completion of a designated service period or the attainment of
pre-established performance goals. The plan administrator will, however, have
the discretionary authority at any time to accelerate the vesting of any and
all unvested shares outstanding under the stock issuance program.
Outstanding share right awards under the program will automatically
terminate, and no shares of Digital Island common stock will actually be
issued in satisfaction of those awards, if the performance goals established
for such awards are not attained. The plan administrator, however, will have
the discretionary authority to issue shares of Digital Island common stock in
satisfaction of one or more outstanding share right awards as to which the
designated performance goals are not attained.
Automatic Option Grant Program
Under the automatic option grant program, eligible non-employee members of
the Digital Island board of directors will receive a series of option grants
over their period of board service. Each new non-employee board member will,
at the time of his or her initial election or appointment to the board,
receive an option grant for 30,000 shares of Digital Island common stock,
provided such individual has not previously been in Digital Island's employ.
On the date of each annual stockholders meeting, beginning with the 2000
Annual Meeting, each individual who is to continue to serve as a non-employee
board member will, whether or not his or her class of directors is standing
for re-election at that particular annual meeting, automatically be granted an
option to purchase 10,000 shares of Digital Island common stock, provided he
or she has served as a non-employee board member for at least six months.
There will be no limit on the number of such 10,000-share annual option
grants any one eligible non-employee board member may receive over his or her
period of continued board service, and non-employee board members who have
previously been in Digital Island's employ will be eligible to receive one or
more such annual option grants over their period of board service.
Stockholder approval of this Proposal will also constitute pre-approval of
each option granted under the automatic option grant program on or after the
date of the 2000 annual stockholders meeting and the subsequent exercise of
those options in accordance with the terms of the program summarized below.
Prior to such amendments, the initial option grant made to newly-elected or
appointed non-employee board members covered only 15,000 shares of common
stock, and the annual option grant to continuing non-employee board members
covered only 5,000 shares.
Each automatic grant will have an exercise price per share equal to the fair
market value per share of Digital Island common stock on the grant date and
will have a maximum term of 10 years, subject to earlier termination following
the optionee's cessation of board service. Each automatic option will be
immediately exercisable for all of the option shares. However, any unvested
shares purchased under such option will be subject to repurchase by Digital
Island, at the exercise price paid per share, should the optionee cease board
service prior to vesting in those shares. The shares subject to each initial
30,000-share automatic option grant will vest in a series of 6 successive
equal semi-annual installments upon the optionee's completion of each 6 month
period of board service over the 36-month period measured from the grant date.
However, the shares subject to each initial option grant will immediately vest
in full upon certain changes in control or ownership or upon the optionee's
death or disability while a board member. The shares subject to each annual
10,000-share automatic grant will be fully vested at the time of the option
grant. Following the optionee's cessation of board service for any reason,
each automatic option grant will remain exercisable for a 12-month period and
may be exercised during that time for any or all shares in which the optionee
is vested at the time of such cessation of board service.
10
<PAGE>
Director Fee Option Grant Program
The plan administrator will have complete discretion in implementing the
director fee option grant program for one or more calendar years. If the
program is implemented, each non-employee board member may elect, prior to the
start of each calendar year, to apply all or any portion of any annual
retainer fee otherwise payable in cash for his or her period of service on the
board for that year to the acquisition of a below-market option grant. The
option grant will be a nonstatutory option and will automatically be made on
the first trading day in January in the calendar year for which such an
election is in effect. The option will have a maximum term of 10 years
measured from the grant date and an exercise price per share equal to one-
third of the fair market value of the option shares on such date. The number
of shares subject to each option will be determined by dividing the amount of
the retainer fee applied to the acquisition of that option by two-thirds of
the fair market value per share of Digital Island common stock on the grant
date. As a result, the total spread on the option (the fair market value of
the option shares on the grant date less the aggregate exercise price payable
for those shares) will be equal to the portion of the retainer fee applied to
the acquisition of the option.
Stockholder approval of this Proposal will also constitute pre-approval of
each option subsequently granted under the director fee option grant program
and the subsequent exercise of each such option in accordance with the terms
of the program summarized below.
The option will become exercisable in a series of 12 successive equal
monthly installments upon the optionee's completion of each month of board
service in the calendar year for which the director fee election is in effect,
subject to full and immediate acceleration upon certain changes in control or
ownership or upon the optionee's death or disability while a board member.
Each option granted under the program will remain exercisable for vested
shares until the earlier of (i) the expiration of the ten-year option term or
(ii) the expiration of the two-year period measured from the date of the
optionee's cessation of board service.
Limited Stock Appreciation Rights
Limited stock appreciation rights may be granted under the discretionary
option grant program to one or more of Digital Island officers or non-employee
board members as part of their option grants, and each option granted under
the salary investment option grant, automatic option grant and director fee
option grant program will automatically include such a limited stock
appreciation right. Upon the successful completion of a hostile tender offer
for more than 50% of Digital Island's outstanding voting securities or a
change in a majority of Digital Island's board of directors as a result of one
or more contested elections for board membership, each outstanding option with
a limited stock appreciation right may be surrendered to Digital Island in
return for a cash distribution. The amount of the distribution per surrendered
option share will be equal to the excess of (i) the fair market value per
share at the time the option is surrendered or, if greater, the tender offer
price paid per share in the hostile take-over over (ii) the exercise price
payable per share under the surrendered option.
Stockholder approval of the share increases which are the subject of this
Proposal will also constitute pre-approval of each limited stock appreciation
right granted under the salary investment option grant, automatic option grant
or director fee option grant program on or after the date of the 2000 annual
stockholders meeting and the subsequent exercise of that right in accordance
with the foregoing terms.
Predecessor Plan
All outstanding options under the predecessor 1998 plan which were
transferred to the 1999 plan will continue to be governed by the terms of the
agreements evidencing those options, and no provision of the 1999 plan will
affect or otherwise modify the rights or obligations of the holders of the
transferred options with respect to their acquisition of Digital Island common
stock. However, the plan administrator has complete discretion to extend one
or more provisions of the 1999 plan to the transferred options, to the extent
those options do not otherwise contain such provisions.
11
<PAGE>
Stock Awards
The table below shows, as to Digital Island's Chief Executive Officer
("CEO"), the four other most highly compensated executive officers of Digital
Island (with base salary and bonus for the 1999 fiscal year in excess of
$100,000) and the other individuals and groups indicated, the number of shares
of common stock subject to option grants made under the 1999 plan from the
June 28, 1999 effective date of the 1999 plan through February 29, 2000,
together with the weighted average exercise price payable per share. Digital
Island has not made any direct stock issuances to date under the 1999 plan.
OPTION TRANSACTIONS
<TABLE>
<CAPTION>
Number of Shares Weighted Average
Underlying Exercise Price
Name and Position Options Granted (#) Per Share ($)
- ----------------- -------------------- ----------------
<S> <C> <C>
Ruann F. Ernst........................... 250,000 $49.44
Chief Executive Officer
Paul Evenson............................. 15,000 $38.69
Vice President of Operations
Allan Leinwand........................... -- --
Vice President of Internetwork
Engineering and Chief Technology Officer
Michael T. Sullivan...................... -- --
Vice President of Finance
Timothy Wilson........................... -- --
Vice President of Marketing
All current executive officers as a group
(7 persons)............................. 415,000 $66.96
All current non-employee directors as a
group (7 persons)....................... -- --
All employees, including current officers
who are not executive officers, as a
group (approximately 491 persons)....... 1,738,500 $62.85
</TABLE>
As of February 29, 2000, 4,943,900 shares of common stock were subject to
outstanding options under the 1999 plan, 1,750,746 shares had been issued
under the 1999 plan, and 5,849,354 shares remained available for future
issuance, assuming stockholder approval of the 3,000,000-share increase which
forms part of this Proposal.
New Plan Benefits
No options have been granted to date under the 1999 plan on the basis of the
share increases which are the subject of this Proposal. If the Proposal is
approved by the stockholders, then each of the following non-employee board
members will receive a fully-vested option grant for 10,000 shares of common
stock at the 2000 Annual Meeting with an exercise price per share equal to the
closing selling price per share of common stock on that date: Messrs. Bass,
Gumicio, Cotsakos, Jones and Soghikian.
Each non-employee board member first elected or appointed to the board at or
after the 2000 Annual Meeting will receive, on the date of his or her initial
election or appointment to the board, an option grant for 30,000 shares of
Digital Island common stock with an exercise price per share equal to the
closing selling price per share of common stock on such date.
General Provisions
Acceleration
In the event there should occur a change in control of Digital Island, each
outstanding option under the discretionary option grant program will
automatically accelerate in full, unless assumed or otherwise continued
12
<PAGE>
in effect by the successor corporation or replaced with a cash incentive
program which preserves the spread existing on the unvested option shares (the
excess of the fair market value of those shares over the option exercise price
payable for such shares) and provides for subsequent payout in accordance with
the same vesting schedule in effect for those option shares. In addition, all
unvested shares outstanding under the discretionary option grant and stock
issuance programs will immediately vest, except to the extent Digital Island's
repurchase rights with respect to those shares are to be assigned to the
successor corporation or otherwise continued in effect. The plan administrator
will have complete discretion to grant one or more options under the
discretionary option grant program which will become exercisable for all the
option shares in the event the optionee's service with Digital Island or the
successor entity is terminated (actually or constructively) within a
designated period following a change in control transaction in which those
options are assumed or otherwise continued in effect. The vesting of
outstanding shares under the stock issuance program may also be structured to
accelerate upon similar terms and conditions.
The plan administrator will have the discretion to structure one or more
option grants under the discretionary option grant program so that those
options will vest immediately upon a change in control, whether or not the
options are to be assumed or otherwise continued in effect. The plan
administrator may also structure stock issuances under the stock issuance
program so that those issuances will immediately vest upon a change in
control. The shares subject to each option under the salary investment option
grant, automatic option grant and director fee option grant programs will
immediately vest upon any change in control transaction.
A change in control will be deemed to occur upon (i) an acquisition of
Digital Island by merger or asset sale, (ii) the successful completion of a
tender offer for more than 50% of Digital Island's outstanding voting stock or
(iii) a change in the majority of the board effected through one or more
contested elections for board membership.
The acceleration of vesting in the event of a change in the ownership or
control of Digital Island may be seen as an anti-takeover provision and may
have the effect of discouraging a merger proposal, a takeover attempt or other
efforts to gain control of Digital Island.
Stockholder Rights and Option Transferability
No optionee will have any stockholder rights with respect to the option
shares until such optionee has exercised the option and paid the exercise
price for the purchased shares. Options are not assignable or transferable
other than by will or the laws of inheritance following optionee's death, and
during the optionee's lifetime, the option may only be exercised by the
optionee. However, non-statutory options may be transferred or assigned during
optionee's lifetime to one or more members of the optionee's family or to a
trust established for one or more such family members or to the optionee's
former spouse, to the extent such transfer is in connection with the
optionee's estate plan or pursuant to a domestic relations order.
Changes in Capitalization
In the event any change is made to the outstanding shares of common stock by
reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without Digital Island's receipt of consideration, appropriate adjustments
will be made to (i) the maximum number and/or class of securities issuable
under the 1999 plan, (ii) the maximum number and/or class of securities for
which any one person may be granted stock options, separately exercisable
stock appreciation rights and direct stock issuances under the 1999 plan per
calendar year, (iii) the number and/or class of securities for which grants
are subsequently to be made under the automatic option grant program to new
and continuing non-employee board members, (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option, (v) the number and/or class of securities and the exercise price per
share in effect under each outstanding option transferred from the 1998 plan
to the 1999 plan and (vi) the maximum number and/or class of securities by
which the share reserve under the 1999 plan is to increase automatically each
year. Such adjustments will be designed to preclude any dilution or
enlargement of benefits under the 1999 plan or the outstanding options
thereunder.
13
<PAGE>
Financial Assistance
The plan administrator may institute a loan program to assist one or more
participants in financing the exercise of outstanding options under the
discretionary option grant program or the purchase of shares under the stock
issuance program through full-recourse interest-bearing promissory notes.
However, the maximum amount of financing provided any participant may not
exceed the cash consideration payable for the issued shares plus all
applicable taxes incurred in connection with the acquisition of those shares.
Special Tax Election
The plan administrator may provide one or more holders of options or
unvested share issuances under the 1999 plan with the right to have Digital
Island withhold a portion of the shares otherwise issuable to such individuals
in satisfaction of the withholding taxes to which such individuals become
subject in connection with the exercise of those options or the vesting of
those shares. Alternatively, the plan administrator may allow such individuals
to deliver previously acquired shares of common stock in payment of such
withholding tax liability.
Amendment and Termination
The board may amend or modify the 1999 plan at any time, subject to any
required shareholder approval pursuant to applicable laws and regulations.
Unless sooner terminated by the board, the 1999 plan will terminate on the
earliest of (i) April 15, 2009, (ii) the date on which all shares available
for issuance under the 1999 plan have been issued as fully-vested shares or
(iii) the termination of all outstanding options in connection with certain
changes in control or ownership of Digital Island.
Federal Income Tax Consequences
Option Grants
Options granted under the 1999 plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as follows:
Incentive Options. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise made
the subject of a taxable disposition. For Federal tax purposes, dispositions
are divided into two categories: (i) qualifying and (ii) disqualifying. A
qualifying disposition occurs if the sale or other disposition is made more
than two (2) years after the date the option for the shares involved in such
sale or disposition is granted and more than one (1) year after the date the
option is exercised for those shares. If the sale or disposition occurs before
these two requirements are satisfied, then a disqualifying disposition will
result.
Upon a qualifying disposition, the optionee will recognize long-term capital
gain in an amount equal to the excess of (i) the amount realized upon the sale
or other disposition of the purchased shares over (ii) the exercise price paid
for the shares. If there is a disqualifying disposition of the shares, then
the excess of (i) the fair market value of those shares on the exercise date
over (ii) the exercise price paid for the shares will be taxable as ordinary
income to the optionee. Any additional gain or loss recognized upon the
disposition will be recognized as a capital gain or loss by the optionee.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the option exercise date over (ii) the exercise
price paid for the shares. If the optionee makes a qualifying disposition, the
Company will not be entitled to any income tax deduction.
Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised,
14
<PAGE>
equal to the excess of the fair market value of the purchased shares on the
exercise date over the exercise price paid for the shares, and the optionee
will be required to satisfy the tax withholding requirements applicable to
such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the
optionee's termination of service prior to vesting in those shares, then the
optionee will not recognize any taxable income at the time of exercise but
will have to report as ordinary income, as and when the Company's repurchase
right lapses, an amount equal to the excess of (i) the fair market value of
the shares on the date the repurchase right lapses over (ii) the exercise
price paid for the shares. The optionee may, however, elect under Section
83(b) of the Internal Revenue Code to include as ordinary income in the year
of exercise of the option an amount equal to the excess of (i) the fair market
value of the purchased shares on the exercise date over (ii) the exercise
price paid for such shares. If the Section 83(b) election is made, the
optionee will not recognize any additional income as and when the repurchase
right lapses.
The Company will be entitled to an income tax deduction equal to the amount
of ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of the Company in which such ordinary income is recognized by the
optionee.
Stock Appreciation Rights
No taxable income is recognized upon receipt of a stock appreciation right.
The holder will recognize ordinary income, in the year in which the stock
appreciation right is exercised, in an amount equal to the excess of the fair
market value of the underlying shares of common stock on the exercise date
over the base price in effect for the exercised right, and the holder will be
required to satisfy the tax withholding requirements applicable to such
income.
The Company will be entitled to an income tax deduction equal to the amount
of ordinary income recognized by the holder in connection with the exercise of
the stock appreciation right. The deduction will be allowed for the taxable
year in which such ordinary income is recognized.
Direct Stock Issuances
The tax principles applicable to direct stock issuances under the 1999 plan
will be substantially the same as those summarized above for the exercise of
non-statutory option grants.
Deductibility of Executive Compensation
The Company anticipates that any compensation deemed paid by it in
connection with the disqualifying disposition of incentive stock option shares
or the exercise of non-statutory options with exercise prices equal to the
fair market value of the option shares on the grant date will qualify as
performance-based compensation for purposes of Code Section 162(m) and will
not have to be taken into account for purposes of the $1 million limitation
per covered individual on the deductibility of the compensation paid to
certain executive officers of the Company. Accordingly, all compensation
deemed paid with respect to those options will remain deductible by the
Company without limitation under Code Section 162(m).
Accounting Treatment
Option grants under the discretionary option grant and automatic option
grant programs with exercise prices equal to the fair market value of the
option shares on the grant date will not result in any direct charge to
Digital Island's reported earnings. However, the fair value of those options
is required to be disclosed in the notes to Digital Island's financial
statements, and Digital Island must also disclose, in footnotes to its
financial statements, the pro-forma impact those options would have upon its
reported earnings were the fair value of those options at the time of grant
treated as a compensation expense. In addition, the number of outstanding
options may be a factor in determining Digital Island's earnings per share on
a fully-diluted basis.
15
<PAGE>
Option grants or stock issuances made under the 1999 plan with exercise or
issue prices less than the fair market value of the shares on the grant or
issue date will result in a direct compensation expense to Digital Island in
an amount equal to the excess of such fair market value over the exercise or
issue price. The expense must be amortized against Digital Island's earnings
over the period that the option shares or issued shares are to vest.
On March 31, 1999, the Financial Accounting Standards Board issued an
Exposure Draft of a proposed interpretation of APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Under the proposed interpretation, as modified
on August 11, 1999, option grants made to non-employee consultants (but not
non- employee board members) after December 15, 1998 will result in a direct
charge to Digital Island's reported earnings based upon the fair value of the
option measured initially as of the grant date and then subsequently on the
vesting date of each installment of the underlying option shares. Such charge
will accordingly include the appreciation in the value of the option shares
over the period between the grant date of the option (or, if later, the
effective date of the final interpretation) and the vesting date of each
installment of the option shares. In addition, if the proposed interpretation
is adopted, any options which are repriced after December 15, 1998 will also
trigger a direct charge to Digital Island's reported earnings measured by the
appreciation in the value of the underlying shares between the grant of the
repriced option (or, if later, the effective date of the final interpretation)
and the date the repriced option is exercised for those shares.
Should one or more individuals be granted tandem stock appreciation rights
under the 1999 plan, then such rights would result in a compensation expense
to be charged against Digital Island's reported earnings. Accordingly, at the
end of each fiscal quarter, the amount (if any) by which the fair market value
of the shares of common stock subject to such outstanding stock appreciation
rights has increased from the prior quarter-end would be accrued as
compensation expense, to the extent such fair market value is in excess of the
aggregate exercise price in effect for those rights.
VOTE REQUIRED
The affirmative vote of at least a majority of the shares of common stock
present in person or by proxy at the Annual Meeting and entitled to vote is
required for approval of the amendments to the 1999 plan. Should such
stockholder approval not be obtained, then the 3,000,000-share increase to the
share reserve under the 1999 plan will not be implemented, none of the
amendments to the automatic share increase provisions of the 1999 plan will
take effect, the number of shares of common stock for which each new non-
employee board member will receive an option grant at the time of his or her
initial election or appointment to the board will remain at 15,000 shares, and
the number of shares of common stock for which each continuing non-employee
board member will receive an option grant at each annual stockholders meeting
will remain at 5,000 shares. The 1999 plan will, however, continue in effect,
and option grants and direct stock issuances may continue to be made under the
1999 plan until all the shares of common stock available for issuance under
the 1999 plan, as in effect prior to the share increases which are the subject
of this Proposal, have been issued pursuant to such option grants and direct
stock issuances.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS DEEMS THIS PROPOSAL TO BE IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL OF SUCH
PROPOSAL. UNLESS AUTHORITY TO DO SO IS WITHHELD, THE PERSON(S) NAMED IN EACH
PROXY WILL VOTE THE SHARES REPRESENTED THEREBY "FOR" THE APPROVAL OF THE
AMENDMENTS TO THE DIGITAL ISLAND 1999 STOCK INCENTIVE PLAN.
16
<PAGE>
PROPOSAL NO. 3:
RATIFICATION OF APPOINTMENT OF AUDITORS
PricewaterhouseCoopers LLP has been selected by our board of directors as
our independent auditors for the year ending September 30, 2000. If
ratification of this selection of auditors is not approved by a majority of
the shares of common stock voting thereon, management will review its future
selection of auditors.
Representatives of PricewaterhouseCoopers LLP are expected to be present at
the annual meeting and will have the opportunity to make a statement if they
desire to do so. They are also expected to be available to respond to
appropriate questions.
Unless marked to the contrary, proxies received will be voted FOR
ratification of the appointment of PricewaterhouseCoopers LLP as the
independent auditors for the current year.
VOTE REQUIRED
The ratification of the appointment of PricewaterhouseCoopers LLP as our
independent auditors for the year ending September 30, 2000 requires the
affirmative vote of the holders of a majority of the shares of our common
stock present at the annual meeting in person or by proxy and entitled to
vote.
RECOMMENDATION OF THE BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RATIFICATION OF THE
APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS OUR INDEPENDENT AUDITORS.
OTHER MATTERS
Our board of directors knows of no other business that will be presented at
the annual meeting. If any other business is properly brought before the
annual meeting, proxies in the enclosed form will be voted in respect thereof
in accordance with the recommendation of the board of directors. Discretionary
authority with respect to such other matters is granted by the execution of
the enclosed proxy.
17
<PAGE>
MANAGEMENT
Officers, Directors
The following table sets forth certain information regarding our executive
officers and directors as of December 31, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Ruann F. Ernst (3)(5)... 53 Chief Executive Officer and Chairman of the Board
of Directors
Leo S. Spiegel.......... 38 President and Director
T.L. Thompson........... 53 Chief Financial Officer and Secretary
Paul Evenson............ 39 Vice President of Operations
Allan Leinwand.......... 33 Vice President of Internetwork Engineering and Chief
Technology Officer
Andrew Swart............ 40 Vice President of Software Engineering
Tim Wilson.............. 40 Vice President of Marketing
Charlie Bass (2)........ 57 Director
Christos Cotsakos (2)... 51 Director
Marcelo A. Gumucio 62
(1)(4)................. Director
Cliff Higgerson (1)..... 60 Director
G. Bradford Jones 44
(1)(3)................. Director
Robert Kibble (2)....... 56 Director
Shahan Soghikian (3)(4). 41 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Finance Committee
(4) Member of Nominating Committee
(5) Member of Special Stock Option Committee
Ruann F. Ernst. Ms. Ernst has served as Chairman of the Board since December
1999 and as Chief Executive Officer and as a director since June 1998. She was
President from June 1998 until the closing of the Sandpiper merger in December
1999. Prior to joining Digital Island, Ms. Ernst served with Hewlett Packard,
a computer equipment and services company, for approximately ten years, most
recently as general manager of the Financial Services Business Unit. Ms. Ernst
has also served as Director, Medical Computing Services Division and Assistant
Professor, Medicine and Computer Science at The Ohio State University and as a
Congressional Fellow in the Office of Technology Assessment. Ms. Ernst serves
on the Board of Directors of The Institute for the Future, Phoenix
International and Advanced Fibre Communications, Inc. Ms. Ernst holds a B.S.
in Mathematics, a Masters Degree in Computer Science and a Ph.D. in Technology
and Organizational Change from The Ohio State University.
Leo S. Spiegel. Mr. Spiegel has served as President since December 1999 and
previously served as Sandpiper's President and Chief Executive Officer and as
a director of Sandpiper since January 1998. From February 1996 to January
1998, Mr. Spiegel served as Senior Vice President and Chief Technology Officer
of Donnelley Enterprise Solutions, Inc., an information management firm. From
June 1995 to February 1996, Mr. Spiegel serves as a Senior Vice President of
Donnelley Business Services, a subsidiary of R.R. Donnelley and Sons Company.
From May 1991 to June 1995, Mr. Spiegel was the Executive Vice President and
Chief Technology Officer of LANSystems, a network utilities software developer
and international systems integration firm which he co-founded. Mr. Spiegel
holds a B.A. from the University of California, San Diego.
18
<PAGE>
T.L. Thompson. Mr. Thompson has served as Chief Financial Officer since
January 1999. Mr. Thompson served as Chief Financial Officer of Narrowline, an
Internet marketing firm, from October 1996 to November 1998. From 1989 to 1996
he served in various financial capacities at Ziff-Davis Publishing Company,
most recently as Vice President of Business Development. Mr. Thompson holds a
B.S. in Economics and an M.B.A. from Northwestern University.
Paul Evenson. Mr. Evenson has served as Vice President of Operations since
November 1998. From 1996 to 1998, Mr. Evenson served as Vice President of
Sales and Operations at Westech Communications, Inc., a communications
services firm. From 1987 to 1998, Mr. Evenson served as Vice President of
Information Technology at Montgomery Securities, an investment banking firm.
Mr. Evenson studied Engineering at Oregon State University.
Allan Leinwand. Mr. Leinwand has served as Vice President of Internetwork
Engineering and Chief Technology Officer since January 1997 and as a director
from January 1997 to February 1999. Prior to joining Digital Island, from
August 1990 to February 1997, Mr. Leinwand served as Manager, Consulting
Engineer at Cisco Systems, a network equipment provider, where he designed and
deployed global internetworks for large corporations, governments and
institutions. Mr. Leinwand also served as a network design and implementation
engineer at Hewlett Packard from 1988 to 1990. Mr. Leinwand holds a B.S. in
Computer Science from the University of Colorado, Boulder.
Andrew Swart. Mr. Swart has served as Vice President of Software Engineering
since December 1999, and previously served as Sandpiper's Vice President of
Engineering since January 1998 and as a director of Sandpiper since December
1996. Mr. Swart also served as Sandpiper's President and Chief Executive
Officer from December 1996 to January 1998. From November 1994 to December
1996, Mr. Swart was a managing director of Sandpiper Consulting LLC. Mr. Swart
holds a B.S. in Management Information Systems from the University of Texas at
Dallas.
Tim Wilson. Mr. Wilson has served as Vice President of Marketing since March
1998. From December 1996 to March 1998, Mr. Wilson served as General Manager
within the Business Communications Systems Division of Lucent Technologies, a
telecommunications equipment supplier. Mr. Wilson also served as Executive
Director and General Manager of the Business Communications Systems Division
of AT&T Australia from November 1994 to December 1996. Mr. Wilson holds a B.A.
in Physics from Bowdoin College and an M.B.A. from the Fuqua School of
Business at Duke University.
Charlie Bass. Dr. Bass has served as a director since March 1997. Dr. Bass
is Trustee of The Bass Trust and General Partner of Bass Associates. He also
serves on the board of directors of Socket Communications, Inc. and on the
board of directors of several private communications companies. Prior to co-
founding Ungermann-Bass in 1979, Dr. Bass was at Zilog, Inc., and prior to the
formation of Zilog, Inc. in 1975, he was on the Electrical Engineering and
Computer Sciences faculty at the University of California at Berkeley from
1972 to 1975. Dr. Bass holds a Ph.D. in Electrical Engineering from the
University of Hawaii where he participated in the Aloha System research in
radio frequency-based computer networks.
Christos Cotsakos. Mr. Cotsakos has served as a director of Digital Island
since July 1998. Mr. Cotsakos joined E*TRADE, an online financial services
company, in March 1996 as the President and Chief Executive Officer and as a
director. Before joining E*TRADE, he served as President, Chief Operating
Officer, Co-Chief Executive Officer and a director of AC Nielsen Inc., a
marketing research company. Prior to joining AC Nielsen, Mr. Cotsakos spent 19
years with Federal Express Corporation, where he held a number of senior
executive positions. In addition to E*TRADE, Mr. Cotsakos serves on the boards
of directors of Critical Path, Inc., Fox Entertainment Group, Inc., National
Processing, Inc., Official Payments Corp., PlanetRx.com, Inc. and Tickets.com,
Inc., as well as several private companies. A decorated Vietnam veteran, he
received a B.A. from William Paterson College and an M.B.A. from Pepperdine
University. Mr. Cotsakos is currently pursuing a Ph.D. degree in economics at
the University of London.
19
<PAGE>
Marcelo Gumucio. Mr. Gumucio has served as a director since January 1998,
and served as Chairman of the board of directors from January 1998 until May
1998. He is the managing partner of Gumucio Burke & Associates, a private
investment firm. In April 1996, Mr. Gumucio joined Micro Focus PLC, an
enterprise software provider, as its Chief Executive Officer. He had served as
a non-executive director of Micro Focus' board of directors since January
1996. Prior to joining Micro Focus, from 1992 to 1996, Mr. Gumucio was
President, Chief Executive Officer and Chairman of the board of directors of
Memorex Telex NV. Mr. Gumucio's professional experience in the computer and
communications industry spans almost 30 years and includes senior management
positions at Cray Research, Inc., Northern Telecom Limited, Memorex
Corporation and Hewlett- Packard Company. Mr. Gumucio serves on the board of
directors of BidCom Inc., Burr Brown Corporation and E-Stamp Corporation. Mr.
Gumucio graduated cum laude with a B.S. in mathematics from the University of
San Francisco in 1960. He received an M.S. in applied mathematics and
operations research in 1963 from the University of Idaho, where he was named a
National Science Fellow and graduated with honors. In 1982, he graduated from
the Harvard Business School Advanced Management Program.
Cliff Higgerson. Mr. Higgerson has served as a director since March 1997.
Mr. Higgerson has over 20 years experience with venture capital investments.
Prior to forming Communications Ventures II in the summer of 1997, he was a
General Partner of Vanguard Venture Partners, where he had been since 1992 and
where he continues to manage several portfolio companies. His 25 years of
involvement in the communications field include research, consulting,
planning, investment banking, and venture capital. Mr. Higgerson serves on the
board of directors of Advanced Fibre Communications, Inc. and Tut Systems, as
well as several private companies. Mr. Higgerson holds a B.S. in electrical
engineering from the University of Illinois and an M.B.A. from the Haas School
of Business at the University of California at Berkeley.
G. Bradford Jones. Mr. Jones has served as a director since December 1999.
Mr. Jones is a founding General Partner of Redpoint Ventures, a venture
capital fund which invests in Internet communications, media and commerce
companies. Prior to founding Redpoint Ventures in 1999, Mr. Jones was a
General Partner of Brentwood Venture Capital, which he joined in 1981. Mr.
Jones also currently serves on the board of directors of Onyx Acceptance
Corporation, a specialized consumer finance company, Interpore International,
a medical device company, Trading Edge, an Internet-based fixed income
securities broker, Stamps.com, an internet postage company, and several
privately-held companies. Mr. Jones received a B.S. in Chemistry from Harvard
University, a M.S. degree in Physics from Harvard University and a J.D./M.B.A.
from Stanford University.
Robert Kibble. Mr. Kibble has served as a director since December 1999. Mr.
Kibble is a founding Managing Partner of Mission Ventures, a San Diego-based
early-stage venture capital fund with $63 million under management. Mission
Ventures invests in information technology, healthcare and business service
companies throughout Southern California. Mr. Kibble is also a founding
General Partner of Paragon Venture Partners, a Bay Area venture firm, where he
has been actively investing for twenty years, including nearly four years as
Vice President of Citicorp Venture Capital. He is a director of a number of
private companies, including BizRate.com, KnowledgeLINK, Sitematic and
enonymous. Mr. Kibble holds an M.A. from Oxford University and an M.B.A. from
the Darden School, University of Virginia.
Shahan Soghikian. Mr. Soghikian has served as a director since February
1999. He has over fourteen years of private equity and investment banking
experience, and is a General Partner and head of the West Coast office of
Chase Capital Partners. Since joining Chase Capital in 1990, Mr. Soghikian has
been involved with numerous venture investments and was responsible for
developing and managing the firm's European activities from 1994 to 1998. He
currently serves as a director of Ninth House Network, Complient, Halo Data
Devices, MetroOptix, Coactive Networks, Nextec Applications and DJ
Orthopedics. He received his B.A. from Pitzer College and an M.B.A. from the
Anderson School of Business at the University of California at Los Angeles.
Our officers are elected by the board of directors on an annual basis and
serve until their successors have been duly elected and qualified. There are
no family relationships among any of the directors or executive officers of
the Company.
20
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
The Compensation Committee of the board of directors was formed in July
1998, and the current members of the Compensation Committee are Messrs.
Charlie Bass, Christos Cotsakos and Robert Kibble. None of the members of the
compensation committee of the board of directors was at any time since the
formation of Digital Island an officer or employee of Digital Island. No
executive officer serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving on our
board of directors or our compensation committee of the board of directors.
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table sets forth the compensation earned by our named
executive officers, which include our chief executive officer and our four
most highly compensated executive officers, for the fiscal year ended
September 30, 1999. Since such date, certain of these executive officers have
been succeeded by other persons and, we have added additional officers,
including as a result of our merger with Sandpiper Networks, Inc. For a list
of our current executive, see "Management" above. There are no other executive
officers who would have otherwise been includible in the table below on the
basis of salary and bonus earned for the 1999 fiscal year that have been
excluded by reason of his or her termination of employment or change in
executive status during the year.
The options listed in the following table were originally granted under
either our 1997 stock option and incentive plan or our 1998 stock option/stock
issuance plan. These options have been transferred to the new 1999 stock
incentive plan, but will continue to be governed by their existing terms. See
above "Proposal 2--Approval of Amendments to Digital Island's 1999 Stock
Incentive Plan."
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Securities
--------------------- Underlying All Other
Name and Principal Position(s) Year Salary($) Bonus($) Options Compensation($)
- ------------------------------ ---- ---------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Ruann F. Ernst........... 1999 $ 185,961 $ 64,250 250,000 $24,620(1)
President and Chief
Executive Officer
Ron Higgins (2).......... 1999 150,000 40,000 400,000 --
Chairman of the Board of
Directors
Paul Evenson............. 1999 146,635 27,222 200,000 --
Vice President of
Operations
Allan Leinwand........... 1999 163,333 44,000 323,000 --
Vice President of
Internetwork
Engineering and Chief
Technology Officer
Michael T. Sullivan (3).. 1999 150,000 37,250 110,000 --
Vice President of
Finance
Tim Wilson............... 1999 180,446 51,250 280,000 --
Vice President of
Marketing
</TABLE>
- --------
(1) Consists of reimbursement of rent for Ms. Ernst's apartment in San
Francisco, California.
(2) Mr. Higgins served as President and Chief Executive Officer of Digital
Island from February 1994 until June 1998, and Chairman of the Board of
Directors from June 1998 to September 1999, when he resigned from the
Board of Directors.
(3) Mr. Sullivan has served as Vice President of Finance since May 1997 and
also served as Chief Financial Officer from October 1997 to January 1999.
Mr. Sullivan is not currently an executive officer of Digital Island.
21
<PAGE>
Stock Options and Stock Appreciation Rights
The following table sets forth information regarding option grants to each
of the named executive officers during the fiscal year ended September 30,
1999. No stock appreciation rights were granted to the named executive
officers during the 1999 fiscal year.
Stock Option Grants in Fiscal Year 1999
<TABLE>
<CAPTION>
Potential Realizable
Percent of Value at Assumed
Number or Total Annual Rates of Stock
Securities Options Exercise Price Appreciation for
Underlying Granted to of Base Option Term
Options Employees Price Expiration -----------------------
Name Granted(#) in 1999 ($/Sh) Date 5% 10%
- ---- ---------- ---------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ruann F. Ernst.......... 250,000 10.4% $4.25 3/17/09 $ 668,201 $ 1,693,351
Ron Higgins............. -- -- -- -- -- --
Paul Evenson............ 150,000 6.2% 3.50 10/25/08 330,170 836,715
50,000 2.1% 4.25 3/17/09 133,640 338,670
Allan Leinwand.......... 35,000 1.5% 4.25 3/17/09 93,548 237,069
Michael T. Sullivan..... 10,000 0.4% 4.25 3/17/09 26,728 67,734
Tim Wilson.............. 40,000 1.7% 3.50 10/15/08 88,045 223,124
100,000 4.1% 4.25 3/17/09 267,280 677,341
</TABLE>
The options were granted before the initial public offering of the common
stock and have an exercise price per share which was determined by our board
of directors in its good faith judgment and generally reflects its best
estimate of the fair value of our common stock on the date of each grant,
taking into account factors such as our operating performance, recent sales of
securities, and market conditions.
Each option has a maximum term of 10 years, subject to earlier termination
upon the optionee's cessation of service with Digital Island. The option for
250,000 shares granted Ms. Ernst with an exercise price of $4.25 per share
will vest as follows: the first 234,373 shares subject to that option will
vest in a series of 45 successive equal monthly installments upon her
completion of each month of service over the 45-month period measured from
March 18, 1999, and the remaining 15,627 shares will vest in a series of 3
successive equal monthly installments over the 3-month period measured from
December 18, 2002. The option granted Mr. Evenson for 150,000 shares vested as
to 36,000 shares on October 26, 1999 and will vest as to the balance of the
shares in a series of 38 successive equal monthly installments upon his
completion of each additional month of service measured over the 38-month
period measured from October 26, 1999. The option Mr. Evenson was granted for
50,000 shares vests in a series of 48 successive equal monthly installments
upon his completion of each month of service over the 48-month period measured
from March 18, 1999. The option granted to Mr. Leinwand for 35,000 shares
vests in a series of 48 successive equal monthly installments upon his
completion of each month of service over the 48-month period measured from
March 18, 1999. The option granted to Mr. Sullivan for 10,000 shares vests in
a series of 48 successive equal monthly installments upon his completion of
each month of service over the 48-month period measured from March 18, 1999.
The option granted Mr. Wilson for 40,000 shares vested as to 9,600 shares on
October 16, 1999 and will vest as to the balance of the option shares in a
series of 38 successive equal monthly installments upon his completion of each
additional month of service of service over the 38-month period measured from
October 16, 1999. The option Mr. Wilson was granted for 100,000 shares vests
in a series of 48 successive equal monthly installments upon his completion of
each month of service over the 48-month period measured from March 18, 1999.
The actual stock price appreciation over the 10-year option term may not be
at the above 5% and 10% assumed annual rates of compounded stock price
appreciation or at any other defined level. Unless the market price of common
stock appreciates over the option term, no value will be realized from the
option grant made to the named executive officer.
22
<PAGE>
In November 1999, the board of directors granted Ms. Ernst an additional
option for 250,000 shares with an exercise price of $49.44, equal to the fair
market value of our common stock at the time of grant. This option will vest
in a series of 48 successive equal monthly installments upon her completion of
each month of service over the 48-month period measured from November 15,
1999.
In October 1999, the board of directors granted Mr. Evenson an option for
15,000 shares with an exercise price of $38.69, equal to the fair market value
of our common stock at the time of grant. This option will vest in a series of
48 successive equal monthly installments over the 48-month period measured
from October 26, 1999.
Aggregated Option/SAR Exercises and Fiscal Year-End Values
The following table sets forth information with respect to the named
executive officers concerning their exercise of stock options during the
fiscal year ended September 30, 1999 and the number of shares subject to
unexercised stock options held by them as of the close of such fiscal year. No
stock appreciation rights were exercised during the fiscal year ended
September 30, 1999, and no stock appreciation rights were outstanding at the
close of such year. In the following table, "Value Realized" is equal to the
difference between the fair value of the shares at the time of exercise ($9.90
per share) and the exercise price paid for the shares and the "Value of
Unexercised In-The-Money Options at Year-End" is based upon the fair value per
share at the close of the 1999 fiscal year ($26.00 per share) less the
exercise price payable per share.
Aggregated Option Exercises in 1999 and Year-End Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options at Year-End Options at Year-End
Acquired on Value ------------------------- -------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ruann F. Ernst.......... 133,332 $1,119,989 392,076 418,751 $9,519,925 $9,657,837
Ron Higgins............. 216,000 2,052,000 42,333 141,667 1,083,725 3,626,675
Paul Evenson............ -- -- -- 200,000 -- 4,462,500
Allan Leinwand.......... 163,733 1,555,464 14,775 144,492 361,396 3,528,289
Michael T. Sullivan..... 46,000 437,000 22,000 42,000 524,700 1,075,200
Tim Wilson.............. 53,249 445,307 49,649 177,102 1,134,256 4,152,129
</TABLE>
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
We have entered into employment agreements with Ms. Ernst, Mr. Leinwand, Mr.
Wilson, Mr. Evenson and Mr. Sullivan, each of whom are officers of Digital
Island. All outstanding options held by the foregoing officers will
automatically vest in full upon an acquisition of Digital Island by merger,
sale of substantially all the assets or sale of more than 50% of our
outstanding voting securities, unless those options are assumed or otherwise
continued in effect by a successor entity or our repurchase rights for any
unvested shares subject to those options are to remain in force following such
acquisition.
Ruann F. Ernst. Ruann F. Ernst, our Chief Executive Officer, previously
entered into an employment agreement with us on May 20, 1998 in connection
with her commencement of employment. As part of that employment agreement, Ms.
Ernst was granted options to purchase 794,159 shares of our common stock at an
exercise price of $1.50 per share. On December 15, 1999, the agreement was
amended and restated to increase her salary and bonus levels and to provide
her with enhanced severance benefits. Under the revised agreement, Ms. Ernst
will receive an annual salary of $200,000, effective March 1, 1999, and her
target bonus has been increased to $80,000 effective with the fiscal year
beginning October 1, 1999. Such bonus will become payable in quarterly
installments upon the Company's achievement of designated performance
milestones. Should
23
<PAGE>
Ms. Ernst's employment be involuntarily terminated (other than for cause) in
the absence of a change in control or ownership of Digital Island or more than
18 months following such a change in control or ownership, she will become
entitled to the following severance benefits: (i) 12 months of salary
continuation, (ii) 50% of her target bonus for the fiscal year in which her
involuntary termination occurs, provided the designated performance milestones
for that year are actually attained, (iii) continued health care coverage at
our expense for up to 12 months and (iv) 12 months of accelerated vesting of
her outstanding stock options. Should her employment be involuntarily
terminated (other than for cause) within 18 months following a change in
control or ownership of Digital Island, she will become entitled to the
following change in control severance benefits: (i) 12 months of salary
continuation, (ii) 50% of her target bonus for the fiscal year in which her
involuntary termination occurs, provided the designated performance milestones
for that year are actually attained, (iii) continued health care coverage at
our expense for up to 12 months and (iv) accelerated vesting of all her
outstanding stock options, with the right to exercise those options for up to
one year following the date of her involuntary termination. For purposes of
such severance benefits, an involuntary termination will include any
constructive termination resulting in her resignation within 90 days following
a material reduction in her duties, a reduction in her base salary or a
relocation of her principal place of employment by more than 50 miles. Should
she resign for any other reason within 6 months after a change in control or
ownership of Digital Island, her severance benefits will be limited to 24
months of accelerated vesting under her outstanding options, with the right to
exercise those options for up to one year following such resignation. Ms.
Ernst will be subject to certain non-compete covenants and consulting
obligations for up to a two-year period following her termination or
resignation.
Allan Leinwand. On February 3, 1997, Allan Leinwand, our Vice President of
Internetwork Engineering and Chief Technology Officer, entered into an
employment agreement with us. This agreement provided for an annual salary of
$105,000. Mr. Leinwand is also eligible for a discretionary quarterly bonus of
up to $10,000. Should Mr. Leinwand's employment be involuntarily terminated
(other than for cause) in the absence of a change in control or ownership of
Digital Island, we must pay Mr. Leinwand a severance payment equal to one
hundred percent of his then current annual base salary. Currently, Mr.
Leinwand's annual salary is $170,000, and he is eligible for a discretionary
quarterly bonus of up to $12,500. In addition, should Mr. Leinwand's
employment be involuntarily terminated (other than for cause) within 18 months
following a change of control or ownership of Digital Island, he will be
entitled to accelerated vesting of all of his stock options. In connection
with his employment agreement, we granted Mr. Leinwand options to purchase up
to 240,000 shares of our common stock at a per share exercise price of $0.40
per share.
Tim Wilson. On March 16, 1998, Tim Wilson, Digital Island's Vice President
of Marketing, entered into an employment agreement with Digital Island. This
agreement provided for an annual salary of $150,000. Mr. Wilson is also
eligible for a discretionary quarterly bonus of $12,500. On March 1, 1999, Mr.
Wilson's annual salary was increased to $165,000 and his discretionary
quarterly bonus was increased to $15,000. In connection with his employment
agreement, Digital Island granted Mr. Wilson options to purchase up to 140,000
shares of Digital Island common stock at a per share exercise price of $0.90
per share. Should Mr. Wilson's employment be involuntarily terminated (other
than for cause) within 18 months following a change in control or ownership of
Digital Island, he will be entitled to accelerated vesting of all his stock
options.
Paul Evenson. On October 26, 1998, Paul Evenson, Digital Island's Vice
President of Operations, entered into an employment agreement with Digital
Island. This agreement provided for an annual salary of $150,000. Mr. Evenson
is also eligible for an annual bonus of not less than $40,000 upon achievement
of specified milestones. In connection with his employment agreement, Digital
Island granted Mr. Evenson options to purchase up to 150,000 shares of Digital
Island common stock at a per share exercise price of $3.50 per share. Should
Mr. Evenson's employment be involuntarily terminated (other than for cause) in
the absence of a change in control or ownership of Digital Island or more than
18 months following such a change in control or ownership, he will become
entitled to the following severance benefits: (i) 6 months of salary
continuation, and (ii) continued health care coverage at our expense for up to
6 months. Should his employment be involuntarily terminated (other than for
cause) within 18 months following a change in control or ownership of Digital
Island, he will become entitled to accelerated vesting of all his stock
options.
24
<PAGE>
Michael T. Sullivan. On May 5, 1997, Michael T. Sullivan, our Vice President
of Finance, entered into an employment agreement with us. This agreement
provided for an annual salary of $120,000. Mr. Sullivan is also eligible for a
discretionary quarterly bonus of up to $5,000. On March 16, 1998, Mr.
Sullivan's annual salary was increased to $150,000 and his discretionary
quarterly bonus was increased to $7,500. In connection with his employment
agreement, we granted to Mr. Sullivan options to purchase up to 100,000 shares
of our common stock at a per share exercise price of $0.40 per share. Should
Mr. Sullivan's employment be involuntarily terminated within 18 months
following a change in control or ownership of Digital Island, he will be
entitled to accelerated vesting of all his stock options.
25
<PAGE>
BENEFICIAL OWNERSHIP
The following table sets forth certain information known to us with respect
to the beneficial ownership of our common stock as of February 29, 2000,
except as noted in the footnotes below by:
. all persons who are beneficial owners of 5% or more of our common stock;
. each director;
. our Chief Executive Officer and the four other most highly compensated
executive officers for the fiscal year ended September 30, 1999, whose
salary and bonus exceeded $100,000; and
. all current executive officers and directors a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned, subject to
community property laws, where applicable.
<TABLE>
<CAPTION>
Beneficial Ownership of Shares
----------------------------------
Name of Beneficial Owner Number Percent
- ------------------------ ------------------ ---------------
<S> <C> <C>
Officers and Directors:
Ruann F. Ernst (1)......................... 859,107 1.3%
Leo S. Spiegel (2)......................... 1,607,903 2.4%
T.L. Thompson (3).......................... 71,403 *
Paul Evenson (4)........................... 57,191 *
Allan Leinwand (5)......................... 201,004 *
Michael Sullivan (6)....................... 55,804 *
Andrew Swart............................... 1,839,986 2.7%
Tim Wilson (7)............................. 130,305 *
Charlie Bass (8)........................... 399,283 *
Marcelo A. Gumucio......................... 193,825 *
Christos Cotsakos (9)...................... 48,310 *
Cliff Higgerson (10)....................... -- --
G. Bradford Jones (11)..................... -- --
Robert Kibble (12)......................... -- --
Shahan Soghikian (13)...................... -- --
All directors and executive officers as a
group (15 people) (14)................... 5,464,191 8.2%
</TABLE>
- --------
* Less than 1% percent.
(1) Stock consists of 238,732 shares of common stock held directly by Ms.
Ernst and 620,375 shares of common stock subject to options exercisable
within 60 days of February 29, 2000.
(2) Consists of 1,436,341 shares of common stock held directly by Mr.
Spiegel, 85,816 shares held directly by The Hunter L. Spiegel Educational
Trust and 85,816 shares held directly by The Madison H. Spiegel
Educational Trust. Mr. Spiegel is a trustee of both of these trusts.
(3) Consists of 13,666 shares of common stock held directly by Mr. Thompson
and 57,737 shares of common stock subject to options exercisable within
60 days of February 29, 2000.
(4) Consists of 2,000 shares of common stock held directly by Mr. Evenson and
55,191 shares of common stock subject to options exercisable within 60
days of February 29, 2000.
(5) Consists of 164,933 shares of common stock held directly by Mr. Leinwand
and 36,071 shares of common stock subject to options exercisable within
60 days of February 29, 2000.
(6) Consists of 51,600 shares of common stock held directly by Mr. Sullivan
and 4,204 shares of common stock subject to options exercisable within 60
days of February 29, 2000.
26
<PAGE>
(7) Consists of 53,475 shares of common stock held directly by Mr. Wilson and
76,830 shares subject to options exercisable within 60 days of February
29, 2000.
(8) Stock consists of 399,283 shares of common stock held directly by the
Bass Trust U/D/T dated April 29, 1988 (the "Bass Trust"). Mr. Bass, a
director of Digital Island, is the Trustee of the Bass Trust.
(9) Stock consists of 11,666 shares of common stock subject to options
exercisable within 60 days of February 29, 2000 and 31,087 shares of
common stock held directly by The Cotsakos Revocable Trust, dated
September 3, 1987. Excludes 2,013,367 shares of common stock, held by
E*TRADE Group, Inc. Mr. Cotsakos, a director of Digital Island, is the
Trustee of the Cotsakos Trust and Chairman of the Board and Chief
Executive Officer of E*TRADE Group, Inc. Mr. Cotsakos disclaims
beneficial ownership of the shares of common stock held by E*TRADE Group,
Inc. except to the extent of his pecuniary interest therein.
(10) Excludes an aggregate of 2,341,727 shares held by Vanguard V, L.P. Mr.
Higgerson, a director of Digital Island, is the General Partner of
Vanguard V, L.P. Mr. Higgerson disclaims beneficial ownership of the
shares of common stock held by Vanguard V, L.P. except to the extent of
his pecuniary interest therein.
(11) Excludes an aggregate of 3,575,244 shares held by the Brentwood Venture
Capital entities. Mr. Jones, a director of Digital Island, is a General
Partner of Brentwood Venture Capital. Mr. Jones disclaims beneficial
ownership of the shares of common stock held by the Brentwood Venture
Capital entities except to the extent of his pecuniary interest therein.
(12) Excludes an aggregate of 2,542,394 shares held collectively by Mission
Ventures, L.P. and Mission Ventures Affiliates, L.P. Mr. Kibble, a
director of Digital Island, is a managing member of the general partner
of the Mission Venture entities. Mr. Kibble disclaims beneficial
ownership of the shares of common stock held by the Mission Venture
entities except to the extent of his pecuniary interest therein.
(13) Excludes 2,581,466 shares of common stock held by Chase Venture Capital
Associates, L.P. Mr. Soghikian, a director of Digital Island, is a
General Partner of Chase Capital Partners, the General Partner of Chase
Venture Capital Associates, L.P. Mr. Soghikian disclaims beneficial
ownership of the shares of common stock held by Chase Venture Capital
Associates, L.P. except to the extent of his pecuniary interest therein.
(14) See footnotes 1 through 13 above. Includes options exercisable for
862,074 shares of common stock within 60 days of February 29, 2000.
27
<PAGE>
COMPENSATION COMMITTEE REPORT ON
EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT
The Compensation Committee (the "Committee") of the Board of Directors sets
the compensation of the Chief Executive Officer, reviews the design,
administration and effectiveness of compensation programs for other key
executives and approves stock option grants for all executive officers. The
committee is composed entirely of outside directors.
Compensation Philosophy and Objectives
The Company operates in the extremely competitive and rapidly changing high
technology industry. The Committee believes that the compensation programs for
the executive officers should be designed to attract, motivate and retain
talented executives responsible for the success of the Company and should be
determined within a competitive framework and based on the achievement of
designated financial targets, individual contribution, customer satisfaction
and financial performance relative to that of the Company's competitors.
Within this overall philosophy, the Committee's objectives are to:
. Offer a total compensation program that takes into consideration the
compensation practices of a group of specifically identified peer
companies (the "Peer Companies") and other selected companies with which
the Company competes for executive talent.
. Provide annual variable incentive awards that take into account the
Company's overall financial performance in terms of designated corporate
objectives and the relative performance of the Peer Companies as well as
individual contributions.
. Align the financial interests of executive officers with those of
stockholders by providing significant equity-based, long-term
incentives.
Compensation Components and Process
The three major components of the Company's executive officer compensation
are: (i) base salary, (ii) variable incentive awards and (iii) long-term,
equity-based incentive awards. The Committee determines the compensation
levels for the executive officers with the assistance of the Company's Human
Resources Department, which works with an independent consulting firm that
furnishes the Committee with executive compensation data drawn from a
nationally recognized survey of similarly sized technology companies that have
been identified as the Peer Companies. The positions of the Company's Chief
Executive Officer and executive officers were compared with those of their
counterparts at the Peer Companies, and the market compensation levels for
comparable positions were examined to determine base salary, target incentives
and total cash compensation. In addition, the practices of the Peer Companies
concerning stock option grants were reviewed and compared.
Base Salary. The base salary for each executive officer is determined at
levels considered appropriate for comparable positions at the Peer Companies.
The Company's policy is to target base salary levels between the 50th and 75th
percentile of compensation practices at the Peer Companies.
Variable Incentive Awards. To reinforce the attainment of Company goals, the
Committee believes that a portion of the annual compensation of each executive
officer should be in the form of variable incentive pay. The annual incentive
pool for executive officers is determined on the basis of the Company's
achievement of the financial performance targets established at the beginning
of the fiscal year and also includes a range for the executive's contribution
and a strategic component tied to the Company's performance relative to a
select group of competitors. The incentive plan sets a threshold level of
Company performance based on revenue that must be attained before any
incentives are awarded. Once the fiscal year's threshold is reached, specific
formulas are in place to calculate the actual incentive payment for each
officer. A target is set for each executive officer based on targets for
comparable positions at the Peer Companies and is stated in terms of an
escalating percentage of
28
<PAGE>
the officer's base salary for the year. In fiscal 1999, the Company achieved
its corporate performance targets as well as the strategic target tied to
revenue performance relative to the selected competitor group. Awards paid
reflected those results plus individual accomplishments of both corporate and
functional objectives and a component based upon customer satisfaction.
Long-Term, Equity-Based Incentive Awards. The goal of the Company's long-
term, equity-based incentive awards is to align the interests of executive
officers with stockholders and to provide each executive officer with a
significant incentive to manage the Company from the perspective of an owner
with an equity stake in the business. The Committee determines the size of
long-term, equity-based incentives according to each executive's position
within the Company and sets a level it considers appropriate to create a
meaningful opportunity for stock ownership. In addition, the Committee takes
into account an individual's recent performance, his or her potential for
future responsibility and promotion, comparable awards made to individuals in
similar positions with the Peer Companies and the number of unvested options
held by each individual at the time of the new grant. The relative weight
given to each of these factors varies among individuals at the Committee's
discretion. During fiscal 1999, the Committee made option grants to Ms. Ernst
and Messrs. Evenson, Leinwand, Sullivan and Wilson under the Company's 1999
Stock Incentive Plan. Each grant allows the officer to acquire shares of the
Company's common stock at a fixed price per share (the market price on the
grant date) over a specified period of time. Options granted to this group of
individuals in June 1999 and later vest in periodic installments over a four-
year period, contingent upon the executive officer's continued employment with
the Company. Accordingly, the option grants will provide a return only if the
officer remains with the Company and only if the market price appreciates over
the option term.
CEO Compensation. The original compensation package for Ms. Ernst was
negotiated with her at the time she commenced her employment in June 1998 and
consisted of three components: base salary of $150,000, annual incentive
compensation of up to $60,000 and stock options for 794,159 shares with an
exercise price of $1.50 per share. On December 15, 1999, the Committee decided
to revise Ms. Ernst's compensation package, and an amended and restated
employment agreement was executed. Under the revised agreement, Ms. Ernst will
receive an annual salary of $200,000, effective March 1, 1999, and her target
bonus has been increased to $80,000 effective with the fiscal year beginning
October 1, 1999. Such bonus will become payable in quarterly installments upon
the Company's achievement of performance milestones established by the
Committee with her concurrence. The Committee believes that the revised salary
and bonus are necessary to maintain Ms. Ernst's compensation at a competitive
level in the industry. In addition, the revised agreement provides enhanced
severance benefits. Should Mr. Ernst's employment be involuntarily terminated
(other than for cause) in the absence of a change in control or ownership of
the Company or more than 18 months following such a change in control or
ownership, she will become entitled to the following severance benefits: (i)
12 months of salary continuation, (ii) 50% of her target bonus for the fiscal
year in which her involuntary termination occurs, provided the designated
performance milestones for that year are actually attained, (iii) continued
health care coverage at the Company's expense for up to 12 months and (iv) 12
months of accelerated vesting under her outstanding stock options. Should her
employment be involuntarily terminated (other than for cause) within 18 months
following a change in control or ownership of the Company, she will become
entitled to the following change in control severance benefits: (i) 12 months
of salary continuation, (ii) 50% of her target bonus for the fiscal year in
which her involuntary termination occurs, provided the designated performance
milestones for that year are actually attained, (iii) continued health care
coverage at the Company's expense for up to 12 months and (iv) accelerated
vesting of all her outstanding stock options, with the right to exercise those
options for up to one year following the date of her involuntary termination.
For purposes of such severance benefits, an involuntary termination will
include any constructive termination occasioned by her resignation within 90
days following a material reduction in her duties, a reduction in her base
salary or a relocation of her principal place of employment by more than 50
miles. Should she resign for any other reason within 6 months after a change
in control or ownership of the Company, her severance benefits will be limited
to 24 months of accelerated vesting under her outstanding options, with the
right to exercise those options for up to one year following such resignation.
In consideration for these enhanced benefits, Ms. Ernst will be subject to
certain non-compete covenants and consulting obligations for up to a two-year
period following her termination or resignation.
29
<PAGE>
Although Ms. Ernst's target bonus for the 1999 fiscal year was established
as a percentage of her base salary pursuant to her employment agreement, the
actual performance milestones for the payment of that bonus were set by the
Committee at the start of the 1999 fiscal year with her concurrence, and those
milestones were the same as those used for incentive compensation purposes for
all of the Company's other executive officers for the 1999 fiscal year. The
Committee also granted Ms. Ernst options for a total 250,000 shares during the
1999 fiscal year. The option grants were made in recognition of Ms. Ernst's
performance and leadership with the Company and were designed to provide her
with a significant incentive to remain in the Company's employ over the 4-year
vesting period in effect for those grants. In addition, the options place a
significant portion of her total compensation at risk, since those options
will have value only if the market price of the Company's common stock
appreciates over the term of those options.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code disallows a tax deduction to
publicly held companies for compensation paid to certain of their executive
officers, to the extent that compensation exceeds $1 million per covered
officer in any fiscal year. The limitation applies only to compensation that
is not considered to be performance-based. Non-performance based compensation
paid to the Company's executive officers for the 1999 fiscal year did not
exceed the $1 million limit for any officer, and the Compensation Committee
does not anticipate that the non-performance based compensation to be paid to
the Company's executive officers for fiscal 2000 will exceed that limit. The
Company's 1999 Stock Incentive Plan has been structured so that any
compensation deemed paid in connection with the exercise of option grants made
under that plan with an exercise price equal to the fair market value of the
option shares on the grant date will qualify as performance-based compensation
that will not be subject to the $1 million limitation. Because it is unlikely
that the cash compensation payable to any of the Company's executive officers
in the foreseeable future will approach the $1 million limit, the Compensation
Committee has decided at this time not to take any action to limit or
restructure the elements of cash compensation payable to the Company's
executive officers. The Compensation Committee will reconsider this decision
should the individual cash compensation of any executive officer ever approach
the $1 million level.
Other Elements of Executive Compensation
Executives are eligible for corporation-wide medical and dental benefits and
participation in a 401(k) plan under which the Company currently provides no
matching contributions. In addition, executives participate in a corporation-
wide short and long-term disability insurance program and a group term life
insurance program.
It is the opinion of the Committee that the executive compensation policies
and plans provide the necessary total remuneration program to properly align
our performance and interests of our stockholders through the use of
competitive and equitable executive compensation in a balanced and reasonable
manner, for both the short- and long-term.
Submitted by the Compensation Committee of our
Board of Directors
Charlie Bass, Christos Cotsakos and Robert Kibble
30
<PAGE>
PERFORMANCE GRAPH
The following graph shows a six month comparison of cumulative total return
on our common stock, based on the market price of our stock assuming
reinvestment of dividends with a return of the Standard and Poor's 500 Index
and the Nasdaq Stock Market (U.S.) Index, for the period beginning June 28,
1999, the day our common stock began trading, through December 31, 1999.
[LINE GRAPH]
6/28/99 6/30/99 9/30/99 12/31/99
Digital Island $100.00 $179.38 $260.00 $951.25
S&P 500 Index $100.00 $103.11 $ 96.35 $110.36
NASDAQ $100.00 $103.22 $105.52 $156.37
(1) The graph assumes that on June 28, 1999, $100 was invested in our common
stock and in each index, and that all dividends were reinvested. No cash
dividends have been declared on our common stock.
(2) Stockholder returns over the indicated period should not be considered
indicative of future stockholder results.
Notwithstanding anything to the contrary set forth in any of our previous
filings made under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings made
by us under those statutes, neither the preceding Stock Performance Graph nor
the Compensation Committee Report is to be incorporated by reference into any
such prior filings, nor shall such graph or report be incorporated by
reference into any future filings made by us under those statutes.
31
<PAGE>
CERTAIN TRANSACTIONS
Some of our directors, executive officers and affiliates have entered into
transactions with us as follows:
Preferred Stock Financings
Since October 1, 1997 we have sold 4,283,181 shares of our Series C
Preferred Stock at a price of $3.45 per share, 2,022,476 shares of our Series
D Preferred Stock at a price of $5.25 per share and 11,764,706 shares of our
Series E Preferred Stock at a price of $4.25 per share in a series of private
financings. We sold these securities pursuant to preferred stock purchase
agreements and an investors' rights agreement on substantially similar terms
(except for terms relating to date and price), under which we made standard
representations, warranties, and covenants, and pursuant to which we provided
the purchasers thereunder with registration rights, information rights, and
rights of first refusal, among other provisions standard in venture capital
financings. Each share of our preferred stock was converted into one share of
our common stock upon the completion of our initial public offering, except
that each share of Series D Preferred Stock was converted into 1.088084 shares
of our common stock, to give effect to an anti-dilution adjustment resulting
from the sale of the Series E Preferred Stock. The purchasers of the preferred
stock included, among others, the following holders of 5% or more of our
common stock, directors, and entities associated with directors at the time of
our initial public offering:
<TABLE>
<CAPTION>
Shares of Preferred Stock Purchased
-----------------------------------------
Name Series C Series D Series E
- ---- ----------- ----------- -----------
<S> <C> <C> <C>
Bass Trust U/D/T dated April 29,
1988 (1)......................... 39,420 34,095 27,765
Chase Venture Capital Associates,
L.P. (2)......................... -- -- 2,823,529
The Cotsakos Revocable Trust dated
9/3/87 (3)....................... -- 28,571 --
Crescendo II, L.P. (4)............ 289,855(5) 143,429(5) 463,294(5)
Crosspoint Venture Partners....... 289,855 -- 926,824
E*TRADE Group, Inc. (6)........... -- 1,333,334 562,588
FW Ventures III, L.P. ............ -- -- 1,822,353
Marcelo Gumucio................... 29,000 -- --
Merrill Lynch KECALP.............. -- -- 1,482,824
Tudor Global Trading, Inc. ....... 1,015,000 190,476 744,470
Vanguard V, L.P. (7).............. 260,870 142,857 --
</TABLE>
- --------
(1) Charlie Bass, a director of Digital Island, is the Trustee of the Bass
Trust U/D/T dated April 29,1988.
(2) Shahan Soghikian, a director of Digital Island, is a General Partner of
Chase Capital Partners.
(3) Christos Cotsakos, a director of Digital Island, is the Trustee of The
Cotsakos Revocable Trust dated 9/3/87.
(4) David Spreng, a director of Digital Island from July 1997 until December
1999, is the Managing Member of Crescendo Ventures II, LLC, the general
partner of Crescendo II, L.P.
(5) Includes shares held by Eagle Ventures II, LLC pursuant to a parallel
investment agreement with Crescendo.
(6) Mr. Cotsakos, a director of Digital Island, is Chairman of the Board of
E*TRADE.
(7) Cliff Higgerson, a director of Digital Island, is the General Partner of
Vanguard V, L.P.
Investors' Rights Agreement
Pursuant to the terms of the Amended and Restated Investors' Rights
Agreement dated February 19, 1999, as amended, by and among Digital Island and
the holders of our preferred stock, the investors acquired certain
registration rights with respect to their capital stock of Digital Island.
Beginning one year after our initial public offering, holders of more than
two-thirds of the currently outstanding common stock issued upon conversion of
the preferred stock may require us to effect up to two demand registrations
under the Securities Act covering the
32
<PAGE>
lesser of 50% of the outstanding common stock issued upon conversion of the
preferred stock or a number of shares of such common stock yielding gross
aggregate proceeds in excess of $15.0 million, subject in either case to the
board of directors' right if such registration would harm Digital Island to
defer such registration for a period up to 60 days. In addition, if we propose
to issue equity securities under the Securities Act for our own account in an
underwritten public offering, then such holders have the right (subject to
quantity limitations determined by the underwriters) to request that Digital
Island register such common stock. Also, such holders have the right to
request an unlimited number of registrations of such common stock on Form S-3
under the Securities Act. All registration expenses incurred in connection
with the first two demand registrations described above, the first two
registrations on Form S-3 described above and all piggyback registrations will
be borne by Digital Island. The participating investors will pay for
underwriting discounts and commissions incurred in connection with any such
registrations. We have agreed to indemnify the investors against certain
liabilities in connection with any registration effected pursuant to the
foregoing Investors' Rights Agreement, including Securities Act liabilities.
Employment, Indemnification and Non-Disclosure Agreements
We have entered into employment agreements with Ms. Ernst, Mr. Leinwand, Mr.
Wilson, Mr. Evenson and Mr. Sullivan, who are named executive officers for
fiscal year 1999. We have also entered into indemnification agreements with
each of our other directors and officers. See "Executive Compensation--
Employment Agreements and Change of Control Arrangements."
Agreement with Former Sandpiper Officers
Concurrently with the effectiveness of our merger with Sandpiper, Leo
Spiegel, a former executive officer of Sandpiper and the Company's new
President, entered into a employment agreement with us pursuant to which he
agreed to remain in our employ until November 24, 2000 unless we terminate him
earlier. If his employment is terminated by us without cause prior to November
24, 2000, then he will be entitled to salary continuation payments until the
earlier of (1) one year after the termination of his employment or (2) the
date he begins employment with another employer. Mr. Spiegel will also be
entitled to such salary continuation payments if he terminates his employment
with us for "good reason" before November 24, 2000. A termination for "good
reason" will mean his resignation for any of the following reasons: (x)
diminution of responsibilities consistent with his position of President of
the Company, after providing notice to the chief executive officer and
allowing for reasonable opportunity to cure the diminution of
responsibilities; (y) change in title or reporting relationship; or (z)
involuntary relocation from his principal place of employment in San Diego,
California. Pursuant to his employment agreement, Mr. Spiegel will be subject
to certain non-compete covenants for up to one year following the date of his
termination or resignation.
On October 31, 1999, Mr. Spiegel held 858,917 shares of Sandpiper common
stock (921,360 shares of Digital Island common stock, as converted), issued
pursuant to a restricted stock purchase agreement, which were subject to
repurchase by Sandpiper at $0.07 per share upon a termination of his
employment. Although his restricted stock purchase agreement with Sandpiper
provided that all of these shares would vest free of this repurchase right
upon certain events such as the merger, in connection with his employment
agreement with Digital Island described above, Mr. Spiegel waived these
acceleration rights and instead agreed that 50% of his unvested shares, as
converted, would vest on March 24, 2000 and the balance on November 24, 2000,
unless he terminates his employment without "good reason" or is terminated for
"cause" prior to vesting.
Also concurrently with the effectiveness of our merger with Sandpiper,
Andrew Swart, a former executive officer of Sandpiper and our new Vice
President of Software Engineering, entered into an employment agreement
providing that he would remain employed by us for a period of one year
measured from the closing date of the merger, unless we terminate him earlier.
Should Mr. Swart's employment be involuntarily terminated (other than for
cause) prior to the end of the one-year period following the closing of the
merger, then he will be entitled to
33
<PAGE>
salary continuation payments until the earlier of (1) one year after the
termination of his employment, or (2) the date he begins employment with
another employer. Should Mr. Swart's employment be terminated for cause, then
he will be entitled to all salary, bonus and benefits earned through the date
of termination of employment, but nothing else.
Mr. Swart was granted a stock option for 150,000 shares of Digital Island's
common stock following the closing of the merger. The option vests over 50
months of successive employment with us. In the event of a change of control
following the closing of the merger, Mr. Swart's option will accelerate in
full unless the acquiring company assumes the option. If Mr. Swart is
terminated (other than for cause) by the acquiring company, or if he resigns
due to adverse changes in his terms of employment, upon or within 18 months
following a change in control but more than 12 months after the date the he
commences employment with us, Mr. Swart's option will immediately vest and
become exercisable for all shares at the time subject to that option.
Director Arrangements and Stockholder Notes
In February 1998, Digital Island granted a nonstatutory option to purchase a
total of 183,000 shares of our common stock to Marcelo Gumucio, then the
Chairman of the board of directors and now a director of Digital Island. These
options were immediately exercisable and subject to repurchase by Digital
Island, with the right to repurchase expiring in 16 equal quarterly
installments. At the time of the option grant, Mr. Gumucio exercised the
option to purchase the entire 183,000 shares of common stock, in exchange for
a $109,800 note. Under the terms of the note, interest accrues on outstanding
amounts at 5.61% per annum. Interest is to be repaid in four equal annual
installments commencing February 24, 1999. The entire principal amount is due
and payable in one lump sum on February 24, 2002. In August 1999, Mr. Gumucio
repaid the entire principal amount as well as all accrued interest.
Officer Loans
On April 21, 1999, Ms. Ernst, our current Chairman of the Board and Chief
Executive Officer, and Mr. Higgins, our then-Chairman of the Board, each
delivered a promissory note to us in payment of the exercise price of certain
outstanding stock options they held under our 1998 stock option/stock issuance
plan. Ms. Ernst delivered a full-recourse promissory note in the principal
amount of $199,998 in payment of the exercise price for 133,332 shares of our
common stock, and Mr. Higgins delivered a full-recourse promissory note in the
amount of $86,400 in payment of the exercise price for 216,000 shares of our
common stock. Each note bears interest at the rate of 7.75% per annum,
compounded semi-annually, and is secured by the purchased shares. Accrued
interest is due and payable at successive quarterly intervals over the four-
year term of the note, and the principal balance will become due and payable
in one lump sum at the end of such four-year term. However, the entire unpaid
balance of the note will become due and payable upon termination of employment
or failure to pay any installment of interest when due. None of the shares
serving as security for the note may be sold unless the principal portion of
the note attributable to those shares, together with the accrued interest on
that principal portion, is paid to us. In December 1999, Mr. Higgins repaid
the entire principal amount of his note, as well as all accrued interest.
On June 14, 1999, Ms. Ernst borrowed an additional $128,000 from us in order
to finance the tax liability she incurred in connection with the exercise of
her stock options on April 21, 1999 for 133,332 shares of our common stock.
The loan is evidenced by a full-recourse promissory note with interest at the
rate of 7.75% per annum, compounded semi-annually, and secured by the same
133,332 shares which serve as collateral for Ms. Ernst's April 21, 1999
promissory note. The terms of her note, including the due dates for payment of
principal and accrued interest and the acceleration provisions, are
substantially the same as the terms in effect for her April 21, 1999 note. The
April 21 and June 14, 1999 promissory notes from Ms. Ernst aggregate to a
principal total indebtedness to Digital Island of $327,998.
34
<PAGE>
The following table indicates the highest amount outstanding under each of
the foregoing loans during the 1999 fiscal year and the amount outstanding
under each loan as of February 29, 2000:
<TABLE>
<CAPTION>
Highest FY 1999 Balance Current Outstanding Balance
----------------------- ---------------------------
<S> <C> <C>
Ms. Ernst............... $327,998 $340,708
Mr. Higgins............. $ 86,400 $ 0.00
</TABLE>
E*TRADE Agreements
We have entered into a global data distribution agreement with E*TRADE dated
August 1, 1997 where we provide network connectivity for E*TRADE. Mr.
Costakos, a member of our board of directors, is President, Chief Executive
Officer and a director of E*TRADE.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us
and our officers, directors, principal stockholders and their affiliates will
be approved by a majority of the board of directors, and be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
STOCKHOLDER PROPOSALS
To be included in the proxy statement and form of proxy relating to the
annual meeting to be held in 2001, a stockholder proposal must be received by
T.L Thompson, Chief Financial Officer and Secretary, Digital Island, Inc., 45
Fremont Street, 12th Floor, San Francisco, CA 94105 no later than December 21,
2000. If the Company is not notified of a stockholder proposal by February 6,
2001, then the proxy solicited by the board of directors for the 2001 annual
meeting will confer discretionary authority to vote against such stockholder
proposal.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Our directors and executive officers must file reports with the Securities
and Exchange Commission indicating the number of shares of our common stock
they beneficially own and any changes in their beneficial ownership. Copies of
these reports must be provided to us. Based on our review of these reports and
written representations from the persons required to file them, we believe
each of our directors and executive officers filed all the required reports
during 1999. To our knowledge, during 1999, no other person subject to the
reporting requirement of Section 16(a) failed to file or was delinquent in
filing a required report.
35
<PAGE>
OTHER MATTERS
Our board of directors knows of no other business that will be presented to
the annual meeting. If any other business is properly brought before the
annual meeting, proxies in the enclosed form will be voted in respect thereof
in accordance with the recommendation of the board of directors. Discretionary
authority with respect to such other matters is granted by the execution of
the enclosed proxy.
It is important that the proxies be returned promptly and that your shares
be represented. You are urged to sign, date and promptly return the enclosed
proxy card in the enclosed envelope.
A copy of our Annual Report for the 1999 Fiscal Year has been mailed
concurrently with this Proxy Statement to all stockholders entitled to notice
of and to vote at the Annual Meeting. The Annual Report is not incorporated
into this Proxy Statement and is not considered proxy solicitation material.
We have filed an Annual Report on Form 10-K for the year ended September 30,
1999 with the Securities and Exchange Commission. You may obtain, free of
charge, a copy of the Form 10-K by writing to T.L. Thompson, Chief Financial
Officer, Digital Island, Inc., 45 Fremont Street, 12th Floor, San Francisco,
CA 94105. Our Form 10-K is also available through our website at
www.digitalisland.com.
By Order of the Board of Directors,
/s/ T.L. Thompson
T.L. Thompson
Secretary
Dated: March 23, 2000
San Francisco, California
36
<PAGE>
DIGITAL ISLAND, INC.
---------------------
1999 STOCK INCENTIVE PLAN
-------------------------
AS AMENDED AND RESTATED EFFECTIVE JANUARY 20, 2000
--------------------------------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1999 Stock Incentive Plan is intended to promote the interests of
Digital Island, Inc., a Delaware corporation, by providing eligible persons in
the Corporation's service with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Corporation
as an incentive for them to remain in such service.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity programs:
- the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock,
- the Salary Investment Option Grant Program under which eligible
employees may elect to have a portion of their base salary invested each year in
special option grants,
- the Stock Issuance Program under which eligible persons may, at
the discretion of the Plan Administrator, be issued shares of Common Stock
directly, either through the immediate purchase of such shares or as a bonus for
services rendered the Corporation (or any Parent or Subsidiary),
- the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive option grants at
designated intervals over their period of continued Board service, and
- the Director Fee Option Grant Program under which non-employee
Board members may elect to have all or any portion of their annual retainer fee
otherwise payable in cash applied to a special stock option grant.
<PAGE>
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. However, any
discretionary option grants or stock issuances for members of the Primary
Committee must be authorized by a disinterested majority of the Board.
B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of those programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
D. The Primary Committee shall have the sole and exclusive authority
to determine which Section 16 Insiders and other highly compensated Employees
shall be eligible for participation in the Salary Investment Option Grant
Program for one or more calendar years. However, all option grants under the
Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
F. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no Plan Administrator shall exercise any discretionary
functions with respect to any option grants or stock issuances made under those
programs.
2
<PAGE>
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive such grants, the time or times
when those grants are to be made, the number of shares to be covered by each
such grant, the status of the granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive such issuances, the time or times when the issuances are
to be made, the number of shares to be issued to each Participant, the vesting
schedule (if any) applicable to the issued shares and the consideration for such
shares.
D. The Plan Administrator shall have the absolute discretion either to
grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
E. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals who
first become non-employee Board members on or after the Underwriting Date,
whether through appointment by the Board or election by the Corporation's
stockholders, and (ii) those individuals who continue to serve as non-employee
Board members at one or more Annual Stockholders Meetings held after the
Underwriting Date. A non-employee Board member who has previously been in the
employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to
receive an option grant under the Automatic Option Grant Program at the time he
or she first becomes a non-employee Board member, but shall be eligible to
receive periodic option grants under the Automatic Option Grant Program while he
or she continues to serve as a non-employee Board member.
F. All non-employee Board members shall be eligible to participate in
the Director Fee Option Grant Program.
3
<PAGE>
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall not exceed 12,544,000
[plus auto increase] shares. Such reserve shall consist of (i) the number of
shares estimated to remain available for issuance, as of the Plan Effective
Date, under the Predecessor Plan as last approved by the Corporation's
stockholders, including the shares subject to outstanding options under that
Predecessor Plan, plus (ii) an additional increase of approximately 2,500,000
shares approved by the Corporation's stockholders prior to the Underwriting
Date, plus (iii) the 2,000,000 shares added to the reserve on January 3, 2000
pursuant to the automatic share increase provisions of Section V.B of this
Article One, plus (iv) an additional increase of 3,000,000 shares authorized by
the Board on January 20, 2000, subject to stockholder holder at the 2000 Annual
Meeting.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2001, by
an amount equal to 4.75% of the total number of shares of Common Stock
outstanding on the last trading day in December of the immediately preceding
calendar year, but in no event shall any such annual increase exceed 5,000,000
shares./1/
C. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 750,000 shares of Common Stock in the aggregate per calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation at the original issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. However,
should the exercise price of an option under the Plan be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with
- -------------------
/1/ Both the increase in the size of the automatic share increase from 4% to
4.75% of the total number of outstanding shares of Common Stock and the increase
to the annual limit from 2,000,000 shares to 5,000,000 shares were authorized by
the Board on January 20, 2000, subject to stockholder approval at the 2000
Annual Meeting. If such stockholder approval is obtained, both increases will
become effective with calendar year 2001.
4
<PAGE>
the exercise of an option or the vesting of a stock issuance under the Plan,
then the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is exercised
or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such option or stock issuance. Shares of
Common Stock underlying one or more stock appreciation rights exercised under
Section IV of Article Two, Section III of Article Three, Section II of Article
Five or Section III of Article Six of the Plan shall not be available for
subsequent issuance under the Plan.
E. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made by the Plan Administrator to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the maximum number and/or class of
securities for which any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year, (iii) the number and/or class of securities for which grants
are subsequently to be made under the Automatic Option Grant Program to new and
continuing non-employee Board members, (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option under the Plan, (v) the number and/or class of securities and price per
share in effect under each outstanding option incorporated into this Plan from
the Predecessor Plan and (vi) the maximum number and/or class of securities by
which the share reserve is to increase automatically each calendar year pursuant
to the provisions of Section V.B of this Article One. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
5
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section I of Article Seven
and the documents evidencing the option, be payable in one or more of the forms
specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
6
<PAGE>
C. Effect of Termination of Service.
--------------------------------
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option held by the Optionee at the time of death
and exercisable in whole or in part at that time may be subsequently
exercised by the personal representative of the Optionee's estate or by the
person or persons to whom the option is transferred pursuant to the
Optionee's will or the laws of inheritance or by the Optionee's designated
beneficiary or beneficiaries of that option.
(iii) Should the Optionee's Service be terminated for
Misconduct or should Optionee otherwise engage in Misconduct while one or
more of his or her options are outstanding, then all outstanding options
held by the Optionee shall terminate immediately and cease to be
outstanding.
(iv) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of' Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
limited exercise period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the Optionee
would have vested had the Optionee continued in Service.
7
<PAGE>
D. Stockholder Rights. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of
inheritance following the Optionee's death. However, a Non-Statutory Option may,
in connection with the Optionee's estate plan, be assigned in whole or in part
during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate. Notwithstanding the foregoing, the Optionee may also designate
one or more persons as the beneficiary or beneficiaries of his or her
outstanding options under this Article Two, and those options shall, in
accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding those
options. Such beneficiary or beneficiaries shall take the transferred options
subject to all the terms and conditions of the applicable agreement evidencing
each such transferred option, including (without limitation) the limited time
period during which the option may be exercised following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section 11, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Nonstatutory Options when
issued under the Plan shall not be subject to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Dollar Limitation. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000).
8
<PAGE>
To the extent the Employee holds two (2) or more such options which
become exercisable for the first time in the same calendar year, the foregoing
limitation on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
C. 10% Stockholder. If any Employee to whom an Incentive Option is
---------------
granted is a I 0% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (II 0%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become exercisable for all
of the shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully vested shares of Common Stock.
However, an outstanding option shall not become exercisable on such an
accelerated basis if and to the extent: (i) such option is, in connection with
the Corporate Transaction, to be assumed by the successor corporation (or parent
thereof) or (ii) such option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing at the time of the
Corporate Transaction on any shares for which the option is not otherwise at
that time exercisable and provides for subsequent payout in accordance with the
same exercise/vesting schedule applicable to those option shares or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant.
B. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
the same, (ii) the maximum
9
<PAGE>
number and/or class of securities available for issuance over the remaining term
of the Plan and (iii) the maximum number and/or class of securities for which
any one person may be granted stock options, separately exercisable stock
appreciation rights and direct stock issuances under the Plan per calendar year
and (iv) the maximum number and/or class of securities by which the share
reserve is to increase automatically each calendar year. To the extent the
actual holders of the Corporation's outstanding Common Stock receive cash
consideration for their Common Stock in consummation of the Corporate
Transaction, the successor corporation may, in connection with the assumption of
the outstanding options under this Plan, substitute one or more shares of its
own common stock with a fair market value equivalent to the cash consideration
paid per share of Common Stock in such Corporate Transaction.
E. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effective date of
such Corporate Transaction, become exercisable for all the shares of Common
Stock at the time subject to those options and may be exercised for any or all
of those shares as fully vested shares of Common Stock, whether or not those
options are to be assumed in the Corporate Transaction. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall not be assignable in connection with such Corporate
Transaction and shall accordingly terminate upon the consummation of such
Corporate Transaction, and the shares subject to those terminated rights shall
thereupon vest in full.
F. The Plan Administrator shall have full power and authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall become exercisable for all the shares of
Common Stock at the time subject to those options in the event the Optionee's
Service is subsequently terminated by reason of an Involuntary Termination
within a designated period (not to exceed eighteen (18) months) following the
effective date of any Corporate Transaction in which those options are assumed
and do not otherwise accelerate. Any options so accelerated shall remain
exercisable for fully vested shares until the earlier of (i) the expiration of
the option term or (ii) the expiration of the one (1) year period measured from
the effective date of the Involuntary Termination. In addition, the Plan
Administrator may structure one or more of the Corporation's repurchase rights
so that those rights shall immediately terminate with respect to any shares held
by the Optionee at the time of his or her Involuntary Termination, and the
shares subject to those terminated repurchase rights shall accordingly vest in
full at that time.
G. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effective date of
a Change in Control, become exercisable for all the shares of Common Stock at
the time subject to those options and may be exercised for any or all of those
shares as fully vested shares of Common Stock. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall
10
<PAGE>
terminate automatically upon the consummation of such Change in Control, and the
shares subject to those terminated rights shall thereupon vest in full.
Alternatively, the Plan Administrator may condition the automatic acceleration
of one or more outstanding options under the Discretionary Option Grant Program
and the termination of one or more of the Corporation's outstanding repurchase
rights under such program upon the subsequent termination of the Optionee's
Service by reason of an Involuntary Termination within a designated period (not
to exceed eighteen (18) months) following the effective date of such Change in
Control. Each option so accelerated shall remain exercisable for fully vested
shares until the earlier of (i) the expiration of the option term or (ii) the
--------
expiration of the one (1) year period measured from the effective date of
Optionee's cessation of Service.
H. The portion of any Incentive Option accelerated in connection with
a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation
is exceeded, the accelerated portion of such option shall be exercisable as a
Nonstatutory Option under the Federal tax laws.
I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to grant
to selected Optionees tandem stock appreciation rights and/or limited stock
appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of Common
Stock and the surrender of that option in exchange for a distribution from
the Corporation in an amount equal to the excess of (a) the Fair Market
Value (on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares.
11
<PAGE>
(ii) No such option surrender shall be effective unless it
is approved by the Plan Administrator, either at the time of the actual
option surrender or at any earlier time. If the surrender is so approved,
then the distribution to which the Optionee shall be entitled may be made
in shares of Common Stock valued at Fair Market Value on the option
surrender date, in cash, or partly in shares and partly in cash, as the
Plan Administrator shall in its sole discretion deem appropriate.
(iii) If the surrender of an option is not approved by the
Plan Administrator, then the Optionee shall retain whatever rights the
Optionee had under the surrendered option (or surrendered portion thereof)
on the option surrender date and may exercise such rights at any time prior
to the later of (a) five (5) business days after the receipt of the
rejection notice or (b) the last day on which the option is otherwise
exercisable in accordance with the terms of the documents evidencing such
option, but in no event may such rights be exercised more than ten (10)
years after the option grant date.
C. The following terms shall govern the grant and exercise of
limited stock appreciation rights:
(i) One or more Section 16 Insiders may be granted limited
stock appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for a
thirty (30)-day period following such Hostile Take-Over) to surrender each
such option to the Corporation. In return for the surrendered option, the
Optionee shall receive a cash distribution from the Corporation in an
amount equal to the excess of (A) the Take-Over Price of the shares of
Common Stock at the time subject to such option (whether or not the
Optionee is otherwise vested in those shares) over (B) the aggregate
exercise price payable for those shares. Such cash distribution shall be
paid within five (5) days following the option surrender date.
(iii) At the time such limited stock appreciation right is
granted, the Plan Administrator shall pre-approve any subsequent exercise
of that right in accordance with the terms of this Paragraph C.
Accordingly, no further approval of the Plan Administrator or the Board
shall be required at the time of the actual option surrender and cash
distribution.
12
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for such calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). Each individual who files such a timely
authorization shall automatically be granted an option under the Salary
Investment Grant Program on the first trading day in January of the calendar
year for which the salary reduction is to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
that each such document shall comply with the terms specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the dollar amount of the reduction in the Optionee's base
salary for the calendar year to be in effect pursuant to this program,
and
13
<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.
D. Effect of Termination of Service. Should the Optionee cease
--------------------------------
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
term or (ii) the expiration of the two (2)-year period measured from the date of
such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or the laws of inheritance or by the designated beneficiary
or beneficiaries of such option. Such right of exercise shall lapse, and the
option shall terminate, upon the earlier of (i) the expiration of the ten (10)-
--------
year option term or (ii) the two (2)-year period measured from the date of the
Optionee's cessation of Service. However, the option shall, immediately upon the
Optionee's cessation of Service for any reason, terminate and cease to remain
outstanding with respect to any and all shares of Common Stock for which the
option is not otherwise at that time exercisable.
III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all the shares of Common Stock at the
time subject to such option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully-
vested shares until the earlier of (i) the expiration of the ten (10)- year
option term or (ii) the expiration of the two (2)-year period measured from the
date of the Optionee's cessation of Service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become fully exercisable for all the shares of Common Stock at the time subject
to such option and may be exercised for any or all of those shares as fully-
vested shares of Common Stock.
14
<PAGE>
The option shall remain so exercisable until the earliest to occur
of (i) the expiration of the ten (10)-year option term, (ii) the expiration of
the two (2)-year period measured from the date of the Optionee's cessation of
Service, (iii) the termination of the option in connection with a Corporate
Transaction or (iv) the surrender of the option in connection with a Hostile
Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have
a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the option is otherwise at the time exercisable for those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation. The Primary Committee shall, at the time the
option with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph C. Accordingly, no further
approval of the Primary Committee or the Board shall be required at the time of
the actual option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under this Plan, substitute one or more shares of its own common stock
with a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Corporate Transaction.
E. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
15
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below. Shares of Common Stock may also be
issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of designated
performance goals.
A. Purchase Price.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. Vesting Provisions.
------------------
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program shall be
determined by the Plan Administrator and incorporated into the Stock Issuance
Agreement. Shares of Common Stock may also be issued under the Stock Issuance
Program pursuant to share right awards which entitle the recipients to receive
those shares upon the attainment of designated performance goals.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
16
<PAGE>
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with respect to
any shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while holding one
or more unvested shares of Common Stock issued under the Stock Issuance Program
or should the performance objectives not be attained with respect to one or more
such unvested shares of Common Stock, then those shares shall be immediately
surrendered to the Corporation for cancellation, and the Participant shall have
no further stockholder rights with respect to those shares. To the extent the
surrendered shares were previously issued to the Participant for consideration
paid in cash or cash equivalent (including the Participant's purchase-money
indebtedness), the Corporation shall repay to the Participant the cash
consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase money note of the Participant
attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock which would
otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
6. Outstanding share right awards under the Stock Issuance Program
shall automatically terminate, and no shares of Common Stock shall actually be
issued in satisfaction of those awards, if the performance goals established for
such awards are not attained. The Plan Administrator, however, shall have the
discretionary authority to issue shares of Common Stock under one or more
outstanding share right awards as to which the designated performance goals have
not been attained.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.
17
<PAGE>
B. The Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof).
C. The Plan Administrator shall also have the discretionary authority
to structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
18
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
The terms and provisions of this Article Five reflect the amendments
to the Automatic Option Grant Program effected by the January 20, 2000
restatement of the Plan adopted by the Board, subject to stockholder approval of
such restatement at the 2000 Annual Meeting. Such stockholder approval shall
also constitute approval of each option granted under the amended Automatic
Option Grant Program on or after the date of that Annual Meeting and the
subsequent exercise of each such option in accordance with the terms and
provisions of this Article Five.
I. OPTION TERMS
A. Grant Dates. Option grants shall be made on the dates specified
-----------
below:
1. Each individual who is first elected or appointed as a
non-employee Board member at any time after December 31, 1999 shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 30,000 shares of Common Stock,/2/ provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.
2. On the date of each Annual Stockholders Meeting, beginning
with the 2000 Annual Meeting, each individual who is to continue to serve as a
non-employee Board member, whether or not that individual is standing for
re-election to the Board at that particular Annual Meeting, shall automatically
be granted a Non-Statutory Option to purchase 10,000 shares of Common Stock,/3/
provided such individual has served as a non-employee Board member for at least
six (6) months. There shall be no limit on the number of such 10,000-share
option grants any one Eligible Director may receive over his or her period of
Board service, and non-employee Board members who have previously been in the
employ of the Corporation (or any Parent or Subsidiary) or who have otherwise
received one or more stock option grants from the Corporation prior to the
Underwriting Date shall be eligible to receive one or more such annual option
grants over their period of continued Board service.
B. Exercise Price.
--------------
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
- ------------------------
/2/ Prior to the January 2000 amendment, newly-elected or appointed
non-employee Board members were to receive an automatic option grant for 15,000
shares of Common Stock.
/3/ Prior to the January 2000 amendment, continuing non-employee Board members
were each to receive an annual option grant for 5,000 shares of Common Stock.
19
<PAGE>
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. Option Term. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.
D. Exercise and Vesting of Options. Each option shall be immediately
-------------------------------
exercisable for any or all of the option shares. However, any unvested shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. The shares subject to each initial
30,000-share grant shall vest, and the Corporation's repurchase right shall
lapse, in a series of six (6) successive equal semi-annual installments upon the
Optionee's completion of each six (6)-month period of service as a Board member
over the thirty-six (36) month period measured from the option grant date. The
shares subject to each annual 10,000-share option grant shall be fully vested as
of the grant date.
E. Limited Transferability of Options. Each option under this
----------------------------------
Article Five may, in connection with the Optionee's estate plan, be assigned in
whole or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate. The Optionee may also designate one or more persons as the
beneficiary or beneficiaries of his or her outstanding options under this
Article Five, and those options shall, in accordance with such designation,
automatically be transferred to such beneficiary or beneficiaries upon the
Optionee's death while holding those options. Such beneficiary or beneficiaries
shall take the transferred options subject to all the terms and conditions of
the applicable agreement evidencing each such transferred option, including
(without limitation) the limited time period during which the option may be
exercised following the Optionee's death.
F. Termination of Board Service. The following provisions shall
----------------------------
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person or persons
to whom the option is transferred pursuant to the Optionee's will or the
laws of inheritance or the designated beneficiary or beneficiaries of such
option) shall have a twelve (12)-month period following the date of such
cessation of Board service in which to exercise each such option.
20
<PAGE>
(ii) During the twelve (12)-month exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares of Common Stock for which the option is exercisable at the
time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member
by reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable after
the expiration of the option term. Upon the expiration of the twelve (12)-
month exercise period or (if earlier) upon the expiration of the option
term, the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Board service for any
reason other than death or Permanent Disability, terminate and cease to be
outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become exercisable for
all of the shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
Immediately following the consummation of the Corporate Transaction, each
automatic option grant shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).
B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become exercisable for all
of the shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
Each such option shall remain exercisable for such fully-vested option shares
until the expiration or sooner termination of the option term or the surrender
of the option in connection with a Hostile Take-Over.
C. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction or Change in
Control.
21
<PAGE>
D. Upon the occurrence of a Hostile Take-Over, the Optionee shall have
a thirty (30)-day period in which to surrender to the Corporation each of his
or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required at the time of the
actual option surrender and cash distribution.
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under this Plan, substitute one or more shares of its own common stock
with a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Corporate Transaction.
F. The grant of options under the Automatic Option Grant Program shall
in no way affect the right of the Corporation to adjust, reclassify, reorganize
or otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
22
<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years for which the Director Fee Option Grant
Program is to be in effect. For each such calendar year the program is in
effect, each non-employee Board member may elect to apply all or any portion of
the annual retainer fee otherwise payable in cash for his or her service on the
Board for that year to the acquisition of a special option grant under this
Director Fee Option Grant Program. Such election must be filed with the
Corporation's Chief Financial Officer prior to first day of the calendar year
for which the annual retainer fee which is the subject of that election is
otherwise payable. Each non-employee Board member who files such a timely
election shall automatically be granted an option under this Director Fee Option
Grant Program on the first trading day in January in the calendar year for which
the annual retainer fee which is the subject of that election would otherwise be
payable in cash.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the
non-employee Board member's election, and
23
<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) equal monthly installments upon the Optionee's
completion of each calendar month of Board service in the calendar year for
which the director fee election is in effect under this Article Six. Each option
shall have a maximum term of ten (10) years measured from the option grant date.
D. Limited Transferability of Options. Each option under this
----------------------------------
Article Six may, in connection with the Optionee's estate plan, be assigned in
whole or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate. The Optionee may also designate one or more persons as the
beneficiary or beneficiaries of his or her outstanding options under this
Article Six, and those options shall, in accordance with such designation,
automatically be transferred to such beneficiary or beneficiaries upon the
Optionee's death while holding those options. Such beneficiary or beneficiaries
shall take the transferred options subject to all the terms and conditions of
the applicable agreement evidencing each such transferred option, including
(without limitation) the limited time period during which the option may be
exercised following the Optionee's death.
E. Termination of Board Service. Should the Optionee cease Board
----------------------------
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the two (2)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
F. Death or Permanent Disability. Should the Optionee's service as
-----------------------------
a Board member cease by reason of death or Permanent Disability, then each
option held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the expiration of the two (2)-year period measured
from the date of such cessation of Board service. In the event of the Optionee's
death while holding such option, the option may be exercised by the personal
representative of the Optionee's estate or by the person or persons to whom the
option is transferred pursuant to the Optionee's will or the laws of inheritance
or by the designated beneficiary or beneficiaries of such option.
24
<PAGE>
Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Board service
(less any shares subsequently purchased by Optionee prior to death), by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.
Any such right to exercise the option shall lapse, and the option shall
terminate, upon the earlier of (i) the expiration of the ten (10)-year option
term or (ii) the two (2)-year period measured from the date of the Optionee's
cessation of Board service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully-
vested shares until the earlier of (i) the expiration of the ten (10)-year
--------
option term or (ii) the expiration of the two (2)-year period measured from the
date of the Optionee's cessation of Board service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall immediately become exercisable for all the shares of Common Stock at the
time subject to such option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. The option shall remain so exercisable
until the earliest to occur of (i) the expiration of the ten (10)-year option
term, (ii) the expiration of the two (2)-year period measured from the date of
the Optionee's cessation of Board service, (iii) the termination of the option
in connection with a Corporate Transaction or (iv) the surrender of the option
in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have
a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the option is otherwise at the time exercisable for those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required at the time of the actual option surrender and
cash distribution.
25
<PAGE>
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under this Plan, substitute one or more shares of its own common stock
with a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Corporate Transaction.
E. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
26
<PAGE>
ARTICLE SEVEN
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares (less the par value of
those shares) plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock upon
the exercise of options or the issuance or vesting of such shares under the Plan
shall be subject to the satisfaction of all applicable Federal, state and local
income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Withholding Taxes to which
such holders may become subject in connection with the exercise of their options
or the vesting of their shares. Such right may be provided to any such holder in
either or both of the following formats:
Stock Withholding: The election to have the Corporation withhold,
-----------------
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Withholding
Taxes (not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at the
--------------
time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Withholding
Taxes) with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
27
<PAGE>
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately on the Plan Effective
Date. However, the Salary Investment Option Grant Program and the Director Fee
Option Grant Program shall not be implemented until such time as the Primary
Committee may deem appropriate. Options may be granted under the Discretionary
Option Grant at any time on or after the Plan Effective Date, and the initial
option grants under the Automatic Option Grant Program shall also be made on the
Plan Effective Date to any non-employee Board members eligible for such grants
at that time. However, no options granted under the Plan may be exercised, and
no shares shall be issued under the Plan, until the Plan is approved by the
Corporation's stockholders. If such stockholder approval is not obtained within
twelve (12) months after the Plan Effective Date, then all options previously
granted under this Plan shall terminate and cease to be outstanding, and no
further options shall be granted and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan, and
no further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Plan Effective Date. All options outstanding under
the Predecessor Plan on the Plan Effective Date shall be incorporated into the
Plan at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be deemed to affect or otherwise modify the rights or obligations
of the holders of such incorporated options with respect to their acquisition of
shares of Common Stock.
C. One or more provisions of the Plan, including (without limitation)
the option/vesting acceleration provisions of Article Two relating to Corporate
Transactions and Changes in Control, may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the Predecessor
Plan which do not otherwise contain such provisions.
D. The Plan was amended and restated on January 20, 2000 (the "January
2000 Restatement") to effect the following changes, subject to stockholder
approval at the 2000 Annual Meeting:
(i) increase the maximum number of shares of Common Stock
authorized for issuance under the Plan by an additional 3,000,000 shares so
that the authorized share reserve was thereby increased from ___________
shares to ____________________ shares of Common Stock;
(ii) increase the size of the automatic share increase to
the Plan each calendar year from 4% to four and 4.75% of the total number
of outstanding shares of Common Stock on the last trading day of the
immediately preceding calendar year;
(iii) increase the limit on the maximum number of shares of
Common Stock by which the share reserve under the Plan may increase
automatically each calendar year from 2,000,000 shares to 5,000,000 shares;
28
<PAGE>
(iv) increase the size of the initial automatic option grant
made to each newly-elected or appointed non-employee Board member from
15,000 shares to 30,000 shares of Common Stock, effective for non-employee
Board members who first join the Board after December 31, 1999; and
(v) increase the size of the annual automatic option grant
to each continuing non-employee Board member from 5,000 shares to 10,000
shares of Common Stock, effective with the 2000 Annual Stockholders
Meeting.
No option grants or direct stock issuances shall be made on the basis
of the share increases authorized by the January 2000 Restatement unless and
until that restatement is approved by the stockholders at the 2000 Annual
Meeting.
E. The Plan shall terminate upon the earliest to occur of (i) April
15, 2009, (ii) the date on which all shares available for issuance under the
Plan shall have been issued as fully-vested shares or (iii) the termination of
all outstanding options in connection with a Corporate Transaction. Should the
Plan terminate on April 15, 2009, then all option grants and unvested stock
issuances outstanding at that time shall continue to have force and effect in
accordance with the provisions of the documents evidencing such grants or
issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under the
Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
29
<PAGE>
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
30
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option
------------------------------
grant program in effect under Article Five of the Plan.
B. Board shall mean the Corporation's Board of Directors.
------
C. Change in Control shall mean a change in ownership or control of
------------------
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a period
of thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
-----
E. Common Stock shall mean the Corporation's common stock.
-------------
F. Corporate Transaction shall mean either of the following
----------------------
stockholder approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
A-1
<PAGE>
G. Corporation shall mean Digital Island, Inc., a Delaware
------------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Digital Island, Inc. which shall by appropriate action
adopt the Plan.
H. Director Fee Option Grant Program shall mean the special stock
---------------------------------
option grant in effect for non-employee Board members under Article Six of the
Plan.
I. Discretionary Option Grant Program shall mean the discretionary
----------------------------------
option grant program in effect under Article Two of the Plan.
J. Eligible Director mean a non-employee Board member eligible to
-----------------
participate in the Automatic Option Grant or Director Fee Option Grant Program
in accordance with the eligibility provisions of Articles One, Five and Six.
K. Employee shall mean an individual who is in the employ of the
---------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. Exercise Date shall mean the date on which the Corporation shall
-------------
have received written notice of the option exercise.
M. Fair Market Value per share of Common Stock on any relevant date
------------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to the
price per share at which the Common Stock is to be sold in the initial
public offering pursuant to the Underwriting Agreement.
A-2
<PAGE>
N. Hostile Take-Over shall mean the acquisition, directly or
------------------
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
O. Incentive Option shall mean an option which satisfies the
-----------------
requirements of Code Section 422.
P. Involuntary Termination shall mean the termination of the Service
------------------------
of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her duties and responsibilities or the level of management to which
he or she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and target bonus under any
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected by the Corporation without the
individual's consent.
Q. Misconduct shall mean the commission of any act of fraud,
-----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
R. 1934 Act shall mean the Securities Exchange Act of 1934, as
---------
amended.
S. Non-Statutory Option shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
T. Optionee shall mean any person to whom an option is granted under
---------
the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
A-3
<PAGE>
U. Parent shall mean any corporation (other than the Corporation) in
-------
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. Participant shall mean any person who is issued shares of Common
------------
Stock under the Stock Issuance Program.
W. Permanent Disability or Permanently Disabled shall mean the
---------------------------------------------
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
X. Plan shall mean the Corporation's 1999 Stock Incentive Plan, as
-----
set forth in this document.
Y. Plan Administrator shall mean the particular entity, whether the
-------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Z. Plan Effective Date shall mean the date the Plan shall become
--------------------
effective and shall be coincident with the Underwriting Date.
AA. Predecessor Plan shall mean the Corporation's 1998 Stock
-----------------
Option/Stock Issuance Plan in effect immediately prior to the Plan Effective
Date hereunder.
BB. Primary Committee shall mean the committee of two (2) or more
-----------------
nonemployee Board members appointed by the Board to administer the Discretionary
Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and
to administer the Salary Investment Option Grant Program solely with respect to
the selection of the eligible individuals who may participate in such program.
CC. Salary Investment Option Grant Program shall mean the salary
--------------------------------------
investment option grant program in effect under Article Three of the Plan.
DD. Secondary Committee shall mean a committee of one or more Board
-------------------
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
A-4
<PAGE>
EE. Section 16 Insider shall mean an officer or director of the
-------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
FF. Service shall mean the performance of services for the
--------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
GG. Stock Exchange shall mean either the American Stock Exchange or
---------------
the New York Stock Exchange.
HH. Stock Issuance Program shall mean the agreement entered into by
----------------------
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
II. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under Article Four of the Plan.
JJ. Subsidiary shall mean any corporation (other than the
-----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
KK. Take-Over Price shall mean the greater of (i) the Fair Market
----------------
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
LL. 10% Stockholder shall mean the owner of stock (as determined
----------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
MM. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
NN. Underwriting Date shall mean the date on which the Underwriting
------------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
OO. Withholding Taxes shall mean the Federal, state and local income
-----------------
and employment withholding taxes to which the holder of Non-Statutory Options or
unvested shares of Common Stock may become subject in connection with the
exercise of those options or the vesting of those shares.
A-5
<PAGE>
DIGITAL ISLAND, INC.
PROXY
Annual Meeting of Stockholders, April 20, 2000
This Proxy is Solicited on Behalf of the Board of Directors of
DIGITAL ISLAND, INC.
The undersigned revokes all previous proxies, acknowledges receipt of
the Notice of the Annual Meeting of Stockholders to be held April 20, 2000 and
the Proxy Statement and appoints Ruann F. Ernst and T.L. Thompson, and each of
them, the Proxy of the undersigned, with full power of substitution, to vote all
shares of common stock of Digital Island, Inc. (the "Company") that the
undersigned is entitled to vote, either on his or her own behalf or on behalf of
any entity or entities, at the Annual Meeting of Stockholders of the Company to
be held at the Park Hyatt Hotel, 333 Battery Street, San Francisco, California
94111 on Thursday, April 20, 2000 at 10:00 a.m. local time (the "Annual
Meeting"), and at any adjournment or postponement thereof, with the same force
and effect as the undersigned might or could do if personally present thereat.
The shares represented by this Proxy shall be voted in the manner set forth on
the reverse side.
The Board of Directors recommends a vote IN FAVOR OF the directors
listed below and a vote IN FAVOR OF each of the listed proposals. This Proxy,
when properly executed, will be voted as specified below. If no specification is
made, this Proxy will be voted IN FAVOR OF the election of the directors listed
below and IN FAVOR OF the other proposals.
1. To elect directors to serve for a three-year term ending in the year
2003 or until the successors are duly elected and qualified;
WITHHOLD
AUTHORITY
FOR TO VOTE
Ruann F. Ernst [ ] [ ]
Charlie Bass [ ] [ ]
[ ]_________________________________________
For all nominees except as noted above
<TABLE>
<S> <C> <C> <C>
2. To approve a series of amendments to the Digital Island 1999 Stock FOR AGAINST ABSTAIN
Incentive Plan which will (i) increase the number of shares of --- ------- -------
Digital Island common stock available for issuance under the 1999 [ ] [ ] [ ]
plan by an additional 3,000,000 shares, (ii) effect certain changes
to the automatic share increase provisions of the 1999 plan, as
fully described in the proxy statement, and (iii) effect certain
changes to the automatic option grant program in effect for the non-
employee board members under the 1999 plan, as fully described in the
proxy statement.
3. To ratify the appointment of PricewaterhouseCoopers LLP as
independent auditors of the Company for the fiscal year ending
December 31, 2000. [ ] [ ] [ ]
4. In accordance with the discretion of the proxy holders, to act upon
all matters incident to the conduct of the meeting and upon other
matters as may properly come before the meeting. [ ] [ ] [ ]
</TABLE>
MARK HERE MARK HERE
FOR ADDRESS [ ] IF YOU PLAN [ ]
CHANGE AND TO ATTEND
NOTE BELOW THE MEETING
NOTE: Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, give
full name and title as such.
Please sign, date and return promptly in the accompanying envelope.
Signature:_______________Date:__________Signature:_______________Date:__________
